Winners, Losers, and Investing Lessons From a Brutal 2022

By any measure, 2022 was a challenging year. The similarities to post-bubble markets in 2000 were extensive, and memories of those days helped shape many of my columns. Last January, I noted Cisco's (CSCO) post Nasdaq bubble stock performance to caution that Zoom (ZM) and Peloton (PTON) were likely to fall further.

Cisco's revival took a genuine fundamental business turn along with copious cash flow production. Stocks that have been crushed post pandemic bubble will likely require the same to spark hopes for a recovery. The stocks I was cautious on in 2022 were down by an average of 47% while stocks I recommended fell by 10%.

My bearish picks show that it's easier to find dogs in a bear market than long ideas. My negative calls on Rivian (RIVN) , Lucid Motors (LCID) , Robinhood (HOOD) , Coinbase (COIN) , and Carvana (CVNA) , which plummeted a whopping 95% after my article, seem far easier in retrospect but companies burning through cash while their shares traded at absurd valuations was clearly problematic. We've witnessed a dive in recent market segments that ignored fundamentals -- meme stocks, short squeezes, celebrity CEOs, cult stocks, etc.

-- and the lesson that price and fundamentals matter is critical. No selloff is too far for a stock of a company with a suspect business model that is cash flow challenged. Too many garbage stocks attracted way too much investor and media attention.

I had good timing near highs for warnings on AMC Entertainment (AMC) and Digital World Acquisition (DWAC) , the SPAC buying Trump's media business. My Bearish Picks View Chart »  View in New Window » It took long enough, but the Fed finally took the punch bowl away in 2022. For ages, growth stocks raged.

Investors wanted stocks to follow the Amazon (AMZN) precedent: As long as revenues keep growing solidly, the stock will follow higher. That changed abruptly this year with growth slowing, inflation hurting profit margins, and cash flows suffering. Amazon gave up 50% of its value, returning the shares to levels not seen since 2018.

Stocks valued for uninterrupted growth usually can't hold up in a challenging macro backdrop. In the descent back to earth, there are seeds of hope for a future recovery as businesses right size and valuations start to look attractive again. The challenge of the bear market of 2022 was that even as fundamentals stayed solid, stock multiples dropped drastically.

Sure, value far outperformed growth, but multiples in many value stocks also decreased. In part, recessionary concerns sank various sectors with economic sensitivity. The boom in travel is hardly reflected in many travel-related stocks.

Last January, because of balance sheet issues, I was cautious on cruise companies (when the stocks traded much higher), yet I recommended Delta Air Lines (DAL) on several occasions. Fundamentally, those ideas still have legs, although DAL may stay cheap for some time. My Bullish Picks View Chart »  View in New Window » My favorite pick of 2022, General Motors (GM) , had a solid earnings year, yet its P/E fell from 8 to 5.

Where I assumed the Cruise division could be worth upwards of $20 billion as it started service in San Francisco, Morgan Stanley's auto analyst said the >80% owned subsidiary of GM is worth zero. Admittedly, given their technology, I didn't consider that its value could be taken to zero even though they lost about $2 billion this year. For Cruise and GM, bear markets breed skepticism but also create opportunity.

The massive drop in big-cap tech stocks is a reminder that there are no sacred cows in investing. When a stock becomes frothy and overvalued, it's an auspicious time to sell down the position. More money is lost due to concern for capital gains taxes than can be imagined.

I made the mistake of recommending semiconductor capital equipment stocks last January. Chip shortages, increased chip complexity, and new factories in the U.S. and abroad had analysts and management convinced that visibility in the cycle was strong through 2025.

Unfortunately, I bought into that outlook near the highs. The relearned lesson with semiconductors is that it's never a new paradigm and always a cyclical business. A Critical Takeaway One critical takeaway from a brutal 2022 is that the market action is still two-way.

Buying index ETFs or quality stocks with intact fundamentals on significant weakness is still a good strategy. There will always be pundits who call for much lower levels, regardless of how far the market has fallen, which can cause a reluctance to buy on weakness or even lead to panic selling -- tune out that noise. I look forward to a choppy, opportunity filled year in 2023.