Investors ought to be cautious as more and more stocks are being valued based on measures other than the revenue or earnings numbers that their underlying companies produce each quarter, CNBC’s Jim Cramer warned Monday.
Too many stocks are trading on “nontraditional valuation metrics” that make the market more difficult to ascertain, something that the “Mad Money” host said is reminiscent of an infamous period roughly two decades ago.
“You have to be skeptical of markets, entire markets, where more and more stocks are valued on something other than earnings. This is what happened during the dot-com crash — you had tons of companies that were trading on eyeballs and page clicks,” he said. “The more stocks that trade on weird metrics, the more likely it is that the market’s overvalued.”
During the dot-com bubble, in the mid-1990s to early 2000s, highly speculative internet stocks were the hottest assets on Wall Street. The tech-heavy Nasdaq eventually collapsed, shedding nearly 80% of value within seven months in 2000.
Wall Street trading was practically flat during Monday’s session. The Dow Jones Industrial Average advanced less than 15 points to just shy of 26,950 points, while both the S&P 500 and Nasdaq Composite slipped not even 0.1%. There are too many “disparate metrics” to keep up with, Cramer said, pointing to companies such as Netflix, Facebook and Alphabet to support his case.
Shares of Netflix were down nearly 1.8% one day after the streaming platform took home four awards at the 71st Emmys, short of HBO’s nine and Amazon’s seven statues. Cramer framed the stock price decline as a reaction to Netflix’s showing at the Sunday event. The company likely would have seen a big subscription boost had it won more awards against its two rivals.
“There wasn’t anything that made people say like, ‘You know what, wow … see all those awards? I’m missing out on too much content. I got to sign up.’ And that’s why the stock got hit today,” the host argued.
As for Facebook and Alphabet, Cramer said equities in the internet giants would be higher if they were judged by earnings. Instead, their stocks have traded based on news updates on antitrust investigations into the companies. Shares of Facebook fell 1.6% Monday after a Wall Street Journal report said that competitor Snap has been working with the Federal Trade Commission to address the social media behemoth’s hardball tactics.
Google parent Alphabet, which faces federal and state investigations, managed to gain 0.39% because there was no negative news that came out about the company.
“I have another dozen examples in my head. A dozen examples of stocks that simply don’t trade on earnings or sales anymore,” he said. “When there were only a few of these names, it was fine. But these days there are so many of them that it’s become much harder to parse what’s going on in the broader market.”
The host advised that it’s safe to own just one or two stocks of companies that are being judged by “odd metrics” because they take a lot of patience. He also suggested buying other names that have big dividend yields and to be skeptical of a market that’s not largely based on earnings.
“You can only go up for so long based on something other than earnings before we have to accept that valuations have gotten out of whack. In other words, this is not a normal market, so we do need to be careful.”
Disclosure: Cramer’s charitable trust owns shares of Facebook, Alphabet and Johnson & Johnson.