Overreaction?
“Money flows, in effect, can render fundamental analysis futile in the short run, even while creating a compelling longer-term opportunity.” —Seth Klarman (December 2000)
The stock market ended last week with a bang. The Dow Jones Industrial Average rose more than 700 points on Friday (over 2%). The S&P 500 and Nasdaq also posted strong gains on Friday and for the entire week.
It was the Nasdaq’s sixth straight week of positive gains, and 2023 is starting to resemble a Yogi Berra market: “It's like déjà vu all over again.”
Like in the pre-2022 market euphoria, technology has led the way this year. Specifically, seven stocks have been driving most of the index returns in the S&P 500 and technology indices due to their weightings and year-to-date performance (Apple, Microsoft, Nvidia, Amazon, Meta, Alphabet, and Tesla).
Not everything has been going up. For example, Dollar General (DG), a stock that had a positive return in 2022 and is generally considered a business that benefits—at least relative to other businesses—in difficult economic environments, saw its stock drop by about 20% on Thursday and is now down over 32% year-to-date.
And for another example, The Walt Disney Company (DIS) continues to hover around the lows it reached during the depths of Covid in 2020, as worries over streaming costs and its potential have been given more weight in investors’ minds than the recovery and strength in other parts of the business.
This newsletter doesn’t have an opinion on the prospects or investment merits of DG or DIS at these prices. But we have noticed that many investors we like and admire have bought shares around or above where those companies’ stock prices sit today.
Overreaction causes both the best and worst returns—it just depends on when you buy and when you sell during the process. Certain technology companies have had a major upward reaction in their share prices. Many other well-known companies have had the opposite reaction to their value in the stock market. Figuring out which, if any, or all, are justified is what makes the game of investing so interesting.
“If only one word is to be used to describe what Baupost does, that word should be: ‘Mispricing’. We look for mispricing due to over-reaction.” —Seth Klarman
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