Maybe TACO has a limit? (NOTW#85)
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Markets continued to fall this week as the US and Iran did not reach an “amicable” end to the conflict (there were tonnes of rumours about it, though). There were also plenty of company-specific news this week.
Without further ado, let’s get on with it.
Articles of the week
I published one article this week. It was on Hermes, a company that I had not written about in a long time: ‘The Stock is down 40%, the Business Isn’t.’
The stock has suffered a meaningful (and kind of unusual) drop of 40% from highs, while the business has continued compounding. This begs the question: is the stock finally attractive? I go over what might have worried the market and the valuation in the article.
Without further ado, let’s see what the markets did this week.
Market Overview
The conflict in Iran continued to weigh on financial markets despite the continuous news flow regarding an “imminent” ceasefire (it seems that TACO also has its limits after all!). Both indices were down more than 3% this week:
The Nasdaq has already entered correction territory (down 11.5% from highs) whereas the S&P 500 is very close to it (down 8.8%):
It does seem likely that the S&P will eventually reach correction territory and that we are in for a rough ride. Now, when sentiment goes to extremes one thing typically happens: bears come out in full force. I don’t blame them, though. A couple of weeks ago I wrote that there’s a very credible (and terrible) bear case for the economy and markets, but we shouldn’t mistake this with the belief that bears can see the future (they can’t).
When things start dropping and multiples start compressing, one starts to feel that there’s no support/bottom, why? Because it’s true, there’s no support. Stocks can ultimately go down to stupid levels that will most likely test even the strongest of convictions. It’s very easy to claim that it was a great time to buy at the bottom of any given correction, but it’s not as simple when one is living the moment (it’s super easy in hindsight, though). The bottom line here (no pun intended) is that the future is unknowable and we can’t judge the past with the eyes of the future.
With this I am not trying to claim that we are nearing a bottom or that indices have come down a tonne (they’ve not). My advice here would be to do something very simple: try to isolate yourself from the noise (X is a huge echo chamber that goes both ways), do your own work, and focus on the fundamentals. When someone is trying to forecast the future and they’ve got the price action going their way, they’re most likely going to sound very believable, but the reality is that their ability to forecast the future is not better than yours. Timing bottoms is impossible, but trying to prevent yourself from making stupid sentiment-driven decisions at or near the bottom is not.
The industry map was pretty much a sea of red this week with the exception of energy, consumer defensive, and utilities:
One thing that has gotten me by surprise is that, despite being considered a defensive industry, healthcare is getting “destroyed” like many sectors. The healthcare sector (as measured by the XLV) is down 8% this year, not what I would’ve expected in turbulent times!
This is even more confusing when one considers that consumer staples (also considered a defensive industry) is holding up quite well this year and since the conflict started:
Sometimes things are unexplainable. A significant portion of the healthcare industry is currently accelerating its top line and is coming out of the pandemic hangover and the conflict is unlikely to destroy their demand. Strange, but we’ll see how it develops (I’ve been wrong thus far).
The fear and greed index worsened quite considerably again and is now reaching very interesting levels:
I added to one position this week
This week I added to my top position again. I believe the market is getting this one very wrong, but we’ll only know in hindsight: