Thoughts as the slide continues

[PaulWBryant]

As I do every day, I’m glancing at the PS ratios of the stocks I own:

ESTC 22
MDB  20
SMAR 20
TWLO 18
AYX  25
ZS   23
CRWD 37
PINS 16
OKTA 24
TTD  17

I can see reasons why all of these are where they are. PINS and TTD and TWLO look relatively cheap, but TTD may be growing slower than many others, and PINS and TWLO are already 15b+ companies.

That said, while I wouldn’t call these “cheap,” I don’t see anything on this list that is so expensive that the share price couldn’t increase 50% or more in the next 12 months. That’s not something I would have said about ZS at a PS of 40 or CRWD at 60. At this point, we don’t need multiple expansion…we just need multiples to mostly hold. Even if they contract 10%, if the companies are growing 50% or 60% or 70% or 80% or 90%…well, you get the idea. So at today’s prices, I’m pretty stoked to build my ESTC, MDB, SMAR, and TWLO positions back to over-sized.

But as I said here (https://discussion.fool.com/amazon-is-worth-more-than-zscaler-34…

We can’t expect the market to be reasonable. The market is over-correction personified, and stocks are wild stallions. When hot, they run up far beyond what logic or analysis can support, and when out of favor, they fall to levels beyond “cheap.”

But we can expect buyers to be greedy, and some of them to be smart, and to know a great deal when they see it. So we can expect our companies to have a floor. We just can’t pinpoint where, or when. So just make sure you can ride the waves down and then back up again, and then up further and further. Don’t mortgage your house to buy at these levels – or any levels! But don’t get out at these levels either. We have to be patient.

Yes, our stocks absolutely could drop another 50%. Or they can go up that much…or much, much more. I’m betting on the latter to happen over time…because that’s what the stock market does – it goes up over time. Sure, a company’s stock will only go up over time if the company keeps growing and becoming more profitable, but we have good reason to believe these companies will.

And since we can’t know what will happen over the next few days, or weeks, or months, it helps to know what has happened over the last, well, always: The best companies become more and more valuable.

Bear

PS - One of my lowest conviction companies, Teladoc (TDOC), was up 20-something percent in September, so I sold it today. I figure I can add opportunistically to one of my stocks, or add something new on which I have a high conviction.

[LifeOfDreamer]

Since a wide range of favorites are beaten down, i am avoiding a wide basket approach as i feel some companies are simply better due to mgmt execution and/or TAM, etc…

Also trying to see who is beaten down the most unfairly.

I would not say AYX was really beaten down, for example.

ZS - yes…seems like near $50 is a really good price.

TTD in 190s seems good. 170s in Spring was great and i loaded up back then on that over-reaction.

Estc was beaten up so much thru lockup pain that i think it is a bit more solid as floor in the 80s, although it was obviously in 70s as recent as June.

Those are my big 3. Going to ride those from here. Only 13% cash left and may even deploy rest today…will see.

Not calling a bottom…no one can. But i liked these companies a ton before, and so i like them even better at lower prices.

Dreamer

[bjurasz]

I agree Bear. Even I’m looking to get back into some of the stocks I ditched over the last few months. Fortunately I can get back into them at levels lower than my sell price. Sometimes luck is on your side…

[SaulR80683]

I agree Bear!

No one can really tell anyone else what to do. I can only tell you what I do:

If one of my stocks is down by itself, I worry what is wrong. If one of my stocks is down for a good reason, I will usually sell the position and reinvest in a higher conviction company. If all of my stocks are down I don’t worry. I figure it’s just the market doing its thing. If all of my stocks are down for no good reason, with no company specific bad news on any of them, you would have to pry those stocks out of my dead hands (figuratively speaking ). But that’s just me, and it’s worked for me for 30 years now.

Right now, I wouldn’t dream of having a large cash position. In fact I wish I had the guts to buy more stocks on margin (but I don’t, so I’m just selling lower conviction stocks and adding to higher conviction ones).

