In the stock market, beauty's only growth deep. Anything more substantive than that, anything that represents, say, value, quickly takes on the coloration of being worthless.
I'm always saying that this market is enamored with growth, that it will pay "anything," meaning pay up beyond reason, for a company that's growing at a speed that well exceeds that of the average company.
Often that predilection gets hidden, perhaps because of earnings surprises or takeovers. You may not see it that starkly as there can be momentary sparks of growth for just about anything when compared with itself.
Sometimes, though, it's so stark as to be painful. Today is one of those "sometimes."
First, let's deal with the two stocks that caused the Dow Jones to yell timber, United Technologies (UTX) and IBM (IBM). The first, UTX, or UTEX as it's known on Wall Street, has, for years, been considered one of the bluest of blue chips. You could always count on the company to deliver good numbers whether it be in aerospace, defense, or heating, ventilation and air conditioning or Otis elevators. Occasionally one division would slip, or another would have an anomalous and fleeting downturn. But the mosaic always worked and disappointment wasn't in the vocabulary.
Now, frankly, it's the language I have come to expect from the company, as pretty much every single division disappointed, with Otis being particularly egregious.
In fact, today's quarterly report, the big guide down, on top of a previous shading down of the numbers just a month ago is simply embarrassing and exasperating. You can always tell when things are awry when you get open rebellion on the conference call like this exchange between a top-notch analyst, Jeff Sprague, and Greg Hayes, the president and CEO of United Tech:
"Greg, I don't know if you can hear it from your seat but certainly there's a lot of murmuring out there that something isn't quite right, and it just doesn't feel like the UTX we've come to know with the water torture on the guidance. What is your confidence level now on where you cut things? How aggressive is the forecast as it stands today and where is the soft spit in the guide still in your view?" Ouch, that's heresy.
Hayes' response echoed a resigned-ness about his own company's prospects: "Good question, Jeff. Look, to say that I am disappointed would be a significant understatement. We're all disappointed in having to take the guidance down." Then after describing some acute weakness he added, "what we have tried to do today is to put a stop on the downside, and I think the guidance we have given for both Otis and for the Aerospace Systems Group is guidance we feel confident that we can hit. And I am tired of delivering bad news and so we've probably been more aggressive on the downside because we don't want to overpromise and under-deliver."
To which, all I can say is "wow." That's a major admission from a major CEO of some major screw-ups at a company that's known for its consistency. And you know what? Even though the company yesterday sold what was once seen as a pristine, fantastic division, Sikorsky helicopter, because it had been missing numbers, a sale that drove up the stock of the buyer, Lockheed Martin (LMT) by the way, and guided the elevator business way down, in large part because of China, I'm not sure that the market trusts them. That's why this company could lose 7.5% on the quarter, an astounding decline for this once paragon of consistency.
And you know what? I don't even know if it is done going down. First, it only yields 2.5%, hardly enough protection to stop those fleeing. Second, it sells at 13x next year's earnings, a big discount to the 18x the average stock clocks in at. But that may not be enough. There might have to be a further discount because this market abhors anything that stinks of value. UTX is a pariah because its earnings may actually be shrinking year over year.
But if you want hated, consider IBM, the one-time titan of tech. It got clobbered today because it's trying to transition from value to growth, emphasizing divisions that have all the right buzzwords like "cloud" and "big data" and "cognitive intelligence" and "analytics" while de-emphasizing old legacy information technology offerings. The company's making progress. The strategic imperative businesses, as IBM calls them, are delivering some terrific growth, but the good part of the company can't outrun the decline of the legacy businesses and now IBM's had 13 quarters of negative revenues.
IBM's in a real bind. It's committed to spending billions upon billions of dollars buying back stock and paying dividends when I could argue that the money could be much better spent just paying up for some big-time acquisitions that would expand its cloud and big data offerings instantly, like a ServiceNow (NOW) or a Tableau Data (DATA) or a Splunk (SPLK), but those would be an anathema to its core shareholder base, which includes Warren Buffett, the company's largest holder. Buffett loves the buybacks and dividends and management justifiably loves Buffett. But that means embracing value and value is, alas, an anathema to the majority of investors.
IBM now sells at an astoundingly low 10x earnings, a huge discount to the average stock. That's the kind of price-to-earnings multiple we expect of a company with no growth whatsoever, which is exactly what IBM is giving you. I can't recall when I have seen it so cheap and yet it is as unwanted as I can ever remember. That's the paradox of value I keep alluding to.
You want galling? Consider what this market is willing to pay for. On a whiff of spending discipline, it rallies Google (GOOGL) nine points on top of the 100 it gained last week, after a momentary pause in Monday's trading. Or how about Facebook (FB), which has been a juggernaut of late even before we have seen the quarter, rallying again today on the expectation of good numbers. Or Netflix (NFLX), which just won't quit after adding subscribers at a record level.
While it is true that Google isn't all that expensive on earnings, trading at about 20x next year's number after the run, Facebook's current multiple is about 50x earnings and Netflix? It doesn't even matter to people. As long as the content is exciting and the sign-ups robust, then earnings be damned.
Now as I mentioned yesterday, the buyers of Amazon (AMZN) don't play by the valuation rules either. And we know those who keep purchasing Tesla's (TSLA) stock clearly aren't exactly what I call bottom fishers or value hunters.
Yep, this market has a curious double standard. If you have super growth then your stock will be rewarded with a super premium. No price is too expensive for the priceless. But if your stock represents value? Then it's just plain valueless.