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 these stocks and I think markets are over-reacting and now showing signs of selling exhaustion which may be primed for a bounce.


Deploying Cash:


As a result of the broad and indiscriminate selling, opportunities have presented themselves in high-quality companies at steep discounts. There’s many high-growth, profitable, divided paying companies that have seen their market caps reduced by 20%-50% despite the continued growth and end markets. As valuations moderate, there’s many high-quality names at steep discounts such as Microsoft (MSFT), Boeing (BA), Adobe (ADBE), Chipotle (CMG), Netflix (NFLX), Visa (V), JP Morgan (JPM), Goldman Sachs (GS), Amazon (MAZN), Facebook (FB), Best Buy (BBY), Disney (DIS), Nvidia (NVDA), Salesforce (CRM), PayPal (PYPL), Starbucks (SBUX), Nike (NKE) and Square (SQ) that may be great entry points for the long-term investor.


Deploying Options:


If engaging in options trading in this environment, one must tread carefully and follow the rules of option trading and grasp the concepts of iv rank. There’s also foundational knowledge that one must understand for risk-defined options via put spreads, call spreads, diagonal spreads, iron condors and tools that can be used to screen potential option trades via an options screener tool.


Conclusion:


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. With markets being as oversold as they were during the height of the pandemic, now is as good of time as any to put money to work in heavily discounted stocks.

Disclosure: Stock Options Dad LLC is a Registered Investment Adviser (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. Any recommendation contained in this article is subject to change at any time. No recommendation is intended to constitute an entire portfolio. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback, the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Adviser (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital and maximizing return on investment. For more engaging, short duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to info@stockoptionsdad.com. The author holds shares of AAPL, ADBE, AMZN, AXP, BA, BBY, BMY, C, CMG, CRM, DIA, DIS, FB, FDX, FXI, GOOGL, GS, HD, INTC, IWM, JPM, MRK, MSFT, NKE, NVDA, PYPL, QQQ, SPY, SQ, TWTR, USO and V.


Originally published in agreement with INO.com https://www.ino.com/blog/2022/02/opportunities-abound-building-out-a-portfolio/#.Yf65u-rMJPY

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