I know Saul has posted summaries of his positions randomly in the past. It strikes me that this is a good thing to do to make sure you understand the situation well enough and don’t fool yourself about what you know. My take-away from this excersise was that I really don’t know HUBS as well as the other 4 companies. But I share in case anyone has input on any of my other thoughts, and in case it’s helpful to anyone else.
SHOP - This is about as good as it gets. Growth has been incredible, nearly 100% for years now. Sure it will slow soon, but if they maintain 50%+ growth their P/S will continue to stay in a range I’m comfortable with even as the shares appreciate. Also, as Saul has pointed out more than once, they can be profitable any time they choose. I’m fine with them spending as much as they need as long as they are growing like this, but when they start cranking out a profit it should grow just as quickly as revenue has. This company seems to be THE place to look if you’re a small business that wants to sell online. Why would you not use Shopify?
PAYC - Another super fast grower in a space that seemed (to me, a former payroll coordinator who used ADP) ripe for innovation. Bert has written admiringly about them, and I haven’t heard a single negative about their business or services. They seem to have a niche much like SHOP’s, where they serve the fast-growing SMB segment of companies. They’ve been growing phenomenally, though at more fathomable rates than SHOP. But get this – they are already profitable. A PE around 60 seems like nothing for a company with their growth prospects, but I don’t actually look at it that way. I look at it like any other fast-growing SaaS company, most of which don’t have profit yet – I look at P/S. Theirs is just under 9.5, and that’s fairly reasonable. But I give them a big plus (check mark, smiley face, whatever) for having earnings to boot. ALSO, basically all their revenue is recurring, which means every time they get a new customer, revenue and EPS go up not just for that quarter, but for every quarter thereafter. Any wonder I like their business model?
HUBS - I’m already seeing a theme, and HUBS is another in the category. Basically the theme is, why NOT use this company? If you’re an advertiser looking for digital ad placement, why would you not use HUBS? It just makes your life easier. I would love to explain further, but I admit this is not the highest visibility area for me. The only reason this got to be in my top 5 was because I added quite a bit when it declined about 16% in December. It’s up 12% so far in January (after just 4.5 days). I won’t be adding to it any more as it’s nearly a 10% position now, but it’s still not what I would call expensive at a P/S just over 8. Steady growth, recurring revenue, and again, once you use HUBS, why would you ever go back to doing things the hard way?
LGIH - After 3 companies whose P/S averages nearly 10, here’s a company whose P/S ratio is 0.8. Their PE is under 9.5, and they are growing revenue at 30%+ almost every quarter. Does that make any sense? I have tried to determine the reasons for this seeming undervaluation. Some have spoken to debt or other business risks, but I just don’t think this company is being run irresponsibly. There’s even a lot of short interest keeping the stock down, but I think a lot of it has to do with interest rates (which will probably not be much of a factor in sales…I myself bought a house in 2006 and paid over 7%. People don’t care. They just want a house.) and a potential slow down in the housing market, which I guess does have to happen eventually but perhaps will
A) not be as dramatic as feared and
B) not affect LGIH as much as higher priced home sellers.
All in all, even if there are some negatives I’m not seeing, they certainly seem priced in already. On the other hand, if the market is wrong about not all, but any of these things, the sky is the limit.
YELP - I think people got tired of the Yelp story about 3 years ago. It was near $100 a share in March of 2014. This was pretty insane…I haven’t calculated it but the P/S had to be close to 30. Pretty much peak optimism (and piqued interest from all). The market sort of lost favor in the company as it was burning cash, and it fell for a couple years until it bottomed in (when else?) February 2016 at around $16 a share – yikes. I don’t know what the P/S fell to (2ish?), but it’s under 5 now, with shares back up to $40. Revenue growth has been steady the whole time and is around 30% now. They seem to be doing some things right including cutting an international business that wasn’t working, and focusing on profitability. I don’t see any reason for them to slow down…the ad revenue they live on is basically recurring, and as they grow they’ve been able to work on transaction revenue as well. I think they’re being run well, and they’ve certainly won out over other similars like Urbanspoon and such. I wouldn’t be surprised if they were bought by Tripadvisor or someone, but they also seem to have a good niche and I’m happy with them operating on their own.