On a port diet - hitting reset

I was right.
I was wrong.

I was right that the valuations were a friggin joke.
I was wrong by how much.

Just like when LSPD and UPST effed me over late last year, I plan to overcome the current UPST debacle and batten down the hatches.

I no longer believe we have a bunch of whipsaw and while I expect bear market rallies, I think the fat will continue to get shed off some of these valuations.

I trusted UPST’s mgmt to have a clue, and they didn’t.
What makes me so sure GLBE mgmt will fare any better, in terms of forecast guidance? Nothing anymore. I think GLBE is a solid little business, but the macro for them almost couldn’t be worse, so I need to reduce prior to ER, otherwise I risk way too much more in an UPST-ish like post-ER collapse. Which is crazy given how much GLBE has fallen, but if you want to place a 5 or 8 P/S on ecommerce right now, then how much lower can they go…$12? $10? I will keep some, but this feels very covid economy to me, and so I am going to look for the SPG’s of the world to stabilize and build off of.

If bear market, you go down -15% or so, market wide. If recession, we can expect -35%+ down.
So building cash back up.

And yeah, I pretty much am marking the bear rally that will start as soon as I hit sell, and that is ok.

Dreamer

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I have benefitted from reading Saul’s early posts in 2014.

Back then he talked about a Peter Lynch suggestion of charting graphs of stock price against Trailing PE of 20. PE!!!

He also had 25 stocks. And looked for growth of at least 25%. That worked for 30 years at about a 30% annual CAGR. Why couldn’t it still work now?

I get it. The world “changed” in 2017 or so with move to SaaS.
But I truly believe the gross margin game is misleading, as it will all eventually come down to whether you have a profit and what your P/E is. If you can’t really grow at your high rate without all the spend, then you are just buying growth. The idea that you can just turn off expenses at any time and be a dividend-issuing cash cow is nonsense…it would collapse the stock. So you are stuck in what feels like a ponzi.

For every GOOGL, AAPL, MSFT, AMZN that makes it to the $1T market cap and starts to look like value stocks with decent PE, there are dozens of examples of S-curve investing also-rans that have come way down to Earth.

TWLO, SQ, SHOP, ZM, OKTA.
For SaaS legends, look at NOW and CRM. NOW has held up pretty good, but may be the exception.
SQ is at Summer 2018 prices right now.
OKTA is at Feb 2019.
etc…
They are all MUCH bigger companies now, in terms of revenue. But of course they couldn’t grow 50-60%+ for more than a couple years in a row. Why does anyone think that a perfect linear progression should take place in growth rate into perpetuity?

This is why I take profits and tend to exit too soon. I am looking to the end game and not concerned with missing out on the overshooting of my exit price.

So, yeah, 2020 returns bugged me. I “only” did 77% when everyone else and their cousin in growth investing did 200%. But it always felt like GME/AMC or crypto to me…it was a fad that would pass and plummet. I just didn’t know when. Took longer than I thought, admittedly. But covid also lingered much much longer than I expected, so perhaps that explains it all. Covid plus the free/easy money it spurred just went on and on and on.

I want to own DDOG and NET, but not at current prices. Same with NVDA and TTD.

Some poor guy was scolded as being foolish for wanting to wait for DDOG to “drop” back to $135 before he bought. $135 is now 40% gain from today!

If you really think DDOG has a great chance of hitting $135, at some point, in 2022, you should buy RIGHT NOW. That nets you a 40% gain. Isn’t 40% awesome? So how confident are you it can get there?

I just never understood the concept of buying a 60b mkt cap at 50-60 P/S, and thinking you had a good double/triple on your hands.

Of course valuation matters. It always did.

Dreamer

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He also had 25 stocks. And looked for growth of at least 25%. That worked for 30 years at about a 30% annual CAGR. Why couldn’t it still work now?

That was back in the day when I actually posted there with the occasional kudo. The method evolved into the 1yrPEG and screening (gasp!) for actual p/e divided by current eps rate of increase. The method was discovered and you couldn’t find p/e’s under, say 20 with eps increase of 30. That sort of thing. Something similar happened with SaaS stocks being discovered which led to large increases in P/S. Question now is whether 1yrPEG is suitably forgotten so there are nuggets to be found.

