I recently posted a link to Jamin Ball’s substack in this OT post - https://discussion.fool.com/jamin-ball-quotcloudquoted-judgement….
Relevant there is his posts on SaaS valuations from 2016-2022 from a Price (he uses “EV”) to “Next Twelve Months” (ie. NTM) Revenue.
Some readers noticed that I said “The talking heads on TV will keep telling you that there’s a strong correlation between interest rates and growth stocks, and that with rising interest rates growth stocks will continue to get killed, but I’ve spent time modeling this data all the way back to 2004 with companies like Salesforce and I think most of these people have no idea what they are talking about“
I was asked off board to share the data/insights that led me to make such a claim, and thought it would be worthwhile to share with the board rather than do one-off replies.
Backing up for a moment, it’s worth mentioning that most of the “talking heads” chatter I’m referring to is coming from channels like CNBC where 90%+ of analysts are telling you to GET OUT OF YOUR GROWTH STOCKS and move into some garbage cyclical value stocks. And what is their reasoning for this? It’s almost always because “high interest rates are bad for growth stocks…blah blah blah” Seriously, just watch some clips from analysts on YouTube and you are going to hear this line over and over again.
I heard this so many times it’s almost like these analysts have secretly banded together behind closed doors to create a self-fulfilling prophecy that drives the market towards value stocks, and they keep beating the drum on this talking point regardless of how much growth stocks have already sold off!
However, that said, I still wanted to do my due diligence on interest rates vs. growth stocks to stay as objective as possible, so i decided to build on what Jamin did, utilizing a similar set of indices dating back several years, to judge for myself whether the data proves their point or vindicates my suspicion that they are full of BS.
To that end, I’m sharing the research that I’ve done so that you can judge (and manipulate via copy of you so choose) the data for yourselves.
Here’s a few links to Google Sheets that provide Growth Stock Index P/S Ratios and 10 Year Treasury rates dating back to 2010. I’ve shared 3 different versions of datasets that include a range of indices of our favorite growth stocks.
Give it a minute to load and render the Charts on top of the data…
The data is transparent. You can see each stock I included in the index for each spreadsheet, so if you think I’m suffering from any sort of Confirmation Bias, I’m happy to poke holes in this and try to find anything that would prove contradictory.
That said, I’ve also looked for a correlation between P/S Ratios and other Yields (eg. 2 year, 10-2’s, etc) and I didn’t see any compelling correlations that would be more useful or insightful than what I’m sharing here.
Ok, so from my perspective, where do I see that these 90%+ analysts have a point? Well, if you are only looking at the RATE OF CHANGE for interest rates, and are only hyper-focused on what’s happened the last 6-12 months only, then the data can certainly back you up on rising rates (inverted) as a strong correlation to growth stock P/S ratios.
However, any analysis that goes back beyond 12 months really breaks down in terms of finding a tight inverse correlation between interest rates and growth stocks. In fact, in many cases, growth stocks actually rise as interest rates rise and fall as interest rates fall. You can see this in the trend data for instance providing a better DIRECT correlation between the years of 2013-2019 in terms of growth stock PS Ratios and interest rates moving in the same direction.
I would typically never go this far into OT territory to prove a point, but I’m so sick of the interest rate talking point echo chamber that I felt compelled to bring to light some raw data that cuts through that narrative.
Like Saul or anyone else on this board, I cannot predict the future and do not claim to be some kind of market timing expert, but what I can tell you is that COVID was not a “pull forward” for our favorite companies, it was a state change that made them even more valuable going forward, and at this very point in time, they are ~15-20% cheaper on average than they were before the pandemic even started!!
In summary, I could care less if interest rates in the short term go to 2% or even 2.5% this year given the historical data above. Right now, more than ever, I look at this as one of those rare opportunities to take advantage of an overly-hyped negative narrative against our companies and do as much buying over the next few weeks/months as possible while the getting is good.
Lastly, I want to at least acknowledge that there is some truth to multiples getting over-extended due to the rise in liquidity and low interest rates, but I contend that the narrative there is extremely overdone, and the markets have over-indexed to the downside, creating opportunities for longer term investors that can see the forest from the trees.
Hope you found this an insightful/interesting read.