If you’re a bargain-shopping kind of investor, there are certainly plenty of stocks on sale here. The S&P 500 (SNPINDEX: ^GSPC) is down nearly 19% year to date, while many of its constituents are dramatically deeper in the red.
Beaten-down prices alone aren’t enough of a reason to start scooping up stocks though, no matter how big their pullbacks might be. A company still has to be a name worth owning for the long haul, regardless of its price.
And, that’s a tough thing to figure out for the S&P 500’s four worst performers for 2022 so far.
What went wrong
If you’re wondering, the biggest losers among the S&P 500’s tickers so far this year are PayPal (NASDAQ: PYPL), Align Technology (NASDAQ: ALGN), Etsy (NASDAQ: ETSY), and Netflix (NASDAQ: NFLX), down 63%, 64%, 70%, and 75%, respectively, since the end of 2021. Ouch!
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At first blush, there’s not a common thread. Netflix was crushed because, for the first time in its history, it lost subscribers. Align Technology (the name behind Invisalign dental braces) is struggling with the lingering impact of the COVID-19 pandemic. E-commerce platform Etsy is still trying to figure out what it is in a marketplace that includes competitors like Amazon, as well as empowering, DIY e-commerce platforms like those offered by Shopify. And PayPal? Despite continued revenue growth, investors still believe alternative payment options will chip away at its market share.
There’s more commonality to these setbacks, however, than there seems on the surface. With the exception of Align, investors were genuinely surprised these companies’ smashing successes seen in 2020 and into 2021 — in the throes of the COVID-19 pandemic — didn’t persist into 2022.
In other words, the wrong kind of surprise can wreak havoc on a stock.
As for Align, while it never really thrived or suffered due to the coronavirus contagion (aside from logistical challenges linked to lockdowns), it’s still dealing with the pandemic’s fallout that’s lasting far longer than anyone initially feared it might. Now the specter of an economic recession is prompting some consumers to rethink the immediate need for straighter teeth. Even so, it’s an unexpected headwind that’s rattling investors, turning them into sellers.
On the surface, it seems somewhat irrelevant. While the market may not have seen these struggles brewing, the sell-offs these tickers have dished out still just reflect how these companies are performing right now.
Except, that may not quite be the case.
Yes, the direction these stocks have been moving jibes with the turn these companies’ businesses have taken. The depth to which investors respond to lackluster results, however, can vary depending on expectations. If the market knows that so-so earnings are in the cards, the revelation of lackluster numbers doesn’t send investors into a panic…when the selling really ramps up. If investors know to brace for bad news, then stocks are typically eased into a more appropriate price to reflect that reality.
The alternative? Shock takes an exaggerated toll on a stock’s price. That’s largely what’s happened here with these four names.
Shock also distracts people from looking at the future rather than the past, when they should be doing just that.
Perhaps most problematic, however, is that these sell-offs have reached extreme proportions only because stocks tend to move in a herd. Once the selling stampede starts, it’s tough to stop it, even when lower prices may not be merited for most of them.
The question remains, however: Should you buy the S&P 500’s four worst-performing stocks of 2022 so far?
This isn’t always the case, but right now, yes — these stocks are too sold-off for long-term, buy-and-hold investors interested in them to simply pass them up.
While the pullbacks made enough sense, fear and panic have arguably taken more of a toll than they should have. Investors, as a crowd, are starting to think a little more level-headed though. While they know 2022 could be tough, they’re also starting to see these aforementioned companies have viable plans to deal with it.
Netflix, for instance, could launch an ad-supported version of its streaming service as early as this year, appealing to value-minded senses that will be heightened if the economy is weak. While PayPal may be facing a kind of competition it’s never faced before, it’s also innovating new ways to keep its place as the world’s biggest digital payment middleman. Just last month, it unveiled a cash-back credit card, and late last year allowed e-commerce sites built by Wix to offer buy-now, pay-later loans to their customers. Align and Etsy are adjusting, too.
Yet, none of these stocks’ already-overblown sell-offs reflect these initiatives.
And it’s not just these four companies. A bunch of great stocks have been dragged lower than they deserve to be, for all the wrong reasons.
That’s not to suggest any of these names have hit their absolute bottom, mind you. They may still lose more ground. It is to say, however, now that the dust of the knee-jerk selling is starting to settle as we push past the hysteria, the market’s starting to realize that at least with some stocks, the selling was more than a little overboard. That makes many of these names great buys now, even if we’re not all the way through the turbulence just yet. Better to be a little too early than a lot too late.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Align Technology, Amazon, Etsy, Netflix, PayPal Holdings, and Wix.com. The Motley Fool has a disclosure policy.