No. of Recommendations: 13
The 3-year mega-trend of SaaS companies trouncing the market continues this year, even in the throes of this fastest bear market in history. In this post, I'll discuss what SaaS is, compare the Tech Growers screen I introduced earlier this week to Saul's portfolio performance, show how this sector is continuing to outperform, and describe the growth of telehealth during this pandemic. Lots of topics, so let's get started.

What is SaaS?
SaaS (Software as a Service) refers to the delivery of software via the Internet and sold via a monthly subscription. The software runs in your browser or mobile app, but it always connects to a back-end server in the "cloud" or a data center. There are no long-term contracts or heavy up-front license fees.

The earliest example of a successful SaaS company is Salesforce, which went public in 2004. Microsoft, Adobe and Oracle have been around since the 1908s, but they did not offer SaaS services until relatively recently. Office 365, for example, first came out in 2013. Around the same time, the earliest publicly traded SaaS companies, like Service Now, Atlassian and Splunk were gaining tremendous market share, and paving the way for a dozen others to go public, like Twilio, Zendesk, MongoDB, Docusign, Paycom and Shopify. So this is a relatively new industry that you could only invest in after 2013.

Tech Growers Screen vs the Market, Saul and BRK
Participants on Saul's board have been investing in SaaS stocks since early 2017. I switched from MI to investing in these companies in early 2018. I have a software development background, and know these companies' products pretty well. Saul's update yesterday describing how he is actually up 13% since Jan 1 is a must read:

I introduced the Tech Growers screen earlier this week to try to capture this industry's growth in a mechanical screen. Here's the message where I describe this screen:

So let's compare the past 3.25 years of this screen against Saul, BRKB and SPY, with a starting amount of, say, $300,000 at the end of 2016.

Tech Tech
Growers Growers Saul Saul BRKB BRKB SPY SPY
Year Return Amount Return Amount Return Amount Return Amount
$300,000 $300,000 $300,000 $300,000
2017 59.1% $477,300 84.2% $552,600 21.6% $364,800 21.7% $365,100
2018 58.0% $754,134 71.4% $947,156 3.0% $375,744 -4.6% $348,853
2019 54.4% $1,164,383 28.4% $1,212,360 10.9% $416,700 31.0% $456,997
2020* 0.3% $1,167,927 13.4% $1,374,816 -21.0% $329,193 -21.0% $361,028

* YTD through 3/27/2020

Both Saul's portfolio and Tech Growers quadrupled in value in the 3-year period from 2017-19. But what's more remarkable is that both strategies are still in the black this year, despite a crushing bear market.

Conversely, the Berkshire port has not only badly lagged the market, it has utterly failed to protect investors from a severe market downturn - even while holding a 20% cash position and paying no dividends. BRKB is down 21% YTD after dismally under-performing in 2019.

Why is it that SaaS stocks are providing safety in a bear market, and BRKB is not?
I can only guess that many SaaS companies, like Zoom video, Ring Central, Zscaler and Zendesk are actually enabling people to work from home. The tech behemoths like AMZN, FB, NFLX and MSFT also thrive when people are forced to stay home.

Of course, there is no guarantee that this sector will continue to outperform the rest of the year. Having held these software stocks for almost 3 years now, I can tell you that they do not go up in a straight line, and there is plenty of downside volatility - my port has sunk 15% to 20% at times before bouncing back up. However, as I've said several times before, I don't confuse volatility with risk. I'm in these for the long haul. The fact that they all have 9-figure recurring revenue streams, no expensive physical assets to maintain in inventory, no debt, and gross margins north of 75% give me some sense of stability and conviction.

With the exception of ROKU, I had zero urges to sell any of my holdings this year, and, instead kept adding to my core positions in small amounts. I am not a believer in "backing up the truck". If the market revisits the lows of 2 weeks ago (and it very well might), I will keep adding a little more to each position. Doesn't matter to me where the exact bottom is - I never did well at market timing. The good news is that you can do very well, just dollar cost averaging, and you don't need market timing as a skill.

The Growth of Telehealth
Here in the NY / NJ area, many practicing doctors have been summoned to hospitals and are only seeing emergency cases in their offices. If you know anyone who is at home and needs to consult with a doctor or mental health counselor, see if they have a telehealth or nurse line benefit through their health insurance provider.

Teladoc (TDOC) is the nation's largest telehealth provider, and has been publicly traded since 2016. This is one of my holdings, and I expect it will continue to do well even after this pandemic ends. They offer both clinical and behavioral health consults via phone or video chat. There are several other companies like this, like Amwell, MD Live and Doctors on Demand.

Stay home, stay healthy and stay safe.

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