Not Everything is a Bargain...Dig Deeper
March 29, 2025
Managing money is not the easiest of jobs these days. The market averages have declined significantly from their peaks. Of course, that has happened before. It's never pleasant though not especially unusual or alarming. (In 2022, the S&P500 declined 18% from its peak in a few months…it is down just half that much now.) The Trump administration’s proposed and enacted tariff policies and threats are also not unprecedented nor should anyone be surprised - Trump’s first term featured tariffs as a major policy initiative as well.
The greatest difficulty for investors, and investment advisors, in the current environment is the lack of policy consistency and predictability. There will be tariffs, OK – but how much, against whom, when, under what conditions, will they be negotiated are all unclear. It is very unsettling and has created uncertainty for individuals and companies alike. As these initiatives are just beginning, the direct repercussions to consumers and the economy have yet to be felt, much less the unanticipated consequences which are likely. Though the wisdom of the tariff initiatives has been questioned and criticized from all sides of the political spectrum, the administration seems prepared to stay the course. The fact that there are many doubters is beside the point for investors.
The uncertainty and occasional chaos that has dominated the scene for the last few months is the real problem. If the policies were clear and stable, it would be easier to strategize and operate - maybe that will be the case after next Wednesday when the bulk of the tariffs are to be imposed. Maybe not. Regardless, the dramatically changed circumstances in the country has created even greater market volatility along with a pronounced swing down in share prices. Volatility can provide interesting investment opportunities, favorable entry points for buying shares of companies that previously maybe appeared to be too expensive. In other words, a second shot at missed opportunities. In the current environment however, exercising some added caution while considering those opportunities would be wise for investors. Despite the many notable price declines, bargains do not necessarily abound.
In the first place, the intended and unintended consequences of the administration’s policies are unknown. Impacts won’t be limited to just the obvious (e.g. auto makers). Unexpected impacts to companies seemingly above the fray could occur. Secondly, a company whose share price has declined significantly might now seem to be a more attractive investment...but is it really? Recently, I heard a number of pundits calling out stock opportunities, pointing out share price declines for various stocks as a rationale. Maybe…but there is an important difference between relatively attractive and attractive on an absolute basis. Simply put, price decline is not enough.
For example…Applovin is an AI-powered advertising business with an excellent business model, recent dramatic growth and a wildly popular stock. The share price reached $525/share just last month. Today, little more than a month later, the shares can be had for $272. Nearly a 50% decline and a very attractive entry point, no? Maybe...except that the $525 price gave Applovin a valuation of $180 billion and with sales of less than $5 billion, net income of barely $1.5 billion, a P/E (price to earnings ratio, a common valuation metric) of about 120. Pretty clearly overvalued. More to the point, Applovin’s current P/E ratio, even after its recent share price plunge, was still 60. Despite the decline, it remains very expensive (the overall market trades around 20) and hardly a bargain or a screaming opportunity.
In the abstract, a significant price decline by itself is obviously not enough information. You have to do more work, especially now. You might want to check if the company is growing, reasonably valued, remaining dynamic in the face of a rapidly changing environment? There will be opportunities from volatility, just tread carefully, look deeper. A lower price alone, even after a large % decline from a peak price, is not by itself any kind of sufficient justification for an investment. Applovin is just one of many similar examples. A company with good growth, good financials, reasonable valuation, excellent continuing management, etc. might become available at an attractive price. That’s what you want. And now for something different.
It has not been an easy time in the US lately... lots of change, negative sentiment growing. The link below is to get your mind away from all that...the markets, tariffs, politics, and your messed up March Madness brackets. Sent in to me by a fellow newsletter reader, it is a sampling of a number of known and unknown folks for their opinions on the meaning of life. Occasionally humorous and sometimes insightful. A change of pace as a new season begins. It seemed timely.
It is slowly becoming spring in these parts and that renewal of so much plant and animal life is heartening and makes me a bit reflective (thus the link above). I hope you are all somewhere lovely with new plant shoots emerging, early flowers, returning birds...and you can take a moment to think about all the good things in your life. Have a nice weekend.