One thing that I tried to figure out is that, despite the assurances from several seasoned members on this board, including Saul himself, could the current crash really be a paradigm shift in the hyper growth space?
Some may point to last year’s selloff and how quickly these stocks bounced back. Last year was different from this time in some major ways.
First, last year the hyper growth stocks sold off together with the rest of the market, as trade war and Fed tightening scared the entire market. Well, with the Fed quickly changing its tune and trade war becoming a seesaw since then, the market as well as the hyper growth stocks both quickly recovered, and then some.
The bout of the last couple weeks happened largely in the absence of general market malaise – a rotation trade many say. Should the economy subsequently slow down further, as many think may happen, it’s hard to see the hyper growth stocks recovering anytime soon.
It’s nice to claim that we are investing for the long term, but if this sector remains depressed for extended time, it’s going to inflict a lot of pain, both financial and emotional, on a lot of investors.
Second, when these stocks started to sell off last year, the valuation overall were quite a bit lower than when the current selloff began. Some of the SaaS stocks still sport higher valuations even after the current selloff compared to last year. This makes snap back a more daunting task. Many stocks may now have to grow into higher price, not being able to count on multiple expansion.
The second point makes comparing with even earlier FUD selloffs troublesome, for those earlier periods saw multiples even lower than last year.
So the big question for the long term investors here is: where do you expect price appreciations in the coming months to come from? (It’s much easier to make the case if the horizon is longer, say over the next 3-5 years.)
bashuzi,
I’ve been having these same thoughts lately. I’ve noticed that the SaaS stocks are down big while the market is slightly up (past 1-2 weeks). The selloffs last October, November, and December were not like that. I’ve also noticed that even good earnings and guidance for SaaS stocks are not rewarded as much as they had been previously. See ESTC, SMAR, and CRWD as examples. And now ZS which was already down 31% from the all-time high may drop another 20% tomorrow for a 45% decline from the high. Down 31% going into earnings is already a very steep decline. The results were quite good and guidance wasn’t that low. To me it seems like evidence that multiples have contracted.
So the multiples on the SaaS stocks have contracted. Will they continue to contract, stabilize, or reinflate? I have no idea if this is temporary or longer term, but for some reason the change in sentiment has made me nervous and cautious. I don’t know exactly why I feel particularly cautious this time and not during the other selloffs in 2017-2019. It could be PTSD from my 2015/2016 losses. Or it could be that the idea of multiple compression for an extended period seems like a real possible outcome. I don’t have concerns about the businesses of the companies that I own (AYX, MDB, ZS, TWLO, ESTC, OKTA, TTD, SMAR, CRWD, PINS in order of allocation). If the multiples awarded to these companies is now step-shifted downward and we are at a new valuation set point then the growth rates in stock prices will closer to growth of these businesses. Again, I do not have a crystal ball and I don’t think that anyone can know whether this is will be a long term step change of lower multiples on SaaS. I think that the huge gains in my portfolio may also be influenced my current caution. On July 26, my portfolio hit a peak of +100.05% YTD 2019. At the end of August it was +83.3% YTD 2019. On August 5th it was down to +75.6% YTD 2019 and today (before tomorrow’s ZS drop) it is at +55.2% YTD 2019. It will probably be about +50% YTD 2019 tomorrow. In 2018, the portfolio had hit a peak of +111.9% (YTD 2018) in early September and on December 24th it had dropped down to +32.6% (YTD 2018). However, the entire market was also down about 20% from the high and the Fear/Greed Index was down to 2 on a scale of 0-100. I think that buying SaaS stocks at that point was a much easier decision than it is today. It just made sense that the the SaaS stocks should be down more than the market and that they would recover more on the rebound. Now, it seems hard to know whether what might happen. 1) if market drops, do our stocks rebound or go down more, 2) could the multiples have reset lower for an extended period or will they go back to the previous levels.
I have used long calls and short puts for the past 2+ years and this has juiced my returns. Perhaps, I was really, really fortunate to enter into these trades when I did. In past selloffs, I have added to these options positions. I have been doing the opposite last week and the week prior…buying back short put positions and selling most of my long call positions with expirations between now and January 2020. I do not want to discuss the specifics but the gist of my actions are akin to deleveraging, bringing the total value of my options to about 3% of my portfolio (it was around 10-12% during much of the period between mid-2017 and recently).
So now what? I think I will complete my deleveraging, be happy with my past gains on 2 years of leveraging, and sit tight with my SaaS portfolio. I know others have been adding amid the selloff. Perhaps that will turn out to be a great move. While I believe that I own among the best stocks out there, I am open to the possibility that the returns going forward may well be more like Saul’s historical average (15-30% range) and not the 60-90% annual gains that we’ve seen in 2017-2019.
Chris