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2025 is off to a very rough start

The first quarter has been extremely rough as Trump’s policies have created significant uncertainty for the markets…and uncertainty is enemy #1 for stock prices.  

Earnings season was basically good, however guidance and comments about the unknown impact of tariffs and government cutbacks triggered selloffs across the board.  Some companies delivered stellar results and raised guidance leading to a short-term bump in the stock price, but within a day or two even they met with heavy selling.  

There’s no telling when the selling will stop as fundamentals and valuation take a back seat to the macro headlines, and selling begets more selling.  Hedge funds control massive investment funds and frequently act in unison in the markets, and in 2025 they have been selling long positions (“de-grossing”), especially in tech.

Then machines take over and extend the momentum whichever way it was going.  For the past few years, technology was king and buying strength was a winning formula.  So far this year it’s more about picking spots, only buying small positions, and in some cases, moving quickly out of losing positions.  The more defensive areas have held up well, but technology and growth companies in particular have been hit very hard.

In taxable accounts I have stayed in most positions as I believe in them and selling names with significant unrealized gains and outstanding mid/long-term prospects presents the double whammy of paying taxes and then timing the re-purchase of shares correctly.

International and Value-Oriented Companies

International markets have been outperforming U.S. markets this year and most Peattie Capital accounts own Mercado Libre (“MELI”), which is often referred to as the Latin American Amazon.  Another company I like very much because of its monopolistic position in semiconductor equipment is Dutch company ASML Holding N.V. (“ASML”).  Alibaba (“BABA”) and TenCent (“TCEHY”) are leading Chinese tech companies and for more aggressive accounts I have been adding them.  

In conservative accounts I have been adding Treasury Bills and not buying any equities whatsoever.

 

Reasons for optimism

Over the past 20 years, stocks have been weak early in the year and then performed well the rest of the year.  In the current environment, however, everything is overshadowed by the chaos in Washington.  

 

Tom Lee has been bullish and correct for several years, and he remains constructive on the markets:

In 2018, Trump made remarks about tariffs at Davos on Jan. 26, triggering a plunge until Feb. 19, when the VIX surged and equities bottomed, with the S&P 500 retreating to support above the 200-day moving average. Investor sentiment measures showed bearishness continuing well after that bottom. “If we fast-forward to 2025, a similar pattern appears to be unfolding,” Lee noted, so “if the 2018 comparison holds, equities could be poised for sustained upside.” 

Additionally, two straight days with 90% advancing issues is highly unusual and has been a good indicator for the past 40 years.

Indisputably, attractive values are being created for some growth stocks, as measured by market cap/EBITDA as a % of the EBITDA growth rate, a common valuation tool for them.

For example, Fan Duel parent Flutter (“FLUT”) and Draft Kings (“DKNG”) are now trading at/below half their growth rate.  FLUT has a market cap of about $39bn, and EBITDA is expected to be about $2.5bn in 2025, then grow about 30% for the next couple years.  So, the market cap/EBITDA is roughly 15x, which is about half the growth rate.  

At $34, DKNG has a $16bn market cap with expected EBITDA in 2025 of $950mn, a ratio just over 17x.   DKNG’s EBITDA growth is expected to be north of 50% for the next couple years so by this metric shares are even cheaper than FLUT’s.  

To be sure, a recession would change things and future growth rates are uncertain.  But for growth-oriented accounts, these are the kinds of valuations that have historically worked out well.  That said, it’s impossible to say whether they get cheaper before they rally.

A few other names I like:

Below is a chart of the aforementioned MELI, which is down about 13% from its February high but still up about 15% for the year.  

Source: Bloomberg

Another company I like very much right now is Take Two Interactive (“TTWO”) which will be releasing the next version of Grand Theft Auto later this year.  Here’s what’s happened around prior releases…and the last one was 12 years ago.

Here are a few other tweets that I like which have some data on both sides:

My conclusion is that opportunities abound but until there is more clarity on tariffs volatility will linger.  I am cautious about any new positions, particularly in technology, which has been a terrific place to invest the past few years.  

For now, patience and a strong stomach are required.  

Please feel free to contact me with questions or comments.  

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