Enough already with these ridiculous industrials.
Let's just go buy the stocks of the best companies and make some big money regardless of the price. Too soporific an analysis of a day's action? Probably, because we can't get into the heads of the buyers. However, Wednesday it seemed like whatever went up in the first quarter got sold down, and whatever had been banged down finally got its day in the bullish sun.
Is this a definitive rotation back into the Nasdaq names that led this market last year? Or is it a one-day respite from the misery that this group has inflicted on so many people who are new to stock investing and have endured a horrendous period since the year began?
To answer that question, we have to figure out how these darlings, and I am talking about the Snowflakes (SNOW) and Twilios (TWLO) and Service Nows (NOW) and Salesforces (CRM) became so disliked. We have figure out why the stocks of the Apples (AAPL) and the Amazons (AMZN) and Adobes (ADBE) became such dogs even as their businesses remain strong.
First, some of this move just may be the mechanics of Wall Street. Mutual funds that disclose their positions have been reluctant to show that they owned these names. You don't want to be in stocks that were obvious losers. Buying them the last day of the quarter after such miserable performance makes you look smart, not dumb. Some firms send out their holdings before the end of the quarter. They don't even have to show that they own these disappointing holdings.
Why would they be reluctant to show them?
Because this has been a quarter about the reopening of the U.S. economy because of the rapid vaccination process that many did not anticipate. We could be on the verge of an unprecedented boom and when you have one of those, which we rarely have, you can't afford to own stocks that have these slight beats. You have to go for the ones that have real pizzazz.
Case in point, Cleveland-Cliffs (CLF) .
Unlike the old winners, the FANGS and the cloud kings and the like, you probably don't know Cleveland-Cliffs. It's an ancient firm, dating back to 1847 when Cleveland ruled the world -- hey, John D. Rockefeller started his Standard Oil Empire there. Cleveland-Cliffs is known for making iron that's used for steel as well as making steel itself. It's an old fashioned company that's supposed to be past its prime. But when things boom, institutional money managers don't want Service Now or Salesforce, they want Cleveland-Cliffs. And who can blame them? Last night Cleveland-Cliffs pre-announced a sharply better than expected quarter, something these tech companies almost never do. When you get a pre-announcement, something that says Wall Street has no idea of the magnitude of how well this company can do, that creates amazing buy interest, hence why the stock rallied 15% Wednesday and is now up 36% for the year.
Unless you have been an institutional money manager, you are probably scratching your head about this whole outperformance. Who cares about iron and steel? You want data centers, semiconductors, internet of things, software as a service, and the like. A pathetic old Cleveland iron works? Are you kidding me?
But if you are an institutional steward of capital, you are salivating over the comparisons Cleveland Cliffs just gave you. Remember, the thing that drives stocks the most, that is the best predictor of the direction of a stock is, if a company trumped the estimates. The bigger the magnitude of the beat, the larger the gain. The great tech companies have not been able to demonstrate that they can crush the estimates or if they can, the belief is that the gains are not sustainable. DocuSign (DOCU) and Zoom (ZM) , for example, both reported monster beats vs. the estimates, but those gains are considered ephemeral, because once the country reopens, business will not be as strong vs. the expectations.
In fact, there is a belief that they may not even beat the estimates at all. So, on the one hand you have the stocks of companies that won't offer much of a surprise and on the other hand you have companies that actually have such a wide variance of earnings that they can't even be kept under wraps. They have to be pre-announced, because the government doesn't want you to wait until the company's reporting day, if you are going to report a number that's a magnitude of difference vs. what research firms are looking for. And remember, this company's doing these kinds of numbers before President Joe Biden even proposed his American Jobs Plan that will, if passed, use a ton of iron made by Cleveland-Cliffs.
If you were to ask me whether this move is a sign that the companies with stocks that roared Wednesday are about to show the same kinds of explosive earnings that Cleveland Cliffs showed, the kind of earnings that will propel their stocks into the stratosphere, I will tell you absolutely not. They are not part of the great reopening. They don't fit in to the thesis that the big trigger-pullers want.
Further, these companies have stocks that are too expensive for most professionals who like to buy stocks that sell at a ratio of price to earnings, not price to sales. Sure, they like a Facebook (FB) or an Alphabet (GOOGL) , because their stocks are so beaten down that they actually qualify as inexpensive. I could argue that Apple's stock is almost there, too. But most of stocks that flew Wednesday just can't be counted on to have big runs here. Sure, they can get a couple of days' worth of momentum.
But you must respect what the largest managers want, the stocks of companies that will produce exciting, huge gains if the economy grows at 10%, which is becoming the consensus of what could occur this quarter as America officially reopens and stimulus comes flooding into the American coffers.
It's not just the comparisons, though, that could hurt Wednesday's ralliers. As the economy gains momentum, it will create inflation at a pace that, again, will make large money managers less likely to like expensive stocks, because those are the ones less likely to hold their value.
Now, I don't want to rain on anyone's parade, especially as we are closing out the quarter at a record high for the S&P 500 showing that there is broad participation in the move. Nor do I want you to bail from some of the great growth stocks of our time. I do want you, though, to look over your portfolio and do some critical thinking about how many of 2020's best stocks do you want to own. I think as the quarter goes on, it will be kinder to the industrials and the banks and less hospitable to techs and health care stocks.
Remember my view. I do not want you to be blown out of the market, because you are experiencing heavy losses. When you get these counter-trend rallies like Wednesday's and perhaps Thursday and Monday, you need to consider them as reposition days if you own nothing but companies with big sales but no earnings to speak of -- or if you own too many special purpose acquisition companies or too many companies of which you do not even know what they do.
I know, you could argue that it's better to own a Unity Software (U) or a Crowdstike (CRWD) or a Zendesk (ZEN) or a Ring Central (RING) than a dirty old iron company. That might have flown last year, when individuals traders were more in charge than at any time I have ever seen. But 2021 is the year that the institutions took back control of the market and for them, what's best of breed means very little. They want what's the most surprising company, not in terms of invention or in terms of its consistency, but in terms of its earnings vs. expectations and very few companies will have stocks that will do better than dirty old Cleveland-Cliffs.