Best,

Saul

[mauser96]

I know it is OT but re calling bottoms in Dreamer’s post
https://discussion.fool.com/the-major-bottom-detector-triggered-…
We should be careful saying that no one can run a mile in 4 minutes just because we can’t.

[tzbbear]

I’m worried about increasing margin calls amid the current repo madness. This is too much like 2007 to even think about buying right now. I’m already losing big on my 2 Fool recommendations which I bought in July.
The Fed has lost control of the repo rate. It’s still rising above the upper limit set by Fed last week. Big players must be running out of cash fast.
With the Fed pumping $ into the repo market there is no way to know true market rates.

[thejusticier]

“If one of my stocks is down by itself, I worry what is wrong. If one of my stocks is down for a good reason, I will usually sell the position and reinvest in a higher conviction company. If all of my stocks are down I don’t worry. I figure it’s just the market doing its thing. If all of my stocks are down for no good reason, with no company specific bad news on any of them, you would have to pry those stocks out of my dead hands (figuratively speaking ).”

The SaaS are being re-evaluated. The market is indeed marking down all of them. The unknowable question is when will it go back to valuing them like they were just a few weeks ago? if ever.
Those who hoped for a quick bounce back have been disappointed. It could be longer (months or years) or it could reverse course again tomorrow. We don’t know. The moneys have been flowing elsewhere.
The market valuation of a given thing changes with time. There are fads and there temporary preferences and rosy stories. Not saying that SaaS is a fad. Definitely not. But the market valuation for them can vary by a lot. 30, 40 50% off the top. I am not going to run after that. I am in for the longer run, and I don’t expect it back to where they were a few weeks ago in the short term i.e. a few weeks or months.
I placed my bets and I don’t want to see this nonsense for a while.

tj

[RoyGeeBiv]

No mention of ZM here, but I have added to my buy more list. Why? A few weeks ago my broker asked if they could loan out my shares for 8%. Sure, I said… Why not.

Since that day I have received numerous updates increasing the loan rate I receive for my shares. Most recently it was in excess of 30%. Wow.

This tells me that there is an increasing demand on the short side, which IMO will be emasculated as quarterly results continue to show strong growth.

🆁🅶🅱
Why do you consult this people’s gods, which could not save their own people from your hand?

[addedupon]

“We should be careful saying that no one can run a mile in 4 minutes just because we can’t.”

Congrats to your friend and those who have profited from his posts.

But running the 4 minute mile is nothing like the complexity of predicting the financial markets.

Financial markets have an unlimited number of variables which constantly change. And of course many important variables are so vague or completely imbedded so as to make closing the problem to be a functional impossibility today.

I should say that i also saw the March 9 bottom and was irritated when Mark Haines called it on CNBC that morning, which is why it is known by many as the “Haines bottom.” He made it somewhat more expensive to go all in that day. Got burned badly in the Great Recession top of 2008-2009.

People here think they have the dominant variables identified but even here, we acknowledge being wrong often.

I’m still immodest enough to think i can do that more often than most but i am not certain of that. I see that your friend has demonstrated over time that he has often been right. Warren BUffett (my favorite) has most often been right over 60 years and is clearly a giant, but he was also lucky that he reached adulthood in in the 1950s.

I continue to believe that no one knows how to precisely time market tops and bottoms with consistency.

But there are many people out there who can convince many others that they have the special tools to do so.

Peace.

[NajdorfSicilian]

Yes, our stocks absolutely could drop another 50%. Or they can go up that much…or much, much more. I’m betting on the latter to happen over time…because that’s what the stock market does – it goes up over time.

Yes, although they are more likely to drop in half before going up ‘much, much more’ as that’s just the way the market works. No worries if you can stomach the volatility.

But 90% of public companies end up going to zero, the latest research has shown. I know, I was shocked also. The 1 really big winner makes up for tons of losers.

