Question: Which of my stocks are cheap?

Also Saul I am just wondering as you discuss building your portfolio, if you see any of your current stocks as being relatively cheap and where you are putting new money. I love SHOP but am worried that it is a little overextended right now although I think in time to come I will laugh at that statement as it charges upwards. TWLO is close to its lows and seems to be building a base - perhaps TWLO, Likewise with HDP. PAYC also a little over extended. So many great companies and so hard to choose.

Hi CraigDoc, Interesting question. Here’s how I see it, but it’s just impressions as I really have no inside knowledge in these areas.

Amazon - Certainly not cheap. Seems to be constantly growing in value. Taking over world of retail. AWS seems to be getting some competition from Microsoft. When will it stop finding new things to invest in and start making money. Possible political risks?

Arista - Growing revenue and EPS at 35%, but not cheap (PE is 37). Still battling in the courts with Cisco, but will probably keep growing and taking market share whatever Cisco does. I don’t know about possible future technological threats. Very smart management and very good company.

Bofi - Was cheap six months ago at $16. At $29, not so cheap. Legal issues not over but seem to have faded in importance. Now, just a good, apparently well-functioning bank, but with EPS growth and growth of tangible book value both slowing considerably as it becomes larger. PE of 15. Just on the border of cheap, maybe.

Hortonworks - Cheap? No way? Maybe cheap in that it’s down 65% from its high, and it’s certainly bounced off its bottom and is on its way up, and revenue was up 51% last year, and billings were up 63%, and deferred revenue was up 72%, and they reached Adj EBITDA breakeven, but they are still losing money, and while they are in a rapidly growing field, I don’t have a clue about technological challengers.

Kite - How does one evaluate cheap or expensive for a company like this, which has the first in a class of drugs which is likely to totally disrupt the whole treatment of cancer. On the other hand its up 79% already in the seven weeks I’ve had my little position, on news which was totally expected (by me anyway), based on their past results. This was no big surprise! Why the big move. The shorts were hoping for some bad result to bail them out and they finally abandoned ship and covered. When Kite gets FDA approval the price may rise again, but when reality sets in and they start to get evaluated as a real company instead of an exciting story, and losses continue for the foreseeable future (at least a year or two) the price may come back to earth for a while. I’m totally satisfied and holding my small position, but cheap??? No way!

LGI Homes - Yes! Cheap! In the sweet spot in a market where they can sell all they can build as fast as they build it. (Remember though that there is no recurring income). Revenue was up 33% last year and earnings per share were up 36%. And they are at a PE of 9.5! This one is Cheap!

PayCom - How do you measure cheap here? Revenue was up 50% in 2015, and 46.5% in 2016, and it’s probably just about all recurring. But people are aware of this and it has a PE in the 60’s. Not at all wildly over-extended, but not really what I’d call cheap either. Good company.

Shopify - What is cheap and what is expensive for a company that’s grew REVENUE at 90% last year? And it’s almost all recurring as I see it. (Granted in a recession or depression some of its clients will go broke and their customers will buy less, but that doesn’t make it non-recurring to me. If you sell a TV set today, tomorrow you have to go out and sell another one to someone else. THAT’S NON-recurring!). This is a truly booming company, but NOT cheap.

Splunk - This one is making money! And adjusted earnings were up over 100% off a small base. And revenue was up 38% last year. And cash flow is positive and growing. Existing customers spend more each year. It’s all rapidly growing and recurrent. I love it. But cheap. Nah! Not with a PE of 150.

Square - Adj EBITDA has been positive and growing for three quarters. Losses are shrinking. Revenue was up 42% last year. All recurring the way I think about it. But they are in a crowded field and don’t have much moat except ease of use and integration, and very smart management. Good company, but not really cheap until they start making some money.

Talend - This one may qualify, just on the basis that revenue growth is accelerating, losses are coming down, revenue is recurring, and it hasn’t been discovered and bid up yet. Here is the year-over-year growth percentage of revenue for the past eight quarters: 15% 19% 22% 28% 34% 38% 40% 45%… Now that is pretty amazing!!! Revenue growth percents usually come down as the company gets larger. - Illiquid stock. Be careful.

Twilio - They surprised themselves and broke even last quarter. Losses are falling, revenue was up 66% for the year. There are people who feel this company will be replaced by other technologies or open source, and others who really love it. I’m just sticking with the growth trend.

Ubiquiti - Yes! Probably cheap! Earnings up 37% last fiscal year. PE of 17. CEO has taken over running the company in a serious way. They have a fanatically loyal community of users and customers. Expanding now into enterprise. Only danger (and a real one) is that they make tech hardware, not software. They have overcome some of the dangers by having a very numerous and diverse worldwide community of customers and they sell products at a third of what Cisco sells the same products for. That removes the danger that they will become commoditized. They can do this because they don’t have much sales expense with their community who evangelize for them, and thus have great margins even as they sell for much lower prices.

I hope this is of help.

Best,

Saul

46 Likes

Saul, Thanks for that extensive reply. It might be time to find some Saul type stocks that are cheap :). Although as you implied in retrospect many of these that are up nicely and are expensive by traditional methods could turn out to have been cheap.

I lightened my SBNY late last year after the trump run up and at that time got into PAYC, SHOP, UBNT and NVDA for what now seems really cheap and was thinking of exiting the remaining half but I am not sure where I would put it within the Saul Universe although I am entertaining small positions in a couple of these: ESNT, BOX, HCSG,SRCL, CTRP and IMPV. Some of those are a little speculative but have been mentioned on this board and seem interesting at least as starter positions.

Saul, Again thanks !!!

Craig

1 Like

Saul,

Please do not let me twist your word.

The way I read the above, it you were not over weight LGIH and you were to trim so “no cheap” positions, LGIH would get the call. Followed by Taland, Twillo and Ubiqti.

Cheers
Qazulight (From my phone before first coffee)

1 Like

The way I read the above, it you were not over weight LGIH and you were to trim so “no cheap” positions, LGIH would get the call. Followed by Taland, Twillo and Ubiqti.

Hi Qazulight,

I can’t understand your question. Perhaps you should try rephrasing it, or not letting your spell checker go wild. (smile)

Thanks

Saul

LGI Homes - Yes! Cheap! In the sweet spot in a market where they can sell all they can build as fast as they build it. (Remember though that there is no recurring income). Revenue was up 33% last year and earnings per share were up 36%. And they are at a PE of 9.5! This one is Cheap!

Talend - This one may qualify, just on the basis that revenue growth is accelerating, losses are coming down, revenue is recurring, and it hasn’t been discovered and bid up yet. Here is the year-over-year growth percentage of revenue for the past eight quarters: 15% 19% 22% 28% 34% 38% 40% 45%… Now that is pretty amazing!!! Revenue growth percents usually come down as the company gets larger. - Illiquid stock. Be careful.

Twilio - They surprised themselves and broke even last quarter. Losses are falling, revenue was up 66% for the year. There are people who feel this company will be replaced by other technologies or open source, and others who really love it. I’m just sticking with the growth trend.

Ubiquiti - Yes! Probably cheap! Earnings up 37% last fiscal year. PE of 17. CEO has taken over running the company in a serious way. They have a fanatically loyal community of users and customers. Expanding now into enterprise. Only danger (and a real one) is that they make tech hardware, not software. They have overcome some of the dangers by having a very numerous and diverse worldwide community of customers and they sell products at a third of what Cisco sells the same products for. That removes the danger that they will become commoditized. They can do this because they don’t have much sales expense with their community who evangelize for them, and thus have great margins even as they sell for much lower prices.

Saul,

Ok. I have had my coffee, (and a couple of mimosas and eggs Benedict, and fruit and coffee - the Riverside hotel in Boise has a great brunch.) and I have FireFox running.

As I have been following you, it has become apparent that you neither buy nor sell stocks. You trade them. I see a lot of value in this, but I am unsure of my ability to emulate so I am still watching after a long time, maybe a year. I will note that just grabbing a few of the “Saul” stocks from my caps portfolio has turned it from red to green and this is without actually trading as often as you do.

