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(Probably) a Bear Market Rally

I wrote back in early December how “stocks felt heavy”. This felt like a bear market to me, even though the indexes were holding up extremely well. They went on to new highs in the late December Santa Claus rally.

I went on to describe how it felt eerily like the second half of 2015. And how I was worried that the first month of 2022 would be like the carnage of the first month of 2016.

That feeling certainly turned out to be right. We have seen a very similar result. And now that so many stocks have become incredibly oversold and have charts that have gone straight down, it looks like we might rally.

But I think this will be a bear market rally.

That means that I need to be careful not to keep longs too long. I’m hopeful that I can get some nice bounces in the beaten down names I’ve been adding to over the last couple weeks. But I have to be careful not to get greedy and hope for a return to prior highs.

I’m looking for a bounce. A strong one, at least I hope, but not a straight run to higher highs.

If I had any guts, what I would have done over the last couple weeks is just buy more biotechs, buy more small caps, load up. This has been a huge drawdown and so many names are trading at levels that do not value the business at very much, and in the case of Biotechs, value it negatively.

But as it is, I am betting with the money of my family, which I have done well with over the years and so my primary objective is not to blow it. Don’t lose, try to win where you can. The antithesis of the hedge fund that needs to perform to survive. So small risks only.

I did add to a couple biotechs on Monday when the fear was palpable. And there is one new biotech I added this week, on Wednesday after results. More on that in a second. But I did not go all in by any stretch. As much as I think this sector is poised to rise, I can’t take too many chances in case I am wrong.

There was also one non-biotech name that I added to this week that I wanted to talk about and think may be mis-priced here after a very deep drawdown.

Finance of America.

FOA has done nothing but go down since its SPAC merger was finalized in March.

The correct response to this chart would be – but this is a SPAC, right? Isn’t this par for the course?

The list of SPACs down 80% or more is very long. There are so many terrible businesses, or really just businesses that are way to early stage to be on the public market, that have gone public via SPAC, and now they are all getting killed.

But FOA is not really like most of these businesses. This not a LiDAR or robotics or EV company expected to begin generating revenue in 2030 and trading on the hopes and dreams of an investor presentation until then.

FOA is really kind of boring. They are simply a mortgage origination company.

That comes with its own problems. Like many mortgage companies, FOA is complicated. They originate loans, they securitize loans, their balance sheet is a mess of loans held for sale and debt held to fund them. Much of it is non-recourse and not really part of the book value of the business, per-se. There are Special Purpose Entities that hold the loans before sale and variable interest entities where FOA has no economic interest but does hold management over and so they are consolidated. It makes understanding the company very hard.

On top of that usual complexity, FOA has extra complexity because it is not a usual origination company.

Your typical mortgage originator sells the majority of its loans through Fannie and Freddie securitizations. These are called agency loans. These are loans to prime borrowers that qualify to be insured.

Fannie and Freddie originations are pretty commoditized. There are lots of mortgage origination companies that can make these loans, it doesn’t lead to much moat and margins are tight.

However last year with COVID, this market did what a lot of markets did. It went on tilt. Margins skyrocketed to (I believe) over 600 bps at one point as people refinanced their homes en masse . The usual level is more like 150-200 bps.

That was great for FOA because they made a lot of money along with every other mortgage originator.

So FOA rode this wave and came public around March. Which is about the same time that the dislocations in the mortgage market began to ease.

The consequence is that the blowout earnings of 2020 reversed in 2021. Their Q2 earnings look like a mess.

So what do you think a stock will do if it goes public and the first quarter out of the gate its highest income business (Mortgage) goes from $117 million of pre-tax income the year before to -$6 million this year?

It’s going to shit the bed is what its going to do.

You can try and explain all you like that this is “in-line with industry trends” (they did), that there are a bunch of “non-recurring costs” that impacted the results (there were) and that mark-to-market accounting hammered the numbers even more (they did).

No one cares. Most of your shareholder base (the one’s that can sell the stock) only have a foggy idea what you do. They bought you because you were a SPAC that went to market at a $1.9 billion equity value on the belief they were buying something at 4x earnings (see below, from the March 2021 presentation).

And now they are saying, these guys lost money? Get me the hell out of this!

So selling begets selling. It doesn’t help that gain-on-sale margins on mortgages continue to normalize through Q3 and Q4. Take a look at the chart of Rocket Companies, LoanDepot or even Mr. Cooper. They are all going down because mortgage gain-on-sale profits are coming back to earth.

Ok, so why am I investing in this hot mess?

