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  1. Home
  2. / Jim Cramer

Jim Cramer: Playing the Relative Investing Game

Investing can be fun until it turns brutal for what seems to be no reason.
By JIM CRAMER
Mar 04, 2021 | 06:41 AM EST
Stocks quotes in this article: PINS, FB, SNAP, TWTR, SNOW, ZM

Relative investing may be the most treacherous kind of investing there is and right now we are playing the relative game like it's almost never been played.

What's relative investing?

Let me give you an accessible example: the stock of Pinterest (PINS) , one of my favorite websites because it attracts people from around the world who are hobbyists, an insanely benign site where you are not going to be withholding news from our greatest historical ally, the Australians, or inciting people to riot on the Capitol steps.

Pinterest was, at one point, an also-ran in the great debate among advertisers about where to target consumers. It was growing, but not as fast as others, it skewed international and most of the American consumer product companies don't really understand international markets well enough to go all digital on them. But then the company had a fulcrum quarter, one that revealed it was growing fast enough and clean enough that it was worth a buy, or at least taking some of the ad dollars allotted for the uncontrollable Facebook (FB) , and it worked.

Next thing you know the company's stock has gone from $20 to $80 and you go from having a mid-cap stock, to a $50 billion company on your hand, one that is selling at 70 times earnings with the sky being the limit because the estimates say it is growing at 50%.

So, what does that say about its competition in the sector? Here's where relative investing gets you: Pinterest's move ignites the whole group. So, Snap (SNAP) , which like Pinterest, had been a bit of an also-ran because of problems with its own design, cleans up its act, starts getting an increased amount of traffic and the market has to figure out what the new Snap is worth. Ah simple: let's not figure out what its worth absolutely on its own, let's go relative.

Is it growing like Pinterest? No, it's growing twice as fast.

So what's it worth?

Easy: twice as much as Pinterest. So it gets a valuation that's two times Pinterest at its height, or $100 billion.

Then along comes Twitter (TWTR) , and its growth is accelerating. We put it through the same prism as Pinterest and we get a stock that's worth twice what we thought, or $60 billion instead of the $15 billion it traded at not that long ago.

But what happens if we have a sell-off, a deep sell-off of these high price to earnings stocks, one precipitated by fractious bond yields that move up 50 basis points, a small move relative to where they have traded over the years, but a huge relative decline in price. Do we say, don't worry about it, the businesses are fine? Do we think that, somehow, there is something to buttress these valuations other than their relative net worths? There's no buyback, they are probably issuing shares. There's no dividend, these are growth stocks. Plus the chart, which had been straight up is now bent, bringing on short sellers galore. There's nothing to pin the valuation on, so we go Humpty Dumpty until yields calm down.

That's where we are right now and it makes for the shaky edifice that so many of us feel is underpinning the great growth stocks of the moment, including Snowflake (SNOW) with a tremendous growth quarter last night or Zoom (ZM) the other day which has been thrown out as if it's been supplanted by another, better, system. The only stocks that have beaten the withering fire: the cruise lines because they were never embraced by institutions anyway. All of these stocks only got where they were there because others got there earlier and maybe those others are wrong which means there's not much to hang your hat on.

The bad news may mean that everything growth is worth less than we thought, and I mean, everything. The good news is that the main reason why we were even allowed to play this relative game so successfully is that low interest rates inspire magical relative thinking. If we get rates to be tamped, then the game will be played again this time with a little more caution and a little less absurd valuations because the less informed will get blown out by the losses.

Investing can be fun until it turns brutal for what seems to be no reason. Then again, if it weren't brutal at times, wouldn't everyone be rich who invested? That's why prudence matters, profit-taking makes sense when you have big gains and those who think stocks only go up, learn the hard way that they go down and they go down a heck of a lot faster than they took to go to those lofty, relative and, for now, mistaken heights.

(Facebook is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells FB? Learn more now.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long FB.

TAGS: Investing | Markets | Stocks | Trading | Jim Cramer

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