Opportunities Abound – Building Out A Portfolio

Introduction:


The economy is going through a pivotal moment as the Federal Reserve withdrawals stimulus as economic tailwinds may be in jeopardy. The culmination of inflation, supply chain constraints, pandemic backdrop, rising rates and easy money polices coming to an end has led to some individual stocks losing 30%-80% of their value in a matter of weeks. All the major indices have sold off in a meaningful way and are now in correction territory. Initially there was a massive sea change in the markets out of technology, specifically high beta/richly valued stocks and into value. As a result, the Nasdaq dropped over 15%, Russell 2000 dropped over 20%, S&P 500 dropped over 10% and the Dow Jones dipped down over 8%.


With many high-quality companies selling at deep discounts, this correction is offering an opportunity to build out a portfolio and engage in dollar cost averaging. It’s difficult, if not at all impossible to time the market and buy at the exact bottom however one can initiate a position and add to the position as the stock becomes cheaper when and if the market wide sell-off deepens. Any portfolio strategy should include a cash portion and it’s times like these where the cash portion should be deployed and put to work.

Earnings Disasters and Indiscriminate Selling:


Disappointing earnings have been a linchpin for individual stocks to lose swaths of value while sending entire sectors into a downward spiral. The financials suffered massive selling pressure after JP Morgan (JPM) and Goldman Sachs (GS) reported earnings. Netflix (NFLX) saw its stock tank over 25% after reporting earnings and this reverberated through the streaming space to sink Disney (DIS) too.


With the S&P 500 off over 10%, three of every ten stocks in the index are down at least 20%, nearly half have shed at least 15% and more than 40% of all Nasdaq components have been cut in half. The valuation extremes have largely been concentrated in the large growth companies and in the proof of concept, unprofitable stocks. The market is as oversold, based on various breadth, technical and momentum readings, as it’s been since the spring of 2020 during the pandemic. The S&P 500 closed below its 200-day average for the first time since mid-2020.


Market Shift:


Overall investor enthusiasm has cooled especially in the more speculative momentum stocks in cloud-software, SPACs and recent IPOs. High growth, pandemic-driven and proof of concept names have seen their valuations more than cut in half in just a matter of weeks. Money has flowed into companies that are generating profits, paying dividends and making tangible products. This will likely be the theme throughout 2022 as valuations begin to matter and placed in check.


As such, financial technology, certain software stocks, e-commerce apps, fading trends, sports-betting plays and stay-at-home plays have been absolutely decimated by 20%-70%-plus. PayPal (PYPL), Zoom (ZM), Square (SQ), Robinhood (HOOD), Docusign (DOCU), Peloton (PTON), Beyond Meat (BYND) and Twitter (TWTR) to name a handful of stocks in this bucket. The sell-off has moved beyond thes