Stock market correction and SaaS stocks

Investment Analysis Clubs Saul’s Investing Discussions
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Contrary to this board’s group think, during last year’s stock market pullback, the SaaS stocks did NOT hold up. In fact, they declined more than the broad market.

The SaaS stocks’ top tick to bottom tick declines during last year’s stock market pullback are presented below :

Adobe - down 27%

Alteryx - down 33%

Docusign - down 49%

Husbpot - down 33%

MongoDB - down 27%

Okta - down 44%

Salesforce - down 30%

ServiceNow - down 29%

Shopify - down 34%

Trade Desk - down 36%

Twilio - down 30%

Workday - down 26%

Zendesk - down 37%

ZScaler - down 37%

Zuora - down 60%

These large declines occurred during a garden variety bear-market which was not even accompanied by a business slowdown or economic recession.

Many have bounced back sharply because of the Federal Reserve changing its tune.

How do you think these stocks will fare during a business slowdown or economic recession when their revenue growth rates slow down or top-lines shrink?

Some food for thought…

Best,

GM

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Well when there is an air of “God Complex” that permeates, when that happens, that’s usually when a humbling occurs. Why I watch the fear and greed index.

Me? I’m in these names, but it only makes up about 25% of my portfolio.

Just like surfing, when I paddle out I always first acknowledge my respect for the ocean. The day I don’t might be the day she doesn’t let me paddle back in.

When I read comments like Buffets washed up, or someone has a different point of view so they must be wrong, look at our returns the last two years, I actually get more cautious. But that’s me. I like to give respect to those who have proven themselves over the long haul.

In the meantime, enjoy the ride.

Chris

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How did these stocks recover?

How are the earnings on these stocks?

What has changed besides fear?

SaaS may actually accelerate as companies outsource internal functions to SaaS services for savings.

Please offer better investment options if you have an opinion and lay out your analysis.

That would be more useful than just criticizing select stocks.

We are all always learning

Just a Fool

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Many dominant businesses in a variety of industries and nations are growing like weeds but they are not discussed on this board.

Besides Saas, the following sectors are growing rapidly :

e commerce

digital payments

fintech

robotics

AI

Audio and video streaming

Gaming

telemedicine

cloud

social media/online adverising

Furthermore, many businesses in the more traditional industries are still growing revenues/earnings by more than 20-30% per year.

However, those are neither discussed nor welcome on this board.

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I’m in or have been in all of them GM. I think many were being discussed a year or 2 back but we seem to have migrated to a cloud / SAAS collection.
Ant

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I think GM’s OP is important to ponder. Not all of us were investing through the sudden crash of 2008/9, let alone past ones which occur every decade +/-.

It’s not whether we intellectually understand that most of these stocks represent companies which can weather a storm, it’s whether we are emotionally able to deal with the sudden loss of a large portion of our assets.

It is also expected that, when the bottom drops out, small-cap stocks will tend to be more volatile than large-cap ones. It doesn’t have to make sense, it’s just how the market works.

Currently, I have about 13% of my equity portfolio invested in stocks found on GM’s list (or chosen for similar reasons). After playing with the strategies outlined by Saul for less than a year, they make up about 25% of my unrealized capital gain. A rational person would take another swig of KoolAid, ditch the rest of the portfolio and pump these suckers for all they are worth. That said, as I’ve mentioned when I periodically post my portfolio, there are a number of reasons why I own various classes of equities. One reason I did not mention is that I am (hopefully) aware of my personal pain threshold and realize that I would likely act irrationally if there was a great $ucking sound and my entire portfolio kept dropping over a period of a number of months until it lost half its value.

The “Great Recession” ended up dropping my net worth by about 6% - and yes, even that hurt. The reason why I fared that “well” was because my assets were appropriately diversified (largely helped by the multi-currency strategy I was using).

In any case, I am not advocating that others do what I’m comfortable with, but I am urging a bit of introspection. You have all felt a month of angst. Imagine if that feeling lasted for a year or more (especially if you needed the assets for some reason - loss of job, whatever). While I can’t tell you when an event of this sort will happen, I can assure you that, at some future date it will. Some will use timing techniques which dictate selling most or all of your portfolio based on technical signals. Some will stoically take a long-term hold attitude (though since these stocks don’t pay substantial dividends, there is an opportunity loss involved in this). But most here regularly trade in order to follow Saul’s strategy and I suspect both of those strategies are not likely to be popular - leaving a very messy situation.

