To The Moon

$S&P 500(.SPX)$ $NASDAQ(.IXIC)$ $DJIA(.DJI)$ $Tesla Motors(TSLA)$ $Amazon.com(AMZN)$

Market Volatility Continues

Just when it seemed like things couldn’t get worse, we’re hit with another significant red day across the board, continuing from last week, which marked the worst performance for the S&P since September 2024. It's clear that investors are worried about the short-term outlook, as we’ve now entered the extreme 16-point territory, down from 20 just last Friday. Concerns are mounting, and last month, Bank of America warned that the S&P could tumble by 40%, calling it a bubble era. Looking at last week's performance, it’s not any better, with many companies and sectors all seeing losses. Over the past month, most of the MA7 (aside from Apple and Microsoft) have dropped by double digits, highlighting that investor sentiment is worsening.

Rising Fears of Recession and Market Declines

Frustration is growing, with President Trump being called an "agent of chaos" and fears of a recession becoming more tangible. CNN reports that US stocks dropped after Trump suggested a recession might be possible, and the New York Times says stocks are falling as recession fears intensify. Investors are concerned that an escalating trade war could lead to higher prices, slower growth, and greater uncertainty, ultimately harming consumers. Bloomberg echoes these concerns, noting that slumping stocks are fueling recession worries.

S&P’s P/E Ratio and Potential for Further Declines

With all these drops, the S&P now trades at a P/E ratio just under 29. While this might not seem overly high, the average P/E ratios—both mean and median—typically sit around 15-16, suggesting more downside could be ahead. However, predicting market movements is nearly impossible.

Valuations Still High Despite Losses

Looking at forward P/E valuations, many companies, despite their recent losses, are still in the red. For example, Microsoft’s valuation is at 25, Apple’s is at 27, Amazon’s is at 25, and Tesla's is at 60, all above their 5-year averages. Still, no one can predict the future.

Tom Lee’s Optimism Amid Market Concerns

Last week, CNBC analyst Tom Lee expressed optimism, saying he’s a buyer of stocks. He believes bad news has already been priced in and that there could be a rally of 10-15% in March, April, and May. Lee views the current market sentiment as a bear market, but he remains hopeful, acknowledging the uncertainty surrounding tariffs but seeing the recent price corrections as a reason to be bullish.

Global Trade War Impact and Consumer Effects

Meanwhile, the ongoing trade war is not helping, with Canadian tariffs remaining in place until the US shows respect. The new Canadian Prime Minister has vowed to continue the fight, claiming that President Trump is damaging Canada’s way of life. On the other hand, China is retaliating against US farm goods with more tariffs. One thing is clear: the consumer is unlikely to benefit from these trade tensions.

Strategies Amid Market Corrections

So, with the market correction in full swing, what’s the best strategy? We're often advised not to try to time the market, and while no one has a crystal ball, one strategy to consider is simply dollar-cost averaging.

New York Times Insights on Investment Strategies

The New York Times has explored various investment strategies and ultimately concluded that, regardless of market conditions—whether it's a down market, an up market, high volatility, or low volatility—dollar-cost averaging is typically a better approach than waiting for the perfect moment to invest. This is because no one can predict where the market is headed. The article also discusses the option of sitting on cash, waiting for a market pullback, or investing immediately in hopes of a large rebound. Vanguard, similar to the New York Times, has its own strategy and recommends lump-sum investing (or lump-sum averaging) and dollar-cost averaging. They found that lump-sum investing outperforms cost averaging 68% of the time, while cost averaging beats holding cash 69% of the time. In fact, lump-sum investing outperforms cash 70% of the time. Therefore, the advice is clear: stay invested in the market, using either dollar-cost averaging or lump-sum investing.

The Advantages of Cost Averaging for Risk-Averse Investors

For risk-averse investors, the cost averaging strategy can be a superior choice compared to holding cash. Implemented correctly, this strategy may suit investors who are wary of taking on too much risk over an extended period. However, considering the cost of holding cash for prolonged periods, most investors—especially those who don’t have a significant aversion to loss—should invest a lump sum right away. Of course, different strategies work for different investors, and it's important to follow the approach you believe is best. If we look at the market over a long-term period, from 1870 onwards, there have been numerous times when it seemed terrifying to keep your money in the market. The recent events like the COVID-19 pandemic, the Ukraine conflict, inflation, Black Monday, and the Great Recession are prime examples. Despite these concerns, the key takeaway is that long-term investors are typically better off staying invested in the market.

