I began working at Merrill Lynch after school when I was 16 years old. One of the more senior brokers told me that the most important lesson I could learn about the stock market was – drumroll, please – “Buy low. Sell high.” That’s it? I got it, I thought. However, that advice is so much harder to implement than to recite, as recent market action underscores. Much of this difficulty stems from the investor bias of reacting to the present rather than anticipating the future. We can all agree that last year was horrendous for stock owners. The speed and severity of the decline from early January surprised most market participants, despite the signs of excess valuation and the threat of higher interest rates. My own radar was not particularly effective, either. By the second week in March, the S & P 500 had dropped 12% and the Nasdaq Composite had fallen about 20%. We began to look for opportunities in equities we had previously considered too expensive, but with inflation flaring and the Federal Reserve fomenting, markets kept sliding, and we waited. In mid-June, the S & P had sunk 23.4% from its Jan. 3 peak of 4,796, and the Nasdaq had collapsed more than 30%. Searching for opportunities in the rubble Bargain hunters began scouring the charred landscape for equities that had given up over 50% of their value in the prior year. We waded into the pool of drowning stocks with real earnings behind them, but too early. Without any sign that the Fed would shake its zealousness, the market continued to implode. On Oct. 12, the S & P closed at 3,577, down 25.4% from its peak. Was this the bottom? We had already seen at least two head fakes, but somehow this time seemed different, an observation I noted in a November piece . There was finally some evidence, including the consumer price index, that the Fed’s actions were yielding results. Prices have fallen for homes , rent and used cars . Tech and communications companies, such as Meta, Salesforce, Google and Amazon, experiencing weak sales, have laid off workers they hoarded during the pandemic. Retail sales have softened. These are signs of a slowdown in demand, whatever its official definition, which is an absolute necessity to curb inflation. It is no surprise to us that stock prices have moved higher. The S & P has climbed 14% since the October low, and the Nasdaq advanced by roughly the same magnitude from its low on Dec. 28. Speaking of “buying low,” we reviewed the universe of the 148 stocks over $5 billion in market capitalization on Oct.12, which had fallen at least 50% from their twelve-month high. As might be expected, about half of these stocks (47%) are tech related. As the table below illustrates, the average decline from that twelve-month high for the entire group was 60%, over twice the drop of the S & P and nearly 67% greater than the Nasdaq collapse. Since the market low in October, about half of the cohort has climbed 20%. Within that group, there is an average gain of 35.6%, two and a half times the gain for both the S & P and the Nasdaq Composite. It’s not just about buying the cheapest names Does that suggest we should just buy stocks that have collapsed? Not at all. Profitability, rather than lack of net income as well as earnings growth over the prior three years, appears to be correlated with their inclusion in the market recovery. Among the top winners include well-known equities such as those below: There is nothing magical about this list. Each name, and many others that fell over 50% last year, represented an opportunity and a risk at the levels they were priced. All are clear market leaders in their sectors. Our job is to evaluate those risks and make tough decisions, which become particularly anxiety-producing when markets are in turmoil, and the consensus is extremely negative. To simply remain bearish because the Fed will raise rates again or because we are “unsure” about the severity of the slowdown risks missing some great opportunities offered by sharp selloffs. For example, Meta, one of the most discredited stocks in the S & P, has popped more than 60% since its low on Nov. 4. At 90.8, Meta traded at under 10 times the 2024 estimate, which certainly reduces the risk that you are paying too much for that stream of earnings, assuming you think it is sustainable. Buying a stock that moves up 35% in a few months after a trouncing is not just a head fake. As this market climbs a daunting wall of worry, those investors, who have correctly ignored intense pessimism and purchased shares at oversold levels, may need to remember the second half of the adage. Getting the buying right is not enough for full credit. We just lived through an avalanche; we never lose money by taking some profits off the table. Karen Firestone is chairperson, CEO and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.
