Bearish and bullish indicators; Four stocks on my radar screen: Constellation Brands, Five Below, RH, and Align Technology
1) It was ugly out there yesterday, with the S&P 500 Index falling 4.8% – its worst day since the COVID-19 crash back in early 2020.
And so far this morning, the pain is continuing. Stocks are taking another big hit today in the wake of China announcing retaliatory tariffs.
So are we hitting the bottom? I don't know... By some measures, we didn't see anything like total capitulation yesterday – for example, in a post on social platform X, the Kobeissi Letter argued that "selling has been ORDERLY":
After yesterday's collapse, the Kobeissi Letter also showed in another post on X that the S&P 500 is down less than 10% year to date (as of the close)... but it feels like more because so many investors are concentrated where there has been the most pain, among the Magnificent Seven stocks – Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA):
Here's another chart from a post on X reflecting that, through the end of March, the other 493 stocks in the S&P 500 were actually up on average:
All of these data points indicate that the market could have further – perhaps much further – to fall.
2) But there are some bullish indicators as well...
Bearish sentiment among average investors (as measured by the American Association of Individual Investors, or "AAII") just surpassed its levels from March 2020 and late 2022 and hit a high not seen since March 2009 – all of which were fantastic times to be buying. Take a look at the chart in this post on X from the Kobeissi Letter:
Most importantly, there's evidence that, as I noted in yesterday's e-mail, President Donald Trump's newly announced tariffs are "most likely an opening gambit to force other countries to trade with us on better terms."
Late yesterday, he said he was open to tariff cuts – here's Bloomberg with more details: Trump Open to Tariff Cuts in Return for 'Phenomenal' Offers. Excerpt:
President Donald Trump said he was open to reducing his tariffs if other nations were able to offer something "phenomenal," indicating that the White House was open to negotiations despite the insistence of some top officials.
Trump, speaking on Air Force One on Thursday, broadly defended his tariff program despite a stock market meltdown, saying he was happy that interest rates were falling and believed that the economic turbulence would settle.
And as the article continued:
"The tariffs give us great power to negotiate," Trump said, adding that "every country has called us."
Asked if that meant he was considering relenting, Trump said it "depends."
"If somebody said that we're going to give you something that's so phenomenal, as long as they're giving us something that's good," Trump said.
And as his son Eric said in a post on X yesterday:
3) While I'm not calling a bottom here, in my hunt for bargains, I'm definitely sifting among stocks that have been clobbered...
I'll mention four today – two of which I've written about before and two new ones. Please let me know which interest you, and I'll take a deeper dive – as always, you can send me an e-mail by clicking here.
First up is spirits giant Constellation Brands (STZ), which Warren Buffett was buying around $240 per share just a few months ago.
I analyzed Constellation in my February 19 e-mail when it had closed the day before at $169.38 per share – saying that the stock was "starting to look downright cheap for a high-quality global business that generates substantial (albeit flat for many years) [free cash flow]."
Despite the turmoil since then, the stock is actually up – it closed yesterday at $181.49 per share – so that's perhaps a good indicator that there's not much downside. It's definitely on my watch list.
Second, shares of discount retailer Five Below (FIVE) crashed 27.8% yesterday to close at $58.83 – not just a 52-week low, but more than a seven-year low, as you can see in this 10-year stock chart:
Investors are concerned that Five Below will be particularly affected by the new tariffs because it sources most of its products from Asia, and its entire business model depends on ultra-low prices.
I last wrote about Five Below (with links to prior analyses) in my March 21 e-mail, after the stock had last closed at $76.11 per share – and I'm glad I warned my readers about it at those levels. As I concluded:
That valuation might appear cheap to those who remember that it regularly traded above 30 times earnings during its heady growth day... but it's not cheap enough to interest me in light of the many uncertainties surrounding the company.
This is still a good company, and its stock would be a huge beneficiary if Trump eased the tariffs. And I'm not sure it makes a lot of sense that Five Below gets clobbered while Walmart (WMT) (down 2.8% yesterday) and Costco Wholesale (COST) (up 0.2% yesterday) are mostly unscathed.
Turning to a new idea, shares of luxury furnishings retailer RH (RH) – better known as Restoration Hardware – tumbled a staggering 40.1% yesterday after reporting earnings per share that heavily missed expectations, and the CEO (I assume inadvertently) used a four-letter word on the conference call when he heard how the stock was reacting.
Here's the Wall Street Journal with more on the story: The Day Trump's Tariffs Shook Corporate America. Excerpt:
Restoration Hardware Chief Executive Gary Friedman was on a call with analysts Wednesday afternoon talking about the furniture retailer's strategy and how the housing market could slow in this economic environment when news of the tariffs broke. He asked colleagues to get a "live read" of his business to check how the company's stock was doing.
"Oh really? Oh, s---, OK," Friedman said in the moment. "Everybody can see in our 10-K where we're sourcing from so it's not a secret."
More than 70% of the furniture company's products come from Asia, according to its annual report, including 35% from Vietnam and 23% from China, where steep new duties were put in place.
The stock, which closed at $149.39 per share, is down from more than $700 per share in 2021 and sits at a roughly five-year low, as you can see in this 10-year stock chart:
RH is a good business, Friedman is a retailing genius, and I would think retailers serving wealthy customers would hold up better than others... so I'm inclined to take a closer look at this stock.
Lastly, Align Technology (ALGN), maker of Invisalign clear aligners to straighten teeth, is a great business but has always been much too richly priced for me to consider. But the stock fell 5.9% yesterday to close at $154.24 per share – a roughly eight-year low:
I think it's worth a look as well.
You will notice that I'm not bringing to your attention the stocks of any airlines or automakers, many of which are also getting whacked. That's because during times of turmoil, I'm looking to take advantage by buying the stocks of quality companies that I can hold for many years.
Again, let me know which of these you think are worth exploring to see if their futures will be as bright as their pasts – and whether their stocks might be bargains... Again, you can send me an e-mail by clicking here.
Best regards,
Whitney