Over the last five weeks, investors have been given a needed but potentially unpleasant reminder that stocks don't move higher in a straight line. Between Feb. 19 and March 21, the widely followed Dow Jones Industrial Average, broad-based S&P 500 (^GSPC +0.80%), and growth stock-powered Nasdaq Composite (^IXIC +1.63%) respectively shed 5.9%, 7.8%, and 11.3% of their value.
You'll note the double-digit percentage decline for the Nasdaq Composite firmly placed this market-leading index in correction territory.
While stock market corrections are traditionally a great time to do some bargain hunting, a historically pricey market has made me think twice about pulling the trigger. During this five-week downturn, there's only one stock I've purchased -- and it's quickly become one of my core holdings.
Image source: Getty Images.
Valuation remains a front-and-center concern for the stock market
Before digging into the details of the one and only stock I've bought with frequency in recent weeks, let me explain my reasons for walking on eggshells during the current Nasdaq sell-off.
The prevailing concern I have for Wall Street has little to do with President Donald Trump's tariffs, the prevailing rate of inflation, or what the Federal Reserve might do next with interest rates. Rather, it's the historic priciness of equities.
To state the obvious, "value" is a subjective term. What I view as exceptionally pricey might be deemed a bargain by another investor. Despite having some degree of play when it comes to the subjectivity of what constitutes value, statistics undeniably say that stocks are pricey.
My go-to valuation tool that helps me assess the relative cheapness or priciness of the broader market is the S&P 500's Shiller price-to-earnings (P/E) Ratio. You'll also find the Shiller P/E referred to as the cyclically adjusted P/E Ratio (CAPE Ratio).
S&P 500 Shiller CAPE Ratio data by YCharts.
The Shiller P/E is based on average, inflation-adjusted earnings from the previous 10 years. Adjusting for inflation and looking at a decade's worth of earnings history provides the closest thing to an apples-to-apples valuation comparison.
As of the closing bell on March 21, the S&P 500's Shiller P/E Ratio clocked in at 35.28. For context, this is more than double its average reading of 17.22, when back-tested to January 1871. Additionally, the peak reading of 38.89 in December marked the third-highest reading during a continuous bull market cycle, dating back 154 years.
On top of the Shiller P/E telling me that stock valuations are extended to the upside, historic precedent provides a warning. The previous five times (excluding the current instance) the S&P 500's Shiller P/E topped 30 were eventually followed by declines in the benchmark index of at least 20%.
In other words, outsized readings for the S&P 500's Shiller P/E have historically been a harbinger of eventual (keyword!) big-time downside. While I'm more than happy to nibble when I find an occasional bargain, most of my cash reserves are saved for declines of 20% or greater following these periods of extended valuations.
Image source: Getty Images.
I've nearly doubled my stake in this high-growth, cash-rich tech stock
With a better understanding of why I'm not itching to press the buy button just yet on the vast majority of stocks, let me introduce you to the one existing holding that coerced me to purchase shares on more than one occasion over the previous three weeks: adtech stock PubMatic (PUBM +5.02%).
PubMatic is a cloud-based, supply side, programmatic ad platform that assists publishers in selling their digital display space. Its sole focus is digital advertising, including the likes of video, mobile, and connected TV (CTV) -- i.e., ads presented during streamed content.
As you'll note in PubMatic's chart, shares dove a little over three weeks ago. This tumble had everything to do with its first-quarter guidance and full-year outlook failing to measure up to the consensus of analysts. PubMatic's second-largest demand-side platform (DSP) customer, Alphabet's (GOOGL +1.71%)(GOOG +1.35%) Google DV360, has adjusted its bidding algorithm, which PubMatic's management team suggests will create revenue hiccups through the midpoint of 2025, but not beyond.
NASDAQ: PUBM
Key Data Points
Take note, PubMatic hasn't specifically called out Google DV360 as the DSP whose bidding algorithm has changed, but it's easy enough to put two-and-two together with The Trade Desk and Alphabet's Google DV360 being the only two DSPs mentioned in the company's risk factors section. Once this change is worked through in the coming months, PubMatic is expected to return to double-digit sales growth.
Beyond this growth hiccup with Alphabet, PubMatic's digital ad segments are growing like weeds. CTV revenue more than doubled in the fourth quarter from the prior-year period and accounted for 20% of the company's total sales. As CTV becomes a larger component of total revenue, PubMatic's sales growth should accelerate.
To add fuel to the fire, management made the decision many years back to build out its cloud-based infrastructure. Though it would have been notably cheaper and faster to rely on a third-party platform, the decision to build out and control its own infrastructure is expected to result in a superior operating margin as revenue scales. I fully expect earnings growth to outpace sales growth in the latter-half of this decade.
Another reason I felt comfortable significantly adding to my stake in PubMatic is its cash-rich balance sheet. This is a company that's generated positive cash flow from operations for 10 consecutive years, and it closed out 2024 with $140.6 million in cash, cash equivalents, and marketable securities, to go along with no debt. PubMatic is nearing $3 per share in cash, yet its shares closed out last week at just $9.75.
PUBM Shares Outstanding data by YCharts.
I'll also add that the company's board hasn't been shy about using its cash to repurchase stock. Since implementing buybacks two years ago, the company's outstanding share count has declined by more than 8%. For businesses with steady or growing net income, buybacks tend to have a positive impact on earnings per share (EPS).
To round things out, PubMatic is jaw-droppingly cheap. Shares are currently valued at 12.7 times forward-year EPS, or a forward P/E below 9 if you back out the company's cash position. It's an incredibly inexpensive price to pay for a company at the center of the digital-ad revolution that can sustain a double-digit growth rate -- and it's quickly become a top-10 holding of mine.