Because like I said at the start of this, FOA is not your usual origination company. And I don’t think the market has bothered to look at it enough to figure that out yet.

Yes, FOA has an origination business. But a large part of that origination business is non-agency mortgages. Think subprime. And of the business they have, most of it is purchase, not refinancing.

So ok, that could help. But its still originations.

The bigger part of the story is that FOA has 3 other businesses that are not originating mortgages for people buying or refinancing their house. These businesses are:

1. Reverse Mortgage
2. Commercial Lending
3. Home Improvement loans

Each of these are far more niche than mortgage originations. That also means, they aren’t as much a commodity business that is subject to low margins. They aren’t nearly as rate sensitive.

Together these businesses make up what FOA calls their Specialty Finance and Services segment.

Likely because they recognized that their stock was in deep doodoo, FOA scrambled on their third quarter call to try to explain to investors that they are not just a mortgage origination company. They outlined a 7-point “market mis-perception” case:

1. Their comparison set is mortgage companies
2. Yet their origination segment is only about 20% of earnings
3. Individual companies in their reverse, commercial and lender services businesses trade at far higher multiples than mortgage companies and then them
4. transaction multiples in these sectors always underscored by expectation of sector growth – example of Anchor Loans by Pretium Mortgage a week ago. See here: https://www.prnewswire.com/news-releases/pretium-acquires-anchor-loans-to-deliver-enhanced-capital-solutions-for-homebuyers-301414181.html
5. The mortgage platform they have is geared to purchase market
6. It is also geared to non-agency which they think will reduce volatility compared to agency dependent refis
7. They plan to double down on reverse, commercial and home improvement lending

It didn’t really work. It is tough to change perception when you are a SPAC that went to market as a mortgage company, hardly any brokerage covers you, and all the mortgage companies and SPACs are getting creamed.

So where are we now? Well, FOA gave the following guidance for Q4:

It works out to about $70 million of adjusted net income for the quarter. This is less than the $75 million of adjusted net income in Q3. So still not good right?

Well, yes and no. Even if FOA meets guidance it is down quarter over quarter, I’ll give you that. And that is largely because the mortgage business continues to normalize (meaning go down), which is really no surprise. A bank I follow closely, called SB Financial Group, has a large origination business. They reported Thursday. Their originations were down 25% year-over-year and their gain-on-sale margin was down from 503 bps to 288 bps. LoanDepot hasn’t reported, but their guide was for Q4 gain-on-sale margins of 210-260 bps versus 290 bps in Q3.

So yes, earnings are still being dragged down by mortgage. But the rest of the business – the Specialty business – is doing quite well.

At the midpoint, adjusted net income from SF&S would be at $64.8 million in Q4. In Q3 it was $59.6 million. This year it is up pretty significantly over 2019 and 2020.

The problem is the mortgage business has been down more.

But where we are now is an adjusted net income level of around $280 million annualized with the mortgage business contributing ~$20 million of that.

There are 191 million shares fully diluted. So that works out to $1.50 EPS. The stock is under $4, trades at about 2.5x PE.

While the stock traded at 4x PE at the time it went public, that was on a much higher “E” and those were on peak, unsustainable, earnings. Now it is on earnings largely from SF&S, which is growing.

I’m not the only one sniffing around this stock. Leon Cooperman was on their Q3 call asking questions. Cooperman held 900k of Replay Acquisition Group before the merger, but has increased his position to 4.4 million shares in Q2 and 4.7 million shares in Q3. He has been buying all the way down.

Cooperman focused his questions entirely on the long term:

Just a couple of high level questions. I noticed on your press release of earnings, you referred to yourself as a high growth consumer and specialty lending business. I think the stock sells is somewhere between two and three times earnings, we’re starting to see just high growth. I know you spent a lot of time this morning discussing why, do you think the market, are you relying upon the market just to wake up and change the expectations or there proactive things you could do, I notice for example that GE is breaking themselves up in the three companies. So, that would be question number one.

36:19 And related to that question is, forget about the next quarter, but on a five-year basis, when you refer to yourself as a high growth consumer specialty lending business, what kind of growth do you think the company can support on a five-year basis per annum? And secondly, on the cover sheet there are three earnings numbers, it’s the basic $0.36, there’s the fully diluted zero point two two dollars, and then there is the adjusted net income of seventy five million dollars or zero point three nine dollars, which do you think given you’re now into the business the most relevant to your business.

36:50 The kind of number that we shaped dividend policy going forward or are the kind of activities? Those are two questions, and congratulations on a good quarter.