So, the question was, if you were to be trading, and you were not over weight in these stocks, we could expect that when the time comes for trimming and adding, these would be added to, especially LGIH and Ubiquiti.

Cheers
Qazulight (Boise is a nice place to visit.)

If I was average weight in all of them, and not overweight in any…? when the time came for trimming or adding would I add to those four (LGIH TLND TWLO UBNT)? That’s your question…

Treating this as the total hypothetical it is, if they were all currently at 8% (figuring 12 positions), I would:

I’d add to LGIH first.

I’d add to Splunk second. To remind you, here’s what I said about them: Splunk - This one is making money! And adjusted earnings were up over 100% off a small base. And revenue was up 38% last year. And cash flow is positive and growing. Existing customers spend more each year. It’s all rapidly growing and recurrent. I love it. But cheap. Nah! Not with a PE of 150. …I guess you missed the “I love it.”

I would keep Talend at an average size position because of its illiquidity and wide bid/asked spreads, but if that’s not a problem for you, you might add to it. If it was more liquid I might add a little.

I’d keep Twilio at an average position because I don’t have enough understanding about what they do or confidence in it to make it an above average position. I’m not sure what made you think I did. Here’s what I wrote: Twilio - They surprised themselves and broke even last quarter. Losses are falling, revenue was up 66% for the year. There are people who feel this company will be replaced by other technologies or open source, and others who really love it. I’m just sticking with the growth trend.
Doesn’t mean I don’t like it. Just not an oversized position worth (unless it grows there itself).

I’d keep Ubiquiti as an average size position too. But don’t forget that for me an average sized position is about 8%. That’s a bunch.

I might add a tiny bit to Shopify, because I have a lot of confidence there in spite of the run up. Shopify - What is cheap and what is expensive for a company that’s grew REVENUE at 90% last year? And it’s almost all recurring as I see it… This is a truly booming company, but NOT cheap.

I might add a little to Arista.

I’d sell half of the Bofi. I wouldn’t want it to be a full 8%, and would be more comfortable at 4%. Same for Kite, of course. Especially since it’s run up so much… 8% would be too dangerous for me.

I might add a tiny bit to Paycom. Good company.

I might sell a tiny bit of Amazon to help pay for the ones I’m adding.

Hope that helps. As you see I’m not focussed on “cheap,”…which makes sense if you think about it as I’m in no way a “value” investor, and I don’t look for cheaper entry points at all, etc. I look for companies that have recurring income (if possible), and ones I think have a long runway and have a long way to go on that runway, and generally a big future.

Saul

19 Likes

Hortonworks - Cheap? No way

Another way of looking at is, I think, HDP will be eventually bought out and I expect it will fetch $1B valuation easily, that is 65% higher from where it is today. The takeover put, basically limits the share prices from going down significantly from here.

1 Like

I’d sell half of the Bofi. I wouldn’t want it to be a full 8%, and would be more comfortable at 4%. Same for Kite, of course. Especially since it’s run up so much… 8% would be too dangerous for me.

I"m wondering if I missed a few posts somewhere along the line, Saul: I did not see BOFI as one of your holdings at the end of February, but your post above suggests you still own shares (or perhaps sold your shares but then bought in again(?))

I still own mine and intend to keep them at least until we see how the H&R Block factor affects their earnings.

Good post re “cheapness”
Few stocks are cheap today. It’s a bull market.

In general individual stock prices are determined as much (or maybe more) by the sector and general market pricing as they are individually set. That is probably true of P/E too though I have not studied it.

Hope that helps. As you see I’m not focussed on “cheap,”…which makes sense if you think about it as I’m in no way a “value” investor, and I don’t look for cheaper entry points at all, etc. I look for companies that have recurring income (if possible), and ones I think have a long runway and have a long way to go on that runway, and generally a big future.

This resonated with me big time. It’s almost a Foolish truism at this point, but the best companies are rarely cheap. I’ve heard it said a zillion times, but I have to repeat it here because I’m starting to realize more and more how true it is. At first I didn’t believe it. I thought, yeah, but all things considered I’d rather find something great AND cheap. Those are like unicorns, though, if your definition of “cheap” is a PE like LGIH.

