Let's Stop Guessing Why Our Stocks Are Down

Investment Analysis Clubs Saul’s Investing Discussions
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I get it, it’s natural. We want to know why. Why have our stocks dropped so much?

I’ve seen a lot of articles guessing as to why. Even direct copy and pastes from other paid websites without the publication’s permission (MAJOR NO NO).

But guess what. All of these guesses and pontifications are absolutely worthless. They are a waste of time.

  1. We truly don’t know why our stocks have sold off. If you want proof, look at the 50 different reasons out there to try and explain it.

  2. All of these posts are after a major drop has already happened. Of course, some perma-bear will post and claim that they’ve been warning us for one or two years but to those people I’d ask. How have your returns been over the last 1, 3, 5, and 5+ years?

  3. It’s all basically OT. Let’s focus on the specific reasons growth companies are good investments (or not) now and for the next 5+ years. That’s where the money will be made.

So let’s get back to researching and discussing the best growth companies we can find.

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Austin, truly respect your approach and effort to present your arguments for your convictions.

That said, I see part of understanding how to pick winning stocks to be understanding why stocks don’t win.

Sometimes that might be grueling and feel oppressive because it’s all negative, or it feels grasping, but I for one believe that I learn a tremendous amount during downtimes that help me sharpen my process.

For instance, sell offs offer me incredible opportunities to rebalance my portfolio (Recently departing GH, EVBG, EHTH, OKTA for ROKU and SFIX)

Why?

  1. Last years sell off, and even recent sell offs, remind us of buoyancy. Stocks may all be down, but some come back faster.

  2. Valuation (while doesn’t matter to some) does matter to me and my feelings on Market Cap vs opportunity in front of it.

For instance, while many folks focus on the ROKU hardware, I focus on the platform of the future, which is TV OS. If ROKU wins the standardization here, we have huge opportunities. There is no need to have an extra device to plug in ala the external disk drive of the 1990s. ROKU has powerful allies in Walmart and TCL to push products to the masses.

As for SFIX, it’s not as sexy as many of the others, but it’s EV/S bounces from 1-2. When it gets low, I buy, as it is the disrupted in the retail space. How smart is their customer service btw?

My wife received flowers a month after our first child was born because they noticed the style of clothes she was purchasing switched from maternity to something else. I guess those boxes will keep showing up.

Anyhow - I’m very curious as to why SHOP has weathered the storm so well and why CRWD has been pummeled (I think Tinkers theory of endpoint competitive advantage cycle is really sharp)

Also, I constantly ask myself why I wouldn’t keep adding to AYX, the only company I own that I can’t really throw a stone at.

Or ESTC which is the engine behind DDOG, receiving no compensation, yet guides stronger than any company we have.

I see downturns as opportunities to explore how far apart the market treats floors and ceilings of our companies. And to gain insights into the true convinctions of others.

Just a Fool, full invested

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JAF,

The ideas in your post are exactly the the type of things that are on topic and appropriate.

I’m all for figuring out why certain companies are great or not great investments.

What I was talking about not doing is trying to continue guessing as to why all of these companies are down.

I’m guilty of this too, but my point was let’s stop saying it’s “because of WeWork” or “profit taking” or “sector rotation” or whatever.

None of that stuff will matter if we’re invested in great companies. So let’s discuss the long term pros and cons of specific companies.

That’s what matters over the long term.

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None of that stuff will matter if we’re invested in great companies. So let’s discuss the long term pros and cons of specific companies.

Not including valuation as part of an evaluation of a stock (not the company…the stock) as being a good-to-great buy that will bring in, or surpass, the CAGR you want, is akin to evaluating pro athletes but ignoring their age.

You look at an athletes recent stats and go “see…they are great…I will just give him a contract for 5 years!” That is like ignoring a stock’s valuation and saying “I have a 5-year outlook” to explain away any concerns on valuation.

Zoom (ZM) at peak was about $25b mkt cap or more. Let’s say you bought then and said “hey…I don’t pay attention to valuation, as over 5 years, any growth stock with incredible metrics will wind up being a great investment!”

If you wanted a 20% CAGR, then after 5 years, Zoom, a video conferencing app, would be worth just over $62b mkt cap. Does that even make sense? Does the TAM even exist to justify that? What P/S would it have to be at that point?

If you wanted 25% CAGR over those 5 years from your ZM investment, their mkt cap would need to be $75b. Basically 11-12 times the current market cap of Alteryx. Huh?

Commonsense says growth stocks under $3b with P/S under 15 have a better chance to drive higher share price returns than growth stocks over $20b with P/S over 40-60. Just because the latter have higher growth rates (for now - not forever) doesn’t mean they will be good investments.

I am too busy to argue this anymore. Good luck all.

Dreamer

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