The answers were that they aren’t going to break themselves up because the mortgage business generates customers for the specialty businesses, they can grow SF&S at 15% per year and that we should focus on the adjusted net income number.

Cooperman has always been a pretty astute mortgage investor. I followed him into Arbor Realty years ago (at about the same price as FOA is at now, coincidentally) and did quite well alongside him.

So that is FOA.

A Little Bit of Biotechs

I finally bought more Eiger this week. I waited and waited and waited to add to my position but when it cracked down to $3.55 on Monday I said enough is enough and doubled down.

I did add one other new biotech stock this week. Checkpoint Therapeutics.

I say new but I owned this for a week around New Years. I bought it then as a tax-loss selling idea and it didn’t work so I quickly sold. Now I bought it back.

But this time I buy it back with a bit more conviction.

The reason I have some more conviction is Checkpoint released results on their anti-PD-L1 drug candidate.

I had said that Cosibelimab had released some interim results previously. Here are those results, followed by the new results:

And here are the new results from the larger patient cohort:

They noted that “the median duration of response (“DOR”) had not yet been reached at the data cut-off point (76% of responses are ongoing)”.

Compare the final results to Keytruda (Merck) and Libtayo (from Regeneron) results. They look pretty much the same, if not better. And the safety profile looks good too. Here is what B Riley says:

we call out that the response rate is in line with or better than the two approved PD-1 inhibitors on the market in this indication, the complete response (CR) rate is trending positively, and the safety profile indicates cosibelimab could be a preferred combination partner

This is how HCW titled their note the day of the release:

Again, this is a very big market. Checkpoint’s strategy is to undercut the big players (Keytruda is owned by Merck, Opdivo by Bristol Myers) on price and take a piece of it:

So I don’t know. Either the analysts are missing something, as am I, or this is just such a bad biotech market that even if you get just the right results, the best your stock can do is stay flat.

But I could be wrong. They do have to muscle their way in against big-Pharma. And its not a better drug, other than maybe the safety profile. Maybe that is what is holding the stock back.

But it also is a very bad biotech market. I’m guessing that it has at least something to do with the latter. I think it is worth a small position, at least for a pop.

Puke Buying

Corrections like this are very hard. No matter what you try, it is extremely difficult to make money on days when the market is down 90 points.

I can almost stay flat on my margin account because I am short enough SaaS and momentum stocks to make up for the carnage on my longs.

But in my RRSP or my wifes cash account, even though the stocks I hold there are more weighted to dividend paying, and even though I have the index hedges, it is really tough to not lose money on a day like Friday.

Think of it this way – on a day like Friday you are likely to have 3-4 stocks down 5%. The index is down 2%. So you need 2.5x the holdings in the inverse index just to make up for those 4 stocks. Pretty quickly you’re biggest risk is all the inverse ETF you hold (which can go south on you quickly). You just can’t make the numbers work. Not to mention that if you are putting that much into just beign hedged, you might as well just be holding cash.

I think that the only time I managed a correction ideally was during COVID. And that was just because it seemed so obvious at the time to just get out entirely.

But now? I have been dragging my heels on getting out entirely. Because things just don’t seem that bad. The market seems bad, but the world doesn’t seem that bad. And many stocks are very inexpensive.

So I’m hedged, but I’m not cash. And there is a difference between the two in that when the shit really hits the fan, as Friday showed, hedging does not mean you don’t lose money.

You could put my investment ideas into 4 buckets right now.

1. A bunch of banks/insurers
2. A bunch of biotechs
3. Gold/metals related
4. Small cap idiosyncratic

I’m going to go through why I own each of the first 3 buckets.

Banks

Bucket 1 is the biggest. I own a bunch of regional and community banks that all trade at very low multiples (most are close to tangible book and at or under 10x earnings).

During the first two weeks of the year, these stocks actually did really well. As I wrote about here, my portfolio was actually going up a little, and it would have been going up a lot if not for the drag of biotech.

But this week, not so much. The KRE (that is the regional bank index) gave up its gains from the past two weeks. CUBI had a bad week. Most of the banks I own gave up the previous weeks of gains.

Do I sell? Get out?

It is hard for me to agree to that.

The outlook for banks and insurers, with Omicron likely ending COVID, with rates on the rise, with an economy that should be at least okay, should not be that bad. And the stocks are some of the cheapest one’s out there.

I also think there is a chance we see something that hasn’t happened in years. Expanding interest margins.

I don’t think the Fed, the Bank of Canada and others can raise short term rates too far because too many households have variable mortgages that depend on those rates. But they don’t control longer dated rates.