I suspect the same will happen, over the long-run, with SaaS stocks. The big winners from here - whether they be CRM, TWLO, SHOP, ADBE, MDB - will have to make up for the dozens and dozens that don’t make it and have share prices that halve, and halve again.

[pauleckler]

Last week of the quarter is always a rough time for stocks. As companies close their books executives go into a silent period where they cannot respond to rumors. Rumor mills dominate the news. We are seven days from end of quarter and 20 days from the new earning season. Mutual funds and pros also adjust their portfolios to show they made all the right choices before they are forced to publish holdings.

Will earnings disappoint? Surprise? Or merely continue to do well?

Make your pick. And hold the winners.

[BobbyBe]

Saúl,

About a year ago, as the September/October market started to get volatile you (as far I can recall, maybe it was someone else), made a post about how our stocks had traded within a certain p/s range. The idea of your post was to point out that even with the decline, our stocks were still within that range. Our stocks enjoyed huge multiple expansion in 2019, and I’m curious if with the current drop they may have fallen back into the range that they were trading at the end of last year. I can’t seem to dig up the old post and I wonder if you might have it stashed away.

[GauchoRico]

If all of my stocks are down for no good reason, with no company specific bad news on any of them, you would have to pry those stocks out of my dead hands (figuratively speaking ). But that’s just me, and it’s worked for me for 30 years now.

Right now, I wouldn’t dream of having a large cash position. In fact I wish I had the guts to buy more stocks on margin (but I don’t, so I’m just selling lower conviction stocks and adding to higher conviction ones).

Saul,

I wanted to continue this discussion mainly because it seems to me that you have a strong conviction that this sell off in your (our) stocks is a similar to other sell offs. First, what’s worked for 30 years for you may not have been the same as what we’re seeing here.

1. Perhaps you can go back and check what companies you were invested in each sell off, but I’d venture to guess that they were not all concentrated in one sector as they are now (i.e. in IT software companies). But rather you might find that your stocks fell along with everything else in most cases.

2. I also feel comfort when my stocks are dropping along with all (or most) other equities. In this case, IT software has dropped 25% or more while the market is near all-time highs. Unlike what we saw last year, the drop has been specific to companies in the IT software and other companies that have seen outsized stock price increases in the past year.

So, I would challenge you with the following thoughts/questions:

1. might you be anchoring (to recent high prices) what our stocks should be worth? You have written in your past few end of month summaries that there are a bunch of reasons why fast growing SaaS deserve higher multiples than companies with different business models and slower growth. I completely agree that they should be higher. But I question how much higher and if there is now a new normal being set for these stocks. I don’t know.

2. you have been writing (in your past few end of month summaries) that the rest of the world (i.e. other investors) have now recognized that these SaaS business are worth more than other businesses. I think you were implying that the multiples that we saw at the end of July were here to stay and that this is the year when other might well pile in driving prices (and multiples) even further higher. What I question whether this is actually true (I don’t think anybody can know this); I wonder if in the short and medium term (and maybe long term) whether we have reset the multiples to a lower level on IT software stocks.

Chris

[XMFBreakerTinker]

Chris, what multiple would you pay for Alteryx in isolation from everything else?

Then compare it to where you expect the company multiple to actually be 12 to 24 months from now based on its current enterprise value.

Do the same for Zscaler.

There is no need to be so philosophical nor hypothetical. We have real businesses, we have real numbers.

Like with all businesses if there business flips so do they. Of course we invest in what we don’t think will flop.

So let me know. The Answer objectively answers your question. Interpret it how you will.

This time is different? Maybe, but so was 2009. Yikes! Except as an example ISRG AND VRTX AND CRM and PANW Anne what not. World ended, panic ensued, dark ages…errr, wait did that happen?

Each to their own perspectives and time frames.

Tinker

[GauchoRico]

Chris, what multiple would you pay for Alteryx in isolation from everything else?

