- Starting Monday we're introducing a little more of the long term to our work.
- We're going to be making a few selective long-term, buy-and-hold picks with a view to making >100% gains over a multi-year period.
- We walk you through our Multibagger strategy below.
DISCLAIMER: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Beyond The Mouse Raid
For some time now we've focused on short-term trades, trying to grab a little free money here and there in the middle of this strange market, where risk asset prices bear even less relation to the real world than usual. It's worked out well for us.
If you're a subscriber you know of these Mouse Raids from chat, and you have real-time 24/7 access to our Coverage Universe resource where we highlight short-term ideas like 'buy below / sell above' levels and our stock chart analysis showing our supporting logic.
Our DNA here at Cestrian Capital Research, Inc lies in long term investing, like, multi-year, multiples-of-money investing. So we're going to be layering a little of that into the service. To make it interesting - rather than saying, oh, buy AT&T (T) preferred and click in 5% per year in safe dividends but while you're doing that you better hope the stock doesn't drop as the management team continues to set fire to money pretending to be Netflix (NFLX) - we're going to be focused on stocks we think can make a multiple of money over a number of years. Multibaggers. Which we define as, >100% return in an unspecified period of time but let's call it 2-4 years.
Now, the beauty of public stocks and today's online brokerage services and low / no commissions is that there are many many ways to make $ from stocks. The goal of course is to maximize returns from any given quantum of capital over any given period of time. A simple measure of doing so is IRR - internal rate of return. If you're not familiar with the concept, all it does in the context of investing is to adjust returns for the time period of hold. If you get a 10% return in a year, you score 10% absolute gain and 10% IRR. If you get 10% return in two years, you still get 10% absolute gain but your IRR falls to 3.2%. 10% return in 6 months, an IRR of 21.2%. You get the idea. Faster is better. Slower, worse. Shock.
Coming from institutional investing, we always have an eye on IRR. If you manage professional money, well, your retirement system investor is paying you fund management fees the whole time and so not unreasonably wants to know how fast you are making money for their members.
Let's walk through a couple examples.
Buy The Market
First up, buying the market. Your finance textbook, or any Buffett tome, will tell you that you can make around 6% p.a. from US equities, on average, over the long run. That means 6% IRR on a total return basis - including stock price appreciation and dividends.
Here's SPY and QQQ - the proxy ETFs for the S&P500 and the Nasdaq respectively - on a total return basis over the last twenty years.
Absolute returns of 215% and 221% respectively, inclusive of dividends. Over twenty years those IRRs are 5.9% and 6.0% respectively. Yup, seems Finance 101 has it about right. You can pick all kinds of different periods but if you look long enough often enough you'll see that the market will pay you 5-7% ish per year if you leave your money there long enough - not going with the herd by selling when it gets scary-low and then buying when it gets exciting-high, not running with the smart money and doing the converse - just leaving it there. This is why Warren Buffett says, most people should just buy a passive S&P tracker and go do something else with their time.
OK, next. Mouse Raids. Again, if you're a subscriber you know we're regularly scoring in the range of 5-15%ish on mouse raids right now, in each case over a period of a few days to a few weeks, usually time and again in the same set of well-researched stocks where we know the fundamentals in great depth, have talked to the CEO already, and so forth. We thank you, crazy market, for the opportunity to run this rinse-and-repeat strategy.
Let's look at how that works from an IRR perspective vs. buying the market. Below we show a 20-year buy and hold of SPY or QQQ (buying an selling a single share in each case), vs. a 1-month Mouse Raid scoring 5% or 10% on a notional $100k principal.
Source: Cestrian Analysis
So the speedy returns help your IRR. This means that, if we can only find enough mouse raids, it would be far better to only do mouse raids and leave our dusty old Finance 101 on the shelf where it belongs. (It's irrelevant anyway, since all such books were written before the combination of central bank-driven inflationary expansion of money supply + internet-driven deflationary consumer pricing delivered a world in which stocks only go up. Er, until they don't).
