Ain't no mountain high enough, ain't no river wide enough, to keep portfolio managers from getting to you.
Think about that song whenever you see stocks rallying well in advance of anything that seems even remotely good news, because it is the thesis behind much of what passes for intellectual rigor when it comes to the timing of professional portfolio management.
One of the most vexing aspects of buying stocks is not trying to figure out how long it will be before a particular business cycle turns -- but rather, how long money managers might be willing to wait for the turn to take hold or even be in sight. If there ain't no valley wide enough for some of the bigger dogs, then, well, that's the timeframe that matters. You can't game the game, you have to game the gamers.
This dichotomy of the actual turn versus the turn that's perceived to be in sight has played out in an incredibly volatile and capricious way this earnings season, and I want to go over some of the more bizarre but ultimately lucrative battles we've seen, so you know how subjective this art of timing cycles can be. Oh, and let's not bury the lead too much: Sometimes there's no cycle at hand except the hope cycle -- and that can be a killer, as we know hope should be left to the stadium not the ticker or crawl at the bottom of the screen.
Let's start with one that pretty much everyone disagrees on, which is why it's been so confounding: The oil cycle.
Thursday night on Mad Money, David Demshur, who runs Core Labs (CLB) , an oil service company with the best return on investment, so he is no slouch, said it is really just a matter of time before the oil drilling cycle turns.
Seems logical, correct? If you run an oil company, you have to replenish your oil every year and, hopefully, show growth so Wall Street is appeased.
But for Core Labs, and for its cousin Schlumberger (SLB) , there has been no cycle turn and anyone who has tried to predict one has been crushed. Don't I know it. For a long time I told club members of Action Alerts Plus to hang on to some oils. I said that all of the time on Mad Money, too. It worked with Anadarko Petroleum (APC) , as we caught not one, but two, bidders as both Chevron (CVX) and Occidental Petroleum (OXY) decided they needed Anadarko's prospects but not its management.
But we also thought the stock of Schlumberger, so much lower than it was when oil was literally half of where it is now, would bounce as traditional large-scale drilling would bounce back once oil had stabilized.
Well, oil has stabilized and drilling has bounced back. Someone should tell the stocks though. The traditional cycle of drilling has changed. The oil companies themselves, after spending way too much, have been chastened. Investors have taken their dollars away from companies that were willing to spend like crazy to grow -- natural clients of both Schlumberger and Core -- and given them to companies that are prudent cash managers. It's a wholesale shift and it turns out there is a valley wide enough to keep portfolio managers away from these stocks. It's been a huge and disappointing bust of a non-cycle, the first any of us have ever seen.
Do you give up now? I'm not. But I would normally be doubling down here and instead I am taking a pass. I think the growth of the fecund portion of Texas known as the Permian, which has helped double our production from roughly 6 million to 12 million barrels a day in eight years, will keep a lid on oil for years, something confirmed by the oil futures, which out five years from now trade in the mid-$50s, five dollars below current prices.
As bad as it has been to get ahead of the oil non-cycle, fortunes have been made anticipating the turn in the big commodity-like semiconductor stocks and their doppelgangers, the companies that make equipment to build new and more powerful semiconductors.
Right now, prices for major semiconductors like flash and DRAM are still going south. Yet the stocks of companies that make them, like Micron Technology (MU) or Western Digital (WDC) , and the cap equipment makers like Lam Research (LRCX) bottomed five months ago. Not that long ago I saw an old friend, Dan Niles, a hedge fund manager and former analyst, who talked on CNBC about how this move is happening way too early, therefore implying no staying power.
Remember though, we don't need to game the game, just the gamers -- and the big portfolio managers have gotten ahead of the turn and aren't letting go. I fear that if you aren't in now, you will miss the next leg up, not down.
You may not have heard of the stock of Arista Networks (ANET) -- until today, because it is falling $50. But what happened last night to this stock was purely cyclical and few gamed it correctly. Arista, which makes the plumbing for the cloud, last night hinted how there's a pause in spending for a major cloud provider, thought by the analyst community to be Microsoft (MSFT) . That's stunning, because until last night we didn't even know there was a cycle of spending. The cloud's supposed to be a secular grower.
I think it's just a pause, NOT a cycle. I say that because earlier this week Lisa Su, the CEO of Advanced Micro Devices (AMD) , said she sees downturn in chips for the data center. This one's tough because Bob Swann, the CEO of Intel (INTC) , saw something akin to Arista when he spoke in the wake of Intel's shortfall. I am going with Su.
Cycles can be elusive and chasing them can be deadly. I have watched helplessly as the stock of Dow Chemical (DOW) flails and flaps because of a disbelief in the plastics cycle. Dow has tried to present itself over the years as immune to the cycle and a far more secular grower. However, the crunch in the stock on Thursday shows not only that the Street isn't buying the company as a grower regardless of the business cycle, but also that it is being dubbed a cyclical -- and the cycle's at the BEGINNING of a downturn that might not end, given the hatred some younger portfolio managers have toward the poorly recycled commodity.
Where do I come out? I am splitting the difference: I will take the 5.3% yield, close to a floor and the highest in the Dow Jones Industrial Average, until CEO Jim Fitterling figures out a way to get this pup moving again.
The meanest and most insidious cycle of all, the one that's been brutal if you try to anticipate it? The auto cycle. People aren't buying cars worldwide at the pace they used to. Blame it on the cost, blame it on the sharing economy. Whatever. Nevertheless, on the eve of the mother of all IPOs in this cycle, Uber, it is worth pointing out that DowDupont (DWDP) -- what's left after you spin out Dow -- and 3M (MMM) are both hostage to what is thought to be a cycle, yet its either elongated beyond belief or permanently impinged. No matter, no one's trying to anticipate a turn anymore. It's been too costly to game the gamers.
So, remember, you can't wait until the cycle turns, you will be too late, because there ain't no valley wide enough to start buying. But then again, you may just be doing nothing but crashing into a mountain.