This is a little reminder for those who haven’t been through this before, or who have and don’t remember. Although this can be very scary it’s not unique, and we tend to forget it happens with some regularity and doesn’t mean the world is coming to an end.
For example let’s look at last year, 2018:
On Sept 11 last year my portfolio of SaaS stocks was up 96%.
On Oct 29, a month-and-a-half later, it was up just 45%.
Thus, my portfolio was down 26% from its high (145/196 = .74). It had lost 51 points. It had lost 53% of its gains for the year (45/96 = .47)
Two weeks later, on Nov 7, it was up 85%. Even when the market as a whole melted away on Dec 24, it never got as low as only up 45% again (close though).
It finished the year at up 71.4%, just a few trading days later.
And for those saying that the SaaS stocks will never again see this year’s highs again, and other such foolishness, let’s check:
At this year’s high of up 77%, my portfolio was up 204% from the beginning of 2018, or more than twice that 96% gain that it topped out at last year. (1.714 x 1.774 = 3.04)
Thanks for the perspective, although many will argue that there is an important difference between this time and last year.
Last year was part of broad market selloff due to macro economic/geopolitical factors, while the ongoing selloff has been largely despite a fairly benign general market condition, and is instead part of overall rotation away and repricing of high growth and momentum.
As some has argued on this board recently, if multiple expansion ceases to be a driver for return, the SaaS stocks will need to rely on business growth to eventually catch up, and that can be a fairly prolonged process.
It would be more illuminating if you can provide perspectives based on previous occurrences of rotation/compression based drawdowns, not just the one based on broad market correction.
Bashuzi, it feels like you are taking a dig at Saul with this question. Maybe you’re not, but that’s how it seems.
Saul takes a lot of time on his posts. If you want to do your own research and post about previous occurrences of rotations/draw downs based on whatever… you can.
Saul was sharing his perspective from what happened with his own portfolio. That’s research we can’t do ourselves, but you can certainly answer the question you asked with public information.
I tried to be careful with my wording in my previous post, although English is not my first language. If I gave the wrong impression, please accept my apologies.
To respond to your suggestion, a couple weeks ago on this board I did dig up an earlier episode of underwhelming performance by high growth stocks that started mid-2015 and lasted for a while. I was merely trying to learn from Saul’s past experience his perspective on similar episodes which I’m sure have happened many times before.
Investing is and will always be a process of learning. I look forward to learning more from the best.
Bashuzi,
SaaS does not in my opinion necessarily need an accelerating market to sell their product successfully. Why, because in using their products you can save money from current ongoing business expenses. Listen to customers in ZS Analyst Day. Look at the numbers, look back in charts to see How October 2018 affected the stocks you are following, you have to do the homework too. Then look at the current circumstances and make your own decision.
Last year at almost exactly this time, SaaS stocks started to decline ahead of the S&P. Then the S&P started its fall about a month later and for the most part fell more than SaaS stocks. When the recovery began in January, SaaS stocks far outpaced the S&P
There’s absolutely no guarantee this pattern will repeat. But a fall of SaaS stocks at a time the general market is not falling does not necessarily mean that their day is done.
It would be more illuminating if you can provide perspectives based on previous occurrences of rotation/compression based drawdowns, not just the one based on broad market correction.
We have not been through a sector rotation of this scale since we invested in SaaS in 2017 so we can’t provide an example. The protection comes with the growth rate of these companies. If the growth continues then the stocks will eventually surpass their recent highs. That could be soon or in a few years.
But a fall of SaaS stocks at a time the general market is not falling does not necessarily mean that their day is done.
There is the “mistake” depending on how you invest. Are you simply investing in stocks on momentum as money flows ebb and flow into one sector of stocks (and thus just investing in relative money flows of the market, mania, etc), or are you investing in the businesses themselves?
This statement only makes sense if your focus is on the former and not the latter. That is fine, but there is no answer to that.
If the latter, then your question does not make sense as “their day” as stocks are done. It is a maxim that if their businesses thrive so will their stock prices unless they are in a bubble. They are not in a bubble.
So the question is how goes the business? How goes the future for the business? How is the stock priced based upon those prospects? Creates a lot less angst, a lot less guessing, and gives you a much larger risk/reward outlook on life.
I’ll let the rest of you discuss this, but if a bubble, let me know what Alteryx would be worth if its price was cut in half and it performed to minimal forward 12 month revenues?
I think the price to sale you get might cause you to give some thought as to whether or bubble or not. If a stock can be cut in half and become that inexpensive given their growth profile I posit it is not a bubble.
The situation now doesn’t seem to me to be like what happened in, say, 2000-2001. That was a crash in response to a bubble, fueled by specious metrics like “click count” and funky accounting. What’s happening now strikes me more as an over-correction and profit-taking - our stocks are now “oversold.”
Once the pundits note the continued success of these companies, they will be back “in fashion,” and the share prices will rebound, barring some sort of severe macroeconomic trouble. Then maybe we’ll need to watch out for an “overbought” condition.