Thursday marked the end of the first month of the new year ... and what a market. Investors have been through the proverbial ringer from January 2 right through January 31. The market ended up 200 points Thursday to wrap up the craziest January I have seen in my 30 years! So what happened and where do we go from here?
Superb growth stocks of 2006/ 2007 have seen the foam come off the top of their superb performance. Names like Intuitive Surgical (NASDAQ: ISRG), Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), First Solar (NASDAQ: FSLR) and others have seen valuation reductions of up to 30-35%. Bad businesses? No. Changing business models? No. Tough environment? Yes. Think of the example of a Major League baseball team winning its division one year by garnering 96 victories, but the next year winning 93 games to capture the same division title. Bad team? No, just a different environment, and still winning its division.
The economy has taken a step back and said to these companies, "if you thought you could have 30% growth ... think again, it's going to be 25% instead this year." The growth bar gets re-set and so do the valuations. The important point is that many terrific companies weather through these periods and when economic times improve, they go back and capture even higher valuations than before the slow down.
The good news for investors is that while this economy may be brittle, it is not broken. Exports remain very strong as the S&P 500 companies collectively reported foreign revenues comprising 50% of total revenues for 2007. The financial sector is fairing better after a disastrous 2007. Most major banks thankfully missed their fourth quarter estimates; hopefully, because they wrote off any loan that even smelled suspiciously wrong. The way has been paved for a better earnings environment for 2008. The markets are not going to give double digit returns unless the financials participate.
The consumer discretionary companies have for the most part reduced fourth quarter and 2008 earnings estimates by 5% or so and their valuations have been punished. Punished enough.
The really good news is that a lower interest rate environment has historically been very healthy for growth investing. Portfolio managers are more open to growth ideas as returns on cash will be dwindling.
So investors, it's been one heckuva of ride so far and we are only one month into this year!
Georges Yared is the CIO of Yared Investment Research and the author of Baby Boomer Investing...Where do we go from here?
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