Healthy declines? Bullish selloffs? Positive corrections?
When I first got in the business 40 years ago I would hear these terms and they would drive me crazy.
What could ever be good about the market going lower, unless, of course, you are a short-seller betting on plunging prices.
But over the years I realized that, just like a gardener who cuts back plants in order to encourage growth, a sell-off can breed a better market down the road.
I don't want to get ahead of myself, though. Let's discuss what I am concerned about and why we need to be worried about certain aspects of this market.
First concern? IPOs, specifically to Infinity and Beyond Meat (BYND) .
Last night we profiled Beyond Meat and gave it our total stretch blessing to buy up to $35, a ridiculously high price but it is a ridiculously fast grower. We mulled all day how we could possibly get to a price of $35 and in the end said that because it is growing faster than all tech companies coming public, the stock of this faux meat substitute, can get a total stretch valuation from its $25 origin.
But it turns out our totally lenient $35 target, which translated to 25 times last year's sales - not earnings but sales - is only half of what the market turned out to be willing to pay. That's right, this thing's twice as expensive as the top we endorsed and we accepted that we were accepting nosebleed prices.
Now I know that the company only raised $241 million and it is only a $4 billion company, this kind of behavior, taking a stock of an unproven loss-making company to 50 times sales, is NOT a good sign. It's a sign of a lack of discipline and over exuberance. Moreover, it is going to encourage reckless behavior right along the lines of how Pinterest (PINS) and Zoom Video (ZM) , have continued to percolate since coming public.
Think about the trajectories of those two darlings. Pinterest prices at $19, opens at $23 and change, and then goes to $34 seven days later before pulling back to $29 today. Zoom Video is more outrageous: priced at $36, opens at $65, and then goes to $76 before slouching to $72, another double from where it all started.
Pinterest now sells at 22 times 2019 sales. Zoom's 40 times 2019 number.
Why is this so troubling? First, because I don't even like to pay more than 10 times sales for any stock because there is too good a chance that it might blow up in my face come a couple of quarters.
Second, and perhaps more important, when you get these kinds of moves you can revert to what your mother always told you when you were little, or at least I hope she told you: It's all fun and games until someone gets hurt.
I know the Lyft (LYFT) deal was a bust. But that ride-share IPO now seems like a distant memory. Now it really is all fun and games, and those who are plotting this undisciplined course will get hurt.
When will they get hurt? It's not clear. The brokers seemed to have learned from Lyft that you have to let the buyers win now and then and these three, Pinterest, Zoom Video and Beyond Meat are massive wins.
Could the brokers simply be trying to suck you in for the biggest deal of the skein, the IPO of Uber, a company that's losing money with slowing growth? We know when Facebook's (FB) IPO crumbled the market took a header. What if history repeated itself with the biggest deal of this era?
Second sign of too much froth? How about the stock of Tesla (TSLA) soaring not on better than expected sales or earnings, but on a $2 billion capital raise! Why is it rallying? Some of it is because if the company can get all of that money, then it's in clover for a downturn. But it also rallied because Elon Musk indicated he intends to buy $10 million of the stock portion of this equity and convertible bond offering. You may hate him, you may love him. But we certainly can't doubt his commitment to the success of this company's common stock, and his enthusiasm may make it so the deal gets oversubscribed and short sellers won't be able to cover or bring in their shorts on it. Stocks typically go down on these kinds of deals, not up. The Tesla balance sheet isn't exactly pristine and the company that is bringing the deal, Goldman Sachs, actually has a sell on the stock. Talk about excess, that's the definition of excess. I remember there was a time when Goldman Sachs research would kill underwritings they felt weren't worthy of the firm. Clearly that's no longer the case or the firm wouldn't be working with Musk to raise the capital. Do I think that it will be a good deal? Again, everything is about price but it sure seems that in this tape, it will work.
Third example of froth? Take a look at the stock of Qualcomm (QCOM) . It's gone from $59 to $87 in a couple of weeks' time. It reported last night and the management said that things may not be as immediately rosy when it comes to 5G as people think. It portrayed the lag between now and when it is mainstream as potentially disappointing to some.
Initially the stock got hammered on this cautionary warning. But by the time trading started today it went up, not down, on the downbeat forecast. Sorry, that's not realistic. That stock should be pruned.
Now it's not like everything's rosy. This morning I interviewed Jim Fitterling, the CEO of Dow Inc (DOW) , after he reported a pretty decent quarter, not too far from the mark, and the stock fell an astounding 6% to where it yield's 5.33%. I would argue that's an irrational lack of exuberance. My charitable trust, which you can follow by joining the Action Alerts PLUS club, is getting clocked by this stock and I am aghast at how hated it is right out of the chute. That's actually encouraging. You want people to know that you can lose money, not just make money when you invest.
Once again the managed care companies are getting spanked. Remember, I said that these stocks had further to go before they bottomed. They may not be done going down.
And a market darling like Square (SQ) got spanked when it did an in-line quarter. That's encouraging, too. Skepticism is welcome.
Know that you do not make big money like this at the start of a major move. You tend to get it near the end and I don't want anyone to get hurt here. That's why I reiterate that I am blessing some trimming so you have cash to buy if the market does take a header. Again, I don't have great trepidation here. You will most likely make good money holding an array of stocks here if you are patient.
But better prices, I believe, lay ahead. Why not be ready for them with some fresh cash to do some buying?