Our stocks that will get through this the best

[GauchoRico]

Saul posed this question:

which of our stocks will get through this the best, and WHY?

OKTA: embedded deep in their customers with something the customers can’t live without. Secure sign in for all their employees, vendors, customers. The evidence that they are here to stay is that typical contracts with their enterprise customers are something on the order of 4 years! Who would sign up for 4 years if they thought there was a chance that they would switch. OKTA now has built in connections with something like 7000 apps/services; this takes time and money to replicate and is a reason why OKTA is dominating its space. OKTA is CFFO positive and improving that. They have $1.4B in cash. This means that they are basically self sustaining now and even if they fo FCF negative they have enough cash to ride things out. I currently have have 12.9% of my portfolio in OKTA.

AYX: huge ROI for customers. average contract length is 2 years. Automates business processes and workflows means saved money. Listen to the CFO interview from the week after the last earnings. AYX has become the standard for many workflows. It’s not going to be removed. Here’s another thing that I think will protect AYX: aren’t the number of people who know how to use AYX in short supply? Assuming they are then it is competitive for companies to get them so they won’t want to lay them off as it would be difficult to find a replacement when things return to normal. And assuming that they don’t lay them off the company may as well keep them productive and working on projects. And AYX is basically FCF positive now with a cash balance of $975M so they can easily survive even an extended difficult time. I have 40.8% in AYX but I expect I will be reducing it since it’s too high of an allocation.

Here is a post of mine of mine from about 6 months ago:
https://discussion.fool.com/chris-what-multiple-would-you-pay-fo…

Assuming their recent FCF target/guidance of 30-35% in 4 years and 50% CAGR on TTM revenue for 4 years, I would think that the company would be worth a 40-50x multiple on FCF at that time. So 4 years from now, I think AYX should be worth about $23B in the middle of 2023 with about 80M shares outstanding. Therefore, the share price would be about $290 which would give you a CAGR of 27% from here. I’m not worried about AYX long term.

Now, 6 months have gone by and we have received 2 more earnings reports in which revenue growth was 65% (in Q3 2019) and 75% (in Q4 2019). The company has also made continued progress in increasing its FCF. The stock price has dropped from $110 to $103 in spite of the better than expected results of the past 2 quarters. So now we are 3.5 years away (instead of 4 years) from the middle of 2023 with a lower stock price today and a higher than expected growth rate. So to calculate a new CAGR, I’ll use $103 today, 3.5 years away, and all the same assumptions as above. So 282% return in 3.5 years would be 35% CAGR. Even if we lost a full year due to the pandemic, we would have a CAGR of 26% over a 4.5 year period. Personally, I think there could be a lot of upside to this estimate as AYX may continue to grow revenue faster than an average of 50% per year and it could be valued higher than 50x of FCF.

PAYC: the customers love them and they’re in HR software which is necessary even (and especially) when companies hire and downsize. The have enormous FCF margins (>35%) so they are completely self funded and just increased their share buyback 2 days ago (tells us they are very confident in their future even with what’s going on). I have a 7.4% position in this one.

ZM: will only do better in this environment and they are solidly FCF positive (and increasing fast) with $844M of cash. I have a 5.6% position in ZM.

I have about 2/3 of my portfolio in the above four and I don’t see any long-term danger with any of them even if the economy runs into some serious headwinds for a while.

We can analyze each of our stocks in this way.

Chris

[SaulR80683]

I have about 2/3 of my portfolio in the above four and I don’t see any long-term danger with any of them even if the economy runs into some serious headwinds for a while.

I agree, Chris. I have 54% of my portfolio in three of them. Alteryx is my largest, currently at about 23%, Zoom is third at about 19%, and Okta is fifth at a bit over 12%.