Then compare it to where you expect the company multiple to actually be 12 to 24 months from now based on its current enterprise value.

Actually, I recently did this for Alteryx since it’s ~25% of my portfolio. Assuming their recent FCF target/guidance of 30-35% in 4 years and 50% CAGR on TTM revenue for 4 years, I would think that the company would be worth a 40-50x multiple on FCF at that time. So 4 years from now, I think AYX should be worth about $23B in the middle of 2023 with about 80M shares outstanding. Therefore, the share price would be about $290 which would give you a CAGR of 27% from here. I’m not worried about AYX long term.

Do the same for Zscaler.

Doing this for ZS is a little more difficult and I haven’t done the same exercise because they are not as far along on their path to profitability (i.e. more assumptions to make) as AYX is. I like ZS and have been adding. TWLO seems a bit more fuzzy (for various reasons) and I have been reducing it.

There is no need to be so philosophical nor hypothetical. We have real businesses, we have real numbers.

Yes, I agree to focus on the numbers and I do believe that we have selected a group of special companies. But when the stock prices run up so fast (as they have)…much, much faster than their growth rates, doesn’t it make sense to question whether this is sustainable? I’ve been watching the price movements along with the movements of other companies in other sectors. To me it doesn’t at all seem like we saw at the end of 2018 (everything dropped then). To me it doesn’t at all seem like what we saw in 2008/2009 (everything dropped then). Now we have a sector specific drop.

Like with all businesses if there business flips so do they. Of course we invest in what we don’t think will flop.

So let me know. The Answer objectively answers your question. Interpret it how you will.

This time is different? Maybe, but so was 2009. Yikes! Except as an example ISRG AND VRTX AND CRM and PANW Anne what not. World ended, panic ensued, dark ages…errr, wait did that happen?

What feels different for me is that the selloff is sector specific AFTER a huge run up in the sector. I agree that the businesses are doing great. I’m fairly confident that we will be near the all-time highs (assuming no massive market meltdown) for the IT software stocks sometime around the first quarter of 2021. This assumes that the current EV/Sales multiples will hold (i.e. not rise or fall much).

Chris

PS: Yes, I’ve been philosophical about this because I had been talking about lightening in the period between May and July…did a little but capital gains taxes kept be from selling too much.

[12x]

Enterprise software doesn’t have anything to do with streaming TV, colon cancer screening, or DC/AC inverters.

Roku, Exact Science, and Enphase have nothing to do with SaaS, yet they fell at the exact same time. The only thing they have in common is they are high growth companies that had huge price appreciation this year.

In SaaS itself, I fail to see why cloud endpoint security would ever have the same fortunes as a cloud data analytics software companies. I don’t see how this could possibly be a repeat of juniper, F5, and all the other tech bubble companies getting hammered for no apparent reason after the internet bubble burst because these cloud SaaS companies have only one thing in common; making enterprises run more efficient.

The only thing I remember was the Barron’s article talking about valuations the week the selling started. Maybe that was enough. I don’t know the reason for the selling in unison. I’m sure people have theories such as quants or whatever else. I just know all momentum stocks are getting hit hard. Some of them such as ZS are actually at reasonable levels. Some like CRWD are still too rich for my blood.

I don’t know what caused the selling, I don’t know when it is going to stop. And quite frankly this can be good in a way because private funding may dry up some on the 2nd tier companies who would eventually compete with the ZScaler and Coupas of the world. Cloud based security has nothing to do with purchasing management software. That’s my thesis for continuing to hold these stocks.

When CRWD, ZM and WORk opened at extremely high levels then continued to go up many of us on the Tinker board and elsewhere agreed that the prices were just too high to offer meaningful long term price appreciation potential. It was a sign of stock market froth. So were talks where old people who went through 2000 bubble burst were irrelevant because they had scars of previous bears. It didn’t stop the Stocks I held from falling along with the more expensive ones anyways.

But in the end business excellence will shine through all this as time goes on regardless what the stock market does in the short term.