I wonder if we could see a world where short term rates remain low even as longer term rates slowly rise over time. I’m not talking about a wild-hyper-inflation-type rise like the crazies are shouting about. But a modest rise, so that net-interest-margins for banks maybe go up 0.5% in the next year.

Which should be beneficial because the net interest margin of banks has shrank so much over the last 10 years.

If you go through the banks I own, even though some of them have developed other businesses that don’t depend on interest, they still derive a lot of their income from interest margin. And with interest margins so low right now, for many a 0.5% increase would be akin to doubling their non-interest-income business. So its significant.

To put it another way, with commodities the old saying was to buy when the PE was high and commodity prices low and sell when the PE was low and commodity prices high.

With the banks, we are at multi-decade lows in NIMs, but the PE is low. Far lower than the market average.

So sell now? Ehhh…

On to biotechs

My one big mistake over the last 4 weeks has been thinking that buying biotechs at prices near or under cash with drugs in late stage trials would be a good idea. My premise, which has proved false, was that these stocks couldn’t possibly go below where they were during the peak COVID panic.

As it turns out – they can, and cash has only been a partial counter force against further share price losses. When the XBI goes down, they all go down, idiosyncrasies be damned. My only redemption has come from my SaaS and momentum short trades which apparently are tied to the hip with the XBI (for now) and thus makes money as these names lose money.

Where we are now, four of the biotechs I own have negative EV’s based on Q3 cash levels. The other 3 are getting there.

Do I sell?

Well clearly I’ve been wrong. Cash on hand has been only a bit of help. But at this point: A. apart from Caribou these stocks are all trading at only slight positive or negative enterprise values, B. apart from CRVS these stocks are at levels that are lower than they were during the worst of the COVID panic and C. they are all terribly, terribly oversold.

Nothing fundamentally has changed with these names. They are all closer to their next data read-outs then they were a month ago.

And here’s the thing I keep thinking: these names aren’t goosed by COVID numbers like a Netflix or Peloton. We are seeing an unwinding of the COVID trade, sure, makes sense, but these are just collateral damage to that. In fact, th forces at play for these biotechs are the opposite: because of COVID, drug trials didn’t get done, patients didn’t enroll, everything slowed down. Now that is ending and we can get back to normal.

I also don’t buy the argument that biotechs are rate-dependent stocks like SaaS/tech companies are. Consider this chart, which was posted by @Amarillo_Slim1 on twitter.

Biotech stocks have traded at a far higher EV/cash multiple in the past during periods where rates were much higher. So the “long-dated-assets-discount-rate-rising-present-value-compression” argument doesn’t hold water to me.

Finally, big drawdowns with biotech stocks just happen. And then they end. Consider this chart of Eiger, which is the one biotech I’ve (unfortunately) held through this entire drawdown:

This drawdown is unique in terms of the absolute price it has taken Eiger down to. I honestly never would have thought we’d see a $3-handle on this stock, what with an approved drug generating revenue and with Phase 3 results on HDV less than a year away.

But what is not unique is this steep, sudden drawdown. It has happened over and over again. And most of the time, the stock has recovered almost as fast as it has fallen. If history is any guide, it could be back to $6 in a month.

That makes me very reluctant to bail out here. Even as each of these stocks painfully slip a few cents more almost every day.

Eiger also presents an example of another point. Funds are getting involved with some of these beaten down biotechs.

The funds and clients of Columbia Management Investment Advisers now own 20% of Eiger (or more if they continued to buy this week). They have bought over 6 million shares in the last year including over 1 million in the last 3 months.

The funds mentioned in the filing that hold the bulk of the shares are Seligman Tech and Seligman Offshore funds. These don’t look like dumb investors to me. They are run by Paul Wick. His funds were profiled in November in The Institutional Investor:

A hedge fund manager best known for running long-only mutual funds is enjoying one of his best years in recent memory.

Paul Wick’s Seligman Tech Spectrum fund is up 24.37 percent for the year through October, well ahead of many other tech- and internet-focused funds, a number of which have been mired in the red for most of the year. “We’re playing in a different area that they pretty much ignore,” Wick asserted in a recent phone interview. 

Wick is the lead portfolio manager for the Seligman Technology Group at Columbia Threadneedle Investments. He has been heading up Seligman’s technology investment group since 1990.

Wick is not a momo growth guy, which is probably why he has been around for so long:

“We are fundamental growth investors [who] are valuation aware,” Wick stressed in the phone interview. “Others have a tendency to forget about valuations and drive off [the] cliff periodically.”

