http://www.thestreet.com/story/891820/1/the-winners-of-the-new-world.html
Editor's Note: James J. Cramer is the keynote speaker at the 6th Annual Internet and Electronic Commerce Conference and Exposition, held today at the Jacob Javits Center in New York City. We're running the full text of that speech here.
You want winners? You want me to put my
Cramer Berkowitz hedge fund hat on and just discuss what my fund
is buying today to try to make money tomorrow and the next day and the
next? You want my top 10 stocks for who is going to make it in the New
World? You know what? I am going to give them to you. Right here. Right
now.
OK. Here goes. Write them down -- no handouts here!:
724 Solutions
(SVNX),
Ariba
(ARBA),
Digital Island
(ISLD),
Exodus
(EXDS),
InfoSpace.com
(INSP),
Inktomi
(INKT),
Mercury Interactive
(MERQ),
Sonera
(SNRA),
VeriSign
(VRSN) and
Veritas Software
(VRTS).
We are buying some of every one
of these this morning as I give this speech. We buy them every day,
particularly if they are down, which, no surprise given what they do, is
very rare. And we will keep doing so until this period is over -- and
it is very far from ending. Heck, people are just learning these stories
on Wall Street, and the more they come to learn, the more they love and
own! Most of these companies don't even have earnings per share, so we
won't have to be constrained by that methodology for quarters to come.
There, now that that's done with, can we talk
about the methodology that produced those top 10 so that you can
understand how, in a universe of a gazillion stocks, we arrived at
those, so you too can figure it out? I hope we can because I have
another 10 and still another 10 and another. They all do the same thing:
They make the Web faster, cheaper, better and easier to access
anywhere, anytime. They allow you to get on the Web securely anywhere in
the world. They make the Web economy the only economy that matters.
That's all they do.
We try to own every one of them. Every single one. And
if I had my druthers, I wouldn't own any other stocks in the year 2000.
Because these are the only ones worth owning right now in this extremely
difficult, extremely narrow
stock market.
They are the only ones that are going higher consistently in good days
and bad. I love every one of them, just as I loathe the rest of the
stock universe.
How did this stock market get like this, to where the
only people who can make a dime in it are the people who are interested
in the most arcane subject, the moving of data from one space to
another, via strange new machines and software? How did it get to the
point where nothing else matters, most particularly the 90% of the stock
market I have studied for the last 20 years? How did all of that
knowledge become totally irrelevant and the only stocks that work are
the stocks of companies that didn't exist five years ago and came public
in the last two or three years?
Let's start with the world in the early 21st century, a
world where capital is abundant for a chosen few and nonexistent for
just about everybody else. It is a world where the whole of Wall Street
and Silicon Valley is at your fingertips if you are creating the
infrastructure for the New Economy, and a world where neither Wall
Street nor Silicon Valley could give a darn about you if you are using
that infrastructure.
Or in other words, we don't care if
General Motors
(GM) and
Ford
(F) are going with
Oracle
(ORCL) or with
i2
(ITWO)
for their new parts procurement process. We don't want to own GM or
Ford on any occasion. In fact, we would rather own the loser in that
tech bake-off than the winner in nontech, because in this new world,
there is so much business to be done for the i2s and the Oracles that
the capital will remain plentiful for them, win or lose a particular
piece of business.
Just yesterday I found myself wishing I had bought i2
when it lost out to Oracle for the giant business-to-business contract
for the Big Three automakers. Others had the same idea because i2, the
loser Friday, was up much more Monday than GM and Ford could be this
year. i2 can own the world because the company with the access to cheap
capital always wins. And the companies with no access have to lose.
Or, closer to home. We in the stock market don't care that
The Street.com Inc.
(TSCM),
a company I helped create, has built a compelling new brand, has more
than 100,000 paid subscribers and has $100 million in the bank. We just
want to know which companies TheStreet.com employs to publish each day.
