Warren Buffett said to never try to time stock picks perfectly, but if you do, attempt to "be greedy when others are fearful, and be fearful when others are greedy."
After the worst quarter for the S&P 500 since the first quarter of 2020, many top stocks are down significantly. And the four worst-performing stocks last quarter included some very popular names, including Netflix (NFLX 0.33%), PayPal (PYPL 0.48%), and Etsy (ETSY 1.30%). On top of these well-known consumer discretionary stocks, technology consulting firm EPAM Systems (EPAM -1.60%) took the crown for the worst-performing stock in the index.
So should you buy these stocks while the fear is high?
Pandemic tailwinds are turning into headwinds for Netflix, PayPal, and Etsy
In the first quarter, Netflix was down 37.8%, PayPal was down 38.7%, and Etsy was down 43.2%. These stay-at-home growth stocks buoyed by the pandemic reversed course in a big way in 2022, as they were hit by a double-whammy. Not only is growth decelerating as the pandemic pulled forward demand for these stocks, but inflation has spiked. That's led to rising interest rates, which lowers the value of earnings further out into the future. Future earnings make up the bulk of the intrinsic value of growth stocks, so pandemic beneficiaries have been doubly punished.
All three companies reported decent fourth quarters, but the problem was guidance. Netflix guided to lower-than-expected subscriber growth, with CEO Reed Hastings saying, "We're just, like, staying calm and trying to figure out." Not exactly encouraging. With the streaming industry becoming more competitive as other services have launched, some are now questioning how many subscribers Netflix will be able to add and ultimately keep -- especially as it recently raised prices.
Meanwhile, the move away from purchasing goods during the pandemic to more experiential services could also hurt Etsy's results. Etsy's growth decelerated to 16.2% in the fourth quarter, versus 35% for the full year 2021. Even worse, the company only guided to only 4.9% growth in the current quarter, with even lower margins on an EBITDA (earnings before interest, tax, depreciation, and amortization) basis.
Like Netflix, Etsy has raised prices to maintain revenue growth, but it's having some blowback. Last week, 8,000 Etsy sellers signed a petition protesting Etsy's new take rate increases, which are set to rise from 5% to 6.5% in April. Adding fuel to the fire, Loop Capital analyst Laura Champine downgraded the stock in recent days on yet another headwind: inflation in online advertising, which Etsy uses to acquire customers. Overall, it's been an ugly quarter for Etsy, which is facing multiple difficulties.
Finally, PayPal is suffering from some of the same headwinds as Etsy and Netflix, although it has some company-specific headwinds as well. Most notably, it's losing revenue from its largest customer in eBay (EBAY 1.01%), which used to be PayPal's parent company and exclusive partner. eBay is transitioning to another payment provider, which has lowered revenue to PayPal and hit PayPal's growth in recent quarters. Meanwhile, the omicron variant and geopolitical tensions are threatening PayPal's profitable cross-border revenue. On top of that, management admitted it was abandoning its long-term user goals, as PayPal is now pulling back on advertising to low-usage new customers to focus on keeping higher-frequency users more engaged.
Yet of these three, PayPal would actually be my pick for the best buy at this current moment, even though Netflix is the only of the three I own -- a small position I've held for a long time.
PayPal is still generating enough free cash flow to buy back a significant amount of stock, and its forward P/E ratio is the lowest of the three. Furthermore, PayPal could reaccelerate revenue in the back half of this year, as the effect of the eBay revenue declines should be over by midyear. That catalyst could certainly help the stock, while I don't see a distinct catalyst for the other two.
EPAM Systems is interesting here as well
Finally, EPAM Systems may be worth a look, as it was down the most of any stock in the S&P 500, plunging 57.1% in the first quarter. Similar to the other three, the company has been a beneficiary of rapid digital transformation, but on the enterprise side. A mixture of consulting, engineering, and design, EPAM helps companies design, build, and implement new technology systems and train employees.
Obviously, digital transformation was a hot topic during the pandemic, and EPAM's stock soared as a result, entering the S&P 500 index last year.
EPAM, like many other highly valued stocks, took its lumps as the interest rate and inflation outlook changed. However, the stock took yet another leg down at the end of February, after management pulled its first-quarter guidance immediately following the beginning of the Russian invasion of Ukraine. EPAM also announced it was pulling out of Russia, where it served some businesses -- but not the government. EPAM also committed $100 million to help employees in Ukraine and their families.
EPAM is profitable and had initially guided for adjusted (non-GAAP) earnings per share to rise 27.3% this year at the midpoint, to $11.52 per share. That's a deceleration after last year's scorching 42.7% EPS growth, but it's still pretty darn good.
While I'm not as familiar with EPAM, this sell-off could be an opportunity. Technology consulting is an asset-light growth business, and with the stock down so much, it's worth a look. It's true that the company may not hit its earnings target this year, but Russia was probably only a small part of its business. Russia's GDP is tiny, and EPAM operates in more than 40 countries. While European tech projects may be put on hold, digital transformation will continue to march forward. After losing more than half its value already this year, EPAM is a tech stock I'll be following going forward, and maybe buying in the near future.