A house divided still stands -- it's just not a sturdy as it was before.
I am speaking of the state of momentum investing -- how the market wants to stick with earnings per share and still wants reasonable valuations. That's the lesson of Michael Kors (KORS), the handbag and accessory company, and Workday (WDAY), the software-as-a-service company for all things human resources as well as a burgeoning financial-services business.
This morning when Kors reported, the stock immediately flew higher as the sales were so strong that you figured there could be no real problems. But a company that sells at almost 30x earnings, even with a spectacular growth rate, a 54% increase in sales and a 26% comparable-store sales number, is subject to a microscope and profit-takings, and short-sellers seized on an uptick in inventory, one that was flagged by Herb Greenberg ahead of time in his excellent Realty Check. I didn't want to believe it at first because retail is so tough that any merchandiser putting up those numbers would be rewarded. However, there can be no chinks in the armor with high-multiple stocks, and the defense of a cutthroat group reversed the stock cold.
Workday is similar. The fantastic, fast-growing software company won huge accounts, including Hewlett-Packard (HPQ), Life Time Fitness and Netflix (NFLX) for its services. The growth is an awesome 74%, but the company still reported breakeven operating cash flow instead of some number that would warm the hearts of those who truly want to see big gains in earnings as well as rapid growth.
Like Kors, you can see the ebb and flow of opinion as those who want to play the rebound take profits while those who don't mind losses as long as there is growth still pay up for the company's sales.
I continue to think that a battleground is no place to be, and both of these companies are in battleground mode. They are subject to massive interpretation. Greenberg, for instance, questions whether an inventory overhang could mean degradation in gross margins down the road for Kors. I worry that as Workday goes higher, the buyers will say, "I am not going back to that world where sellers overwhelm buyers because there are so many new software-as-a-service companies about to come public now that Workday put up strong numbers."
There are so many pros and cons with both. Kors has clearly decimated the competition; Coach (COH) is nowhere and any retailer wanting hot merchandise loads the boat with Kors. But that kind of growth has historically been too difficult to maintain. With a stock at or near all-time highs, there's cause for concern.
For Workday, even as it dismissed the notion of SAP (SAP) and Oracle (ORCL) really coming on strong, you have to wonder if either company will allow Workday to do what Salesforce.com (CRM) did to them -- basically becoming the platform of choice for so many companies. And when those two giants decided to squeeze Workday, won't it affect the growth?
Plus, how much longer can the bankers fend off venture capitalists itching to offload their own SaaS companies into the public markets?
So each company is subject to a crossfire of sellers, and that means the gains are tough from here, particularly in an atmosphere where retail is chaotic and Oracle and SAP must protect their turfs better.
The day when momentum investors can power up their stocks with their own buying is over. The fact that 3D Systems (DDD) can destroy its own stock with a secondary is a reminder that supply is the enemy of demand, and I think supply lurks quietly underneath in both stocks. Better to be safe and a seller than sorry and a buyer.