I’ve been reading this board for a while and am constantly amazed at the knowledge and experience of the members here.
I’ve been nibbling at some Saul stocks recently, but one of the things that’s held me back is my price anchoring. No matter how great a company, I find it tough to jump into a stock that’s doubled or tripled in a just a few months time.
I’m old enough to remember the tech bubble, and the years (if ever) it took for many of those companies to ever get back close to their highs. CSCO is still about half of where it was in 2000.
Are these companies destined to follow the same path? Is it safe to jump in at these levels? Or will history repeat itself? When is it too late? Or when is the time spent waiting for a dip that may never come a lost opportunity?
Any thoughts appreciated.
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Hey Todd,
In short, the tech bubble had a lot of tombstones that focused on an idea and euphoric sentiment (with a power factor). No revenue and no actual numbers to post. Incredulous how analyst’s kept recommending higher price targets!
The Saul type stocks exhibit strong YoY Rev growth. Strong YoY growth not at the expense of higher YoY expenses. Total addressable market should be high to continue the long runway. Strictly using Case Schiller metrics aren’t adequate since these SAAS companies don’t have a typical balance sheet found in the 20th century. Moreover, what’s the cost to obtain an additional customer and then retain them with add on subscription premiums versus a durable good from CAT, GE, GM? Should PE values be allowed like AMZN? Maybe, depends if management has the special Bezos sauce.
I greatly enjoy and learn from Saul and Bear’s EOM reviews. They typically go over the most recent earnings. In addition, other will typically review the earnings and provide great insight.
~Scott
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Todd: I’m old enough to remember the tech bubble, and the years (if ever) it took for many of those companies to ever get back close to their highs. CSCO is still about half of where it was in 2000.
Are these companies destined to follow the same path? Is it safe to jump in at these levels? Or will history repeat itself? When is it too late? Or when is the time spent waiting for a dip that may never come a lost opportunity?
Scott: No revenue and no actual numbers to post. Incredulous how analyst’s kept recommending higher price targets!
The Saul type stocks exhibit strong YoY Rev growth. Strong YoY growth not at the expense of higher YoY expenses. Total addressable market should be high to continue the long runway. Strictly using Case Schiller metrics aren’t adequate since these SAAS companies don’t have a typical balance sheet found in the 20th century. Moreover, what’s the cost to obtain an additional customer and then retain them with add on subscription premiums versus a durable good from CAT, GE, GM?
Scott,
First, thanks for the kind words. Second, that’s a lot of info packed into that paragraph. I agree with you 100%. You seem to have captured what a lot of folks are missing. I’ve seen Ears say that “there’s nothing special about the subscription model.” Well you’ve named 3 things that are:
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The “balance sheet” issue. Many folks don’t like the fact that SaaS companies run close to (sometimes below) cash flow break-even, and give away lots of stock based compensation. But it’s a different business model that involves very little or no debt. I don’t see any of the naysayers considering this.
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They can spend a lot acquiring customers because they have great gross margins, so once they have the customers they are very profitable, incrementally.
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As Saul keeps trying to beat into everyone’s heads, these revenues are very stable. Sure, compare it to magazine subscriptions. But how many magazines sell 20% - 30% more product to each of their subscribers each year? Or retain 95%+ of their subscribers? Steady growth at an impressive clip is very likely if the product is good enough for those things to be true.
Lastly, to the original poster - many current valuations, though certainly rich in most instances, are completely incomparable to the crazy dot com bubble days. We’re talking by orders of magnitude. Here’s just a little more about that: http://discussion.fool.com/i-came-to-a-point-when-i-felt-csco39s…
All this to say, I don’t think we’re in a bubble. Any money in the stock market will be subject to volatility, but I would recommend putting at least the majority of your money in the game. You could miss out on a lot more upside before another “correction.” And even when the stocks go down, if the companies keep chugging along, you’ll probably just want to add a bit more, because they won’t be down long.
Bear
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Bear, if you’re going to quote someone at least try to get the quote right. What I said was
there’s nothing magic about the SaaS model. Meaning the SaaS model doesn’t automagically
guarantee success. Take a look at Marin Software (2MAA), for example.
Price anchoring isn’t the only bias. There’s also survivorship bias – only looking at the SaaS
companies that have been successful (so far) while ignoring all the SaaS companies that have failed
in the last few years. And recency bias – these companies have limited operating histories and
the seas have been VERY smooth the last few years.
It’s easy to think you’ve got the market figured out and everyone else just doesn’t get it.
I’ve fallen into that trap.
Ears
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There’s also survivorship bias – only looking at the SaaS
companies that have been successful (so far) while ignoring all the SaaS companies that have failed
in the last few years.
Isn’t even your fake SaaS portfolio up 39% this year?
Listen, Ears, it’s nothing personal. You just seem too skeptical to ever take a chance. You said yourself you’re in preservation mode at this point. I’m glad you’ve made enough money for your lifetime. Some of us still need to compound, and the only way to do that is to have skin in the game.
Bear
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To agree with Scott and Bear, Todd, while you say you remember the dot-com bubble, perhaps you were too young to really remember what was going on.
