No Use Making Sense of the Cult Stocks

 | Aug 20, 2013 | 11:37 AM EDT  | Comments
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amzn

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nflx

When will Tesla (TSLA) peak? At what point must we abandon Amazon (AMZN)? Isn't Netflix (NFLX) overdone to the upside? These are the questions I get constantly at my Twitter account, @jimcramer.

I have to tell you that, point blank, these stocks will peak when the companies fail to execute on their game plans. Until then, they remain cult stocks, and cult stocks go up until the cult gets destroyed by management itself. All other attempts to call a top are irrelevant, because the cultist buyers don't care about valuation. They just care about "the experience."

Let me just say, from the outset, that all three of these stocks are wildly overvalued on the basis of earnings. They simply make no sense at all. They are way out of control when compared with the rest of the market. The problem with that analysis, though, is it could have been said 100 points ago for Tesla and 200 points ago for Netflix and Amazon. That's right -- while short-sellers continue to make that case every day of the week, and while these people are cogent professionals, the valuation case doesn't mean a thing for the investors who are buying these stocks.

Take today. Tuesday morning, Tesla's Model S received five stars from the National Highway Traffic Safety Administration, the highest any car can get. This news comes on top of the report from Consumer Reports, which gave the car their highest rating ever.

Now, the vast majority of professionals couldn't give a darn about this. They look at the market capitalization of Tesla, $17 billion, and the scoff that such a valuation is ridiculous for a car company that makes 20,000-odd cars. Again, though, they also said this at $10 billion, at $8 billion and at $5 billion. They look at the price-to-earnings multiple north of 230x and they say the price of this stock is a travesty. But it is not a travesty to those who own the stock, because these folks look at different metrics -- metrics like "cool car per share" and "safety per share." I know such terms are painful for those who do rigorous analysis, but the market isn't always all that rigorous.

Or take Netflix. This morning the Weinstein Company announced that Netflix will be the exclusive pay-television home for its content. The shrewd, seasoned investor says, "So what? Big deal. Who cares?" The user of Netflix, though, says, "Wow, now the Weinsteins are in? I can get everything with Netflix. I love this service. I have to buy the stock."

This morning I read an article about Amazon and how the company is spending fortunes to build out its warehouse network, and how this could really crimp earnings. This would be a negative for any other company's stock -- but not for Amazon. For Amazon, it's about dominance, about having the ability to do same-day food or next-day shipping with ease.

All three of these new items make the cult case stronger for ownership. All three signify that management, be it Tesla's Elon Musk, or Netflix's Reid Hastings, or Amazon's Jeff Bezos, totally "gets it." The people who like Netflix and buy the stock now have another reason to buy. The people who own Tesla can now crow they own shares in the safest car. Those who own shares of Amazon can say, "Look out, supermarkets. Look out, Wal-Mart (WMT). You can't defeat my stock." Oh, and it is "my stock."

Now, I recently test drove a Tesla and I loved it. It went from zero to 85 in a nanosecond, and you heard nothing. Plus, now I am doing management a real favor. I just binged on "House of Cards" on Netflix, and I thought it was one of the greatest shows I have ever watched -- although I blanched at "Orange is the New Black," because it's kind of embarrassing to watch with a woman. I ordered three books on Amazon this weekend.

But does any of this make me want to buy these stocks? No, because I am a professional, and that's not how it is done. However, professionals do not rule every stock. Some are ruled by retail investors, buttressed by short sellers who continue to undervalue the experience. As long as the experience is maintained or enhanced, these unsophisticated owners will keep owning and keep buying. Oh, and guess what? They have had the added advantage of being right.

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