When some stocks fall too much and others rally too high, Wall Street loves to play a game called mean reversion. It's the type of thing that they learned on some trading desk, something that makes sense historically, something that makes sense economically, something that makes them sound smarter than you. But in reality it is just short hand for: "on the one hand it's good but not this good, and on the other it's bad, but not that bad." I guess because it's only two words, instead of a mouthful, it's helpful. Nevertheless, I think that for the purposes of the vast majority of viewers and readers, what you need to think about is the extremes and whether they are fair or have gotten too good or too bad.
Best examples? Let's start with one that some think got too good: Take-Two Interactive Software (TTWO) . I have followed this company for ages, hated it from $27 to $13, loved it from about $15 until, well, I still love it. Why? Because it has taken a hit business and developed it into an annuity, with key franchises like Red Dead Redemption, NBA 2K and the greatest entertainment franchise of all time -- Grand Theft Auto.
Last week, Take-Two reported a quarter that looked like a typo both on the top and the bottom line. It was as if a whole swathe of the country decided you know what, I am not doing what I was doing, I am now going to do nothing but play one video game over another, only of the Take-Two variety. In fact, I think I am going to quit work and play video games and get paid to do so by the federal government.
You get the picture.
So the stock spikes to $150. And then on the call, the company says something that I thought was pretty logical, that maybe things won't always be this way and it doesn't expect any new big hits in the interim before they start up all over again. You then get the sickening pirouette that comes from the company itself deflating its stock, when, of course, all they were doing is what they always do, which is underpromise, and now you have the so-called smart money out and the camp followers frightened and nauseated and asking what the heck is wrong with Take-Two when all that is really wrong is that some have figured out that with the Great Re-opening it can still be good, but not this good.
I swear that is all that has happened.
On the other side, let's look at Southwest Airlines (LUV) . This is the best-run airline, bar none. Yet, because of the sad shape of the industry, it had to take $3.2 billion in payroll support. That pretty much, for most people, doomed this fantastic company, that and the 55 million shares they offered at the end of April and $1 billion in convertible senior notes.
The horror, the horror.
But then, despite all of this horribleness, the stock got to the low $20s, cut in half from where it was when this whole nightmare began and it stopped going down. We don't know why. Maybe it was because Warren Buffett stopped pressuring it with his miserable selling -- he did own 10% of the darned thing, that could destroy any stock.
Then the Grand Re-Opening began and a few more people start flying. When you are flying a couple of thousand people instead of millions and those numbers double, you better believe you have some eye-popping gains, certainly bigger than the ones that Take-Two gave you.
Of course, Gary Kelly, the CEO, told us recently on Squawk on the Street, that it doesn't matter if you are set to fly if there is nothing to go to. But have you seen the news? Theme parks are making plans to open up. Plus oil stopped going down so the key Permian Basin of Texas might get some "mojo," to use the precise term.
Next thing you know, Southwest's stock jumps 10%. And even after that jump, it is still nowhere. So it can do it again, and, if more good news about the opening comes, still one more time.
Yes, it's bad, but not that bad.
At home on day one, people are thinking these Wall Street traders are off their minds. On day two, they are thinking, wait, they are giving away money, maybe I should get some. And on day three? They plunge.
What do you think happens then?
What's bad can't be that bad and what's good? It can't be that good.