Wick believes his group is more focused on a company’s profit margins and cash flow, as well as companies repurchasing stock or doing accretive acquisitions.

Anyway, if you read through the 13D filing, you can see that Wick’s funds and clients were large buyers in late December in the low $5s. Now we are a buck lower.

I added a bit to my biotechs on Friday. I have been cautious the last two weeks and just tried to do nothing with these positions. But Friday I broke down and added to ABIO and ALDX. Both of these stocks are WAY below cash and they have years of runway given their current burn.

Gold

Gold is the last single theme bucket and the last bucket I will talk about.

But what can you ever say about gold stocks? Cuz who the hell knows.

If it really is a market collapse gold stocks will go down… maybe. But maybe not. During COVID they actually went up until somebody gamed the 3x ETFs and then they gave up all their gains and then some in like 3 days.

What I do know is that tech and SaaS are long duration assets. That means they are dependent on their earnings stream many years away. In the case of some of these SaaS names it had gotten so stupid that you would have to go out 30-40 years to truly realize the value on a discounted cash flow basis.

Gold stocks, on the other hand, are (like bank stocks) the opposite. They are short duration assets.

Banks give you the earnings right now, dividends right now and in some cases buybacks right now.

Gold stocks do too. In fact they are even shorter duration – basically the length of the mine, especially now when exploration is priced at a big, fat zero. Its all about today’s cash flow.

The gold stocks I own are also very reasonably priced.

Soooooo… the case can be made.

The trick right now is figuring out if these stocks can go up while other stocks go down.

It seems like the growth-cohort of SaaS/momentum/stay-at-home stocks is finally seeing their good fortune come to an end. As I tried to point out in my last post, you can make a case that there is further to fall.

And quite honestly I have a hard time believing that the descent of the growth stocks will be over until we finally see Tesla give up the ghost. It is the unquestionable kingpin and as long as it still stands the triple-waterfall collapse will not be complete.

With that as my premise, the question I can’t answer is if other stocks can go up if Tesla and all the other stocks held up by it keep falling.

If I knew the answer to that I I wouldn’t have so many hedges on my portfolio that I am essentially barricading it like I was about to be attacked by the huns.

But I do know that the stocks I own are the antithesis of growth/SaaS/momentum stocks. They are very low PE stocks. They are short duration stocks.

And I do know that during a regime change there are new winners. And even with the pummeling, I have optimism that I might be in 1 or 2 of those.

I May Never Buy the Growth Stocks

The growth stocks have been destroyed over the last few months. Many are down by 30-50%. I wanted to get an idea as to whether I could soon step in and buy some of these names.

Below I’ve gone through my list of growers. This is not comprehensive of all growers or of the best growers. It is just the list of stocks that I track. I went through a simple exercise with each. Look at the basic numbers. Don’t look at the specific business numbers, don’t look at addressable market, user metrics, moat any of that stuff. Just look at growth, cash flow, opex – as if they were a generic business that just happened to be growing instead of a magical SaaS business.

The result? I don’t know if I will ever be able to buy any of these stocks. I mean they are still incredibly expensive by my eye. If they can’t look cheap after the kind of collapse they have had, I don’t think they ever will.

ADBE

• $243b market cap
• $6.1b of cash, $4.1b of debt
• grew 14% this year, expected to grow 15% next year
• trades at 31x PE on 2022 EPS
• in 9m cash fow of $5.1b, capex of $249mm and acquisitions of $1.47b
• I mean its 36x annualized cash flow for a business growing under 15% ex-acquisitions

BIGC

• $2.3b market cap
• $360mm cash, $335mm of debt
• grew 42% last year, expected to grow 28% in 2022
• they only grew 22% in year prior to COVID
• gross profit grew $45mm in 9m, opex grew $55mm
• cash burn of $31mm
• also had $81mm acquisitions, $2.3mm capex
• these guys are honestly kinda brutal

CRM

• $225b market cap
• $13.3b cash, $10.6b debt
• grew 24% this year, expected to grow 20% next year
• gross profit was up $$2.7b in 9m, opex up $2.2b
• they did $4b of cash flow in 9m, had $550mm capex and $14.8b of acquisitions
• in 2020 acquisitions of $1.3b were nearly have of cash flow
• so roughly at 47x FCF and growing 20%, that isn’t taking to account how much cash is being used to generate revenue growth from acquisition
• gets a 48.5x PE
• My problem here is that at $225b market cap, if they have scaled to their true profitability by now, when does it happen?
• I mean they are 2x the size of IBM – when does the market say wait – they are just growing primarily by acquisition like IBM did, why do they get at 48x PE while IBM gets 13x?

