You may not know the concept of dedicated money. It's the core principal of money management that money, once allocated to a specific business sector, has to stay in that sector no matter what. It just shifts its focus within that segment. Today we are seeing it writ large and it is defining the winners and losers, in a host of sectors.
The most glaring place to spot this inter-sector rotation? Technology. For most of the last year we have seen a lot of money go into what I call plain vanilla technology, semiconductors that power industries like autos, personal computers or cellphones. We had seen a resurgence in money managers buying stocks that have to do with enterprise spending, meaning those big-ticket information technology purchases that are the backbone of modern day, computerized business.
Slowly, though, we have seen interest dissipate in the plain vanillas of tech. The disaffection started when Intel (INTC) and Microsoft (MSFT) failed to deliver earnings upside surprises of the quality needed to keep their stocks roaring higher. Given that these stocks had given you magnificent runs in 2014, there was a bit of "okay, terrific, but can't you do better than that," about both companies. I think Intel deliberately kept expectations down but either way the stock has hit a wall. I get that.
Microsoft, which my charitable trust owns, gave you a very uninspiring quarter and totally lackluster guidance when many were expecting big things, and it got hit with a slew of downgrades. You can measure the quality of conference calls dozens of ways. I like to ask, was it a breathtaking performance? Was it a beautiful arc that told a riveting tale? Was it a charming narrative of growth followed by spectacular guidance?
And then there's those kinds of conference calls where you have to dig paper clips into the palms of your hands to stay awake. Microsoft was one of those kinds of calls. It was like going to a movie where nothing happens. As I listened, I found myself reading the label for the all-natural and organic rice cakes I was snacking on while I tried to combat that "Lunesta" of a call. Didn't work. Slept like a baby on the kitchen floor.
Then we had the twice-told disappointment in the once-charmed SanDisk (SNDK), the company behind flash memories that excited so many because it was a ubiquitous product, until someone else made a better ubiquitous product. Yep, a preannouncement to the downside followed by still one more shrill number cut. A condo of pain!
At the same time, we got some negative chatter out of the disc drives makers, inexpensive stocks that had been charmed for so long but are now looking more and more like value traps. Sure they spit out cash like ATM machines. Except money managers demand at least some revenue growth or they will punch in their pin numbers and take out their money. We saw that happen all day.
The exodus from cheap tech includes money fleeing from Micron Technology (MU) when we heard about a Korean company muscling in on its business.
But today we got the real parting blow, the coup de grace, the one that said, "Okay, we are done with inexpensive tech." Today we got Hewlett-Packard's (HPQ) quarter and frankly I was as disappointed in the whole affair as you could be, visibly disenchanted after we interviewed CEO Meg Whitman on this morning's Squawk on the Street. It was, quite simply, a real bad quarter, one that's befitting of the 10% beatdown the market's meting out to its stock.
Hewlett-Packard's reach is big. It spans all portions of tech. Enterprise spending, networking, personal computers, storage and printers. And it was almost all bad. There wasn't anything positive that I could really hang my hat on, anything to make me want to stick around, not even the split into two companies, one of which is going to give you the best chit in the 3-D printing game. Sure 3-D is cool, but the rest of the printing business, we learned today, is being eviscerated by the Japanese, aided by their weak currency. Hewlett-Packard called it "fierce competition," in the space.
You know what? I want no competition in the space.
Which bring me back to what happens when managers get disenchanted with one portion of a sector and flee to another segment of it, this time growth over value. That's what defined trading today as money didn't just gravitate to higher-growth companies from lower-growth value enterprises like Hewlett Packard -- it flash flooded into it. That's right, we are seeing a wholesale switch to the expensive stocks of high-growth companies that have lagged, the companies with big moats, the companies that nobody thinks have much competition even though they don't represent, or in some cases, resemble value at all.
We are seeing people buy the stocks of none other than Facebook (FB) and Google (GOOGL), two darlings of recent yesteryear that had been left for dead by boring old tech. The stocks of Facebook and Google have been painful to own, they've been like watching paint dry. No, check that, it's dreadfully unfair to Cramer faves PPG Industries (PPG) and Sherwin Williams (SHW) -- premier paint-makers that have participated fully in the Home Depot (HD)-Lowe's (LOW) led home renovation boom.
Now Google deserves the opprobrium. Any company with management that feels compelled on its conference call to say that, unlike what many money managers think, it actually cares about its stock price going higher has gotten a little embarrassing. Can you imagine any coach or manager in sports ever saying, "Hey guys, I actually care about winning, I really do?" But that's what we heard on the Google call.
Facebook? It reported a fantastic quarter, just amazing, but one thing that's annoying about Facebook is it typically moves around on earnings and not any other time. It's static and it's been clinging to the mid -$70s. If I want a static clinger I will go buy Clorox (CLX) and get some yield, too.
But in the face of all of these old tech names doing poorly, the money dedicated into the tech pool is choosing high growth even if it has higher risk. How do I know this? Because I scoured the newswires, hit up the trading desks and put up queries in social media about why Google and Facebook were running, and when there's no reason you know the reason is the rotation I just described.
Of course the rush out of boring tech into exciting tech didn't stop at Google and Facebook. After a couple of days of pain, money came roaring back to Palo Alto Networks (PANW) and FireEye (FEYE), gold standard cybersecurity companies.
We also saw waves of capital coming into Netflix (NFLX) and Amazon (AMZN), too, but they had been among the biggest winners this year already. We are hearing lots of noise out of Amazon analysts that this quarter will show a real earnings breakout. Netflix has Season 3 of House of Cards coming out, which will certainly mean a wave of new sign-ups. I know I am bingeing on it the moment the series is released.
You know when I play "am I diversified," I often say that you have to think outside of the box when it comes to what defines a sector. Today's one of those days, because we are see growth rotations in more than just the tech segment. I have been waiting for the most expensive stock in the restaurant group, Chipotle (CMG), to come alive when overall growth woke up from its slumber. Today it soared. In many ways Chipotle is in the same sector as Netflix -- they trade on the fastest growth, not on growth at a reasonable price. Starbucks (SBUX), the other most expensive stock in the restaurant group, is breaking out, too, although that one, like Netflix and Amazon, has been a great performer all year.
Who else trades in the growth sector? Take a look at Priceline (PCLN). Again there is no news whatsoever. But it's roaring because all of growth is roaring. Yes, they all trade together.
Now I have to tell you, do not get too complacent about the longevity of this rotation. We have an analyst meeting from IBM (IBM) tomorrow and if it tells a better tale than it did last quarter we could see a reversion right back to old tech of which IBM certainly defines. That's how fickle this market can be.
For now, though, the market has declared a winner in the tug of war between growth and value courtesy the huge disappointment that was Hewlett-Packard, a reminder that a big move in a big capitalization stock can create a seismic shift among money managers in no time flat.
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