Fifteen seeds do beat second seeds. Upsets do happen. They are a given. We are surprised, but they do occur even as, in the end, a true underdog goes all the way.
We all accept that dogma when it comes to March Madness. Every bit of that is a given. Sure, when a Middle Tennessee stuns Michigan State or a Baylor falls to Yale, we are stunned, as stunned as I hope the nation will be by Villanova when the Wildcats take it all in Houston.
But in the end, fairy tales don't come true when it comes to sports, and, yes, they don't come true in the stock market. The favorites win, and sometimes, it often isn't zero sum: Many favorites win because there is no stock tournament champion.
I can't stress how important this theory is to investing because I can't get over the raw cynicism I hear about stocks -- good, solid stocks, of good, solid companies. When they do well, it's like Yale beating Baylor. It's always shocking.
Let's use this March Madness as a teaching theme about the stock market just using last week's earnings. Let's talk about Oracle (ORCL), which reported an excellent quarter last week and saw its stock propelled from $38 to $41, a terrific gain.
Here's a company that has been transitioning rapidly to the cloud from an older, on-premise technology. That concept always eludes non-techies, but just consider there is no Amazon (AMZN) store that you walk into when you place an order. It goes into the cloud. Amazon intercepts it and sends your requests your way.
A retail store, with its physical inventory and cumbersome rent and bricks and mortar, is old tech. Amazon is the cloud. Oracle has a combination of old and new tech under its wings. It is a dominant player in the older, slower-growing but still lucrative tech business. But it has a quickly growing cloud business and, just like so many retailers have a cloud strategy or else, Oracle is the same for tech. Consider, if you will, that Oracle is Wal-Mart (WMT) making its move on the Web to challenge an Amazon-like competitor, in this case, Salesforce.com (CRM). The difference is that Salesforce is focused on a platform that helps you sell more goods and coordinate your company's sales with service and marketing, while Oracle is doing that plus human capital and enterprise resource planning. It has bigger ambitions.
OK, enough of the background. Now I want you to consider Oracle's founder, Larry Ellison, as if he were a fabulous winning coach in the NCAA, and Oracle as a perennial contender. Ellison saw that Salesforce.com had come out of nowhere to develop a new offense and started winning business away from his team. So he pivoted and adjusted and brought in Mark Hurd and had him join Safra Catz, two very talented executives, as co-chief executives while he became chairman, to execute this difficult on-premises-to-cloud transition.
It took a couple of years but now it is coming on strong and the growth really is amazing. When the company reported last week, it had some eye-popping numbers that indicated a true acceleration. Oracle has been changing its stripes quickly and successfully for the most part.
Now, enter the NCAA and March Madness. Ellison and Hurd are both extremely competitive, zero-sum game. If you listen to them on their conference call and you go through their earnings statement, they take multiple shots at both Salesforce.com and Workday (WDAY), to the point where if you really got caught up in it you would believe that, indeed, there is a tourney, and these teams are going to trash-talk themselves to Houston where there is only one winner. They are so aggressive in their diatribes against one competitor in particular, Workday, that they make you feel that even thinking about betting on Workday is like betting on Middle Tennessee to win the second round against Syracuse, or Yale actually beating Duke, which, as delicious as that might have been for those who went to that Ivy League school -- and no other -- wasn't going to happen.
The analysts don't help. They, too, get caught up in the game. They, too, make it very zero sum. They, too, get emotional, the way the weaker sportscasters do as they sit around the table bantering without doing as much homework as you would expect from professionals.
Take a look at their emotional notes about the cloud after LinkedIn (LNKD) and Tableau Software (DATA) imploded with slower results in the first week of February. To them, it seemed these two upsets -- both Tableau and LinkedIn seemed to have momentum going into their quarters -- predicated a slew of upsets by Salesforce, Workday, Adobe (ADBE) and Oracle, for that matter.
So, suffice to say this community, as it is called, didn't think Oracle had what it took to get their ticket punched for the big dance, let alone the Elite Eight.
But the whole construct is wrong. In truth, this is about business, not bracketology. There is no Houston. There's no Sweet 16 even. There's just good companies with different valuations that either make sense or they don't. Yes, I will tolerate this much analogizing: LinkedIn and Tableau turned out to be the equivalent of soft high seeds, but in reality they weren't even playing in the alleged tourney. They weren't cloud stocks to begin with.
But the cloud conversion is so big that you have to forget about the notion of a Final Four going to a Final Two going to a champion. I think Salesforce, Workday, Oracle and Adobe and SAP (SAP), which also has a considerable software management business, can all be winners.
Now there are odds on each team to win an individual quarter or year. Oracle was valued at 14x earnings going into the quarter. Somehow that's underdog status vs. its long-term historical performance, but that's because cloud accounting is done ratably, meaning you can't see the earnings breakout until it accumulates over time, so it was a safer bet to do well, not to win, because there is no winning, but to do well. Salesforce, on the other hand, is expected to grow fast, so if it did poorly the consequences would be devastating for the stock. Again, though this is not Michigan State exiting the tourney in a stunning upset. A weaker quarter for Salesforce could beget a stronger quarter. Or a shift in what money managers want out of growth like Salesforce into value like Oracle.
It turns out Salesforce, Oracle, Workday and, yes, Adobe, which we will keep in the analogy because it is heavily cloud, all had spectacular quarters. There was enough internecine rivalry on the Oracle and Workday conference calls to make you feel like you were enjoying a true back-and-forth contest with only one winner, but, again, that's the foolish sports zero-sum thinking intruding into the reality of hard-fought business.
What you needed to know is that none of these teams was impacted by the slowing at Tableau, which is just an analytics company, or the cyclicality of LinkedIn listings, which turned out to be more macro, more involving slowing job growth worldwide than a repudiation of cloud growth, another ill-advised conclusion.
Suffice to say we get caught up into thinking that all of these companies are going to Houston with only one winner. It's the opposite, there is no tournament, just lots of good companies taking advantage of a secular or non-cyclical change that is going on in the data consulting world.
That's one of the chief reasons why I am not surprised at the remarkable turn in the entire stock market since the bottom on Feb. 11. Many businesses are doing well. Their stocks were all being brought down by a variety of issues from sentiment to a lack of cash coming into the market to lower oil prices causing a fear of a credit crunch to weaker European banks. None of those should have impacted these stocks.
But my conclusion is that the sooner you get the sports analogies out of your heads, something that hedge fund managers in particular are prone to, the sooner you realize that you can make money not betting against a loser and for a winner or not placing money on an underdog to go all the way. Rather, just accepting that there could be multiple winners and you aren't betting at all, you are simply investing in good franchises that could do well over time regardless of the other's strength. You want sports? Watch March Madness. You want business? Watch the trends, invest in good franchises, particularly when they are undervalued, and everybody wins.