What a brutal trading session it was for the growth stocks, with high-multiple names continuing to take a brunt of the damage, while sparing many value names like the top dividend-growth stocks. Indeed, the souring of high-growth names in 2021 appears to be carrying over into the new year. In any case, rate hikes are coming, and if corporate earnings can’t grow accordingly, stocks could find themselves under continued pressure.
What’s in the middle of the crosshairs? That would be unprofitable growth stocks bought on their promises of profits way into the future. Indeed, with such names that only have a price-to-sales (P/S) multiple to go by, it’s tough to conduct a valuation that isn’t subject to such a considerable source of error. The further into the future you need to look for earnings growth, the harder it is to evaluate the name, given the potential for competition that may not have been factored in at the time of valuation, or a number of macroeconomic or idiosyncratic issues that are impossible to project over the long haul.
Yes, high-multiple names are beaten up. Are some worth picking up after suffering 20-50% drops from peak to trough? Sure, but are many still overvalued and likely to continue to fall even further into the abyss. That also could be the case. Arguably, the latter scenario seems like the greatest risk, given the trajectory of rates and just how extended the growth trade was in late 2020 and early 2021.
There’s no need to be a hero by trying to catch a falling knife!
Although you could make a considerable amount in a bounce-back, there’s really no need to be a hero, especially if you cringe at the thought of a 20-30% loss after you’ve purchased shares. Remember, a stock probably will not bottom after you’ve bought, so ensure you’ve done your homework and have an intrinsic value estimate that implies a relatively wide margin of safety. Because without such, it’s tough to tell how deep the rabbit hole you’re planning on jumping into could go.
Personally, I like to keep it boring when the previously hot trade shows signs of weakening. Sure, you won’t make a huge sum over a brief time span, but at the same time, you won’t lose your shirt in a hurry, either. Regarding risk-adjusted returns, I think a more careful consideration for risks could pay off in 2022, a 180-degree reversal from the type of strategy that paid off in 2020.
Deep value can help investors zig and markets zag
Consider First Majestic Silver (TSX:FR)(NYSE:AG), a silver miner that’s been under so much pressure that the stock is likely in deep-value territory. Now, silver, along with gold, have been duds in 2021. Could the tides turn in the new year? I’d say it’s likely. Regardless, the valuation in a top-tier miner like First Majestic leaves much in the way for error. With such a margin of safety, I think investors can limit their downside while experiencing intriguing upside potential for the year.
Precious metal miners are less correlated to the broader markets, especially the hotter areas showing signs of cooling off. First Majestic has a solid management team, with some enviable gold and silver mines in Mexico and the United States. In addition, silver could begin to rally off its 52-week lows into year-end. In such a scenario, FR stock could amplify such gains, given its leverage on the price of the metals, most notably silver, it mines.
The stock is sitting at a 52-week low of around $13 and change per share. My takeaway? It’s time to start doing some buying of the underrated miner.