In Fast Growth Stocks, we explained the risks to “growth investors” seeking quick profits in some of the market’s most speculative firms. That rant laid the groundwork for our paper explaining the obvious opportunity to invest in growth companies at reasonable prices. A once in 20-year opportunity, in our view.
If you want bullish Friday fodder, you’ll not find it here. Not today. Long-time readers of our work know we are an investment newsletter. You’ll not find us darting in and out of stocks claiming to be the most clever folks in the room. Terrific way to end up in clown-town.
Lots of people in this business claim they can read the tea leaves. We don’t and we won’t. KCR isn’t here to make your broker rich. We’re here to help you compound your money safely.
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Check out the movie The Hummingbird Project. Not even a Rotten Tomatoes score despite Jesse Eisenberg from The Social Network leading. But an entertaining primer on why short-term trading calls are entertaining but poor stuff for preserving and growing capital. We digress…
Let’s revisit our piece, The High Price of Predicting Progress, from March of 2021. In that piece we built a screen that pulled out every stock that was trading at over 33x sales and losing money. Why 33x sales?
Because 33x sales was Cisco’s valuation at its peak of the dot.com mania. Cisco is a living reminder of the risks to investors in the stock market’s speculatively priced firms.
- The chart below shows Cisco’s share price from 2000, when it traded at 33x sales, through today
- You can see investors lost 85% of their money when the stock price troughed in October 2002
- Those same unfortunate investors spent 16 years waiting to get to breakeven
Over that same time period, the company grew revenues 172% and earnings per share by a staggering 681%. Even when the stock you pick turns out to be a champ, you get crushed when you pay obscene multiples.
Even investors with the highest risk tolerances, long-term investment horizons, and the most aggressive investing styles are unlikely to ride stocks through the floor. Twenty-two years in Cisco and you made 0.67% per annum.
The good news is crushing drawdowns like the above are often optional. As Mark Twain explained….
“There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.”
Growth Stock Investing Made Complicated
The table below shows all the stocks we panned a year ago due to their dearth of free cash flow, negative price-to-earnings ratios, and indefensible price-to-sales ratios. The columns alternate between where the stock was at publication in March of 2021, and then where the stock is today.
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The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.
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April 1, 2022 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
April 1, 2022
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
