The market is down this year and people are scared. And compounding the financial pain is the extreme psychological pain driven by fear-mongering media narratives.
As an investor, you should recognize (1) The media doesn’t care about you (they just spew ridiculous emotional narratives in order to capture more eyeballs so they can get more advertising dollars), and (2) Disciplined, long-term, goal-focused investing is a winning strategy (forget the soup of the day—know your goals, stick to your long-term plan).
In this report, we review the current “terrifying” market conditions, but first share two stock ideas (one high-income, and one high-growth) that we believe are particularly interesting right now (depending of course on your own personal goals and situation). We have a special focus on DocuSign, so let’s start with that.
DocuSign is a pandemic stock that rose spectacularly to over $314 per share as the disingenuous media convinced investors that COVID would prevent people from ever interacting in person again for as long as they live, and therefore they needed DocuSign if they ever wanted to execute a document again. Like most rumors and conspiracy theories, the DocuSign narrative was based on some truth (it really is a convenient easy-to-use product that allows you to easily execute documents remotely—pandemic or not—and this type of solution is increasingly valuable in the massive and ongoing digital revolution that increasingly dominates the way work gets done).
However, from a valuation standpoint, DocuSign got way ahead of itself with price-to-sales multiple reaching nosebleed levels and revenue growth expectations unrealistically extrapolating pandemic anomalies that pulled forward years of future growth.
DocuSign announced earnings on Thursday after the close, and even though revenue and earnings were strong, forward revenue growth guidance and analyst estimates have come down significantly, and the shares price has plummeted. To be clear, DocuSign is still expected to grow rapidly (2022 sales growth guide is 18%), and the total addressable market opportunity is still massive, it’s just not meeting the stupendous projections the pandemic fearmongers were pumping.
Most investors appreciate that, in the short term, market prices are often a whimsical narrative-driven voting machine, but in the long term markets do a much better job weighing the true value of a business. And in DocuSign’s case, the business does have long-term value, and the valuation has come back down to earth as the pandemic narrative pendulum now appears to be swinging too far in the opposite direction for many once-pandemic-darling stocks like DocuSign. Granted, DocuSign has a nice name and has some first mover advantages, but the reality is the competitive moat of the business is not enormously wide (ie many other companies can, and do, do what DocuSign does).
Nevertheless, we like that DocuSign is the leader in the digital signatures space, and that there really is a massive total addressable market opportunity to capture old-school non-electronic signatures, combined with the company’s high customer retention rates, strengthening operating margins and improving cash position.
2. Exxon Mobil (XOM), Yield: 4.1%
Unless you have been living under a rock, you realize that gas prices in the US have been rising dramatically thanks to the tragic Russia-Ukraine conflict (Russia is a big global supplier of energy), the Biden Administration’s “environment first” approach to US independence energy (the US could produce ample fossil fuel energy domestically to keep prices low, but the Administration knows that would be political suicide with much of its base), and of course inflation (February year-over-year Consumer Price Index, released Thursday , was 7.9%, the highest level in over 40 years as the pandemic-easy-money-chickens have come home to roost!).
As mentioned, the stock market is down this year (the S&P 500 is down ~12%), and the only sector that has actually posting gains is the energy sector. Exxon Mobil is a direct beneficiary of higher oil prices, and the shares of Exxon Mobil have been extremely strong this year.
Obviously, well-known large-cap energy companies, like Exxon Mobil, face some of the most intense media fear-mongering narratives of any publicly-traded stock because of the large fossil fuel (pollution) footprint (when gas is burned to power your because it releases pollution that is harmful—although how harmful is widely debated—despite any “settled science” narratives you may hear).
The question for many investors is whether or not it is too late to invest in energy stocks like Exxon Mobil. On one hand, oil prices could still rise dramatically higher as the Russia-Ukraine conflict continues (and as the Biden Administration remains true to its “anti-keystone-pipeline” campaign promises), and as inflation may remain high for an extended period of time. On the other hand, some investors fear they’ve already missed the rally and buying now would be “buying high” (instead of “buying low” like many investors believe you are supposed to do).
In our view, it can still make a lot of sense to own specific energy stocks, and we do continue to own shares of Exxon Mobil in our prudently-diversified 39-stock Income Equity Portfolio (the portfolio currently yields ~6% and is outperforming the S&P 500 by nearly 10% so far this year as of today). Further, Exxon Mobil’s already strong balance sheet is increasingly fortified by higher oil prices. Further still, we appreciate that the company has given credence to environmentalist concerns (regarding its fossil fuel footprint), but has remained steadfast in its commitment to oil and gas (unlike some of its peers that are bowing to pressures and haphazardly refocusing their strategies) . As much as many people want electric vehicles to reduce high-pollution gas-powered cars, it’s not going to happen overnight, and demand for oil and gas (ie Exxon Mobil) will remain high for many decades to come.
Because no one can predict the future, it can be a good idea to own attractive stocks across sectors, and Exxon Mobil is a cash rich blue chip that also pays a healthy 4.1% dividend yield—for those of you focused on high levels of current income.
Terrifying Market Conditions:
To dive a bit deeper into current market conditions (which have many investors increasingly spooked), here is a video from Blue Harbinger’s Mark Hines on current market wide challenges (including inflation, interest rates and oil prices).
And just to reiterate, current market conditions may seem frightening, and the fear-mongering media can make them downright terrifying. From a data standpoint, high inflation is a huge risk to the economy because it is so devastating to savers (for example, the $100,000 you had saved last year, can now only buy around $92,000 worth of stuff) and to people on tight budgets. Additionally, high inflation is forcing the fed to dramatically increase interest rate expectations, thereby devastating stocks with high future growth expectations like DocuSign (because as interest rates rise, the current value of future earnings declines—particularly painful to so many high-growth pandemic- darling-type stocks). Here is what Charlie Munger recently had to say about inflation:
“Inflation is a very serious subject. You can argue it’s the way democracies die. So it’s a huge danger once you’ve got a populace that learns it can vote itself money. If you look at the Roman Republic, they inflated the currency steadily for hundreds of years. And eventually, the whole damn Roman Empire collapsed. So it’s the biggest long-range danger we have probably, apart from nuclear war. The safe assumption for an investor is that over the next 100 years, the currency is going to zero. That’s my working hypothesis.”
As an investor, you may feel stuck. On one hand, you don’t want to have your money in the market because you are afraid conditions are going to get worse (and if you listen to the fear-mongering media, conditions are absolutely terrifying). On the other hand, even though interest rates are expected to rise, they are still very low by historical standards, and when you factor in inflation, your nest egg just isn’t going to cover your expenses forever (ie, you’re going to run out of money).
Our advice is to ignore the fear-mongering media, and instead to stay focused and disciplined on your long-term goals. As hard as it may be psychologically, being a contrarian investor and buying when the market is down tends to work out even better than buying when the market is up. Historically speaking, there have been much bigger market declines than this one, and the market has always recovered from every single one—even though it seemed like the world was ending at the time. In fact, the market not only recovered, but eventually rose dramatically higher, and the real losers were the ones that sold everything only to miss out on the subsequent rebound because they were sitting on the sidelines. As we wrote in our previous Blue Harbinger Weekly:
It’s often said that investors react 2-3 times more emotionally to market declines than to market gains (I believe it), and this is often the culprit for bad decisions.
Whether you are young (and can handle the high volatility of high-growth stocks), or whether you are already retired (and every market decline feels absolutely devastating), it is important to have an investment strategy, and to not let the obnoxious fear -mongering media distracts you from achieving your goals. Disciplined, long-term, goal-focused investing is a winning strategy.