CRWD

• $43b market cap
• $1.9b of cash, $700mm of debt
• grew at 64% this year, expected 40% next year – if these growth numbers turn out to be rightits a pretty big slowdown over last 5y (110%, 93%, 82%, 64%, 40%)
• gross profit increased $300mm, opex increased $335mm
• generated $415mm of cash from operations, $105mm of capex and another $353mm of acquisitions
• trade at 209x PE on 2023 EPS, 325x on 2022
• very expensive but they are at least growing in a profitable way

DBX

• $9.3b market cap
• $1.9b of cash
• $1.37b debt
• growing at 12% this year, expected to grow 10% next year
• grew gross profit by $164mm in 9m, opex was pretty much flat ex-impairment
• generated $567mm of cash, capex/acquisitions of $146mm – ~20x FCF
• trades at 14.9x 2022 EPS
• its the cheapst SaaS by some margin, but as a company its still not really that cheap – 10% grower at 15x PE

DDOG

• $45b market cap
• $1.45b of cash, $735mm debt
• growing 65% this year, 42% next year
• trades at 44x P/S, 445x PE
• gross profit increased $200mm in 9m, opex roughly the same
• generated $170mm of cash in 9m, capex of $27mm, acquisitions of $200mm
• seems like if you are over that 40% growth number any multiple is legit

EPAM

• $31.6b market cap
• $1.3b of cash, no debt
• revenue grew 41% this year, 30% next year
• trades at 50x PE
• revenue grew $700mm, all expenses grew $600mm
• the weird thing about these guys is that they aren’t actually SaaS, they are outsourcing, but they trade at 8x P/S like they are SaaS
• before pandemic they grew 20%, I bet they come back to that level

FSLY

• they are a $3.7b company – have $1.1b of cash, $932mm of debt
• they lost $162mm in 9m
• gross profit grew $16mm, expenses grew $120mm (!!)
• were negative cash flow, maybe flat excluding working capital
• but they spent $41mm in capex
• estimates are for 21% growth next year
• FSLY is really bad, they hardly grew at all but expenses grew a ton
• Just to say it again, this looks bad to me – how can expenses increase 10x GP

CDLX

• $2.1b market cap, $293mm cash, $174mm debt
• they are growing – grew 47% in first 9m
• but expenses way outgrew revenue – expenses up $115mm, revenue up $57mm
• they burned $38mm of cash flow in 9m
• spent $494mm on acquisition – some of that growth wasn’t organic
• estimates are for 34% growth next year
• kinda brutal, I get the sense they are trying to cover up a bad business by spending to create growth

HUBS

• $24.8b market cap
• call is for 29% growth next year, had 46% this year
• they are expected to have $2.39 EPS next year – 219x PE
• revenue grew by $300mm, gross profit grew by $233mm, opex grew by $236mm
• had $143mm of cash flow, $70mm before working capital, $58mm of capex
• to their credit they aren’t buying up companies left and right, I don’t see big acquisition expenses
• brutally expensive but at least they are making money

IDN

• $90mm market cap, $13mm cash
• expected to grow revenue to $16mm this year, $19mm next year
• so they trade at 4x P/S
• grew revenue by $2.8mm, expenses by $5mm this year
• very slightly cash flow positive
• who knows, at least its reasonably cheap on P/S

Open Lending

• $2.6b market cap, $90mm of cash, $143mm of debt
• expected to grow revenue 15% next year (grew 90% this year)
• EPS estimate of 92c – 22x PE
• gross profit grew by $90mm, opex really didn’t grow at all
• their cash flow was $68mm for 9m, very little capex
• this does not seem like a terrible business – its just too expensive (update: since its auto loans, see below, it may be a terrible business)
• I mean stockholder equity is $128mm – like 20x book – that seems crazy for what is essentially a glorified bank – update: I’m wrong about this, not a bank, don’t know what I was looking at here, they are just an originator of auto loans, sell to banks for fees, also take a fee (and risk?) on insuring loan from 3rd party

LivePerson

• $2.3b market cap, $630mm cash, $565mm debt
• they grew revenue by $80mm, expenses by $56mm
• cash flow was $35mm, had capex of $57mm
• their interest costs were way up for some reason – i think accretion on convertible
• estimates are for 27% growth next year, had 28% this year
• they only trade at 3.8x P/S on next years sales
• this actually isn’t as bad (or expensive) of a business as some

