Look, this is a very tough market. The average stock in the S&P 500 is down 20% from its high. We are gripped with intense commodity deflation at the same time the Fed is worried about being too easy lest we have inflation pick up given the robust job growth. We await every tick from China and the ticks have been mighty bad. Oil is going so low that companies are going to have to reorganize. How many? Too many.
The political backdrop is incredibly negative. Perhaps worst of all, stocks of best-of-breed companies are getting damaged even when they report excellent earnings or good news. Even stocks that have received takeover bids are getting crushed to the point that you have to be concerned whether they should have done deals at all. Would Dow's (DOW) stock be higher had it not tied up with DuPont (DD)? I think that's a totally legitimate question worth asking Dow CEO Andrew Liveris tonight on Mad Money. I am sure he didn't expect a selloff of this magnitude after a tie-up that sounds so terrific longer term.
All of these issues are why I prepared a checklist yesterday to show you how many things need to go right in order for the market to get out of this funk. I by no means believe every single one of these boxes has to be checked to get a bottom, as some have implied in social media. Nor do I think my worries naturally conclude in a recession for the U.S. That's just not true. I am saying, however, that this is an unforgiving market and in an unforgiving market you have to expect things will go wrong, not right.
So with those negatives in mind, let's talk about the hazards of speculation. I often tell people they have every right to speculate with a position or two in a diversified portfolio. Some of our biggest wins have come, for example, from speculating on low-priced stocks. Consider that 10 years ago I put Len Schleifer, the CEO of Regeneron (REGN), on Mad Money when it was a $5 stock. Today it's at $456.
Len talked at the time about a revolutionary drug, Eylea, that he said could work wonders against a very bad eye disease. There was a standard of care back then for the disease, known as macular degeneration, that involved giving a patient a weekly injection in the eye in order to reduce progression of the illness. Len said his company had come up with a drug that had the same results as the once-a-week injection except it only had to be injected once a month. He posited a question about which you would prefer more, being injected in the eye once a month or once a week.
I was in disbelief that there could be such a better mousetrap, but I immediately suggested that Regeneron would be a terrific stock to speculate on.
That turned out to be a very right decision.
Similarly, for much of 2014 and all of 2015 I urged you to buy the stock of Receptos, another speculative biotech. Again, that paid off handsomely with a rich bid from Celgene (CELG) that allowed you to make very good money.
Right now, though, I would tell you that with this identical set of circumstances we have, I would be reluctant to have recommended the stocks of either company. Neither had earnings. Neither had anything that could possibly at that moment be described as blockbuster drugs. Regeneron had been kicking around for ages. I remember buying some Regeneron on the initial public offering back in 1991 when I was running my hedge fund. It had talked about a cutting-edge treatment that could lead to a cure for spinal-cord injuries. It didn't pan out.
I would be totally gun-shy in this environment if I had Len on today with the same set of circumstances because I would so fear that his eye drug, which has turned out to be one of the all-time great blockbusters, could turn out to be a loser like the spinal-cord formulation. I would have said, whoa, Receptos is way too dicey to be talking about right now.
Which brings me to two situations where it is time for a mea culpa because I misjudged the environment we are in: Fitbit (FIT) and Alcoa (AA).
I championed Fitbit from the moment it came public and it soared. When it got too close to the sun, I had the good fortune to say, "Take profits." But not that long ago, I did a piece comparing Fitbit to GoPro (GPRO) and came out wholeheartedly in favor of Fitbit over the camera device company. I was right, GoPro plummeted and Fitbit hung in.
Then, however, at the beginning of December with the stock at $30, I interviewed CEO James Park, and afterward, feeling reassured, I said it would be a Fitbit Christmas. I was confident it would be a big seller and that it would also garner incredible sales from corporations that might want to cut down on their health care bills. It was a health-and-wellness special.
I was right on both counts. Every major retailer I checked in with sold a huge number of Fitbits. It was among the top holiday gifts at all outlets. In the meantime, the company's been winning big corporate orders as a health-and-wellness incentive to keep health care bills down.
Not only that, but on Jan. 5, with the stock still at $30, Bob Peck of SunTrust, one of the best analysts on Wall Street, came out with a report that was even more glowing than my review of Fitbit, and I felt terrific about the situation.
Since then, however, the stock has fallen apart, to put it mildly. Yep, it's been crushed. What happened? First, there's been tremendous shadow boxing as we heard from reports from the Consumer Electronics Show about myriad Fitbit competitors all over the lot. Second, we heard endlessly that Apple (AAPL) is about to come in with a Fitbit killer. (Dow and Apple are part of TheStreet's Action Alerts PLUS portfolio.)
Neither seems to be challenging Fitbit's prospects right now. But it doesn't matter. Fitbit is, in the end, a speculative stock, and even though I was right about the holidays and the orders, it didn't matter. This market abhors speculation and I should have recognized that. My bad.
Alcoa? Same thing. Last night the company reported a quarter that wasn't perfect. There were issues involving the falling price of alumina and about a recent acquisition that has fallen behind schedule. The acquisition is in the key aerospace division, which is the company's keystone business line.
I chose to overlook those issues and, after interviewing CEO Klaus Kleinfeld, I recommended the stock because in six months the company will be splitting in two and I believe the price of alumina won't matter that much and the glitch at the aerospace division will be history.
I was wrong. This market is unwilling to overlook anything negative and it turned on what I thought was a decent speculation ahead of the mid-year split and sent the stock down more than just about any in the S&P 500.
I have little doubt that Kleinfeld's decision to split Alcoa into a commodity producer and a proprietary manufacturer of aluminum-based products, with a dominant position in lightweighting both planes and trucks, is the right move. I have little doubt that the stock will one day react to this larger sum-of-the-parts way of evaluating the company.
But, again, my push on what is a speculative grade situation was wrong, at least short-term. Just like with Fitbit, I misjudged the antipathy people have toward any story with any holes in it, let alone a speculative situation with some actual flaws.
Now, I still believe in both situations. I think Fitbit's stock does not represent the opportunities open to this company as a health-and-wellness device and overstates the competitive landscape. I think when Alcoa finally does split in two you will see tremendous value created by the split.
But it doesn't matter. The bottom line is that I was wrong about the environment and that's a huge factor in what I should be taking into account. That's why I am issuing a mea culpa. We are not in the right moment to speculate and I should have known better and I regret that I did even as I remain confident in the long-term value of both the stocks and the companies behind them.