Enough with the righteous indignation already

That attitude is causing people to attack this bull market -- and it will hurt you.

By Jim Cramer Mar 6, 2014 1:22PM

Image: Businessman reading newspaper © A. Chederros/ONOKY/Getty ImagesYou can't be righteous in this business. You can't be intolerant. It will cost you money. You can't be doctrinaire. It will ultimately cause you to underperform. You can't be oblivious, unless you are so darned rich it doesn't matter.TheStreet.com logo

Yet, I see some sort of righteousness or intolerance every single day in the stock battlefield and I think it's becoming the fog of war that's causing people to accuse this bull market of bogus bona fides on pretty much a daily basis.

So, in the interest of opening people's minds that are already made up and, more importantly, showing you the biases that are masked by righteous indignation, let me spell out what's driving the enmity to a lot of these moves that we are seeing today and why the moves can continue, regardless of these largely intellectual parlor-game challenges.

First, you have to accept the notion that there is no one way for a stock to go from $10 to $20, or $100 to $200, or $300 to $500 for that matter. There are multiple ways stocks move up and that, to some degree, is at the heart of the religious-like intolerance you are seeing and hearing every day. I think people are comparing what they think is the only way a stock should go higher to what really is nothing more than a normative way that stocks HAVE gone higher.

What's the normative way? Pretty simple. Let's take Disney (DIS). Everyone knows Disney, so it's not hard to understand.

The righteously indignant want Disney to be valued on earnings growth, dividends and how those earnings and dividends will vary over time. In fact, they are often intolerant of any other prism to value stocks.

Disney, under Bob Iger -- a bankable 21 CEO from "Get Rich Carefully," -- has taken this company from a wayward, episodically successful enterprise to one with a consistent earnings stream stemming from the expansion of the un-DVR-able ESPN, the multiplication and enlarging of theme parks and a reliable slate of movies. So, a company that was a bit of a hit or a miss has now become a regular outperformer because of actions taken by Iger, including the purchase of Pixar, Marvel and now Star Wars, which provide for reliable sequels to bolster every quarter.

For that consistency and the regularity of earnings, pretty much regardless of worldwide strength- -- it is a global company -- the stock of Disney gets a premium to the average stock in the S&P 500. That makes sense to everyone, dogmatists and otherwise. Plus, if you get any event out of the ordinary that is positive, you will see a growth spurt coming from the higher earnings that the event may precipitate. So if you see, for example, a new franchise like "Frozen" develop, you are actually able to estimate that it could raise numbers now and in the out years as the franchise is developed through merchandise, television, the stage and ultimately theme parks.

But now we are going to get our first bout of indignation. If Disney's stock goes up too much without a concomitant increase in earnings estimates, then the purists would say that Disney's going up because of multiple expansion, aka the Greater Fool Theory. That's right, the sticklers would say, "Hey, I am perfectly happy to pay a premium price-to-earnings multiple to the average stock for Disney because it is an above-average company with superior management. But listen clearly. Do not ask me to pay a higher premium for those future earnings as the earnings go up. Or in dollars and cents, if the average stock is trading at 17x earnings and we have historically awarded Disney a premium multiple of 20x over time, three multiple points above average, don't start saying we are now going to pay 21x or 22x or 23x those earnings and think you can get away with it."

Yes, there's anger even about the notion of multiple expansion because the hide-bounders say that's not the way it works. The multiple has to stay the same on rising earnings or all you are doing is paying up and up for those same earnings. Why is this so sinful? The usual justification is something like what our mothers told us: if you have too good a time, someone is going to get hurt.

Me? If an institution is changed and changed for the better and it is becoming even more profitable than I thought, I totally condone paying a higher price-to-earnings multiple. I do it because it's my job to spot when companies have gotten better and aren't the same old companies and because I put a super-premium on superb management that executes in all environments and that's what Iger has done with Disney.

The indignant ones get downright angry when actual professionals continue to pay up and up for a company like a Chipotle (CMG) or Monster Beverage (MSNT) or Michael Kors (KORS). They think no company deserves too much of a premium to the average company, particularly when you are paying well in excess for what might be the hope of an acceleration in earnings, even though when you get it, as was the case with these three, they grudgingly accept that the stock deserved (past tense) to go higher.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.

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More from TheStreet

Mar 6, 2014 1:37PM
Sometimes when you read the heading it just screams Bobo at you ...righteous indignation indeed ....how about some of that indignation for the people you told to stay out of the market 5 years ago - missing 100 % plus of upside ....how about some indignation for the poor saps who followed your stock of the year Alcoa all the way down from $19 t0 $8 -- where you said you would short it !!! How about some indignation for the people who followed your constant buy Gold calls at 1900 an ounce ....bear sterns, countrywide, ...the list is endless !!!
Mar 6, 2014 2:49PM
As I explain in my book "Get Rich Filthily" you don't have to worry about telling bull markets from bubbles. All you have to do is write books telling everybody else how to write books about giving investing advice by telling everybody else about...
Mar 6, 2014 1:47PM
How does Kramer explain the valuation of Fireeye (FEYE). It goes public at $20.00, less than 6 months later runs all the way to $96.00+. It hasn't made a profit. It competes in an industry with low barriers to entry. None of it's competitors has seen a similar price rise. How can it's market cap of $13 billion be justified??? 
Mar 6, 2014 2:54PM
Jimmy, I still have a hard time figuring which week you are a Bull and which Week you are a Bear. Regardless, this market really hasn't been that hard to figure out. We have Corporations engaged in Near Record Stock Buybacks thanks to artificially induced interest Rates and the built in Tax Advantages.

