Weekend thoughts: anxious and bullish

I’ve been thinking a lot about the “what a week” meme. It feels like markets have just been absolutely brutal for the past few weeks, and I keep thinking “man, what an awful year”…. and then I remember January isn’t even over.

Drawdowns are all part of the game, and as far as drawdowns go this one hasn’t even been that bad. The IWM is barely 10% off its all time highs!

That’s kind of shocking to me; it feels like most of the stocks I follow have been hit way harder than that. For me personally, most of my portfolio has “held in there” with the noted exception of my beloved cable stocks, which have been absolutely hammered.

Again, it’s all part of the game. But I’ve found this drawdown a little more taxing than most (excluding the big COVID drawdown, when there were “is opening the mail going to kill me? do I need to soak all of my groceries in bleach twice or is just once ok?” fears to go along with worries the whole world was ending). I suspect the current drawdown has been exasperating in part because every stock I’ve bought recently has seemed to follow a three-step pattern of

1. I buy the stock

2. The stock announces great news (good earnings, buybacks, insider buying, etc.)

3. The stock goes straight down 20% in a couple of weeks

Combine that pattern with cable stocks, which serve as my largest positions and which I’ve always thought of as “low beta / not economically sensitive,” going straight down, and the drawdown has been a little frustrating. But I’m finding it especially taxing because (again, outside of COVID) I can’t remember a market where so many of the people I talk to are this anxious. It seems everyone I talk to is prepping for “the big crash”, looking exclusively for shorts, convinced we’re heading into stagflation, etc. It’s depressing; it’s tough to say “there are lots of companies that look cheap and are buying back stock” ten times a week to people who are convinced the fed is hiking eight times this year, oil is heading to $300, and the whole economy and market are going to tank.

Anyway, enough of my complaining / using the blog as a therapy session. I’ve been thinking about lots of things during this drawdown, and I might build out on a few of them later. Those thoughts include:

1. I’m shocked the indices are only ~10% off all time highs. I see so much red and so many stocks that have been cut in half, it just feels like there’s much more pain out there than “down 10% in a few months".

2. The round trip in lots of growth darlings (including Peloton, Netflix, Stitch Fix) and many others. For years, skeptics pointed out that these were either fads or their economics made no sense, and skeptics were laughed out of the room as the share prices went up and to the right. The skeptics are laughing now; despite interest rates still near record lows and these businesses having seen huge improvement from COVID, their stocks are cratering.

   • Why am I thinking about that? Well, I consider myself a value investor, but I looked seriously at all of those and even bought small positions in a few at some point (though, fortunately, I don’t hold any currently). So I’ve been wondering: were the skeptics right all along? Or is the current share price an opportunity? Did I get swept up in a wave when I looked at / considered those businesses? I mean, I thought Peloton looked attractive at $80 and at ~$50, and here it is at <$30 (with a better balance sheet thanks to a capital raise) and I don’t want to buy it. Clearly the business is way more challenged now, but how do I justify liking it at $80 and not now? Kind of feels like I was swept up on the “buy the growth leaders and bro down” hype plus how much I enjoy my Peloton.

   • PS- my friends at Daloopa have a free Peloton model if you’re interested in brushing up on them; I’ll disclose I’m friendly with the team but worth checking out if you build out lots of models!

3. A ton of investing is psychological. I know one thing about me is I love companies that buy back shares for tons of reasons, but a huge one is that in drawdowns that buyback gets more and more valuable (assuming, of course, the company will continue to buyback shares; lots of companies like to buyback their shares when the stock is high and then stop when the stock is low!). Consider Charter: they bought back >$12B in stock last year (we won’t know exactly how much until they announce earnings next week). They executed all of those repos with the stock trading >$600/share and often >$700/share; the stock is currently under $600/share. I have every confidence they’ll be roughly as aggressive (hopefully more so) buying back shares in 2022. Lower share prices just mean the buybacks go farther and farther; at current prices, CHTR could retire 15% of their shares in buybacks in 2022 (versus maybe 10% in 2021). I just love how a buyback means a lower share price means you own more of the stock, and that if the stock doesn’t go up this year buybacks means you can shrink the float even more aggressively the next year.

   

   • I know it’s trite, but again: a lot of investing is psychological and being able to hold stocks through draw downs. I just find it easier to do so (and be excited about doing so) when a company is consistently executing a share buyback plan and you know you’ll own more of the company / the company will be able to buyback more of itself every time the stock ticks down.

4. Again, I’m surprised how much fear there seems to be in the system right now. Maybe it’s because people are feeling as shelled out as me, but I haven’t heard anyone who’s really bullish on the markets right now. Everyone I talked to is some combination of very cautious, looking for shorts, convinced stagflation is coming, or talking about a market crash (and often all of those blend together).

On point #4: I’ll take the other side of that fear: yes, there are pockets of excess, but I’m pretty bullish the market overall. There are obviously still some pockets of excess (though a lot fewer than a few months ago!), but I see plenty of value in the market. Everywhere I look, I see retailers trading for single digit earnings multiples that are hammering their share counts, or cable companies trading at reasonable multiples gushing cash flow while gobbling up shares.

I’ve seen lots of people calling for "the market” to go down another 20% plus. Stock prices can do literally anything in the short term, but I don’t really get where the “big crash” calls are coming from. Below are the top 25 stocks in the S&P 500; yeah, there are one or two things that stand out as having elevated multiples, but across the board these are generally some of the best and moatiest businesses in history with pristine balance sheets that spit off cash and are growing at impressive rates that are unheard of for companies their size. The 10 year is yielding <2%; would you rather buy these businesses at a going in yield of 4% (and growing) or the 10 year? I think it’s these businesses, no question.

I get that you can’t say “the largest companies in the world are reasonably priced, so we can’t have a crash!” Stocks can do anything they want in the short term, and reasonably prices can look unreasonable in a hurry if it turns out earnings were elevated by strange things (COVID boost, stimulus, etc.). But, in general, most of the companies on the smaller / midcap side that I’m looking at reasonably resemble what I’m seeing in those large caps (except with much better / lower multiples!). In general, corporate balance sheets are fantastic and multiples are reasonable. Sure, maybe we get a recession, but balance sheets are great so it’s hard to look at companies and say “o yeah, a recession is absolutely going to murder them and we’ll see a wave of bankruptcy filings” And I tend to think many of the current issues / fears go away over the next six months as COVID declines and the world gets back to normal (i.e. the supply chain starts to normalize and lots of the inflation fears fade away with it).

Anyway, I’m no macro expert, so take all of that with plenty of salt. But, outside of COVID, I haven’t seen people this concerned / negative on the market. I’m guessing that’s because a lot of people are feeling as shelled out as I am. I know it’s strange out there, and it’s tough to get your head beaten in every day in the market, but I’ve got to tell you…. I’m pretty bullish here.

I know, I know. Famous last words. Stocks can do anything they want in the short term, but I think markets overall look decently attractive here, and there are huge swaths of the market that look very cheap and are buying back shares at an extremely aggressive clip right now. Investors willing to stomach some short term volatility will almost certainly do well in those over the medium to long term.