"It's so cheap" is not an investin

Investment Analysis Clubs Saul’s Investing Discussions
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I’m pretty good at understanding valuation – at looking at the financials of a company and classifying it as either “cheap” or “expensive.”

I’m pretty rubbish at making any use of this knowledge. Valuation can tell you what the market is expecting, but it can’t tell you whether the market is correct (spoiler alert: it usually is).

I’m FAR too quick to say “the market is undervaluing this!” when something is “cheap.” Usually the market is right.

When the market started to price SEDG at a PE of 12…10…8…there were no signs of great trouble, at least in the rear view. Sure, sequential growth had slowed a lot, but their last several quarters had been solid: revenue at about 125M with around 45 cents per share of EPS. Sales were steady and margins were good. They said they were in a temporary rough period but they expected growth would resume.

But steady rev/EPS were expected to continue for the September quarter, and they did. However, they finally came out and said the next quarter will be down…revenue more like 115M…and they proved the market right. SEDG is still what I would call “cheap,” but what does “cheap” even mean when there’s so much risk? Will 115M become 100M and eventually 0M? Then you can’t really call them cheap. If they struggle a bit and get back on course for years to come, SEDG would actually turn out to be a great mid- or long- term buy right now. But why flip a coin? The demand for their products could literally go away forever. I’ve flipped too many coins this year, and to mix a metaphor, the dice have not been weighted in my favor. Some things are just “too difficult,” and I’m trying to do a better job of figuring out when that is. The market wasn’t crazy to value SEDG at a PE sub-10 (and it’s not crazy that it’s at 7 now). The market was factoring in more than just the recent trends. It was factoring in risk, a lot better than I was.

How am I going to do better in the future? I’m glad you asked. For one thing, I’ve stayed away from a few names because of risk. Maybe they’ll end up killing it and I’ll be sorry I missed out. But I simply have to admit they are too difficult for me, and stick to what I feel more comfortable with. PN, BOFI, UBNT and others fall into this category.

I admit this leaves me scratching my head about SKX. I would classify it as reasonably priced rather than straight up “cheap.” I think the market isn’t really saying much (other than that the rapid growth is over) and is simply waiting on SKX to show something. But I’m interested to know what others think. Am I ignoring what the market is predicting? I think SKX is a lot safer long term than SEDG, or some others. I think they’ve got a good niche, and their lower valuation is due to:

  1. their rapid growth slowing down a LOT, and
  2. the retail and footwear markets simply being in a down period.

But I could be wrong. The whims of fashion could shift, and anyone caught dead in Skechers shoes could be a social pariah. What do others think?

For any business I can possibly invest in, there will always be aspects I don’t understand. I will try to do a better job of identifying which companies are “too difficult” and I will NEVER shrug and say, “This stock is so cheap! Look at the ridiculous bargain the market is giving us.” Because it’s time to face it: the market is smarter than I am.

But the real lesson is simply that valuation in itself tells me NOTHING about whether a stock is a buy or sell. Is SHOP a sell because it isn’t “cheap?” Ha. Valuation is only the very beginning. Gotta start somewhere.

Bear

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Another factor is the quality of management. It was worth buying up Apple when Steve Jobs returned. Maybe the guys running SEDG have new products in mind, or maybe they just believe in pushing somewhat improved versions of what they sell now. Maybe if they make the best inverters, that will be enough.

How good are the people running SKX?

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<<<How good are the people running SKX?>>>

good question! they bankrupted a previous sneaker company, but seemed to have learned their lesson and took SKX to #2 in the country!

How good are the Vikings? They won the first 5 games of the year, lost 3 left tackles, and boom, that is all she wrote.

I’d wager that SKX management knows what they are doing and are pretty good at it by now.

Steve Jobs though? No. I’d leave that the to head of Nike or Under Armour or Tesla or the like, but pretty good management team in general though.

Tinker

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Hi Bear, I followed your link in the last post to your remarks about SEDG:

I’m FAR too quick to say “the market is undervaluing this!” when something is “cheap.” Usually the market is right. When the market started to price SEDG at a PE of 12…10…8…there were no signs of great trouble, at least in the rear view. Sure, sequential growth had slowed a lot, but their last several quarters had been solid: revenue at about 125M with around 45 cents per share of EPS. Sales were steady and margins were good. They said they were in a temporary rough period but they expected growth would resume.

But steady rev/EPS were expected to continue for the September quarter, and they did. However, they finally came out and said the next quarter will be down…revenue more like 115M…and they proved the market right. SEDG is still what I would call “cheap,” but what does “cheap” even mean when there’s so much risk? Will 115M become 100M and eventually 0M? Then you can’t really call them cheap. If they struggle a bit and get back on course for years to come, SEDG would actually turn out to be a great mid- or long- term buy right now. But why flip a coin? The demand for their products could literally go away forever. I’ve flipped too many coins this year, and to mix a metaphor, the dice have not been weighted in my favor. Some things are just “too difficult,” and I’m trying to do a better job of figuring out when that is. The market wasn’t crazy to value SEDG at a PE sub-10 (and it’s not crazy that it’s at 7 now). The market was factoring in more than just the recent trends. It was factoring in risk, a lot better than I was.

I also decided to get out and stay out in February. Here’s what I posted in my Feb portfolio summary. The SEDG investors thought I was crazy at the time.

I decided to exit SEDG… While they clearly have a dominant position in their field, I sold out for several reasons. First, they had increased in price almost 100% from about $15 to $29.50 in a few weeks with the passage of the renewing of the tax credits, and this was at a time when others of my stocks were way down at PE’s below 15, so I had better places for the money. Second, they have so many risks. Risks for the solar industry, risks of electric utilities fighting back, risks because Solar City, a very large customer, greatly cut back their growth strategy, and finally, their ASP (average selling price) falls continuously so they have to continuously cut their costs just to keep up. I sold out at an average price of about $26.25.

You are correct, their entire market could disappear with something new coming along. They aren’t quite a one-trick pony, but close. They make a good product, but competition could develop something better or cheaper any time. You can’t say that with some other companies like Amazon, Shopify, Signature Bank, LGIH, Paycom, Splunk, etc. Business model is important. Most of those have recurrent income.

Saul

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