The last couple days, we have seen the market go from an aggressive bear to absolutely indiscriminate selling. That means the good and the great get thrown out with the bad and the mediocre. And always remember: It can still get worse.
Saul’s words are worth reading a second time: So what happened in the last two days. Well our SaaS stocks, which had held up for months while everything was going down, finally got caught up in the panic and sold off. Why hadn’t they sold-off earlier with the market? Because their business model of infiltrating their indispensable software into the very hearts of their customers’ businesses, and thus with very recurring revenue, has considerable insulation from the effects of an economic slowdown and rising interest rates, and they thus have no rational reason to fall, they just got caught up in a panic.
Just 7 market days ago I didn’t see any bargains (https://discussion.fool.com/when-i-see-no-bargains-34083738.aspx…). Wow, things have changed a LOT in just over a week! I mentioned that when bargains are scarce, I tend to increase the tail of my portfolio with a lot of small positions. That’s largely because I didn’t want to add to my favorites when they were so expensive, so I put a little money in a lot of ideas, and held some cash. Well, I’ve sold out of some of the smaller positions to add to MDB, NEWR, TWLO, AYX, and OKTA. But I’m still holding some cash. Because when you take a longer view, the companies I just listed are all up this year, and (except for NEWR) their PS ratios are higher than most any companies were a couple years ago – even SHOP’s. So can they get cheaper? Absolutely.
But they are down, and I have taken the opportunity to add to my favorites. Why? Because I think they’re the best of the best – but also because these are the biggest movers. They go up more. And they go down more. They call these high beta stocks, and if all stocks move 1% they often move 2% or 3%. Twilio is a good example. Even with my high beta portfolio I’m down about 15% from the recent high, but Twilio is down from $99 to $76 – more than 23%. We also know how fast it’s growing. Its PS is now under 15. Okta is another good example, down over 20%. AYX and MDB and NEWR are down similarly.
Again, it’s only the principal I’m trying to explain. There haven’t been any changes in my conviction in any particular companies – even the ones I sold or trimmed. Nothing has changed, obviously, with the companies: it’s been 7 days. It’s just that I’m taking the opportunity to pile into the best of the best. The 5 stocks above, along with Wix and Pure Storage, now make up 66% of my portfolio. PAYC and ESTC and ZS are close to that group in conviction, but I trimmed those because:
- When I trimmed them, they hadn’t fallen as far as the others.
- For ZS and ESTC specifically, they still have very high PS ratios, so they could potentially have further to fall.
So that’s 66% of my portfolio now concentrated into 7 companies. I have another 18% of my portfolio in other companies (which may get sold soon) and the last 16% is in cash. Yes, still a lot of cash! Even as I’ve added to my top positions, I have wanted to stay flexible. So when I got low on cash I trimmed as I explained above. I will probably use some of my cash to buy back some of what I trimmed if things continue to fall. If this is the bottom, I’m content that I’m concentrated more heavily than ever in my favorite companies – the ones I consider the best. Even as I hold some cash for now, these will drive great returns for me if the market shoots back up.
So that’s what I’m doing. Discriminate selling to keep some cash, and adding opportunistically to the best of the best.
Best of luck to everyone here. None of us like to see our stocks go down. But I hope you’ll be able to use the volatility to your advantage as much as is possible.
Bear