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Boyar Value Group's 1st-Quarter 2022 Letter

Discussion of markets and holdings

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Apr 15, 2022
  • The first quarter of 2022 started out poorly for equity investors, with the S&P 500 declining by 11% during the first 16 trading days of the year.
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April 11, 2022

A Look Back

The first quarter of 2022 started out poorly for equity investors, with the S&P 500 declining by 11% during the first 16 trading days of the year and recording 35 down days for the quarter—according to Bloomberg, the most first-quarter daily declines since 1984. February was a particularly disastrous month,with the S&P 500 declining by 2.99% and the Nasdaq 100 declining by 4.5% to finish down 12.6% through the end of February. Toward mid-March, however, sentiment shifted and the equity markets (as measured by the S&P 500) staged an energetic rally, advancing ~8.5% in ~13 trading sessions. Even so, for the first quarter of 2022, the S&P 500 still declined by 4.6% (its first quarterly decline in 2 years) and both the Nasdaq and the Russell 2000 entered bear market territory (typically defined as a fall of 20% or more from recent highs). From a historical perspective, such developments are not surprising, with midterm election years having historically produced large intrayear pullbacks (17% on average, according to LPL). It is also worth noting that midterm election years tend to produce strong year-end rallies (although this year has been anything but typical).

The decline in the major averages does not tell the whole story, however, because the typical stock has done significantly worse than they have. While not a complete apples-to-apples comparison, as of April 6 the “average stock” in the S&P 500 had declined by almost 17% from its 52-week highs, a figure that for the Russell 3000 exceeds 32%.

Some of the best-performing technology stocks over the past decade had a horrible first quarter. According to Gunjan Banerji, writing in the Wall Street Journal, Meta Platforms (

FB, Financial) (formerly Facebook) lost ~$232 billion in market value in a single trading session, Netflix (NFLX, Financial) lost 38% of its value during the quarter, and Salesforce (CRM, Financial) had its worst quarterly performance since 2011. Such dismal performance stands in stark contrast to the strength exhibited by energy shares, which enjoyed their best quarterly performance in history by advancing 38%, with companies Occidental Petroleum (OXY, Financial) and Halliburton (HAL, Financial) increasing by 95% and 65%, respectively. While the energy sector’s advance from the beginning of 2021 through 1Q 2022 has been impressive (advancing over 114% with dividends reinvested), it is worth remembering that energy shares fell ~33.6% in 2020 (with dividends reinvested). Historically energy shares have not been a good place for equity investors: from January 1990 through 1Q 2022, the energy sector gained ~1,527% (with dividends reinvested), compared with 2,403% for the S&P 500 (with dividends reinvested). For this reason (and to avoid wild price swings), we typically avoid shares in energy-related companies.

Nine of eleven S&P 500 sectors were in the red, with Utilities the only other sector to advance (increasing by 4.8%). Communication Services was the worst performer, losing 11.9%, followed by Consumer Discretionary, which lost 9.0%, and Technology shares, which declined by 8.4% yet at 24.4x (fwd.) earnings are still selling significantly above their 20-year forward P/E ratio of 18.3x.

The pain was felt across almost every asset class as well as globally. “Safe” Treasuries declined by 5.6%, investment-grade bonds fell by 7.8%, and municipal bonds posted their worst quarter in ~40 years, with a 6.4% loss (erasing $108 billion in market value from Bloomberg’s municipal bond index for the first quarter of 2022). Indeed, more than $3 trillion in value was erased from fixed income and stocks during the first quarter, according to data from Bloomberg. The pain was worse for Chinese investors, whose CSI 300 index (comprising the largest companies listed in Shanghai and Shenzhen) lost 15% during the first quarter of the year, the worst quarterly decline since 2015. The Nasdaq Golden Dragon China Index, consisting of U.S.-listed Chinese stocks, declined by 21% for the quarter.

The only major asset class that performed well was commodities, with the Bloomberg Commodity Index advancing 25% for its best quarter since 1990. The increasing price of oil grabbed the bulk of the headlines as U.S. oil futures surpassed $130 a barrel in early March (though they have since declined to around $100 per barrel). This is a far cry from ~2 years ago, when on April 20, 2020, WTI crude settled at a negative $37.63 per barrel! Notably, wheat prices advanced 31%, recording their best quarter since 2010, and nickel became so volatile that the London Metal Exchange had to close trading in the metal for over a week to restore order.

So what caused all this pain across nearly every major asset class? We think John Authers, writing for Bloomberg, said it best: “Two huge shocks dominate the landscape—the sharp hawkish turn by the Federal Reserve and other central banks, and Russia’s invasion of Ukraine. These events between them naturally increased the risk of a recession or economic slowdown. They also dented hopes for earnings growth. Higher interest rates, international disruptions, and spiking commodity prices all make it harder for companies to make money.”

