Over the past few years, tech stocks have ruled the world with amazing returns and many here, including myself, have tried to develop criteria or patterns that might be applied to other potential tech candidates.
We have been through many many permutations from valuation considerations (P/S, etc.), TAM/SAM considerations (Tinker Rules), Revenue acceleration/deceleration rates (Saul’s criteria), competitive advantage rules (Michael Porter), Founders rules (Rule Breaker), Industry insider technical folks, Technical analysis, etc.
Many (perhaps most) of these stocks have been rule breakers from all/most previously accepted rules of norms for stock investments…these previous “well accepted” criteria were essentially irrelevant.
I have tracked many a portfolio criteria from buy and hold, the valuation portfolios (published here by Saul), etc.
There appears to have been ONE main criteria for investment success these past few years…all others essentially largely irrelevant to the stock performance. One reason to consider patterns is that they can save enormous time analyzing stocks and avoid distractions of largely irrelevant information that might cause an investor to buy or sell when the data element was largely poorly predictive of stock performance.
Let’s be honest that most trades today are performed by quants and algorithms by which massive data has been entered into trading programs that trigger buy/sell decisions. These sophisticated programs are gaining more popularity such that many previous investment gurus like Mauldin, etc. have suggested that software based trading should be part of anyone’s portfolio.
But unless we have some sophisticated quants on this board, we are beholden to using somewhat archaic criteria for buy/sell decisions…archaic criteria which actually appear to have been quite superior to the general stock market indices unless under the market conditions/macroeconomic conditions we have chafed these past few years. Saul has been his own quant and like most of you, I have followed his buys and sells which quite clearly emphasize revenue growth.
So what was the one criteria that seemed to rule the world for decisions? I see many of you post your portfolio results which have been pretty solid for sure and without a doubt the fact that you have generated these returns certainly suggests an element of courage to have invested in these stock types.
It turns out that the single criteria that predicted stock returns was…highest YoY revenue growth rate. Margins???..nope, the SaaS argument about margins didn’t change the fact that ROKU with its lower margins still had the highest return YTD at 190%.
So if we essentially bought the highest revenue growth companies at beginning of year in equal amounts what would be the returns:
ROKU 190%
SHOP 104%
ZS 89%
SMAR 76%
TTD 74%
OKTA 70%
MDB 69%
AYX 50%
TWLO 49%
ESTC 17%
Portfolio return YTD was 79%!
How does that compare with your portfolio? This was a mindless portfolio…simply stocks whose YoY revenue growth rates were > 50%…no other criteria. No concerns about revenue deceleration, margins, TAM/SAM, Founders, etc.
Now thinking back over the past few years, I have seen Saul jump off stocks with decelerating revenue growth (SHOP being the most recent in memory) and he has been very facile to anything that might affect the revenue growth rates. IMO, he has essentially stress revenue or all else.
But what I am suggesting here is that this mindless approach would have yielded portfolio returns that exceeded most of your individual returns with far less time to manage and therefore far more time to enjoy your life outside of investments…little to no analysis but for revenue growth.
We have also argued that these Uber high P/S stocks could only be justified because they were largely SaaS with high gross margins and therefore they could ultimately turn over to profitability with profit margins of up to 40%. But perhaps the somewhat unexpected finding this year is that the two highest return stocks in this high revenue growth index, had some of the worst gross margins (ROKU and SHOP)…at least as compared to an AYX for example.
So what this data suggests to me, is that revenue growth rate reigns supreme OVER ALL other criteria. And then the natural corollary is that additional parsing of data was unnecessary.
Hope this analysis was somewhat provocative and of interest to you, your portfolio and the time allotment you spend maintaining it.
Best:
Duma