Irrational exuberance is back, and these are the worst offenders


It was way back in 1996 that then Fed Chairman Alan Greenspan first used the term “irrational exuberance” to describe stock market prices, and whether he was right or wrong to use the term is one of history’s oft argued irrelevancies. What can’t be argued is that major indices, particularly the NASDAQ, remained on a sharp, upward trajectory for three and a half years after the words were said. Many fortunes were made during that time, and some of today’s giants, namely Google (GOOGL) and (AMZN) first rose to prominence, while the biggest giant of all, Apple (AAPL), rose from wreckage into the re-imagined company of today.

Having lived through the era, trading all the while, I recall that most of us knew things were out of whack, but we were essentially powerless to do anything about it. Borrowing costs, particularly of technology shares, were so high that shorting the market was frequently not feasible, and, of course, it was always extremely dangerous. The corollary of irrational exuberance is this quote, of uncertain origin: “The market can remain irrational longer than you can remain solvent.”

Fortunately, today’s bull market, while perhaps as irrational, is nowhere near as exuberant as the bull market of the late 1990s. If you aren’t comfortable in today’s hottest tech stocks (and I mean to point out a few in which you shouldn’t be) you can invest in other sectors that offer reasonable and reasonably secure returns. You can even short-sell, if short selling appeals to you, though in most cases, you would be better served by buying naked put options.

That said, remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.

Becton, Dickinson and Company (BDX)

Becton Dickenson is a venerable and diverse medical device company. It is headquartered in the US, but currently generates 60% of its revenue overseas. There are plenty of other companies in the space, but the space is big, so to see what’s going on, we’re going to have to look under the hood. What we see is a company that has recently grown almost beyond recognition via two colossal acquisitions. In 2015, the company acquired CareFusion for $12.2 billion and in 2017 it agreed to acquire CR Bard in a deal worth $24 billion.

Now, the fun part. Analysts believe the acquisitions will be immediately accretive to earnings—so much so that they are forecasting earnings of $10.60 in 2018, up 130% from the $4.60 earned in 2017. Now throw in $300 billion in synergies, and you can see why the market is excited. So what’s the problem? The company grew the old fashioned way—it borrowed. The debt to equity ratio is now 4.7, which is too high no matter how you slice it, especially considering that bond rates are now rising more rapidly than expected. Just an everyday growth trap. Wait until the jaws snap shut, then swoop in to pick up the wreckage.


Chart courtesy of

Tableau Software (DATA)

Tableau Software produces data visualization products. Such software can be used to make it easy for the eye to take in, and for the mind to comprehend, vast amounts of data, but its true purpose is far greater than the mere creation of pretty charts and graphs. Via math I can barely recognize as math, this company’s software uses “insights” gained through the results of its visualizations to further process data, resulting in new insights. Here’s a bit of what they say about what they do on their website: “Tableau helps people transform data into actionable insights. Explore with limitless visual analytics. Build dashboards and perform ad hoc analyses in just a few clicks. Share your work with anyone and make an impact on your business.”

Groovy. But companies are supposed to make money or, failing that, make some sort of progress in the direction of making money, and that is, well, not entirely happening. On an annual basis, the company’s revenue has grown each year, but by less than in the previous year; in 2017, revenue growth will be in the single digits for the first time. And that’s the good news.

The company’s operating margin has fallen from the low 3.3% it achieved in 2012, to the head-spinning, self-destructive current level of -18.7%. Unsurprisingly, the company is in earnings decline. But what about value? P/E Ratio of 322.

Is sure sounds like what the company can do is neat. And that, I fear, was the very last good thing I’d be able to say about the company. Well, let’s move on, rather than pile on.


Chart courtesy of

Apple (AAPL)

Over the past year, Apple has gone from, $120 to $180. It’s market cap is $911 billion, making it the largest publicly traded company on US markets. (It is not largest company in the world; that’s Saudi-Aramco. Proven reserves? Yeah, they’ve got that.) There are good things to be said when it comes to Apple’s prospects, including the fact that a quick dive into the numbers reveals earnings growth of 10% in 2017 with analysts forecasting a wowing 22% in 2018, while the company’s P/E Ratios (trailing: 19.13, forward 15.55) make the stock look cheap, even at nearly $1 trillion.

Irrational exuberance can start in any number of places, and truth be told, it starts as frequently in analyst earnings and revenue forecasts as it does in whacky valuations. 22%? I think the company, generating 62% of revenue from iPhone sales, is exposed and vulnerable. And now, component costs seem to be on the rise. Tim Cook needs to get Elon Musk on the phone, because unless humanity soon discovers an advanced civilization on another planet with everything but iPhones… who are they going to be selling iPhones to now? Me? I already have one, and as the company now knows, if they try to break it, I can sue.


Chart courtesy of



But wait… Mr. Julian, weren’t you among the first analysts in the western financial media to take this strange sounding company seriously? Why would you turn on your own pick just because it has been successful?

Well I very certainly took YY seriously long before the rest of the world did because it was so clear that it was filling an important role in the Chinese social structure. I was absolutely sold, once, on the explosive revenue and earnings growth, despite what seemed to be too much dipping into the debt markets. The debt was troubling not because debt in itself is so very bad, but because debt seemed such an unnecessary crutch for a company with such explosive growth and such apparently strong cash flow. In 2015, when revenue rose by 53%, I was astonished that the markets did not seem to take note. It was near the end of 2016, a year in which the company’s revenue growth fell to half of that in the previous year, that buyers began to move in.

And now, a potential weakness has emerged. It appears that YY’s entire revenue stream is coming from just 2.1% of its customers. That small core of big spenders could be captured by a rival platform a lot more easily than a wide base of paying customers could be, and it makes the risks here too high.


Chart courtesy of

Aspen Technology (AZPN)

Aspen provides software and software as a service solutions to manage engineering and manufacturing plants. The company has a large testing center which it uses to test various configurations of machinery, striving to optimize efficiency. So, OK, I here you say, but efficiency at what? Well, to understand that, you need to understand that Aspen’s real customers are not purchasers of manufactured products, but the manufacturers themselves, each of which has unique needs, but all of which are served by Aspen’s software which allows them to optimize their own processes based on experiments conducted at the testing center. Neat idea, but revenue and earnings growth have fallen to nearly flat, wile the trailing and forward P/E’s remain over 30. It really isn’t clear why AZPN shares have gone from $56 to $76 over the past six months, except as a result of participation in the general market surge. If the past is any guide, that means it could lose those gains very quickly in the event of a market downturn.


Chart courtesy of

Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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