New Year, New Strategy? Actually, No; Here's Why, Plus 6 Quick Updates

Summary

• A new year is a terrific time to take the pulse of our portfolios.
• But the business cycle and long-term wealth compounding don't adhere to the Earth's orbit around the sun.
• Below I analyze some of the current market conditions, offer perspectives for long-term investors, and update positions on several companies.

William_Potter

Welcome to 2023

The turning of the calendar is an excellent time to take stock of our positions, rebalance, do some tax-loss selling, and learn about new companies.

It's fun to put out and read a lot of lists of our favorite stocks for the new year and look at how our favorites from the prior year performed.

However, the most important thing we can do is affirm our commitment to our long-term investing goals.

The most important quality of an investor is temperament, not intellect. - Warren Buffett.

The headlines swirl around us daily, and the most hysterical often garner tons of attention. Then there is the deluge of economic data and indicators, many of which conflict. We could drive ourselves nuts trying to keep up. What did Powell say at his press conference? When will interest rates level off? How many jobs were created last month? What is the VIX (VIX) doing?

Let's put 2022 in perspective

Not hanging on these news items doesn't mean we should be ignorant of economic trends and data; far from it. But we should always be mindful that wealth compounding over many years will involve market drawdowns.

The terrorist attacks of 9/11, the housing crisis, the Greek debt crisis, Brexit, the stock market dive in 2018, COVID-19, and current inflation are just a few of the economic shocks since 2000. 2022 wasn't abnormal.

Many growth names were decimated but are great buys now. Look for sales and customer growth, free cash flow, strong balance sheets, Fortune 500 customers, and secular growth industries. CrowdStrike (CRWD) is an excellent example and one of my top long-term picks.

When the market dips, I feel nervous excitement; it used to be fear. Losses are no fun; my portfolio is down considerably from its highs, even though some positions did very well last year. But long-term opportunity is knocking.

Successful companies go through intense drawdowns

If you're going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it. - Charlie Munger.

It's incredibly tempting to jump from one position to the next, switch from growth to value to energy, and back again based on current headlines. But it's challenging to be consistently ahead of the curve this way. Let's remember stock is an ownership position in a company, not a poker chip.

Yes, we should always consider changes and ensure we have positions in compelling companies we believe in, but wholesale changes based on short-term factors are typically losing moves. My most significant mistakes predominantly come from selling rather than buying.

It's tough to envision, but even the world's most outstanding companies go through multiple drawdowns of 35%, 50%, and even 80% over their lifecycles. I have taken some big names from diverse sectors, and their drawdowns since 2000 are graphed below. The graph is "percentage off their high price," so the downward dips indicate the stock is falling, and the revert to the top indicates a new high.

Data by YCharts

What's the point?

The chart is messy, but the takeaway is that even fantastic companies go through horrendous downswings. We can make massive profits by making intelligent, calm decisions during these times. The ticket is to find tremendous companies in secular-growth industries and stick with them.

These companies have tremendous returns since 2000, with Apple (AAPL) leading the way at +16,470%, Starbucks (SBUX) at +4,280%, Visa (V) at +1,610%, Microsoft (MSFT) at +515%, Exxon Mobil (XOM) at +465%, and JPMorgan Chase (JPM) +425%, including dividends.

Take Visa as a recent example. It crashed more than 50% after going public at the worst possible time, 2008.

Data by YCharts

Visa's financial results were exceptional from 2008 to 2012 despite the stock crashing twice. A $10,000 investment right before the crash is worth over $170,000 today, as shown below, and oodles more if we were dollar-cost averaging.

Data by YCharts

Why? Because Visa has a tremendous business model, mouth-watering margins, and a stranglehold on its industry. Those massive drops are barely blips on the long-term chart above.

My investing style has evolved over the years, and whenever I make a trade now, I imagine how I will feel about it in five years, not in five weeks or months.

The importance of accumulating positions over time

Some point out that it took eight years for the S&P 500 to reach new highs after the 2000 crash. The Nasdaq (QQQ) fared worse. Not good. However, this argument uses a faulty assumption. It assumes that we took our entire bankroll and invested it at the absolute top of the market.

Dollar-cost averaging is the concept of purchasing stocks in chunks over time. Here is an excellent overview with examples. This discipline ensures we are not stuck entering a stock position with horribly unlucky timing. There is a ready-made schedule for those who contribute monthly to an IRA, 401(k), or brokerage account.

Active dollar-cost averaging

Strict dollar-cost averaging tells us to invest equal amounts at each interval. But we don't have to be that rigid. It pays to invest a little more when the stock is down and a bit less when it is up - especially in a bearish market. We can set limit orders at increasingly lower prices and take advantage of large drops in high-conviction companies with more significant buys.

