The following commentary was originally sent to Action Alerts PLUS subscribers on Feb. 5, 2016, at 1:11 p.m. ET.
This isn't the environment to bottom-fish.
As we witness the broad market selloff, the biggest victims are clearly the high-multiple stocks, with Facebook (FB), Panera (PNRA), PayPal (PYPL), Starbucks (SBUX) and WhiteWave (WWAV) getting hit the hardest. Although we view the selloff in these names as an overreaction, we have to respect the force of the market and avoid the temptation to fight it. In other words, we have to let the market wash out the momentum names before we consider buying into the falling knifes around us. Thankfully, we continue to hold historically high cash levels (around $200,000, or about 9% of the portfolio), which helps brace us from the fall, but of course does not allow us to outright avoid it. (Facebook, Panera, PayPal, Starbucks and WhiteWave are part of TheStreet's Action Alerts PLUS portfolio.)
Let's first dissect WWAV, as its shares are getting hit the hardest. Several sell-side analysts (from Deutsche Bank and Wedbush in particular) have taken down their estimates ahead of the company's fourth-quarter results next Thursday. The main concerns involve the following: 1) revenue pressure in the plant-based beverage category (given increased private-label competition); 2) the fact that Wal-Mart (WMT), a big counterparty for WWAV, is closing some stores; 3) high capital spending; and 4) the recent resignation of the CFO.
Some of these points are fair (CFO resignation, competitive pressures, and Wal-Mart), but none are new. The focus around increased private-label competition in plant-based beverages has been well known since the middle of last year; in fact, private-label share gains have decelerated in recent months based on third-party data. Wal-Mart's store closures have an impact on almost every single relevant consumer packaged-food player, many of which derive over a third of their sales from the retailer (vs. a little over 10% for WWAV). High capital spending is valid, but not uncommon for a growth company, and we believe the market has failed to account for the category expansion, growth acceleration and scale opportunities provided by WhiteWave's recent acquisitions of Wallaby's and Vega (both will close in August).
We would await further estimate cuts and/or post-earnings weakness before adding to our position as the majority of sell-side analysts have yet to cut their estimates ahead of the quarter.
Facebook and PayPal are getting dragged down with the higher-multiple Internet/social media/digital complex in concert with its cohorts. This basket-selling -- somewhat due to the awful first-quarter guidance issued by LinkedIn (LNKD), with shares down 40% intraday -- is also a force that we do not intend to reckon with. The fundamentals for both companies, along with the powerful long-term growth stories, were made overtly evident in their recent respective quarterly results and forward guidance, which leave us with little doubt that the selling is illogical. When fundamentals diverge from logic to this extent, however, we recognize there are undercurrents precipitating the action that are beyond our control. We are in it for the long term and will not be distracted nor tempted by the flood of selling intraday.
Finally, both Panera and Starbucks are getting hit for their premium valuation within the restaurant space. These premiums are warranted -- in SBUX's case given its consistency and track record of execution as well as highly visible growth story; for PNRA, we see multiple growth levers playing out this year following a heavy investment cycle focused on mobile initiatives (Panera 2.0), which should boost traffic and through-put.
All in, we would await some stabilization before dipping our toes into these piranha-infested market waters. We have the cash to pick when the time is right, but today is too volatile to trade around. We will be actively monitoring the portfolio for opportunities and will bite when the time is right. We are willing to be patient in the meantime.