Cramer's Rewrite of His 'Red Hots Are Candy' Piece

Talk about a piece that inspired people. We all know that at any given time there is a group of stocks that rocks. But the media is too stodgy ever to put them together in an index until they have ossified and have become boring fixtures of the firmament. It is time for that to change. We at Cramer Berkowitz have developed our own index, Cramer's Red Hot Index -- just try stealing that one, CNBC-Dow Jones -- and now's the time to look at those components and find out what the heck we are dealing with. Pull up a chair and get ready for the index with soul, one that travels at a points-per-hour basis that the S&P can only dream about.

Oh, man, does my partner rock. (Oh that vacation at Montauk, how long ago was that? Seems like forever. Just forever. Berko was at the helm and the keyboard and he dazzled. No flies on that guy.) Not only does he nail Dell (DELL) in my absence, but he blows out of the Hewlett-Packard (HWP) perfectly and doesn't get sucked into the Applied Materials (AMAT) inferno.

(Hewlett-Packard had run up too much, so it was time to jettison that one. Dell, well, Dell is back and we should stop kidding ourselves about it. It is better than ever. AMAT, I mean, what is the deal with AMAT? What do people want? Try orders. It didn't have them.) Sure, he boots the Tricon Global (YUM) too fast -- his kid doesn't like crispy popcorn-like pieces from KFC as much as mine do, I guess. (Berko succumbed and bought it back later in the week. I prevailed on him that this is a cheap one. Not as cheap as Dave and Busters got at week's end, but cheap nonetheless. One of the reasons this stock is going down is because people suspect that the Tiger fund might have to sell it because Tiger may be having a tough year. I say go ahead, bet against Julian Robertson. You're dumb as particle board if you do though. He is the best. He'll beat you at this game. He owns this game. This guy is Ted Williams and you can sneak a fast ball by him every once in a while, but for the most part, umpires defer to him on balls and strikes.) Maybe he misses the eight easy Gateway (GTW) points.

(We got back into this one during some nastola sell program last week. Gotta love the new Gateway, meaning the one that no longer seems to disappoint.) Doesn't get Cyprus Minerals (CYM) either. Forgets to sell the Micron (MU), too. (Good call, Maria Bartiromo recommended it this week, allowing us to trim our position. Oh, what was that? Did I make that mistake again? Merrill Lynch recommended it, Maria merely sent it to the moon with her breathless touting. Now I am out of the closet. I hate this stuff and I am not going to take it anymore.) And what's with the sale of the DRGs while that group was ramping, for that matter? (No justification for that sale. The drugs had a huge move. It seemed to run out of steam by the end of this week, though.) 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.

(You have to understand the dynamic between me and my cooler, more charming, better-looking, lovable partner. I like to be right. He likes to be right. We love being right together. But it doesn't always happen. Every hour I torture Jeff, just as I tortured my wife when we worked together, about things we should have been doing. I have spent years trying to correct that, but here, at the middle age of 44, I have come to terms with myself. It is my lot to torture my partner, whoever it may be, about blown calls that we have made.)

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) and the Brocades (BRCD). 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. (Oh man, may I forever be banished from 9th and Passyunk for spelling Geno's with an I instead of an E! Next I will be saying "cheesesteak with onions" instead of just "cheesesteak with." I have been away from the city of my birth, Philadelphia, way too long.) or they are Ben & Jerry's (BJICA) 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.

(Here they are. The Red Hots. The stocks that trade in points per hour increments. The stocks that have made people fortunes. I am going to track these, and keep you posted. The Red Hots, and their position size in my Red Hot Index, are below. These are the stocks that are up 300, 400, 500, 600 and 700%, and some of them have just come public. This was the biggest week for these Red Hots because Cisco the Great blessed the valuations. Rather than wait for Cerent, which would have been the next great Red Hot to come public, Cisco (CSCO) scooped it up for about $7 billion in stock. Mind you, had Cerent come public, it would have had that same stupid charade all of the underwriters put us through, that torture where it opens a gazillion points higher than where it was priced and then keeps going up and up and up and up. If Cisco the Great had waited until Cerent had come public to buy it, I bet it would have had to pay twice as much. That's one of the reasons that Cisco the Great didn't go down after it paid what it did. It "stole" it before the momentum funds could take it to some level where it could never be bought. Shrewd move, King John!)

