Major discounts or dead money?
Welcome to 2022, where the largest companies trade like penny stocks. JPEGs of animals are still selling for millions of dollars and commodities behave like altcoins. The last three months have been anything but kind to the majority of investors. High-flying technology companies plummeted due to the concerns of rising interest rates. Chinese stocks barely recorded any green days as foreign investors fled. Europe entered a bear market in the week following Putin’s invasion of Ukraine. The combination of macroeconomic events contributed to the increased volatility and revealed a few very interesting opportunities.
Long-term investors have always favored fundamental analysis. They claim it to be the “purest” form of research. Nevertheless, it appears that in recent months, fundamentals do not matter. There is an abundance of companies trading at record low levels. Levels that have not been seen since the global financial crisis in 2008. Have the markets lost their minds?
Those who read the “Intelligent investor” are well aware of this famous quote: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” When Graham wrote those lines, he never know their applicability would last for an eternity.
Currently, the investing atmosphere is filled with uncertainty. The United States does not know how to tackle abnormally high inflation. Raising interest rates seems to be the only viable option. However, raise the rates too fast and you are begging for a recession. Europe does not know how to combat the Russian invasion. Most of their natural gas, oil, minerals, and wheat come from it. The impediment of the Russian economy appears to be their preferred solution. In history, such economic barriers often resulted in real wars. China is still dealing with its “Zero Covid” policy. Not long ago they had to close down a few major cities. Furthermore, foreign investors are still not 100% sure, if the government fully supports overseas listings.
However, that does not mean you should not invest. “Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion.” – Pabrai
Currently, some of the world’s largest companies are trading at unreasonably low valuations. Meta platform dropped 20% on their last earnings. The second-largest advertising business is currently cheaper than many utility companies are. Which company do you believe can grow more efficiently? A tech company with $3 billion users or a company providing water to households? Another famous example is Alibaba. A company with more than a billion customers at 9x P/E. They themselves believe their stock to be massively undervalued. The buybacks in 2021 increased by over 7000% when compared to 2020. That sparked an interest in many legendary investors. Among them are Charlie Munger, Mohnish Pabrai, Ray Dalio, etc. These are not the only companies that are relatively attractive. Netflix, Paypal, Intel, Disney, Ally, Sofi, etc.
However, until some of the uncertainty blows over, this could be dead money. Essentially a wise investor should also consider opportunity cost. Money managers have a tough decision to make. The previously mentioned opportunities could be very fruitful. However, it might take years for the price to catch up to the real value of the business. Not everyone is prepared to wait that long.
Investing is not as easy as it was in the months following the March 2020 drop. Back then, you could buy anything and get an enjoyable ROI.
Today, you need more than that.