What the rest of the world seems to be missing

Investment Analysis Clubs Saul’s Investing Discussions
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What the rest of the world seems to be missing.

In the last few days I’ve seen news articles stating that the market is officially in a Bear Market (down 20% from its high), that the S&P is either in a Correction or a Bear Market (depending on the author of the news piece), that small cap stocks (the Russell 2000), are in a Bear Market, etc, etc.

In fact, year to date, of the three indexes I have traditionally compared against:

The S&P is down 6.6%
The Rus is down 12.5%
The IJS is down 14.6% … (So much for “value” stocks!)

And the three of them are down an average of 11.2%. That’s from breakeven, mind you! They are down much more from their highs of the year. Probably roughly double that figure. It’s pretty terrible.

If you throw in the Dow, down 5.6% year to date, and the Nas, down 3.9%, the average of the five indexes is still down 8.6% year to date (again, from breakeven).

Okay, according to the fears that we’ve been fed, in this type of a market our “over-valued,” “ridiculous EV/S Ratio,” and “money-losing” stocks should be getting killed, and should be negative by multiples of what the general market is negative. … Well, ladies and gents, that isn’t happening! Not at all! My invested portfolio is currently up 70.4% year-to-date! That’s UP 70.4%! Making much higher lows than the lows in the up 45% range that I was telling you about a couple of months ago, while the general indexes are making lower and lower lows. And, of course, a number of my stocks are up over 100%, or 150%, year to date, even after all this noise.

So what’s going on? Well, we are investing in SaaS companies, that is to say, first of all, in software companies (which means low capex, and low cost of goods sold, so high gross margins), with no debt to speak of (not hurt by rising interest rates), and they lease their software so they have almost all recurring revenue (which gives considerable protection against a slowing economy), and they are selling products that enterprises all over the world need to have, to enter the modern world, to cut costs, and to function they way the customers want them to, and these products make their customers’ businesses run more efficiently (and thus save them money), so the customers have even more incentive to buy our companies’ products in hard times.

And because the SaaS companies we are investing in are the best of the best, they are growing revenue at 45% to 70%, which are rates that are simply unimaginable for ordinary companies.

For more on this subject, please click on: Why My Investing Criteria Have Changed, on the side panel, or here’s a direct link:

https://discussion.fool.com/why-my-investing-criteria-have-chang…

For more on our SaaS companies see, also on the side panel, Why it Really is Different! or use this link:

https://discussion.fool.com/oh-this-time-it8217s-different-33123…

Finally I recommend How I Pick a Company to Invest In. Same panel, and here’s the link:

https://discussion.fool.com/how-i-pick-a-company-to-invest-in-33…

Although I’ve been telling you about this for some time now, somehow the vast outside world hasn’t caught on so far, which is good news for us.

Best,

Saul

And don’t forget the Knowledgebase.

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We have had that same discussion on the NPI board. Across the board cheap stocks are down and not cheap are up. With all the volatility up and down, the trend for cheap has been down and not cheap up. The market has made a clear discrimination.

PSTG is a poster child. Cheap, de-risked, etc. Yet after Q3 earnings the stock ran up. Was not long however until it fell, fell not only from where it ran up to, but fell materially below where it was pre-Q3 earnings. It went from the high low $20s to high $20s to now trading in the high $16s-low$17s. But what a bargain! Perhaps so, I don’t know.

Compare that to practically any silly over-valued stock, you will find the exact opposite pattern. There is a near 100% correlation, with the cheaper a stock the relatively worse its performance. The only exception I have seen (and I don’t follow them all) is Nutanix. Nutanix is not “cheap” in my opinion as its trailing peak multiple was 9 and it is now 7 or something like that. But Nutanix was cheap.

Micron, the cheapest of all stocks that might be discussed here or on NPI is also down the furthest.

So why Nutanix and not the rest? Called fundamentals. Nutanix’s fundamentals in regard to competitive advantage, growth rate, changing cash flow capabilities (with growing subscriptions) and the stock goes up.

The same with all the rest of the silly overvalued companies we invest in. They all continue to exhibit excellent fundamentals.

When I talk about fundamentals I am not talking about 1950s textbook fundamentals of P/E, dividends, etc. I am talking about disruptive, long-term growth, with sustainable advantages, that continue to be superbly managed and becoming more and more dominant in their markets, and even perhaps their growth rates (not always but we are seeing it with some) and opportunities are growing. The only single detraction from these silly overvalued stocks ------> overvalued.

There is a reason why David Gardner has made a brilliant career using over-valued as a prime and irreplaceable criteria for his investing methodology.

So now, anyone here have a “cheap” stock they think might break the near 100% correlated trend then we morally less pure folk (as sometimes it is like having a moral argument instead of an investing discussion) that may be another exception like Nutanix?

Tinker

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I was just rereading Why My Investing Criteria Have Changed, which was written on July 15th.

