📈 Should you invest today?
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I’m Pieter and welcome to a 🔒 subscriber-only edition 🔒 of Compounding Quality.
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The past few days have been intense.
The United States expects a recession, and the Japanese Nikkei Index plummeted yesterday.
But what’s happening exactly and how should you act as an investor?
What’s happening
Investors fear that the US economy will enter a recession.
Here’s what is happening in a few bullet points:
US Nonfarm payrolls increased less than expected
The American unemployment rate jumped to 4.3% (a three-year high)
There is a 70% chance that the FED will cut interest rates by 50 basis points but investors fear that the FED is too slow in loosening its monetary policy to avoid a recession
Here’s what the performance of some major indexes looked like over the past 5 days:
S&P500: -5.3%
Nasdaq: -5.6%
MSCI World: -6.0%
Nikkei 225: -9.1%
Is this something we should be afraid of?
Or does this decline offer opportunities?
Warren Buffett once said you should be fearful when others are greedy, and greedy when others are fearful.
Today it might be a time to become a bit more greedy again as the market is currently in ‘Extreme Fear’ mode:
Source: CNN
We like declining stock prices as we LOVE adding wonderful companies at lower prices.
Stocks are like hamburgers:
You are not convinced yet?
Here’s another proof that you should start buying stocks once the media starts to worry:
“It’s absolute cockamamie crazy to sell stocks after they drop. Instead, you should say: “Today there’s a first-rate bargain and I’m buying.” - Charles Ellis
Quality stocks that declined > 20%
The beautiful thing about Mr. Market is that it can offer great opportunities once in a while.
I’ve compiled a list of 10 Quality stocks that declined at least 20% from their all-time high.
10. Edward Lifesciences
How does the company make money?
Edward Lifesciences makes money by creating and selling medical devices, mainly for heart treatments and critical care.
Their products are used to treat heart diseases and other serious health conditions. They sell these products to hospitals and doctors around the world.
Why is it a quality stock?
Healthy net cash position
Great capital allocation skills (ROIC: 24.9%)
CAGR since IPO in 2000: 16.9%
How much did the stock decline from its 52-week high?
36.9%
Source: Edward Lifesciences’ website
9. Estéé Lauder
How does the company make money?
Estée Lauder makes money by creating and selling skincare, makeup, perfumes, and hair care products.
They sell their products in department stores, specialty shops, and online
Why is it a quality stock?
Beauty products = a very attractive industry
Fabrizio Freda has been the CEO since 2009
Estée Lauder trades at one of the cheapest valuation levels over the past 10 years (forward PE: 26.4x)
How much did the stock decline from its 52-week high?
47.4%
Source: Finchat
8. Charles Schwab
How does the company make money?
Charles Schwab is an American multinational financial services company.
It offers banking, commercial banking, investing, and related services including consulting, and wealth management advisory services to both retail and institutional clients.
Why is it a quality stock?
Healthy net cash position
Asset managers are very profitable (Net Income Margin: 26.3%)
CAGR since 1990: 17.8%
How much did the stock decline from its 52-week high?
21.6%
Source: Charles Schwab’s website
7. ASML
How does the company make money?
ASML makes money by developing and selling machines that help make computer chips.
The Dutch company has a (quasi-)monopoly in producing essential machines for the semiconductor industry.
Why is it a quality stock?
ASML has a monopoly in an attractive industry
The demand for chips will only increase
Net cash position, high profitability, and great capital allocation skills
How much did the stock decline from its 52-week high?
27.0%
Source: Finchat
6. Domino’s Pizza
How does the company make money?
Domino's Pizza is a global leader in pizza delivery and takeout.
The company operates a franchise model, with a significant portion of its stores owned and operated by independent franchisees.
Why is it a quality stock?
The company’s earnings went 5x over the past 10 years
Domino’s Pizza has a ROIC of more than 50% (!)
DPZ bought back 40% of outstanding shares over the past 10 years
How much did the stock decline from its 52-week high?
20.9%
Source: DPZ’s website
5. Lululemon Athletica
How does the company make money?
You probably know the leggings from Lululemon Athletica already.
Lululemon makes money by designing and selling workout clothes and accessories. They also offer fitness classes to help people connect with their brand.
Why is it a quality stock?
Strong brand name with market-leading position in yoga pants
Healthy net cash position
Lululemon Athletica trades at its cheapest valuation level ever (forward PE: 16.4x)
How much did the stock decline from its 52-week high?
54.8%
Source: Finchat
4. Dino Polska
How does the company make money?
Dino Polska is the most efficiently run grocery store in Poland.
They sell food, household items, and daily necessities to customers. The company is expanding heavily and reinvests almost everything in organic growth.
Why is it a quality stock?
Dino Polska is structurally more profitable than its peers
The company owns (almost) all its stores while rivals lease their stores
Dino Polska is expanding heavily to the east of Poland
How much did the stock decline from its 52-week high?
31.6%
Source: Dino Polska’s website
Now let’s dive into three companies that I consider buyworthy today.