What to do when a stock you own goes down; Investor fears related to Adobe are overblown; More on the market's reaction to the Iran war and the private-credit turmoil; Bill Ackman's IPO is being lumped in with private credit; Tesla needs special approval for its Cybercab

1) It's always nice to nail the inflection point (or close to it) on a stock...

A few examples of mine from last year are Five Below (FIVE) on April 4, Eli Lilly (LLY) on September 25, and my "Stinky Six" stocks to avoid on October 29.

The problem is, this is a rare occurrence – for every investor, including myself. Far more often than not, a stock will fall to a level that looks cheap enough to buy, you jump in, and then it falls some more.

How do you avoid this mistake?

You can't... And it's not a mistake. Nobody – not Warren Buffett, not the best supercomputers, I mean nobody – has perfect timing.

In light of this, two things can be helpful...

First, you could buy a not-quite-full-size position to start. For example, if you think a stock should be a 5% position, only buy 4%. That way, it's good news if a stock falls because you have the option to make it a full-size position at a lower price.

Second, I've found that it helps to have a fatalistic approach: Anytime you buy a stock, assume it's going to fall at least 25% from the price at which you bought it.

This mindset offsets the natural feelings of pain and regret that losing money triggers. And it allows you to do a careful, unemotional analysis of the stock to determine which of three actions to take: buy more, hold, or sell (either partially or entirely).

2) This topic is on my mind today because one of my favorite tech stocks over the past year, Adobe (ADBE), fell as much as 8.4% this morning...

This comes after the company reported first-quarter earnings yesterday evening (you can read the press release here and the presentation/earnings call transcript here).

And unfortunately, going into today, the stock was down 27% since my team and I recommended it to Stansberry's Investment Advisory subscribers last April.

Given what the stock is doing today – and the fact that it has lost roughly 60% of its value in the past two years – you'd think the business was collapsing.

But the opposite is true...

In the first quarter, revenues were $6.4 billion, up 12% year over year ("YOY") and above analyst estimates of $6.3 billion. Adjusted earnings per share ("EPS") were $6.06, up 19% YOY and ahead of analyst estimates of $5.87.

Free cash flow was a whopping $3 billion, also up 19% YOY, of which the company used $2.5 billion to repurchase 8.1 million shares during the quarter. And the diluted share count was down 6.2% YOY.

Ah, but AI is going to destroy the business, so guidance must have been terrible, right? Wrong...

The company's second-quarter revenue guidance is $6.5 billion at the midpoint, up 10% YOY, in line with analyst estimates. And adjusted EPS guidance is $5.82, up 15% YOY and above estimates of $5.68.

What appears to be causing the stock's decline today is the announcement that 18-year CEO Shantanu Narayen will be stepping down as soon as the company finds a replacement.

It's generally not good news when a well-respected CEO steps down – but in this case, I think it is. One of my smartest friends, an activist investor, texted me this last night:

Narayen's retirement is actually a good thing. He was getting way too comfortable. I was actually considering going activist on this one.

I also think the AI fears are overblown – and could even be a tailwind as Adobe incorporates AI into its products.

Per the earnings report, generative-AI credit usage increased more than 45% quarter over quarter, showcasing increased user engagement with AI features like Generative Fill in Photoshop and Firefly. As a result, Adobe's AI-first annual recurring revenue ("ARR") tripled in the first quarter, contributing to more than one-third of new ARR.

Overall, the company continues to grow nicely and retains mouthwatering economic characteristics: 89% gross margins, 30% after-tax profit margins, robust free cash flow and share repurchases, etc.

And the stock is downright cheap. At around $248 with full-year EPS estimates of $23.49, the stock has a price-to-earnings ratio of only 10.6 times. I think it should trade at double that...

If you're already an Investment Advisory subscriber, you can read our full report on Adobe from last year here.

If not, you can find out how to become one and gain access to our full portfolio of open recommendations – including our current, specific buy advice for Adobe – right here.

3) The Wall Street Journal's James Mackintosh wrote an insightful column about why the stock market hasn't fallen much since the start of the Iran war:

Some stock markets have suffered badly, but Wall Street far less. Main Street might be nervously eyeing soaring prices at the pump, but investors are reassured that the economy's fine and the U.S. is insulated by being the world's biggest oil producer. Inflation might be a little higher, but so long as this is a short war – the same assumption as the oil market – this is a little local difficulty, not a major threat to U.S. growth or profits.