Get 'em While They're ...You Know The Cramer Red Hot Index
Ticker	Year-to-date price performance	% Wgtd. in index
(QCOM)QCOM	636%	23.3%
(JDSU)JDSU	233	13.2
(BRCM)BRCM	121	9.7
(JNPR)JNPR*	533	7.1
(CNXT)CNXT	335	4.9
(PMCS)PMCS	207	4.6
(EXDS)EXDS	437	4.6
(ARBA)ARBA*	485	4.1
(QLGC)QLGC	178	4.3
(RBAK)RBAK*	918	3.6
(VRSN)VRSN	274	3.6
(RHAT)RHAT*	464	3.4
(BRCD)BRCD*	847	3.2
(PHCM)PHCM*	619	2.3
(EXTR)EXTR*	331	2.5
(NTOP)NTOP*	406	2.3
(CMTN)CMTN*	452	1.8
(ZOOX)ZOOX*	358	1.5
*1999 IPOs. Percentages as of Aug. 26.

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. (I picked on Brocade, but I could have been talking about any of the accompanying 18 stocks, including several potential rookies of the year. I could no longer resist. I am opening my hand to my readers. Here is a list of 18 of the most rocking, overvalued, wildly out-of-control stocks I have ever seen in my whole trading life, including six I own: Qualcomm (QCOM); JDSU -- which we call JDSBlack, like Jack Daniels; Juniper (JNPR)(unofficial son of Cisco the Great); Exodus (EXDS) (movement of the people/Internet service provider); RedBack (not the Australian beer of the same name, but the single most overvalued beloved stock I have ever owned) and Verisign (VRSN) (Matt Jacobs.com, my associate, has us into this one). Why 18? Because I reserve the right to be as I am, mercurial and capricious and arbitrary, that's why. Why not two divisions with nine teams each? Because there are no playoffs. This isn't the National League or something.)

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. (Ouch, this was mean. But the notion of this thought can't be lost. Once you have broken the valuation barrier, you have unbound Prometheus. You can pay whatever the heck you want. You can take a stock to a power level that suits you, instead of it. Of course, Cisco the Great said this week with its Cerent buy that it so fears the power of the mutual funds to destroy valuations that it would rather pay an absurd price right upfront, than a totally ridiculous one once it comes public.)

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. (Yeah, you keep the balls in the air with every new dollar. You create fund after fund and you stuff some more of the stock in those funds. You never let the stock come in. And when there is a lock-up that expires, where insiders can sell, you buy more. You NEVER let the market makers cover their shorts and you bury those who short these stocks with your own capital. This is naked, vicious capitalism of its most rapacious variety. You win the brass ring, you get more capital. You get more capital, you buy more stock.)

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) 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. (I know I have been at this game for too long when I start to reveal these shenanigans. But I can't take it any more. I know what goes on. A lot of you emailed me and told me you know it too. Some of you emailed me and told me that you are doing it. Good for you! That's the first step toward a cleaner life!!)

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.)

(I got more letters on this than on anything I have ever written. People always had this suspicion that this stuff occurred but they felt paranoid even having the thoughts. Traders be free of your paranoid chains. It happens with tremendous regularity!) 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. (A lot of you emailed me and told me you were short a lot of these Red Hots. I have to hand it to you. Either you have stones of granite or you have a head made of granite. One or the other. Good luck to you.)

There have been whole contingents of money managers who haven't given a darn about valuation since 1990. (What a joke those valuation classes are at business school. Professors, after nine years, it no longer is an aberration. Graham and Dodd lose you more money than you make with them. They lose you the money that you would have under management to the guy who is betting against Graham and Dodd.) 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. (Many of you emailed me and said, "no that is not the end of the..." I don't remember what else you wrote because I clicked on to the next story rather than read your gospel.)

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.)

(You now have my 18 stocks. When I say I am playing the Red Hots, you have my index. I will try hard not to mention then by name because even though they are big-caps, they have small floats and I am not in the business of inflating or touting stocks I write about. I am in the business of enlightening you about how the game is played or cheated on.)

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. (Yeah, if I had stayed long my basket of undervalued savings and loans, my money would be out the door at year-end instead of increasing nicely. And that's not the game.) 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. (Cisco the Great just made living with themselves a heck of a lot easier.)

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