FROM THE STREET.COM
Unexpected Supply
By James J. Cramer
1/13/00 9:19 PM ET
When Net companies buy other Net companies with stock, the strangest thing happens: Sometimes the recipients can immediately dump the stock, inundating the market with supply nobody expected.
So, when Digital Island (ISLD:Nasdaq - news) buys
Sandpiper Networks, the Sandpiper recipients can offload a ton of Digital Island.
When E.piphany (EPNY:Nasdaq - news) buys
RightPoint, the recipients can blow out of a massive
amount of E.piphany.
Take a look at those two stocks. Tell me that you can
live with that amount of pain, that you can handle that
level of discomfort as these insiders take their stock off
the table.
If you can, I salute you. But if you can't, then you
understand my predicament. I never wanted to sell any
E.piphany, but I have to sell some if I am going to
manage my risk.
All of my trading life I have had to understand the
fundamentals first, the macro environment second, and
the charts third. It has never been in my lexicon to have
to know the insider-selling rules. They have never played
this big a role in the stock market. Since the start of the
new year, however, they are the dominant force on the
Nasdaq.
Now, however, it is ironic that the most material piece of
information in this market is not earnings, or revenue, or
guidance. It is float. Or, more accurately, the "moving
float average." (I just made that up, but boy would it help
to know the moving ratios of how much stock is
outstanding over how much trades.)
Let's take eToys (ETYS:Nasdaq - news), which is my
favorite example. One week the stock is at 59. Another
week it is 19. What happened? Stock was released.
Lots of it. Millions upon millions of shares. And it got the
stuffing knocked out of it.
Let's think about the eToys situation. It really did have a
pretty respectable Christmas, certainly a better one than
Toys R Us (TOY:NYSE - news). You have to admit that
it has great brand recognition and that it has massive
revenue for a young company. It has executed fairly
flawlessly. It will be a winner in the dot-com retail world.
But a phenomenal amount of stock was free to trade,
much more than any other dot-com, and the stock
simply fell under its own weight. I also have no doubt
that the selloff in Yahoo! (YHOO:Nasdaq - news) is
similarly engendered by people who can sell who could
not before.
Why do I take a pasting in Yahoo!? Because it has
delivered flawlessly and has managed its growth
fantastically, and because I don't think that all of the
insiders are that anxious to sell, even up here. I could be
wrong, but I am betting that the selling dries up in a
matter of days, not weeks or months. I saw the same
thing in Microsoft (MSFT:Nasdaq - news). The amazing
thing with Microsoft is how little insider-selling there was
from the top honchos on the way up. They believed.
They wanted to own. They even bought on dips. With
the great companies, people aren't so eager to bail.
This share issuance has
become so important that I
wish the SEC would make
the companies spell it out
much better. Instead of allowing it to be buried in filings,
the SEC should mandate that any large amounts of
stock that are for sale should be publicly disclosed.
Right now only a handful of people know about some of
these private sales. That's great for the sellers, but
terrible for the buyers. In a world where the single most
material piece of information is the size of the insider
sale, you would think it would have to be made public at
the time of sale.
Until it is, I have had to scale back our exposure to
many of these highfliers. It is too difficult, too
unknowable to trade them. They trade madly,
unseasoned, as if they were small-caps. But they are
billion-dollar companies.
One last example. Tibco (TIBX:Nasdaq - news) is a
multibillion dollar company that went down 50 straight
points on a lockup expiration. It then traded back 40
straight points after it ended.
But who knew other than the market makers that it
ended? Yet it was the single most importance piece of
information you needed if you wanted to buy the stock.
Nothing else mattered.
It is time that the rules about insider-selling changed.
There should be more notice and more knowledge. Until
then, these unseasoned stocks can't be a big part of my
portfolio. I just can't manage risk the way I have to if I
am going to stay in the business of trading stocks.
Random musings: To the dozens of people who
thanked me for the warning about not to trade on that
first number with Intel (INTC:Nasdaq - news) and to the
others who thanked me for suggesting that you might be
able to buy it right after that number, I say you are
welcome.
The number was reported incorrectly, the stock fell on
heavy volume, and then the bullish guidance and real
number surfaced and the stock tacked on a quick 10
points. Real money.
Which reminds me, those kinds of updates will only be
available in RealMoney.com come the second quarter.
Can you afford to miss them? And why not lock in the
low subscriber price for RealMoney now rather than wait
until the package costs $200? See more information in
the press release. |
