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Nobody pays me to call market tops and bottoms. However, I’ve been in the investment business for a long time, and hopefully have learned something along the way.  Sometimes the most compelling signals come along that tell us about the stage of the capital markets more clearly than the reams of economic statistics with which we are constantly inundated. This was the case in the early 1970s when “one decision” growth stocks sold at 50x earnings and more. It happened in 1987 when “portfolio insurance” was supposed to protect against market downturns. It happened in 1999-2000 when the “new paradigm” included valuations related to multiples of sales, eyeballs, or “total addressable markets”. It happened in 2006-2007 when bad mortgages were packaged up and sold to fixed income investors unaware of the continuing risk. Today….it’s happening again, as “unicorn” companies sell at valuations that discount the hereafter.

Jim Cramer, host of Mad Money on CNBC, who I credit as a brilliant short term trader, prides himself on his “rigorous” analysis. However….as an example of how his short term momentum driven decision process distorts his supposedly longer term “rigor”:  When things get tough in the market, he provides a list of 10-15 long term issues that he must see “resolved” before he will buy stocks again. Fast forward two or three weeks, after a day or two of a strong market, and he declares all the longer term issues “resolved”, or at least of no current concern, and you can buy, buy, buy once again.

Wednesday morning, yesterday, Cramer was reflecting on how a bunch of the best performing growth stocks had been hit:  Tradedesk, Ulta, Twilio, and Okta, to name just a few. His conclusion is that the best bellwether for the market, and the signal a new upturn has begun, will be the action in Okta. Now,  I am old enough to remember when “as goes General Motors, so goes the economy and the market”, and when IBM was the greatest growth company (and stock) on the planet. More recently, over the last ten years, Apple has been a great stock market leader and Cramer, to his credit, has consistently urged his followers to “OWN, DON”T TRADE, APPLE”.

I don’t know much about OKTA, except that they provide cybersecurity services. Revenues are growing, from $260M in 2018 to $399M in 2019 and an estimated $562M in 2020 (according to Bloomberg). Unfortunately, OKTA is losing money: $-.77sh. in 2018, an estimated $-.32/sh. in 2019 and $-.43/sh. in 2020. The stock more than doubled in ’19 alone, from about $60 to a high of $140, and has corrected substantially to $108 as of the moment. The current market value of OKTA is $12.5 billion, or twenty two times estimated 2020 SALES. I guess if there are no earnings to capitalize, you might as well put a multiple on sales. Not so long ago, in 2013, a company called Fireye (FEYE), also in cybersecurity, which Cramer favored at the time, was trading over $80/share, growing fast, losing money, selling at something like 25 times sales. Today the stock is $14. Fireye, by the way, has continued to grow sales, from $623M in 2015 to $872M in 2019 and has just lately turned profitable.

You might view Cramer’s comment regarding Okta as an isolated situation, and a special company, maybe the next Amazon,  not typical of the market as a whole. Before you dismiss the above discussion, however, consider Uber and Lyft, and WeWork in the wings, all of which have valuations in the tens of billions and which are billions of dollars away from profitability.

As opposed to OKTA, GM and IBM and AAPL were growing and solidly profitable when they were bellwethers. Calling market tops is a dangerous exercise and timing is of course critical, but a variety of signals indicate that we are closer to the top than the bottom of this 10 year bull market. I’m afraid that there will be lots of people saying “how did I not see this coming?”. As the old saying goes: “when they raid the whorehouse”, they take all the girls. Be careful out there.

Roger Lipton

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