Mr. Market Drinks Your Milkshake

Wall Street can be a cruel tycoon. Like There Will Be Blood's Daniel Plainview, it can be a ruthless destroyer of anything that stands in its way.

Mr. Market doesn't need your blessing or your cooperation. All it needs is a long straw to reach across the room, slurping away at your milkshake.

There will be blood
Yesterday was another rough day for investors. Mr. Market's growing straw sipped a little more at the emptying milkshake glass. After peaking in October, the S&P 500 had surrendered 19.2% of its value as of last night's close.

It's also been hard on the Nasdaq Composite, off by 24.2% since its October highs. The drainage gets even worse if you follow said straw all the way to March 2000, when the Nasdaq Composite hit its all-time high of 5132.52. The secondary stocks gauge is off a whopping 57.7% from where it was eight years ago.

Sure, that particular top was the frenzied end result of the dot-com bubble. Valuations were out of whack by any definition at the time. However, did stocks really seem that pricey just a few months ago? The answer may seem obvious in retrospect, but it sure didn't seem that way at the time.

Perhaps even more disheartening is that even the quality names have been plummeting lately.

Peak

Loss

Apple (Nasdaq: AAPL  )

$202.96

41.0%

Google (Nasdaq: GOOG  )

$747.24

44.6%

Baidu.com (Nasdaq: BIDU  )

$429.19

43.8%

Hansen Natural (Nasdaq: HANS  )

$68.40

42.6%

Crocs (Nasdaq: CROX  )

$75.21

76.0%

All five of these former market darlings peaked during last year's final quarter before taking their swan dives.

It's not as if the fundamentals have followed the shares down to the splat. Apple and Google now trade at just 23 and 21 times this year's profit targets, respectively. Take a quick peek at 2009's estimates and Apple, Google, and Hansen are fetching profit multiples in the teens.

Crocs has seen its fundamentals crack after two quarters of bloated inventory levels and lackluster guidance, but analysts who are paid well to follow the footwear maker still expect growth to continue. Based on Wall Street's projections, Crocs is now trading at seven times this year's earnings and less than six times next year's bottom line.

Then you have Baidu, the Chinese search engine leader that is still part of a booming economy. There aren't any fears of online advertisers scaling back in China, much less as we head into this summer's Olympic Games in Beijing. That hasn't stopped this thirsty market from ramming its thick straw down through the Earth's core to sip Baidu's milkshake at the other end of the planet.

The drain of drainage
"Drainage," is Daniel Plainview's explanation of how he was able to suck all the oil off a rival's virgin tract of drillable land by owning the land around it. That is just before he delivers the now-signature line, "I drink your milkshake."

Investors are probably feeling that way. Their stocks appear fundamentally sound on the surface, but values have been sucked dry beneath them. Even the former standouts that have been hit with sluggish near-term growth prospects, like Starbucks (Nasdaq: SBUX  ) and Home Depot (NYSE: HD  ) , could never have fathomed being marked down this low.

The upside for investors is that this isn't a Hollywood movie. If the fundamentals are intact and the valuations are that much more attractive, the time will come for building an even longer straw.

Not every stock will bounce back, but those who choose well will be rewarded when it's time to strike back and drink Mr. Market's milkshake. They won't have to slurp away beneath the surface, either. When the time comes, the bulls will have their sweet reward in plain view.

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11/26/2014 4:00 PM
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CROX $13.29 Up +0.27 +2.07%
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GOOGL $547.73 Down -1.50 -0.27%
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HD $97.70 Up +0.69 +0.71%
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