The S&P 500 just logged its most bullish January since 2019. But, not every one of its constituents participated in the rally. A surprising number of these stocks, in fact, lost a great deal of ground last month.
There are two schools of thought regarding these extreme laggards. On the one hand, perhaps they're down for a reason. On the other hand, these extreme sell-offs could be misguided, making these pullbacks a buying opportunity.
It's not always easy to figure out which one's the right viewpoint.
What went wrong
Last month's biggest losers among S&P 500 names are Pfizer (PFE -0.71%), Enphase Energy (ENPH 3.31%), and Northrop Grumman (NOC 0.38%), down about 14%, 16%, and 18%, respectively, versus last month's gain of 6.2% for the large-cap index itself.
Pfizer's tumble isn't a tough one to figure out: The company reported toward the end of the month that sales of COVID-19 vaccines and treatments are set to slow down in a big way. The company expects its top line to shrink to the tune of 30% this year, prompting an even bigger decline in earnings.
Enphase Energy's big dip is a tougher one to explain. The solar power technology company seemingly didn't do anything wrong. Nevertheless, last month's sizable loss extends a similar sell-off suffered in December. In retrospect, it looks like this wave of weakness mostly stems from the overheated rally seen in the latter half of last year, in the wake of a couple of pieces of bullish legislation that boosts the country's solar power industry. Sometimes investors just lock in profits, or swap hot stocks out for newer, budding opportunities.
As for Northrop Grumman, although it topped its fourth-quarter earnings estimates and issued guidance that was better than expected, shares renewed their month-long tumble following last week's release of those results. Blame the battle over the debt ceiling, mostly. Defense spending is feared to be among cuts that occur as part of any resolution to raising the debt ceiling (Defense cuts were included in cuts that occurred as a result of the last big debt ceiling battle in 2011). A GOP-led House wants to ease debt accumulation and a Democrat-controlled White House may end up targeting the Defense budget in response. Goldman Sachs fanned the bearish flames in the middle of the month, downgrading the bulk of defense contractor stocks due to these budget-cutting concerns.
Be cautious, but yes, these are (mostly) opportunities
The question remains, however: Are these sell-offs ultimately buying opportunities?
Not to wax too philosophical, but, the question in and of itself can be a dangerous one. You should consider buying stocks you'd like to own when they're down. You should not, however, consider buying a stock simply because it lost a lot of ground in one particular calendar month. Every trade should be taken on a case-by-case basis.
Broadly speaking, though, this time around January's biggest large-cap sell-offs lean heavily toward being buying opportunities rather than risks.
Take Pfizer for example. Yes, this year is going to look relatively miserable as sales of its COVID-19 vaccine and treatment come to a screeching halt. This headwind is arguably already priced in, though. Shares are currently valued at less than 10 times this year's as well as next year's per-share earnings. And, once the tough pandemic-driven comps are completely in the past, the company believes its current pipeline will help drive annual sales growth of between 6% and 10% through 2030. The trick is simply waiting a couple of years for that transition away from the height of the pandemic to run its full course. The stock may well start rebounding before those results start taking shape.
Ditto for Enphase Energy. While current and would-be shareholders can expect more of the same volatility that solar stocks have always dished out, there's no denying the opportunity immediately ahead. The Energy Information Administration forecasts that the nation's solar power industry will install 63 gigawatts of power production capacity by the end of 2024, growing its current output potential by 84%.
The only exception here might be Northrop Grumman, and it may only be a temporary exception at that. As long as it looks like there's political gridlock in Washington, all defense stocks -- including Northrop -- will remain in check. Of course, given the current political climate, both parties could stand their ground for a long, long time. They could also make compromises that don't firmly favor the defense contracting business.
Bottom line? There's a difference between bottom-fishing and bargain-hunting. For the better part of last year (in the midst of the bear market), one month's biggest losers were also often big losers in the month before and the month after, and for good reason. Bottom-fishers were punished during this time. But as the end of the bear market appears to be nearing, the steepest of the steep sell-offs don't make a great deal of sense. These are pullbacks you'll want to use as entry opportunities. That's bargain-hunting.
Just bear in mind you'll still want to be selective about your bargain-hunting simply because the bull market that will lift most stocks with it isn't officially underway yet.
