My shoulders were hunched. I didn’t know if I wanted to cry, throw a water bottle at someone, or maybe both. The market had closed, maybe an hour and a half ago, and out of the corner of my eye, I had spied the unthinkable on the screen: “Western Digital sees fourth quarter prelim well below estimates.” Catastrophe. I felt faint at my standing desk; I began to crumble, soon to hit the floor. But a split second before impact, I woke up, 2:47 a.m., the same time I always came to at that infernal Cramer & Co. hedge fund of mine. Do you know that this nightmare occurred just this past Sunday night? I was recalling something that happened 37 years ago, when we owned 4.9% of Western Digital, and it blew up in my face, ruining my year. I started Thursday’s July Monthly Meeting of the CNBC Investing Club with Sunday’s nightmare because you need to know that such a scenario is playing out again all over the Street, just as it did almost four decades ago. The component stocks, Western Digital , Seagate , Sandisk , and Micron , as well as the just-joined SK Hynix , have had tremendous runs. Western Digital is up more than 180% this year alone, and the holders all fear that nightmare. They fear it because that’s what has always occurred. There’s always a boom followed by a bust with these stocks, and the bust will wipe away whatever you’ve made and then some. Or at least it used to. These semiconductor parts makers had always been sink-or-swim. We have never had a cycle that lasted as long as this one. The companies and their suppliers, like Applied Materials or Lam Research , and their customers, Dell , Hewlett Packard Enterprise , or their more nimble cousins, including Corning , Qnity , and Intel, as well as others like Arm Holdings and Advanced Micro Devices , had always gone up quickly but had then fallen hard, much harder than expected. It’s been ineluctable, as foregone as when Western Digital pre-announced oh so many years ago, because the cycle had turned without my seeing it coming. This time, though, we are discovering that we have to unlearn forty years of knowledge. We have to erase the muscle memory. As preposterous and reckless as these words are supposed to be for investing, “This time it really is different.” Contrary to everything we know, the boom stocks are no longer going bust. They just keep booming. And to those who want to jump off because they’ve had my same Sunday nightmare? They are missing gigantic moves. Chips are being rationed; companies like Micron, the data-center dominator, and Applied Materials, which makes equipment for Micron, are, for the first time ever, getting long-term contracts for their wares. The experienced fund managers don’t believe it to be possible, even as it is happening right now. These old folks would rather be short than long, and their short sales (which are bets that the stocks will go down lower) are part of the fuel that makes owning at least some of these a must. That’s right, everybody just keeps waiting for something to give, for some unknown company — from China? Japan? Malaysia? — to flood the market with memory chips, causing the whole chain to collapse. You see that when you look at the price-to-earnings multiple of SK Hynix, the Micron competitor, which sells at six times next year’s earnings estimates. That’s because there are people who believe that those estimates will never be met — or, like in my Western Digital dream, the actual numbers may be only a quarter of the estimates, making the actual P/Es substantially higher and very uninviting. It’s that tension that has caused so many of these stocks to go parabolic. It’s that struggle that, in some cases, actually makes the breakdowns we just had worth buying. Why are the stocks really going down? I think it is all emotion. It’s not the fundamentals. It’s all about what happens when the amateurs hijack stocks and take them to an unsustainable parabola. I don’t care how much you think a stock is going to go higher. If, or when, it goes parabolic, the fundamentals mean nothing; you have to sell at least half because parabolas tend to be halved before they bottom. We are in the bottoming phase as the weak hands are almost gone. The pros who have long memories, as I did with Western Digital way back when, have now joined the retail sellers, and that’s why a bottom is so elusive. That said, when it comes to these companies — not the stocks, but the component plays — we’ve never seen this consistent earnings phenomenon before. We may never see it again. But it’s happening, and that is why we are trying to build a larger position in Intel into the thick of the craziness: we think central processing units (CPUs) will be the next thing to be in short supply after memory chips. That potential shortage is why Intel is my favorite stock. (Jim Cramer’s Charitable Trust is long INTC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Cramer: A nightmare from my hedge fund days informs my current view