I see that on that date (which lays no claim to be the high for the averages, it’s just the day I wrote that post and recorded the values of the indexes), the indexes were UP 7.2% on average, ranging from up 13.4% for the Nas, to up 1.4% for the Dow. And my portfolio was up 57.8% on that day.

Now here we are five months later, in what truly has been a rather severe Correction for all the indexes (which are down 15.8% from that particular day, and probably well over 20% from each of their actual highs), and for the market as a whole, but instead of my portfolio falling precipitously over those months, and falling much more than the market fell as many warned me would happen in a down market, my portfolio is actually 12.6 points HIGHER than it was back on July 15 (moved from up 57.8% to up 70.4%).

Just think about that, really think about it… and thank our wonderful companies!!! It’s been a rocky road with lots of scares along the way, but that is where our companies, and my portfolio, are, in the midst of this market correction! It would be truly almost unbelievable if we hadn’t all lived through it.

Saul

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which means low capex

Well, yes, but one shouldn’t ignore the fact that good software can be expensive to develop and expensive to maintain and extend.

What makes this particularly interesting is that there are documented differences in productivity from software shop to software shop as high as 1000 to 1. In my career, I have had connections to shops at both ends of this spectrum where one was producing new versions of lackluster virtue with perhaps 2000 programmers working on their product while another company had literally a team of 6 doing some roughly comparable volume of work of very high quality. In both cases, the cost of development is expensed. So, “capex” for software companies is a thing needing closer examination.

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Some of us are late to the party. Maybe, we emphasized the less successful: PSTG,PVTL, NTNX, or allocated too small of a % to these wonderful SaaS companies.

Saul and a few others, got in early (TWLO, AYX), so that a 10-20% pullback is a joyous buying opportunity. Your hard work and a little luck paid off. I’m trying not to be envious. Seriously, I just want to be moderately successful - that would be enough :slight_smile:
…

I want to ask, “what now”? What would you buy if you had small positions so far (like < 20% of portfolio.

It’s tough. For example, I’ve been buying SQ in the mid 60’s, lately. TWLO and AYX seemed high.

Thanks,

John

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Forgot to mention that this newbie SaaS investor is enjoying profitable positions in ZS and MDB… So, not totally wayward.

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This one’s for you BroadwayDan ; )

Bloomberg has 1091 months of returns for the S&P. 33 of them are worse than the month so far. Only 13 of them are post 1940.

We have been through one of the worst months in recorded history for the S&P500 (remember…this has already happened) and thanks to Saul, TMF, and members of this board, many of us are still up 60%+ YTD.

I can’t see myself ever considering indexes again.

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“It’s tough. For example, I’ve been buying SQ in the mid 60’s, lately. TWLO and AYX seemed high.”

It takes opposites views for the market to operate. Smoke people are buying while others are selling.

I sold out of SQ today at 62 because for the very reason that it’s not been holding up as well and also because from what I’m learning about Dorsey, there seems that something is off.

I don’t need any other maverick CEOs in my portfolio, one maniac (Musk) is enough. :wink:

Chris

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Smoke=some.

Not sure what Freud would say. :wink:

Chris

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I sold out of SQ today at 62 because for the very reason that it’s not been holding up as well and also because from what I’m learning about Dorsey, there seems that something is off.

Yeah, I am not rich from SQ, bad timing and all that, but I’m thinking of holding on for several reasons. Feds upped interest today, and SQ’s new bank might be a cheaper solution to the problem the higher interest rates caused with regular banks.

Kind of a lot of loose logic. Oh well.

Square again looking to start a bank
https://seekingalpha.com/news/3418197

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Now here we are five months later, in what truly has been a rather severe Correction for all the indexes (which are down 15.8% from that particular day, and probably well over 20% from each of their actual highs), and for the market as a whole, but instead of my portfolio falling precipitously over those months, and falling much more than the market fell as many warned me would happen in a down market, my portfolio is actually 12.6 points HIGHER than it was back on July 15 (moved from up 57.8% to up 70.4%).

Just think about that, really think about it… and thank our wonderful companies!!! It’s been a rocky road with lots of scares along the way, but that is where our companies, and my portfolio, are, in the midst of this market correction! It would be truly almost unbelievable if we hadn’t all lived through it.

It seems really incredible. It really does…but…we consider that our companies have had 2 earnings reports since you wrote your post on July. What were the results of those earnings reports? Several of our companies such as TWLO, MDB, AYX, NTNX, SQ, OTKA and others have reported improving or accelerating business results. The companies that did not perform as well (PVTL, PSTG, NVDA, for example) were cut or trimmed. It’s a constance evaluation and assessment to determine where the funds should be allocated. If the business results continue to be outstanding then the stock prices will follow. Valuation multiples may change but I think the overriding factor of these companies will be growth as multiples can ebb and flow. Companies growing 40-70% will quickly become undervalued if the growth continues and the stock prices don’t move up.

