Reminder: 2021 Tax Information
2021 Form 1099-R’s for retirement accounts (IRA’s, Etc.) that had distributions in 2021 were mailed out to account holders on January 31, 2022. Any IRA accounts that are subject to a Required Minimum Distribution (RMD) in 2022 will also receive a letter with the 2022 required distribution amount. Distributions need to be taken out of the IRA account by 12/31/22.
All other tax packets for all non-retirement accounts will be available and mailed to account holders on February 15th.
As always, we are more than happy to send this information to your tax preparer when they are available as well as a CSV (Excel) file that can be used to download all transactions to most tax preparation software. Just let us know if you’d like us to do this for you.
For all accounts that were active in 2021 before and after August 1st there will be two 1099’s this year. One from E*Trade Advisor Services for 1/1/21 through 7/31/21 and one from AXOS Advisor Services for 8/1/21 through 12/31/21. This is due to the acquisition last year of E*Trade Advisor Services by AXOS Advisor Services. Please don’t hesitate to call if you have any questions or we can help in any way.
Presidents’ Day
The US financial markets will be closed on Monday, February 21st for the Presidents’ Day holiday. Our office will be closed as well. We will be back as usual on Tuesday morning. Remember due to the banking holiday, any distributions requested from accounts during that time may have a one-day delay in processing due to the market closure.
Markets Continue Recalibrating
As value investors, many incorrectly believe that we have no liking for “growth.” However, it’s quite the contrary. We love growth stocks; we just care about how much we pay for them. The more an investor pays up today for future growth, the more risk the investor is taking. Back in 2020, we began expressing concerns for the lofty multiples investors were continuing to pay for certain businesses. Much of this price disconnect quietly corrected in 2021, however, this recalibration has escalated in the first month of 2022, dragging most of the markets down with it.
Many of the “meme” related stocks have also taken hefty declines, such as Game Stop falling 27% and AMC down 40% so far this year. The new brokerage firm catering to younger investors and potentially credited for bringing commission-free trading, Robinhood Markets, has seen its stock fall 20% in the month of January. Stocks heavily geared towards the Bitcoin crowd have also witnessed massive declines, like Riot Blockchain down 29% this month and MicroStrategy down 32%. We believe many of these declines are justified, but we want to bring to attention to show how severe some losses have been. However, there are pools of stocks we do find interesting
For example, in January alone, Netflix stock fell 30%, Zoom fell another 16% after being covered by our last post for falling 45% in 2021. Shopify is down 30% already this year. Ring Central (RNG), a Zoom competitor, is down 60% from its highs. It’s now trading close to its March 2020 lows. These are just a few examples of the sharp pullback occurring in these stocks that had run up to irrational levels. While these examples have lost over half of their values, most are still relatively expensive. But, with a recalibration underway, as value investors, we have become excited, searching for deals among a pool of stocks we would typically never be able to justify swimming in.
Once loved companies like Peloton, which saw its stock price fall roughly 85% from its high and now trading below its IPO price of 2019, are now a potential long-term investment for clients. DocuSign, a company hailed for making digital signatures a reality, has fallen nearly 30% this year and is becoming increasingly attractive the further it falls. Its stock has fallen 65% from its highs. Teledoc Health, a company that digitizes scheduling appointments for healthcare professionals, is down almost 80% from its high, falling 25% just this year. The SPAC market, which we briefly touched on last month, has also seen an overwhelming correction with many exciting opportunities now prevalent in the space. A recent IPO also covered in that article, Rivian, has fallen 37% this year. Investors seem unaware of the breathtaking declines seen in some of these stocks.
A Real Case Study
As value investors, it becomes quite puzzling to us when investors love a stock at outrageous multiples one year earlier and despise it when it becomes an attractive long-term investment through price declines alone and no meaningful change in business. It becomes befuddling as to why investors behave this way, even leading the media desperate to point the finger somewhere. Although it may have been catastrophic for some, a beloved character “Mr. Big” suffered a fictionally fatal heartache on one of Peloton’s machines, surely leading to the stocks disfavor by the markets [sarcasm]… TMZ reported it as such. At its peak, the stock traded at $165 per share before falling to its current price of $28 per share. We previously discussed the company a month ago, but it was once a business loved by investors and priced for absolute perfection. We believe the company to be fairly valued at near $45 per share, and currently priced at $27, we see a fair balance of risk-reward with investors being compensated for long-term growth. And yes, the business has its growing pains, but we believe it’s coming at a good opportunity for investors.
We do intend to initiate a position for clients in Peloton’s stock if it remains at these levels and even increase the holding if further price declines occur. While fitness equipment alone is not typically an attractive industry, Peloton has successfully grown its subscription base from $3 million per year in 2017 to now $541 million in 2021, at now a run rate of over $800 million per year. Their growth will be slowing, but it has been an incredible success. Netflix took twice the time to reach that revenue level with a much larger target market. Peloton now has over 2.3 million subscribers with over a third of those being digital-only, meaning the subscribers have not even bought any Peloton devices. The subscription platform is ultimately the most valuable piece of the business, due to its recurring revenue aspect. Peloton has also managed an incredible 92% retention rate, compared to most streaming services that are closer to 70%.
If Peloton’s value persists for a long period at this level, it could easily be assumed an acquirer would swoop in, even a company such as Apple or even Spotify. Roku, Amazon or even Netflix could even find value in porting its platform to Peloton’s hardware. If you think about it, you have a captivated audience for 30 minutes, ten to twenty days a month. That’s an incredible opportunity for any media business, not to mention hardware suppliers to grow offerings. To put it in perspective, at Peloton’s current valuation, Netflix spends two Pelotons every year on content. Ironically, even a gym-based business like Planet Fitness (PLNT) or Life Time Group (LTH) trying to reach a larger audience not active at their locations could even be a suitor. It’s not unreasonable, as Lululemon, a clothing manufacturer, acquired Mirror back in 2021 at over twice the revenue multiple that Peloton trades at today.
Fortunately, due to our investment philosophy and process, we did not have much exposure to the growth companies that experienced the sharpest decline in January. So, as the market recalibrates, we hope you find comfort knowing we are diligently searching for new opportunities like these and are not focused on short-term volatility. If prices continue declining, it should create more long-term opportunities for our clients.
As always, don’t hesitate to call or email with any questions, or if we can be of further service in any way, We are looking forward to working with all of you in 2022 and in the years to come!
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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Looming Risks Overlooked