Traders work on the floor of the New York Stock Exchange in New York, U.S., Tuesday, March 15, 2022.
Michael Nagle | Bloomberg | Getty Images
Good deals are addictive.
During my teenage years in Boston, my friends and I frequented Filene’s basement, rummaging through tables full of designer clothes, looking for amazing items, marked down up to 90% off their original price at Neiman Marcus. or Saks Fifth Avenue. My most memorable purchase some 50 years ago was the Dior peach shorts I wore that night at a club that was unaware of my missing face resemblance on my license.
Since bargain hunting runs in my blood, a market that crushes the Nasdaq Composite by 23% and sinks the S&P 500 by 13% is one that excites me. Each professional investor has their own criteria for filtering the names that enter the portfolio. The key is to narrow down the list based on the most desirable attributes.
Even though the S&P 500 and Nasdaq rallied strongly last week, there are still legions of decimated stocks to consider as buying candidates. Their decline is understandable in light of the hyperventilated stocks that peaked in late 2021 under the weight of inflation, interest rate shocks and an impending war in Ukraine.
They include the list of 153 stocks trading on both the NYSE and Nasdaq with market capitalizations over $5 billion that are down 40% or more from their 12-month high. Since many of them are years away from making a profit, we’ve also selected stocks with a market value of $10 billion or more that have fallen in price by at least 30%, with 2022 earnings above the 2021 level, resulting in a cohort of 73 names. .
The dominant industry represented in the wreckage of these stocks is technology, which was clearly the group that emerged as the fastest growing and fastest growing sector during the pandemic and through much of 2021.
There are also other factors that support our belief that the market has been oversold. For example, Bespoke Investment Group released a report on March 14 showing that the Nasdaq bear market streak was three days away from reaching the status of the longest decline since 2008-2009 and the Great Financial Crisis.
An illustration of recent extremes is the relative underperformance of growth stocks versus value stocks. Year-to-date, the Russell Growth indices, for large cap, mid cap and small cap, have lagged 13% to 16% behind their value composite peers.
Value investors might argue that this disparity is justified, given how many years growth has beaten value over the past decade. Yet the severity of this decline looks and feels like a surrender. When stocks fall in steep increments for weeks, we finally come to a point where every hedge fund, mutual fund, and trigger-happy phone app trading player with big margin calls has dumped their stocks.
So if the setup is good to buy, the decision making is next. The simplest options are to buy an S&P 500 index fund or, for a higher risk appetite, a fund comprising the 100 biggest Nasdaq names contained in a QQQ ETF. Due to the huge rebound we just experienced, it might make sense to average out these purchases over the next few weeks.
The other approach is to add a few names that have been crushed but have significantly lower earnings support and price-to-earnings multiples than pre-pandemic levels. For example, Adobe, Autodesk, PayPal, and Fidelity National will all grow earnings in 2022, hold strong or dominant stakes in expanding addressable markets, and generate strong cash flow.
Finally, there are the former high-growth but profitless darlings of 2020 and 2021 whose stocks are considered “unanalyzable” by many scholars. These include Robinhood, Peloton, Teladoc, Twilio, Chewy, Cloudflare, and many more with real companies but have gotten outrageously expensive. At least 65 of them, with market values over $5 billion, are down 60% or more from their 12-month highs.
We will focus on those whose estimated five-year sales growth is at least 20% per year, whose operating cash margin is expected to exceed 20% in three years, and where a discounted cash flow model justifies the high risk inherent in these investments by a substantial increase. potential.
None of these purchases should put you at ease. But remember that most of the “comfortable” aggressive buying, made in concert with a host of others in 2021, has been pulverized.
Going against the grain is often a good decision in the investment world. Just be careful – keep an eye out for bargains that have wear power.
Karen Firestone is President, CEO and Co-Founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.