Editor's note: This piece, "Growth Is the Real Thing," won the Take Two tally this week. But James J. Cramer vowed today to rewrite all four choices to show that he is back after "being down -- momentarily -- about the Barron's attack." Look for three more Take Two columns over the long weekend.
Could there be anything easier to predict than the pattern of people who drink
? Could there be anything tougher to predict than the pattern of people who engage in online auctions?
(Of course, the shocking news this week was that the old patterns of Coke buying -- no matter what the cost people will keep drinking -- failed this week. In fact, if you go back to Econ 101, Coke is an "elastic" product, and is now being substituted. People hated this piece; people love Coke the stock. I heard a lot of malarkey about how the problems are with Coke's marketing. Nonsense, Coke is the best marketer in the world. I heard talk that the real problem is slower overseas markets. Wrong, all markets were bad. What I didn't hear was the truth: Coke has too much competition and charges too much. Hey, it happens. Lighten up out there.)
Monday may have represented the height of this market's inability to distinguish what multiple should be paid for what business. But it's not what you think. It's the old-line companies that are being valued incorrectly, not just the new companies. The reason why we like
and afford it a high multiple is because it is predictable and growing like clockwork.
(I want to emphasize that this is a piece about the top line. People in this market, both mutual funds and e-traders -- the two dominant forces in the market today -- love organic growth. They hate manufactured growth. They want higher revenues, the true measure of growth, and they shun earnings per share growth with no concomitant top-line increases. For years Coke grew by both raising price and boosting volumes. Now it can't put through price increases without sacrificing volume growth. That's maxing out.
(Amazon seems immune to these concerns right now. It is a total top-line story. I don't know of a soul who trades this stock who cares what Amazon makes or loses right now. What they care about is the sales line. They will pay for explosive growth because they know one day that will translate into earnings. Many of you out there argued against this, saying there is no price that Amazon will ever make money, that the revenues will get bigger and bigger but so will the losses. In fact, that's the bedrock case against the stock. I think it is b.s.; I think they could make money right now if they want to, but they want to take over the world, which is what I want as a shareholder.)
That's the same reason we once liked Coke. Amazingly, in a market that is already absurdly valued, maybe the real mistake in valuing comes from Coke, not Amazon. Coke has turned out to be completely unpredictable in its trends. In fact, if there were no such things as stock buybacks, I would think that Coke might receive the same multiple as a nuclear-based utility that is subject to periodic brownouts.
(Here was another much-disputed point in emails. Coke props up its stock with buybacks; it is a cash machine. That's fine; I don't care what it does with its cash. If you think it is getting a bargain buying back the stock rather than increasing the dividend, well then, fine. But we have to acknowledge that a lot of the reason why the stock is this high is because the buyback cushions any drop. That is key to understanding how Coke trades and we should not be in denial about it.)
Amazon, meanwhile, seems to grow at a pace so swift that it can't be measured by the human eye. In a market that only cares about top-line growth, there is no price that won't be paid for Amazon and no price that will be paid for Coke, except the one that the company's buyback determines. And if
were ever to decide that things don't go better with Coke, you can give this thing an 18 multiple and nobody will want it.
(Coke lacks for giant sellers. I think if Buffett ever pulled the sell trigger on Coke it would do monstrous damage to the stock. But Buffett has fabulous brokers. When he was buying his big position in American Express (AXP) - Get Report last summer, not a soul "gave him up," as it is called when the buyer's confidentiality is violated. That is extremely rare and people can get fired for giving up names.)
Every time you see the total absurdity of Internet valuations, you have to remember that organic growth is this market's real theme. Companies that have pure organic growth are loved; everything else is hated. That's the market's true mantra.
And we don't want just divisions that have organic growth --
, listen up -- we want the real thing. Don't create stocks to sate us; create businesses and give them to us.
(I think that if these companies spin off divisions for their Net stocks, the market won't like them. The market likes pure, unadulterated plays. A tracking stock is not pure, it is artificial.)
When will the mania end? When the growth slows down. Has it shown any signs of slowing down? Heck, it's still accelerating. It's the Cokes that are slowing down, not the Amazons. Enough said.
(Coke proceeded to continue to go down all week. I have to tell you that offline analysts who cover Coke were shocked at how bad Coke really was. Even the apologists for the stock admitted to me in private that Coke has really blown it badly.
(I am not sure what Coke can do other than roll back prices to a level that stimulates demand. Boy does the Street hate that because it would mean Coke is no longer a secular growth story but becomes a cyclical -- a dreaded cyclical that everyone would shun. Stranger things have happened. )
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in the stocks mentioned, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at firstname.lastname@example.org.