In between those I have Datadog in 2nd, at about 20%, and Crowdstrike at about 14%. I have a lot of faith in Datadog, and they had just awesome results announced in February (just a month ago). They have such painless sign on and activation that 100% of their revenue is subscription. (They don’t have any service revenue as they don’t need it). I just don’t see them being existentially damaged by this. As far as Crowdstrike, they also posted phenomenal results, and their price is phenomenally down. I should feel like adding, but when a stock is down and won’t go up and I don’t understand the reason, I am reluctant to chase it down. I think people are afraid of it because it’s a security company and they’ve been bitten in the past by security companies, so they are just sitting it out. We’ll just have to see what the future hods for it.

Best,

Saul

[PaulWBryant]

Chris’s post from last week got me back into Okta. Just a 1% position but it’s a start. I agree that PAYC is a great one to buy at a discount too.

Obviously AYX is my favorite too. It’s so valuable to those who use it. They could see slightly slower growth if companies want to tighten their belts, but even so, AYX benefits from remote workers, because the company must buy a seat for each.

I agree with Saul on CRWD…hard to add when it has so much downward pressure, but I could see it more than doubling at any time. Definitely a mega-grower with a very pedestrian PS ratio at this point.

Saul, why are you so confident in DDOG? Sales are good now, but I can’t see that they’re doing anything unique. Among our companies, I’m the least convinced they’re going to run away with their niche. I still have a ~6% position, but I’ve definitely sold some to add to other things that I’m more confident in (like AYX and OKTA).

My only other large positions are ESTC and SMAR. With ESTC…I mean they’re at a $4 billion market cap now and I just think they’re worth more. Same problem as CRWD – great results but the stock won’t go up. I’ll hold.

I still have an 8% position in SMAR and I don’t see any reason to sell. They’ve been incredibly consistent. Collaboration tools should benefit from anyone working remotely.

Bear

[tdonb]

I am in a strange situation compared to most of you in that while I have been following this board for years and have done well on a small amount, most of my investments went into the Market in January. So I have a lot of losses overall.

I am considering selling some to build a cash reserve, or to reinvest into the ones that will do better, and to collect some losses to offset gains.

My question is, which of these companies do you think will do worst in a slow down that I could sell for 30 days and either reinvest the money in the strongest or hold in cash? And why?

It seems like TTD was out of favor on the board and may struggle as companies cut spending on advertising.

Coupa is a leader in e-procurement space. That means it helps businesses to be more efficient, so it seems like they would do well in a slowdown, unless businesses decide the most efficient move would be to save subscription costs. I do not know what their contract length is?

As you mentioned CRWD is not moving up and people have been burned by security in the past. Hard to tell since they were selling well.

Seems like TTD is best option for selling now. I wonder what people are thinking on COUP?

Any ideas appreciated.

[tdonb]

By the way, thank you for the discussion on the best stocks for a downturn. That has been helpful as I am moving some stocks from an IRA to a roth while they are down so that my tax bill will be minimized.

[mattmacauley]

I agree with most everything that’s been said here, so I won’t re-iterate with any of these, except briefly for ZM. Though it’s more “holistic” than analytical, but I feel like Zoom is breaking out of its shell to become much more than just a video conferencing company. We’ve heard this sort of thing before: “Amazon is more than just a bookstore (or later, more than just an online store)”, that “Apple is more than just a computer company”, or “Netflix is more than just a video store”, and “Roku is more than a hardware company”. I don’t know what the future holds, but I plan to increase my small position in ZM throughout 2020.

But that’s not the point of this post. I want to propose a few others stocks that haven’t been mentioned in this thread, or in similar threads these last few weeks, unless I missed something (very possible).

