Holding Growth Stocks

Investment Analysis Clubs Where Angels Fear to Tread
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Why should we buy shares of growth companies now?

Bert Hochfeld published an article today. I think it is Ticker Target and not Seeking Alpha so I am going to distill the essence of a couple of paragraphs and present some a couple of macro ideas. These might be self-evident, but here goes.

The first is a perspective that is magnified by a sentiment. It is almost impossible for shares of growth companies, whose valuation is, almost by definition, determined by future revenues and (hoped for) earnings, to achieve, let alone maintain, advances in their stock prices. Jeez, I need to channel my Hemingway and choke off my Faulkner…. Oh well.

Switching to Epsilon Theory perspective, common knowledge, everyone knows that everyone knows that the valuation of growth stock is welded to interest rates and interest rate expectations. Present value of future…., and all that. That is the tool of the analysts. A hammer, etc. Common knowledge begats sentiment and Fed dot plots, a coming (or current) recession, and inflation expectations are common knowledge. The growth stocks must sell at highly (?) compressed valuations. Of course, the valuations are highly compressed by recent measures but not so much by 4 to 10-year data—as Dreamer has pointed out for so many months. (By the way, Dreamer, are you going to be one of the 100 Saulinan Select? Do we need to take a snap poll of predictions on this?).

The market also has a show me attitude regarding the idea that we are in a super cycle of digital transformation and AI. Or, even acknowledging the super cycle, the fear of the business cycle dominates the equation.

It seems to me that the common knowledge is not going to change, and so these stocks are not going anywhere until we are further into the cycle, or until several more quarterly reports indicate durable demand for these companies’ products and services. (Whew!, Ernest, where are you when I need you?)
But KC, we are tickling 52-week lows! What could go wrong? Stock prices have never gone below previous 52-week lows? Let’s see. First stock in my port, AYX. 6 times made new 52-week lows in last 19 months. BILL, twice. BRZE 6 times. CRWD, 3 times…. O.k.? Let’s call it the First Law, It Can Always Go Lower. Since it can, and since gains cannot be maintained, why invest now to any meaningful extent?
Add to this, note what I will anoint Dreamer’s Second Law, Post-Earnings Pops Will Evaporate. This law is supported by Bert’s observation that ETF volumes dominate individual stock purchases so that stock prices tend to be homogenized to an average level for the sector. Democratization. An example, if you please. ZS. Remember (why should you?) my sale of calls a mere few weeks ago? $152.50, I believe. Got called away and rose to $193.60. At the moment, $!62.56.
This is my thesis for holding cash, and for increasing cash by selling into any strength that comes along. Then I need to rationalize holding and adding to SPG. 7% dividend. Management proven itself through business cycles. Recessions come and recessions go. Strong companies tend to come out stronger. I “need” to earn my RMD.

That’s it. Thesis recorded. See how it holds up.

It is Friday, options expiration. CRWD puts in the money. Probably will buy to close and take the small loss rather than hold the shares over the weekend. I have ZS puts at $157.50 so I need to watch those. Indexes as slightly down pre-market. Cleveland swept Chicago.

https://www.espn.com/video/clip?id=34646461&ex_cid=espna…

KC

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(By the way, Dreamer, are you going to be one of the 100 Saulinan Select? Do we need to take a snap poll of predictions on this?).

Highly doubtful. Invite may be lost in the mail.

This warrants a longer epic rambling post, but suffice it to say that life is funny in being circular sometimes. Granted we see patterns we want to see. We see meaning where we want to see it.

But my TMF “career” began as a 27 yr old, traveling 3/4 of the time, so in hotels a ton with not a ton to do after work, or even during slow work days. They gave me a credit card back then, with a per diem of $35 a day. Do you have any idea how much Subway and Taco Bell you can buy for $35/day in 1999? Well…it’s a lot.

Anyway, I dabbled with commodities trading in mid-90s, just like the stupid GenZ kids of today go after get-rich-quick crypto. Had a couple good trades, assigned myself label of “investing genius” and promptly lost it all. Fast-forward to 1999 and flush with cash, and the emergence of online brokerages and more prevalent internet access, and an Ameritrade account (and maybe SureTrade…whichever one let you buy partial shares back in the day) I actually came across TMF and became a genius (again) in 1999 investing in tech stocks.

