My top 5 positions

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.

Bear

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Theirs is just under 9.5, and that’s fairly reasonable

Since when did a P/S of 9.5 become reasonable :wink: ?

Thanks for posting this Bear.

I must say you present the optimistic side of all your investments just fine. But, much like we have done at the NPI with vigorous discussion, there is often more to learn from the bear argument.

It is very common that we are asked to defeat someone’s bull argument (Tinker asks this all the time) and see if one’s optimistic bias can still outweigh that more pessimistic view.

Not that you have to be pessimistic, it just keeps one grounded on whether to invest, how much to invest and what you will track to assure that your investment thesis remains intact.

Having your friends here try to play devil’s advocate can be very enlightening for both you and them…particularly if the arguments are fact and data based.

Thanks again and good hunting in 2017 and beyond!

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Having your friends here try to play devil’s advocate can be very enlightening for both you and them…particularly if the arguments are fact and data based.

That would be great!

Bear

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LGIH -

Does that make any sense?

Home builders are valued based on their book value and 10 PE is normal. Actually LGIH is enjoying somewhat higher valuation due to its higher growth. But with their latest guidance the growth is somewhat muted and actually one can argue if the growth prospects are not that strong then why LGIH deserves higher multiples compared to the industry peers?

LGIH - 1.839
DHI - 1.537
TOL - 1.195
PHM - 1.311
KBH - 0.8148

All from ycharts.

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I myself bought a house in 2006 and paid over 7%. People don’t care.

Absolutely! I bought my first house during “stagflation” in the 80’s (google it if you don’t know what it was). Double digit interest rates.

Why would I do such a “stupid” thing. First of all, my life had changed. I had a good job with a steady paycheck. Second, tired of paying rent, I just wanted a house. Third, interest rates were remote conceptually, they were an external over which I had no control, it didn’t make any difference to me what they were. What made a difference was whether I qualified for the loan and felt comfortable with the monthlies irrespective of how much was interest and how much was principle.

And oh yeah, turned out to be not such a stupid thing after all.

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I myself bought a house in 2006 and paid over 7%. People don’t care.

Absolutely! I bought my first house during “stagflation” in the 80’s (google it if you don’t know what it was). Double digit interest rates.

In the early and mid 80"s I was buying multiple dwelling houses with mortgage interest rates as high as 13.5%. Prices at the time were about 5.5 to 6 Times the annual rent roll. 20% cash down. The balance was 15 year fixed rate self liquidating mortgages. The property prices and the rents were dirt cheap and the double digit interest rates kept them down. And then the interest rates started dropping and the prices started rising. Perfect time to own property

The only qualification was to have (beg borrow or steal) the 20% down payment. The few I bought turned out very well

b&w

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In the 80’s I bought a move up house and paid about 14% interest.
Where there is disruption there is opportunity. I bought some rentals that had assumable FHA or VA loans with rates at 9%. A year later I flipped those rentals for double my equity within days of advertising.
I was essentially selling the mortgages and home buyers were willing to pay my ask to get a 9% assumable loan.

Rob

I bought my first house in the early 80’s and took out a 30 year FHA loan at 16% fixed rate – and the owner paid 6 points!

Why would I do this? For two reasons:

  1. Inflation
  2. Taxes

One of the best investments I ever made.

DT

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I bought my first house in the early 80’s and took out a 30 year FHA loan at 16% fixed rate – and the owner paid 6 points!

The lesson to be learned from these 1980’s stories is it isn’t necessary to buy at the cheapest price and terms to make----

One of the best investments I ever made.

It is to buy the right investment.

b&w

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“Why would you not use Shopify?”

There was mention of an (Israeli) competitor last month that was said to be comparable to SHOP. Forgot the name though, sorry. Maybe someone else can recall