Nobody likes the techs and the fins? Yet it's the techs and the fins that are flying and leading this market. What's going on?
When I say the techs and the fins, I am speaking of the technology stocks and the financials. When I say nobody, I mean most of the big-time money managers and activists we interviewed yesterday at the Delivering Alpha conference just didn't seem to want to go there. They didn't seem to like or trust the businesses.
For example, Bill Ackman, smart guy, who has made fortunes investing in restaurants and chemical companies and railroads, just feared buying into a business that could be wiped out by a disrupter. He likes companies with moats, that Warren Buffett description of a business that can't be taken down by the proverbial better mousetrap.
As for the financials, I think the managers who have repeatedly gone back to these stocks as "cheap" vs. their historical levels have just given in, beaten up, not able to take the pain anymore.
They are too hard to analyze.
And you know what? These managers might very well be right when it comes to their targets. But I think it's time we speak truth to power and say just how wrong that's playing out right now.
The hottest stocks in this market, other than the targets of takeovers, are the stocks of companies with disruptive technologies and the financials.
Now I know that you could easily miss them both. I am very sensitive to what these managers think of as tech and what they fear. Take Intel (INTC). Last night, after Intel reported a big upside surprise, the stock jumped almost 10%. As always, the people who bought the stock didn't listen to the conference call and revealed themselves as the special kinds of idiots who belong on some wall of anonymous shame because we can't identify who they are.
But when you listened to the conference call, you realized that Intel, far from being a buy, simply was a tale of woe, a business that's still so levered to the personal computer that all of the good work it's doing away from the PC isn't enough. Stacy Smith, the sensational CFO of the company, said Intel had been modeling mid-single-digit declines in personal computers, but, woops, it turns out that it is, and I quote, "kind of down in the high single digits." Ouch.
The only other business that is declining at that rate is the coal business. I am not kidding, go listen to the CSX (CSX) conference call and you will see that the railroad, after getting used to low-single-digit declines in coal, now sees it declining in the high single digits. Lumps of coals and PCs. Who woulda thunk it? Microsoft's (MSFT) in a similar position, frantically trying to reduce dependence on personal computers by offering cloud-based products. So is Hewlett-Packard (HPQ). But they can't outrun the decline.
IBM (IBM) and Oracle (ORCL) are trying to be involved more in the cloud, but they can't outrun the declines in the rest of their businesses to satisfy Wall Street.
So I totally get the reservations by the big-money men because the tech they know is outdated.
But I wonder if they know Tableau Software (DATA), the company that offers analytics software that is better than anything legacy. It hit another all-time high today, up 48% for the year. I wonder if they are familiar with ServiceNow (NOW), only a few points off its high and one of the fastest-growing information technology companies out there. Sure, these companies can be disrupted, too, but not yet, not in their formative periods. (ServiceNow is part of TheStreet's Growth Seeker portfolio.)
Or let's get less abstruse. I didn't hear anyone like Facebook (FB). Yet companies keep writing checks to Facebook for $100,000 and getting $200,000 back in business. It's the preferred way for everyone to get customers. Every time I am out with a consumer products company exec who is trying to reach millennials, he or she just turns it over to Facebook advertising people with computer science degrees who are smarter than they are about reaching customers. They then keep the customers with the help of Salesforce.com (CRM). Again, that's another company that doesn't come up.
Let's not just use information tech. How about biotech? Where were those big-time portfolio managers on the next Receptos (RCPT), which I might have next week, or for that matter on Celgene (CELG), which is up again today on the acquisition of that terrific company.
Nah, they see pharma as Merck (MRK) or Glaxo (GSK) or Pfizer (PFE), no-growth businesses with uncertain prospects and dubious pipelines. They are looking at old pharma, not new pharma. (Merck is part of TheStreet's Trifecta Stocks portfolio. Pfizer is part of the Dividend Stock Advisor portfolio.)
They were nowhere, that's where. Oh, and let's go there because I have already. I didn't hear anyone talk about the most important disrupting technology force in entertainment worldwide, Netflix (NFLX). Sure, the tech is suffused with creativity, but it is tech nonetheless and its moat reminds me of the Pacific Ocean with no Pearl Harbor in sight.
Or how about the banks? Everyone's giving up on the banks just when the most important expense is coming down and coming down hard: the legal expense. The Justice Department's bank grand inquisitor, Tony West, has gone to PepsiCo (PEP), and that was the signal, right then and there, to raise numbers. Sure, we care about net interest margin, what they make, effortlessly, off your deposits. Yes, the yield curve, the shape of what interest they can get on those deposits, is going higher because of money demand and because the Fed will soon raise rates.
But what these managers missed was the fear and loathing of the Justice Department and, believe me, it would have taken the artistry of Hunter Thompson to describe the bizarre world of how Justice arrived at those sums that the big banks have paid.
Some of these banks have spent billions in defense just to end up paying billions to the United States in fines. I could have argued, like my personal hero, Dick Kovacevich, former CEO of Wells Fargo (WFC), that West would have done better putting some bad guys in jail rather than just having the shareholders bear the brunt of the fines. But you want to have some fun? You caught the beginning of a major run in almost all the big banks when West left the Justice Department for the greener pastures of PepsiCo. Right then, the analysts should have gone Hold to Buy, but they were too busy thinking inside the box and worrying about earnings per share based on lending and deposits. The swing factor was expense, legal expense. Go ask the execs at Bank of America (BAC) or Citigroup (C) or JPMorgan (JPM) if you don't believe me. (Facebook and Wells Fargo are part of TheStreet's Action Alerts PLUS portfolio.)
Or for that matter and more timely, go ask the people at Goldman Sachs (GS) who seem to be a quarter behind and are still getting hit with big litigation fees.
Now, I am not saying there aren't lots of things I heard yesterday that make sense. I thought Bill Miller was spot on when he said Delta (DAL) can go higher. That airline is growing at a phenomenal rate and sells at an amazingly low price to earnings multiple. I understand all the financial engineering that execs want to do with foods and restaurants and retailers.
But in the end, I come back to the fact that these portfolio managers seem to be scared of the past, so they come up with creative ways to cotton up to dowdy situations. I always say there is more than one way to skin a cat. However, the big cats, the lions and tigers, they don't live in the cages these hedge funds hunt in. They are in the great open spaces where they are harder to find but a heck of a lot more lucrative when you do so.