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Investment Analysis Clubs Where Angels Fear to Tread
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This one popped up on my CANSLIM screen. Just quietly going up like crazy and no one talking about it on the news…doc

edit: regarding Super Micro Computer

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Just to put things in perspective. The average price to sales ratio for the market is 2.3.

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I wrote a few things and deleted…On retrospect, I don’t think I said anything wrong…

But it is getting very glaring on how bad things are across the road!

XYZ was holding very high percentage of stock A and B till last week…And if anyone so much questioned it, they were literally shot down…ridiculed…and a response which bordered on how those said stocks were the next best things In the world after slice of bread…. How dare you question that!!!

Now XYZ comes off these…And the same stocks, are crap according to him!!!

The latest earnings reports , slow down and other metrics were all there even where he was holding it…, and so at that time they were fine???

And he feels AEHR has gone up now because it is a stock that people don’t know about before and now realize what a gem it is…, really!!! It is Damn short squeeze !!!

There was nothing wrong with what Rob world wide said about the Beth Kendig service…those folks are unbelievable…and how they can keep a straight face and talk as if they are having great returns is unbelievable…But but how XYZ is able to keep a straight face and say that he is not sure why AEHR rose up recently is equally unbelievable!! It is nothing but short squeeze…Same reason why SMCI is up…Same reason that upstart is up…magnitude of increase May differ but good lord, even a fool like me knows Sir!!!

Totally lost respect!!!

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69

What did Rob say about Beth Kendig service? I did not see prior to delete?
Jille

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It was Robworldwide. Let’s say he gave them a F grade…It’s not just that the picks were horrible, it’s the fact that they are gloating about how highly successful their service was compared to x or y!!!
Of course, they don’t include the entire 2021 and 2022…
Imagine Cathie wood gloating about her ark funds quoting her 2020 returns but totally denying the results of the annihilation that occurred in last 2 years!

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Annihilation
Annihilation1280×720 329 KB

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As I suspected. Thanks for filling me in…
Jillle

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I stopped paying for the service awhile ago but keep track of a few of their all-star picks that are all penny stocks now. FUBO 1.75, SKLZ 0.51, but Voyager crushes them all, fluttering around 0.01 (currently under a cent, VYGVQ)

Not much better - SNAP, ROKU, MGNI, PLTR, VUZI, STEM

Oddly, they were always haters of TTD, preferred MGNI

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Thanks for letting it be known it was the Beth Kindig service (I just get their free weekly emails, so don’t know all their picks/record, but take their updates for what I paid for them). I was on vacation the last week, so I missed what was quickly deleted over on the special board and so didn’t know what service they were talking about that caused an uproar.

Really funny how negatively SNOW is now being talked about based on valuation relative to other also highly valued stocks, yet you still can’t talk about valuation over there! Strange…

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If a newsletter is bad, that is something we should know. I don’t see the problem with that post.

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76

Hi, @rmtzp , you may not have come across this before, but it is relevant to your 10 P/S comment about ZS. One of the more famous CEOs of the dotcom era was Scott McNealy,
of Sun Microsystems, which peaked at about a market cap of about $200B (they later sold to Oracle, 96% off that top). In this Bloomberg interview in 2002, Bloomberg - Are you a robot? , he said

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

It is a terrible valuation; it is insane. There was a brief period of disruption where this worked, but it’s over. The strategy is gone, the losses are unlikely to be recouped. So many of us tried to warn the people on Saul’s board. It’s really sad.

For the most part an equity is worth its future cash flows discounted by a risk-free rate. At 10 * P/S or EV/S, even with 20% net margins it would be 50 p/e (or earning yield of 2%). And ZS has net margins of -24% based on a quick search.

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77

Hi all,
Thanks for all the informative comments on this thread. I’ve recently started to value companies via a simple DCF/ reverse DCF and I am quickly seeing the value in doing this exercise. Does anyone here builds those kind of models and is willing to work together on valuing stocks in this manner. My idea is to learn together and from each other’s viewpoints.