Ran across The Gorilla Game, which is very similar to Saul approach in many aspects. Focus on S-curve and moats and labeling leaders as Kings or Gorillas depending on competitive positioning. Networking companies had the similar love as cloud/SaaS in 2018-2021. Cisco, Juniper, Redback, Sycamore, etc etc…

I lost a lot in the dotcom boom as many did, but actually for chasing a story stock in 2001-2002. It was a precursor to TDOC, and I was ahead of my time, and turns out they were fraudulent (Cyber-care). But in early 2000 I was looking around at valuations and trying to understand why JNPR was worth $60b mkt cap or whatever. The resident board gurus just virtually patted me on the head, because I “didn’t get it”. They are all gone now. One guy, Bruce Brown, still is on TMF…still seems to want to defend the GG. He is half right, half wrong.

The S-curve momentum investing is simply a growth-rate-contingent trade. And it sure seems like it only works in bull markets. Covid/2000 is weird and unique for obvious reasons. But 2000, 2008, even Dec 2018, and 2022 seem to tell you that valuation does sometimes matter.

Problem is that history (since 1990s anyway) seems to indicate we can be irrational for a lot longer than we can be sane. So if we choose wisely, this downturn can allow us to invest in the next sideways or bull run in companies that will flourish from a stock price perspective.

MSFT famously never went away, but stock price languished from 2000 to what…2015 or something. CSCO and JNPR and many others never recovered from dotcom bust.

So what does that tell us about SNOW or DDOG or even AAPL or TSLA or NVDA?

If OKTA can exist and grow, and ROKU, and TWLO and name all the other ghosts of favorite stocks past, who seem to miraculously be at 2018 prices in many case (so 4 years gone poof) then why can’t that also happen to SNOW and DDOG or SHOP or others for longer?

I go back and forth about DDOG and NET all the time because of this. They IPOd so strong, and perhaps never should have been anywhere near that large, and human nature says “got to get back to ATH eventually” and distracts us from wondering if NOW and CRM (and ZM in an accelerated fashion) aren’t helping predict what will happen to DDOG. $1.7b in rev this year? Then in 2 more years maybe $4b? Impressive. ZM already beyond that. NOW is well well beyond that. CRM is talking about $50b in 2026 or something. But if DDOG is growing “only” 40% in 2025, then it gets a revised P/S and, ironically, is worth then as much as it is today? That seems to be the model.

So good luck timing the ol’ S-curve. It works, I guess, during bull markets.

I like the “investments” better. NVDA when I saw the DC/AI potential and people thought it was a gaming company, back in 2015 ish. TTD when the move to digital advertising seemed less obvious.

By the way, despite big drawdowns this year, the investments in TTD or NVDA had cemented much longer-lasting gains than the TWLO or OKTA or DDOG or ZM or others. Yet they were never cloud/SaaS.

NFLX (streaming leader) and AMZN (AWS cloud leader) were other great examples. As was FB as social media leader. All blew away investments in Cloud/SaaS companies.

Finally, when you notice an OKTA or TWLO or MDB is at a 52 wk low, and you start to notice prices are back to 2018 levels, please also notice that their market caps are much much higher than back then, thanks to stock comp, which we are told to ignore and is no big deal. So MDB is, like, super cheap, yet still a $13b mkt cap for a company that has competition and can’t seem to make profits. Is CockroachDB the next MDB? Does anyone care anymore?

Choose wisely out there.

Dreamer

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please also notice that their market caps are much much higher than back then, thanks to stock comp

Good point.

KC

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ONDS is down. I had an order in at $3.91 and it was #3.92/3.94 bid/ask. I cancelled. Will watch.

KC

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Any new thoughts on ONDS? They just release earnings. Seem to be treading water. Is there a catalyst in the future for them?

