The takeaway: Equity markets have officially entered correction territory, driven by a geopolitical conflict in the Middle East, an ~50% spike in crude, and renewed inflation and rate fears. Even the Mag 7 are down sharply from their 52-week highs. At the same time, quality software franchises have been re-rated lower, and large BDCs like OBDC are trading at ~25% discounts to NAV with non-accruals of just 2.3% at cost. In our view this is the kind of dislocation where long-term investors should be accumulating, not selling.
Dear Investor,
Equity markets have officially entered correction territory, marked by a decline of at least 10%. It has all happened very rapidly, with the onset of a geopolitical conflict in the Middle East driving a nearly 50% increase in crude oil prices. That has caused inflation concerns to re-emerge, pushing interest rates higher, which has in turn been negative for real estate and the mortgage markets.
Even the Mag 7 is not immune
Drawdowns from 52-week highs as of this writing:
- MSFT down 31%
- Meta down 25%
- Tesla down 24%
- Amazon down 20%
- NVDA down 19%
- GOOGL down 14%
- Apple down 14%
Volatility is not fun while you are going through it, but we are taking advantage of the opportunity to accumulate shares at what we view as more discounted valuations.
Hyperscalers and the data-center capex question
One of the bigger concerns around the hyperscalers — Microsoft, Amazon, Meta, and Google — is that they are investing hundreds of billions of dollars into data centers. That is pressuring near-term cash flows, and it is genuinely uncertain whether the return on those investments will be sufficient to justify the capex. These are valid concerns. There will be some clear wins and some misses: Meta lost tens of billions of dollars on the Metaverse push and is now swinging much bigger into AI.
Overall, we are reasonably optimistic that the aggregate returns should be reasonable, and buying these stocks after they have sold off hard provides a more attractive entry point than chasing them at the highs. Dollar-cost-averaging makes a lot of sense in this environment — calling an exact bottom is not realistic, and we are not trying to.
Software has been clobbered — and that looks familiar
Software stocks such as Salesforce, Adobe, Intuit, and Zscaler have absolutely gotten clobbered. Adobe used to trade at 2x the market multiple and now trades at roughly half the market multiple. The elephant in the room is AI potentially making it easier to replicate some of these programs.
We have been doing extensive research in the space. What we see is that these companies are aggressively incorporating AI into their own products, revenues are still growing rapidly, and — in our view — AI may ultimately create additional demand for software rather than eliminate it. The setup reminds us of about fourteen years ago, when “the cloud” was framed as an existential threat to software and ultimately turned out to be a huge growth accelerator. There are real uncertainties, but the large declines have created entry points where investors can buy growing businesses with strong cash flows at below-market multiples.
Private credit: the math does not match the headlines
I wanted to touch once again on private credit because the reporting and headlines have been so disconnected from the underlying data. Take OBDC, which is currently trading at roughly a 25% discount to its net asset value. BDCs are, at heart, diversified loan portfolios — it isn’t rocket science. OBDC’s current non-accrual rate is only 2.3% at cost and 1.1% at fair value, because management marks values down when necessary.
For OBDC to lose 25% of its net asset value, the portfolio would need to absorb something on the order of a $1.85B hit. Assuming a 50% recovery on any defaults, that would imply roughly 22.5% of the portfolio defaulting — an outcome we view as wildly out of line with both the current non-accrual rate and the firm’s historical credit experience. Meanwhile, the company continues to generate cash flow and pay quarterly dividends, and management has been buying back stock — which is highly accretive at these valuations.
Don’t let the doom cycle drive the decision
Downturns are never fun. It was just about a year ago that the market declined by more than 20% on tariff fears, only to recover quickly. Short-term stock-price movements are largely noise. The market is meaningfully more attractively priced than it was a month ago, and historically, when we have seen this kind of disconnect between stock prices and our estimates of intrinsic value, the recoveries that followed have been significant.
Management teams of many of our investments are doing the right thing and buying back stock. Political pressure to resolve the current conflict will likely be intense, particularly as we head into a midterm election year — the sooner it is resolved, the better for the economy and for the market.
— Tim Travis, CEO/CIO, T&T Capital Management
Important Disclosures
T&T Capital Management LLC is a Registered Investment Advisor. This article reflects the views of the author as of the date written and is for informational and educational purposes only. It is not an offer to sell, nor a solicitation of an offer to buy, any security. References to specific securities (including MSFT, META, TSLA, AMZN, NVDA, GOOGL, AAPL, Salesforce, Adobe, Intuit, Zscaler, and OBDC) are examples of positions the firm or its clients may hold and are not recommendations to buy or sell any security. Market statistics (drawdowns, discounts to NAV, non-accrual rates, oil price moves) are approximate as of the time the underlying email was written and are subject to change. Past performance is not indicative of future results, and forward-looking statements — including illustrative stress scenarios on portfolio defaults and recoveries — involve risk and uncertainty. Please read our full firm disclosures before acting on any information contained herein.
