The Red Hots Are Candy, but Too Many Make You Sick
By James J. Cramer
8/23/99 12:40 AM ET
Oh, man, does my partner rock. Not only does he nail Dell (DELL:Nasdaq) in my absence, but he blows out of the Hewlett-Packard (HWP:NYSE) perfectly and doesn't get sucked into the Applied Materials (AMAT:Nasdaq) inferno. Sure, he boots the Tricon Global (YUM:NYSE) too fast -- his kid doesn't like crispy popcorn-like pieces from KFC as much as mine do, I guess. Maybe he misses the eight easy Gateway (GTW:NYSE) points. Doesn't get Cyprus Minerals (CYM:NYSE) either. Forgets to sell the Micron (MU:NYSE), too. And what's with the sale of the DRGs while that group was ramping, for that matter?
All in all, it was a great job. Those last five matters get mentioned only because I am a second-guessing scum sucker from way back.
But what Berko captured correctly, more than anything else that he did last week, was the angst of having to be long the Redbacks (RBAK:Nasdaq) and the Brocades (BRCD:Nasdaq). Forgive me for saying this, but I hate these stocks the way I hate anything I want a ton of but know I can't have. These stocks are cheesesteaks from Gino's. They are Ben & Jerry's (BJICA:Nasdaq) hand-scooped double cones. They are a dozen Krispy Kremes.
They taste great. You can handle a couple of them. But if you have too many of them, you get sick to your stomach and puke them out.
The stock market, when it finds merchandise it loves, immediately prices it so high that only those with a charter to own massive growth at any cost can afford to own them. I tend to blame the go-go mutual fund families for this. They run so much money now that they can't just get long 25,000 Brocade and have it impact performance. They have to own 250,000 Brocade. To get that, they have to sweep the Street. Once the 250,000 shares are bought, the stock is so expensive anyway that you can't justify NOT buying any more.
In other words, if you paid $100 for Brocade, which is absurd by any measure, what the heck is the difference if you pay $200, or $300 for that matter? Market cap no longer means anything, nor does price-to-earnings multiple. They are all off the charts. Which means that any marginal dollar you take in as a mutual fund manager can go to buying more Brocade because, what the heck, it is so high already that the perpetual mutual fund owner obviously doesn't give a darn about price.
What Jeff feels but didn't say is that guys like us think that the Brocades of the world now are simply notches on the way to a couple of mutual funds attempts to get to 40% or 50% years, or even higher.
Look at it like this. If you have no discipline, lots of money and a good marketing department to continue to ensure that you have more money, you can build a portfolio of Brocade, Redback, Red Hat (RHAT:Nasdaq), and a couple of other hot ones and literally keep them in the air until year-end. In fact, a half dozen funds may be doing just that. If they make it to year-end with these stocks, they will be on the cover of Money magazine, be on CNBC and, heck, get written about in TheStreet.com.
Then they can take in fortunes and make the Red Hot stocks (let's use that term for these stocks, as these are not The Stocks Everybody Loves, TSEL, but a whole different cherish variety) be a smaller percentage of their funds so when they cool off, they won't take their entire fund down with them. Believe me, not only does this happen with great regularity, but some of the so-called best funds do it. I have seen it with my own eyes and know enough traders to know it happens.
Berko and I hate this stuff because we never know when the go-go mutual funds are going to finish buying; yet the only real performance during these periods comes from riding the coattails of the Red Hots. (Until TheStreet.com, nobody would ever write about this stuff. It seemed too inside baseball. But I now know otherwise. This is precisely what the public wants to know.)
Consequently, the biggest money is made buying the riskiest stocks with the least conviction and the hottest fundamentals now but the coldest a year from now. (That's usually how long it takes for someone else to figure out these businesses and destroy the margins of the players.) Berko also knows that to short these stocks is to take your life into your own hands. Shorting on valuation is the dumbest thing possible.
There have been whole contingents of money managers who haven't given a darn about valuation since 1990. You tend to find them in the top echelon of managers every couple of years, right before they lose you 20% in a heartbeat during a period when they can't keep these stocks up any longer, or the fundamentals turn south. Right now these momentum funds are reigning supreme. You short their stocks, they take you apart. Period. End of story.
So, as Berko said, we play them small. We play them when they have quick breaks. We know that these breaks are going to be short-lived because the people propping them can't let them get too far down. That would hurt their performance and hurt the charts of the stocks! (Yes, it is a deeply cynical game.)
But to not play them is to risk having the money taken away, as it will be for so many managers who fail to meet the growth benchmarks this year. And having the money taken away is the only way you really lose. Nobody likes to be a loser. So these stocks will go ever higher until they hit the wall. And then they will go down and down and down and down, because they only reason they were ever up there to begin with is because of mutual fund rigging.
There, I said it: The unspoken truth about the hottest portion of the mutual fund industry. I don't know how these guys can live with themselves.
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