Lightspeed POS

• $6b market cap
• gross profit increased $72mm
• opex increased $156mm (!!)
• they have $1.18b of cash, no debt
• cash flow from operations was negative -$27.6mm but the kicker is $398mm on acquisitions (!!)
• estimates are for 32% growth 2022, after 140% this year
• this is a shit show

Cloudflare

• $33.5b market cap
• trades at 37x 2022 P/S, 351x EV/EBITDA
• grew revenue at 50% this year, expected 37% next year
• gross profit grew $125mm in 9m, opex grew $130mm
• they did generate $24mm of cash flow, and excluding working capital generated ~$35mm
• capex was $75mm in 9m
• the numbers are better than most but its ridiculously expensive still

Okta

• $31.5b market cap
• have $2.5b cash, $1.8b debt
• gross profit grew $317mm this year, opex grew $600mm
• cash flow was $90mm this year – includes a big $198mm deferred revenue
• they spent $215mm on acquisitions
• grew at 53% this year, expected to grow at 37% next year
• trades at 17.6x P/S
• opex being twice GP does not look good to me

Onespan

• $665mm market cap
• these guys aren’t really growing – they saw a drop in revenue in 9m
• operating costs of $12mm increase while revenue dropped
• -$4.4mm cash burn in 9m, another $1.5mm of capex
• average estimates are 5% growth next year
• they have never really been a growing business $211mm, $253mm, $215mm revenue in 2018-2020
• I seem to remember a SaaS transition here so maybe that is some of the revenue slump
• though there is no discernable increase in deferred revenue that I can see
• I’m not sure if these guys are even SaaS?

Paycom

• $21.4b market cap
• grew 24% this year, expected to grow 24% again next year
• were growing 14% before COVID
• $230mm of cash, no debt
• $229mm of cash flow from operations in 9m, $275mm if not including working capital
• gross profit increased $125mm while opex increased $115mm
• they are profitable – $4.44 EPS this year, $5.62 EPS next year – 63x PE
• they are way too expensive for a company likely growing at <20% going forward

PagerDuty

• $2.7b market cap
• $545mm cash, $280mm of debt
• grew 31% this year, expected to grow 26% next year
• revenue increased from $154mm to $202mm, gross profit increased $36mm
• opex was up $62mm
• at least for the 9m, opex is increasing at faster rate than revenue
• they burned $7.4mm of cash, they would have had a little more before working capital
• $4mm of capex
• are expected to grow 26% next year, after 31% this year
• trades at 7x P/S
• this isn’t nearly as expensive as some, its not cash flow positive, but this is probably one of the more reasonable ones by the numbers

Paypal

• $226b market cap
• cash of $14.5b, debt of $7.9b
• expected to grow 18% next year, grew 18% this year as well
• has been growing in 15-21% range last 5 years
• PYPL has $191 share price, earned $2.87 in first 9m, $4.62 EPS for FY – 41x PE
• revenue increased by $3.1b, costs increased by $2.2b
• they generated $4.6b of cash flow in 9m, around $5.5b before working capital
• capex and acquisitions were $1.2b
• so $4.3b FCF in 9m – that is about a 2.5% yield annually

Square/Block

• $67b market cap
• $6.8b cash, $4.7b debt
• they grew 86% this year, 101% last year – but are expected to grow 7% in 2022
• growth two years before COVID was 49% and 43%
• EPS estimate for 2022 is $1.86 – 78x EPS
• revenue increased $7.2b, BTC revenue increased $5.2b of that
• so the rest of the business did grow quite a bit – transaction by 47% and subscriptions by 78%
• COGS increased by $6b, OPEX by $1b in 9m – so they became a little more profitable
• I’d have to dig in, 7% growth next year does not look good though for that kind of multiple

NSTG

• $1.6b market cap
• have $370mm of cash and $225mm of debt
• trade at 9.9x P/S
• they did $144mm of revenue this year, 22% growth, $180mm next year, 25% growth
• this is one of those clinical and research suppliers
• revenue grew $21mm on 9m, opex grew $33mm
• growth seemed to slow in Q321, was about 17%
• they burned $73mm of cash in 9m, another $5mm of capex
• these guys look awful, they better see growth pick up

Qualys

• $4.9b market cap
• forecast is 13% growth next year, had 13% growth this year
• $490mm of cash, no debt
• gross profit grew $25mm, 12%
• opex grew $40mm, 25%
• they grew 13-15% before COVID
• they had $160mm cash flow from operations, $21mm of capex
• so fcf was $140mm – FCF yield of 3.1%
• trade at 38x next years EPS, 43x this years EPS
• well they are generating FCF but I don’t know why they get a 43x PE

