The rush to judgment of the rally in this first half's technology winners in the S&P 500 continues with the selloff versus so much of the rest of the market. And while many continue to hammer away at the notion that the move should be repealed because of its alleged similarity to 1999-2000, I presume this selloff is more of a belief that the prices for the moment have gotten ahead of themselves and not much more.
I say that because of the remarkable runs that these top 10 have put on since the year began and the lack of understanding behind so many of them.
But not all of them.
Number six in the rally, Micron (MU) , with a stock up 36%, is perhaps the least reminiscent of the performance of the flotsam and jetsam of the bad old days.
The giant semiconductor company reported just last week and it delivered still one more wildly positive earnings surprise, replete with enthusiastic price target boosts, some of which would produce a double in this $30 stock.
Yet, that's precisely the problem. Despite a remarkable beat, with earnings coming in at $1.62 versus $1.51 and revenues growing to $5.57 billion versus expectations of $5.41 billion, the stock had the audacity to decline 5%. That's because Micron makes two kinds of chips widely regarded as commodity in origin, DRAMs and Flash, and even as the company begs to distinguish the difficulties in making both, particularly the latter, its earnings profile is regarded as considerably at risk from competition very much on the drawing board.
Having lived through way too many boom-bust cycles of this ilk, I totally get the lack of enthusiasm of the buyers and the heated quality of the sellers versus Wall Street's expectations. Frankly, worse, this is distinctly top-like behavior, given that every peak in this stock has been preceded by remarkable trouncing of earnings and dramatic raises in estimates.
The irony should not be lost here: the company that is widely considered to be most like 1999-2000 in its prospects is the one that that has among the lowest price-to-earnings multiples in the entire market, really only challenged by the stock of General Motors (GM) when it comes to seeming cheapness. I say seeming, because I have seen numbers cut in half for this company in a very short period of time.
Should it be avoided? No. It should be played only with options, though, with a suggestion that the January $25 calls with so little premium but a delicious cut off five dollars from here would be the safest alternative.
Number seven in performance? The stock of PayPal (PYPL) , which has run 36% this year. Here's another incidence of chronic underperformance, this time triggered by a cabal of sell-side analyst bears who have continually written off this amazing company at the hands of Visa (V) and MasterCard (MA) , as well as the major banks, especially JP Morgan (JPM) but also Google (GOOGL) and Amazon (AMZN) . Yet they've all become frenemies, not enemies, in the last few years.
Payments processing is one of the hottest areas in the market. Witness the phenomenal run in Square (SQ) , the small-to-medium-size business processor, with a stock up 67% and a business widely perceived as a strong takeover target.
But it's this $65-billion giant with a stock that trades at 29 times next year's earnings that is widely perceived as the winner, because of its millennial love. Much of the gain belongs to the CEO Dan Schulman, who has confounded the critics with alliances with almost all major processors thought, at one time, to be anxious to destroy the company.
It's the fastest grower in the industry, and hasn't even had the time to begin monetizing its Venmo cash transfer system so loved by those in their teens and twenties alike. One of the reasons why its multiple is so high is the rapid adoption of its core product, given the headlong adoption of the web over the brick-and-mortar competition, something that makes it a credible threat to all the traditionalists in the fold.
Can its stock go higher? I think the stock is telling you that, like many of these first half winners, it has to go lower before it goes higher, a delicious savory mass of a company, thought to be plateauing when it's really only the stock, not the business that is unable to plow above this current level at the moment.
Speaking of wanting to go lower before it goes higher, consider the erratic run of the next best performer, the stock of Nvidia (NVDA) , which is up 35% for the year. At $103 before its last blow-out number, the stock hyper-extended to $160 before coming back to earth, if $139 is indeed terra firma.
I have been considered to be the biggest proponent of this stock, but even I blanched at the speed with which it made its last ascent, questioning its sustainability. My fear now, after this pullback, is more toward the notion of missing the next leg up than being obliterated by the next leg down.
Nvidia's chips are at the center of every single major trend, from artificial intelligence like that used in Adobe (ADBE) , to gaming, which is so crucial that game maker Take-Two (TTWO) took the rather remarkable step of withholding the latest iteration of Red Dead from the marketplace because of all the speed with which the new Nvidia chip can produce. It's also the key component to the voice recognition devices of Google (GOOGL) and Amazon (AMZN) , as well as to the mining of all crypto-currencies currently taking the world by storm.
For this, you are paying 39 times earnings for an $82-billion stock. I could argue, though, that it looks nothing like the grossly overvalued turn of the century version of Intel (INTC) , arguably at roughly 200 times earnings with a $400 billion market cap in March of 2000, ahead of an astounding earnings collapse. In fact, I think that Intel's stock at $3 in 1993, about to embark on a four-year run that took it to $26, would be more of a possible Nvdia flight path.
Don't sneer. It was the next portion of Intel's run, from $26 to $70, that was ill-fated, as the first run represented the adoption of the web, which I think could be similar to the adoption of Nvidia's chips to so many trends all at once. That would mean this particular pullback is an opportunity, not the beginning of a trip to oblivion.
We covered (EA) with a stock up 34%. The ninth best performing stock, Lam Research (LRCX) , up 34%, sells at just 14 times earnings for fear that its semiconductor equipment sales that are in use by the commodity makers like Micron could collapse any minute. I do not think that's the case.
I beg to differ.
I think that Lam has a pretty clear runway to a strong 2018, given how its machines represent best of breed and are experiencing incredible demand. The pullback from $165 to $139 has been jarring, particularly as it accelerates of late, but it makes sense if you do believe that much of its product line produces the ability to make commodity chips. I think that plummet sells this company -- led by the brilliant Martin Anstice, a frequent guest on Mad Money -- dramatically short, and its stock is begging for a new entry point.
Finally, there's Broadcom (AVGO) , with a stock at 14 times earnings that is widely perceived as hostage to the fortunes of Apple, hence its low multiple. But I regard it as more of a gateway to worldwide Five G adoption. Through multiple acquisitions, CEO Hock Tan has put together a company that's become integral to all of mobility, not just that of Apple, although, as I have told Action Alerts PLUS club members, it's not a bad stock to own in the run-up to the new Apple iPhone 8.
So, you put it altogether and you have a bit of a hodge-podge of low-multiple winners, something that you saw none of in 2000, and higher multiple companies with fairly certain earnings prospects, rather than very uncertain sales projections like that of 17 years ago.
I understand the fallibility of both the analysis I offer and the potential similarity to all stocks of all cohorts that have had big runs. All I ask is to recognize that, while profits are always to be taken, the prospects of these companies have genuine underpinnings not related to the potential excitement of the web, something that, to be sure, peaked a year ahead of the stock peak itself, even as that was unknown as stocks entered the fabled month of March 2000 with a head of steam that was worthy of a crash into not one, but a dozen retaining walls.