Today's menu

• Our portfolio crash

• How deep is the market crash?

  • A look at the magnificent seven

• Are there bargains?

Our portfolio crash

Lets not deny it. Your portfolio has been dropping over the past few weeks and you don't like it.

Don’t worry, you’re not alone. Our Extraordinary Companies portfolio has been slammed. Our 1-year return is -4.8%. That is a negative return.

Remember when our 1-year return was +50% a few months ago? Those days are gone.

Sad, isn’t it?

Well cheer up buttercup because this is what we’ve been waiting for - bargains.

(Also don’t panic, our 3-year return is positive and we are still ahead of the index).

Over the past year, prices were high and it became harder to find stocks that we wanted. When we look at a stock, part of the analysis is to ascertain expectations. In other words, what is the market expecting from this company in future, to justify the price today?

Lately, the market has been expecting crazy things. That happens in a bull market. People expect companies that are shooting the lights out, to keep doing so. Price begins to diverge from the fundamentals.

In our last newsletter, we showed you a method to detect this. The stock price grows faster than the profits do, meaning the P/E ratio increases.

Over the past month, the market feels like it has been “crashing”.

But is it cheap and should we buy the dip?

Let’s find out.

How deep is the market crash?

The graphs that we are going to look at are drawdowns from all-time-high. They show us the percentage that the stock or index has fallen from it's highest point.

For instance, in the graph below, we see that the S&P500 has fallen 9.31% from it's high. That's a nice dip, but it's not a crash (actually it’s not even a correction).

• Correction: -10% to -20%

• Crash: -20% or more

That’s the point of this first graph - to show you that the market hasn’t really crashed, no matter how it feels. Hopefully that will help us to shake off the dreaded feeling of loss, which the stock market is good at eliciting. Now, with emotions aside, we can think about opportunities clearly.

Let’s look at the Magnificent 7 stocks.

Amazon

Amazon is not what we define as an Extraordinary Company. It might have some great parts to it, but we don’t see what we’re looking for, so we don’t own it.

Amazon is down 18.78% recently.

Apple

We don't own Apple, but we define it as an Extraordinary Company.

Apple is down 14.65% recently.

Alphabet (Google)

We don't own Alphabet, but we define it as an Extraordinary Company.

Alphabet is down 20.42% recently.

That's quite a bit. Maybe it’s worth a look.

Meta (Facebook)

We don't own Meta, but we define it as an Extraordinary Company.

Meta is down 17.78% recently.

I like Meta. It’s a brilliant business. I don’t like the amount of stock-based compensation they hand out, but I’ve heard they are reducing that. Maybe it’s also worth a look.

Microsoft

We own Microsoft but it’s down 18.16% in past 8 months.

That’s unfortunate for us, but Microsoft is a behemoth and a great company. The entire business world runs on Microsoft through their cloud services and their office software. We are happy to keep owning Microsoft.

Nvidia

We own Nvidia - in fact, we own too much of it. It is down 27.22% recently.

That's crash-ish, right?

Nope. Not for Nvidia.

If you can’t handle a bumpy ride, Nvidia is not the stock for you. This company has been down 75% or more, four times in its history (since 1999). The recent drop is par for the course.

Tesla

We don't own Tesla and we don’t define it as an Extraordinary Company. We explained why last year - here.

Tesla is down 51.95% recently. That's unfortunate for Elon.

Are there bargains?

These are pretty big drops, but are these companies in bargain territory?

A historical price-to-earnings (P/E) ratio is the price divided by last year’s earnings. A forward P/E ratio is the price divided by the earnings forecast for next year.

It might feel more intuitive to look at the historical P/E because those are real numbers that actually happened, however, in cases where a company is growing fast, the stock can look expensive on the historical numbers and reasonable on the forward P/E.

A good example of this is Nvidia, it has a very high historical P/E of 39, but an average forward P/E of 25.

For comparison, the S&P500 index has a historical P/E ratio of 25.42 and a forward P/E ratio of 20.72.

The table below is ordered from cheapest to most expensive based on forward P/E ratios.

The problem with comparing stocks is that they are all of differing quality and they have different prospects. So it is not quite fair to compare ratios, but it will give us an idea if things are cheap or not.

The S&P500 index forward P/E of 20.7 will be our comparator - it will represent the “average” company.

In comparison, we can see that Alphabet looks cheap - but there are reasons for this - earnings were below expectations, capital expenditure will be higher than expected and their cloud business did not grow as much as expected.

Meta, Nvidia and Microsoft are a bit more expensive, but allowing for the fact that they are above average companies, perhaps not too expensive.

Apple and Amazon seem a tad expensive.

Tesla looks crazy.

Conclusion

Thus far, the market has (almost) corrected. It might still crash. Who knows?

There is nothing wrong with buying the dip, but don’t do it blindly. You have to look at each company and assess whether they are selling at a reasonable price or not.

For us, nothing here is screaming bargain, but we wouldn’t mind looking at Google and Meta in more detail.

If you're not sure, a strategy you can follow is to buy a bit now and buy a bit later. That way, you won't completely miss out if the market rebounds.

If you're out of money (like the guy in the meme) and you own great companies for the long-term, stop looking at stock prices. There is nothing you can do about it now.

I would like to hear what you’re up to.

DM me on social media or email me.