“As the stock price was going the wrong way, everything inside the company was going the right way.”
With these words, founder & CEO Jeff Bezos described the disconnect during the Dot-com Bubble between how Amazon’s stock (AMZN) and Amazon the company were behaving. A 2018 interview gives additional context to this point. The stock price at that time had peaked on December 10, 1999 at $107.10 per share, and reached its trough on October 2, 2001 at $6.08.
Bezos’s distinction offers a helpful perspective in today’s market as well. Consider the current economic backdrop for the business operating environment: the U.S. unemployment rate is 3.90%, up just 0.40% from its pre-Covid historic low; the U.S. economy should continue to grow in 2022 between 2.5% to 3%; S&P 500 earnings per share should rise from approximately $200 in 2021 to $218 in 2022 – a 9% increase. Well-run companies are poised to do well in 2022 and importantly, so are their employees.
None of this is to say that the broad stock price correction this year is without rationale. Among other things, as the Fed raises interest rates to stem inflation, the rate at which future corporate profits are discounted to the present rises, and some valuations decline. But here, too, the inflation we have today is “demand-pull” not “cost-push.” Strong demand for goods and services from government, businesses, and consumers indicates optimism and capacity to spend and invest. Cost-push inflationary supply shocks – for example, the 1973 oil embargo – have a far more pernicious impact because they are harder to manage.
Our readers will also know that while corrections may be understandable in the short-run, we firmly believe that predicting when to get in or get out of the stock market – “market-timing” – is a fool’s game. Instead, we remain steadfastly committed to staying invested in great companies: high operating cash flow growth and low variability, strong balance sheets, high barriers to entry, and great management teams. The stock prices of companies with those characteristics will fluctuate, sometimes uncomfortably, but ultimately if the business is great the stock price will be again, too.
Returning to our Amazon example we note that the temptation to second guess the decision to remain invested during 1999 – 2003 was overwhelming to many investors, yet by October 21, 2003 the stock had recovered to $59.35. The truly startling observation though is this: even someone who had invested $10,000 in AMZN at the peak in 1999 – believing in the company’s growth prospects and not worrying about the stock price – and held the stock, would have a position worth $279,761 as of this writing.
Stay invested in great companies. Sooner or later their stock prices will reflect their value.
Peloton owns the common stock of Amazon.com, Inc. for certain clients. For a complete list of Peloton equity holdings, please refer to our current 13F filing.
Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal. Diversification may not protect against market risk or loss of principal. The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities. Actual investor results may vary.
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