Big Rock Candy Mountain

Investing Strategies Abandoned Arctic Outpost #13
#1

Maybe its just me, but it looks like the Futures are pointing for widely scattered stock market pain tomorrow which leads me to speculating on whether there are bargain Growth stocks out there. But before you can determine that you have to take into account the Gold Rush of Big Rock Candy Mountain:

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&…

A few interesting data point on deaths by climbers on Mt Everest:

  • The Majority of Deaths on Mt Everest occur on the way down.

  • Sherpa Guides are more likely to die at lower elevations.

Why? It’s blamed on repetitive climbs on the dangerous and unstable Khumbu Icefall

  • Paying Climbers are more likely to die at upper elevations.

Why? Once Climbers reach the Death Zone (26,000 ft or so) two things happen: 1) Their judgement becomes impaired; and 2) Zeal to reach the summit takes over and they begin to ignore their Sherpa Guides.

  • It is estimated that over 300 people have died attempting to climb Mt Everest. 200+ of those people still lay where they died and are sometimes visible to current climbers.

  • The most famous body still on the mountain was known by climbers as ‘Green Boots’. In some years with light snow cover climbers had to actually step over his legs on the trail.

So what has climbing Mt Everest got to do with Investing? Well…just the way I see it; but late last year Growth had its on sprint to the summit with company share prices skyrocketing. And just as most of us should have perhaps recognized the signs of Big Rock Candy Mountain danger - we didn’t. As a result a lot of portfolios have been killed on the way down.

The entire premise of The Big Rock Candy Mountain is that it is paradise. The Gold Rush up Big Rock Candy Mountain was the spectacular spike higher in Growth company share prices.

Note: The following represents a trick question:

So…to determine whether there are in fact mega growth stock bargains just laying around in the surf of the Nasdaq - it then figures that you might have to figure all that out by stripping out the Gold Rush Spike up The Big Candy Mountain. Seems semi-reasonable!

Lets take a few of examples

1)Example A: CRWD

CRWD Current Price: $205.62
All Time High: $298.48
Price Pre-Big Rock Candy Mountain: $233.78
% Below P-BRCM: -21.7%
% Below All Time High: -31.1%

Revenue Growth Latest Report: 63.%
BEAT on Revenue: 4.5%

Current EV/Sales FWD: 21.46

  1. Example B: DOCN

DOCM Current Price: $42.90
All Time High: 133.40
Price P-BRCM: $77.63
% Below P-BRCM: -41.9%
% Below All Time High: -67.8%

Revenue Growth Latest Report: 37%
BEAT on Revenue: Less Than 1%

Current Ev/Sales FWD: 7.59

  1. Example C: NET

NET Current Price: $95.22
All Time High: $221.64
Price P-BRCM: $127.19
% Below BRCM: 25.1%
% Below All Time High: -57.0%

Revenue Growth Latest Report: 54%
BEAT on Revenue: 4.7%

Current EV/Sales FWD: 32.73

  1. Example D: Mystery Company

Mystery Company Current Price: $122.78
All Time High: $412.68
Price P-BRCM: 312.80
% Below P-BRCM: -60.7%
% Below All Time High: -70.2%

Revenue Growth Latest Report: 54%
BEAT on Revenue: 9.5%

Current EV/Sales FWD: 4.74

…

I just made that whole Trick Question think up - there is no trick question. The entire point of this was only to point out that if anyone happens to be using % of price Below All Time High as some sort of barometer of what might - or might not be - a bargain then perhaps you are starting off on the wrong trail.

Oh - well, how about an attempt at a tricky question:

Tricky Question #1: From my data above - considering that I didn’t FUBAR it all up - can you determine which company is the better buy?

Trickier Question #2: Between Example C and the Mystery Company which one is a Center and which is a Shooting Guard?

All the Best,

1 Like
#2

Tricky Question #1: From my data above - considering that I didn’t FUBAR it all up - can you
determine which company is the better buy?

Tricky Answer #1: No

Trickier Question #2: Between Example C and the Mystery Company which one is a Center and which is
a Shooting Guard?