Let's update a few analyses.

Amazon

Pros:

Amazon (AMZN) has fantastic long-term ability given its:

• 38% share of the U.S. retail online sales market;
• 200 million + Prime subscribers;
• secular growth in online retail, cloud services by AWS, and various other initiatives.

Cons:

Amazon has faced a wave of obstacles since its brief pandemic boom, including:

• logistical bottlenecks;
• billions more labor costs;
• inflation and a likely recession; and
• slowing AWS growth.

Capital expenditures have increased from $17 billion in 2019 to $66 billion over the last twelve months, causing negative free cash flow at the worst time. The company is taking out short-term loans instead of increasing share buybacks, like Alphabet (GOOG)(GOOGL).

Verdict:

The company announced 18,000 layoffs upcoming (~ 1% of the workforce). This should marginally assist costs; however, I won't celebrate people losing jobs.

The stock is trading near its price at the end of 2018, when the company produced $233 billion in revenue compared to $502 billion over the last 12 months.

If you like to buy their straw hats in the winter, it's frigid outside for Amazon. The upside potential outweighs the downside at this price, and a little good news will go a long way. I don't know when the rally will come, but the gains will likely be swift. Amazon is a long-term buy.

The Trade Desk

Pros:

Advertisers must meet consumers where they are, which today means buying space on streaming television, video, mobile, and display. The Trade Desk's (TTD) platform provides billions of daily opportunities across these mediums. It also provides data for targeting the right audience and an interface to track campaign effectiveness, among other advantages.

The secular opportunity in connected television is massive, and it has a growing presence and key partnerships, like Walmart (WMT), Albertsons (ACI), and Walgreens (WBA), in retail marketing.

The company is innovative and has outstanding leadership from found and CEO Jeff Green.

The stock is down 45% while sales (+36% - YOY through Q3 2022) and cash from operations (+74%) thrived. The balance sheet is solid, with $1.3 billion in cash and investments and no long-term debt.

Cons:

Significant stock-based compensation expenses and a potential slowdown in advertising spending in a recession.

Verdict:

The Trade Desk is one of my favorite long-term investments.

Cloudflare

Networks must run fast and securely, especially with many businesses moving operations to the cloud. Cloudflare (NET) offers the fastest content delivery network, data storage, security services, and more. Its network of 275 cities puts 95% of the population near one of its centers. The goal is to eliminate the need for companies to have clunky and expensive on-premises servers.

The company has made tremendous strides in attracting large customers (>50% growth), who now make up over 50% of sales. Large customers will be the lynchpin of financial success.

Pros: Secular growth industry, excellent revenue expansion (50% expected this fiscal), a strong balance sheet, and improving operating leverage.

Cons: Weak free cash flow, high stock-based compensation, recession headwinds.

Verdict: The stock is down 62% in the past year and trades at a price-to-sales (P/S) ratio lower than its 2019 IPO. The bottom may not be in, but I am moderately bullish at this price.

Pair Trade Update: Tesla and AutoZone

In June 2022, I published the article: Automotive Pair Trade: Sell Tesla, Buy AutoZone, which can be found here. It didn't make me many friends with Tesla (TSLA) fans, but the result thus far is shown below.

Data by YCharts

AutoZone (AZO) has done what it usually does during economic turmoil and thrived. Its fantastic buyback program and massive free cash flow let investors rest easy.

Meanwhile, Tesla faces a storm of distraction, competition, economic headwinds, high valuation, and other risks.

Bottom line: AutoZone now trades at the top of its typical P/E range, and I am not a buyer above $2,265 per share. Tesla is in free fall, but the company's long-term outlook is bright. I'm not a buyer yet, but another sharp drop could change that.

Carnival

Carnival (CCL) stock is down 32% since my strong sell call, and the situation hasn't improved.

Operating losses, negative free cash flow, occupancy below 2019 levels, more junk bonds issued with interest rates above 10%, and the worst balance sheet leverage imaginable persist.

Even worse, the company has issued so many shares that the valuation is discounted less than it looks. The share price is down 82% since January 2020, but the enterprise value is only down 7%.

Bottom line: Carnival stock might be fun for traders but not for investors.

In closing

Is the market near the bottom? It is probably getting close, but I don't have the hubris to make these short-term calls.

2022 was a challenging year, and 2023 will be volatile as well. The stocks of many excellent companies are down 40% or more from their highs. But my strategy remains the same. Find innovative and compelling companies with impressive metrics and accumulate ownership over time.

As always, thank you very much for reading. All the best.

Disclosure: I/we have a beneficial long position in the shares of AAPL, AMZN, CRWD, GOOG, JPM, MSFT, NET, TTD, V either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.