Just back from three days of bed rest and still a bit woozy, but I wanted to get back in touch with "the market."
So, I called my favorite young hedge fund manager. (This is the same guy I spent a
day with back in August.) He is the epitome of today's momentum investor -- always looking for the hottest action and laughing at traditional value investing.
He's also up 46% in the year to date, which is a lot better than many more experienced hedge fund managers.
I started by asking him whether he was a bull on
, perhaps the hottest data storage play. Brocade trades at about 245 times Wall Street's 2001 earnings estimate, which struck me as a bit high.
"I'm not long it, but with a 100% estimated earnings growth rate, it doesn't seem unreasonable for it to trade at 245 times. I'm sure
may have had periods in which they traded at forward multiples like this back when they were fast growers. I'm sure that those stocks were trashed back then by all the Wharton MBA's."
This guy has no MBA.
Where should investors place their money then?
"The financials are the place to be," he replied. "There's a
Fed easing coming. Everyone is worrying about credit card debt exploding, but
are almost at all-time highs. That tells me that the soft landing is intact. Oil prices go down. Interest rates go down. We have a slowdown."
Is a market participant like my friend here concerned about slowdowns in Europe and Asia?
"I only care about the U.S.," he said. "Europe and Asia have been slow growers for a decade and the
Nasdaq Composite bottomed?
"Not really. I believe that stocks with good fundamentals will do well, and those that do not will not get a lift."
So, who's going to do well?
"It's the information economy. All the oils and other industrials are trades. They get cheap, then come back but then get left behind when compared to tech," he said. "Long term, you hold consistently growing companies. The consumers, tech, media."
What about stocks with more down-to-earth P/Es?
"Value is a code name for
expletive deleted," he said.
He was sounding a little too optimistic.
"The best companies are always expensive, and the worst are always cheap," he said. "I just looked at the
richest list and saw not one short-seller on it. They should see a shrink instead of looking at
filings. Stocks go up on improving expectations and down on the opposite.
has been cheap for 30 years."
Long Time Gone
How long are you?
"Fifty percent long and 50% cash," he said. "The market's not at all clear here. Dicey. I don't know how the year is going to end."
And where has he made most of his 46% year-to-date return?
"Lots of trading," he said. "Made most of my return since June. I was down 5% after the April-May slide. I didn't get short quickly enough. I held on to too many losers. Since June, I made money on the big acceleration. I had a big trade on
-- long from $58 to $78. I'm out now.
He's still long Charter.
"I'm also long
Metromedia Fiber Network
"Lower interest rates will be good for the financials. These stocks are underowned by the large institutions. A cable company like Charter is a safe bet with accelerating cash flow driven by new services, including video on demand," he said. "Bank One is a turnaround. I am betting Jamie Dimon can turn it around and I get a leveraged play on declining interest rates."
Why Metromedia Fiber? Isn't telco a disaster in the making?
"The bet is that this is a New Era telco that puts the traditional telcos like
out of business. Metromedia has accelerating revenue growth, and the stock has been beaten down along with all the telcos."
But Metromedia loses money and is looking at overcapacity.
"The critical thing is that WorldCom and Telephone and Sprint are blowing up because of a collapse in pricing for data and voice services. It's the Metromedias that have the new fiber networks that are underpricing them and offering networks with far greater bandwidth. This is creative disruption going on. I saw Bernie Ebbers
CEO of WorldCom at a Goldman Sachs conference about a month ago. He's usually cocky, but not this time. He came up with the growth for WorldCom as being Web hosting! That's it? Pathetic. So I think all these guys with circuit switch networks
as opposed to optical switching are in trouble. I am betting that the new guys like Metromedia will win. I am betting that something analogous to the development of electricity by Edison will happen here.
"We started with the light bulb, but look at all the appliances that came later. We will come up with new applications to make use of the new supply of optical fiber networks. I think it's a great long-term play. If you have a low-cost, high-bandwidth network, you win. If you don't, you lose. I think the
buy them at some point."
What happens to his portfolio if he's wrong about all these moon shots?
"They simply do not go down until the story changes," he said. "Momentum investing comes down to three things. One, the companies must beat the estimates and give good guidance. Two, and sometimes even more important, they must show accelerating quarter-to-quarter sequential growth. Three, the stock price must retain its trend. More often than not, they give you time to get out. You may lose 10 points off the top, but you can get out sooner than later."
He went on to say, "I don't own everything. I don't like technology companies whose stock charts look
, Intel, Microsoft,
. Those are totally overowned. All the institutions own them up to the gills. The marginal buyer is not going to go near those. You would be better off owning Brocade at 247 times next year's earnings. It's still a market darling."
This seems like an awfully dangerous way to invest -- relying on some marginal buyer coming in and taking stock off your hands at higher prices.
"It is very dangerous. This year has separated the men from the boys."
And how long will this bull market continue?
"We are in a 'super cycle' driven by the explosion of Baby Boom wealth and consumption and the buildout of a whole new infrastructure, and the move toward global markets for companies. I do not see all of those forces peaking anytime soon. This is still a bull market. Look, even though we have had crashes in many sectors of the market, other sectors continue to work. Tech crashes, but the drugs and financials keep working. That tells me that the super cycle is intact. The Baby Boomers are using more prescription drugs as they age. They are relying more on financial service companies to help them invest and manage their savings. So, I see more opportunity in this market. Look at the new high list. Those are the stocks to own. I consider all investing to be momentum investing."
There you have it -- the world according to a real mo-mo man. Be optimistic. Trade like hell. And be happy. It's a brave new world.