In fashion and out of fashion. We talk about it all of the time. The same stocks that would strut down the market runway greeted with oohs and aahs can be pelted by tomatoes just a few weeks later. Stocks that have languished in the bargain aisle for months suddenly start selling like hotcakes, with shortages at every turn.
These rotations, as we call them, roil the markets and drive the uninitiated to distraction. How can something be so loved and then so hated in such a short period of time?
Not to be too sacrilegious in my metaphor mixing, but the answer is a little like Ecclesiastes, too everything, turn turn turn, there is a season, turn turn, turn, and a time to every purpose under heaven.
No, the purpose is not to shake you out, although it does feel like there is a time to gain and a time to lose.
But what's really going on? Investors are furiously recalibrating what they will pay for and what they won't and right now they want to own the stocks of solid companies that pay dividends and, if possible, buy back huge gobs of stock. They don't want the stocks of companies that issue equity, come up with non-GAAP ways of showing they are doing OK and only grow revenue, not big profits.
Given that the latter -- the Salesforce.coms (CRM) and the ServiceNows (NOW) , the Adobes (ADBE) and the Workdays (WDAY) , the Oktas (OKTA) , the Crowdstrikes (CRWD) , Palo Alto Networks (PANW) and the Zscalers (ZS) -- were all red hot, we are now wondering if something went wrong. Did these companies all lose their luster because they are now struggling with their high growth? With a few exceptions, the answer is absolutely not.
Salesforce Tuesday night reported a monster quarter and stories about how it cut its next quarter's forecast are simply not true. We know that Adobe's been putting up terrific figures. Sure Workday and Palo Alto seem like they have disappointed, but most companies with stocks that are flying now would kill for their growth rates.
So, what changed the collective minds? First, Wednesday we got still one more story that we are closer to a trade deal than we were two days ago when we heard we were far away from one. When we get that chatter, traders -- not investors, but traders -- decide that worldwide growth might be returning. Who in heck needs to buy consistent high revenue growth stocks when you can buy the stocks of companies that you thought were going to do poorly, but now have the possibility that their fortunes will change for the better?
Last night we had Michael McGarry on from PPG Industries (PPG) . He talked about how many of his businesses were doing quite well, but what really represents upside is the Chinese auto market where their coatings dominate, because of their universal high quality. You get a trade deal of any sort and you may be one step closer to a huge up 2020, so the stock flies to an all-time high. When you think of Chinese autos, you gravitate to Illinois Tool Works (ITW) , another stock that's closing in on an all-time high. Emerson's (EMR) chock full of China business, so its stock runs. Deere (DE) just reported an extremely difficult quarter and the company had the misfortune to report on a day when the talks looked like they would fail. Now the stock's flying on hope of a deal. Same with FedEx (FDX) , with a stock that was just criticized by an analyst who suggested that estimates are too high. But that won't be the case if Chinese trade improves. Even 3M (MMM) , which has missed quarter after quarter, has enough Chinese business to pique the interest of traders.
A hoped for rollback in tariffs breeds buying in retailers and what they sell. Home Depot's (HD) got a lot of made in China wares, including many product lines from Stanley Black & Decker (SWK) . So they both go up.
If we do get a bargain with China it's going to involve allowing our banks to do more business in their country. Here you get a two-fer, more business means higher rates, music to the ears of the big banks so JP Morgan Chase (JPM) and Citigroup (C) , Bank of America (BAC) and Goldman Sachs (GS) all soar.
Oh, and if you need confirmation that things might improve, look no further than the price of oil, which is finally lifting. Forget that the cause of the lift might be supply cuts by OPEC countries. The fact is, if oil can lift and the stocks can rally, you've created a situation that buoys, not just the oils and the drillers, but the minerals and even the beleaguered steels.
Oh, and you want crazy? Consider the curious action of Union Pacific (UNP) , which came out Wednesday and pretty much said put the wood to the estimates, saying that fourth quarter volumes will be down at least 10%. In another market this stock could have been down 10%. In this one? The fashionistas drooled over the $7.1 billion the company returned to shareholders in the first three quarters of 2019 including five dividend increases in the past nine quarters. Industrial volumes? Flat. Ag? Mins 2. Premium products off 14%. Energy down 20% with coal in secular decline.
But expenses are being slashed in precision fashion: third quarter work force down 13%, trains running much more efficiently with 2,800 stored locomotives, allowing for a fabulous, low operating ratio, the real gauge that drives performance. You layer on a Chinese deal and there's no stopping this freight train.
Oh, and of course, the traditional hardcore techs, the ones that play in the six big megatrends as outlined by Microchip (MCHP) , an inexpensive semiconductor company that preannounced better than expected earnings this morning, trends for 5G, data centers, autonomous driving, internet of things, electric vehicles and artificial intelligence machine learning, soared. They are undervalued by traditional metrics and trade on earnings not revenue earnings that could roar on a trade deal. Consider Micron Technology (MU) or Broadcom (AVGO) or Qualcomm (QCOM) for that matter. The stocks of Analog Devices (ADI) and Texas Instruments (TEX) took off already, as they look a lot like Microchip; same product lines.
Now, though, what do we do with the stocks that have been kicked off the runway? As I said earlier this week, the sell-offs in these kinds of stocks tend to last not days, but weeks or even, sometimes, a full month. Do we need Amazon (AMZN) when we can own the much less expensive, dividend and buy-back king Apple (AAPL) ? What's the real appeal of a Salesforce.com here after the big Dreamforce confab? Alphabet's (GOOGL) stock rallies, but that's an anomaly, chalked off to a belief that shareholders will do better without the distraction of founders Larry Page and Sergey Brin stepping down, and with the much more focused Sundar Pinchai taking the helm. The chaos that we perceive, with multiple health care divisions, money-losing other bets, a questionable set of ethics at the top that's the subject of an outside counsel investigation? Could they be behind this terrific company?
There's only one problem with these trade-related rotations. They are all torturous. If the Chinese don't buy billions of dollars in pork, will the slow ones now later become fast because the times they are a changing, If the president says he's not rolling back tariffs and he's going to put the Dec. 15 duties in effect, do you want what's being sold Wednesday or what's being bought?
That's why I like to use the rotations to readjust the portfolio. The companies being thrown away are those that are surfing the biggest secular growth story of our time, the digitization of corporations. They digitize or die and only about 15% of the world's corporations have adopted the core of digitization the cloud. That's why I say wait a couple of more days-remember I said these fashion rotations don't turn in a day and pick your favorite digitization play from the ones we always talk about. It's always better to catch them on the way down, not on the chase up. Let them come to you; that's exactly what they are doing.
