Evolution of Saul's investing approach

The following is my observation of a change in Saul’s investing approach from what it was 2 years ago to what it is today. Two years ago Saul would look for companies that were growing earnings rapidly. He would look at the last 2 years of earnings and calculate the growth in earnings. Companies that were growing earnings fast would interest him. If the earnings were accelerating that would really interest him. He would then compare the earnings growth to the P/E which gave rise to the 1YRPEG. Companies with a low 1YRPEG would gain the most attention and investment dollars. Additionally, Saul would look at revenue growth over the past 2 years. 20% revenue growth would be good and anything over 30-35% y/y revenue growth would be great. Saul was highly biased toward investing in profitable companies; companies that were no yet profit might interest him and he might invest in some if a clear path to profitability was there, but Saul did not put large allocations into non-profitable companies.

Fast forward to today. Saul rarely talks about 1YRPEG anymore. He now focuses more on companies that have exceptional revenue growth. Companies such as SHOP, ANET, SQ, and SPLK. Profitability is not as important to Saul as it was 2 years ago. He also now focuses on companies that have recurring revenue which was important 2 years ago but not a primary focus. Two years ago SWKS and SKX were top holdings; these two companies had exceptional earnings growth until they didn’t; they also did not have recurring revenue. Today, he invests substantial amounts into TLND, MULE, SQ, SPLK, and SHOP which are not profitable or barely so. Two years ago he would not have have such large positions in these companies.

So, Saul, what do you think of the above? Have you actively considered the changes? Have you been influenced by Bert? Or have you learned some things and changed your approach? Do you think the change is temporary while fast growing tech companies which rapidly hyper growing recurring revenue are in favor?

Chris

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Thanks Chris, I think that there is a lot of truth in what you say. I am more interested in hyper-growth companies now, and give a lot of emphasis on companies with recurring income. I now avoid technology hardware companies for the most part (exception Ubiquiti), because they are often subject to large orders from companies that are much larger and much more powerful than they are. This makes their great seeming revenue growth very fragile. (As I put it somewhere, they are not masters of their own destiny.) What happened to Skyworks and Infiniti a couple fo years ago is a great example. In addition, they almost always have a lot of competition that is trying to undercut them on price. They often end up being commoditized. 1YPEG is just a tool, one metric among many. It’s far from a be-all and end-all. I recently have accumulated a number of companies involved with Big Data, which is growing very fast, and I don’t see an end to that in sight, and most of these companies have primarily recurring revenue. Skechers was running against two headwinds. One was the law of big numbers. Once you have a lot of stores it’s hard to keep building 30% more each year compounded. (Same thing with restaurant chains, of course). Second was the hurricane headwind of closing brick and mortar stores because of the internet. Skechers didn’t get it and kept building more stores when they should have quit. JMO. I don’t think I have been influenced by Bert as far as these outlooks go, although I do get some very good ideas from him. He’s all into value considerations which make less sense with hyper-growth recurring revenue companies (Shopify and Mulesoft are good examples of companies where he liked everything about them but didn’t invest in Mulesoft, for instance, because of valuation, and sold out of Shopify because if valuation. Also he really likes Hortonworks a lot because of P/S valuation, but I am more skeptical because of losses, and have kept my position small.) How’s that? Did I answer your questions?
Best

Saul

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And, by the way, it seems to be working for now (smiley face).

As of yesterday’s close, my portfolio as a whole was up 42.3% year-to-date, while the average of the three indexes I have been comparing with (S&P, Russell 200, IJS small cap value) is up 3.2%. Who knows if it will continue, but I seem for now to have adapted to the market as it is at present.

Best,

Saul

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Who knows if it will continue, but I seem for now to have adapted to the market as it is at present.

This is Saul’s secret sauce.

I think there is still a lot of value in evaluating a company with a focus on earnings growth, and accelerating growth and the 1YPEG is a metric that helps bring the valuation into focus for me. Glad to have learned about it here, even if it’s out of vogue at the moment.

I wonder what the shift away from earnings has done to your charting? I finally started doing the logarithmic “charts a la Saul” last quarter, but on several of the companies I follow much like yours now there are no earnings to chart.

I still find great\ value in the excercise of putting pencil to paper and stepping away from the computer screen. It also always me to being much more familiar with the company and affords a look at long-term price action.

But I wonder what you look for when there’s no price to earnings data to compare? Or have you found that charting is less important as the focus is off of earnings and their acceleration?

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Hi Tim

I finally started doing the logarithmic “charts a la Saul” last quarter, but on several of the companies I follow much like yours now there are no earnings to chart.

I do paper and pencil semi-log monthly charts on every stock I invest in. I have the stock prices graphed and I just wait impatiently for the earnings line to pop its head up from the bottom of the page. I also have revenue and earnings quarterly tables tucked in on the page, as well as TTM trailing earnings, watching losses get smaller and smaller. Sometimes I also have quarterly tables for free cash flow.

I still find great\ value in the excercise of putting pencil to paper and stepping away from the computer screen. It also always me to being much more familiar with the company and affords a look at long-term price action.

I agree 100%. I feel exactly the same way. About my weekly stock price charts as well.

But I wonder what you look for when there’s no price to earnings data to compare? Or have you found that charting is less important as the focus is off of earnings and their acceleration?

I think earnings are very important but I also look at free cash flow and operating cash flow, and all that revenue that doesn’t get counted on a subscription model. I think of it this way: If a company sells a license to use the software, it gets paid a large sum up front. It all gets counted right now (in the same quarter that they have the marketing expenses). On the other hand, if they sell a three year subscription they may get paid the whole thing up front, but they can only count 1/36th each month as revenue, even though they already have the money. So all the marketing expense hits up front, but only a tiny part of the revenue does. And even if over the course of the subscription and renewals they make much more eventually, it really cuts profits for this quarter. On the other hand, oddly they’re allowed to count it as cash flow (because they have the cash). Interesting.

Hope that helps

Saul

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Saul, given the nature of your holdings (apart from AMZN) I think your benchmarks should include something relevant, sector-wise, as well; maybe an ETF.

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As of yesterday’s close, my portfolio as a whole was up 42.3% year

Very good Saul

:slight_smile: