The stock market is off to a disastrous start in 2022. The S&P 500 has fallen some 18% year to date as investors grow concerned about rising interest rates, inflation, and the war in Ukraine. The sell-off that's happening among many quality stocks in some ways resembles the 2020 market crash that took place during the initial stages of the COVID-19 pandemic.
Investors made mistakes back then in dropping quality investments regardless of their valuations and long-term records of stability. Although the reasons behind the two crashes are different and the sell-off has been much longer this time around, investors are still potentially making big mistakes in focusing too heavily on near-term market conditions.
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The patterns look alike
The S&P 500's decline this year looks bad. But it's still a bit modest when compared to the March 2020 sell-off. From March 1 to March 16 of that year, the index fell by 19%. That's a deeper decline in a much shorter time. And while the reasons behind the sell-offs are different, the end result remains the same: both good and bad stocks were plummeting.
For example, two quality growth stocks that struggled then were Align Technology (ALGN 0.12%) and Walt Disney (DIS 0.82%). Align's stock fell by 26% during that time frame while Disney's shares were down 19%, mirroring the market's decline. Both businesses rely on in-person traffic; Disney needs people to go to its theme parks, while healthcare company Align Technology needs them to visit their dentist to assess whether they need braces.
And while both businesses suffered from the pandemic and stay-at-home orders, those were ultimately short-term problems. There wasn't anything wrong with their business models.
Year to date, shares of these companies have fallen even more sharply this time around, with Disney down 32% in 2022 and Align crashing a whopping 58%. There are concerns that inflation could make it more difficult for people to afford going out to theme parks or to get braces. Plus, rising interest rates are making the bond market a more attractive place to put money right now, as opposed to growth stocks.
But these market conditions aren't permanent, even though investors are acting like they could be (e.g., high oil prices) and are buying up energy stocks as if they are the hottest new memes. Just like in 2020, when quality stocks rallied after the initial crash, many could recover from this year's sell-off as well.
Rational investors have glorious buying opportunities today
I've chosen Align and Disney as examples because both are what I'd consider to be quality businesses. They post profits, are growing, and could do well as the economy returns to normal this year. They don't look to be in trouble, and their declining stock prices don't do the companies justice. Disney hasn't been trading this low since around April 2020. Align's stock is also getting close to its two-year low.
For investors who can see beyond just the current market conditions to the long-term demand for their products and services, both Disney and Align could be incredibly cheap additions to a portfolio right now. While their trailing earnings multiples look expensive (Align trades at a multiple of 31 times its profits and Disney is at a multiple of more than 70), investors need to remember that they only account for the earnings in the most recent year. As these businesses recover from the pandemic and post stronger bottom lines, their earnings multiples will improve.
What matters are the fundamentals. Align has generated net profit margins of more than 17% over the trailing 12 months, and sales for the first three months of this year totaled $973 million, up 8.7% year over year. With more growth still on the way, Align's numbers could look even better in a year or two.
The same goes for Disney, which at 3.5% has seen its profit margin over the trailing 12 months take a beating; before the pandemic, the entertainment company was reporting profits that were higher than 15% of revenue. But the positive is that during the first three months of 2022, its revenue was more than $19 billion and rose by 23% year over year as the company's recovery already looks to be underway.
Regardless of whether it's Align, Disney, or another beaten-down stock, there is no shortage of opportunities in the markets right now. Investors look to be repeating the mistakes they made two years ago in panicking and selling off quality investments. For more rational, long-term investors, however, this could be an opportunity to buy some stocks at significantly reduced prices.
