What are we willing to pay for a stock and when will we pay it? Today we got dramatic, in-you-face examples of these queries and the answers are a lot more subjective and ethereal than I thought.
First today we got a dramatic example case of "what's it worth" when an activist firm with a brilliant reputation, Elliott Management took a $3.2 billion stake in the venerable AT&T (T) and sent a letter to the board of directors calling for value creation that could bring the stock, currently trading at $37, to as high $60 plus per share by the end of 2021, representing a 65% upside.
AT&T's stock has been a miserable performer and Elliott blames the underperformance on some ill-advised moves by management, including an overpay for Direct TV, which is losing subscribers, and a failed acquisition of T-Mobile (TMUS) which jumpstarted that competitor with a gigantic break-up fee.
Despite those suboptimal outcomes and some questionable diversificatiosn into Latin America among other "causes", Elliott says with some changes by management the company could be worth a great deal more.
Specifically, by divesting distraction, cutting the fat, emphasizing some winning entertainment assets and stopping willy nilly mergers and acquisitions, this very undervalued company could trade at a lot higher price-to-earnings multiple.
Notice I didn't say that they need to fire Randall Stephenson, the CEO. They didn't call for board seats. In fact, Elliott, known for hardball tactics - something I think is an overdone as a narrative as they are actually quite constructive unless you mistakenly attack them - is presenting a totally reasonable roadmap to an increased institutional shareholder ownership. Given its abnormally high yield - as much as 6% before the recent run-up - it makes sense. What a great way to get income and have a stock advance.
Except the latter's not happening because of what Elliott says is pretty poor management, something that the stock market, the ultimate arbiter says is the case. In fact, the whole brief reads like a research report on why you should be willing to pay more for an improved AT&T, it just needs to improve first.
I find the document and - hopefully - the dialogue as good first steps toward owning a stock that institutions have shunned but many of my viewers and readers own because of its iconic reputation and its conservative capitalization, even as the first is tarnished and the second, good enough to support the dividend, doesn't justify the risk of ownership.
But, if Randall Stephenson embraces Elliott's changes, something that the company says it already agrees with in many a case, then the stock would be worth buying, even up here, because of how far behind the market it is and how inherently inexpensive it might be with the correct moves.
Which brings me to the turmoil roiling the market today - the wholesale revision of what's safe and cheap versus what's problematic and expensive no matter what.
While it's been going on for a week, market participants are beginning to recognize that there's no stopping the avalanche in selling of the expensive stocks to buy the cheaper stocks like AT&T.
Today we saw a wholesale jailbreak from high quality super-growth names into companies that look a lot like AT&T in terms of how far behind the market they are, but unlike T, how little recognition they are getting for changes they have brought about themselves.
Let's take some classic examples. One of my absolute favorite companies is Shopify (SHOP) , because of e-commerce trends that are in their infancy. As Baird said today in an excellent piece of research: "We are increasing our estimate for year-end Shopify customers to slightly more than one million (up from 800,000-plus at year-end 2018) based on recent partner checks indicating ongoing merchant momentum." Baird tweaked its sales estimates up to $1.54 billion from $1.53 billion in 2019 and $2.05 billion from $2 billion in 2020. That's phenomenal growth.
There's only one problem: Shopify, which is an almost $400 stock, should earn about 70 cents per share. So even though its got all of those customers, even though it is part of the great secular trend of empowerment retail, even though its got incredible revenue growth, it costs a fortune.
But it could be worse. CrowdStrike (CRWD) , the cybersecurity company, just delivered a fantastic revenue number and highlighted that it expects a smaller quarterly loss than anticipated: 11 to 12 cents instead of 14 cents. That's' terrific, except, alas it is a loss. This market doesn't want to see losses, it wants to see gains, big gains, and doesn't want to pay a lot for them.
It wants a stock like that of Citigroup (C) with an almost 3% yield that sells at nine times earnings, or a little faster growth Goldman Sachs (GS) with a lower yield but the same price to earnings multiple. It prizes JP Morgan (JPM) , even as its stock sells at 11 times next year's earnings because it is doing so well including possibly snaring the book-runner job of the largest deal ever, the Saudi Aramco offering.
It's not just the banks. The down and out oil companies saw their stocks rally, everything from Schlumberger (SLB) , the service giant, to the disliked Apache (APA) , both of which have yields north of four. By the way, if you want to be in that house of pain, I would welcome you to Action Alerts PLUS holding BP (BP) , which yields a sustainable 6% and actually has growth!
Why is the rotation happening? I believe that there is a prospect of trade happiness in the air -something I doubt but there's nothing stopping this hope moment - coupled with a belief that the Fed has no choice but to cut rates now that employment has weakened.
Oddly a hope that once rates are cut the economy will brighten is causing interest rates to go higher. And we're also seeing oil up a buck and a half. Remember every time you see that oil is going up the algorithms adjust and spit out that the economy is better even if the only reason why oil may be up is a potential cutback from the Saudis.
The ironies abound. Oil goes higher but down and out retail climbs with it as if it somehow brings in more shoppers that would otherwise go to WATCH, my acronym for Walmart (WMT) , Amazon (AMZN) , Target (TGT) , Costco (COST) and Home Depot (HD) .
Oddly, I like to be contrarian at moments like this. I say oddly because I think there is a misconception that I am still from the Church of What's Happening Now, which the late Mark Haines used to call me when I was a hedge fund manager. These days I want to buy what they are selling, although the stuff they are buying today is so cheap there's no reason to trim or cashier.
You need to know that we are not yet at some level that can necessarily sustain a bottom in the super growth stocks because if rates keep going higher the presumption will be that the oils and the slower growing techs and banks will be doing better than we thought.
I know the truth which is that high growth never goes out of season, it just has periodic hiccups that shake out the weak owners. So if you haven't found one or ones you like, consider Salesforce.com (CRM) , which had an amazing quarter, or Okta (OKTA) , which has cratered despite owning the highest end of cyber security.
I know that many of you have asked me on Twitter why your high growth stock isn't working. For that I say that's why we play am I diversified because on days like today you learn that all super high growth stocks, no matter what the concept, all trade together and when they trade down, well, don't take it personally.
(Citigroup, Goldman Sachs, JP Morgan, Schlumberger, BP, Amazon, Home Depot and Salesforce are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)