TDOC (Teledoc)

This stock has been discussed on here from time to time. They do tele-medicine. It’s obvious to see the potential here with COVID-19, and how this is a new macro-trend. Indeed, their share price is up 64% over the last 3 months. Here are two relevant threads on this board from last year that got a healthy discussion, with pros and cons:

Austin’s “why I own TDOC”, 1/24/19: https://discussion.fool.com/why-i-own-tdoc-34117521.aspx
rockleppard’s TDOC writeup, 10/4/19: https://discussion.fool.com/teledoc-tdoc-34310116.aspx
SeekingAlpha article from last week: https://seekingalpha.com/article/4331730-teladoc-huge-upside…

I also can’t help but wonder whether this is in a mini “COVID-19 bubble”. I believe in the long-term story of this stock, but at $125 and P/S of 16.6, it looks a bit frothy right now. Of course, I said the same thing a 3 months ago when it was at $80. I sold out of it last July at $68 for what I thought was a nice profit then. I’ve been waiting for a better re-entry point since COVID-19.

MA & V (Mastercard & Visa)

These aren’t ultra-high growth “Saul stocks”, but MA has a 33% CAGR since their 2006 IPO, and V has a 22% CAGR since their 2008 IPO. I know some people here are confident that they can beat that going forward, but if you could guarantee me a 22% rate for the next dozen years, I’d be all in. Unfortunately, with so many businesses shutting down during the COVID-19 outbreak, people are going to have to be racking up credit card debt at historic rates, just to pay their bills. Credit card companies are going to reap the benefits. I’d buy these over SQ – a company regularly discussed on here, in a heartbeat. Before COVID-19, I’m not sure I would have said that.

Also, I’ve traveled a lot, and it’s surprising how much of the world is still largely a cash society. This includes much of Asia, and even European countries such as Germany. This is of course going to change in the long term, but I suspect that COVID-19 will be a catalyst. Not only is cash a potential vector of diseases, but a number of people who prefer cash and are out of work are going to be forced to take on credit card debt for the first time. Both MA and V are down, but not as much as the market as a whole.

Even though my current holding are nearly 100% high-growth – companies that are no strangers to this board, I will likely be buying some MA and V in 2020 because I expect them to do very well over the next few years.

Questions I’d like to pose:

FSLY (Fastly): This has been discussed on this board since their IPO last year. I still don’t really understand this company, other than that they improve internet performance and make things faster. Given how many people are now going to be working from home on Zoom, or just watching more Netflix during quarantine, it seems like that a company like FSLY could be well-positioned to benefit. At $14, they’re well below their 52-week high of $35, and -36% over the last month alone. Some of this was in response to their CEO stepping down. Does anybody who understands FSLY better have any insight on their resilience and/or opportunities through the COVID-19 crisis and beyond?

Finally an OT question, so feel free to (only!) respond by email. I’m 3 decades from retirement, and I put away money every month. I’m torn on whether to buy more of my favorite stocks that are down (e.g., AYX, DDOG, OTKA), or more ZM, which is up 67% over the last 3 months, but I really feel like is the beginning of something big. No doubt that some of the potential growth due to COVID-19 is already baked into the share price of ZM and TDOC…but how much? Is ZM at $110 really better than AYX at $95? I’m sure others are wondering the same thing. No board replies to this thread on this particular question, please! But if you’d like to chat, email me.

[SaulR80683]

I’m torn on whether to buy more of my favorite stocks that are down (e.g., AYX, DDOG, OTKA), or more ZM, which is up 67% over the last 3 months, but I really feel like is the beginning of something big. No doubt that some of the potential growth due to COVID-19 is already baked into the share price of ZM and TDOC…but how much? Is ZM at $110 really better than AYX at $95? I’m sure others are wondering the same thing.

Hi Matt,
That seems very focussed on the stocks, and not OT at all. You mentioned ZM being at “the beginning of something big.” Do you want to tell us what you are thinking about?
Saul

[Rubenslash]

One of the companies to compare our current stocks with is Salesforce, perhaps the only SaaS company already listed in the 2009 financial crisis.

They dropped about 70% from their all time highs in a period of just 5 months (July to Nov 18), however in the 2 years after the bottom, the stock price increased by 400%! It took them approx. 1.5 years to recover from that previous high.

Key message is, don’t panic if our SaaS companies drop 20% or more on a single day. Most of them have little debt, high cash balances and are cash flow positive. They will probably be hit harder than the market in general but they should bounce back as quickly once the crisis is over.