Regarding UPST, it seems reasonable that it will languish until at least one more ER. But I have been massively wrong for 6 months. The 1yrPEG would send of flashing green alarm lights of course. But the problem is that it looks backwards and it is the forwards of UPST that have no history. I still haven’t gone through the financials. I know the balance sheet ballooned, but not by how many dollars. Would one more $500,000 securitization have done away with the excess increase? That lack of securitization was what I was studying or looking for and it was a concern which I ignored.

Otherwise, and more generally, the fear/greed index is, … OMG!!! 6. Was like 16 or 19. Six is in the COVID collapse territory. That gives me pause. What you think, Dreamer, a tip-the-toe-in buy signal or is the terror such that we should expect a day or two more of in-th-tank??? Maybe I should buy a marker position for a couple of stocks. We might have a worthy bounce off this so I’ll not sell UPST. Hope for a bounce to sell into (or think about selling) before waiting out the next Q (or 2).

77% cash. I had been thinking of SPG and OKE as BTCash. But f/g of 6, this might be the time for something with a little higher Beta.

I have been out of TTD too long to have any feel for entry point. No good idea at moment. Over in the taxable account, and considering that my RMD from IRA will be “significantly” smaller… No, dummy, you took it early 2022 when it was higher than normal. Dang! I’ve not sold anything much in the taxable. Too much profit. Still 150%, 173%, 183% and 234% (OKE, GOOG, ANET, SHOP). Nah! 71% is OKE and I’m happy to collect the divi and it is pipeline, etc., and unless major recession the energy prices/stocks should remain high, no? Might be time to harvest the other three when/if we hit 50 on fear/greed, but this is a bad tax year. Income this year looks to be highest in retirement and maybe before. Next year–which is long way off, investment wise would be time to change out of SHOP, etc.

UPST down to 27.20 in premarket. Forward p/e of 14. But, eps will (forecasted to) fall until 5 quarters from now. Not tasty. No intent to buy the dip even when 3-days expires.

So the project is to find buy candidates for what ought to be a bounce off the f/g = 6 moment.

KC

The method evolved into the 1yrPEG and screening (gasp!) for actual p/e divided by current eps rate of increase.


Can you speak to me like a 5 year old, and explain which metrics I need to look at for this formula, and/or are there any finance sites that already do an accurate job of listing this metric for you?

thanks!
Dreamer

and it seems they got rid of the Fear and Greed graph that showed a few years back, no?

I wanted to compare to covid and Dec 2018, but can’t.

That does seem low, but it can go lower.

I still come back to certain stocks being rich.
Do any of these scream “bargain” if you didn’t know what their previous ATH was?

SNOW, TTD, NET, DDOG
PAYC, ADSK, VEEV, NOW, ADBE, PCTY

Because those are the cream of the software crop.

Maybe they just won’t ever come down to Earth.

I want these at my prices:
TTD, DDOG, NET, NVDA
Don’t trust GLBE, so waiting until after (likely) post-ER beatdown next week.
PTLO and SPG are value plays that should be recession proof, but their stocks may still tumble.

Can I make a case for AMZN and GOOGL again soon?

Dreamer

The f&g graph now has a selection for overview or timeline view above and to the right of the index.

The f&g graph now has a selection for overview or timeline view above and to the right of the index.

Right, but when I tried that, it only seemed to still go out 12 months or so…thought we used to see it back over a few years, no?

Pick a date back to 2006

https://pyinvesting.com/fear-and-greed/

Here is VIX back to 1990

https://www.macrotrends.net/2603/vix-volatility-index-histor…

Buckets Full of Tea Leaves

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SNOW, TTD, NET, DDOG, NOW

I like this list. I also like to use NOW as a model saas stock.

I also like MDB (even before it got popular on another board) and CFLT for exponential data theme along the lines of SNOW and also like CRWD. Though CFLT has been punished.

Besides feeling pain in all these names, feeling hurt by upst with lower caps.

awesome, thanks!

I don’t really have any memory of 2011 angst, but interesting that we are currently below Dec 2018, but still above covid and 2008.

Covid is more a black swan freakout v-shaped oddity.

It makes sense to me that our current environment (more about inflation/rates/Fed) is similar to 2008, and while we have Ukraine war now, don’t forget Trump picked his fight with China in mid-2018 that lasted a year plus, which didn’t help matters at end of 2018. So some similarities.

Big difference now is we are still early in the rate raising stages. So is that baked in yet, or do we slowly bleed for another 8-12 months?

Dreamer

Can you speak to me like a 5 year old, and explain which metrics I need to look at for this formula

For The Founder, anything. But I’m uncertain as to whether you meant that it is I or thee who assumes the role of the 5 year old. In any case, speaking like a 5 year old comes naturally to me.

