Last month ended up being a decent one for stocks. The S&P 500 gained 4.6% in March, touching record highs on the last day of the month.
Not every name fared so well, though. Indeed, a couple of S&P 500 constituents tumbled in a big way. Shares of television media outfit ViacomCBS (PARA -4.27%) (PARA.A -0.15%), fell 34%. Shares of rival TV outfit Discovery (DISC.A) (DISCK) were also off, to the tune of 25%.
The common thread is obvious. Both are in the same industry, and more than that, both companies are working on streaming services that circumvent the conventional cable gatekeepers. That deeper foray into streaming is a big reason both stocks soared by triple digits beginning late last year, which in turn is the big reason a slew of analysts have been downgrading both all year long.
Last week's downgrade from Wells Fargo was a back-breaker for the stock, when analyst Steven Cahall cautioned investors that "there's too much risk to justify the recent valuations."
The ensuing selling may have also sparked a market oddity that exaggerated this weakness. Reportedly, shares of Discovery and ViacomCBS owned by Archegos Capital Management were sold when the fund was unable to meet a margin call. These large, so-called "institutional"-sized exits would have dramatically bolstered any selling pressure surrounding these already falling stocks, pushing them even lower as a result.
The $64,000 question: Did the market overreact so much that both stocks have become attractively priced again?
Buying quality stocks on dips is actually a good strategy
The Discovery/ViacomCBS saga cuts right to the heart of one of investors' chief philosophical questions... should you try to catch a falling knife? As big as the sell-offs have been thus far, it certainly seems like both names could continue sinking.
The fact is, however, most of the market's stock-gouging horror stories end rather quickly, and do so without the worst-case scenario ever taking shape.
One doesn't have to look too far back to find such proof. Take IBM as an example. Its stock lost 13% of its value in the span of just a few days in late October 2020 after missing quarterly revenue estimates and then opting not to offer guidance.
Now shares are up 32% from that low, hitting new 52-week highs on Monday.
Intel tumbled 18% in just one day last year, and suffered three other separate but similar setbacks in 2020, mostly in response to ongoing foundry challenges and threatened market share. Now the stock's within sight of a two-decade high reached last month.
Then there's Boeing.
Already beleaguered by design problems with the 737 MAX, shares of the aircraft maker were crushed in early 2020 when the COVID-19 pandemic started shutting down air travel indefinitely. Between February 2020's high and March 2020's low, Boeing shares lost 74% of their value. Now they're up 175% from the March 2020 bottom.
Point being, investors will often sell based on fear, and then correct their mistakes once they've had time to collect their thoughts and gather more information. The selling pressure that took ViacomCBS and Discovery shares lower last month looks long on fear, and short on sound thinking.
Why a rebound could be in the cards
None of this is to suggest steep stock sell-offs never worsen following their initial bearish leg. It's also not to say the precise low point will be easy to spot once it's been hit. Timing is hard to do. It must also be noted that Discovery and ViacomCBS both still have much to prove, particularly with their young streaming ventures.
As John Tinker, analyst with G.research, recently said of ViacomCBS though: The stock's risks "remain well known." Ditto for Discovery. Indeed, despite this year's downgrades and lowered price targets, both stocks are currently trading below analysts' consensus price targets. ViacomCBS is priced more than 20% below its average price target.
And as for Archegos' unanswered margin call, whether or not the rumor is true, it's irrelevant. It merely explains why the selling was so strong last Friday. It's not an indictment of either company.
Bottom line: To the extent either was a buy a little over a month ago, they're just as much of a buy now at the exact same price. No new information has actually surfaced. The only thing that's different now than a couple of weeks ago is the stocks' prices. Don't overthink this one.