2022 has marked the end of an era of cheap money, and that’s bad news for companies with a ‘growth at all costs’ approach. In the year ahead, investors will need to exercise due diligence in distinguishing between good and bad firms.
That’s because the US Federal Reserve’s interest rate hikes in 2022 have ended the era of super easy money and exposed many companies with bad business models. He calls those companies “zombie stocks” with heavy cash burn.
Stocks get hit hard after their bad business models are exposed. Too much capital has been allocated to bad investments, bad people, and bad ideas, e.g., FTX, Zombie Stocks, Meme Stocks, ESG. The massive fallout after cryptocurrency exchange FTX filed for bankruptcy in the United States, amid investigations for losing and misspending billions of dollars in user deposits.
Until these misallocations are rectified, our economy and market will struggle to grow at normal rates. Hence, investors need to do their homework. Do the companies in the portfolio have the balance sheet and cash flows to withstand a slowdown in economic activity, or ask yourself: have they taken a ‘growth at all costs’ approach that is unsustainable as the era of free money comes to an end?
‘Zombie’ stocks to avoid, or even to short!
Zombie companies refer to those that have been on the market for more than 10 years and earn enough to operate, but not to pay the interest on their debt. In recession or tightening cycle, those zombie stocks, which could “go to zero,” for example, include online used car retailer Carvana, online home goods retailer Wayfair, payments company Affirm and cloud services company RingCentral.
Some of those stocks have lost a vast majority of their value in 2022. Carvana plunged around 98% for the year, while Wayfair tumbled about 83%. Affirm lost nearly 90% and RingCentral was down around 82%.
Not everything is bad, buy dip when opportunity comes!
Growth stocks such as tech firms have benefited from an era of low rates. But investors should now be selective when looking at the sector. The best tech stocks to buy are those with strong cash flows and with valuations that underestimate the firm’s ability to generate cash in the future. Those big names like Qualcomm, Alphabet, Cisco and Oracle should be paid attention to.
Fullerton Markets Research Team
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