Qualitative factors vs the numbers

Investment Analysis Clubs Saul’s Investing Discussions
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In reading your responses, it seems to me that you are weighing some qualitative factors much more than what the numbers are showing.

Hi Chris, I thought that over, and you are undoubtedly correct. I do weigh some qualitative factors more than the numbers. For example:

I don’t trust Chinese companies, no matter how good the numbers, and I also worry about the political risk.

I don’t feel comfortable with internet hardware companies, especially chip companies, no matter how good the numbers.

I love companies that have recurring revenue, and give that extra consideration.

As I noted in my comments on Blackline, I feel their alliance with Deloitte is very important although it hasn’t affected the numbers yet.

I value Talend’s management’s sense of euphoria, when they say “Our win rate is ridiculously high!” and imply that they have no real functioning competition for the moment.

I feel that the sense that Arista’s problems with Cisco are gradually fading is an important factor, although I can’t put any numbers to it.

I felt that my unease about WIX was more important than its good numbers. There are plenty of great companies that I don’t feel uneasy about.

In fact, I think a big reason I read the conference call transcripts religiously is unconsciously looking for qualitative factors.

Hope that helps,

Saul

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I thought that over, and you are undoubtedly correct. I do weigh some qualitative factors more than the numbers…In fact, I think a big reason I read the conference call transcripts religiously is unconsciously looking for qualitative factors.

Thanks Saul! Yes, qualitative factors are very important in evaluating businesses and making investment decisions. This last post by you is very helpful, probably to many on this board. I think, though, that my main point was that when the numbers don’t follow the qualitative factors then something’s wrong with the analysis, or something’s wrong with the importance of one or more qualitative factors , or you just have a story. I think we’ve all been taken in by a good story and have learned that the business results (the numbers) need to reflect what we view as important qualitative factors or else we risk being in a story stock with underperformance.

Now back to BL and WIX: Deloitte sounds good for BL but as investors I think we want this to result in an uptick in the revenue growth results. I would think it might take a year (given the long sales cycle times) to start and effect from Deloitte. Regarding WIX, I see that you are uneasy but I’m have trouble pinpointing exactly what it is which makes it hard to evaluate and make a decision. In reading the transcript of the earnings call, I could tell that several analysts were having an issue with their results. Management didn’t agree and I can’t see what the analysts are talking about either. The market reaction was several with a 15% drop and 30% drop from a recent high of around $86. Then in looking at the growth rate, the valuation, and the company’s drive to continuously improve their product offering, I saw the drop as an opportunity. Since you’re often right about troubles that companies face I thought I’d press you on it to try to get a better understanding of specifically what concerns you.

Chris

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The first thing I look at when considering an investment is what business is the company in? What’s their competitive advantage? Do they have a moat? What are the biographies of the management team? I research other questions of this nature long before I take a serious look at any numbers.

I put tremendous weight on non-quantifiables. If a company flunks on any of these factors, I don’t bother with the numbers, I move on.

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