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February 2022

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Should investors be buying US stocks now, or waiting for them to drop more? Here is how we address that question. We have not been particularly optimistic about US stocks for 2022. Valuations are stretched, the US Federal Reserve is removing monetary stimulus, and earnings growth is slowing down. In our December Wealth Monthly, we set a 2022 year-end target for the S&P 500 of 4,850. That was just 3% above where the S&P 500 was trading at the time. After a rough market in Jan and first half Feb, the S&P 500 is now 7% below our year-end target.

We will use our S&P target to determine our strategy. If we do not use our target for decision making, there is no sense in having one in the first place. Investors buying US shares today are looking at a 7% return over the next 10 months. That is pretty good compared to what investors are getting in fixed income markets. It’s easy to decide that investors should ride out the current bout of stock market volatility and hold onto their current US positions. But, how about adding? That is a tougher decision. Not buying today means taking the risk of missing on the opportunity to buy buying a substantial dip. Quick recoveries have been a feature of the US market for several years. However, we think investors should try to get the current volatility to work for them. The S&P 500 could easily drop another 3-5%.

When US stocks are dropping, invariably the financial media invites guests that are bearish stocks to explain why. Investors should not let these people scare them from buying. Someday these pessimists are going to be correct, and US stocks will enter painful bear market. However, right now we view corrections as buying opportunities. Even with the Fed raising rates, fixed income investments are going to remain lower than the inflation rate. US stocks are going to stay relatively attractive versus cash and bonds.

We turned negative work-from-home/stay-at-home stocks sooner than we should have. We thought these stocks would peak as Covid vaccines became widely available. They only began underperforming toward the end of last year when high flyers generally fell out of favor. We also do not think it is a coincidence that work-from-home/stay-at-home stocks began to sell off sharply when the omicron wave began. Governments are coming to the conclusion that for the vaccinated, omicron is not a critical threat. Denmark and the UK have lifted their domestic Covid-19 restrictions, and other countries are expected to follow.

A couple of the work-from-home/stay-at-home stocks fell enough to attract potential takeover interest. We were lucky enough to recommend one of them. Shortly after we recommended Activision-Blizzard (ATVI US), Microsoft (MSFT US) bid for the videogame developer.

Peloton (PTON US) shares jumped around 30% in after-hours trading Friday Feb 4, after The Wall Street Journal reported on the interest from Amazon (AMZN US) and others. Peloton share are seriously beaten up. Peloton's market value was down to around US$8b when the WSJ story broke, down sharply from its high around a year ago of some US$50b.

NYU Professor Scott Galloway, who we often quote in our Wealth Monthly, had been predicting that Peloton might get a takeover bid from a tech giant. If you don’t already, please try listening to Galloway podcasts. Galloway believes Peloton would be a good acquisition for Apple (AAPL US). Could we have a bidding war Peloton between tech giants? We think that Amazon and Apple would try to avoid one, but if it happened, it could get crazy. Eight billion US dollars is “coffee money” for these firms.

Other work-from-home/stay-at-home stocks could receive takeover interest if their shares fell enough. Single product software firms have a checkered track record, and probably would benefit the most from being part of a larger firm. DocuSign (DOCU US) would be a nice fit for any company that sells business software. Zoom Video Communications (ZM US) might have synergies with a payments firm. Last year, PayPal (PYPL US) kicked the tires of Pinterest (PIN US). Investors generally thought that was a bad idea. However, adding payments to Zoom seems to make more sense.