Buy when there's blood in the streets. Even if it's your own blood.
-- Attributed to Baron Rothschild.
From January 26 through February 8, the S&P 500 and Dow Jones Industrial Average fell more than 10%. This marked a sharp reversal for the market, which had spent most of the past year inexorably marching higher and hadn't really come close to a double-digit drop in nearly two years. A number of individual stocks fell even more than the market.
But while plenty of other investors were selling, I was taking Baron Rothschild's sage advice and buying more shares of three of my favorite companies: upstart engineering firm NV5 Global Inc (NVEE -0.55%), high-growth homebuilder LGI Homes Inc (LGIH 7.13%), and leading consumer robot-maker iRobot Corporation (IRBT 1.80%). Keep reading to learn why I decided to buy these three stocks in the middle of the worst market turmoil in more than a year.
When the market gives you lemons...
On the surface, NV5 Global, LGI Homes, and iRobot don't appear to have anything in common. And when it comes to their businesses, that's true. NV5 is a small engineering firm that specializes in infrastructure and related projects; LGI Homes is a homebuilder; and iRobot designs and makes robots that do household tasks like vacuuming and sweeping floors.
But there's one thing that all three share in spades: These are serious growth stocks. Over the past three years, NV5 and LGI Homes have grown revenues 155%, while iRobot's sales are up 56%. Profits have also increased sharply: Earnings per share (EPS) for NV5 are up 61%, LGI Homes EPS are up 201%, and iRobot's are up 44% since 2015:
Growth stocks often take an even bigger beating than the rest of the market when there's a sell-off. That was certainly the case with these three, which fell more than twice as much as the S&P 500 and Dow:
As an owner of all three of these companies for quite some time, I was feeling the pinch of the market sell-off in my portfolio. But instead of selling these great companies out of fear they would keep falling, I took advantage of the opportunity to buy even more. At recent prices, I was able to buy NV5 Global shares for around 16 times 2018 earnings estimates, and both LGI Homes and iRobot for about 10 times and 24 times, respectively, 2018 earnings estimates.
That's a pretty solid discount to the premium investors have been willing to pay for these companies in the past. It's also a price that gives me a reasonable level of comfort that I'll get a solid long-term return as these three companies continue to grow sales and earnings.
It's time in the market, not timing the market
I know how difficult it can be to ride your portfolio down, especially if you own growth stocks that tend to fall faster and more deeply than the market overall. But the reality is, you'll almost never be able to successfully exit the market at the top -- there's just not a reliable way to know when the market will peak.
On the other hand, a strategy based on buying great companies and holding for the long term can really pay off. After all, the market spends about twice as many days going up as it does going down. If you buy opportunistically -- like when your favorite growth stocks fall twice as much as the market during a big sell-off -- you'll have a much better shot at beating the market.