Yes, Saul is on to something. The world seems to have not yet caught on to SaaS companies with hyper growth rates and a long runway ahead of them.

Chris

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I just found out that an ex-boss of mine is on the BoD of ZS.
He’s an extremely smart guy who could have retired years ago (like I did) but has a passion for innovation, so this boosts my confidence in ZS.
Just an anecdotal observation, but I’ll be adding to ZS simply due to that fact.
Cheers, PB.

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I will not disappoint as the local Cassandra!

It is well worth listening to the whole of both the Druckenmiller and Gundlach recent interviews, in which they talk about my relentless theme, unconstrained global debt which can never be repaid.

I share the view about subsoftforbiz but a double in 2019 is a very high bar. One headwind is the overall market multiples inflated wildly for years with QE, it is logical that with QT they will deflate back to the mean and beyond. A simple corollary. Then, the market is starting to listen to those advancing the debt problem. In our own paddock, the triumphal claim that ‘it is strange that no-one has cottoned-on yet to what we can see so clearly’ hardly stands up to steadily increasing P/S ratios where the average of the most talked about companies here is probably just below 20!

I submit that in 2019 the only way to get an actual double on this board’s favorites will be shrewdly to enter the subsoftforbiz market after the washout. But I really think the double this coming year will be found using a screen for smallcap GARP and/or concentrating on a group of ‘what the market loathes most’. (In that respect, I have delegated banks to Berkshire.) Maybe our double might be found in the historical SA recs. list. If I come up with a solid idea for even a half-double, I’ll let you know, as pronto as my own full investment allows. However, at the risk of going off-topic here (please don’t respond), I’ll give you my best bet and a strong outsider: GE.

Volatility is a promise in 2019 and may well throw up our opportunity. Indeed what with the algos. and ETFs and all, I have placed a few madly absurd low limit orders on blue chips I never expect to get. Anything could happen in 2019.

Having supplied a few ‘hostages to fortune’ to be quoted back at me in a year’s time with suitable derision, I now depart for Christmas and wish you all happiness, health and wealth in the New Year. Thanks Saul, Paul and all the others who write here with such interesting cogency.

(FD: In the subsoftfor biz space, I have large holdings in MSFT and ADBE, medium in VEEV and very small ones in profit but at lousy odds in TWLO AYX MDB OKTA TTD ZS and SQ + a couple of cybersecurity outfits.)

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Some of us are late to the party

That would be me as well, I started this whole thing in early August. BAD TIMING, and timing does matter! I’m currently up less than 6% for the year, with a high of 28% on the year. At least I’m roughly 10% higher than the S&P 500 though, which is nothing to sneeze at. I’m hanging in with the strategy though for 2019. I’ve been slowly convinced of the strategy as these 5 months have gone by. There were times when I was willing to completely bail on it, but I’m at about 80% confidence in the strategy now, even given the likely headwinds for 2019. My current SaaS allocation is well over 50%, higher than it has ever been.

I emailed Saul personally this analysis of mine but I’ll share a shortened version here, minus the wonderful looking Tableau chart that I cannot paste here. I took at look at the stocks I held, which are almost entirely big-cap growth plus the SaaS holdings discussed here. I took at look at 52 week highs. Then I looked at the 3-month lows, which tells me how far they fell. Then I took a look at their closing price last Friday, to see how far they rebounded. My big cap names fell slightly more than the SaaS holdings, just slightly. But, the SaaS companies rebounded about 25% higher, whereas the big cap names only went 5% higher. I found that amazing.

Yes, I’m sitting today at an account balance that is 17% lower than my personal 52-week high. Yes I’m only up 6% for the year. But that is more than 9% better than the S&P 500 is doing. And it is about 4.2% better than if I had stuck with my late-July portfolio and never took a portion to high growth.

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subsoftfor biz space

I’m sorry but that term is new to me, possibly to others as well. What is it?

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subsoftfor biz space

I’m sorry but that term is new to me, possibly to others as well. What is it?

Lazy poster!

Denny Schlesinger

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Subscription software for business.

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Lazy poster!

And yet when I google the term I get only two hits. Both to this forum. Lazy? No.

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And yet when I google the term I get only two hits. Both to this forum. Lazy? No.

Not you, whoever used/coined the term. Sorry about the confusion.

Denny Schlesinger

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Me: they sell software, which means low capex

tamhas: Well, yes, but one shouldn’t ignore the fact that good software can be expensive to develop and expensive to maintain and extend.

No comparison! With software you don’t need to build huge factories and buy manufacturing facilities, and manufacturing machinery, and upkeep them, and heat and air condition and provide electricity for the factories, and pay workers, and unemployment insurance, and all the rest, and STILL have to do R&D to improve your products and manufacturing. And to increase your sales by 50% you have to build another factory. With software you just sell 50% more product while your fixed costs almost don’t budge.

Saul

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