I suppose if you want to continue earning profits in growth stocks you need this. Can’t have every IPO opening at 50x sales and use the argument if sales keep doubling every year in 3 year it will be cheap. ZM and CRWD are already less than 100% growth.

[XMFBreakerTinker]

I had not added any new money to the market this year until last week and today. I put all I had and more in October and December, which is the last time we had discussions like this. Those were called “historic” crashes by the media for whatever it is worth.

Yes, I agree to focus on the numbers and I do believe that we have selected a group of special companies. But when the stock prices run up so fast (as they have)…much, much faster than their growth rates, doesn’t it make sense to question whether this is sustainable?

That is my point. There is a time to sell. One such time is in a bubble. I objectively determined there is no bubble, but of course others may disagree and I don’t want to argue that issue. I have put out a simple example of my reasoning in regard.

The time to sell Nvidia and Arista happened early in 2018 no matter where the market was (it was near or at an all time high at the time and Nvidia and Arista both were at all time highs) so I sold. It was not the price per se, but the price accompanied with the holistic factors, with the holistic factors primarily represented by where they hit on the S curve. Thus, there were substantive reasons to sell unrelated to how the market was doing. Fortunately this was identifiable at the top. I stated I needed to do something to “turbo charge” my port so moved on.

I just do not substantively see the reason to sell Alteryx or Zscaler, as an example. In fact the opposite, I bought. The risk/reward just based on buy out value using Tableau and Mule as the multiples, which were between 12 and 16x forward revenue creates numbers to support this label. Run those numbers yourself, the floor is not real far below.

But these things aside. This is the logical fallacy I see (and trust me, I often do things just because I want to even though it makes no sense to anyone, I just wanted to do it. I’ve gotten better over time to just not do these things as they have cost me in opportunity costs - and a stupid period in September where I played earnings and thought I knew more than market - of course I did not).

But here is the logical fallacy: I agree that the businesses are doing great. I’m fairly confident that we will be near the all-time highs (assuming no massive market meltdown) for the IT software stocks sometime around the first quarter of 2021. This assumes that the current EV/Sales multiples will hold (i.e. not rise or fall much).

When I buy a stock I don’t assume any multiple, I assume what the real value is. Back in June, 2018 I calculated that Alteryx had a “virtual” PE of 28! So what is the virtual PE next year or the next year NO MATTER THE MARKET SENTIMENT.

Here, we have companies that within 12-24 months, that are huge money printers (AYX and Zscaler - just a matter of time) will be in low teens and then mid single digits in price to sale. By year 3, if the conservative expectations are met will AYX be selling at a mid single digit multiple with 30%+ expected operating margins and no competition and huge growth ahead still? Not if the business is still cruising along.

Thus what multiple the market will give does not matter. Sometimes we get lucky and it prices in 3 years of growth in the multiple. Sometimes it prices in one year of growth. In the great bubble of 2001 Juniper and QCOM had more than a decade of perfect growth already priced in. I concluded, so where is the upside? I sold. The market sentiment had nothing to do with it. The price the market gave it required 10 years or more to get back to even.

so if the multiple in the market sentiment is 1 year ahead or 3 year ahead today, what does it matter? In year 3, if the business performs, the company will at least equal that 3 year ahead multiple (even if today it is only valued one year ahead, and remains only valued 1 year ahead in year 3).. Makes for a better time to buy than when it was at a multiple looking 3 years ahead.

Sure, we could have sold at the top of this cycle and then rebought now!!! I’m sure someone did. I calculated a 25% tax rate for doing so, so I chose not to. May have been worthwhile in retrospect but no sense crying over milk that is already spilled.

Thus the risk is not the market multiple, but how the business will perform relative to the current valuation.