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And that assumes… I… maintain the current run rate. Do you realize how ridiculous those… assumptions are?

Really, Scott McNealy, did you plan for zero revenue growth rate for the next ten years? Then 10x revenues would be ridiculous. We made a couple of tries to see what EV/S could/should be for DDOG. The key unknowable is the growth rate for the next… 4 years. Model some efficiencies of scale for SG&A. Move R%D to cost of goods sold because as McNealy implied, you gotta keep pumping out innovation to keep growing at the assumed growth rate. Could you ever get to a p/e of… 25? What market cap does that imply? How does that compare to XYZ?

Beats heck out of me.

KC

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Hi KC,

Could you please explain a bit for me, if you don’t mind…

I am assuming your are meaning to say that…DDOG can become a stock with P/E of 25? What has to happen for that? and how does it get to there from its current unprofitable metrics…

I had 200 shares with a cost basis of 160…and then rode it all the ay down to 60s…I did not buy any after that but neither sold…But then when it went back to 88 or so after the latest ER , I sold…and then the damn thing decides to run even more.

I was very convinced on that as long as the analysts had kept a high price target…but then those folks rerated it, and that’s when I lost it…

Thanks,
Charlie

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Hoping ANDY sees this but I guess any of you folks may also be able to answer this.

In the past, I had got killed by my very erroneous thinking…I bought XYZ at $350 just a year back…it felll to $300 after one ER…I would buy thinking well people wer buying at 350, and so it should be a good deal at $300…and I would think that those who are selling now were just day traders who just were not willing to hold long term…and the damn thing would fall to $250…and now I would panic and say…well, no choice but DCA so that I can get out even when it eventually rises…HOW STUPID WAS I - I know now!!!

I saw Andy’s comments on SNOWFLAKE…and I guess he is referring excatly to this

So, how does one correlate with what P/S is appropriate for what revenue growth?

I am guessing using such metrics is the way to decide if something is cheap or not…Thinking that stock A at 150 is 50% cheap compared to its prior 1 year price of 300 is, well, heights of stupidity - And that was me !!

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Hi Charlie, Do not think that I know anymore than you do or anyone else. I will give you my thoughts on this but take them for what they are worth and let’s just all keep learning. Snow is a great company, but I think because of Slootman they have always been over priced. They have good FCF margins but right now they are growing Revenue at 48 percent down from over 100 percent just about a year and a half ago. They are guiding for growth in the high 30 percent next quarter.

Now what you are willing to pay for a company Charlie is always very subjective. Some people will buy at any price but Snow has gone from a P/S of 18.58 to 206.25. It has always been a little scary for me because of how it was valued. But if a company is growing Revenue at around 30 percent, isn’t profitable, but has a FCF margin of around 27 percent. No debt and around 4 billion in cash, well I would be willing to buy it around a P/S of 10. Now that might be to high for other people also but for me that is where I would buy it. But when it gets there, if it does, I will not go all in. I expect that when this down turn is over that Snow will start accelerating it’s Revenue growth.

In a downturn Charlie, everything can get much cheaper than anyone would think. Maybe we have seen the lows and maybe we haven’t. But if you can buy a company, that you believe is a great company, at a much cheaper price, buy a little, hold and see if it goes lower so you can buy more. Just make sure the company you are buying can come out the other end without declaring bankruptcy. So companies with no debt, cash, at least FCF positive.

Hope that helps. But realize this is just my thoughts. Maybe someone else has a better idea.

Andy

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Thanks Andy, that certainly helps!

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84

Since most people use a price/sales ratio of 1, that says a lot. See below.

The appropriate price-to-sales (P/S) ratio to pay for a company will depend on a variety of factors, including the company’s growth prospects, profitability, industry trends, and market conditions. Generally, a lower P/S ratio indicates a company is undervalued relative to its sales, while a higher P/S ratio indicates a company is overvalued.