We want to know who the host is, which publishing tool works best, which
wireless strategy TheStreet.com is adopting and how does it automate
its email? (By the way, the answers are Exodus,
Vignette
(VIGN),
Motorola
(MOT) and
Kana
(KANA)
-- all at or near their 52-week highs as TheStreet.com languishes at
its 52-week low, a triumph of the arms merchants over the combatants if
there ever were one.)
How did this bizarro world where nine-tenths of the
companies I have followed as a stock picker for the last 20 years are
losers and one-tenth are winners? To answer that question, you have to
throw out all of the matrices and formulas and texts that existed before
the Web. You have to throw them away because they can't make money for
you anymore, and that is all that matters. We don't use
price-to-earnings multiples anymore at Cramer Berkowitz. If we talk
about price-to-book, we have already gone astray. If we use any of what
Graham and Dodd teach us, we wouldn't have a dime under management.
So how do we sort through which stocks get bought and which stocks get assigned to the waste bin?
We have a phrase on Wall Street. It's called
raising the bar
. If you can raise the bar, or brighten the outlook for your
company, if you can see your growth accelerating, your stock will go
higher and you will be given the currency to expand, acquire and do
whatever you want. That's the secret of the quintessential New Economy
stock:
Cisco
(CSCO). This giant networker has the ability to control its own destiny. It can, as my colleague
Adam Lashinsky says at
TSC, buy any company it wants to. It can pay any price. Because
it has a currency that it better than U.S. dollars: It has Cisco stock.
It can do that because it raises the bar every quarter!
But what about the Old Economy stocks? Can
Merck
(MRK) raise the bar? Can
Pfizer
(PFE)? Can
U.S. Steel
(X)? Or
Phelps Dodge
(PD)?
Union Pacific
(UNP)?
No, no, no, no, no and no. So what happens to them? Despite the
billions in buybacks and the plethora of strong buys that the Street has
put out about these companies, their stocks have no traction. They just
stumble along, rising and falling haphazardly with every whim and
quizzical speech of the
Federal Reserve chairman that still controls their destiny. If
Greenspan indicates that there is more tightening ahead, these
traditional companies, the ones that you measure with traditional
matrices, get pole-axed as we worry about where the capital will
ultimately come from if credit gets choked off, while the arms merchants
in the Web war, with capital to burn, just go higher.
It is no secret that the
Dow, made up principally of companies that can't raise the bar, is down 12% while the
Nasdaq, which is made up of companies that can raise the bar, is
up 12%. And in the self-fulfilling jungle that is Wall Street, only
growth can maintain growth!
So how do we find what are the great growth companies,
knowing that growth and not cheapness of stock to company is what
matters? We have to look for the fastest-growing industries and then
select the companies that can make the infrastructure happen the fastest
and the cheapest in those industries. The growth must be positively
organic, if not viral. There must be heavy technological barriers to
entry. And there must be an ability to scale without any thought to
human cost. These companies must be able to dominate their businesses or
be willing to become part of a larger institution that dominates.
So, whom does that eliminate? First, any company that
is a commodity producer simply can't be owned, no matter what. The New
Economy makes those be simply a function of low-cost producer with no
ability ever to raise price. This, of course, is the crying shame of the
way the Fed is trying to break the economy because the only place that
could stand for a little inflation is in the deflationary commodity
industries. But their inflation revolves around the ability to build
inventory to anticipate future price hikes and the Fed is taking short
rates to a height that makes it uneconomic to stockpile.
Second, it eliminates any bricks-and-mortar company
that doesn't embrace the Net. To not embrace the Net is to give a cost
edge to a competitor who does. It does so because the Net removes the
middleman that was a product of the regional economy. There is $4
trillion worth of wholesaling that gets instantly eliminated by the Net.
Before only the largest orders could be processed by the biggest
companies because it was too expensive otherwise. Now all orders can be
processed by the biggest companies through the Web. There is no need for
the jobber or the wholesaler. Obviously, if you are still using that
old distribution network, you can't compete against those who do
.