Evaluating Market Opportunities and Stocks

Now, let's consider whether there are any opportunities in the current market. Looking at some stocks, we can begin with Nvidia, which currently sits at $17. Over the last year, the stock is up by only 15%, with a 20% decline year-to-date. This marks what we typically consider a crash, given that a 20% drop qualifies as a crash, and a 10% decline is considered a correction. However, over the past 10 years, Nvidia has significantly outperformed the market, growing 18,000%, and is now trading at the lower end of its 52-week range. Wall Street analysts and Seeking Alpha have both labeled it a strong buy. Nvidia also trades at a forward P/E ratio of around 25, which is much lower than its 5-year average. Based on this, we can conclude that the stock is significantly undervalued, showing a strong signal for potential investment.

Valuation of Nvidia and Projected Upside

Running our own valuation model for Nvidia, we arrive at a fair price of $162 using the Discounted Cash Flow (DCF) method. Over the past 5 years, Nvidia has grown at a triple-digit rate, and even over the past 10 years, it's maintained 104% year-over-year growth. Our model incorporates a low, medium, and high growth rate of 15%, 20%, and 25%, respectively. Based on these figures, the current valuation indicates a 52% upside to $162. For those who believe this is too optimistic, at the 15% growth rate, the upside would be 8%, translating to $115. Conversely, for more optimistic projections using a 25% growth rate, we see an upside of 112%, reaching $227.

Applying a Margin of Safety

We also apply a margin of safety of 10% to the valuation and consider a “buy” price of $146, assuming the company meets the three golden criteria: a wide moat, strong financial metrics, and good forward-looking data. At the current price of around $116, Nvidia offers a 35% margin of safety. Wall Street analysts have a 12-month price target of $177, representing a 66% upside. Even with the more conservative 15% growth rate, there's still a small margin of safety, sitting around 5%, with a target price of about $119.

Alphabet: A Strong Buy Opportunity

One company we've discussed that looks like a very strong buy right now is Alphabet, which is up 23% over the last year but has been hammered down 13% year-to-date. Over the past 10 years, Alphabet has significantly outperformed the S&P 500, with a 496% increase. Currently, it’s trading in the mid to low end of its 52-week range, with strong buy ratings from both Seeking Alpha and Wall Street. The stock's forward P/E ratio sits around 19, which is significantly lower than its 5-year average of 22.3, indicating a potential undervaluation. Additionally, using a historical model, we see that it sits at the lower end of the fair value range, further supporting this undervaluation signal. Based on our intrinsic value calculation, Alphabet’s fair price comes in at $226, while Wall Street has a target of $220, suggesting a 33% upside. If we apply a margin of safety, at 12% growth, we can still see a significant margin of safety, with a potential buy price of around $170.

Meta: A Reasonable Investment at Current Price

Another stock to consider is Meta, which is down nearly 6% today. Over the last year, it has risen 15%, and year-to-date, it is flat. Meta has outperformed the S&P 500 over the last 5 years, with a 65% increase. It’s currently trading at the midpoint of its 52-week range and has a strong buy rating from both Wall Street and Seeking Alpha. The stock’s forward P/E is around 24 to 25, and it is trading close to its 5-year average. When we run Meta through our valuation model, we calculate an intrinsic value of $700. Using a 10% growth rate, we still see a healthy margin of safety, with a potential buy price of $595. Wall Street’s target price of $765 implies a 29% upside, making Meta a solid option for consideration.

