Is it Prince or is it The Monkees?
That's the dichotomy we are staring down the barrel of. Put simply, are we singing "Party like it's 1999," a Prince stalwart that would mean we are about to get crushed, or are we "Believers" and we can't leave this market if we tried, a Monkees tried-and-true tune via the amazing Neil Diamond, the actual song writer.
As we go higher, this gulf is beginning to get wider. We are hearing more and more about how this market is reminiscent of 1999, when we saw the Nasdaq explore higher only to explode outright in 2000. Those are the people who are warning us that we are simply partying without an ounce of discipline.
Then there are the Believers, who think that the market's not just a fairy tale, but the real thing.
Which is it? Gee, it's awfully hard to tell.
We have been scaling back some of the highest fliers for my charitable trust, which you can follow by joining Action Alerts Plus club. I have been taught that discipline trumps conviction, and I can't walk away from something that has kept me in the game for 41 years. It can hurt: Every sale has been "wrong" so to speak, because almost all of the stocks we have sold have continued to go higher. I just don't want to be accused of being Prince, but the late, great singer doesn't have a lot of common with Jimmy Chill.
But I do believe that there are many stocks you can still own, that can still be justified, and I want to attack them head on.
Let's start with Apple (AAPL) , the world's largest company. Eight months ago, the stock traded at $169. Now, on the eve of earnings, it's at $319.
This morning CNCB's David Faber posited that this move is chiefly multiple expansion, meaning we are simply paying a lot more for the same earnings.
What if it isn't the same earnings, I shot back. What if Apple reports a huge upside surprise because of the amazing demand for the 11 -- we just got word that Apple has raised its semiconductor orders for the device, and its accessory business may have had some serious growth because of the love for the AirPod pros, which I can attest are extraordinary. In other words, after a long time in the flatline wilderness Apple could be apple a growth stock again.
Then when I was on "Halftime" with my buddy Scott Wapner, we were fortunate enough to have legendary investor and businessperson Mark Cuban on, and he pointed out that the whole character of Apple is now changing with the recurring service revenue streams. I'm a believer in the growth of the service business, which reminds me of the razor blade side of Gillette: It's where the money is. My conclusion: Own Apple, don't trade it.
Now let's deal with Netflix (NFLX) . Last night Netflix reported a quarter that drove the stock down as domestic sign-ups disappointed. Given that this is a sign-up story, meaning it matters how many people embrace Netflix each quarter, we heard clarion calls that the growth days are over. The buyers, it turned out, were partying like it was 1999, until Tuesday evening's comeuppance.
I have liked the company, Netflix, for a very long time. There was nothing that was said on last night's video conference call that made me less of a believer in the story. Yes, they changed some metric that some say now overstates how many viewers a given program has.
I say who cares. What matters is Netflix is an amazing platform. Yes, it is overvalued on earnings, but it has always been overvalued on earnings. But how about market cap? I think that it is perfectly reasonable that Netflix has a $150 billion market cap, because of the opportunity it has to be truly a global entertainment company, something that was made clear Tuesday night as Netflix grew international subs much faster than expected. What about all of the competition from all of these other services like Disney+ (DIS) and ViacomCBS (VIAC) and Hulu and the like? Netflix CEO Reed Hastings talked about how that's a natural evolution. At one time rabbit-eared broadcast ruled the entertainment world. Then cable. Now it's streaming and Netflix is integral to streaming, something Cuban, a huge and long-lasting shareholder of Netflix, emphasized when he said most new televisions come with Netflix built in. Who else is built in?
The secret sauce of Netflix? Artificial intelligence. They know what you want and they aren't interested in harvesting that data in any way other than to give you what they know you want. How powerful is it? Sure, I want to watch "The Witcher" and the documentary about Aaron Hernandez, the Patriots great, who was convicted of murder and died in prison. Who doesn't?
But the other night I had some free time and I wanted to know what Netflix had for me. Five years ago, I interviewed Hastings on one of our forays to the San Francisco bureau. In preparation for the interview, I got up at 2:30 a.m. and called customer service, which I heard was legendary, and I said I wanted to watch the best movie about the Soviet Army's invasion of Germany in World War II. The woman, Selina, as I remembered it, within seconds asked if I had watched "The Fall of Berlin," which chronicles the tale of a soldier on the Eastern Front who fights his way to Berlin.
Bingo. Perfect match. It was just what I wanted.
Now, fast forward to last Monday night. I was itching for something to do. What pops into my queue? "T-34." What's T-34? It's the name of the legendary Russian tank that took the Soviet Army from Moscow to Berlin. A mythological tank crew challenges the Nazi's and shows the superiority of the T-34 to the giant tanks the Nazi's used.
Granted, I am niche watcher, but how is that for artificial intelligence? Many companies claim they have AI ability. Netflix changes your life -- or at least your viewing patterns -- with it.
Let's put one more in front of you. So many people talk about how this market's become too expensive. There are no bargains. I say, wait a second. How about IBM (IBM) and Broadcom (AVGO) ? Last night IBM reported an upside surprise with excellent cash flow, great numbers from its Red Hat division and, most important, fantastic mainframe sales. I think that at 10-times earnings with a 4% yield, IBM represents a decent investment for as long as that mainframe cycle keeps working. Broadcom? It's got terrific cellphone orders, but it's been kept back because the company paid $18.9 billion cash for CA Technologies, a business heavily allied with IBM's mainframe cycle. What do you have here? A well-run semiconductor company -- the hottest group in the market -- that sells at 13-times earnings, a considerable discount to the rest of the group, with a 4% yield to boot.
Sure, IBM has several faltering businesses. Yes, it's classic cloud business, away from Red Hat, isn't growing nearly as fast at Red Hat. The company will have trouble meeting estimates when the mainframe cycle peters out, although it shows no sign of slowing now.
What do these examples show? Simply put: they explain how you can justify believing in three high profile stocks and how it's not all that much of a leap of faith when you consider the pros as well as the cons.
That's what makes me a believer and makes me someone who doesn't want to leave the market -- even as I'd often like to try.
