Oomph factor mid-year update

Here’s an update on where we stand on valuations compared to my original Oomph factor post in mid-April. Have valuations become significantly higher since then? In many cases, the answer is no. Has the EVSO ratio been predictive of the future return? No, not in this short 3-month lookback period.

So let’s dive in to the numbers. Remember that the Oomph factor is the square of the YoY revenue growth rate, in multiplier form, multiplied by the gross profit margin. So if a company has 40% YoY revenue growth in the most recent quarter, and has 80% gross profit margin, its Oomph factor O = 1.41.40.8 = 1.57. The higher O is, the better. We found that companies with O > 2.0 are knocking it out of the park, and extremely rare in the universe of 3,500 or so publicly traded companies.

So what multiple of Oomph is the market paying? That’s where the EV/S/O ratio comes in. It’s simply the EV/S ratio divided by Oomph. So if the company in the above example has an EV/S ratio of 20, its EVSO is 20/1.57 = 12.7. In this case, the lower the EVSO ratio, the better, in terms of value.

Again, EVSO is just one of many ways to evaluate a company, and there’s nothing magical or guaranteed about it. You also have to look at TAM, market share, and many other qualitative and quantitative factors. But just as P/E ratios, by themselves, did not accurately value growth companies in Peter Lynch’s time, and he had to divide P/E by G(rowth) to get the PEG ratio, I am using EVSO as a valuation measure for companies with no earnings at all.

So now lets take a look at today’s EVSO ratios compared to what they were in mid April. We’ll also look at the returns since then, and the change in EVSO.


        Oomph on  Oomph  EVSO on  EVSO    Return       EVSO
Ticker  4/16/19   Today  4/16/19  Today   Since 4/16   Change
======  ========  =====  =======  =====   ==========   ======
AYX       2.18     2.03    9.4     11.8      32%        +25% 
TTD       1.86     1.44    9.7     13.5      12%        +39%
ESTC      2.15     2.12   10.7      9.3     -10%        -13%
SMAR      2.04     2.17   11.2     11.6      20%         +3%
MDB       2.13     2.18   13.4     12.4      10%         -7%
TWLO      1.66     1.75   14.1     12.8       8%         -9%
ZS        2.16     2.10   15.1     16.2      16%         +7%
OKTA      1.64     1.73   15.9     18.3      31%        +15% 

So have things become way more overvalued since mid April? Looking at the EVSO change column, the answer is yes only for AYX, TTD and OKTA. Stocks like ESTC, MDB and TWLO are actually cheaper now than 3 months ago, on an EVSO basis. SMAR and ZS are not much pricier either. And ESTC looks like the biggest bargain of the bunch - it’s the only one with an EVSO below 10.

Within this short lookback period, the EVSO ratios from April have not really been predictive of the forward 3-month returns. While it’s true that the cheapest stock from April, AYX, has had the highest return since, the next highest return was delivered by OKTA, the most expensive stock from April.

I don’t make portfolio changes too often. But, based on the above, I’ve trimmed a little off my TTD, AYX and OKTA, and used the proceeds to buy a lot more ESTC and a little more MDB.

And, may I say, I love this board!

Good luck to all,
Ron

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Thanks for teaching me how to do all of this myself. I love being the outlier investor. This goes for this post and all others that remain on topic on this board. The analysis here is outstanding.

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Ron,

“Has the oomph factor been indicative of future returns…so far no”

“I don’t make portfolio changes too often. But, based on the above, I’ve trimmed a little off my TTD, AYX and OKTA, and used the proceeds to buy a lot more ESTC and a little more MDB.”

Please - please - don’t make changes based on a model that - while a fun name - has nothing to support its metrics/derivative (arbitrarily squaring YoY, etc)

As a person who makes turning data into decision support tools, this is highly flawed, and even worse because you recognize the flaw and still act on it.

Instead, I’d encourage you to mess with your evaluations. What metrics do prove out a correlation that you can rely on.

I’ve pounded the table on it, but the truth is this: gross profit growth vs EV/s is a relationship that correlates. Saul posted the reasons why in his most recent monthly report.

But that isn’t the only factor. Tinker pounds the table on TAM. And he also isn’t wrong.

Respectfully,
Just a Fool

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JAFbrblev,

“Has the oomph factor been indicative of future returns…so far no”

I never looked for a correlation between Oomph and future returns. I am looking to see if a low EVSO ratio is correlated to future returns (in the same way that low PEG ratios used to be predictive of growth stock returns in the past).

I never expected to see a strong correlation with returns over a 3-month period. That’s too short a time period. I’ve been holding these SaaS stocks for almost 2 years now, and expect to hold them for years longer as long as their earnings reports support the growth thesis.

Also, I never made drastic changes based on my analysis. I said that I trimmed a few positions and added to a couple more. For example, AYX has quadrupled on me, and grown to 17% of my portfolio, so I took it down to 13%, that’s all.

The main conclusions that I wanted to share in my post are that 1) stocks like ZS, MDB, ESTC, SMAR and TWLO are valued pretty much the same or cheaper than how they were valued back in mid-April and b) ESTC, in particular, looks like a bargain right now.

Ron

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