I don’t think we need to be looking for what’s cheap…maybe we should consider if something is unreasonably expensive…but mostly we should focus on the runway ahead, as Saul says. If SHOP whose revenue was 389M last year someday achieves a run rate of 10B, you won’t care if you first bought it at $40 or $65.

Now yes, I trim a position if it starts to look extremely pricey and I sometimes load up on something if it looks much less expensive than my other stuff. But I no longer keep positions at ANY size if I’m not confident about the company. This position size jockeying is just a guess based on my current confidence levels.

I’ve grown quite skeptical of “cheap.”

Bear

4 Likes

maybe we should consider if something is unreasonably expensive

This is certainly something I have been paying more attention to. I.e., stocks which have already gained dramatically by the time they come to my attention. There are, of course, one’s like Amazon that have been doing that for years on end which one would never buy if one allowed this concern to always dominate, but I think in the past I have been too willing to climb on to a stock which had already gone up a lot only to have it retrench.

2 Likes

I"m wondering if I missed a few posts somewhere along the line, Saul: I did not see BOFI as one of your holdings at the end of February, but your post above suggests you still own shares (or perhaps sold your shares but then bought in again(?))

I did sell out of it last quarter but bought back a miniscule amount (0.6%).

Saul

“…but I think in the past I have been too willing to climb on to a stock which had already gone up a lot only to have it retrench.”

I am not a huge fan of TA but I do find that some stocks have trading patterns that I take advantage of and some have an intimate connection to their 50 or 200 DMA that helps guide me. If it is a company I like I will often use these patterns. Maybe they work or maybe I have been lucky. I find that a stock that hugs or keeps revisiting its 50DMA that suddenly gaps up will almost always revisit that 50DMA and give a great opportunity to buy once it has come down a little. I bought PAYC in early Feb and Mid November based on those two events. In the case of ATVI earning surprises that brought it back to the 200DMA allowed me to pick up stock in Feb 2016 and early January 2017. Again both of these events worked out really well. I realize that this might be a selective memory bias and I have missed out on opportunities in the past but I do think there is some merit to this approach - or not :slight_smile:

2 Likes

Being one of those who thinks of TA as seeing things in the tea leaves, I am disinclined to use any of these “signals”, but I will say that I am now more inclined to look for dips and set mental thresholds for when I will buy. I can’t say that I have been doing this long enough to have much idea of how well it has worked, but I have at least one case where I have a positive return where I might not have if I had just leap when I decided the company was desirable … but so far, most of the effect has been to keep me out of companies.

1 Like

Hi Saul,
Great post and thanks for letting us into your thoughts on your holdings. After reading through it, I must admit it hit me that your portfolio has really changed over the last couple years. It seems like it wasn’t long ago that you were working on the 1yr peg ratio as a good way to evaluate a company. As I recall, most of the companies you owned favored very well when using that parameter. SKX, WAB, INBK, etc. Now I notice that quite a few of your present holdings don’t even have earnings…

Now I am in no way attacking your choices or methods. I just can’t help but be impressed at the way you move and shift as the markets change. It wouldn’t surprise me at all if a market correction started to appear that you would again change your portfolio mix. And probably get out of most of the high fliers before they take a significant hit. And have very logical arguments for the moves you made.

Again, I am always interested in methodology as much as selections because I want to improve my techniques and I must admit, I have no idea how you do what you do. I am impressed, just not sure what to do about it for my own portfolio.

Anyway, just some Sunday night musings… Congrats on the awesome start to the year… keep it up and thanks for the look behind the curtain (although I haven’t figured out what is back there yet! :slight_smile:

Randy
Long INBK AND SKX

6 Likes

IF my stock is “cheap” I get very worried, very worried indeed. But cheap is a matter of interpretation. I have bought many a stock that was “cheap” by my calculations (and I actually used calculations) but was still considered 'overvalued" by the pundits.