I managed to find my “Saul 2” stock screener. It was buried deeply inside DW’s Schwab account. The bread crumbs had been carried off by the Tapinoma sessile and the web site navigation had changed but perseverance ruled. Also, over at Saul’s there is an obscure link in the “additional information” on the right hand side:

Portfolio Performance Tracking Templates/Helps

Kevin’s 1YPEG public doc.

That one is in the Paleozoic strata and the Google Sheets needs a permission request. For fun, I sent one. Will Kevin respond?

Anyway, from the screener one would conclude that the key characteristics are p/e and eps growth, year over year.

Mechanically, as I recall, it is (eps growth, YOY)/(p/e), looking for greater than 1.

It evolved from the standard PEG: The price/earnings-to-growth (PEG) ratio is a company’s stock price to earnings ratio divided by the growth rate of its earnings for a specified time

My screener also looks at YOY revenue growth. Right now, the screener has 181 stocks screened for 400 million to 10 B market cap, p/e between 1 and 30, and p/e growth 25 to 100%. I must note that I recognize DHIL and LAD still on the list, and DHIL is still 500 million market cap. Seems like there were always a lot of small banks on the list. Saul’s gems would have shown up on the list but they had to be identified by another skill set.

Class dismissed.

KC

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are there any finance sites that already do an accurate job of listing this metric for you?

Not that I am aware of. Kevin’s Google Sheets was updated by the individual stock guru and had lots of information that was automatically imported–or semiautomatic.

KC

Mechanically, as I recall, it is (eps growth, YOY)/(p/e), looking for greater than 1.

===

OK.
So Company A reports:

  1. EPS grew to $2, which was 25% y/y. (for that Q)
  2. P/E (I assume trailing twelve months or TTM) of 15.

Public school math says that is 1.67 or a good 1YPEG score. That correct?

Or is #1 supposed to be a TTM of EPS, somehow compared to the 12 months prior to that? (guessing not, as that seems complicated). My point is, #1 is a Qtrly metric, and #2 is a TTM metric.

But maybe the point is to capture Recent EPS Growth and overlap that with Trailing P/E Assigned by Market, thereby uncovering an “undervalued” gem that may be growing. (guessing that is it)

Then the Saul secret sauce on top would be to dig in a bit and make sure the recent Q EPS y/y spike isn’t some weird anomaly. Like the prior year had a one-time hit to EPS, so it was an easy compare, or they recognized stock investment gains, etc etc… And generally understand if their business and mgmt was solid.

What I would probably do is just apply the formula to companies I already have researched/track, vs using the formula to uncover new stocks.

thanks!
Dreamer

Mechanically, as I recall, it is (eps growth, YOY)/(p/e), looking for greater than 1.

===

OK.
So Company A reports:

  1. EPS grew to $2, which was 25% y/y. (for that Q)
  2. P/E (I assume trailing twelve months or TTM) of 15.

Public school math says that is 1.67 or a good 1YPEG score. That correct?


So this is probably a meaningless exercise, but it occurs to me, given fact that many growth stocks purposely aren’t looking to maximize profit, that we could tweak the formula as:

Pick one: Revenue, FCF, Gross Profit growth (YoY) / (TTM P/S)
The higher the number, the better, I would guess.

I think some of the Saulites already do variations of this, because it sounds familiar, but I may look into it a bit.

Dreamer

So this is probably a meaningless exercise, but it occurs to me, given fact that many growth stocks purposely aren’t looking to maximize profit, that we could tweak the formula

Wow!, does that open up a can of worms, or what?

First, yes, people do this. Bert (Ticker Target) uses FCF to evaluate. But, you say, he just compares an FCF to revenue growth rate. For any given revenue growth rate he has established a standard FCF.FCF per share. But, the question is, “what is ‘standard’?” Sez who? In 5 year-old’s terms the answer is “'Cause Mommy says so.” Or in this case, the market says so. The wisdom of the market place for price discovery. But, just as USPT as $400 may or may not have been right, some multiple of FCF may or may not have been, or is, right.