Booking Holdings: A Solid Investment with Caution

Booking Holdings is down 5% today and up 28% over the last year. Year-to-date, it’s down 10%. Over the past 10 years, the company has massively outperformed the S&P 500, with a 285% increase. It’s currently trading in the midpoint of its 52-week range, with double buy ratings from Seeking Alpha and Wall Street. The forward P/E is around 22, which is below its 5-year average of 23, signaling a potential undervaluation. Our intrinsic value calculation for Booking Holdings comes to just above $5,000, using a conservative 4% growth rate. Applying a margin of safety of 10%, the buy price is around $4,500, and at 20% margin of safety, it drops to $4,000. Wall Street sees a target price of $562, which translates to a 26% upside. Booking Holdings is worth keeping on the watchlist, especially for those looking for undervalued opportunities.

S&P Global: Fairly Valued with Moderate Upside

S&P Global is down nearly 2% today, up 15% over the last year, and flat year-to-date. Over the last 10 years, it has outperformed the S&P 500 with a 369% increase. The stock is currently trading in the midpoint of its 52-week range, with strong buy ratings from Wall Street and Seeking Alpha. The stock trades at a relatively high P/E of 28.9, but it's still below its 5-year average of 30.2, indicating potential undervaluation. Our intrinsic value for S&P Global is $634, with a 12% growth rate applied. At a 10% margin of safety, the buy price is around $570, and Wall Street’s target of $610 suggests a 24% upside, which still provides some room for growth.

Uber: Strong Buy with Substantial Margin of Safety

Uber is down 9% today, and over the last 5 years, it’s up 151%, outperforming the S&P 500. It’s currently trading at the midpoint of its 52-week range and has a strong buy rating from both Wall Street and Seeking Alpha. The forward P/E ratio sits around 31.3, and our intrinsic value calculation for Uber is $14, using a 10% growth rate. This gives a healthy margin of safety, with a 30% upside potential. Wall Street sees a 26% upside with a target price of $9. Uber is worth considering for your portfolio, especially given the margin of safety and growth potential.

Amazon: Strong Buy with Growing Upside

Amazon, a stock we recently covered in more detail, is a double strong buy from Wall Street and Quant, with a buy rating from Seeking Alpha. It’s currently trading at a forward P/E of around 31. Over the last year, Amazon is up 12%, but year-to-date, it’s down 12%. Over the past 10 years, Amazon has massively outperformed the S&P 500 with a 96% increase. Our valuation for Amazon is $230, using a 20% growth rate for free cash flow, which gives a nice margin of safety. With Wall Street’s target price of $270, there’s a 40% upside. Amazon remains a solid investment opportunity.

Arista Networks: A Potential Buy at a Discount

Arista Networks is down 8% today but is up 14% over the last year. Year-to-date, it’s down 30%. However, it has massively outperformed the S&P 500 over the last 10 years, with a 1,616% increase. It’s currently trading at the lower end of its 52-week range, and all analysts have given it a buy rating. The forward P/E is around 33. Our intrinsic value for Arista Networks is $162, with a growth rate of 0%. Even with a conservative approach, it shows a significant margin of safety, suggesting at least a 50% upside to around $80. Wall Street sees a target price of $125, implying a 62% upside.

Tesla: Still Holding Potential Despite Short-Term Declines

Tesla has been battered down 14% today and is down nearly 50% year-to-date. Despite this, the company has massively outperformed the S&P 500 over the last 10 years, up 173%. It’s currently trading at the lower end of its 52-week range, though it has a very high forward P/E of 92. Our intrinsic value calculation for Tesla comes to around $200, using a 35% growth rate. Wall Street is bullish, with a target price of $350, implying a 54% upside. However, given its high valuation, it may not be the best entry point at the moment, but it could still hold long-term potential.

Netflix: Premium Valuation with Limited Margin of Safety

Finally, Netflix is down 4% today but up 43% over the last year. Year-to-date, it’s down 4%. Netflix has been a high-quality company over the last 10 years, up 1,300%, but it’s trading near the midpoint of its 52-week range. It has strong buy ratings from Seeking Alpha and Wall Street, with a forward P/E of 35.8. Our valuation for Netflix is $725, based on a 15% growth rate, which we feel may be a bit too high. There’s currently no margin of safety at this price. If the stock were to drop to around $652, it could be considered a buy. Wall Street sees a 28% upside, with a target price of $1,100.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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