Cheap vs Expensive: A Truism
This past six months brought to mind the truism that stocks that are cheap are usually cheap for a reason, and that barring outright fraud (like Luckin Coffee), stocks that are expensive are usually expensive for a reason.
There were people on our board who thought Crowdstrike was too expensive and overpriced to buy at the beginning of the year. Crowd is up 87% since then.
There were people on our board who thought Datadog was too expensive and overpriced to buy at the beginning of the year. Datadog is up 107% since then.
There were LOTS of people on our board who thought Zoom was too expensive and overpriced to buy at the beginning of the year. Zoom is up 223% since then.
Even Okta is up 55%, for God’s sake.
On the other hand
There were those who bought Nutanix because it was so cheap at the beginning of the year, and they were hoping for a bounce. It’s down 31% year-to-date
And there were those who bought Anaplan because it was cheap, and had pretty good results, so they thought it had to go up. It’s actually down 17%, year to date.
And there were those who bought Smartsheets because it was cheap, so it had to go up. They were right. It’s up all right, but only 2%, year to date.
And there were those who bought Elastic because it was really cheap, and they couldn’t understand why it was staying so cheap in spite of what seemed like good results and good prospects. They were correct too. It’s up 26% year-to-date (With the help of a 6% rise on Friday. It was up all of 20% year-to-date on Thursday). But they could have been up twice as much with Okta, three times as much with Crowd, four times as much with Datadog, and eight and a half times as much with Zoom.
So what’s my point? Look, I’ve made the same mistakes in the past. I got out of Amazon at about $950 a few years ago (after entering at $550), because I figured “Where can it go from here?” It’s now at $2500. Granted, that’s a lot less gain than Zoom has had just this year, and not hugely more than Datadog has had so far just these five and a half months, but I’ll admit that I never dreamed I’d see Amazon at $2500! Never! But, of course, that was before AWS took off.
What my point is, is that the best companies are overpriced for a reason. It’s usually because they are highest confidence positions for a lot of people, who understand the company and aren’t going to get scared out. And cheap companies are cheap usually because they are lower confidence for a lot of people. We were lucky and got stocks like Alteryx before people figured out what was going on, and other SaaS stocks before people understood why they were special. (We put together extreme high revenue growth, very high margins, and recurring revenue with high dollar based net retention rates, and low capital requirements). But most cheap stocks are cheap compared to our companies because people understand that they are not as good as our companies. It’s as simple as that. At least that’s the way it seems to me.
A link to the Knowledgebase for this board is in the Announcements panel that is on the right side of every page on this board.
For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially “How I Pick a Company to Invest In,” and “Why My Investing Criteria Have Changed,” and “Why It Really is Different.”