[brittlerock]

It is with great difficulty that I write this post. I feel somewhat like a traitor.

On Friday I went largely to cash. I kept a toe in the water in order to keep track of things, but for the most part I am out of the stock market. I do not have any intention of making this a permanent withdrawal, but honestly I have no time line, I have no trigger that will signal my return. I’m on the sidelines watching.

Generally, our participation on this board comes with an expectation that we provide the reasons we have for making the investment decisions we make. I had two primary reasons for this decision:

1. The erratic behavior of the stock market was interfering with my sleep. That’s unhealthy.
2. In a word, pandemic.

But, it is not just the disease. If I were to detail my reasoning I would have to wade deeply into politics. I’m not going to do that out of respect for the rules of the board. I’ll just leave you with the fact that the political landscape and my evaluation of the present situation led me to this decision.

Maybe I have a different perspective than most. I live about 10 minutes from the Life Care Center in Kirkland, WA where this virus made it’s American debut on January 21. That was less than a month ago. The health care system here in the Seattle area is already under stress. Everyday supplies required to run a health care facility are already being rationed at most (all?) hospitals in the area. From what I’ve read, Evergreen Hospital in Kirkland which received the patients from the Life Care Center has run out of beds. Patients are on gurneys in the hallways. Staff is exhausted and demoralized. A number of staff members who were exposed to the virus were sent home in order to self quarantine. None of them have been tested (as of a few days ago) as there are no test kits available. Those that are asymptomatic have been recalled even though they may be infected.

Testing failures have been devastating with respect to getting the upper hand on this situation. And this is in light of the fact that if we wanted to test we could have done so. The WHO test kits have been available since early January. Those tests work. The only reason we didn’t use it is because there was a conscious decision to reject that test. I won’t say any more along this line of reasoning as it quickly devolves to a political discussion.

This is going to get worse before it gets better. And because of the delays in taking action, it is going to be much worse than it might have been otherwise. Even if we did everything right from this point forward (I have no confidence that we will get things even half right) the impact of this disease is going to be enormous.

Will our companies suffer? It depends on how define “suffer,” but I have confidence that none of them will be driven out of business. They have subscriptions that will continue to feed their coffers, they carry little to no debt and most of them have considerable cash on hand. So what’s to worry? The customers of our companies are not nearly so well postured. The way I see it, revenue growth will be seriously curtailed. There is not any shelter from this. It’s on every continent except Antarctica. The depth of damage and the toll in human life and suffering is going to be very significant.

This is going to take an indiscriminate toll on the market. If it turns into a rout, people are going to get out. As the sell pressure builds, algorithmic trades will trigger thereby exacerbating the situation. For what it’s worth, in my estimation this is where things are headed.

I’ve seen it written on this board numerous times, “This time it’s different.” IMO, that phrase applies to the current situation. I have no idea when the bottom will come. I have no criteria with which to identify the bottom. I have not suddenly become a market timer attempting to make graceful and profitable exits and entries to the market. But of this I am reasonably sure. We have not yet seen the bottom. As the death toll mounts on a daily basis, the market will suffer.

Might I be wrong? Of course I might be wrong. If so I will timidly put my tail between my legs and buy back into the market after having paid taxes and lost the gains I might have made had I not sold. I considered that. I decided to sell anyway.

We are each responsible for our own decisions and actions. I am not encouraging anyone to follow my lead. I am only reporting what I have done, and to some extent, why I’ve done it. Even though I am temporarily out of the market, I’m still a daily visitor to this board. I’m still a member of this cyber-community.

My best wishes to all of you irrespective of your decisions or what you think of mine. Stay healthy as best you can. Social distancing is not just a couple of words, it’s an actual practice. I encourage all of you to put it into practice in your daily life.

[PaulWBryant]

Please no responses to Brittlerock’s OT post.

