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  • Martin Sosnoff

The Magnificent Seven Ready For A Shakeout

The fall from grace can be swift and hugely punishing. Note the shrinkage here ranging up to 80% for Ericsson, Cisco, Qualcomm and WorldCom. They all were household names. 

How not get carried away by today’s $500 pieces of paper? The Street is useless, forever cuddled in story stocks. Players digest quarterly reports then extrapolate revenue growth, operating profit margins, as well as new product developments. I like the way Microsoft breaks down its divisions and product lines. Readable.

I remember when NASDAQ touched down at 1,100 during the banking crisis of 2008-’9. Today, we’re at 18,000 and happy. But I recall how they took IBM out to be shot on its bad numbers. The data processing industry was changing too fast for this committee bound management. The pursuit of growth is a double-edged sword. 

The Magnificent Seven dominates NASDAQ, but getting shaky.  Back in 1972, JP Morgan’s 1-decision stocks nonsense embraced Walt Disney, Schlumberger and Polaroid which sold at huge premiums. Even Eastman Kodak sold at 165% of the S&P 500 list in the sixties. 

In the sixties, Gillette was bid up to a premium on the razor blade concept of repeated usage. We see dozens of stocks, now ingrown, selling in triple digits because their management regards high priced paper as a badge of honor. It all started with Buffett, who said long ago stock splits added no value, a pure arithmetic concert. 

What’s going on today is many properties, with T-shirted headmen view their stock price as a coincident indicator with their virility. A soaring stock is reflected in their elongated member between the legs. Higher the stock price the more elastic is their schlong and vice-versa.

1950s and 60s management conventionally dressed in double breasted suits and wore white shirts with starched collars and cuffs. They treated shareholders in a straight-laced patter, like priests of capitalism.

The Watsons running IBM, in the 50s, prescribed white shirts for their entire salesforce. GM, GE, and U.S. Steel never hired Jew boys out of city colleges. I was attracted to the plain talkers at Xerox and Polaroid. Edwin Land, presided at his Polaroid annual meeting held al fresco in a Boston Park setting. 

Decades later, Apple's headman, Steve Jobs, used Edwin Land’s style of show-and-tell to introduce his iPhone to shareholders at their annual meeting.

Kent Damon, Xerox’s courtly chief financial officer would upbraid analysts on their shabby homework. He wasn’t in the business of forecasting earnings per share. But, I learned about early scalability of a new product like 

Xerox’s 914 copier. Later, I applied my model of early scalability to Internet properties like Facebook and Google. 

What players in $500 stocks have chosen to ignore is that nothing is forever. Xerox and Polaroid floundered finally, when new competitors like Nikon and later a slug of Internet providers ended Xerox's primacy on single copying.

Through appreciation, Microsoft is now a 10% position for me.  It fluctuates daily, 2 to 4% both ways. You read their quarterly reports to extrapolate revenue growth, operating profit margins, as well as new product development. Revenue momentum is solid at Microsoft, keeping me in the fold. 

What happened is fewer stocks with huge capitalizations now dominate portfolios. I never sell good-acting stocks, but portfolio domination by a handful is dangerous for your health. For years, I promised my clients that Polaroid and Xerox could levitate 2% monthly. But the music did stop and the stocks became firewood.

Can Apple, Microsoft, and Amazon turn into firewood, sometime soon? I doubt it, but I’ve begun to diversify out of high flyers,  looking for operating leverage elsewhere. In airlines, for example, I own the lower priced American Airlines which sells in the low teens, not $600 a share. I crave more low price-earning stocks. Like Enterprise Product Partners, an MLP with racheting numbers, acts well.

I bought Eli Lilly, too, for its non-tech construct. Microsoft and Amazon, comprise 25% of my assets. Not so extreme as Buffett, but it’s gutsy. I’m thinking of buying a double-wide trailer. If necessary, I could live off my Social Security stipend and distribution from my IRA. Assume too, I’d hold some 2-year Treasuries yielding near 5%. 

If Buffett and Jaime Dimon at JP Morgan are peeling off shares in their parent company, why should any of us even consider owning their paper? I don’t.  I’m sticking with my hand of 40% long, with a pile of Treasuries.

What would make me change?

Let the Russians pull out of the Ukraine. Gimme soft oil futures quotes and a prime interest rate near 4%, not 6%. Home mortgages at 8% hang too punitive for prospective home buyers. Home insurance rates seem too pricey as well. 

I’ve heard no rationale on how or when the negative yield curve unwinds in  10-year versus 2-year Treasuries.

My magic word is “scalability.” It’s easy to make more cell phones. Scalability existed,  too, in the 1950s for Polaroid cameras and Xerox copiers.   Product scalability is the ultimate rationale for growth stocks like Eli Lilly selling in the clouds.

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