This echoes the sentiments I've been expressing all week to ignore the headlines.

4) Following up on yesterday's e-mail about the turmoil in the private-credit market, this WSJ article gives the latest example:

The private-credit engine that powered massive growth on Wall Street is sputtering, with investors trying to pull money out of big funds, forcing firms into uncomfortable decisions and endangering their future profits.

The latest example came Wednesday when Cliffwater told clients that investors in its largest fund asked to cash out 14% of their money this quarter. The $33 billion fund will pay out about 50% of the redemption requests, meaning that the other half will need to wait at least another quarter to exit.

I think hedge-fund manager David Rosen of Rubric Capital Management will be proved correct:

[He] singled out Cliffwater in a letter to investors last month that warned about the risks lurking in private-credit portfolios and urged all investors to get out of the asset class while they could.

"We would not be surprised if Cliffwater is the canary in the coal mine and will be the first domino in the 'bank run' we foresee," Rosen wrote in the letter, which the Journal reviewed. 

5) On Tuesday, I wrote that my college buddy Bill Ackman is taking his firm, Pershing Square, public under the ticker "PSI."

It hadn't occurred to me that investors might be foolish enough to lump PSI into the group of money-management firms exposed to private credit – because it has no such exposure.

But as this WSJ article notes, investors might do just that when PSI goes public in the near future:

When Pershing Square sold a stake to a group of investors in 2024 as a precursor to an eventual IPO, it told them not to compare it to other hedge-fund firms, but to much larger asset managers like Blue Owl and Brookfield. At the time, they were enjoying premium valuations.

Now, however, the share prices of Blue Owl and other alternative-asset managers are in retreat, in part because individuals invested in their private-credit funds want out.

As the article continues, Bill highlighted Pershing Square's notable differences from private-credit funds:

Pershing Square has no direct exposure to private credit, which has caused investor agita partly because such loans can be hard to value. Ackman's portfolio of a dozen or so large, publicly traded stocks is easier for investors to value. (One of its top holdings, ironically, is Brookfield Asset Management's parent company.)

Most private-credit fund managers allow for a small amount of investor redemptions each quarter, while closed-end funds like PSUS and PSH, which will account for nearly all of Pershing Square's assets under management, don't allow for that.

As I noted on Tuesday, PSI is a great business. I'll be keeping an eye on its IPO and valuation.

6) This WSJ article from yesterday focuses on the challenges Tesla (TSLA) will face getting approval to mass produce its new Cybercab because it lacks standard controls:

[CEO Elon] Musk has said that the Cybercab – and the wider deployment of its Full Self-Driving software – will be crucial to the company's planned shift to autonomous vehicles and humanoid robots...

But the company needs approval from the National Highway Traffic Safety Administration ["NHTSA"] to sell the Cybercab, since it lacks a steering wheel, pedals and side mirrors. NHTSA grants exemptions to automakers to sell vehicles not fully in compliance with the rules but caps them at 2,500 cars a year.

Tesla hasn't yet applied for an exemption on the Cybercab, a spokesman for NHTSA said. If it doesn't get an exemption, the company has to certify that its vehicles still meet all of the federal vehicle safety standards.

If NHTSA finds the Cybercab isn't in compliance with those standards, the agency could order Tesla to recall the vehicles and fix them. Were Tesla to refuse such an order, the company risks major fines, and NHTSA could file litigation against the company to enforce the order.

The article misses the far bigger problem: that Tesla's package of software and, even more importantly, hardware (lacking radar and lidar) is nowhere near ready for fully autonomous driving.

As I noted in Monday's e-mail, "according to Tesla's own published findings, the company's autopilot is four times worse than that of a human."

The accidents caused by Tesla's robotaxis have been minor or low speed so far. But I think it's only a matter of time before something more serious happens, as the company recklessly rolls out a system nowhere near Waymo's level of safety. (Tesla won't release its safety data, unlike all of its peers.)

The day this happens, I think Tesla's stock will sink – and Uber Technologies' (UBER) will soar. I outlined my reasoning in my March 2 e-mail:

As for one of the big overhangs on the stock – that Tesla's robotaxi service will expand rapidly and take share from Uber – I have the opposite point of view...

For reasons I outlined in detail in my December 11 and December 17 e-mails, I think Tesla's long-promised robotaxis are years away from prime time. And when investors realize this, Uber's stock will be a major beneficiary.

Best regards,

Whitney

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