State of the Web: Is This the End?
By James J. Cramer
1/30/00 2:29 PM ET
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Is this the end? Is this how the high-multiple period concludes, with a whimper, not a bang? Do we just suddenly reverse all of those great gains that we tacked on last year? And do we go back to one set of valuation parameters instead of the bifurcated parameters we have now? I don't know the answers to these questions. I just know enough to ask them. I am afraid. And after a week like last, such questions have to be asked.
What was so pivotal about last week? Let me count the disturbing trends I saw and outline their potential impact for the bullish methods of investing that currently prevail.
If you blew away a quarterly earnings report, as JDS Uniphase (JDSU:Nasdaq) and Veritas Software (VRTS:Nasdaq) did, your stock got hammered anyway. Ever since 1990 stocks that blow away numbers have been rewarded with higher prices. We don't know whether this is because shorts had to capitulate, causing stocks to go higher, or whether momentum funds singled these earnings beaters for more money that came in over the transom. Whatever, once a stock got to its 52-week high, we always saw the technicians pile in, as they like their buys to be triggered by a breakout. The implication? If this method of blowing away numbers -- and these guys blew away the posted and the bogus whisper numbers -- doesn't work, there will be a heck of a large number of stocks trading way too high for their own good.
Qualcomm(QCOM:Nasdaq) "blew up" with its cautionary comments. All this week I've been talking about the valuation disparity between the stocks individuals and the high-multiple momentum mutual fund cohort like and the stocks that everyone else likes. Qualcomm is the quintessential momentum/individual investor stock. It's in a business that theoretically has the highest growth rate in the world: cell phones, particularly for those nations with bad land lines. It had backers who wanted to own it because the potential for unlimited growth seemed incredibly high. And it had analysts whooping up $1000 price tags to get the investment interest going. It also had Soros' backing, through public filings. This stock reminded me last week of U.S. Surgical when it peaked. It hesitated, spun wildly out of control, then began the long descent down. Qualcomm is a very important stock for the bulls. They can't afford to lose it. It's growth and it's stock ramp lent credibility to the whole notion that billion-dollar companies can spring up as if by magic. Last week shattered a lot of conviction about that thesis.
Nearly every secondary failed. This is a very bad sign because, if you extrapolate, you can say that many of the valuations we created last year were false, based on artificial scarcity. Once real supply hits, such valuations wilt. In other words, if the companies that now routinely get valued at above a billion had a float that equaled 80% to 90% of their corporate structure rather than 10% to 25%, they would simply collapse. If you don't believe this, look at E-Toys(ETYS:Nasdaq), whose float is huge. This stock trades like the downward trajectory of a wrecking ball.
Upgrades didn't work. All last year every single price target raising, no matter how cockamamie, worked. Every upgrade worked. None worked this week, leaving those who knew about the upgrades ahead of time with serious losses.
Dell(DELL:Nasdaq) didn't make it. OK when Gateway(GTY:NYSE) blows up, that's one thing. But Dell has always been one of the horsemen of the Nasdaq, one of those stocks that created Dellionaires. They aren't going to be making any more Dellionaires in the near future.
All of these situations could be countertrend. It may turn out that we were just badly in need of some sort of shake-out before we resume our endless upward climb. Or maybe they are the beginning of a collapsing of our two markets into one, where earnings matter, and multiples to earnings again play a role in determining a stock's trajectory. If that happens, believe me, we won't be returning to the Red Hots any time soon. That's just not where the action will be.
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