Third, it eliminates any industry that does not have a
proprietary brand. This is one of those weird features of the Web that
people haven't woken up to yet, but it will seem obvious a few months
from now. In the New World's economy, the desire to "name your own
price" is too great to squelch. An outfit like
priceline
(PCLN)
will change the very nature of brands in this country. It won't destroy
the premium brand, but it will force everyone else out of the market.
Why? Because the way priceline works is that we are trying to buy the
premium brand for the price of the off-price brand. That means the
off-price brands, whether they be
Colgate
(CL) or
Dial
(DL) or
Hunt's or
Ralston
(RAL),
are simply doomed by the Web. Why would you ever buy the second- or
third-best when you can get the best via priceline for the same price as
the lower tier? Ahh, that's a real killer. It leaves only the top
brands to vie for supermarket space. The others won't be worth carrying.
They won't move! Oh yeah, same goes for the airlines and the hotels and
just about everybody else.
Fourth, it just destroys retail as we know it. Why?
Because the companies that embrace the Web more vigorously will
eventually be pitted against other companies that embrace the Web more
vigorously, creating a virtual constant price war, the kind of war that
Marx, of all, actually predicted would happen to capitalism. It will happen to retail once everyone realizes that
Amazon
(AMZN) recreated
Wal-Mart
(WMT)
online because it will forever have access to cheap capital. Why do I
say forever? Because at a certain point, it will be done with its
buildout and will effectively be able to cherry-pick whomever it wants
to destroy while having it be subsidized by other areas. It will be
Home Depot
(HD) vs. Wal-Mart vs. Amazon in the end. Nobody else. And that's only if Home Depot figures out it better get on the Web and fast.
Fifth, it wipes out everybody who straddles the Old and New Worlds. Let's take the
brokerage
industry. If you are trying to preserve a price point, because you need
those margins, you can't and you become roadkill. Same with journalism.
If you are free online and cost offline, you will eventually not be
able to charge offline. Why not? Because the
Hewlett-Packards
(HWP) and
Intels
(INTC)
and Ciscos are bent on making the online version far superior to the
offline version. And they will do it. They, too, have the access to
capital to make it happen.
I can tell you from
TheStreet.com that we have substantial cost advantages over our
printed cousins. We can come out around the clock. We don't require
paper, ink, delivery people or trucks. In that sense, we are much more
like television, personal television, which is why we were wrong
initially to think we could charge for basic news, and right to think we
can charge a huge amount for proprietary analysis that can make you
money.
The struggle between the offliners and the onliners in
banking will also pan out just like these other industries, with huge
wins for those with a fresh online culture and hideous losses for those
who don't see it coming or are slow to adjust. If you have to preserve
your giant branch network and the costs that come with it while someone
else perfects secure wireless Internet transactions, you can forget
about it. You can't afford to compete. How can
Bank of America
(BAC) compete with
Nokia
(NOK) as a way to bank? How can
Goldman Sachs
(GS) compete with
Yahoo!
(YHOO)
as a way to invest? Isn't Nokia, with its wireless machine that goes
everywhere a better bank than one that needs branches? Isn't Yahoo!,
with its access to all of the information and quotes in the financial
world a better place to
buy stocks than Goldman?
Of course they are.
So, if you can't own the retailers, and you can't own
transports, and you can't own banks and brokers and financials and you
can't own commodity makers and you can't own the newspapers, and you
can't own the machinery stocks, what can you own?
A-ha, that just leaves us with tech. That's why we keep
coming back to it. That's why, despite the 80% increase in the Nasdaq
last year, we are looking at another record year now. It is by that
process of elimination that I have picked my top 10. And my next 10 and
my next 10 after. Only those companies are worth owning. The rest?
You can have them.
Thank you.
Reposted from Finanz und Wirtschaft