To say that 2022 was a terrible year for stocks is an understatement. The benchmark S&P 500 index was down 19%, with the tech-heavy Nasdaq Composite down 33% on the year. Investors have shunned equities in favor of safer places to park their hard-earned savings.
This might be the wrong approach as prices will eventually start to climb again. At that point, you will want to be properly positioned to benefit. I don't know when exactly, but another bull market seems inevitable. Here's what the smartest investors are doing to prepare their portfolios.
Evolving as an investor
The best investors, those that want to remain successful and stay in the game for the long term, know that they must constantly try to improve their ability to find winning stocks to own. The past few years have provided a critical lesson on how we should all try to evolve as investors based on ever-changing circumstances.
Since the end of the Great Recession, most of the past decade was characterized by ultra-loose and stimulative Federal Reserve monetary policies. This not only led to strong economic expansion, but it favored businesses that were able to access capital markets at favorable terms in order to invest aggressively in their growth at the expense of near-term profits. The same dynamic applied more recently during the pandemic surge for many internet-based businesses during and right after the coronavirus health crisis.
The market was head over heels with these enterprises, rewarding what was often undisciplined corporate financial behavior. Companies like Carvana and Peloton Interactive, for example, were able to increase revenue rapidly with positive net income not even a concern for shareholders. It was easy to make money as an investor by simply buying the fastest-growing companies you could find and enjoying the ride up.
Then 2022 changed that backdrop. Inflation quickly reared its ugly head, and as a result, the Federal Reserve started raising interest rates. Consequently, these Wall Street darlings saw their stock prices plummet as profits and free cash flow started to matter once again. Investors should now be evolving their strategies to favor these sorts of businesses.
NASDAQ: LULU
Key Data Points
An unstoppable apparel stock
With this framework in mind, readers should look no further than Lululemon Athletica (LULU +1.35%) as a company whose shares should be added to portfolios. The athleisure pioneer not only exhibited strong revenue growth over the past few years -- 167% between fiscal 2016 and 2021, to be exact -- but this impressive gain did not come at the expense of the bottom line. In fact, diluted earnings per share (EPS) skyrocketed 239% during that same five-year stretch.
And while many companies that were growing like wildfire in recent years have since slowed down dramatically, Lululemon is showing no signs of this happening. In the most recent quarter, sales jumped 28% compared to the prior-year period, with diluted EPS rising 39%.
Management expects revenue for the fiscal fourth quarter (which ends at the end of January) to increase 24% versus Q4 2021. That's remarkable, even more so when you consider how convinced many expert economists are that a recession is likely this year.
Helping shareholders sleep well at night is Lululemon's strong balance sheet, something that should seriously be prioritized right now. As of Oct. 30, the company had about $750 million in liquidity and zero debt, meaning that it is at no risk of running into solvency issues should a severe economic downturn happen in the near future. That's easily worth paying a price-to-earnings multiple of 35 for right now.
The main takeaway for investors is not to completely avoid stocks in down markets. Instead, always find ways to improve your process to adapt to the changing landscape. Not only will your portfolio returns improve, but most importantly, your skills as an investor will get better.
