Some thoughts on a painful correction

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Some thoughts on a painful correction

My portfolio has a mix of conservative companies and rule breakers, and generally speaking all the conservative ones have gone up this year while the rule breakers are down regardless of how good their results are…

To me, this just looks like the market cycling out of rule breakers and into conservative stocks as people get spooked and decide to take profits. Long term, that probably spells opportunity, though it may be a rocky ride in the short term.

Neil

I couldn’t have said it better. Any stock which had been going up has been getting crushed for the past eight weeks. It’s very discouraging.

But this isn’t 2008. For those who are too young to remember, in 2008 the banks and auto companies were failing, the economy was falling off a cliff, there were massive lay-offs being announced almost daily, unemployment was rising, it really WAS scary.

Currently we have rising GDP, jobs being created, falling unemployment, energy prices are low, new industries are being created, no big industry is crashing, corporate earnings have certainly ben satisfactory (for our stocks, at least, which are the ones I know about). Sorry guys, this is definitely not 2008, and there’s no reason to think it will become 2008. (And remember, bad as 2008 was, in 2009 the market (my portfolio at least) was up over 100%, so even 2008 wasn’t the end of the world).

Now the talking heads are worried about the Ukraine and Russia, and about the overbuilding of apartments in China, and how the Chinese housing market could collapse, but they always have something to worry about. A couple of years ago it was Greece and Spain and Italy that were going to crash the world, distant memories now. Important as China is, its economy is a small fraction of the US economy, and Russia is much smaller still. It’s very, very, likely (though of course no 100% guarantees), that everything is going to be just fine, and our rapidly growing companies will continue to grow rapidly.

More to come …

Saul

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#2

…continued

Now, let’s look at how some of our companies are doing, rather than how their stock is doing:

UBNT
Their last six quarterly revenues have been (in millions of dollars) : 61 – 75 – 83 – 101 – 130 – 138. For the Mar quarter they estimated between 138 and 144, which would be up 70% from 83. They have not pre-announced any problems. They probably expect to exceed the estimates they gave. There has been no bad news.

Their last six quarterly earnings have been (in cents per share) : 15 – 20 – 24 – 33 – 46 – 48. For the Mar quarter they estimated between 47 and 51, which, at the midpoint, would be up 104% from 24. They have not pre-announced any problems. They probably expect to exceed the estimates they gave.

If they hit, but don’t exceed, just the midpoint of their range, their trailing PE will be 24 at a stock price of $42, and 21.6 at a stock price of $38.

CELG
Their previous six quarterly earnings reports had been
$1.29 up 27 cents,
$1.32 up 27 cents,
$1.37 up 29 cents,
$1.52 up 30 cents
$1.56 up 27 cents
$1.51 up 19 cents.

The March quarter results were:
$1.67 up 30 cents.

Mar revenue was $1.73 billion, up $0.27 billion from $1.46 billion.

At the current price of $146.70 they have a trailing PE of 23.4.

They have a 2 for 1 split coming in June.

In March the FDA approved their drug Apremilast for Psoriatic Arthritis (which could be a big seller for them.

In April they acquired a late stage drug for Crohn’s Disease.

All along they have been making partnerships with small drug companies to subsidize their research now, and take over marketing of the drugs coming from that research.

For 2014 they forecast product sales up 16%. For comparison, for 2013 they forecast product sales up 11% and hit 18%!

In January they gave the following long term guidances:

2015 Guidance Raised
Product Sales of $8.5 billion to $9.5 billion
Adj Earnings of $9.00 to $9.50

2017 Guidance Raised
Product Sales of $13.0 billion to $14.0 billion
Adj Earnings approximately $15.00

Both UBNT have been hard hit in this selling wave. They sure look good to me.

More to come…

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#3

…continued :

Mar quarter results:

Record revenue, up 25%
Adj earnings of 63 cents, at high end of guidance range
?Fingerprint ID business accretive to adjusted results a quarter ahead of schedule

Outlook:
Up to 40% annual revenue growth expected in fiscal 2014

While at the start of the year we had forecast annual revenue growth to be about 21%, with the strength of the fingerprint ID business augmenting the growth of our core touch solutions, we now expect to achieve top-line growth of 37% to 40% for fiscal 2014.

We expect another exceptional quarter in June. Considering our backlog of $145 million, we anticipate revenue to be in the range of $275 million to $295 million for the June quarter, up 20% to 28% over the prior year quarter’s record revenue, and up 40% sequentially.