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ONDS is a story stock, right? They have several moving parts. The most advanced, marketing-wise-- is the railroad radio communications systems. That is rolling out now with Siemens as their partner. Not the most interesting part of the business. Then there is the American Robotics business, including the Fullmax Scout Systems which I think integrates with the 900 mhz communication system for mission critical operations. Help me out here. IoT uses, duh, internet such as Cloudflare. The scout system has backup. This is drone observation of rail lines, pipelines, industrial complexes. Autonomous drones, out of site, programmed flight pattern stuff. FAA approvals needed and obtained. This business seems to be, from a marketing and design point of view, oriented towards privately owned, capital intensive, large infrastructure industries. On the other hand , the new acquistion, Airobotics has been oriented towards government infrastructure, towards defense, smart cities, public safety, etc. But I think they all link together and the vision seems to be drone systems as a service. Subscription based service. I think the business development is not treading water though the stock price and revenue are. 2023 may be the year. I must say that their Power Point presentation, https://d1io3yog0oux5.cloudfront.net/_a48ca915f71754af83d7e49b67012369/ondas/db/575/4708/pdf/Q3+2022+Earnings+Deck+FINAL+11.14.22.pdf, was not highly illuminating and to me was quite short on revenue growth as compared to number of units of “stuff” that they projected. ONDS is one of several small holdings of story stocks that I have. Why? I don’t know. Maybe so someday I can say Ï bought ONDS
when it was $6 a share…"

KC

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I still have a bit of TTD thanks to you Dreamer. I bought several times on the way, probably didn’t sell enough (or cash enough covered calls) on the way down.

At one point I promised you a modest house in the Midwest and a beer with my gains. The offer for a beer still stands.

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The last week or so was a serious FOMO/POMO test for me. For the most part, POMO won out–and I think to my benefit. I am waiting for a full two months before commenting on “Thesis recorded. See how it holds up.” But in the meantime, here is a podcast from KBR that will likely strengthen your POMO self.

Van Hesser’s 3 Things in Credit - A KBRA Podcast

hmmm.

There, maybe. The podcast can be accessed via Apple or Google or… whatever. Your usual suspects, I suppose.

First, the Fed mentality is to not quit too soon and do a Volker 2.0, a double dip. Pain now to avoid more pain later. Labor market and inflation still too strong and the market is not pricing in the size and duration of interest rate increases. Second, the Walmart/Target quarterly earnings show that the consumer is cutting back on discretionary spending in order to fund stuff like, you know,… food. So, while the [warning, Fed-speak] aggregate labor demand is too high, those people like the 1,400 (?) UPST hourly employees who were laid off] are going to Walmart for staples (no, not the little metal ones), they are not going to Target for the budget chic T-shirts, and buying Toblerone at the checkout. As the Fed overshoots on #1, those affected by #2 will expand (when will that filter down to SPG?)
Third, the demand for credit will battle with the ability to afford credit, with Upstart being hurt both ways.
I think most podcasters and posters are Fed skeptics and critics but the analysts (IMO) tend towards soft landing scenarios (fairytales?). This podcast expects a continuation of BMR’s and pullbacks. But my POMO is not so strong as to hold off for 12-month low prices. For example, UPST. I would hate to miss out on $15 or $16 while holding out for $14–and seeing it go to $20 or $24. Two reasons. A couple of $15.50 to $22 cycles give me +80% (or more, compounded) and that would be most welcoming. And then, at some point (the $1 million question, when) these stocks including UPST are going to go on a one or three year run and I fear being left in the trough, holding on to my good 'til cancelled $14 order as UPST hits $40 or $50 and maybe I can erase the trauma of the last 12 months.

Those covered calls I sold Tuesday expired worthless so I pocketed a month’s living expenses… well, funded them pre income tax as those nickels and dimes gush out of the IRA slot machine.

KC

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PoMo means Post Modern to those of use in the arts. How do you use the acronym of POMO?

Also, the use of JC on Fool, is that like a Venture Capitalist?

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Pleasure Of Missing Out.
Opposite of FOMO.

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How has that worked out?

I have followed the performance of Saul’s, the ones he held either end of August or end of September. Can’t remember which, but I wrote down what he had for whichever I thought was most representative at the time.

