I’m fairly new to the group (a couple months), but have read hundreds of Tremendous posts from the group already and I feel I mostly understand the philosophy that Saul Investors employ. It makes perfect logical sense. I’d really like in the future to be able to add to the group, however I know I’m in the learning phase so I don’t say anything as to not clutter the board with unhelpful or overly obvious posts.
Would one of the seasoned veterans be willing to do a screen capture of themselves walking through a quarterly report (perhaps one of the more popular stocks such as CRWD, or SNOW, or UPST etc.) Saul Style. What numbers they’re really looking for, what they do with them (spreadsheet, plotting the numbers on a graph etc.), and other general things they look for. (Of course each quarterly report is different but surely there are some universal truths and things to look for in each). I think seeing someone do this gives an additional insight as to the thinking they use, which combined with the tremendous posts could be very powerful.
I feel this would potentially help the posts going forward be higher quality and more aligned to Saul thinking for those of us that want to contribute but are either a bit newer, or newer to SaulStyle thinking.
Perhaps this could be put in a google drive and added to the “Newbies place to start” section.
Either way thanks to ALL of the contributors for ALL the hours of research and typing up your posts! I’m already a significantly better investor because of your efforts.
Look for the Knowledgebase, it is 3 parts, under the Announcements to the right side of the screen. Or if on your phone, I think it appears toward the bottom. Read through that, several times, and take notes.
What I have been doing is reading through the quarterly reports of the companies that are being followed here to see what I can get from it. Then read what is posted about those reports from the members on here. See what you may have missed or didn’t understand.
After reading the sidebar, I recommend going through Gaucho Rico’s Growth Stock Analysis series of posts (https://gauchorico.com/category/blog/growth-stocks/), especially the 6th part goes into detail how to examine and analyse the earnings report.
As mentioned by others, Saul’s Knowledge Base (KB) really is the Rosetta Stone of how to evaluate a company. Read through it a few times, and I’d suggest taking the approach and practice it on a few companies. For an interesting compare and contrast, I’d suggest evaluating Crowdstrike (CRWD) then evaluate at a company like AMC Entertainment Holdings Inc (AMC). The difference between these two is staggering.
So this is how I evaluate a company, in this order. Others might have a different order. Also, as pointed out in the KB, always look at “adjusted” numbers, which are non GAAP. Adjusted numbers net out the effect of irregular or non-cash expenses, such as those related to employee stock compensation, acquisitions, restructuring, or one-time balance sheet adjustments, etc. This often smooths out high earnings volatility that can result from temporary conditions, providing a clearer picture of the ongoing business. Lastly, pretty much every American company reports their quarterly financial results similarly, especially in the tables at the bottom of their quarterly announcements. Once you start looking at these, you’ll get really good at knowing where to look for the financial metrics of interest. The more you do it, the better (and faster) you’ll get. Also, always go to the source for this information: the company’s Investor Relations page. Yahoo, Google Finance, et al, often do not update their numbers very quickly, especially right after an announcement. And sometimes it’s flat out wrong.
First, I look revenue growth, typically mentioned in the headline of a quarterly earnings announcement but almost always the first line of the company’s Condensed Consolidated Statements of Operations: the table(s) at the bottom of the quarterly announcements. For revenue growth, look a both YoY( looking for > 40%) and “sequential” (e.g. QoQ = Quarter over Quarter)growth; it should be positive, which means it’s growing sequentially: There are some examples of companies that have great YoY numbers but slowing or even negative “sequential” revenue. This could be a red flag…
Then I look at a company’s recurring revenue, the more the better. This is important because it means a company doesn’t have to expend resources to go out and reacquire the recurring portion of their revenue.
Then I look adj. gross margin; The higher the better, but I’m looking for >70%. Gross margin is a company’s net sales revenue minus its cost of goods sold. So, for example, if a company’s gross margin is 70%, that means that 70% of it’s revenue drops down to the “gross profit” line. A great example is DDOG; in their last conference call, they said that many customers are buying 4 or more modules (products). In simple terms, you could consider that after they sell the first product to a customer, all products sold after that are almost at 100% gross margin: it doesn’t cost DDOG anything(or very little) to sell those additional products, after the expense of selling the first product is recognized. That’s why you see companies like DDOG sporting an adj. gross margin number of 77%.
Next, I want to see customer growth (positive)
Then Dollar based Net Retention rate >110%
Then adj operating margin (growing)
At this point, I evaluate: If these metrics aren’t met, I typically stop and move on to another company. Why? Because there are companies out there that have all these attributes.
If everything still looks good, I keep going and look at things like financial outlook(growing and positive), strong management, and then competitive differentiation. Some folks call it a “moat”. Competitive Advantage is sometimes difficult to assess, often somewhat subjective. Then the rest of the metrics in the KB.
The only thing I add to Gary’s list for myself is a thumbnail glance at market cap vs TAM. I recently started placing more value on a company’s potential to grow multiple times their size. This is all about runway to grow. I expect I’ll get to hold a smaller quality company longer and at higher growth rates than a larger one. E.g. Shopify vs Lightspeed. I still own both but I’ve been reducing the former and shifting more of my portfolio weight to the latter. This is a personal choice but is tied in to the “you can’t own them all” line of thinking. Trying to keep my portfolio to around 8-10 holdings is liberating because I can be picky without the FOMO (mostly…still evolving!)
Aside from revenue growth rate, most items are about recognizing the quality of the growth to build trust (a.k.a. conviction) in Managment. Along these lines as well: it is nice to know if growth is organic or due to events like free trial periods ending or acquisitions which introduce a few more considerations related to vision and ability to integrate and such. I think some may be missing out on Lightspeed by throwing out all but organic growth and treating that as the “real” growth number. In their case they are small, acquisitive and the type and results of each make it clear to me they know what they are doing so why not include some of the accretive growth from these additions? They add real value and it isn’t a one-time windfall, it is expansion of products, customers and TAM.