All corrections (actually very few) will be as short as what we have just lived through. Make sure you know your limits and pain thresholds and invest with them in mind.

Jeff

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Correction:

Should say “Not all corrections (actually very few)…”

Jeff

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GrowthMonkey -

Please don’t take this the wrong way as I both admire and appreciate your posts. However, haven’t the following companies come up on this board a time or two in the not so distant past?

Besides Saas, the following sectors are growing rapidly :

e commerce - SHOP, does WIX count?

digital payments - SQ

fintech - SQ again, STNE (which I think you brought up and I find interesting)

robotics

AI - NVDA, even though they keep throwing up all over themselves

Audio and video streaming - ROKU?

Gaming - NVDA again, EA (someone just mentioned their Apex Legend pop I believe)

telemedicine - TDOC (maybe I see them more on NPI, but some posters here hold it and have mentioned it in their recaps for sure)

cloud

social media/online advertising - FB, TTD

Furthermore, many businesses in the more traditional industries are still growing revenues/earnings by more than 20-30% per year.

However, those are neither discussed nor welcome on this board.

There’s even been mention of a couple of marijuana stocks, which could very well see business soar during the next market crash. :slight_smile:

Maybe I’m confusing some things I’ve read on NPI or maybe I’m not identifying sectors correctly. However, I do think there’s a variety of businesses discussed here even if they are non-traditional. The only thing that really seems to be taboo is retail. It’s just that the 40%+ growers that have the most sex appeal and get the most love seem to trend SaaS.

Again, I enjoy reading your posts and have learned quite a bit from them. In all sincerity am I missing something on this one?

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Stocknovice,

Thanks for your kind words.

You are right and I stand corrected : stocks in other sectors are discussed sometimes on this board but the vast majority of the posts are about Saas stocks.

I get the SaaS model and it is a great business, but these stocks are also vulnerable to stock market downtrends/recessions (they declined by 27-60% during last year’s correction).

I have nothing against SaaS and roughly 20% of my portfolio is invested in these companies but they are not ‘safe havens’ which can thrive in a tough stock market/business environment.

If and when a business slowdown comes along, highly likely that SaaS stocks will also tank along with the rest of the market (due to general sentiment and valuation compression).

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Imagine if that feeling lasted for a year or more (especially if you needed the assets for some reason - loss of job, whatever).

I believe in the rules section, and often in posts, Saul mentions having THREE years of “living comfortably”, or some such phrase, in cash.

re your general point, as I understand the general idea here, if your portfolio has appreciated 300% during a period when, say, the S&P has increased 50%, and then the market goes down 50%, you’re way the heck ahead (and if my math is correct, still have a 50% profit - which still will presumably bounce back within a few years)

Of course, we don’t live in an ideal world, and if you were unlucky enough to begin this strategy too close to a stock market downturn, your medium-term results would not be nearly that rosy…Saul does outline his 30 year results, somewhere, which includes two big downturns, and how he dealt with them.

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These large declines occurred during a garden variety bear-market which was not even accompanied by a business slowdown or economic recession.

I think that you are describing high beta stocks, in general.
They go up faster as well as down faster.
Generally, if you hold for a longer enough time, most of it is during up markets.

Mike

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I believe in the rules section, and often in posts, Saul mentions having THREE years of “living comfortably”, or some such phrase, in cash.

Yeh that was on my list for Santa too but I think it got lost in the mail to the North Pole.

A

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I believe in the rules section, and often in posts, Saul mentions having THREE years of “living comfortably”, or some such phrase, in cash.

I think this deserves some qualification.

In the extreme instance where all you have is ‘three years of living expenses’ then this strategy would result in you investing nothing, then living for three years on your cash pot before going broke.

In the optimum situation where you have amassed a comfortable investment pot, then three years is ideal. But for many of us, we may need to make a judgement between how much cash we keep for safety, while not depleting the rest of our portfolio so much that it is damaging to our returns.

