(Please enjoy this updated version of my weekly commentary published March 14th, 2022 from the POWR Growth newsletter).
First, let’s review the past week:
Over the last week, the S&P 500 is down by 0.5%. There was slightly more weakness in the Russell 2000 and the Nasdaq. In fact, the Nasdaq is flirting with bear market territory.
However, the major takeaway is that we are at the bottom of the range. It feels like the outcome is binary – either we see a big oversold bounce that takes us to the upper-end of the range, or we break the bottom of the range and begin a new leg lower.
Given the prevailing emotions, numerous risks, and negative newsflow, it’s easy to understand the bearish case. At the same time, it’s a good exercise to at least make the argument for the former scenario.
In a perverse sense, the market has absorbed a tremendous amount of negative news since late January, when we first bottomed around 4,200 on the S&P 500. Since then, inflation has gotten worse by magnitudes, the world has become much more dangerous, and we are seeing a return to lockdowns in Asia which means that supply chain issues and transportation bottlenecks will continue to feed into inflation.
So, it’s actually quite impressive that the S&P 500 is only down by about 12% from its all-time high given all of the negative developments over the past couple of months.
The Gameplan
In some markets, there is clarity and the ability to make a plan and stick to it for months if not years.
Clearly, this is not such an environment. This is a time when “return of capital” takes precedence over “return on capital”. Therefore, we will continue to aggressively manage risk from a individual stock basis as we always do, but also manage portfolio risk.
Earlier, we discussed the market’s precarious position and its binary nature at the moment. Direction is a coin flip, but the market is setting up for a big move… in either direction.
Therefore, I’m particularly paying attention to the 4,100 level as a line in the sand. Above this line, I’m willing to be more aggressive, below this line, is our cue to get into a more defensive position.
Opportunities
In terms of our longer-term strategy, not much has changed. In a more normal environment, such selling, fear, and oversold levels have naturally correlated with buying opportunities.
Going back to the core drivers of markets – earnings and rates – we can see that earnings growth was better than expected in Q4 and forecast to rise 4% in Q1. Rates have been marching higher as well, but remain acommodative. Although, much less so given the Fed’s inflation focus.
In terms of specific opportunities, there are 2 that I’m paying very close attention to and have been discussed in the past. The travel sector is booming, and bookings for Q2 and Q3 are off the charts. The other is to find the opportunities that are created by the crash and bear market in many speculative growth stocks. Especially the handful of ones that have shown no slippage in terms of revenue and earnings growth.
It’s hard for the market to pay attention to these subtle improvments on the horizon, while there is a 12-car pileup right in front of it. However, I think that is what investors are most rewarded for specifically in these circumstances.
Now, let’s move on to the portfolio…
Portfolio Review
Preferred Apartments (APTS)
APTS is set to be acquired by Blackstone for $25. This confirms our thesis of strength in real estate, specifically multifamily and “starter homes”.
I continue to like this theme (as does Blackstone), but the remaining companies are not as high-quality and are somewhat overvalued.
But, I do think there is more upside and very favorable valuations in other housing and housing-related stocks.
Silicon Motion (SIMO)
SIMO was an outperformer for the first few weeks we owned it, as it stubbornly stayed in the green even with weakness in tech and the market.
This is no longer the case as the market’s weakness has eventually drug it down. I like the company and its products, but this is not the market or environment to indulge such convictions.
Newmark (NMRK)
Like SIMO, NMRK has been giving back gains. Despite still being in the green, it’s also on the chopping block.
The major reason is that people are simply not going back to offices. There have been reports of companies mandating in-office presence but only 50% of employees showing up.
If we look at stats like hotel occupancy rates, restaurant reservations, miles driven, movie theatre attendance, etc., these are trending higher and off anywhere from 0% to 30% below pre-pandemic levels. The slowest area to recover is office attendance which remains more than 50% below pre-pandemic levels.
This was contrary to my expectations as I believed office attendance would recover like other parts of the economy.
Olin (OLN)
OLN is up more than 10% over the past week. Many believe it will be a beneficiary of the Russia-Ukraine invasion, since many chemical companies in Europe are dependent on Russia to provide inputs which means more revenues and pricing power for OLN especially as demand could also be higher due to the war.
Conclusion
The market continues to test our patience. However, as a student of history, I know that the worst things get in the near-term, the better the opportunities will be in the long-term.
All the Best,
Jaimini Desai
Chief Growth Strategist, StockNews
Editor of the POWR Stocks Under $10 Newsletter
SPY shares . Year-to-date, SPY has declined -7.14%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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