Portfolio Review: Uncertain Economic And Geopolitical Outlook Leads To Market Volatility

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Checking Out Of Check Point

Check Point Software Technologies reported first quarter revenues increased 7% to $543 million with net income declining 7.4% to $169.4 million and EPS dipping 2.3% to $1.30. While optimistic about the future, given all the uncertainty sur- rounding global unrest, supply chain bottlenecks, inflation, and higher interest rates, Check Point left its 2022 estimates unchanged, projecting revenue to reach $2.2 to $2.375 billion, up 5.4% at the mid-point, and EPS of $5.68 to $6.28, down 1.6% from 2021 at the mid-point. With earnings declining and better investment opportunities available, we decided to check out of Check Point Software by selling with a modest 4% gain over the last 18 months.
 

Booking More Booking Holdings

Booking Holdings booked revenues of $2.7 billion in the first quarter, up 136% from last year. First quarter gross travel bookings increased 129% to a record $27.3 billion. Room nights booked increased 100%. Thirty-four percent of total revenues were paid for via Book- ing’s payments app versus thirteen percent in 2019. During the quarter, Booking Holdings generated nearly $1.6 billion in free cash flow with the company returning $950 million to shareholders through share repurchases. In April, Book- ing repurchased an additional $320 million of its shares, which leaves about $9 billion remaining authorized for future share repurchases that are expected to be completed during the next three years.

Despite an uncertain macroeconomic environment, global travel trends continue to strengthen with a busy summer travel season expected. Accordingly, we plan to book a trip with Booking Holdings by adding to our investment position as the stock appears undervalued. Buy.

An uncertain and challenging economic and geopolitical outlook is leading to market volatility, exacerbated by computer trading. Wall Street’s worries appear endless including the highest inflation in forty years, rising interest rates, rising energy prices, recession fears, the war in Ukraine, and the continued Covid-19 lockdowns in China impacting supply chains. It is no wonder that this has been the worst start to a new year for the S&P 500 since 1970.

With the Fed removing liquidity from the punch bowl, the markets are flushing out speculative excesses. Nasdaq holds many of the more speculative and overvalued stocks which is why that index is down 27% compared to the Dow’s blue-chip index which is down “only” 14% year-to-date. When meme stocks, SPACs, and cryptocurrencies, with little underlying value, meltdown, Mr. Market’s fear becomes contagious; and it spills over into even high-quality stocks.

However, after listening to the quarterly conference calls and updating our valuation models for the companies we own following solid first quarter financial results, we know that volatile stock prices are not reflecting the strong underlying business fundamentals of the companies we own. Many of our high-quality companies currently appear undervalued, which provides us with good buying opportunities and bodes well for future long-term returns. As experienced in the past, we expect our high-quality companies will be the first to bounce back and continue to grow over the long term given their strong cash flows, solid balance sheets, and high profitability.

Meanwhile, our investments continue to provide us with growing dividends and substantial share repurchases. While market volatility is unsettling, staying calm, patient, and disciplined during these inevitable turbulent periods rewards investors who maintain their long-term perspective. We have experienced many corrections and bear markets over the decades and always keep in mind that Wall Street is perversely the only market that people flock to when prices are rising but run away in panic when prices are declining. As long-term investors, we prefer to buy when high-quality merchandise goes on sale!