META - Gravity Still Rules
Summary
- The latest equity-market bounce may feel like sweet relief after a rough 2022 - but beware the underlying fundamentals.
- Over the course of last year, investors were reminded of the rule of gravity.
- In this environment, we think it is more imperative than ever to keep a close eye on business fundamentals, and as such, we believe the divergence in underlying companies’ operating performances will be ever apparent going forward.
By Yona Rom, CFA
The latest equity-market bounce may feel like sweet relief after a rough 2022 - but beware the underlying fundamentals.
Over the course of last year, investors were reminded of the rule of gravity. After rising more than 50% in 2020 through the end of 2021, gravity grabbed hold in 2022: The S&P 500 Index ( SP500 ) plunged 25% before ending 18% down for the year, and many high-growth, unprofitable and crypto companies lost at least half of their values.
While this reversion to the mean worked on the way down (see Gravity Rules ), the pendulum has now fiercely swung the other way, with the S&P 500 up roughly 9% year-to-date. In fact, some of the worst-performing stocks of 2022 have more than doubled this year, yet are still down 95% from their 2021 peaks. Easing inflation and an eventual Fed pivot are now being factored more emphatically into valuations: The market now firmly expects at least two rate cuts by the end of 2023, despite the Fed’s efforts to communicate its resolve.
Maybe these expectations are correct and we are headed for a soft landing, but we would note that simply compounding the current year-to-date S&P 500 return would equate to a nearly 150% annualized gain! It is fair to say that it is extremely unlikely this will occur, and as such, we believe the details on what you own, not how much you own, will be even more critical going forward.
In this environment, we think it is more imperative than ever to keep a close eye on business fundamentals, and as such, we believe the divergence in underlying companies’ operating performances will be ever apparent going forward.
For example, Meta ( META ) (formerly known as Facebook), which is now up over 100% from its 2022 lows, is highly profitable with multiple levers to toggle profitability at scale. By contrast, names like Wayfair ( W ), Peloton ( PTON ), and Carvana ( CVNA ) - also up more than 100% - remain unprofitable and, in our view, have less scalable and more uncertain business models.
In a shaky economic environment, we believe the variance between management team capabilities, customer stickiness, brand and pricing power, business scale and effective capital allocation will cause meaningful deviations in stock performance over time.
Momentum often obscures perspective - and January’s gravity-defying performance may be hiding this fact.
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Gravity Still Rules