Cramer: Are market valuations growing absurd?
(Click for video linked to a searchable transcript of this Mad Money segment)
Jim Cramer has noticed a growing skepticism in the market concerning valuations. Is it warranted?
After digging into the issue, the "Mad Money" host came to discover what he called a 'religious-like intolerance' toward certain stocks.
That is, "There's a constituency of investors that only wants certain stocks to be valued on earnings growth, dividends, and how those earnings and dividends will vary over time," Cramer explained.
And in the event the P/E ratio appears excessive by these measures, these same investors insist the stock is bound to tumble. But, in real terms, the P/E ratio may not be excessive, in the least.
Cramer says the phenomenon is most pronounced in Disney. That's because, until recently, the stock had been valued by those conventional methods; earnings growth and dividends.
"But Disney CEO Bob Iger has transformed the company," Cramer said. "And because of the transformation, Disney's stock now gets a premium to the average stock in the S&P 500."
"If an institution has changed for the better, and it's becoming even more profitable then I totally condone paying a higher price to earnings multiple," Cramer said. And that multiple should be sustainable.
Cramer believes the same phenomenon is at play in Chipotle, Monster Beverage and Michael Kors.
That is, again, there's a contingency in the market that's convinced these stocks are overbought. "They don't understand that investors are willing to pay a higher premium for their accelerated earnings." And as long as earnings accelerate, Cramer believes share price will accelerate too.
The phenomenon grows even more pronounced in stocks such as Salesforce.com, Yelp, Workday, Cornerstone, Concur and other cloud, social and mobile plays. That is, skeptics insist the P/E ratio doesn't warrant the multiple. Period.
It may not. But it doesn't matter.
"These stocks aren't trading on P/E ratio, they're trading on sales growth," Cramer explained. In the cases of all these stocks, "As long as the sales growth momentum stays strong, investors will be willing to pay up."
Of course, Netflix, Tesla, and SolarCity are at the far end of this scale. All of these stocks trade at valuations that are so rich, skeptics argue they probably can't be realized, ever.
But that doesn't mean they're going to decline anytime soon. "These stocks are trading on dreams," Cramer said, "they're trading on the promise of tomorrow." And as long as they allow investors to dream, Cramer doesn't see these stocks tumbling either.
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Although it may not appear that the stocks listed above have any strong relationship to one another, there is, in fact, a valuable through line.
Quite simply, "There are many ways to value a stock," Cramer said. "And people who only want stocks to move on earnings growth and dividends may have a hard time making money in this market."
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