Greg: Your friend Cramer and his 'new way' to look at the market <G>...FYI...
<<TheStreet.com
Cramer illuminates his new prism for viewing the market
By James J. Cramer 02/23/2000
People liked this piece. They thought it told the truth about what we do at my firm. We do not possess the Rosetta Stone. But we do have a pretty good idea about how to make money. And we know when we are not making money. We know it because we measure ourselves virtually every hour. We know it because we embarrass those among us -- myself included -- if we cost us money. We are unsparing and naked in our pursuit of profit at the workplace. There are no pretenses about what we do. You either make money, and it is good, or lose money, and it is bad. If you are bad I am merciless, if I am bad Jeff is merciless. If you are at our shop and you lose money, you will feel as if you have red hot screws in your eyes and I have a Black and Decker power screwdriver. I can't help myself. This is not some Nikko Tinbergen study of reciprocal altruism among starlings that I'm conducting. We are trying to make money. For our partners. Period.
When they change the rules and it becomes a game about who can be the nicest and sweetest money manager, you can bet that Dale Carnegie won't have jack on me. Until then, look out. I'm about making the bottom line be more black than the next guy's bottom line. I'm hardwired to do it and I don't know any other way. When I stop caring, I am not worth reading, other than historically. And you know that.
You have to have a prism to penetrate the stock market. Our goal at Cramer Berkowitz is to look through a prism that excludes the most dangerous stocks, includes the most promising stocks and allows you enough liquidity to be able to move quickly if need be. (In other words, we want a good risk reward. We don't want to put ourselves in unquantifiable harm's way. We want to put ourselves where opportunity is greatest and the downside is well-defined. That is the definition of money management, in my opinion.)
The amazing thing about our prism is it has changed completely in the past four years. First, let's talk about the old prism. We cared chiefly about how a stock was positioned relative to the mean. (In other words, we viewed the stock market as a giant store where all merchandise was measured against every other piece of merchandise, and we were looking for things to bring into our store that were cheaper than they looked, hoping to sell them for more than what we bought them for. We figured that if we could identify what the average stock looked like and sold for and could then find stocks that were mispriced -- meaning they were cheaper than the average stock but should have been more than the average stock -- value would win out and others would come to recognize that they were worth more than they were selling for.)
We were looking for stocks that might sell at a cheaper multiple to earnings than the market but that grew faster than the market. Or we were looking for stocks, chiefly financials, but also cyclicals, that sold at absurdly low levels to true book value, betting that their value would be brought out through either stock repurchases or acquisitions by other companies. (If you look at companies as if they are accounting entities, it's possible to stack them up against each other. This is the so-called "apples-to-apples" gobbledegook you're always hearing managers talk about. In this world, Cisco > (CSCO) is expensive and Champion Paper is cheap. Because one set of financials shows some real value -- CHA -- and the other shows chimerical value.)
To find these stocks, we would look through screens, read annual reports and watch insider-buying patterns. Often we would come across them by going to conferences, but just as often we would come across them by talking to analysts. Once we were in the stocks, we cared passionately about whether they would meet the expectations of the Street on the bottom line, the so-called whisper number. If they didn't, we would freak out like everyone else, but because we fundamentally believed in the company, we might stick around and buy more when others were panicking because we would understand the screw-up and conceivably value it as an opportunity.
(This was the view of money managers in the latter part of the 20th century. You find companies you like. Then you find out how well they can do if they do a good job. The goal is to find companies that can set expectations and then exceed them. Internally, all companies have goals, and then they have stretch goals. The stretch goal is what happens if everything works. The stretch goal was originally the whisper number, the real number to beat. But the whisper number got corrupted by journalists. They now simply take the estimate they see on Wall Street services and add a penny or two and call it a whisper. Yes, it's that phony and pathetic. But journalists, particularly television journalists, can pretty much do what they want in this day in age because the editors don't understand this stuff either. Is this a good way to measure companies? Considering that the companies themselves set the expectations, it's a pretty darn silly way to measure companies. But we need to have something to make sense of them.)
The new prism is entirely different. When we say the "fundamentals" in the new prism, we are not talking about earnings per share or whisper numbers. We are looking at revenue growth and orders. When Hewlett-Packard's > (HWP) number came out yesterday, we didn't care nearly as much about the bottom line as about the top line and the orders. (Revenues can't lie. Companies can finesse tons of internal things and fix it so that bottom-line earnings meet or beat expectations. But sales are raw; they tell the truth whether management does or not. Orders, too. If a company does well at the top line, then we are content. Sales is a better, truer, measure than earnings.)
