'I Am Positioned Aggressively for a Stock Market Correction,' Says Doug Kass – TheStreet.com

This post was originally published on this site

At the risk of sounding stupid (and wrong), I don’t like the market nor its action one bit.

 
As mentioned late Wednesday, a large market-on-close imbalance when combined with month-end window dressing caused a late rebound.
 
Thursday morning, despite lower bond prices and higher yields, banks continue to be moribund.
 
With vulnerability in the league-leading FANG stocks (see today’s opening missive), I am positioned aggressively for a market correction–something few consider even as a possibility.
 
Finally, the Russell Index continues to lag.
 
I have added to an already large ProShares UltraPro Short QQQ ( SQQQ) position on the market’s ramp early in the day.
 
Position: Long SQQQ large; short BAC large, C large, JPM large .
 
Will FANG Lose Some of Its Teeth?

Originally published June 1 at 8:00 a.m. EST

“Put money to work in the companies that represent the future … Put money to work in companies that are totally dominant in their markets, and put money to work in stocks that have serious momentum … These stocks have the potential to really take a bite out of the bears.”

And for that reason Jim Cramer has nicknamed them FANG stocks.
–Jim Cramer, “Does Your Portfolio Have FANGS?,” February 2013

Back in February 2013 my pal Jim “El Capitan” Cramer brilliantly (and well-ahead of anyone else) coined the term “FANG” stocksFacebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Google, now Alphabet (GOOGL) .

Thursday morning, I present some serious questions about the “A” and “N” in Jim’s “FANG.”

With Amazon and Netflix both hitting all-time highs and Amazon having finally traded at more than $1,000 a share, the media is awash in stories about how these four “super stocks” and others that have captured most of the market’s gains in this bull cycle. Indeed, it has been a subject I repeatedly have addressed in my Diary.

As a survivor of the “Nifty 50” with growth stock investor Putnam Management in the 1972-1974 period and as a short seller during the dot.com boom in the late 1990s, I have seen the movie before.

In 1972-1974, being young and impressionable, I actually bought into it. As the Internet bubble developed in 1999-2000, not so much as I became skeptical, delivering lectures and articles for various analyst societies and penning an editorial in Barron’s “Other Voices” which highlighted the fantasy of technology valuation in “Kids Today.” In that editorial, I warned that bear markets were borne out of conditions like the heady tech stock party that was being experienced in the late 1990s. The market, I surmised, was beginning to lose its moorings. I used the sage advice of “Adam Smith” (a.k.a., George Goodman) and “Scarsdale Fats” (a.k.a., Bob Brimberg) to illustrate my points. Three years later, the Nasdaq began a 75% decline in prices.

In the current bull market cycle and four years after Jim’s creation, FANG & Co. (who knows what history eventually will call them) continues in its prominence and many again are analyzing these leaders and their rising role in a narrowing market.

Over the last week this has occasioned a lot of thinking about this, for reasons discussed below.

Here are my conclusions.

The analysis used for it is hardly being done at all except possibly by older fools who have lived through speculative bubbles and can talk about it.

Though I would not be a buyer at current levels, I can find little fault with Facebook and Alphabet shares as attractive investments (subject to more reasonable pricing) over time. Based on what I believe to be solid forward growth, neither is expensive.

For what it is worth, I estimate Facebook will grow Ebitd at 30% annually over the next few years. For Google, that growth in cash flow is about 15% per year. Moreover, both generate significant free cash flow and both currently show revenue growth in excess of my estimates for Ebitd growth. Given the low cost of goods sold for both firms, they have great control over cost and can manage reported Ebitd.

Facebook is terrific about over estimating expense growth on its conference calls. A reasonably intelligent case can be made that Google is a value stock.

For Amazon and Netflix, the valuations are another story. I would avoid both.