A few days ago, some traders were behaving like it was the end of the world, selling just about everything at increasingly desperate prices. Even now, 7 out of 10 stocks in the S&P 500 are down YTD and about half of them are somewhere between correction and full bear market territory.
After all, we’d been told that inflation was out of control after two years of free money. The Fed had signaled it was finally time to tighten up on policy and end the zero-rate era.
But in the meantime, a lot of stock prices had swelled to unsustainable levels. Once again, people complained, loose money had created a bubble . . . and all bubbles inevitably burst, leaving little but wreckage behind.
At least that’s how the story goes. There’s a problem with that narrative, though.
Precedents Provide Perspective
We’ve already lived through an extended period of free money and the shock when the Fed finally started guiding interest rates back to normal. These aren’t unique circumstances.
And yet nobody seems to remember that there was even a series of “taper tantrums” after the 2008 crash as the Fed first slowed its bond purchases and then stopped them entirely. All of this has played out before.
If you’re wondering, the world didn’t end. Wall Street survived. Great companies kept growing. They thrived. So did the stocks and the shareholders.
Of course, they had to hold onto their shares in order to reap the long-term rewards. Those who dumped because they were convinced that the market was too weak to survive the end of free money missed one of the biggest bull runs in history.
Think about it. Apple at the equivalent of $30 after you adjust for its 4-for-1 split. Amazon below $400.
Back then, these stocks looked grossly overvalued. Amazon wasn’t even reliably profitable as Jeff Bezos poured money into new ventures like cloud computing.
And as for mighty Apple, shares commanded a lofty 56X earnings multiple . . . even though year-over-year growth looked flat at best. That’s what they call an unsustainable valuation now, isn’t it?
Someone who let these numbers scare them away missed out on a chance to quintuple their money in the seven years that followed. Steering clear of Apple might be one of the biggest mistakes in recent investment memory.
Here in early 2022, history may be on the verge of repeating itself. Yesterday, Apple was down 13% from its peak. After all, the Fed was coming and once again, all those growth stocks looked vulnerable to a big fall.
That was yesterday. But even after today’s massive rebound, some are muttering about how overvalued stocks like Apple are . . . how the numbers just don’t add up.
Apple survived the previous Fed taper and the end of the post-2008 free money era. And today, the stock trades at a far more reasonable 26X forward earnings . . . not even half its 2014-15 multiple.
So my thought is that if the giant of Cupertino is at best half as expensive as it was a decade ago . . . and if it soared 450% in the last tightening cycle . . . then people selling it now are only going to regret their decision in years to come.
The Dream Of The Bargain Shopper
And that’s just one stock. The last three weeks have pushed hundreds of big names into correction territory. It’s a bargain hunter’s dream.
When people ask me where to start, I have to take a deep breath. Just about everything is on sale right now. Start at the top of the food chain and go down from there.
Big banks. Big pharma. Big retail. Big tech. My rule of thumb is that if it takes a year for these stocks to bounce back to their recent highs, you’ve matched the long-term return on the S&P 500.
Start with that. And then from there, you can get fancy buying stocks that are more badly battered. One figure I’ve seen said 40% of the NASDAQ 100 is down 50% or more from its peak.
That’s a vast amount of wreckage. It will take time to recover confidence there. But when it happens, shareholders will cheer.
So buy Square, or “Block” as Jack Dorsey prefers to call it. Hold on for a few years. Buy Roku. Buy Adobe. Buy Salesforce.
Amazon is down 24% from its peak. It’s unlikely to drop to pre-pandemic levels . . . the economy has changed too much. That tells me this might be close to the bottom, worth nibbling at before earnings.
But notice, I said it might take “a few years” for these stocks to recover. Fed dread is a terrible drag. Even Apple was dead money between the first rate hike at the end of 2015 and mid-2016.
At that point, the earnings multiple on AAPL didn’t even drop below 40X. Apple is cheaper today than it was at the bottom of the previous taper tantrum. Why are people not buying?
I think it’s because they’re scared. Fear is always a factor on Wall Street.
You climb each wall of worry people construct to separate you from your conviction and your stock. Does anyone even remember the 2015-16 correction cycle?
That’s the thing about walls of worry. When you push through them, they vanish in the rear view. The stocks keep looking forward . . . making money, growing, expanding.
We’re about to enter a robust M&A cycle. A lot of stocks are going to get taken out at what today look like solid premiums.
It won’t happen overnight. But in a year, a lot of shareholders are going to feel pretty good.
On the sidelines, it’s going to feel pretty cold. What will they tell themselves, when the Fed starts raising rates and stocks stop flinching?
Come up with a new fear factor, bears. I’m waiting.
IPO Insight: Delays Are Good
Right now you need to be supremely confident or utterly desperate to ring the Wall Street bell and take your company public. There isn’t a lot of room to be rational in between.
The confidence is easier to spot. If you’ve built a strong business, it doesn’t really matter when you push the IPO button. You know the company will be worth more in the future, which will make the stock more valuable.
“Market conditions” don’t play a factor in that story. If Wall Street is throwing a tantrum when you go public, the stock might struggle in the early weeks . . . but you’re looking toward a bright long-term outcome.
And if you’re utterly desperate, you know you might not get another chance to make an exit. The IPO window might close, leaving you and your backers trapped in a stalled situation and bleeding cash.
In that scenario, an IPO in unsettled conditions is better than no IPO at all. The people who buy your shares are left holding the bag . . . but that’s not your problem, you say.
Between these extremes of confidence, the prudent thing to do is delay the debut like Justworks did a few weeks ago. You’ve already filed the paperwork. Why not wait for the market tide to turn in your favor?
After all, that’s what your investment bankers are telling you. When I took companies public, I listened to them. And they listen to the market.
When the market is telling you that 70% of the deals you do are going to not only trade below your offering price but underperform by about 30 percentage points . . . you pay attention. There’s little point in rushing a deal out unless it’s really good or your clients insist.
And that’s why I’m pleased to see more deals hitting the “pause” button. Wall Street doesn’t need any more copycat IPOs where the backers are more interested in selling their shares than giving investors something special.
At a guess, I suspect at least 200 of the stocks that hit the market last year fall into that category. They soaked up money and goodwill, taking the spotlight from more deserving companies.
Even the good deals need a little more space than what they have now before they can really shine. We saw “only” eight new IPOs in January, which feels almost quiet when you look back at months like November when we had to digest about two new stocks every trading day.
But it’s still an incredibly crowded pipeline in a normal world. I’m eager to see a lot more companies pause their debut and give the market mood a chance to heal.
When we see the great stocks that went public in the last few months finally start to get back to work, “market conditions” will be ready for stocks like Justworks.