Here they are, with then and now prices:

  
Symbol    9/23 price    11/26 price
CRWD          160.39          140.06
S              24.79           16.32
DDOG           87.28           74.84
SNOW          172.13          144.42
NET            54.43           46.30
BILL          125.74          121.47
MNDY          114.43           97.83
ZS            158.64          138.75

These average down 15.8%. I am not about to declare victory. This is just a point in time. All the way back, two days before, 11/23, these averaged down 17.9%. This is very much a work in progress, and one doomed to failure if I stay largely in cash long enough. But I wanted to record this because in the last two months there has been serious FOMO/POMO angst on my part, and some celebration on that other board. I am not throwing rocks at Saul’s portfolio, either. I own 6 of these stocks, just very much smaller percentages. Actually, I own only 5 as I sold calls on CRWD, $139 and it closed at $140.05. I still made money as I sold them for $1.84 and sold puts for $0.94.

Anxious to see how next week turns out.

KC

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Crowdstrike down after hours to 111 after earnings. That is only a 92% gain from it’s IPO close on the first day of trading 6/12/2019. Wow all that multiple expansion and now contraction. Who knows where it goes from here.

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and Bear just declared it to be cheap, bc it is 50x future FCF or something meaningless like that. Just urinating into the wind when it comes to valuation.

Dreamer

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So I had to check, and this mammoth beatdown brings CRWD to a 14 P/S, even with the likes of BILL and DDOG. You know - companies I still think are too expensive.

TTD is richer, as is NET, SNOW, and ZS. Not saying it is a 100% predictor of which stocks are next to fall, but it doesn’t make me warm and fuzzy about them.

Recession hasn’t even occurred yet.

Dreamer

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This has nothing to do with what Snowflake valuation should be today but Snow Ipo’ed at $120. At market open on 9/18/2020 the first day of trading it opened at $240. Today after hours were at $122. WOW

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O.k., so I said I thought I would be on sidelines this week. Road to Hell and good intentions and all that! No, I stepped in front of all that news that I discussed elsewhere, violated the rule against holding options that expire beyond earnings… Sold puts and basked in the glow of the juicy premiums. Those options were “safe” at $124 and $121. But I doubled down yesterday, noting the blood in the street, and bought at $111, $112 and 114 (and change) so on paper I made money yesterday on CRWD. We shall see what Thursday and Friday bring.

KC

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CRWD looked oversold this morning. I started a trading block in CRWD @ $110. Open order to sell @ $120…As you say, we shall see…

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All COVID stocks must come down.
At the end VALUATION matters. There was a time when rates were low and free money everywhere…its over. Saul and Bear need to adapt fast. You cant believe that the rates will be back at %2 in less then 12 months…
in 12-18 months this will just growth less then 40%…nothing special anymore for a SaaS

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“We shall see what Thursday and Friday bring.”

Hah! CRWD closed at $124.00. Sold puts expired worthless. And as a bonus, I sold one more put yesterday, on expiration day, what a wild and crazy guy. O.k., only $200. Hardly a a ka in a ka-ching but when grasping for straws, take it.

KC

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Another month of restricted holding of growth. The down 15.8% for those Saulian growth stocks is now down 23.5%. These vary from down 0.1% (MNDY) to down 46.5% for S. ?Is that right? Double check. Yep. Not that I am chortling , I have CRWD as my #1 and it is down 36.5%. On the other hand, my whole port up 4%, so there is a moral victory–if you are into those sorts of things.

Where to go from here?

Puts and Calls. More of the same, in about the same amount. I have invested 4% excess in UPST now that those puts were assigned. I need $13.80 to break even. NASDQ is up slightly premarket, I might sell half of the new shares and write calls against the other half. DDOG and CROWD I will probably write calls, but only 3-1/2 sessions 'til expiration. Premiums might be scant.

The 5 BMW positions. Have to decide whether to treat those as a basket or two baskets. I mean, all together being 5% of port up to 10%? This has been a crummy market and my trial positions are down from 3% to 10%. Might scale it back to just the two fashion retailers.

As I go over my high growth candidates, I can see that I am going to have to go to 25 total stocks. MF says 25 to 30 which I am loathe to do but at this point still lack conviction for just 20. I have targets for GLBE, CRWD, SNOW, BILL, FOUR, UPST and DDOG. I have my moonshot, VERI, which was up 48% a few days ago, break even now.

KC, you have a work in progress. 12 weeks target to get invested. If there is tax loss selling in the market here, then wash sales are 30 days, right? Well, so much ETF’s now with a little similarity and just enough difference to get around wash sales, so factor that out.
Put the close on this year without the slightest tear.

KC

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