We want to see growth. We no longer care whether the earnings per share is above or below the mean of the market. We don't care because when we do, we end up missing all of the best stocks. (Again, those who trade off of earnings per share numbers in this market are fools. Those numbers just don't tell you enough. Sales is a much better measurement. And those who trade off of traditional business school methods -- internal rates of return and book value -- might as well retire. That can't make you any money at all.)
A case in point is bio vs. pharma. The old prism works perfectly for the big pharmaceuticals, but they generate no capital gains anymore (in case you haven't noticed). But try using the old prism on biotech and you strike out entirely. We haven't yet been able to adopt our current prism to biotech, because revenue growth isn't as important as trials. These stocks seem to us to be selling on potential size of market per drug vs. established companies' market capitalizations. One of the things I am trying to divine out of our biotech rotisserie league is an apples-to-apples way to compare these companies, which is another way of saying, I am looking for a prism that works to identify winners. (For some industries, sales are meaningless. Take COR Therapeutics> (CORR). Here's a company that was in the 30s when it reported earnings per share. The earnings per share were disappointing and a whole host of analysts then downgraded it. It went to the mid-20s. Two weeks later, the company announced some great results of a trial it conducted and the stock doubled. In days. What does that tell you about what matters? )
(We did not use stocks under $500 million in market cap because we feared the Hymowitz effect, where we would move the stocks to nobody's good, including our own.) (Cheap shot here. I don't like managers who pump small-cap without mercy, because it doesn't help anybody. We all know that when you are on TV you can move a stock. Big deal. It goes right back down. The only people who are helped are the traders who would shoot Liberty Valence. The speed freaks and the aggressive daytraders who are there to fleece people and who don't know how the market works. If Hymowitz sells into it, he gets investigated by the government. If he doesn't, he doesn't gain. What the heck's the point? This time, when Hymowitz was on CNBC , the other people on the set made it clear not to chase. I was happy. That's all I want. Some Miranda warnings. Don't chase; wait! I don't want people to lose money. There has to be a way you can talk about new and good stories without fleecing people! . I thought they did it this week on CNBC. That's fine with me.)
Understand that for tech, our prism now includes a couple of items that we simply could not have cared less about in the old days. We care about lockup expirations because when eToys' > (ETYS) lockup expired, the stock went from 58 to 14, and we can't have that happen to us. (Supply is the enemy of demand. Too much supply all at once and a stock goes down. Period.) We care about secondaries because sometimes the secondaries mark a level of distribution that a stock can't handle. Case in point: The secondary in Scient > (SCNT) has made that stock so heavy that it doesn't have the snap we need to get back in. We care about -- oh mercy -- the chart, because many of the big funds now care about the charts. They probably always cared, but now that the pure fundamentalists are retiring, they are more out of the closet about it. And we have brought in a head trader who cares passionately about the charts -- just as my wife did when she ran our firm's trading desk.
(These are all current day money management hot buttons. Gary B. Smith could work anywhere on Wall Street because he has a great handle on charts. He is a godsend and we should all be glad he works for us and not some giant hedge fund where he wouldn't be allowed to share his techniques and ideas. Because he can make you money.)
Is one prism more or less rigorous than the other? I don't think so. I used to. I always felt that we had replaced science with alchemy when we shifted prisms. I loved the lovey blanket of the P/E and the sanctity of book value. But what good is a prism that consistently keeps you out of winners and keeps you in losers? (Here I'm just touching on the arrogance of those managers who feel superior because their numbers and stats are not producing winners, yet they won't change. Maybe they will come back in style. Or maybe it was just an era and their ways will never come back. If I were one of them, I'd be worried that they won't be coming back in time to save my business. And a whole new generation of people that take care of their own finances is growing up and doesn't understand or forgive underperformance.)
In the end, this business comes down to one thing: money. Can you make it for people, or can't you? You may have a long-term approach for your money, but the people whose money you run just don't. They will take it from you if your prism produces low or abysmal returns. And they will give it to the guy with the better prism.
Is that fair? Is that just? Is that kind? Nah, it's just business. (Yep, the people take the money away if you can't figure out the market. I know. I have had some taken away. Managers don't talk about it. Except for me. It's embarrassing and difficult and a true comeuppance. And I don't like it one bit. So I change and adapt to make sure it doesn't happen. And I bring in youth. And I try, as Mark Haines used to say, to find out what is happening, what is wining, now.) >>
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