Maybe it's not a SaaS selloff after all

This may be strictly speaking OT, but I hope it’s relevant to some people given the rapid fire crash our SaaS stocks just suffered.

One reasonably strong explanation for the current crash may not have a whole lot to do with SaaS valuation per se.

Out in the broader market where people don’t pay that much attention to our little corner of hyper growth investing, what has just happened is interpreted by many as the reversal of the much broader value versus momentum factors in the US equity market. Importantly, pure exposure sales growth has suffered much milder loss than the pure exposure to momentum as shown in the one-week returns table as of today:

+6.2% for US Value factor
+3.6% for Dividend Yield factor
… … …
-1.8% for 5Y Actual Sales Growth factor
-2.5% for 3M EPS Revision % factor
-6.8% for 3M Target Price Change factor
-7.1% for US Momentum factor
(Source: Bloomberg)

For those who are not familiar with factor investing, “5Y Actual Sales Growth factor” means a portfolio of long positions to higher 5Y sales growth and short positions to lower or negative 5Y sales growth (with position size “kind of” proportional to the sales growth rate), and is structured to be neutral to the other factors. Similarly, “US Momentum factor” is a portfolio of long positions in stocks that have gone up recently and short positions in stocks that have gone down recently. And so on.

Based on this picture, it seems that Momentum may simply just snapped ferociously after enjoying a great decade during which Value has underperformed (painfully for value investors). Imagine a bunch of hedge funds holding increasingly concentrated portfolio of past winners (and maybe short past losers). Then a few funds got scared of potential upcoming recession and decide to take profit. Through stop loss orders and automated algo trading, this profit taking activity is picked up by other institutional investors who may not share the pessimistic economic outlook. Then the whole thing just snowballed as everyone tries to rush out the door in a very crowded trade.

One strong supporting evidence for this scenario is that gold and bonds also crashed. They have nothing to do EV/S, but they are both poster boys of recent momentum winners.

If this is a good description of what has been happening, then SaaS stocks were just collateral damages as they are (very small) part of the momentum stocks, and such market technical driven selloffs in the past have been known to snap back equally ferociously in relatively short span of time, provided the macro picture holds up. Because after such technical-driven carnage is over, many investors realize they still hold the same fundamental view on their former holdings except that they are much cheaper now, so these assets get snatched up in a reversal process of snowball.

Is this a good description of what has been happening? Will the history of V-shape snapback be repeated this time? I don’t have a clue obviously. But as I wrote above, there are some good evidence that momentum, not SaaS valuation, was the real culprit.



(Once again apologize for being somewhat OT)

Another possibility of what can happen going forward is that Value will finally begin to outperform Momentum and Growth for some years, after doing horribly for most of the last two decades. In this case, even if SaaS stocks valuation is not the real reason for their selloff, they may nonetheless suffer lower returns together with the rest of the growth stocks.

Research has shown that if we go back 100 years, Value would outperform for most of that time, with the recent decades being “anomaly”. But there are good arguments to be made that growth stocks should continue to do better going forward as “value” stocks are underpriced for good reasons in a world that is very different from decades ago.


Being OT, see my point of view at the NPI board:

Subject: Re: What’s so great about SaaS?…

Denny Schlesinger

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I appreciate that explanation, even if it teeters towards OT. I had seen some discussion of that on Twitter, I think, and it didn’t have the same level of explanation attached to it, so I think I mostly missed it.

On Monday, from just looking at my portfolio, I assumed the carnage was mostly just high P/S multiple companies, but the momentum aspect puts a finer point on that. Certainly the higher P/S multiples that compressed on Monday were elevated in large part due to ongoing momentum.

Considering the level of momentum that had been gained by many of the individual companies discussed on this board, my personal opinion is that this post was value-added and a positive contribution to the board.



I agree with this, though i doubt it has much meaning to Saul stocks.

Which broader category our SAAS/cloud stocks are a part of wouldn’t change anything for me. If the story doesn’t disappoint, and it hasn’t for almost all of my Saul stocks, i’ll use the opportunity to add to the best of them (e.g AYX).

But among my investment outside the scope of this board, i own the momentum ETF MTUM, which is down 3% since Friday’s close. Among MTUM’s top 10 holdings, most are down sharply this week including PG, MRK, and other stocks not historically exciting plays.

What does this all mean to us? Momentum matters and you have to stay in the great companies through thick and thin, because much of the appreciation comes at surprising times…which means maybe i shouldn’t have sold ZS this morning. :slight_smile:


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