However, it’s important to note that there is no one-size-fits-all answer to this question, as what constitutes a “good” P/S ratio will depend on the specific circumstances of the company in question.

Some investors may use a P/S ratio of 1 as a rough benchmark for valuing a company, but it’s important to consider other factors such as the company’s growth potential, profitability, and competitive position.

For example, a company with strong growth prospects and high profit margins may justify a higher P/S ratio than a company with lower growth and lower margins. Additionally, different industries may have different average P/S ratios, so it’s important to consider the industry context when evaluating a company’s P/S ratio.

In summary, while the P/S ratio can be a useful tool for evaluating a company’s valuation, there is no single “good” P/S ratio that applies to all situations. Investors should consider a variety of factors when evaluating a company’s valuation, including growth prospects, profitability, industry trends, and market conditions.

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85

If they got there and had dividend with a payout ratio of 100%, they’d be paying the same as a 5 year treasury.

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P/S is a really bad metric. Retail has low margins and low P/S multiples as a rule. Software has higher margins and higher P/S. But that says nothing about which sector is a better investment or how you can compare companies within sectors.

Let’s say we four magical companies that can pay out 100% of profit and still grow, and both have $100M in revenue right now. Let’s assume a discount rate of 4% and no dilution. Let keep it simple and use the DCF formula here Discounted Cash Flow (DCF) Explained With Formula and Examples

Company 1 has 10% margins, 10% growth. Company 2 has 10% margins, 20% growth. Company 3 has 20% margins, 10% growth. Company 4 has 20% margins, 20% growth. The net present value over a 10 year window, discounted by 4% of them looks like this

Company 1
10 11 12.1 13.31 14.641 16.1051 17.71561 19.487171 21.4358881 23.57947691
1 1.04 1.0816 1.124864 1.16985856 1.216652902 1.265319018 1.315931779 1.36856905 1.423311812
10 10.57692308 11.18713018 11.83254153 12.51518816 13.23721825 14.00090392 14.80864837 15.66299347 16.56662771 130.3881747
Company 2
10 12 14.4 17.28 20.736 24.8832 29.85984 35.831808 42.9981696 51.59780352
1 1.04 1.0816 1.124864 1.16985856 1.216652902 1.265319018 1.315931779 1.36856905 1.423311812
10 11.53846154 13.31360947 15.36185708 17.72521971 20.45217658 23.59866529 27.22922918 31.41834136 36.25193234 206.8894925
Company 3
20 22 24.2 26.62 29.282 32.2102 35.43122 38.974342 42.8717762 47.15895382
1 1.04 1.0816 1.124864 1.16985856 1.216652902 1.265319018 1.315931779 1.36856905 1.423311812
10 21.15384615 22.37426036 23.66508307 25.03037632 26.47443649 28.00180783 29.61729674 31.32598694 33.13325542 250.7763493
Company 4
20 24 28.8 34.56 41.472 49.7664 59.71968 71.663616 85.9963392 103.195607
1 1.04 1.0816 1.124864 1.16985856 1.216652902 1.265319018 1.315931779 1.36856905 1.423311812
20 23.07692308 26.62721893 30.72371416 35.45043941 40.90435317 47.19733058 54.45845836 62.83668272 72.50386468 413.7789851

If each has 1M shares, and ignoring taxes, you’d pay $130, $206, $250, and $413 per share for those cash flows today which implies P/S of 1.3, 2.1, 2.5, and 4.1. P/S is just a reflection of assumptions about growth and margins on current valuation.

In the real world, you’d use a higher discount rate, maybe a longer window for your net present value calculation, you’d take into account taxes (yours and theirs), company margins would change over time, and you’d have to account for future dilution. But you see how a company with 20% net margins, 20% growth, and zero dilution only has a P/S around 4. It’s really hard to justify a P/S of 10 under extended periods under real world circumstances.

I am just a hack at this, I’m sure lots of people know this better. But this is a fundamental way of doing a valuation, it is inescapable over the long term, Some people just forget it periodically when markets get too exuberant.

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