First of all, excuse me for my English, I am not a native English speaker.
What I noticed when reviewing the monthly portfolio updates was the prevalence of several smaller cap companies, that although mostly meet the criteria of this board (high-growth companies), were pretty much flat over the last couple of years and then suddenly soared during 2020/early 2021. To give some examples of the stock performance:
Fulgent Genetics:
January 2017 - January 2020: +7%
January 2020 - Now: +753%
Magnite:
January 2017 - January 2020: +27%
January 2020 - Now: +420%
Expi:
January 2017 - January 2020: +173% (not too bad)
January 2020 - Now: +1.027%
Fubo:
January 2017 - January 2020: -89%
January 2020 - Now: +267%
And the list goes on, these are just examples. Also take a look at the chart for these stocks over the last 5-10 years, if that doesn’t scream bubble, I don’t know what else does. Not to mention all the SPAC’s now that are competing for the same companies, leading to insane valuations.
I am not here to say that all Saul stocks are in a bubble, not at all. In fact, my entire portfolio pretty much consist of what I would call high quality SaaS stocks (CRWD, DDOG, TWLO, DOCU, OKTA, SNOW,…). However I am hoping that we could discuss this topic, especially as there are many “veterans” here that have been investing for several decades and have gone through ups and downs in the market. It would be interesting to get their view on the current frothiness in the market.
I’m sure there are multiple reasons. But one of the key reasons, in a number of these cases, is the pandemic caused a shift to social distancing, and effectively forced many companies to adapt to WFH and to accelerate their business digitization and/or rapidly transition to the cloud, whether public, private, or hybrid. Some of these transitions are one-way, meaning once you make the move you are not going back. Others may be more tightly coupled to the WFH trend, and if that trend reverses it will likely prove challenging for those companies to sustain growth.
Some of these examples are possibly bubbly, and may revert back, but finding the gems in there is not necessarily as essential as it might seem. No doubt, companies like Zoom were in the right place at the right time, and were airlifted by the pandemic driven shift to online meetings. Can Zoom continue to innovate and grow once the pandemic has been conquered? I think they will struggle, but even a 1 year trend of extreme growth is one that investors can well take advantage of… why not?
I noticed the same thing. This is what I THINK is an explanation:
The price of a stock has multiple influences:
The business quality part:
Investors like Saul and others here buy growth stocks because their careful analysis leads them to feel that the underlying businesses are booming, and their growth in sales and market share will lead to growth in profits and net worth later. They see the future in the business, and expect the fundamentals (profit margin, cash flow) to make the company into a solid sustainable business. Think of Amazon in 1998 or Apple in 2006.
The trendiness part:
Others buy into whatever is “trendy” and in the news. In the last few years, growth has been extremely trendy. Investors like Saul and Cathie Wood are in the news and waves of new investors are jumping into growth stocks. You can see that when the average price to sales or price to earnings ratios on companies are all rising together. When it gets to positive extremes, people start talking bubble. When it gets to negative extremes, they talk crash. Most of the time, the trendiness factor is irrelevant to the quality of the underlying business.
Like Buffett or others have said, “In the short term, the market is a voting machine. In the long term, it is a weighing machine”.
CRWD, DDOG and the others have solid businesses. Their prices are impacted by their true growing businesses AND their trendiness. Investors like Saul and others here use their insights and “weighing” skills to pick them based on their business prospects.
Their trendiness may rise and fall, like AMZN’s trendiness did. But like AMZN, top quality businesses continue the growth of their business and their value becomes clear. The investors on this board are buying early in that run of growth.
fuboTV went public in 2020 via a merger with Facebank AG and then sold off the legacy Facebank AG assets, yet you are quoting the stock price changes in FUBO from when it was a completely different company as evidence of a stock price bubble.
Looking only at stock price action is not evidence of anything other than the stock price action. Have you researched Fulgent, Magnite, or Expi to see what has changed in their businesses in the past year? Like FUBO, they could have a clear and compelling reason for the stock price action changes based on the fundamental changes in the company…but we don’t know that from your post.
This is all just macro hand waving…Looking only at stock price action is not evidence of anything other than the stock price action.
I think Lee just appropriately and entirely wrapped up this thread.
We’ve recently stumbled into too many conversations about stock price rather than companies, including many comments in monthly recaps. It is important to remember company execution drives stock price and NOT the other way around.
I would also add that we are seeing the dominance of Cloud First business model that is effectively outperforming, and a lot of brick and mortars that were dragging their feet suddenly had no choice when the pandemic hit. They had to accelerate their transformation or die.
If company execution and innovation have changed while a new trend has developed, maybe it is not a bubble. As others have said in this thread, looking solely at price action tends to be myopic.
Well a minor 10% correction on the Nasdaq and steepening of the yield curve causes a 30-50% drawdown in these stocks and still no buyers. Certainly feels like a bubble popping. My hands are bloody for trying to catch DDOG/NET knives the past 2 days.
People were laughing at my comment but I just had a look at the performance of the 4 stocks mentioned in my first post, and 3 of them are down by 15% or more.