Further, the company substantially increased its outlook for the fingerprint ID business, resulting in an increase to “contingent” money they have to set aside for expected future earn-out payments. This reduces GAAP results but is obviously good for the company.

Third Quarter 2014 Business Metrics
Revenue mix from mobile and PC products was approximately 74% and 26%, respectively.

Revenue from mobile products of $151 million was up 44% year-over-year.

Revenue from PC products totaled $53.5 million, down 9% year-over-year.

Cash was $391.5 million.

The Conference Call was very positive.

The intraday price was up 20% from $60 to $72 when this was announced but settled back to $60 with continued pummeling from selling. It’s now at $58.45 which gives it a trailing PE of an unbelievable 14!!!

Saul

More to come…

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But this isn’t 2008. For those who are too young to remember, in 2008 the banks and auto companies were failing, the economy was falling off a cliff, there were massive lay-offs being announced almost daily, unemployment was rising, it really WAS scary.

Currently we have rising GDP, jobs being created, falling unemployment, energy prices are low, new industries are being created, no big industry is crashing, corporate earnings have certainly ben satisfactory (for our stocks, at least, which are the ones I know about). Sorry guys, this is definitely not 2008, and there’s no reason to think it will become 2008.

It always looks good at the top and bad at the bottom.
You don’t sell when things are looking bad - that’s too late. You sell when things are still looking reasonably good.

At some point within the next few years, things will be looking bad. A recession will come. The problem is that given current valuations, returns between now and then are likely to be quite negative.

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At some point within the next few years, things will be looking bad. A recession will come. The problem is that given current valuations, returns between now and then are likely to be quite negative.

Valuations are which company(ies)? Some valuations look quite good given the adjusted earnings growth rates. Look at SYNA, UBNT, AFOP as examples. Lumping everything into the total market and applying a “universal” valuation is not relevant when you own a handful of individual companies.

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At some point within the next few years, things will be looking bad. A recession will come.

Of course a recession will come sometime! Duh! What does that have to do with investing now???

With that kind of thinking you’d never ever buy a stock. Sorry, but I find it just silly.

Saul

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#4

…continued:

I had said let’s look at how our companies are doing rather than the stocks. In posts 2 and 3 on this thread we looked at UBNT, CELG and SYNA, so far. All three stocks were beaten down, but all three companies were doing great!

Yesterday two of our other stocks reported:

SCTY has really been beaten down. However it’s growing so fast it’s truly, truly, amazing.

Revenue was up over 100%,

MW deployed was up almost 100%

Customers added was up 150%

Operating lease revenue (recurring revenue) was up almost 100%

Nominal Contracted Payments Remaining were up over 100%

And they continue to nominally lose money. They’re doing great.

ZILLOW is not as beaten down as some of the others. It had a great quarter too:
Record Revenue of $66.2 million, up 70% from $39.0 million.

Record quarterly and all-time traffic, and April 2014 hit another record of monthly unique users on mobile and Web (up 50% year-over-year).

Premier Agent count grew 56% year-over-year.

And average monthly revenue per subscriber was a record, up 10%.

“The first quarter was a terrific start to 2014 with record traffic, revenue and results that exceeded our expectations and strengthened our lead. We’re continuing to ramp our marketing investment through the busy spring and summer home shopping season, which also helps increase value and opportunity for our agent and broker partners.”

Marketplace Revenue up 72%

Real Estate Revenue up 77%

Mortgages Revenue up 45%

Display Revenue up 62%

Due primarily to planned increases in advertising expenses, adjusted earnings were 2 cents compared to one cent last year.

Adjusted EBITDA was $8.7 million, up from $5.1 million.

Operating and Business Highlights
Zillow recently introduced the Zestimate(R) forecast, which forecasts what a specific home will be worth in 12 months.

Zillow Mortgage Marketplace continued to grow during the first quarter with 5.8 million loan requests submitted by borrowers, up 29% year-over-year.

During the quarter, Zillow also introduced Mortgage Pre-Approval, a new tool that enables qualified home shoppers on Zillow to get pre-approved for a mortgage quickly and easily, and receive a pre-approval letter in a matter of minutes.

The Zillow(R) Pro for Brokers program exceeded more than 1,000 brokerage partners nationwide. Zillow Pro for Brokers is a free program that improves listings accuracy, provides better reporting, includes a powerful contact follow-up system and increases the visibility of listing agents for participating brokerages.