I encourage others – please do not post your opinions on what the market will do. We simply do not know. That’s really all we can say definitively! A false confidence that we know:

a) what will happen and
b) how the market will react at that point

…can lead us to make bad decisions.

We are all free to have as high or low a cash percentage as we like. But that’s not what we’re here to discuss.

Saul has been very clear.

Thank you,
Bear
Assistant Board Manager

[hmcproperties]

“They dropped about 70% from their all time highs in a period of just 5 months (July to Nov 18), however in the 2 years after the bottom, the stock price increased by 400%! It took them approx. 1.5 years to recover from that previous high.”

For more on this concept of technology stock performance in a crisis and the topic of smaller, growth stocks rebounding after a crisis, I might suggest listening to a recent podcast by Patrick O’Shaughnessy (Invest Like the Best Episode 163): http://investorfieldguide.com/investingincrisis/

Warning: The interviewee (i.e.; Dan Rasmussen) must be working from home as his toddler is in the background during the podcast recording making distracting noises during most of the interview.

Some notable highlights from the interview are below:

1. Regarding the Psychology of Crisis: In discussing the psychology of a crisis; there is the Theory of Rational Beliefs which states that at any given time during a crisis there are a range of forecasts as to what the outcome of a crisis can be and each of those forecasts can’t be rationally disproven because of the extreme level of uncertainty that is underlying the crisis. Studying the patterns of behavior during prior crises show that there is often an expansion of the threat of Rational Beliefs, meaning that the number of forecasted outcomes become more numerous and the range of those outcomes become more divergent. However, only the most extreme and divergent outcomes seem to be those picked up by the media and therefore become the loudest voices in the room.

2. Regarding Buying Profitable Companies:Buying companies with positive net income and positive operating cash flow during times of economic growth and “easy money” doesn’t necessarily impact returns to a great extent, however during an economic crisis comparable returns for these same types of companies are nearly double those of companies without positive net income and positive operating cash flow.

3. Regarding the Duration of a Crisis; Duration can range quite broadly. The shortest can be 1-3 months; in 2008 it was 12 months and the draw down of the S&P 500 went on longer in 2000 at 18 months. [Crisis duration here is measured from the time that high yield spreads reached 650 basis points…OT and I don’t really understand this, but including it for reference.]

4. Regarding a Possible Paradigm Shift: Could we see a paradigm shift brought on by the current crisis; perhaps a compression in U.S. large cap growth as due to overvaluation and a break-out in international that has been fairly valued and a decade of under performance.

5. Regarding the reversion of the long-standing idea of NASDAQ investing over all else: The most obvious thing for equity investors to do during a crisis is to go down in market cap size. During the crash of 1929-1932; large cap stocks took 12 years to fully recover. Small cap stocks took only 4 years. Small cap recovery from 1932-1936 was +800%. This is broadly true of every economic crisis studied; each time the S&P 500 has fallen as it has recently, small caps have lead the rally by a lot, whether that is small cap value or small cap growth. Shifting down in size is a smart thing to do.

6. Musings on Growth vs. Value: [I will keep it short here because this discussion on the persistent disappointment of value investing over the past years was mind numbing.] Growth may continue to win out because the quality of growth stocks today are so high in quality, generating so much cash and so much profit and growing profit at substantial rates (MSFT, ADBE) or driven by companies with solid, high ROE (MA). And if we find ourselves in a world where GDP growth is zero; no economic growth and interest rates at 0% we are going to prize and covet high quality companies; on the other hand do you really want to be owning asset heavy industrials, energy companies, banks, or manufacturing at this time?