Affirm
$22.4b market cap

• grew 63% this year, expected to grow 47% next year
• trades at 12x next years sales
• they have securitizations trusts which makes them a little tricky to understand
• revenue grew by $93mm in 9m, expenses grew by $225mm
• their accounts receivables was up huge which drove positive cash flow but didn’t make money otherwise
• they are a buy now pay later company so all these loans on their books are likely subprime – pretty hard to value on numbers without understanding the loans

TEAM

• $77.5b market cap
• cash of $1.2b, debt of $350mm
• grew at 25% this year, expected to grow 24% next year
• trades at 23.8x P/S and 146x P/E
• in FY2021 gross profit grew $380mm, opex grew $320mm, but they also took a huge non-operating expense for 3rd year, not sure what that is
• in Q122 reveneu grew $155mm, OPEX grew $141mm
• their cash flow from operations was $841mm (including $294mm of deferred revenue), capex/acquisitions was $120mm
• so that is about $700mm of fcf – 100x
• its crazy to me that a company growing 24% gets a 146x PE multiple – I mean the logic that one business that grows 5% gets a 10x PE while another that grows 25% gets 140x PE is hard to fathom

Sigh – Some Stocks I Sold

I went into the new year with a lot of cash. But on the last day of trading I added a number of stocks that I thought would be tax loss reversal candidates. These are the stocks I mentioned in the last post.

It has not worked out very well.

Radcom, Silicom and Finance of America are flat with where I bought them. BM Technologies is up a tiny bit. But the rest, which are all biotechs, have not done well.

I sold Mustang Biosciences and Checkpoint Therapeutics yesterday and Caribou Biosciences and Sangoma Therapeutics today. These names were supposed to bounce into the New Year. Like just about every biotech, they have not. So I’m not going to turn this into some other thesis. I just sold.

I looked more closely at Mustang and Caribou this week, as they fell and I took the loss. You can certainly make the case that Caribou is oversold. I do want to buy it back at some point. But its in some sort of genomics death spiral right now, just like its bigger CRSPR kin like CRSP and especially the smaller guys like VERV and GRPH. It also doesn’t help that allogeneic CAR-T, which I described last post, is in the dog house right now. Allogene, which does a completely different gene editing technique to what Caribou does (called TALENS), had a trial put on pause by the FDA back in October. The reason was a patient saw a chromosomal change, and it may (not for sure) have been caused by Allogene’s therapy.

But this isn’t super good for any company looking to take T-Cells, edit them, and put them back in.

Mustang and Checkpoint just aren’t acting well.

Finally, I sold Sangamo today because my timing was awful. They released the end of a partnership with Sanofi, three days after I bought it – ugh!

These four names were a nice whack to my portfolio that wiped out much of the gains I had over the last few days in the banks and SaaS shorts. This makes it all the worse. My long held banks and SaaS are finally working only to see their gains fluttered away by a bunch of new stocks I just added last week.

It is frustrating.

So on the biotech side what am I left with? I’ve kept Arca Biopharma, Aldeyra, and Lyra Therapeutics primarily because they all trade at or below cash. Arca trades at a ridiculous amount below cash at this point, they could operate 2 years and still be below cash.

While these stocks are still going down, there appears to be no urgency to the selling anymore. They go down on a few shares and not too much volume.

That is very much not like Caribou or the rest of the ARKG or ARKK names or the SaaS names, which have been going down violently, at least until today (today is either the bottom for SaaS or it is going to get nasty IMO).

And that is really the root of my problem here and why I just can’t hold conviction here. This market has the same feel it did to me in December.

I will probably be completely wrong about this, and so I won’t try to predict the demise of SaaS, or ARK, or TSLA, or MOMO because doing so has proven to be a fools game. There is no multiple too large! In fact, today could very well be the bottom for these names. It was just the sort of day that often does it – a big whoosh in the morning and a quick recovery.

The charts of many momo names look wild -big swings in both directions and the start of a breakdown in the uptrend. I can’t shake the feeling that if the wheels were ever going to come off on these names, this feels like a good time for it.

That is a wishy-washy statement. But I can be wishy-washy because I’m not heavily positioned either way in them. I covered about half of my SaaS shorts today, the better names like Crowdstrike and Okta. I continue to hold the weaker names, and I am cringing that another big bounce is coming. I still have my index shorts just in case.

I’m comfortable owning banks, a few biotechs trading at cash and the usual assortment of micro-cap odd-balls. But apart from that, I am best off staying cautious. This last week is evidence of that.