January was a tough one for investors, with the S&P 500 (SNPINDEX: ^GSPC) losing a little more than 5.2% of its value. That sell-off marks the worst month for the market since March of 2020 when stocks plummeted as the COVID-19 pandemic was declared.
Many of the stocks that make up the index saw share prices fall much more. The worst of the worst were Netflix (NASDAQ: NFLX), EPAM Systems (NYSE: EPAM), and Moderna (NASDAQ: MRNA). The first two names tumbled 29% last month, while Moderna shares ended January more than 33% lower. The vaccine trade has clearly lost its luster.
Many discount investors are, of course, mulling purchases of these beaten-down names. Why pay full price when you can buy a stock on sale?
Before plowing into any of these stocks — or any of the S&P 500’s other big January losers, for that matter — take a step back and inspect your true motivation. Just because a ticker has lost a massive amount of value in a short period of time doesn’t inherently mean it’s ripe for a rapid recovery.
The sell-offs make some sense
Take Moderna as an example. While it was one of the most ballyhooed names in the race to create a COVID-19 vaccine, shares of the drugmaker overstepped their sustainable, justifiable long-term value in 2020 and 2021. With the initially created vaccines not quite as effective as hoped at curbing the spread of the omicron variant — and even less effective against the new omicron subvariant — the world is losing interest in what increasingly looks like a never-ending chase for immunity. Denmark and England have essentially dropped all pandemic-related restrictions.
Support for vaccine mandates is withering anyway. The U.S. Supreme Court ruled against the White House’s effort to force all large companies to impose their own vaccination mandates on employees. Even without that ruling, many companies, including Boeing and Starbucks, were canceling their mandate policies.
Simply put, the world’s losing interest in continuing to fight a coronavirus contagion that’s already raced out of control.
Netflix is in a different but comparable situation. While plenty of supporters and shareholders see the recent subscriber growth lull as a temporary headwind linked to strong growth during the early days of the pandemic, that view overlooks a critical detail. That is, Netflix’s biggest and best competition surfaced right before and during the rise of the coronavirus contagion.
The specifics: Walt Disney‘s Disney+ debuted in November of 2019, a month before COVID-19 was first detected in China. WarnerMedia’s HBO Max launched in May of 2020. Discovery made Discovery+ available in early 2021, and it is already serving 20 million paying subscribers. ViacomCBS ramped up its streaming efforts in the middle of the pandemic as well. Its Pluto TV platform now serves 54.4 million viewers, doubling its headcount as of early 2020. Its total number of premium streaming subscribers also more than doubled during that period.
This isn’t to suggest Netflix is doomed. It’s still the most compelling brand in the streaming business. The recent streak of disappointing subscriber growth, however, may reflect an increasingly crowded market more than tougher comps. The former is a more permanent challenge.
Heed the market’s warning
Just because a stock’s been a poor performer of late doesn’t mean it’s destined to forever go lower due to demand issues, of course.
Take the aforementioned software company EPAM Systems, for instance. The stock’s crashed since the end of last year, mostly thanks to an excessive run-up in 2021. The fundamental bullish argument hasn’t changed for this growth name, though. Analysts are still calling for 30% sales growth this year, driving comparable earnings growth as a result. Companies still need help moving into the digital world, and EPAM is still well-positioned as the go-to solutions provider.
Of the S&P 500’s three biggest laggards in January, though, this one is the only one where the sell-off is clearly a mistake.
The thing is, this limited number of sharply sold-off stocks that are actually firm buys following their meltdowns is nothing new. There’s always more to the story, and more often than not, the market’s selling is a reasonable warning that a company is at least worth viewing through a lens of healthy doubt.
In simpler terms, big losses don’t inherently make a stock a buy, even when that stock is a well-known ticker. Always look at the bigger picture.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends EPAM Systems, Netflix, Starbucks, and Walt Disney. The Motley Fool recommends Discovery (C shares) and Moderna Inc. and recommends the following options: long January 2024 $145 calls on Walt Disney, short January 2022 $115 calls on Starbucks, and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.