Trickier Answer #2: Not sure I’d even want either NET or TWLO on my team. I don’t put much stock in
what someone else is willing to pay for them. And growth can be good or bad. A good business growing
quickly becomes better faster. A lousy business growing quickly becomes lousier faster. What I really
want to know about these players is how well they can shoot, pass, and defend, whether they have a
desire to learn, a passion for the game, and their moral character.

which leads me to speculating on whether there are bargain Growth stocks out there…

Does this mean growth investors become value investors when the tide starts going out? :wink:

Best to you,
Ears

2 Likes
#3

I think the whole “they have high gross margin and could turn a big profit at any time they want” is so misleading and untrue.

They have to spend that much on marketing to fuel the growth, and it is unknowable how much their existing (not even future growth) business will suffer if they suddenly cut all their costs to show they can make a profit.

I never bought into the share-dilution-to-infinity, will show a profit when we are as big as Amazon, and our gross margin obviously makes us better.

If two businesses are growing profit dollars at exactly the same rate, and one has a higher GM, should the higher GM be “worth” more?

Some argued recently on Saul board that Saul has decades of experience here, so why argue with Saul on valuation.

But then I scratch my head and think “yeah, but it was only since 2017-2018 that he really flipped into SaaS mode. He had a big winner in low-PE stocks like LGIH, etc…”

Chasing the S-curve is simply unproven. This is/was the Gorilla Game.
As an inexperienced investor, I would ask that board why Juniper (JNPR) was worth $60b or whatever it was, or if valuations were sustainable. I was told “S-curve” and “tornados” and “Gorillas and Kings”. Ok, that is a lot of quotation marks.

Ears said "I don’t put much stock in what someone else is willing to pay for them. "

What he said.

Dreamer

1 Like
#4

Hi Ears:

I suppose, in the end, the Tricky Question #1 wasn’t very tricky at all but it was late and I was tired and wanted to go to bed.

Spent the weekend on a family fishing event down on the coast. Not awful weather but hyper windy. Blew my favorite hat off and tumbled it all the way into the dunes. Was gonna go get it but there was a sign posted that went something like this: Caution - Rattlesnakes in Dunes. Turns out the Western Diamondback hangs out in the Texas coastal dunes. So…I suppose one of them has my Fighting Irish hat. Guess I’ll just buy another one.

As for Tricker Question #2 the question remains: which company is the Center and which is the Shooting Guard? The answer to that question combined with position specific comparative efficiency ratings get you half way there.

Value ain’t doing so well today however, the wife did wind up buying some FDUS. She told me at Breakfast that she already had FDUS but wanted a little more. I thought it was maybe shoes or one of those high end purses but turns out it’s just a common old BDC.

All the Best,

#5

Hi Dreamer:

Ok…but which company is the Center and which one is the Shooting Guard?

After all…This is a basketball board for goodness sake.

All the Best,

#6

Ok…but which company is the Center and which one is the Shooting Guard?

After all…This is a basketball board for goodness sake.

Apologies…thought it was obvious.

NET is the Center, because teams always overpay for height and project massive potential, completely forgetting the slow and plodding nature of the “athlete” and general lack of cardiovascular stamina. That and the inevitable plantar fasciitis.

TWLO is the shoot-first no-D shooting guard on his 4th team in 5 years. Will have a few flashy games and is all smiles when team is winning, provided he gets his shots. But once the honeymoon phase ends, and he starts griping to the press, the GM starts looking at who they can draft to replace him.

hth,
Dreamer

1 Like
#7

Dreamer - pretty good analysis but you forgot about the knees. It’s always the knees that get to the Bigs.

But if you had to have defensive rim defender you couldn’t go much wrong with this guy:

https://wkusports.com/news/2022/3/7/mens-basketball-sharp-na…

Guy is in the portal. and getting a lot of interest.

“In addition to his nation-leading 4.6 blocks per outing, Sharp is also averaging 8.3 points and 7.5 rebounds per game while shooting 72.7% from the floor. He leads the country with 85 total dunks and is the tallest player in Division I basketball.”

Ok so…who might fit that profile? A Google/MELi or perhaps NVDA/MSFT?

This is how the portfolio draft works.

All the Best,