Now, we think we do a good job, run a good service, all that. We get great reviews. We're proud of our Mouse Raids. But as we all know, any particular trading strategy works great until, er, it stops working. Because the world changes and you have to sit back on your hands and watch and think and try little things and fly sounding rockets and generally take it easy until you find your next fat pitch. And that takes time. Which means that we can't count on twenty years' worth of Mouse Raids, which means we probably won't be clocking up 200% annualized returns for the next 20 years. (We'll let you know if we do. Actually, we won't need to let you know. You'll know. Just cast your eye around that time toward our offices. Our new offices.)
So if we assume only a finite number of cheesy snacks on offer at any given time, we had best look for some long-term picks where we can still hope to beat that market IRR of 5-7%, but where we don't have to be constantly on our nerves watching twenty-odd different stock charts and pinging off Trade Alerts in our service. Remember, mouse raids aren't relaxing for the mouse, quality of cheese scored notwithstanding.
Which brings us to ...
We posted this topic a few weeks back - you can see that note here.
We operate in the cloud software and space sectors, exclusively in US equities, focused on companies no smaller than an EV of $1bn. Those selection criteria weren't accidental. In our view this places us squarely in the fat pitch zone for finding multibagger investment opportunities. Cloud is still early in its evolution, and has plenty of growth left in it yet. In space, the now rather quaint postwar notion of a shared peaceful domain has been replaced with an explicit view among the larger nation states that in fact it is the next theater of Earthly conflict. No Death Stars, yet, but a whole lot more military reconnaissance, signals intelligence, and running interference on one another's spacecraft. The drama playing out between China and the US doesn't have its main act in the trade war. That's a sideshow. Look upwards. That's where it's playing out. So here we have two sectors where spending is big, exceeding GDP growth for the next couple decades we think, and where stock prices are likely to respond accordingly. In short, if you want to make 2x or more your money in a reasonably short time, we think red-hot cloud stocks and ice-cool space stocks are great places to go looking.
Here's how that might play out from an IRR perspective.
Source: Cestrian Analysis
Let's say we can find an opportunity to make 2.5x return in three years in a cloud stock. Slack Technologies (WORK), maybe. $34 and change right now, could it be $85 in three years' time? We think it could. And so for that notional $100k invested, if we achieved that over a three year period, we'd clock up an IRR - an annualized return - of 36%. Not mouse raid standards. But then we haven't had to mainline espresso staying up watching the screen in premarket and postmarket and stressing out over holiday weekends and freaking out when they mess up earnings - which they will - and so forth. We would have just bought, went off to play golf for a couple years - actually, learned golf then gone off to play it, came back, and sold.
We think there are plenty of these kinds of opportunities in our sectors. So we're going to be layering them into our service. We'll be resisting the urge to cash them in for a morsel of dairy goodness when they show a quick return. In fact if we do our job properly, we'll clock up a few mouse raids in our short-term account on the same stocks along the way, all the while clicking in that IRR on our long term holding.
We start our Multibagger chapter for subscribers Monday.
If you're not yet a subscriber to our service, check us out by taking a 2-week free trial. You might like it. You'll find our best ideas there, and a lively, friendly chatroom with all kinds of folks chipping in to form better and better investment and trading ideas. You can use all the features and functions on any device and of course you get pretty much round the clock access to us.
We love running the service, it's a whole lot of fun, and looking at the time our members spend with us and the number of new members signing up, it seems we're doing an decent job of running it.
But if you don't like it, you get to spend two weeks for free not liking it and then you get to walk away with nary a backward glance. No payment, no obligation, no guilt. Most of our free triallists end up sticking around, and that's great. Some spend trial time with us, go away and then come back a few weeks or months later (usually at a higher price, as we put our prices up when we have a substantial increase in service levels or functionality). And some think us useless, overpriced, or both, and don't commit. Who are we to tell them they're wrong? This is all the purpose of our two week free trial arrangement. Check us out, then you decide.
Cestrian Capital Research, Inc - 10 July 2020.
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Analyst's Disclosure: I am/we are long WORK, MAXR, NFLX.
Cestrian Capital Research, Inc staff hold personal account long position(s) in MAXR, NFLX, WORK, and short position(s) in SPY and QQQ.
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