What Saul is saying {if I may put in my interpretation} is that all this change in market sentiment and multiple is just NOISE. You can try to trade in and out, good luck. But far more profit is made holding the best until there is a real time to sell (based on substantive fundamental factors). Thus why Arista was so quickly tossed by both Saul and I at nearly the same time. The place on the S curve unambiguously had changed and the stock bolted up on being put into the S&P 500 (or whatever index it was made part of). So good riddance and move on. Had nothing to do with the market sentiment at the time.

Tinker

[12x]

But when the stock prices run up so fast (as they have)…much, much faster than their growth rates, doesn’t it make sense to question whether this is sustainable?

I can’t speak for what Saul does or his methodology, but I would say Philip Fisher had a huge influence on me. He had a complete section in his book talking about what to do if you felt your stock was temporarily overvalued. You hold on. If it’s temporarily overvalued and you sell, you could live to regret it in the future. It may be the shooting star that never returns. It’s easy to think that’s the wrong approach right now, but it sure was the right approach a few months ago. Imagine how many times you would have said over the years “this is unsustainable” and sold something if that’s how you invest. There is a good chance you wouldn’t have captured all of the runup in a lot of these stocks.

I know there are people who get their slide rulers and graphing calculators out and switch between stocks because they believe a certain stock should be sold because it offers less price appreciation potential based on multiple expansion over the next few months. I suppose if you view all growth companies the same, it doesn’t matter. The only thing that differentiate DataDog and Crowdstrike are their current growth rates and price multiples. Who knows it may be the right approach, especially for them, but it’s not what I do.

I felt that MDB was way ahead of itself short term the first time that it went above 120. It wound up peaking around 180. I suppose it’s always easy in hindsight to say what you should have done, and it was so obvious that it should have been sold at $180. It’s finally back around the levels I thought it was just so crazy to be at back in March. Not sure what I would have done had I began the trading game. I may have chased it at $150 after selling at the “too high” price of $120. Who knows.

Not here to lecture. Everyone has their own way they think is “right.” I just had someone on here recently basically saying I was doing it all wrong, as if they have the rulebook to investing mastered.

Along with that Philip Fisher book, I’d say another that was influential for me was David Dreman’s “Contrarian Investment Strategies”. I don’t really predict. I don’t predict future growth rates, where IT stocks will two years, or anything else. I don’t even predict next quarter’s numbers. Studies have shown analysts are horrible at forecasts because all they do is take current trends and extrapolate them into the future. If you look at most forecasts, that’s what they are. Dreman’s book was filled with studies on this.

Everyone has their own strategy molded by experience and lessons. I just think it’s easy to forget why we do what we do in good times, when things go bad. But a lot of people wouldn’t be sitting on those fat gains, even this year, after this recent fall, if not for taking a relaxed approach toward valuation.

[buynholdisdead]

Thus the risk is not the market multiple, but how the business will perform relative to the current valuation.

Well said Tinker. I think part of the problem is that people are following Saul instead of thinking things through for themselves. If you do not know what you own, you will never know the value. Following someone else will only leave you troubled.

This board is about finding great companies and making sure they fit your investment style. If you are feeling fear it is only because you are out over your skies and need to reassess what you are doing. Down turns like this should make you feel excited about the stocks you own and maybe sell your riskier stocks to put the money into the stocks you feel are more sure.

Anyone that is out there that is in their 20’s, 30’s, and 40’s should be jumping up and down because you are getting companies for a much better price. Those in your 50’s and on that do not have a cushion or have enough invested that can keep you going, well you really need to look at your process. Nobody on this board ever said that any stock was going to grow forever without some down side, but by following this board you could be retired a lot earlier then you ever thought. Keep studying and learning.

Andy
Who sold Tlra today and bought more ZS.

[mekong22]

I just had someone on here recently basically saying I was doing it all wrong, as if they have the rulebook to investing mastered.

yes, there were a few posts like that on the NTNX threads in August, too.

Since then, Nutanix is up about +40% while many of our more popular stocks are down -25% or more. At least in the short term, allocating even a small amount of funds there would have worked out well.

-mekong