Phew, we're going down. Thank heavens we are getting clobbered. It's about time we've felt the wrath of the sellers.
Now I know that when the bulls get blasted like this, there's a tendency for many investors to turn fearful. The greedy are, at last, getting blown out. The prudent, the ones who have trimmed and trimmed and trimmed, as relentlessly advised, are being vindicated at last because it's been a very long time that every sale was instantly a wrong one. And the folks who think that stocks never go down? They are learning a brutal lesson: You lose money a lot faster than you make it.
So what am I doing being positive about this decline?
Because it's doing something that needed to be done and needed to be done soon, before too many people were led to the slaughterhouse. It's breaking the pattern of 1999-2000. During that fabled run, the leaders never really took a breath. They just keep charging and charging ahead. If you chart, for example, the rise of the stocks of Qualcomm (QCOM) , Intel (INTC) and Cisco (CSCO) , three of the huge winners of that era, you just don't see any periods like this where the losses run into the double digits for many stocks.
I have been very concerned that we were doomed to repeat that spectacular run because it led to one of the most horrendous declines in the history of the stock market. This market does have a great deal in common. We saw a handful of tech companies involved with digitization and the internet and telecommunications power a miraculous assault on Nasdaq 5000 from 1700. Given that the move started at 1700 just a year and a half before, with almost no substantial correction, the bulls got too confident. While the current move is led by some very substantial companies with excellent earnings -- think FAANG -- we are paying much more for those same earnings than we were one year ago. That's called multiple expansion, but I like to call it, at a certain point, the greater fool theory as in I buy these stocks after they have run -- and many of them have run huge -- with the hope, some would say certainly, that someone will pay even more for them not long from now.
It gets worse. Lately because you haven't seen this kind of selling squall in ages, we have attracted people who bought high and never even sold. The stock of Zoom Video's (ZM) rallied 641% this year. Tesla (TSLA) ? 357%. Those are huge moves and you can expect at least some of those gains to be repealed. Zoom's stock declined 100 points right after it reported a great quarter and then soared again. It hit its all-time high today. Some profit-taking could be in order.
But there are some differences to back then. First, while we are inundated with IPOs, unlike 1998 and the first part of 1999 many are of very high quality, with astounding revenue growth, such as Snowflake (SNOW) or incredible sales AND earnings, like GoodRx (GDRX), the prescription price cutter than IPO'd Wednesday morning. You can't really relate the two, especially because I think many of these companies have staying power, but only a handful of the 330 companies that came public in that era even made to 2002. Second, the undoing of that era came from not the IPOs but the overwhelming insider selling as the execs in many of these companies knew they were falling apart and wanted to hit the exits before their edifices crumbled. Finally, many of those companies' prospects were predicated on the idea that we were going to have rapid web adoption, including video. It took fifteen years for that to come true. By that point almost no one made it.
So what happens now?
I see three buckets of stocks that intrigue me. First, there are the stars that are falling, something that intrigues me. The other day Apple's (AAPL) stock had dropped 25% from its high, something the truly red hot stocks of 1999 never did. That seems to be a level where real buyers come in. So let's play it out. Amazon' s (AMZN) stock traded as high as $3,500. That means you could argue it could be bought at about $2,600, 400 points down from here. Given that Amazon's stock is still up 63% while Apple's stock is "only" up 47%, that seems like a reasonable haircut.
The same back-of-the-envelope analysis would put Microsoft's (MSFT) stock, currently around $202, down to about $180, although if you factor in that it's up 28%, much less than Apple and Amazon, it might stop sooner.
Meanwhile, the toughest to analyze is Alphabet (GOOGL) , currently facing a Justice Department antitrust inquiry, with a stock that's only up 5%. Sure it's valued at 31 times next year's earnings but it has a ton of cash and terrific growth.
See what I am saying? If you ran that same analysis in 1999 you would have said that there really wasn't a price that anything could be bought and you were simply surfing momentum.
Let's step away from tech for a moment, though, to show you some genuine carnage that no one's really thinking about. PepsiCo (PEP) , a very fine company with great growth and a tremendous balance sheet, is now down 17 straight points from its high and yields 3%. General Mills (GIS) just reported an excellent quarter and raised its dividend to a 3.5% level and is still down from $66 to $57. James Quincy, the CEO of Coca-Cola (KO) , was just on and he told a very compelling growth story that comes with a 3.3% yield. The stock of Johnson & Johnson (JNJ) , the company that just announced a gigantic Phase Three trial for a Covid vaccine, is down 12 points from its $157 high and yields 2.79%.
These stocks represent real growth and real value and you can buy some now and buy some lower. They have the added advantage of not having any hot money in them to speak of so your fellow shareholders aren't going to panic and dump the stock.
Now there is one other crucial difference between 1999 and now. We have had weeks where many stocks have been rolling over and rolling over aggressively like those of PepsiCo, Coca-Cola, JNJ and General Mills. But, unlike then, bonds are giving you next to no yield and the Fed Chair just told you that you can expect that to continue for some time given the raging pandemic. Consider these companies like bonds with growth in them, an excellent combination.
Now I am not trying to reassure you that we aren't going to go down. Just the opposite. I think we are in for choppy times where all of those who thought that stocks never go down get lost in the desert and never make it to the promised land of realized profits. I enjoyed Tuesday night's Off the Charts where we considered the work of the legendary Larry Williams who told a tale that said we should expect turbulence until a little less than a month from now. Given the high-quality nature of the companies I just mentioned and how they have stocks that should fair well both in a pandemic and in a slowdown, you can leg into them if you don't own any although, if you are on margin or have no cash, you are still not too late to sell.
The main thing you have to consider: We tend not to bottom until all of those largely new investors lose a considerable amount not just of what they made but of the capital themselves. We can't tell when they will be done selling. But we do know where you can start buying with a lot less risk: down 25% from the top for the high-fliers and at 3% yield for the growth and value stocks.
Anything more aggressive than that, or anything that needs a vaccine to have growth? Give it a rest and we will revisit later.