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.

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.

CSCO Cumulative Absolute Return – Dot Com Peak to Today

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.” 

YOU ARE NOW READING BASIC MEMBER LEVEL CONTENT

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.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Disclaimer

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, LLC and its affiliates (collectively, “Kailash Capital”) 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. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital 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, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

April 1, 2022 |

Categories: Quick Takes

April 1, 2022

Categories: Quick Takes

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