Admittedly, trading was light today, and admittedly, Cisco fell only a bit less than $5 to about $63 a share, hardly a debacle considering its still-lofty valuations. But it is a rare occasion that bad news about Saint CSCO gets blamed for dragging down New Economy stocks across the board. What does Cisco’s stumble mean?
Over the weekend, Barron’s ran a bearish Cisco piece that threw around the phrase “house of cards” in the course of questioning the company’s valuation. The article noted that if Cisco traded at the same multiple of earnings as its top competitors, that might put its price at $35 or even as low as $16 a share. Now, nobody really needed a Barron’s article to learn that Cisco’s stock price is extremely expensive when measured against the company’s earnings, or that its growth strategy is largely tied to acquisitions, which can be risky. In fact, it’s hard to believe that anybody who held Cisco would sell it because they were suddenly concerned by the contentions of the Barron’s story.
It is easy, however, to imagine people selling Cisco because they figure other people might be concerned. In fact, it’s not hard to imagine people sitting around on a pile of Cisco, just waiting for some sort of signal to sell some of it.
We certainly seem to be in a moment when sentiment about the market is extremely difficult to gauge. At times recently it has seemed as though the smart money is not only receptive to bad news but implicitly applauding it. In the course of a recent trip to a city where there is a lot of high-tech start-up activity going on, I happened to meet an entrepreneur whose fledgling tech company has completed its second round of financing. Talk turned to the choppy Nasdaq. “First of all,” he interjected, “the market correction was awesome.” When I got home a couple of days later I saw that the cover of the New Republic included the line “Thank goodness for the stock market crash.”
What explains this sudden burst of Doomsayer Chic? Part of the thinking is that the market had “gotten ahead of itself” earlier this year, and once it cools off for a while–and hopefully “shakes out” weaker players who should not be in the game in the first place–it can start climbing again, and we will all be happy. The investment-advice commentariat preaches that investors should look out for tumbles in share prices as opportunities to scoop up their favorites (“buy on the dips”), and presumably there were some folks thinking along these lines who rushed in to scoop up a mildly tarnished Saint CSCO.
What I am curious about is the thinking of those on the other side of those trades. Were Cisco’s sellers doing a kind of reverse calculation, concentrating not for the “bottom” in stocks they want but for the “top” in stocks they want to dump? Maybe we’ll even start to hear the market gurus advising us to “sell on the peaks.” How “awesome” would that be?