Private Equity Buys Are About Growth

The obsession with growth is what fuels the private equity action we're seeing. It makes so much sense, yet people rarely talk about it.

Put simply, if you are not growing your company's revenue and earnings, there's no price the public market will put on your valuation. You are perennially on sale. There's no sponsorship. There's no multiple expansion. Heck, there's no multiple!

Think about this. When a company has little growth the mutual funds, the momentum funds and the hedge funds all despise it. The analysts don't recommend stocks on a takeover basis, so you won't get any help from them. The managements themselves can only buy so much stock. There's so much for sale, they can't move things.

So, what happens? The stocks languish, basically forever, even if the companies are making tons of money.

Of course, it wasn't always like this. We would see people holding on to stocks if they didn't move. These people would wait for the cycle to turn, holding patiently with the idea that flitting in and out to play cycles was almost obscene.

That's all over now. These stocks just get dumped and dumped and then dumped some more.

The private-equity guys know this. They know that managements are being driven crazy by it. They know that everyone's obsession with growth is creating these bargains of a lifetime, and they're anxious to take advantage of it.

The funny thing is that it is possible to set these companies up as growth companies. The private-equity guys can create a company that will have up numbers next year, which will make the stocks, once again, growth stocks.

I know, nutty.

Works, though.

Random musings: There's a lot of stuff in the press about how the Goldman (GS - commentary - Cramer's Take) people are being paid a lot. Look, they made you as a shareholder a ton of money. Who cares what they get paid?!?

At the time of publication, Cramer was long Goldman Sachs.

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