I read Austin’s post on Herd Mentality (as many others did!) and it compelled me to do some self-introspection, because I think he was describing my mentality, at times. I certainly take notice when Saul does something, and pay attention to the “why”, and if it makes sense to me, I might follow his action. But this thought exercise also compelled me to review what makes a company High Conviction, for me, and if I might be missing out on some good investments because “my bar” is so high. Now this might be different for others, but it closely follows Saul’s criterion so other might benefit. I encourage other to consider what makes a High Conviction company for them,(in addition to “Saul owns it” and share their findings.
The very first things I evaluate are: YoY revenue growth, the amount of recurring revenue as a % of the total, how much ARR is growing, and gross margin. If a prospective company’s revenue growth, ARR, and GM% aren’t greater than or in the ballpark of some of my High Conviction companies, I typically stop my evaluation. But this might be too restrictive and might result in me missing a great opportunity. Now I’m not suggesting that Saul’s criterion aren’t good: in fact, they are very good, and have been proven over time. I guess what I’m saying is that I need to look at the ranges at which I apply them.
For example, a friend suggested I take a closer look at Adobe (ADBE). First thing I looked at in the most recent quarterly was
YoY Revenue Growth: 22%
this is somewhat below my other High Conviction companies, which have YoY Revenue Growth of >60% (CRWD, DDOG, NET, ZM)
ARR: around 75% of total rev ($9.6B/12.8B), growing at 24% YoY - this is good
GM%: ~87%: this is very good
So because their YoY growth wasn’t in the ball park of my other High Conviction companies, I stopped looking and told my friend why I wouldn’t be investing in Adobe because its YoY revenue growth didn’t excite me. Does this mean Adobe is a bad investment? Not at all, it’s just not a company I would invest in, as compared to my other High Conviction companies.
Same thing happened with Fiverr(FVRR)
YoY Rev growth: 82%:
this is very good and not only in the ballpark but exceeds the YoY Revenue growth of my other High Conviction companies
ARR: IMO, there is no recurring revenue in FVRR’s model.
I know some may disagree but “repeat business” is not the same as the ARR that a company like CRWD enjoys, because FVRR needs to secure the business every time a user/customer places/accepts a job.
GM%: 83%: this is very good
So I told my friends that while Fiverr has great YoY growth, their lack of ARR (by my definition), compels me to keep investing in my other High Conviction companies.
How about PTON?
YoY Rev Growth: 172% WOW!
Recurring Revenue %: about 20%, lower than I typically like.
GM%: about 48%, also lower than some of my other high conviction companies
So while PTON’s rev growth is amazing, I pass on PTON because of lower recurring revenue and lower GM% than I typically like, but it again got me wondering, “are my targets too limiting?”… Am I missing out on PTON because of this?
To help answer that, I looked at the stock prices for my high conviction companies and other companies that are not high conviction. I chose some relevant dates to compare (I won’t get into the dates I picked but most can figure it out by looking at the graphs of the companies). The summary of those results are below. Data is from the date listed as the starting point compared to today’s close (10/27/2020).
Top 5 Stock price growth since 3/16 Growth since 3/16
LVGO 610%
FVRR 577%
FSLY 573%
PTON 450%
EXPI 433%
Now since very few of us would be able to time the dip on 3/16, I compared a few other “dips” and “highs”
Top 5 Stock price growth since 8/11 Growth since 8/11
ZM 133%
PTON 86%
EXPI 60%
NET 47%
FVRR 42%
Top 5 Stock price growth since 9/8 Growth since 9/8
NET 70%
ZM 54%
PTON 41%
FVRR 39%
TWLO 27%
Top 5 Stock price growth since 10/21 Growth since 10/21
SHOP 6%
BPRMF 5%
ZM 5%
LVGO 2%
DDOG 2%
Top 5 Stock price growth since ATH "Growth" since ATH
LVGO -3%
MELI -4%
SHOP -4%
ZM -8%
BPRMF -9%
What does this tell me? It tells me that while holding just my highest conviction companies has yielded excellent results, other companies that satisfy Saul’s criterion, but maybe not the “highest” (e.g. highest rev growth, highest ARR, largest GM%, etc.) in the list of companies also do well, and in some cases, do better than my highest criterion companies. Don’t get me wrong, this isn’t about beating the market or any mutual fund, because that’s almost a given. I’m talking about ringing out a few more % of return in your portfolio.
I think the lesson learned for me is to continue using Saul’s criterion to evaluate companies but maybe lower my range, say to include companies with revenue growth =40% (instead of 60%), GM% =50% (instead of +75%), and so on. It reminds me that winning the investment game is probably 2/3 objective evaluation (like using Saul’s criterion) and 1/3 intuition, which Saul has, but I do not.
For those interested, below is the data in its entirety. Stock prices rounded to the nearest dollar (sorry for the crappy formatting)
Comp 3/16 8/11 9/8 10/21 ATH(close) 10/27 Growth since 3/16 Growth8/11 Growth9/8 Growth10/21 Growth ATH
ZM $108 $231 $351 $513 $583 $539 399% 133% 54% 5% -8%
CRWD $33 $97 $126 $135 $153 $133 303% 37% 6% -1% -13%
DDOG $29 $76 $80 $99 $117 $101 248% 33% 26% 2% -14%
NET $16 $38 $33 $55 $62 $56 250% 47% 70% 2% -10%
DOCU $72 $192 $206 $218 $269 $222 208% 16% 8% 2% -17%
LVGO $20 $115 $123 $139 $147 $142 610% 23% 15% 2% -3%
ADBE$286 $435 $462 $496 $534 $479 67% 10% 4% -3% -10%
BPRMF$15 $18 $19 $19 $22 $20 33% 11% 5% 5% -9%
EXPI $9 $30 $40 $48 $61 $48 433% 60% 20% 0% -21%
FSLY $11 $75 $81 $79 $129 $74 573% -1% -9% -6% -43%
FVRR $22 $105 $107$161 $179 $149 577% 42% 39% -7% -17%
MDB $99 $192 $211$249 $270 $244 146% 27% 16% -2% -10%
MELI $467$1101$1022$1,299 $1334 $1,282 175% 16% 25% -1% -4%
OKTA $96 $196 $197 $221 $247 $221 130% 13% 12% 0% -11%
PTON $22 $65 $86 $121 $136 $121 450% 86% 41% 0% -11%
SHOP 322 972 917 1022 1134 1083 236% 11% 18% 6% -4%
TWLO $72 $244 $226 $299 $338 $286 297% 17% 27% -4% -15%