Broadly speaking, the strategy of stepping into good companies while their stock is temporarily beaten down is a sound one. The market ebbs and flows, taking most stocks with it. In the end, though, the cream rises to the top.
If you’re scouring February’s biggest large-cap losers looking for a bargain, though, you may not want to be too quick to act. Although many of these names are familiar, their stock price setbacks may not be temporary. Their steep sell-offs alone aren’t enough of a reason to buy any of these stocks just yet.
Upended S&P 500 stocks
There’s no denying these tickers look like they’re being sold at fire-sale prices. Fidelity National Information Services ( FIS -2.37% ) fell more than 20% last month, and drugmaker Viatris ( VTRS -2.02% ) tumbled to the tune of 26%. Consumer-facing internet companies Meta Platforms ( FB -1.43% ) (the company formerly known as Facebook) and PayPal Holdings ( PYPL -1.41% ) fared even worse, with their stocks sliding nearly 33% and 35%, respectively. Shares of EPAM Systems ( EPAM -6.79% ) ended last month with a whopping 56% loss. For the sake of comparison, the S&P 500 ( ^GSPC -0.79% ) index they’re all a part of only lost about 3% of its value in February.
What went so wrong, so fast? It depends.
EPAM Systems’ sell-off is forgivable even if it’s not forgettable. The custom-coded software company employs a significant number of computer coders living in the countries of Ukraine, Russia, and Belarus, a region recently rocked by military conflict. With no clarity as to when those hostilities might end, EPAM opted to retract its previously posted revenue guidance for 2022. Investors understandably revolted.
As for payment services company Fidelity National Information Services and closely related PayPal, the explanation of their weakness isn’t quite as clear. However, it would be amiss not to point out that new competition is creeping into every aspect of the payment business. From cryptocurrency to Amazon‘s in-house platform to credit card companies now offering remittance services that outright bypass the once-entrenched stalwarts of the payment industry, PayPal’s and Fidelity’s moats are shrinking.
To this end, note that while both of these stocks suffered a great deal last month, February’s weakness only extends pullbacks that began in the middle of last year.
Viatris is seemingly on a firm footing, with just a superficial glance at the company. For instance, it won the FDA’s approval for its generic version of dry-eye treatment Restasis in early February.
However, a longer look under the hood suggests the pharmaceutical company is on the defensive. Not only did Viatris miss its fourth-quarter earnings estimate, but it’s also opting to sell its Biocon Biologics unit and is planning to shed more of its drug franchises in the foreseeable future. While the $3 billion price that Biocon will fetch is fair, it’s also a bit suspicious, as well as an unpopular idea among some shareholders. Biocon Biologics is one of the company’s key growth engines. If Viatris chooses to sell Biocon and other properties, it could be a sign that cash is needed or sales of its other products are fading.
The superficial explanation for Meta’s recent weakness is last quarter’s first-ever decline in the number of daily users of its flagship social networking platform, Facebook. The more philosophical explanation is that last quarter’s contraction may indicate Facebook’s best days are behind it.
Not always the case, but the case right now
Here’s the rub: While last month’s routs look and feel like the sort of plunges that typically recover quickly, the underlying causes of these particular pullbacks have a bit of a different flavor than usual. Although we might see some bullish pushback from here, the challenges described above can’t be wiped away in a mere matter of days. It could take weeks, if not months, to fix what’s really broken, if it can be fixed at all. These S&P 500 constituents remain a little too vulnerable in the meantime to wade into blindly.
This isn’t necessarily true for all stocks right now. I noted on Wednesday that many Nasdaq-listed names, including PayPal and Meta Platforms, are also ultimately paying a long-term price for the dismissal of slowing growth and increased competition. But a bunch of blue-chips within the Dow Jones Industrial Average (DJINDICES: ^DJI) are names worth buying on this dip after being errantly caught up in the recent marketwide bearish tide.
Stock-picking is always a case-by-case, scenario-by-scenario exercise. The current scenario doesn’t favor stepping into the market’s most beaten-down names just because they’ve been beaten down. There’s more happening here than just a bit of unfortunate volatility.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.