A correction can take the good with the bad
January has been a nasty month for stock investors, but it should not have come as a surprise. Charlie Bilello says it well:
Drawdowns are the norm for equities, not the exception; they are the price investors must pay to earn higher long-term returns than bonds or cash.
Many of the stocks we own have been caught in the downdraft, but they aren’t the main driver of market weakness. The chart below from Bilello tracks an example of a stock at the center of the storm–Peloton.
A 2 Year Round Trip in Peloton Stock – Up 490% in 2020, Down 84% in 2021
Peloton was the “perfect” lock-down business. Gyms were closed and people who wanted to work out ordered one of their stationary bikes equipped with video classes. It looks like everyone who wanted a Peloton bike bought one in 2020 and still, the company couldn’t turn a profit. The history of exercise equipment should have warned investors—remember the NordicTrack?
Peloton is not alone. Hundreds of companies were valued on sales rather than profits, and when the selling started last year they suffered a collapse in price. The speculators who bought these stocks are selling good companies along with the bad.
By good we mean businesses reporting 20% profit growth for 2021 as their stocks trade down 15% in January. Businesses that can grow sales and profits will weather this storm and reward those who hang on while others are selling.
Daniel A. Ogden