Rising Interest Rates and Stock Market Performance

The questions on many investors’ minds are how quickly the Federal Reserve will raise interest rates and how a rising rate environment will affect the economy. As always, past performance is no guarantee of future success, but it can be enlightening to examine what happened during past periods when the Federal Reserve was raising rates. According to LPL Financial (

LPLA, Financial), stocks have historically experienced greater periods of volatility in a rising interest rate environment but have performed well even so. During each of the past eight hiking cycles, the S&P 500 was higher a year after the initial increase and advanced an average of 10.8% (5.6% median).

Much of the talk surrounding rising interest rates has described them as negatively affecting technology shares, whose future growth becomes less valuable in the face of rising rates. But history does not support such a view. According to Strategas Securities, Technology has been among the best-performing sectors over the past three decades during periods of Fed rate-hike cycles.

Fixed-Income Does Not Mean Risk-Free

Legendary investor

Leon Cooperman (Trades, Portfolio) (and previous The World According to Boyar podcast guest) has called investing in fixed income “return-free risk.” In 2021 and for the first quarter of 2022, fixed-income investors finally began to realize the truth of his words as that asset class began to experience real pain. If interest rates continue to rise, fixed-income investors could be in store for far greater losses, as can be seen by certain investments’ response
(see chart to the right) to a 1% rise in interest rates.

With U.S. Treasuries down through the first quarter of 2022 after having already declined last year, says Michael McKenzie of Bloomberg, Treasury investors are on pace to see negative returns for 2 consecutive years— something unheard-of since records began in 1974.

Market Valuation

As of March 31, 2022, the S&P 500 was selling for 19.5x earnings (fwd.) versus 19.2x at its February 19, 2020, pre-COVID-19 peak and 13.3x at its March 23, 2020, pandemic low. Since the March 23 bottom, the S&P 500 has gained ~102%. By most traditional valuation measures, the S&P 500 is historically overvalued, yet value shares have not been this cheap relative to growth shares since the dotcom bubble (although they are not particularly cheap compared with their own long-term average). We continue to believe that value will outperform growth in the medium to long-term on a relative basis but also—and much more important produce a positive absolute return.

The S&P 500’s negative return for this quarter has been driven by multiple compression (the multiple, such as the P/E ratio in the following graph, is the price investors are willing to pay to purchase shares in a company), with analysts predicting that over the next 12 months, earnings will grow by 4.1%, although the multiple they believe investors are willing to pay has declined by 9.1%.

Interestingly, 2021’s positive results were driven solely by earnings, which increased by 34.5%, although the P/E multiple dropped by 7.6% as the S&P 500 advanced almost 27%.

Beware of False Bargains

With many former pandemic darlings having decreased by 30%-70% from their highs, we thought it worthwhile to discuss ways of uncovering value amid the carnage (and, still more important, of avoiding value traps), so we penned an article for Forbes in which we described what investors should be focusing on:

One of

Warren Buffett (Trades, Portfolio)’s most famous quotes (echoing Benjamin Graham) is “Price is what you pay; value is what you get.” For most people it’s difficult to separate a company’s stock’s price from what it is worth. Investors often forget that a stock price simply represents the price that someone is currently willing to pay to purchase shares in a company—and many times, that price is not a reflection of a company’s underlying value.

This concept is especially important now as there are many companies that have recently lost 30% to 70% of their value. This significant “price reduction” does not automatically spell a bargain, as companies whose share prices have collapsed could have just been grossly overvalued to begin with. What’s more, they may still be overvalued. To be successful, investors should focus on what a company is worth and pay less attention to short-term share price movements.

Meme Stocks Introduced A New Generation Of Retail Investors To High Volatility

Last year, a new crop of retail investors was attracted to the market by the potential to make a lot of money on short-term share price movements. Many of them piled into Gamestop (

GME, Financial) — and online brokerage firm Robinhood (HOOD, Financial), which played a key role in its meteoric rise and fall (those stocks are down ~50% and ~86% from their all-time highs, respectively). The GameStop short squeeze appeared to turn a typical Wall Street narrative on its head. Retail brokerage account holders organized on social media and took on highly experienced and generally well-disciplined investors. Their level of success was unexpected.

“They took their little brokerage accounts and they organized on social media, and they weaponized them into an attempted corner and a very effective short squeeze to punish certain hedge funds,” The WallStreet Journal’s Spencer Jakab observed on a recent World According to Boyar podcast. “They blew multi-billion-dollar holes in those hedge funds.”

