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Opportunity Time Machine

By March 16, 2022September 16th, 2023No Comments

It’s not often that what we would expect to see “generational investment opportunities” come around. And unfortunately, most of them can only be seen with hindsight. The most recent example of this was March 2020, when it seemed the financial system could collapse with government-mandated business closures sparked by a global pandemic. The S&P 500 fell roughly 40% in five weeks. It was one of the sharpest drops in the equity markets’ history. The index would nearly recover all of its loss in the following five months from the low. Investors who stayed the course and did not succumb to the panic were extremely grateful. At the moment, though, it was not so easy to see this. Stocks could have easily turned lower and led to further losses. However, the valuations being paid for some businesses were so irrational on the downside that it would lead to outsized returns for investors who decided to continue to buy. The valuations were incredibly cheap if you were looking out three to five years like we harped on clients to please look further into the future and not be consumed with the panic of that moment. Specifically, that article was sent to clients on March 25, 2020, two days after the very bottom of the market drop, in which we said:

“We have no idea what direction markets take over the prevailing months. However, we do know we are able to buy stocks in businesses at levels we thought would not be possible for years. We are confident that it should bode well for clients in the next three to five years when this has passed. We adamantly believe in investing in businesses that are undervalued, accepting the risks that come with short-term price fluctuations in the equity markets.”

While history shows that these opportunities are rare, what if you could return to that moment? What if you could return to March 2020 prices and buy stocks at those levels? What if we told you we are paying those rock bottom prices and even paying less in some cases? While equity markets as a whole are still up roughly 90% (S&P 500) from those lows, many individual stocks have suffered all-out collapses since 2021, predominantly in the technology space. We have continued writing about it, and now we believe it is the time to begin to buy. We have avoided all of these investments due to excessive valuations, and we now believe the current valuations are incredibly attractive for long-term returns. As of Friday, we finally started initiating positions in stocks we patiently waited for. We would have never dreamed we could justify buying most of these stocks.

DocuSign (DOCU) was purchased Friday for some clients at a price just under $75 per share. In March 2020, DOCU traded between $70 and $90 per share. In those two years, DocuSign has more than doubled revenues and traded at nearly $310 barely eight months ago. Another example of a stock we initiated for some clients is Peloton (PTON). During the panic of March 2020, PTON traded between $20 and $30 per share. It went on a surge to nearly $170 per share. They grew their gross subscription profits from $200 million annually to now over $1 billion in that time frame. We acquired a position for some clients Friday at under $22 per share. Yet another example, Zoom (ZM), traded in a range from $110 to $160 per share that March. It jumped to almost $580 per share. We acquired this stock on Friday as well under $100 per share. Over the last two years, the explosion of these companies’ businesses has wholly changed the valuation dynamic in investors’ favor. So not only are you paying less in price, you’re buying a much stronger business at a fair valuation. The list of these stocks continues to grow, and we will continue searching for them as prices fluctuate and adding them to client portfolios.

We believe we are entering a moment of generational opportunities within the technology space with the perspective given above. As we wrote about the technology opportunity that came in 2002 after the “dot come bubble,” we believe a similar opportunity exists today. We will continue searching for more attractive valuations if prices continue to fall. It’s astounding that no one wanted to touch energy investments and only allocated to technology not even eighteen months ago as tech stock prices were soaring and valuations were absurdly high, putting investors at massive risk. Today, no one wants to touch these technology businesses at discounts to their highs of 90% in some cases. Most of these businesses have massive free cash flows and little to no debt. We have begun divesting our energy holdings in favor of these investments, and we will continue to overweight them and their peers as prices fall. We do not have the benefit of hindsight today, but we again ask clients to look five years out and find comfort in the justifiable valuations being paid for these businesses today. We believe paying fair valuations for companies is one of the best risk mitigators we can utilize.

As always, please don’t hesitate to call or email at any time if we can be of further service or you have any questions. We appreciate the privilege to be of service now and in the years to come.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc

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