Why I'm not obsessing over my portfolio; A closer look at Align Technology

1) I'll be honest... I haven't been paying that much attention to my personal portfolio for at least a month.

I know I have roughly 30% cash, 30% S&P 500 Index funds, 30% blue-chip stocks, and a handful of more speculative small-cap and private investments.

I also know that I've taken losses in the 70% that's not in cash, but it's not going to help me make better decisions by obsessing over and tracking them all throughout the day. In fact, it's almost certain that it would cause me to make worse decisions.

As I've said plenty of times, the key is to focus on the long run... and not get swept up in the short-term hysteria right now.

Right now, the three big questions I'm asking myself are:

First, do I think things are going to get a lot worse – in which case I would sell aggressively?

My answer, as I've discussed in recent e-mails, is likely no...

The U.S. economy came into this mini-crisis quite healthy. And the damage is self-inflicted, which means it can be mitigated with a simple statement/social media post (though admittedly, the long-term damage to business confidence and investment is harder to gauge).

Second, do I feel like we're at a blood-in-the-streets moment in which I'm trembling with greed – as I was most recently on March 23, 2020? (See my January 6 e-mail about the lessons from that day.)

Not yet...

I agree with some of the sensible thoughts in this Wall Street Journal article from yesterday by columnist James Mackintosh: How Far Does the Market Have to Fall Before It's Time to Buy? As he concludes:

Without a trigger, stocks will eventually find their low. That hardly ever happens before the recession starts, so a longer-term recovery needs something to suggest recession will be avoided.

There could also be triggers for more selling, with this week's earning season bringing the prospect of more warnings from CEOs about the damage tariffs will do.

Still, quite a lot of bad news is now priced in. Brave investors can start to tiptoe back into the market – so long as they realize that stocks could easily fall much further if the tariffs stay on and recession results.

Lastly, are there individual stocks – either ones I own or have been following – that I want to add to my portfolio?

Well, I'll repeat what I said yesterday:

During times of market turmoil, the temptation is to do something dramatic, but that's usually a mistake. Instead, I plan to sit tight and look for the best stocks I can find that look compelling enough to start nibbling on.

Here at Stansberry Research, this is what my team and I have been spending most of our time on.

We're looking for the best bargains. And when we find ones that look promising enough, we share our favorites first with subscribers to our flagship newsletter, Stansberry's Investment Advisory. (If you aren't one already, find out how to become one and take advantage of a 30-day full money-back guarantee by clicking here.)

2) In Friday's e-mail, I mentioned four stocks that were on my radar screen: Constellation Brands (STZ), Five Below (FIVE), Align Technology (ALGN), and RH (RH). And I asked my readers which ones they would like me to take a closer at.

There were quite a few votes for all four, but the winner was Align – maker of Invisalign clear aligners to straighten teeth. (For more background on the company, I recommend checking out its 50-page slide presentation that accompanied its fourth-quarter earnings release on February 5.)

So today, let's take that closer look at the stock...

ALGN shares closed yesterday at $153.35 – a level they first reached about eight years ago and roughly 80% below their all-time high back in 2021. You can see the movement in this 10-year stock chart:

As always, I like to first look at the 20-year trends for revenue and profit:

As you can see, there was substantial, steady growth from 2013 through 2019... a surge in reported profit in 2020 due to a one-time tax benefit... a jump in revenue in 2021 thanks to the pandemic recovery and a roughly $420 million acquisition... and a return to pre-pandemic profits for the past three years.

In summary, Align's profits in 2024 were basically flat with 2018. That isn't an impressive growth record.

The cash-flow statement shows a similar story – things have been flat since 2019. Take a look at this chart of the company's cash from operations, capital expenditures ("capex"), and free cash flow ("FCF"):

Turning to the balance sheet, Align has always had a solid net cash position:

So with FCF averaging $564 million annually over the past six years and net cash steady, let's take a look at how Align has allocated its excess capital:

We can see that, with the exception of one meaningful acquisition, Align has focused on buying back stock.

This can be a good thing – but only when done at attractive prices. And here, Align has failed...

Look at share repurchases in comparison with the stock chart above. The company ramped up repurchases in 2018 and 2019, after the shares had big runs. Then it bought back almost nothing in 2020, when the stock got cut in half during the COVID crash. And then, it resumed big repurchases as the stock soared – buying back about $2 billion of stock in the past four years at prices far higher than today.

As a result, the share count only declined by about 5% in the past four years:

This is a paltry return, given that at today's price, $2 billion would buy back roughly 18% of the company.

Lastly, let's look at the valuation...

As of yesterday's close, Align has a market cap of about $11.3 billion. And with $925 million in net cash, it has a $10.4 billion enterprise value.

With expectations for the company to earn $10.02 per share this year, that means the stock is trading at 15.3 times this year's expected earnings. That's a roughly 10-year low, as you can see in this chart:

I would be tempted at this price, except for two things...

First, the company's earnings and FCF have stagnated – and I'm not convinced by management's growth story.

In fact, with consumer confidence at a 12-year low and a possible recession looming, Align could be particularly vulnerable, as it sells a totally discretionary product that can easily be delayed.

Second, Align has more exposure to tariffs than most investors might realize. On page 40 of its fourth-quarter investor presentation, it disclosed that:

We currently manufacture clear aligners in Mexico and ship them to the U.S. primarily for our U.S. customers with the remainder eventually shipping to other international locations. The U.S./Mexico tariff situation remains very fluid, and we are unable to predict whether new tariffs will go into effect in the future.

Note that this was on February 5 – and consider how things have changed for the worse in the two months since then.

In summary, I think Align is interesting... but I wouldn't buy it until after I see first-quarter earnings (which the company will report at the end of this month on April 30).

There's a good chance that management will reduce guidance for the year, which would take the stock down another leg. At that point, the stock might look like a buy.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.