The dot-com bubble and the present day are two entirely different worlds. Most or many of the dot-com companies had no revenue at all, just an idea, were burning cash like mad, and they were able to raise 10’s or 100’s of millions of dollars on an idea. Top analysts were saying “ABC is at 200 times revenue, but comparables are at 400 times revenue, so ABC is cheap!” I specifically remember Bezos saying in an interview or conference call “I appreciate all the confidence that investors are placing in Amazon, but we are basically a retail bookstore, and at 200 times revenue our stock is over-valued.” Companies like Yahoo would rise $25 or $50 a day.
Our current “over-priced” stocks are selling at 7 to 20 times revenue at most, not 200 times, and their revenue is rising at 40% to 70% per year, most of their revenue is recurring (so it is semi-guaranteed), a lot of them also have considerable deferred income, almost all are debt free, many, or most, are cash flow breakeven or positive (so they are not burning cash), they have dollar-based retention rates of 120% to 140%, meaning last year’s customers add 20% to 40% to their subscriptions this year.
I’m not saying they won’t go down in a general market decline. What I’m saying is that there isn’t the slightest resemblance between these companies and the dot-com bubble. Two different worlds.
Best
Saul
41 Likes
I’ve been a follower of Saul’s board almost since it began. I’ve yet to get in on the ground floor of a single position. Everything I’ve bought has already doubled or more in the relatively recent past before I got on board. I still consider myself a newbie. There’s a part of Saul’s method that only comes from experience, I don’t have a lot of that yet.
But, I was up 83% last year. I’m up about 30% this year. I don’t pay any attention to benchmarks, my annual goal is 20%. I also don’t pay any attention to the vast majority of “analysts.” Every time an analyst issues a buy rating with a price target, that target’s an anchor.
Before I started reading this board I was dreadful about price anchoring. If I bought a stock and it went up, I would not buy more, my “logic” was why dilute my gains? If I bought a stock and it went down, I wouldn’t sell. My “logic” was it’s only a paper loss until I sell. You’ll notice my logic was completely married to the stock price, I didn’t really try to understand the company. All my buying was driven by “tips” or “recommendations” if you like that word better. I was impressed by product and service offerings (I still am). What I was missing was a way to look at the performance of a company. I considered financial analysis bewildering. BTW, I’ve got an MBA and I was an IT analyst for a lot of years. It’s not like I’m allergic to math and logic. It’s just that there are so many variables and ratios and derivatives, etc. that I never knew what was important and what could be ignored. The elegance of Saul’s method is that he has a method of focusing on what are the most important things to focus on most of the time. There’s still room for error. Saul reminds us of this frequently. But, if there were a 100% foolproof method, everyone would be rich.
Best thing I can tell you is stop paying sooooo much attention to the stock price and start paying more attention to the companies. No matter what and when you decide to buy, the stock price will either go up or down after you buy. If you you know why you bought in the first place and you’re reasonably confident about your decision, the stock price will likely go up until there’s a material change in the company’s affairs.
And if you’ve made a mistake, try to understand where you went wrong and move on. We all have to tolerate some losing positions.
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…Before I started reading this board I was dreadful about price anchoring. If I bought a stock and it went up, I would not buy more, my “logic” was why dilute my gains? If I bought a stock and it went down, I wouldn’t sell. My “logic” was it’s only a paper loss until I sell. You’ll notice my logic was completely married to the stock price, I didn’t really try to understand the company. All my buying was driven by “tips” or “recommendations” if you like that word better. I was impressed by product and service offerings (I still am). What I was missing was a way to look at the performance of a company…
Wow, brittlerock, what a great post. Thanks for having the courage to analyze what you had been doing in public. There is a lot for people to learn in it.
Best,
Saul
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Thanks Saul, I forgot to add that I would sell a position after it went up some undefined amount in order to lock in my profits, thereby ensuring that my gains were always limited. Totally irrational actions in every regard.
I was in the market for years, but I don’t think you could have called me an “investor.” I’m not even sure “speculator” is the correct term. My saving grace, if any, was that I was never heavily in the market with my life savings, I simply dabbled. It wasn’t until my mother died in 2010 and I came into a moderate inheritance that I started to pay more attention. But even then it was not a straight line to a more sensible approach to investing.
The first thing I did was to look at my history in the market and determined I really had no idea of what I was doing or why I was doing it. I decided I needed some professional assistance so I walked into an Edward Jones office (based on a recommendation from a friend in the office rather than personal research) and turned everything over to the wise, professional behind the desk. It took some time for me to realize what a folly that was.
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Our current “over-priced” stocks are selling at 7 to 20 times revenue at most, not 200 times, and their revenue is rising at 40% to 70% per year, most of their revenue is recurring (so it is semi-guaranteed), a lot of them also have considerable deferred income, almost all are debt free, many, or most, are cash flow breakeven or positive (so they are not burning cash), they have dollar-based retention rates of 120% to 140%, meaning last year’s customers add 20% to 40% to their subscriptions this year.
I’m not saying they won’t go down in a general market decline. What I’m saying is that there isn’t the slightest resemblance between these companies and the dot-com bubble. Two different worlds.
MSFT, once the most dominant software firm in the world, had a P/S at the peak of 28x, not too far off from 20x but certainly higher.
It is now 7x sales.
CSCO has gone from 35x to under 3x sales before rebounding to 4x. It was growing revenue by over 60% in mid-2000.
‘History doesn’t repeat itself but it sure does rhyme.’
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