Earnings Disappointments Challenge High Valuations
February 4, 2022 | by V. Henry Astarjian | Posted in Blog
For some time now we have been highlighting our observation that the stock market is expensive and that valuations are high by almost any metric.
We have consistently advised caution and selectivity, knowing that an overvalued stock market can reverse course very quickly and trend lower in a significant correction or a deeper bear market.
Yesterday, we saw a dramatic breakdown in the shares of one of the keystones of the current bull market, Meta Platforms, formerly Facebook (FB). After management reported good earnings but provided pessimistic guidance for the future, the shares started losing value during the trading session. By the end of the day, the shares were down over -26%.
Today we are seeing a similarly dramatic reversal in the shares of The Clorox Company (CLX) as investors exit that stock on what they perceive to be less than solid earnings. The shares are down over -14% intraday. Clorox has a long history of good earnings and dividend growth. It is generally considered a conservative stock, not a growthy “hot” stock, by any means.
These two companies are diametrically opposed to each other in terms of risk profiles. Yet, investors are treating them as if they are equally risky.
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As uncomfortable as the market’s volatility may feel at the moment, volatility is a natural part of the ebb and flow of the markets. It provides us with opportunities to earn profits over time.
Waterstone’s approach to managing portfolios in this high valuation environment remains the same as it has been for the past several years. We place a heavy emphasis on managing risk while aiming for good long-term returns. Among other things, this involves researching each stock, being selective in what we buy, maintaining reasonable position sizes, allocating cash at a measured pace, and owning dividend paying stocks.
The stock market continues to be richly valued even after this week’s declines. For now, we should expect the market’s volatility to continue and for other major stocks to dramatically wow on the downside.