Cramer on why he owns Cisco and its valuation:
.....OK, here are my thoughts:
First, as I have written and said so many times before, these
valuations make no sense to me. But a lot of things make no
sense to me. I can hardly say I ignore them. I look and think
about them every day. I marvel at them. I have chronicled the
rising price-to-earnings ratio of Cisco probably better than
anyone, including John Chambers, the head of Cisco.
The goal is not to dismiss the valuations of
stocks; the goal is to figure out how they are
being valued and exploit that for profit.
But let's say that I decided, arbitrarily, that Cisco should never
trade above a 30 multiple because, well, that's what it hasn't
traded above in the past. Why is the past a good guide? In the
past, our parents owned utility stocks. Were they wiser than
us? In the past, we liked to buy companies with cheap
multiples to earnings and hope they got dear. Now we like to
buy companies that have high multiples to earnings and hope
they get dear.
That's all that has changed. As I have stressed over and over
again, if buying slow-growing companies at cheap prices made
you a ton of money, I would do it in a flash. The goal is not to
dismiss the valuations of stocks; the goal is to figure out how
they are being valued and exploit that for profit.
Should the P/E multiple come down because it has
historically come down before? Why? Why is the previous
benchmark so right? Where is it written that P/E multiples
have to contract as a company gets bigger? That's not a way
to make money. That's a meaningless statement.
And what about this claptrap that everybody owns it so what
happens if they want to sell? Hold it, billions upon billions of
dollars of stock are sold every day by people who don't want to
own Cisco anymore. Billions. These markets are good for 1
million shares up, or you can buy or sell 1 million shares
within a point of where Cisco is selling. Ten million? Still not a
problem. These markets aren't thin Ponzi schemes that fall
apart when somebody refuses to buy somebody else out. You
can get out of billions of dollars of Cisco stock because it
happens every day!
I am not going to sell a stock for valuation purposes, and I am
not going to short a stock because it is "overvalued." I am
going to own stocks that raise the bar and sell stocks that
can't. I am going to own stocks with great organic growth and
sell stocks of companies that don't grow. That's the
methodology. That's the dreaded "Church of What's Happening
Now" that the non-stock-picking intelligentsia thinks is so
important. I am not the one defending these valuations; I'm the
one exploiting them. I invite you to exploit them with me.
That's what this column is about.
I am going to own stocks that raise the bar and
sell stocks that can't.
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