7. Thoughts for moving forward: a. Be aware of the bearish opinions on the news outlets from those of whom, so called experts, are finally right after years of calling for a bear market, because now they will be the loudest voices in the room thumping their chests (even a broken clock is right two times per day) on all media outlets. b. Markets price things well in advance before they happen, so yes market conditions will get worse and so will Covig-19, but markets will go up before the conditions improve and before Covig-19 improves. As soon as the worse case scenarios on the tail end of the Rational Beliefs continuum can be ruled out, the markets will begin to recover. c. Based on studying historical market crises and the data; now is the time for a buying opportunity which presents itself between now and the true bottom which often comes 3-6 months after the panic. So then if not right now, then perhaps over the next 3-6 months. This will represent the best buying opportunity of a decade. Avoid the pessimism and the scary voices on the news. Act rationally and the rational thing to do is to start buying. Over the long term, 100% of panics in the market have resulted in reaching the prior peak. The markets are resilient.

I hope you find value in the summary presented above and suggest you may wish to listen to the podcast to pick up on some of the nuances. At times, it becomes a bit “wonky” for my taste, but I navigate past the wonk and pull out the nuggets.

Go Buy Today!

Harley

[Citibeach44]

So what I’m noticing for the first time are posts about selling, moving to the sidelines, what should I sell, is it too late to short the market.

These are the first signs to me that we are starting to see individual investor panic. Playing it safe, losing longer term conviction, letting the monkey brain take over and emotionally make investment decisions.

I’ve been anywhere from 45 to 55% cash for the entire year, more concerned about a long in the tooth bull market and an election coming. That was my decision. Now that’s not even news worthy as we all know.

What I did this morning after trading was halted. I started positions in PAYC, ENPH and added to AYX.

I have limit orders remaining to add to OKtA, DDOG.

I’m willing to keep moving forward and add as I see opportunities.

TMB

[hmcproperties]

“So what I’m noticing for the first time are posts about selling, moving to the sidelines, what should I sell, is it too late to short the market.”

TMB,

Have discussions on Saul’s board indicated to you that there is individual investor panic?

Although I have not been reading as many daily posts as I might otherwise because I have been busy adding and layering in to some of my key companies on the way down; but I can’t say that I concur.

Quite the opposite in fact because I have been reading posts about how best to press forward during these challenging times; posts on which companies fellow board members have been adding to and discussions on SaaS oriented companies and how to continue to evaluate them moving forward.

Maybe I have been avoiding the “doom and gloom” posts; but my experience and take-away regarding this board has been different.

On a related matter; I am thrilled that you have a ton of cash to deploy in this market; not certain why you had it sitting idle for an entire year. I tend to take a fully invested and long term approach. Nobody can time the market.

Harley

[Citibeach44]

“On a related matter; I am thrilled that you have a ton of cash to deploy in this market; not certain why you had it sitting idle for an entire year. I tend to take a fully invested and long term approach. Nobody can time the market.”

Yea Harley I sense a certain tone in your post and don’t think you are quite sincere in your “thrilled” comment.

I didn’t post what I posted as any sort of gloat and fully gave my explanation of why I went heavy cash this year and it has nothing to do with coronavirus, but here were are.

Yes I’ve seen more posts today about shorting, protecting and selling that I’ve seen in quite some time.
I wouldn’t have commented on it if I hadn’t.

My post was about longer term thinking and adding in these sell offs and continuing to do so, no harm and no foul in that. No bragging, or I told you so or anything else you are attempting to make my post.

I hate to say it but posting on this board is a pretty unfriendly endeavor unless you are a regular poster and in the club. One more time I’m reminded I’m not welcome here, and in a time that we should be kind and considerate to each other.

Your post was uncalled for Harley.

TMB

[hmcproperties]

“Yea Harley I sense a certain tone in your post and don’t think you are quite sincere in your “thrilled” comment.”

TMB,

I am thrilled that you have such cash to deploy at this most opportune time. As I stated, I tend to stay fully invested and have had only a modest amount of cash to deploy during this volatile time.

You certainly read far more into my post than was intended.

Go back and review my historical posts to this board. You will see that I do not troll are present argumentative post. It’s just not my style.

This is my last post on this topic as you can imagine we have far too much drama in our lives given current circumstances and a message board post should not add to the issues.

On a humorous note; let me know when you are given the secret password to the “club” because I’m waiting for that as well…ha…ha.

Harley