When a momentum growth stock loses its momentum, say by reporting a bad quarter, that stock can spend as long as 18 months in purgatory as the shareholder base shifts from momentum and growth investors who are willing to give stocks high price-to-earnings multiples for growth, to value investors who only like stocks at much lower valuations. That's the reason why we said Nordson was a sell on Monday night, and it has nothing to do with any of the points raised by Nordson's Corporate Communications Director in his e-mail to us. I don't want to slam the guy, he was extremely polite and we all appreciated that, but I also don't want anyone who watched the show and/or read his e-mail to miss the point.
This has very little to do with Nordson the company, and everything to do with its shareholder base. Nordson has caught the multiple-contraction bug. This case is hardly unique. Jim discusses examples of this in Real Money: Sane Investing in an Insane World, and Mad Money: Watch TV Get Rich. Here are the basics of what we believe is happening and will continue to happen to Nordson until it eventually falls to $44.44, the level at which Jim said he thought the process of multiple contraction would be over for Nordson on Monday night's show.
Let's set the stage: Nordson was a momentum stock before it reported its third quarter after the bell last Thursday. It had gone from $44.64 roughly seven months ago on Jan. 22, to $71.77 on Aug. 21 before the close. That's a 60.7% run. After a stock has had a move like that, the shareholder base mostly consists of investors who expect the company to keep delivering earnings that beat the Street's estimates, keeping the momentum going and driving the stock higher. The moment a company disappoints, it loses all of those momentum investors, which is why Nordson fell 17 points on Aug. 22. That was many of the momentum and growth investors fleeing the stock. We don't think they're done fleeing, partially because we've seen this process happen numerous times and it takes a while, and some big declines, before value investors get interested in a stock that no longer appeals to the growth or momentum guys. Also, let's not forget, at $53, Nordson is still 18.7% higher than where it was on Jan. 22, before it started its big run, the run that attracted all those growth and especially momentum investors.
This is a pattern that occurs pretty frequently, and Nordson fits the pattern. At this point, after that big miss, the company can't really do or say very much to win back all the growth and momentum guys it burned. All it can do is fall until it begins to attract more value-oriented investors, or at least, that's what's happened to similar momentum stocks that lost their mojo in the past.
And please, don't shoot the messenger. We were much kinder and less dismissive on our show than the analysts were, if you can believe that. We're just the media. All we were doing was explaining what people did to the stock, why they did it, and what we think they'll do in the future. We ourselves frankly have no vested interest, we weren't trying to get investment-banking business, we hadn't recommended Nordson, and we didn't feel snookered by them. We're simply translators of the message.
If the company wants to complain, I'd suggest going after the clever analyst at BMO who wrote the Flash note about Nordson: "Disappointing sales, margins and guidance... Oh my!" At least we didn't invoke the Wizard of Oz and throw it in their faces, although in retrospect I wish we'd had room in the story to highlight some of the more hilarious, less respectful responses from the Street.
Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Richand Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.
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