“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”
-Peter Lynch
The current turmoil in the stock market has driven many investors away. Since 2022, the Nasdaq has been down 24%, and the S&P 500 has dropped nearly 20%. (Source: Investing.com) It seems like the stock market's performance has proven the adage" Sell in May and go away" to be true. However, investors should value the opportunity that arises from the recent downfall.
The U.S. economy:
There are multiple factors contributing to the stock market’s lousy performance. For one, the United State’s GDP has decreased for the first time since quarter two in 2020, causing investors to fear and panic. But if we expand our time frame, we can see that one minor disruption in a few quarters is a mere blimp compared to the long-term U.S. GDP’s secular uprising trend. There is no need to be scared of a minor decrease in one, two, or even three quarters. As per the graphs below, the U.S GDP has fluctuated over the years as the U.S experienced Cold War, Dot Com Bubble, and the 2008 Financial Crisis. However, the short-term decrease in GDP when these crises happened is insignificant compared to the long-term GDP trend, which is a rising secular trend.
Individual companies:
Some may still fear and panic about some companies’ slow growth. For example, Amazon’s operating income decreased to $3.7 billion in the first quarter, compared with $8.9 billion in 2021. There was also a net loss of $3.8 billion in the first quarter, or $7.56 per diluted share, compared with a net income of $8.1 billion, or $15.79 per diluted share, in the first quarter of 2021. Other blue chip stocks, such as Walmart, also experienced a slowdown. Walmart’s net quarterly income fell to $2.05 billion, or 74 cents per share, compared with $2.73 billion, or 97 cents per share, from a year ago. (Source: Walmart)
However, we need to view these problems in the current context. With inflation rising, it is natural for many households to save money and purchase cheaper items since they are not receiving any stimulus checks. Furthermore, grocery stores like Walmart face increasing supply chain costs that take a bite out of their earnings. Walmart's inventory also increased by 33% as it made aggressive buys to get ahead of inflation and make sure items stayed in stock. (Source: CNBC) The rising logistic costs result from supply-side disruptions caused by the pandemic, which will most likely resolve over the long term. Therefore, we shouldn't think that the future of Walmart is gloomy just because of one or two-quarters of lousy performance under the current economic environment.
Furthermore, the average lifespan of a company on the Standard and Poor's 500 Index is 21 years, which is 84 quarters. (Source: Statista) One-quarter of bad performance only constitutes 1/84 or 1.19% of a company's lifetime, which does not affect a company's long-term fundamentals. Furthermore, Any business's fundamental or intrinsic value is the sum of all cash flows it will generate in the future discounted to the present. As previously mentioned, bad performance in one quarter is unlikely to change a company's fundamental or intrinsic value permanently. Therefore, Walmart's ability to generate long-term future cash flows is most likely unchanged.
Let’s look at Walmart’s stock price since it went public. Although there were seemingly major downfalls at specific periods, Walmart rebounded strongly and has maintained a steady upward trend. Additionally, looking at Walmart’s earnings per share (EPS) for the past twelve years, we can observe that its EPS has rebounded strongly after every significant downturn.
A similar situation is also happening to Amazon. The pandemic and subsequent war in Ukraine have brought unusual growth and challenges to Amazon in early 2022. Amazon has been navigating a host of economic challenges, including rising inflation, higher fuel, and labor costs, and global supply chain snarls. But its history is perhaps key to understanding why these problems don't matter.
Looking at Amazon's past EPS(Earnings Per Share), we can see that it grew rapidly and steadily and survived crises such as the Dot Com Bubble and the 2008 Financial Crisis. Ultimately, the company's long-term fundamental value drives a company's growth. As we can see, Amazon's stock price kept increasing, mirroring its growing earnings.
In conclusion, Investors should always be focused on the long-term fundamentals of a business as that is what ultimately drives a company's stock price over the long term. Most Importantly, any event that doesn't directly affect a business's long-term cash flow generation abilities can be safely ignored.
By: Siddharth Singhai
Disclaimer:
This White Paper expresses the views of the author as of the date indicated and such views are subject to change without notice. Ironhold Capital has no duty or obligation to update the information contained herein. Further, Ironhold makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.
This White Paper is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Ironhold Capital Fund 1, L.P. (“Ironhold”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based
