Opinion: The stock market is no man’s land. Prepare to bring money in when the turnaround comes

If you were too scared to buy stocks last week when investors panicked, I’d suggest doing a little selling now to free up your nerves – and your capital.

I will be a buyer on the next leg down, just like I was on the last leg down. Otherwise, for now, I think the market is in no man’s land, and I plan to mostly sit tight.

For the bigger picture, here’s part of the first quarter letter I sent to my hedge fund investors in April before the stocks were fully stocked:

“The list of stocks that are starting to look like great investment opportunities is slowly growing and I expect to find some stocks among the rubble that can go up 10-100 times in the next few years. It is in times where we are entering that great success has been built.”

Now, let’s talk about it here and now. When I analyze the market from the top down, looking at the S&P 500 SPX,
-1.02%,
Things still look bad. Analysts still believe that the S&P 500 earnings will rise to around $220 a share by 2022. Subtract 10%-30% of that decline for the likely earnings cuts for some companies such as narrow margins (higher costs) and reduced demand , and you have earned it. $180 or so.

The markets have been trading at 18-20-plus multiples on those earnings for the past few decades even though inflation has been low and, more importantly for multiples, interest rates have been very low.

As interest rates rise, US Treasury securities and other debt become more competitive, so people are willing to pay lower multiples for stocks. So let’s say we should expect a 15 to 16-times multiple on those earnings (and that could be generous even if interest rates stay here or even go higher). In math, take 15 to 16 times 180, which equals 3200 to 3380 points for the S&P 500. It’s currently trading at 3790, which means the S&P 500 could go another 15% lower and still be considered at fair value.

Then again…

  • When I analyze individual stocks that I like from the bottom up, I like the action. We’ll use two names that I’ve recently started building on, Adobe ADBE,
    +0.35%
    and SWAV Medical ShockWave,
    -2.11%.
    ADBE is nothing like Shockwave, but it’s an interesting comparison. Shockwave has a new biotechnology that will enter new markets and the government’s ridiculously favorable rules for health care companies will pay them that allow them to make 85% gross margins. ADBE has software for its core business, which has almost no incremental costs when you bring in a new paying customer. This company also runs at 85% gross margins, without the government setting their prices. In any case, Shockwave will grow 40% or more in the next few years as it enters new hospital systems and doctors are more likely to adopt their technology. Shockwave is set to be released in five years. Meanwhile, it is quite expensive now. ADBE is cheap now and will get cheaper, but slowly.

  • Likewise, when I look at the near-term economy with all its challenges, including higher interest rates, inflation, the Silicon Valley depression, the Russia/Ukraine war, supply chain crises, real estate and other overvalued assets for them, the prospect is dire.

  • Then again, long-term investors need to consider the following: Major companies have spent the last few years figuring out how to make their supply chains more resilient and redundant by moving at least parts of their manufacturing. to additional countries in Asia, Eastern Europe. and Central/South America — and of course, redirecting much of the supply chain into the US

  • And interest rates are close to natural levels for the first time in years – that’s healthy!

  • And the inflation rate has probably already peaked, even if inflation itself isn’t going back to 2% this year or this year. But it could eventually, as those new and improved supply chains cut away at the global shortage, and inventories return to healthy levels, as prices are cut to existing excess inventories in many sectors to clear out.

  • And many companies like Alphabet GOOG,
    +0.02%

    GOOGLE,
    -0.01%,
    Meta Platforms META,
    +0.06%
    and Adobe are finally rationalizing their employee base and will likely see wider operating margins in many sectors of their business as the over-hiring phase is over.

  • And crypto is finally washing out.

  • And just as recently as last week when we followed our playbook and bought stocks, there was fear everywhere and bears were crying about how great they were and the bulls were holding back.

Our top sites at the time of writing include, in alphabetical order: GOOG, Intel INTC,
-1.66%,
META, Qualcomm QCOM,
+0.31%,
Rocket Lab USA RKLB,
+0.22%,
ROK Rockwell Automation,
-0.68%,
Tesla TSLA,
-1.11%
and Uber Technologies UBER,
+1.88%.

For the first time in a long time, I covered almost all of our short positions as the markets fell into the end of the quarter, putting additional long exposure into the panic action, as intended.

I will considerately try to add more short stories and/or fences in the coming days and weeks. I expect that individual stocks will gradually stop trading so much and stock picking on the long and short side will become more important for the next cycle.

Be careful out there. Some stocks have bottoms, and some are very close to the bottom. We’ll look back on it in a few years and be glad we took advantage of the wide sale. But we’ve already taken this huge bounce off those recent lows and should be prepared for more volatility and possibly a downward trend as the path of least resistance in the broader markets. Be prepared to keep buying on the dips, especially when they get really big like last week.

Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or his investment firm may own, or plan to own, the securities mentioned in this column.

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