Similarly, I was always puzzled by what seems to be firmly established wisdom that a company that is growing at 20% should have a p/e of 20. Don’t know how many times some Wizard of MF has stated that. Hint: There is no e=mc^2 for valuation. Pardon while I digress. At a more fundamental level, whether I invest in a stock, or a bond, or a lemonade stand or buy a house to rent, the value of that whatever is a comparison among them of the cash flow I expect to receive, versus the time and effort I spend and the degree of certainty that I’m going to actually receive it next week or next quarter or next year or…

It would seem to this simple soul that if I invest $500,000 in Synchrony Bank cd’s, layered from 1 to 5 years, I can eventually receive 3% per annum for the 5yr, but start with 1.4% for the first year. Well, o.k., I don’t have to do anything but, walk I suppose, to the bank (can’t afford to drive) and pick up the $58.33 on the first of each month. Would you like that in $1’s, says the teller. “No, in quarters, please, it seems like more.” So let’s forget CD’s.

Of course, the investing standard is the U.S. Treasury 10 year which is currently 2.817%, but safer than Synchrony Bank, one assumes. So let’s move on. No reason to look at corporate bonds, you get the idea. And the lemonade stand gets messy, both actually and figuratively. Let’s move on to my old friend DHIL, Diamond Hill This stock has gone slightly down and to the right over 5 years, pays 2.6% dividend. So higher risk than the U.S. treasury and lower yield Makes sense and the p/e is 8.0. That is semi-rational, but why would I take less for more risk? Well, now and then DHIL has traded over $200 versus today’s $175. Maybe I’m a trader of sorts.

Still with me? So lets take some companies with yields around the 2.81 treasury yield and their p/e and their earnings growth rate.


STOCK    DIVIDEND  EARNINGS  P/E     P/E
SYMBOL    % YIELD  % GROWTH  TTM     FYF

JNJ         2.54    44.67    23.85   17.34
KO          2.73    25.63    27.0    26.13
TSM         2.76    15.19    20.75   15.21
MGIC        2.80    16.34    26.11   15.09
AAP         2.87    33.67    21.29   15.23
FLO         3.11    34.93    27.64   21.06
IFNY        3.14    15.13    29.09   25.14
ED          3.35    17.46    21.41   21.01

*  Earnings growth is MRFY vs. prior FY

So what? Well, the p/e could first be compared to the 100/2.81 (10-year treasury) to get the risk free p/e of 35.58. You would want to pay less than that and all do. Seem like all of these companies had good years on earnings growth. That must say something about, maybe, a bad prior year for businesses generally.

But, if there is an e=mc^2 for p/e, one would expect that it would be fn(Yd,Ge,R) [dividend yield, earnings growth, risk], and this relative to some standard, namely 35.58. So, pick a winner or two. JNJ, AAP, FLO. This model uses a standard, the 10-year treasury. At least there is that. But what Bert does is compare to a cohort of similar p/ev with a FCF tweak on a comparative basis. Who is to say that the comparisons are correct, and this is where Dreamer comes in with his “whatabout valuation?” Does the valuation of the cohort even make sense.

So when we look for a different kind of 1yrPEG and we were to use FCF, does FCF yield compare meaningfully [e=mc^2} to 35.58? Or do we care. Would it still be a question of whether the entire cohort does not make sense. What does FCF mean to me in lemonade stand speak. I mean, I can understand it at that level because I can see how FCF can eventually predict how much real cash I can expect and see what yield I am receiving versus my other options. If I were to invest in another rental property, the rents and expenses are relatively predictable and absent leverage I can just about be assured that I will, over a 1 or 2 year period have so much cash to spend. That’s why bonds used to be considered investing and stocks were speculation. Seems that stocks certainly can have quite a bit of speculation in them :slight_smile: :slight_smile: :).

So, a new model. 1) is there an e=mc^2 or 2) are we comparing cohorts, and 3) who says whether the cohorts are correctly valued and on what basis [see 1)]?

Whew. Thankfully, after 2000-2001 I built a base of rentals with now minimal, pocket change, leverage. DW loves it because she can see and touch the stuff and the value isn’t reported “in the newpaper” (remember those days?) on a daily basis. I digress.

Final answer to Dreamer’s question, is that these other metrics can be developed and are by such as Bert at Ticker Target, however they are comparative just like rev/ev and whether or not there is substance is, maybe just throwing rocks at the moon. 1yrPEG worked because it was linked to real earnings and it selected possibly interesting stocks that could be further evaluated wrt business model, future growth, risks, etc. It did not fail due to being a faulty approach, it failed because it was discovered by the masses and the p/e’s ballooned above reasonable levels and we ran out of candidates.

The end.

KC

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Wow!, does that open up a can of worms, or what?

etc (with lots of great explanations on valuation)

great post, KC