Back in 1986 a stock like Microsoft was actually cheap when it IPOed. It was selling for 4-5x trailing revenues, and although I did not know the growth rate at the time, probably about 3x forward revenue, despite profit margins of 34% at the time. Of course there was still worry and concern that IBM could still crush them, or that a substitute operating system might exist, or that Lotus Notes (later bought by IBM) would out do newly introduced Office, that sort of thing. FUD sort of stuff.

Now we have to look forward looking to find “cheap” and that is because we now know better how to value the opportunity in software, and in other types of technology, that were new back then and not as well understood.

When a stock gets “cheap” but the market is in a bull mood, then there is something materially wrong with that company, almost every time, unless there is some sort of misunderstood Fear Uncertainty and Doubt (FUD) event going on. The market is not stupid, just short sighted.

And when the market goes bear, there is nothing “cheap” either as forward looking business projections almost always decline.

So you have to define “cheap”. I will not buy a truly cheap stock by conventional measures. I lose every single time. I mean every single time I have tried. Only tried a few mind you, so anecdotal.

Tinker

4 Likes

Btw

I don’t know if it is “cheap”, and like Saul I am still getting to know Twilio (from his prior stock update in regard to balancing of portfolio if he would add or maintain or sell) but forward looking price to sale for Twilio is 4.5, for a fast growing cloud company that is about as good as it gets in the “cheap” category.

Is this lack of vigor due to (1) Uber’s current controversies and troubles (as Uber is now, not Facebook) Twilio’s largest customer, (2) due to the continuing overhang of insiders, (3) due to continuing fear of substitute technologies, or do it yourself remedies (hint: substitutes, I don’t fully understand, but do it yourself is an utterly absurd fear in the context of Twilio), (4) some real long-term competitive advantage issues (i.e., is the CAP really not so big), or (5) something else.

Being cheap causes concern, and although Twilio is not really “cheap”, in the context of the current market it is “cheap” given the type of company, its growth rate, and current market dominance relative to its peers (which it really doesn’t have any as it is materially different from the other cloud companies).

So it causes one to take inventory of it, and perhaps creates an opportunity, as long as “cheap” is really pretty dang pricey from conventional metrics but not in relation to CAP and TAM and growth rate as indicative of how fast it is getting there.

Tinker

2 Likes

I still own my BOFI and intend to keep them at least until we see how the H&R Block factor affects their earnings.

Hi Speedy, Here’s what the CEO said in the Conference Call:

As I noted earlier, we’ve started our second season – tax season offering cobranded financial products with H&R Block. In addition to the three products we offered to H&R Block customers last year, Emerald Advance, which is a line of credit, Emerald Card a general-purpose reloadable prepaid card, and Refund Transfer a temporary bank account to receive a tax refund, we’ve also offering new IRA accounts and will provide funding for the new refund advance and interest free loan to customers expecting a tax refund.

We continue to expect that on an annual basis, the H&R Block program management agreement will generate $31 million to $34 million of revenue and $13 million to $16 million of net income on par with results reported for the 2016 tax season.

Just reading that it sounds as if the amount of revenue they expect to get from H&R Block is a fairly stable annual sum, with probable small increments as they add additional products around the edge. But that’s just how I read what he said.

Saul

1 Like

forward looking price to sale for Twilio is 4.5

Tinker,

I don’t really get anything close to that low, even if I use the expected 2018 sales, 487M.

Can you explain your calculation?

Thanks,
Bear

Bear, you are correct. I was slightly off, but not by too much. I use enterprise value, and not total marketcap. I have found over the years that using enterprise value often provides much better investment info than just mark et cap. TWLO has a little over $300 million in cash. So I used en terprise value of ~$2.5 billion and then the forward price to sale is 5, GIVE or take whether you use the low, average, or high estimate. My shares are up about 15% since I rebought them. Could be that I used the enterprise value when the shares wer lower when I made that calculation, which would put it around 4.5x enterprise given the last time the price dropped a week or two ago or so.

Presently though 5x forward enterprise value is more accurate.

Tinker

2 Likes