Like so many investment decisions, this will depend upon your personal risk tolerance (which for many on this board I would imagine would be quite high).

Ian

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Many here talk about putting a reserve aside for down market periods.
So where do you store it?

During the last recession I selectively picked a few of my higher conviction holdings at a time and sold them to harvest LTCG carry overs. Then bought back after the wash sale period. It took about two years to use up all those carry overs. Was there a better strategy?
But once again where is the smartest place to store the cash?

Bruce

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Monkey,

It’s a question of strategy. How much upside potential are you willing to sacrifice in order to protect against downside? This board’s answer is “not much”. Basically, keep some cash on the side to buy stocks on the cheap when a correction comes.

You can also buy bonds and stocks like WM or NESR if that makes you sleep better, nobody will hold it against you.

Or you can do a combination of those two approaches and have safe money in addition to saul stocks.

However, I’d prefer this board to stick to the growth stock and leave macroeconomic trends and safe investments to other boards.

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"Monkey,

It’s a question of strategy. How much upside potential are you willing to sacrifice in order to protect against downside? This board’s answer is “not much”. Basically, keep some cash on the side to buy stocks on the cheap when a correction comes.

You can also buy bonds and stocks like WM or NESR if that makes you sleep better, nobody will hold it against you."

Strenlis,

My entire portfolio is invested in 22 high growth companies (20% in SaaS stocks) and I sleep well every night because I beta hedge my entire portfolio during each and every stock market downtrend.

During last year’s market pullback, my indicators told me to hedge in early November and my portfolio was more or less hedged (my account equity remained flat +/- 50 bps) until 8th January.

So, given that I beta hedge my entire portfolio (this strategy has proven to be cost neutral over the last 30+ years), there is no need for me to invest in ‘safe stocks’/bonds and I never worry about bear-markets and recessions.

Best,

GM

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Alright, everyone. Valuable discussion here, but if anyone wants to talk more about portfolio strategy or hedging, please do so off the board. GM is a great investor and he’s happy to discuss is strategies more in-depth via email (click “E-mail this reply to the author”).

Let’s stick to our focus of discussing great growth companies. No one is saying this is the only way to invest. It’s simply the focus of this board and we don’t want to lose that. There are many other great places to discuss other topics.

Thank you.

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Many dominant businesses in a variety of industries and nations are growing like weeds but they are not discussed on this board. Besides Saas, the following sectors are growing rapidly : e commerce, digital payments, fintech, robotics, AI, Audio and video streaming, Gaming, telemedicine, cloud, social media/online advertising

Furthermore, many businesses in the more traditional industries are still growing revenues/earnings by more than 20-30% per year. However, those are neither discussed nor welcome on this board.

Hi Growth Monkey,
That is incorrect. ANY fast growing growth stock is welcome to be discussed on our board. That’s what the board is for!

From the Monday Morning Rules of the Board:

This board is for the discussion and analyzing of individual growth stocks in a cooperative and courteous manner and, secondarily, the philosophy around investing in them.

For some major examples:

Shopify - e commerce
Square - fin tech (?)
teladoc - telemedicine
Abiomed, Gardant Health, etc - Med tech
Kite, etc - and lots more - biotech
Nvidia - discussed at great length on the board - chips
LGIH - discussed for a long time - real estate
Paypal - not sure of its category - fintech, e commerce
The Trade Desk - online advertising
etc
etc

I don’t have to be in a company for it to be discussed. I can’t be in every good investment on the planet. I’m just in a dozen companies.

Best,

Saul

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I believe in the rules section, and often in posts, Saul mentions having THREE years of “living comfortably”, or some such phrase, in cash.

I can’t remember ever specifying three years. If one is retired with no money coming in, I suggested having more set aside, and if you have a steady source of money coming in, having maybe six months set aside. But each to his own.

Saul

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However, those are neither discussed nor welcome on this board.

Some sectors are growing well, but no individual companies have established themselves as growth leaders in the sector. That makes the sector hard to invest in, other that with a predictably lower return ETF.

What is an example of a high growth company from one of these sectors that has been brought to this board and made unwelcome other than for good cause?

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