If you're looking for deeply discounted stocks, there are certainly plenty to choose from now. The U.S. stock market just suffered its worst month since March 2020, when it became clear that the COVID-19 threat was a pandemic-level crisis. The Nasdaq Composite (NASDAQINDEX: ^IXIC) tumbled 9% in January, led lower by technology titans that were must-owns just the month before. Many of these tickers are now “on sale” at deep discounts, and certainly, some of them are ripe for a recovery.
Before focusing your search for cheap stocks on January's biggest losers, though, take heed. Just because a familiar name has been beaten down further than other stocks doesn't necessarily mean it's poised for a bigger rebound. Indeed, extreme weakness is often a warning.
Worst of the worst
In case you're wondering, the Nasdaq‘s biggest large-cap losers last month were Rivian Automotive (NASDAQ: RIVN), Affirm Holdings (NASDAQ: AFRM), 10x Genomics (NASDAQ: TXG), Moderna (NASDAQ: MRNA), and BioNTech (NASDAQ: BNTX). Each stock saw their price fall by more than 30% in January, with Rivian logging the biggest decline.
There was at least one clear theme within these setbacks — the vaccine trade imploded, which upended Moderna and BioNTech.
Designed to combat the initial strains of the coronavirus, most of the available COVID-19 vaccines are only moderately effective at preventing omicron infections, though they still do an impressive job of preventing infections from becoming severe and lethal cases. Moreover, the passage of time has revealed that, as expected, booster shots will be necessary to maintain protection from the virus. Weary after two years of pandemic, many countries, businesses, and individuals around the world are attempting to move forward and get back to their normal pre-pandemic conditions, regardless of the consequences, content to let the coronavirus do what it's going to do. With that as the backdrop, drugmakers involved in the COVID-19 vaccine creation effort lost some of their luster.
“Buy now, pay later” lender Affirm Holdings' stumble obviously wasn't linked to the evolution of society's response to the pandemic, though it was adversely impacted by a fresh revelation. That is, the short-term micro-loan business isn't as sustainable as it should be. Too many borrowers are using these services to make too many purchases they probably shouldn't, and then finding themselves in a bit of financial trouble. The problem has become significant enough that the Consumer Financial Protection Bureau has opened an official inquiry into the entire buy now, pay later industry.
Only time will tell what the CFPB will decide to do about this (if it decides to do anything). But it's certainly a cause for concern for shareholders in the meantime.
And Rivian? Shares were already in something of a free-fall headed into January, after the surge that followed the electric vehicle maker's November IPO. Investors were content to continue this selling, however, after the company warned the market that supply chain issues are crimping production. News that other carmakers are accelerating their electric vehicle production efforts only fanned the bearish flames around Rivian.
Maybe later, but certainly not now
Don't misread the message. Every problem has a solution, and time eventually heals all wounds. The struggles discussed above are no exception.
Timing, however, is everything.
Yes, each of these stocks is up from the low points they touched last week, which is the sort of near-term strength one would expect to see at the beginning of a more prolonged recovery rally. That may well be what's in the cards for most of the names mentioned here.
Don't be too quick to jump to that conclusion, though. The gains those stocks have logged over the past few days could also mostly be attributable to the sheer size of their January declines, which left them ripe for a brief period of sympathy buying. These tickers are still markedly lower for clear reasons, and the amount of time the companies will need to address their particular challenges — coupled with an overwhelming lack of clarity as to the required solutions — makes these Nasdaq-listed names too dangerous to buy into right now. For example, it could take months for the Consumer Financial Protection Bureau to decide what sort of move — if any — it will make with regards to the buy now, pay later industry. And nations around the world may be de-emphasizing their purchases of COVID-19 vaccines, recognizing that the virus can mutate faster than updated inoculations can be created.
In other words, a steeply sold-off stock is only a bargain if there's good reason to think the underlying company can justify a higher valuation. When that fundamental argument is weak or unclear, it's just another cheap stock and is likely to remain one until that argument improves or is clarified.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends 10x Genomics Inc and Affirm Holdings, Inc. The Motley Fool recommends Moderna Inc. and Nasdaq. The Motley Fool has a disclosure policy.