A New Frontier For Speculative Excess

A subset of pandemic stocks flew high as lockdowns and reduced physical movement became a reality. Zoom (

ZM, Financial) and Peloton (PTON, Financial) attracted attention for their potential to replace in-person meetings and trips to the gym, respectively. Robinhood soared on a new generation of retail investors, some of whom turned to day trading to relieve pandemic-induced boredom (and the absence of sports to wager on).

In each case, the pandemic catalyzed a rise in these companies’ fortunes. But at a certain point, investor zeal started to look like it was outstripping common sense. At its peak, Robinhood had a market cap of nearly $60 billion, roughly the size of some blue-chip companies like FedEx Corp. (

FDX, Financial) and Marriott (MAR, Financial), despite paltry revenues and a business model that depended heavily on something called payment for order flow, which made it ripe for controversy. Although the prices for these former pandemic darlings have dropped dramatically, they almost certainly don’t qualify as bargains. We believe their actual value is likely to be quite a lot less than their previous highs. And with investors still rushing for the exits, some of these stocks may still have room to fall further, especially if history is any guide: Many of the dot-com-era stocks lost 50% to 75% of their value and never again reached their former highs.

However, for discerning stock pickers who focus on valuation and catalysts, there could be real value amid the recent stock market carnage. Just because a stock soared to heights in the recent past doesn’t mean it will ever reach them again. But having a sense of how the intrinsic value of a stock compares to its current price can tell you something about whether it’s a bargain—and how much of a bargain it might be. In the long-run company fundamentals (strong cash flows, earnings growth, and sustainable competitive advantages) is what matters most for valuation, not price movements. Keeping this information in mind when making decisions to buy and sell is the key to successful investing.

The Wisdom of Taking a Long-Term View

We’ve said it before, and we’ll say it again: individual investors stack the odds of investment success in their favor when they stay the course and take a long-term view. Yet data from Dalbar tell us that over the past 20 years, when the S&P 500 averaged a 7.5% annual advance, the average investor gained a mere 2.9%, barely beating the 2.1% inflation over the period. Why such a degree of underperformance? Partly because investors let their emotions get the better of them and chase the latest investment fad (or pile into equities at market peaks and sell out at market troughs)—and partly because they sell for nonfundamental reasons, such as a rise in a company’s share price (or in an index).

But history tells us that taking a multiyear view instead would tilt the odds of success in investors’ favor. According to data from JP Morgan, since 1950 annual S&P 500 returns have ranged from +47% to - 39%. For any given 5-year period, however, that range narrows to +28% to -3%—and for any given 20-year period, it is +17% to +6%. In short, since 1950, there has never been a 20-year period when investors did not make at least 6% per year in the stock market. In addition, it is worth noting that from 1950 through 2021, investors in the S&P 500 have compounded their capital at 11.5%. Past performance is certainly no guarantee of future returns, but history does show that the longer a time frame you give yourself, the better your chances become of earning a satisfactory return.

As always, we’re available to answer any questions you might have. If you’d like to discuss these issues further, please reach out to us at [email protected] or (212) 995-8300.

Best regards,

Mark A. Boyar

Jonathan I. Boyar

Important Disclaimer

Past performance is no guarantee of future results. Investing in equities and fixed income involves risk, including the possible loss of principal. The S&P 500 Index is included to allow you to compare yourreturns against an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of the 500 stocks representing all major industries. The Russell 2000® Value Index measures the performance of thesmall-cap value segment of the U.S. equity universe. It includes those Russell 2000® companies with lower price-to-book ratios and lower forecasted growth values. The S&P 1500 Value Index measures value stocks using three factors, the ratios of book value, earnings, and sales to price, and the constituents are drawn from the S&P 500, S&P Midcap 400, and S&P SmallCap 600. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The volatility of the above-referenced indices may materially differ from that of your account(s), and the holdings in your account(s) may differ significantly from the securities that constitute the above-referenced indices. Your results are reported gross of fees. The collection of fees produces a compounding effect on the total rate of return net of management fees. As an example, the effect of investment management fees on the total value of a client’s portfolio assuming (a) quarterly fee assessment, (b) $1,000,000 investment, (c) portfolio return of 8% a year, and (d) 1.50% annual investment advisory fee would be $15,566 in the first year, with cumulative effects of $88,488 over five years and $209,051 over ten years. This material is intended as a broad overview of Boyar Asset Management’s philosophy and process and is subject to change without notice. Account holdings and characteristics may vary, since investment objectives, tax considerations, and other factors differ from account to account.

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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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