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What I Dislike About Wall Street
Posted at 11:35 a.m. EST on Monday, March 17, 2014
This market can turn on companies in a fashion that's so brutal it can take your breath away.
Last week the "Mad Money" crew did our show from an Ensco rig, a shallow-water drill ship built in 1985 that's in strong demand from several of the independents plumbing the depths off the coast of Louisiana. While we were on the rig, we chatted with some executives who showed us how day rates -- the key metric -- have been holding up extremely well despite chatter on Wall Street that they were weakening fast. That was a big reason why Ensco recently doubled its dividend. The conviction and the contracts enabled the company to shell out a huge $3 a share, giving the company slightly more than a 5% yield.
Guess what? Now it yields 6.23% and it isn't because the firm raised its dividend again. It's because the Wall Street analyst community basically has determined that Ensco, along with the other off-shore oil drillers, are foolish and absurdly optimistic. The Street and its followers have decimated the group with Transocean , with a much older and vulnerable fleet than Ensco, giving you a 5.7% yield and a similar company that's been totally left for dead, SeaDrill , down 18% this year, now yielding 11%.
On the other hand, the analysts have fallen head over heels for the once-scorned on-shore plays, notably Halliburton , Baker Hughes and Patterson-UTI . Just this morning, Goldman Sachs sings the praises of that trio, pointing out that the long-awaited turn has come.
Yes, it is absolutely true that there is more aggressive on-shore drilling, mostly because of the phenomenal finds in the Permian, Eagle Ford, Niobrara and Bakken shales.
And it is true that day rates for off-shore rigs have leveled off and in some cases have grown weaker. The Ensco people may say that things are holding in and even trending up right now, but there are a large number of new rigs being built that will put pressure on day rates unless Brazil and Mexico, the two big unknowns, start aggressively drilling, something that hasn't happened yet even as many thought 2014 would be the year for their gigantic programs to kick in.
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But here's where I take issue with the newfound love for the onshore names. It comes after massive moves have been made. Now with Patterson-UTI up almost 18%, we get this powerful Goldman upgrade? Halliburton up 11% and Baker Hughes up 13% now draw the fawning attention of the Street?
In the meantime, Ensco, off about 16%, draws the scorn. Seadrill, which has plummeted 18%, can't catch a break. Transocean, down 21%, is despised. Where were these downgrades when the stocks were so much higher? Where were the upgrades when the on-shore plays were so much lower?
This action is precisely what I don't like about Wall Street. The analysts tend to be trend followers. And while I sense that Baker Hughes, Halliburton and Pattterson-UTI have the momentum that every hedge fund craves, and the off-shore plays are ice cold, I question the value proposition of the hot names.
Sure, the off-shore companies may have yields that are too outsized, but given that Ensco just doubled its dividend, I am not concerned about, say, an imminent cut in the payout.
So, you can go with what's steaming, knowing that you've missed big moves, or you can go with value, and wait it out until the big drilling programs kick in, knowing you have those very large dividends in your favor. I know what Wall Street wants. They want to get rich quickly. Me? I am happy to get rich slowly, because there's much less of a chance of catching a bottom than being eviscerated by a top.
Real March Madness Is in the IPO Market
Posted at 11:53 a.m. EST on Friday, March 21, 2014
You want March Madness? Genuine March Madness? Look no further than the IPO market these last few days.
It is absolutely crazy out there, with sliver deal after sliver deal coming public and immediately going to a premium. I am talking about A10 , Paylocity Globoforce , Borderfree , Castlight and Amber Road and literally about a dozen other companies that have taken advantage of the widest window I can recall to come public. This is an extraordinary moment, with many of these companies using identical buzzwords -- cloud-based, software as a service and big data software -- all kinds of companies that mimic Salesforce.com or Cornerstone OnDemand or Workday .
Meanwhile, the money pours out of those established cloud plays as if they were reporting terrible numbers when, in reality, they are delivering great ones. It doesn't matter. Consider those senior growth stocks as teams like Florida, Virginia and Michigan State and these IPOs as 16-seed colleges.
I find this rotation, which I alluded to earlier, to be frightening in its speed and breathtaking in its frothiness. Why? First, we hardly know anything about these companies. Half of them sound like beers, for heaven's sake. Second, only a small float is coming public, hence the title sliver, causing those bigger institutions who want to get what's known as a whole position to come into the aftermarket to complete it. Remember, that's how you get pops of these kinds of magnitudes. You restrict the float and then you give a growth mutual fund, say, 3% of the stock, which usually amounts to a position that's too small to matter to that client. But the client can then go in the aftermarket and buy what's necessary to get a full position and is able to use a blended average to get a decent-sized position.
So, let's take a fine Pilsner like Amber Road, which is actually a management software company for global logistics. Today, it prices 7.38 million shares at $13 and it opens at $17.50. How does that happen? Maybe a multibillion-dollar mutual fund got 100,000 shares at $13, not enough to go around. It can then buy another 100,000 shares at the opening and own 200,000 shares at $15.25. Not bad considering the stock is more than $17. Oh, and by the way, I don't mean to pick on Amber Road as 30% of the stock outstanding did come public, far more than compadres A10 at 21%, Border Free at 16% and Paylocity at 14%. Plus, that's a lot more than some of the worst of the slivers of this era, including Yelp at 10% of the float and LinkedIn at 7%.
So, if Yelp and LinkedIn ultimately worked, what's the fly in the ointment? First, Amber Road is a relatively unseasoned company with fast revenue growth that's losing a lot of money. That's fairly typical of these deals. The public's appetite has been whetted, but not that many months down the road it is likely that there will be a secondary offering that comes well above the IPO price. That alleviates the tightness and tends to send a company's stock down almost instantly.
Take the trajectory of FireEye . Here was one of the hottest stocks in the universe. It's an acknowledged leader in security software for the enterprise. Its software actually flagged the security issue at Target .
It had been a huge winner trading all the way up to $96 not that long ago. Sure enough, just when the stock spikes to that level, the company files a 14-million-share secondary enabling insiders to cash in and the stock gets clocked instantly, with the deal ultimately being priced at $82.
Next thing you know the stock's below $70. That's right, $96 to $70 in a blink of an eye. And remember, this company, while losing money, is indeed the best of breed with this hideous decline occurring while it came out that Target turned off the FireEye program that would have detected the hacking that has hurt the retailer so badly.
I think the cautionary note here is that stocks like Yelp and LinkedIn are the exceptions and FireEye is the rule. Sure, you made a lot of money if you rode FireEye to the top. But you needed to get out when the insiders sold, something akin to what happened in 2000 when so many insiders sold.
All I am saying is be careful. There's froth everywhere in the IPO market right now. Don't confuse IPOs with IPAs, although both can indeed make you drunk if you have too many of them.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, held none of the stocks mentioned.
- how Wall Street opinion can turn on a dime, and
- why the real March Madness is in the IPO market.