We also have Record S&P Earnings which again ties back to Cash Flow to continually maintain the current Bull Market in Buybacks. We always talk about the FED but we rarely talk about Scale of Corporate Stock Buybacks.

And we continually ignore soaring National Debt, the China and Japan Crisis, emerging Markets breakdown, and what's happening with Russia and everyone in the WEST. That can't continue forever.

Mar 6, 2014 2:57PM

" to what really is nothing more than a normative way that stocks HAVE gone higher."


Sure Bobo......... QE is so freaking normal....... What a clown.

Mar 6, 2014 3:25PM

Wow, I think I agree with Cramer.  I think.  I would say, and I think Cramer is saying, in the end fundamental matter.  If Cramer is saying that, then I agree.  In the short term people  and the market may make arguments that Disney is now worth a premium PE, but at some point all Disney is worth is what it is worth on its actual earning power.  Now you can chose to play the momentum game and follow those saying Disney is worth a premium, the greater fool theory, and you can even make money doing that, but your risks are greater since my definition you are "overpaying" for actual earnings.

Listen carefully, you can play the market many ways, you can play the greater fool theory, you can pay a premium of stocks, you can play the hype of a stock, but in the end all stocks in the LONG run are governed by fundamentals and the discounted cash flows.  If you invest on fundamentals your risk of over paying for a stock are lower.  Your risks are lower.  This fact might keep you from buying the next Microsoft or Apple, but it is a low risk strategy.

Mar 6, 2014 3:27PM

There is a little know correlation between how well known a "Financial Entertainer" is and his track record of investment selection success.

The more well known, the less return their "advise" Yields.

Mar 6, 2014 4:40PM
  To many super positive articles like here today make someone who been around this game as long as I makes ones hair stand up on your neck just a little. Remember 2006 the call for DOW 44000?
Mar 6, 2014 5:38PM

Good job VV....I normally don't trade in and out of stocks, unless something fantastic happens.

Don't deal with options...

BTW....That was PetMeds Express (PETS), not PetSmart (PETM)..

PETS, is about $14 bucks p/sh. (now).......PETM is about $67 per/sh.

PETS pays div of about 5%............           PETM pays div of 1.2%.

PETS has P/E of 15.9....                            PETM has P/E of  16.9

52wk. Hi/Lo   $12.2 - $17.8                        52 week  $61.3 - $77.0*** (edited.)

Possible 25% gain to high..     ( edited)      Possible 13% gain to high.

Total 30% gain with dividend.  (edited)      Total 14.3% gain with dividend.

I think fundamentally PETS is the better investment, pays higher div, and more growth, p/e less.

PETS is an e-commerce business, with potential for a buyout...IMO.

disclmr: temp, Long on PETS. 

Mar 6, 2014 4:31PM
Used to be that there was financial capital, human capital, and social capital around our companies. Seems to have gone astray now days. The CEO's were making 40 times the average worker and now it is 400 times. They are really worth that? Some of the P/E's are very high on some of these companies now and you say they still have room to run?  Only if fools chase them.
Mar 6, 2014 5:01PM
There is little hope for the markets now. Did you really think it would work- moving up and up and up while the entire world's economy fails and billions get suppressed while insane psychopaths jack themselves over game tokens? Righteous indignation? Irrational Exuberance? Terrorism. Choose the gas chamber over the firing squad. 
Do you want to know true sadness? The generation that will be forced to rebuild- can't spell or think for themselves. They will need to. 
Mar 6, 2014 4:05PM

The government and their financial elite masters still can't handle the truth that their financial deregulation and foreign job shipping model failed in 2008, and that corporations and stock markets were in the process of collapsing to their real value. Since then they've intervened continuously and heavily trying to patch up Humpty. But the model is still failed and will always be.

Mar 6, 2014 1:38PM
Cue the ball cupping Burro Bride .....in 3, 2 ....1.......
Mar 6, 2014 5:41PM
Dlh believe, he might have taken job at Vatican, to help teach the Pope better Italian...ooolay..
Mar 6, 2014 5:20PM
What ever happened to CGT11's shadow Rome?
Mar 6, 2014 2:35PM
Sorry VV, I may have tipped Barry the Burro's Bride off, he's still "ranting elsewhere."
Mar 6, 2014 4:05PM
Btw Re Tog - the day your mentioned Pet Smart ?? - I called out SWIR - Sierra Wireless - went from $19 - $24 something in about 5 days - made a nice chunk of change buying calls - if it drops down to 20/21 again with another look !! 
Mar 6, 2014 2:46PM
We have been trying to keep things up this morning, so far so good except for the technologies....Manipulators starting to make their moves and we still have over 2 hours to go so, be cautious, they still cant get over what happened on Tuesday....Be careful, more later.
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