Our market opportunity remains massive and in the early stages of online migration, especially on mobile. The further we pull away now, the better things get and yet we are still just getting started.

My Conclusion: An excellent quarter.

BOFI
Then, let’s look at BOFI, one of the bears’ recent favorites. They recently reported first quarter results. Some prominent values include:

Earnings of $1.00, up 35% from 74 cents. The earnings were up 10% sequentially as well.

Tangible book value of $23.51, up 29% from $18.17. Tangible book value was up 8% sequentially as well.

Assets under management were up 30.0%

Loan portfolio was up 41.3%

Loan originations were up 56%

Deposits were up 34.7%

Asset quality remained strong with total non-performing assets and non-performing loans both roughly just ½ %.

Doing great.

Three more companies doing great, even if the stocks are temporarily down. Are you starting to get the picture?

Saul

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Up to 40% annual revenue growth expected in fiscal 2014.

The intraday price was up 20% from $60 to $72 when this was announced but settled back to $60 with continued pummeling from selling. It’s now at $58.45 which gives it a trailing PE of an unbelievable 14!!!

Saul,

All I can come up with regarding SYNA’s decline is that they are a ‘supplier with heavy Samsung exposure’.
http://seekingalpha.com/news/1727233-samsung-reportedly-puts…

Also, where do you get a trailing PE of 14x? Both ETrade and Seeking Alpha report it at 35X. If the 35X is the number, then valuation is likely part of the decline (along with customer concentration concerns).
http://seekingalpha.com/symbol/SYNA

I haven’t bought into SYNA yet, but am very close to starting a position given the conviction on this board.

By the way, I don’t know if we are headed for a bear market, and I totally agree with your (Saul’s) market conditions analysis in one of your other recent posts, but the S&P 500 has still not declined much on a YTD basis. My feeling is that if this downturn extends to where the S&P does decline and we do head into a bear market, our growth stocks could fall further solely based on market conditions. I don’t want to try to time the market too much here in terms of new purchases, since one really can’t. The question is how much new money (of current cash reserves) to invest, and when, to take advantage of the value opportunities that exist on our wonderful growth stocks.

Thanks for your ongoing input Saul and all.

Best,
Vic

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Also, where do you get a trailing PE of 14x?

Vic,

If you are going to invest seriously, I suggest not getting PE off Yahoo, or Seeking Alpha, or eTrade, etc, but getting trailing earnings off the last four earnings reports, which you can always find on the company’s Investor Relations site. Then divide the trailing earnings into the stock price.

I ALWAYS use “real”, or “cash”, or adjusted earnings, and not GAAP earnings, which probably accounts for the difference. SYNA probably has acquisition costs or amortization of intangibles, or repricing of warrants, or something like that, which reduces GAAP earnings.

Saul

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But this isn’t 2008. For those who are too young to remember, in 2008 the banks and auto companies were failing, the economy was falling off a cliff, there were massive lay-offs being announced almost daily, unemployment was rising, it really WAS scary.

Currently we have rising GDP, jobs being created, falling unemployment, energy prices are low, new industries are being created, no big industry is crashing, corporate earnings have certainly ben satisfactory (for our stocks, at least, which are the ones I know about). Sorry guys, this is definitely not 2008, and there’s no reason to think it will become 2008.

It always looks good at the top and bad at the bottom.
You don’t sell when things are looking bad - that’s too late. You sell when things are still looking reasonably good.

At some point within the next few years, things will be looking bad. A recession will come. The problem is that given current valuations, returns between now and then are likely to be quite negative.<;i>

Hi Advocatus,

Do you (or any other esteemed old trader) have any experience with this type of movement in a somewhat high market valuation? The move as stated way above, from high flyers to steady and strong stocks is quite apparent and I am wondering if this is the modus operandi of a changing market. THis would be a good question for Morgan Housel from one of the ONE members. I"ll do it if I can dig out of the hole I am in from being on vacation but if anyone else feels the urge, go for it.

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HI Saul,

Great post!

SCTY has really been beaten down. However it’s growing so fast it’s truly, truly, amazing.

Just a note here. A friend of mine tells me to be careful here as many of the states will be running out of subsidies for solar this and next year.

I don’t know where to look for this info to see if it is meaningful but forewarned is forearmed.
Mykie who is very glad to be back and has some serious reading to do this weekend

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