Froth is an enemy of the bull. But Beyond Meat (BYND) is the bull's best friend because you don't slay a cow to enjoy a delicious burger.
I mention Beyond Meat because it is the most egregious of the signs of froth, but there are others that must be examined and talked about to be sure we aren't off the reservation and on to a la la land of no discipline and no guardrails. There are some others that I want to address, including stocks in the cloud and stocks that ignited today off of the Salesforce (CRM) -Tableau Software (DATA) deal, but first let's talk Beyond Meat because it is beyond egregious.
The incredible trajectory of Beyond Meat is daunting to those of us who fear a toppy market and the run in Beyond Meat is a slap in the face of those who care about too much enthusiasm.
Now I have little doubt that Beyond Meat was priced too cheaply after this historic run. The first part of the rally I think had to do with irrational exuberance coupled with short-sellers who bet against the company because of competition from Nestle (NSRGY) and Impossible. It costs a fortune to borrow stock to short Beyond Meat -- remember you have to sell a stock to be short and that means locating stock and then banging it out. Locating that stock is very expensive. You have to pay money to borrow it first because it is hard to find as half the float is shorted. That's incredible.
That's why when you have a stock that added $3 billion in market cap in two days by providing full-year sales guidance that beat estimates by $5 million. This little company is now worth $10 billion largely on the backs of true believers who are gobbling up every share and short-sellers who are trying to keep their short on but keep getting bought in, meaning that the stock they thought they had shorted safely is being bought by the brokers who need to give the stock to buyers. It's nasty. But it's the mechanics that are the reason why it was up $29 Monday.
The issue here is that in my real life most people I talk to want to know if they should buy Beyond Meat. It's entirely circular reasoning: they want to buy Beyond Meat because it is going higher. There are no valuation parameters. There's no relation to reality. Kind of Beyond Tulips. You can't dissuade them because there's no reasoning with them. If they were vegans or even vegetarians it would be like rooting for the home team but this is just insanity.
It's a bad sign.
So, froth issue number one is the apotheosis of the ersatz hamburger.
Froth issue number two is the cloud kings. As a champion of these companies I truly respect how well their businesses are run and how their CEOs are pretty fantastic. That said, they can go off the rails. Monday morning Salesforce.com bid an outrageous amount for Tableau Software, a company that does cloud analytics. We had them on Mad Money and they are fantastic at data analysis that's incredibly useful say for any retailer trying to assess how it's doing in real time. Salesforce is paying so much for the company that it had to cut its earnings forecast, driving its own stock down $8 while sending Tableau up $42.
Now I, personally, think this is totally worth it. I expect the Tableau acquisition to pay off in much shorter a time than people realize. I am basing that on how quickly the acquisition of MuleSoft for a huge amount of money back in March 2018 worked out quickly and is now a (TGT) component of the 360 sales approach of CRM. Now, I think this will be the same and that you buy salesforce right here betting it will recover in seven days, which is what happened after the MuleSoft acquisition.
So, where's froth?
In the cloud kings and the cloud princes, which act as if they are all going to get bids when the reality is that they are more likely to be buyers than sellers. That's how you could see these outsized moves Monday in Workday (WDAY) , Splunk (SPLK) , Adobe (ADBE) and VMware (VMW) . That's pure growth and when there is no bid for these companies in a few days they will drop back down like stones.
Final evidence of froth: Each day there is some big-cap stock that is up gigantically on no news. Monday it was Amazon's (AMZN) turn. Why was Amazon's stock up 56 points? Ask around. No one knows. That's a classic sign of froth and it tells me to be careful. We own it for our charitable trust, Action Alerts PLUS, and it so tempting to sell it simply because in this market it goes right back down again Tuesday and a new frothy stock takes its place.
Why not, you might ask, then sell out of everything because froth means top? The answer? There are still plenty of signs that we are NOT at a top. Take Uber (UBER) . Here's a stock with minimally good financials but was still a darling of retail. The fact that it fell apart after the IPO like another money loser, Lyft (LYFT) , did is evidence that there's a limit to the froth.
So, frankly, are the reactions to the acquirers this morning: Salesforce's stock as well as the stock of United Technologies (UTX) , which is merging with Raytheon (RTN) , are both getting crushed. That doesn't happen in a market that's too frothy.
Meanwhile, there's always a reluctance to buy stocks because you don't know what our mercurial president might say or do. Monday morning the president attacked the U.S. Chamber of Commerce as being, basically, anti-American and too profit hungry. It was a populist rant, the type you might get from a Democratic firebrand except that firebrand would be saying that the Chamber sold out the working class.
The fact is that a populist president acts as a check on buyers because you never know when or where he will strike. Ten days ago, he lashed out against Mexico about the sieve-like border. He threatened to put ever-escalating tariffs on goods from Mexico. So many companies have business in Mexico that you would have to take down numbers for a gigantic part of the S&P 500. But then he took them back when Mexico seemed to cave and you had to go right back into the same stocks that you sold. That puts the hammer to froth.
Finally, there's retail. At various times we have a lot of visible retail stocks flying. Not anymore. Now we have just Walmart (WMT) , Costco (COST) and Target TGT going higher. It's hard to declare a market frothy when there are so few stocks in a key cohort that are working.
Where do I come out? Pretty simple: We still have enough moorings that I don't want to declare this market out of control. In fact, I think that Beyond Meat is still an outlier. But if we get more IPOs that go nuts, if we see continued rallies for no reason, if we see stocks getting giddy beyond the cloud kings? Then the tipping point will be reached. I don't think we are there yet. We are still too close to the May swoon. But it's certainly worth watching and worth waiting at this point before we commit any new capital.
