Profitless Growth Stock Reflexivity

Yes.  The beaten down growth stocks look like they are in bounce mode! Beware going long these names as they are now under distribution and fundamentals are about to get worse.  Stock moves like this always augur a future deterioration in fundamentals.

A Large Cap Growth PM friend of mine was on the West coast last week visiting these companies as they were imploding.  He had a big smile on his face because he faded these names into year end and is mostly defensive now.  His peers are not and he is looking good.

He told me that the company managements were asking him about their stock prices and they seemed very concerned to him.  We both realized that this is like 2000 all over again.  Yes he and I are old.  You see when you are a profitless growth tech company your strong stock price actually determines your fundamentals.  It is reflexivity in action. It is virtuous on the way up.  The employees are happy and motivated and are willing to take less cash comp because their options are in the money.  The management teams are happy because they can float more stock at higher prices to fund their expansion plans to hire new programmers and new sales people.  And then the additional sales people mean more revenues and a higher stock price and so on and so on.  However, this works just the same in reverse.  The employees want more cash comp which makes a profitless company’s cash flow even more negative.  The management team worries about expanding too fast because they don’t want to issue stock at lower prices so that means less sales people to ramp the revenue line.   You get what I mean.  The street now has to go from beat and raise stories to miss and lower stories as the growth slows.  Valuations collapse and dreamers get wiped out.  Any time a company’s growth is dependent on the capital markets beware.  When the capital markets decide its over run away don’t walk.

One of the high flyers that many of you were long told my friend that the employees are already demanding more cash comp.  Boy that was fast.  My friend said that this CFO looked sick to his stomach.  Once this BS rally is over I will be aggressively shorting this name.

I got my face ripped off today ouch!  Temporary set back.  This tech wreck is just getting started.  Let the rally play out then get ready for some more liquidation as these companies start missing numbers after the summer.