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Peeking Out From Under The Rubble
Naysayers the world over love it when growth stocks swoon. Aha! they say. We TOLD you they weren’t worth that much. Have you lost your mind? Paying all that money for so little revenue and no earnings? Now, begone, and pass me that $JNJ so I can load up on a 2.5% yielder and sleep easy.
Every now and then, the mavens are correct. The thing with growth names is, they lend themselves to giddiness and overexcitement. If you doubt that, read, oh, all of FinTwit from about June to December 2020. In which everyone is an expert on valuation ratios, customer acquisition costs, the inner workings of exotic database query structures and everything else cloudy. The CACophony (that’s a cloud software joke - hilarious if you’re a FinTwit regular, not so much if you’re neurotypical) has dampened down a little since the market gave everyone a lesson in what happens to growth names when risk gets a bad name.
So is it all over? Should we be buying old-line Boomer classic stocks and DRIPing from here to our sunset years?
Well, there’s never any harm in a little of that. If you owned $LMT or, heck, even everyone’s favorite punchbag $NOC, through Q1, you’re probably feeling either smug or just a little less abused depending on how much of these value darlings you held. So don’t let us dissuade you from keeping these names in your account. After all, they send you free money once per quarter.
But we have news. Over most lengths of run, growth usually wins, even on a total return basis. Best if you can to avoid owning heavy allocations of entirely frou-frou names with no fundamental support (like, most all dot coms during Internet 1.0, or, various SPACs in the current era). But if you can find stocks that have solid financial fundamentals - constant or accelerating growth rates, generating cash (we ourselves completely ignore GAAP EPS but that’s just us), and building a big ol’ book of business, the one you’ll find between the pages of the 10-Q under the unlikely title of ‘Remaining Performance Obligation’, with a balance sheet full of green? You can usually ride out the storm.
These are the kinds of names we try to own big. Some you will know well - your $CRMs, $MSFTs and such - some you will have seen fly across your screen may look too ulcer-inducing to ever write a check - $CRWD, $ZS - and some fly under most folks’ radars - $HUBS and $FTNT spring to mind. As we peek out from under the rubble of the Q1 2021 growth dump, only two of those names - $CRWD and $ZS - have been truly beaten up. And we anticipate good things ahead for them. The others, well, take a look. Holding up pretty good.
We don’t know if Q2 2021 will be any more cheerful for growth names than was Q1. Probably it will, but who are we to say. If the beat-down continues, we plan to keep the faith. Because in the end, nobody truly loves a 2.5% yielder, they’re just the sensible friend you turn to for platitudes in times of trouble. Secretly, everybody loves to get back to that head-in-the-cloud high. The joy of the human spirit will out. And anyway, the value destruction this last quarter wasn’t so bad. Nasdaq still looks like the party to be invited to. And we will leave you with a chart below from FinTwit darling, CloudFlare ($NET). Despite major selloff episodes through the last quarter, the stock has held the upward sloping support line established since the March 2020 lows. You see? Not that bad a beating after all.
Now, back to the fray, and good luck to everyone for Q2!
Disclosure - Cestrian Capital Research, Inc staff personal account(s) hold long position(s) in, inter alia, CRM, CRWD, FTNT, HUBS, JNJ, MSFT, NET and ZS.
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