Over the last four weeks or so, most of my holdings have been taking a beating. Some of my positions are down as much as 50% off their highs. You might ask why?
I don’t know for sure. There is lots of selling pressure because investors are scared. Some investors are scared because of inflation, some are scared of the new strain of Corona virus (Omicron) and some are scared that the Federal Reserve will tighten the money supply to have some control over the inflation.
However, if you have been reading my blog for the last year, you will know that there will always be some sort of macro concerns going on that you have no control over. What you can control is your emotions and therefore your buying and selling decisions. No one likes to see their stocks go down 20, 30 or 40% in one day but that is why not everyone invests their money in the stock market. Rather they prefer to keep their money in a checking account where it earns 0.03% annual return.
This volatility is the price of admission in the stock market. If your time horizon is longer than a year, preferably 3 or even 5 years, this is an excellent time to add to your favorite holdings that are executing well. Every year, at the end of the year, usually in November or December, a lot of mutual funds engage in window dressing to make their portfolios appear better for new investors. This selling pressure results in a lot of stocks going down for no reason that is related to their performance. For individual investors like me, this creates a lot of opportunities to add to my favorite positions.
Now you might think that every time a stock drops 20 or 30% that creates a buying opportunity for me. Far from it. As I have written before, I am pretty selective about which companies I want to own for the long term. Let me give you an example of when I think a 30% drop or even more is worthy and I would sell that position even after that drop if one of my companies reported a quarter like this.
The company I am talking about is Zillow (Z or ZG). Now you must be familiar with Zillow as you may have used this website to look for home prices or new listings. Zillow used to make most of its money from advertising from other real estate professionals. About 5 years ago, Zillow ventured into ibuying real estate using Zillow estimates (Zestimates as they call it). Basically, they would buy and flip houses themselves and carry these houses as their inventory. The reason they did that is because one of the newer real estate companies Opendoor (OPEN) started this process and has been very successful at this.
In their most recent quarter (Q3 2021), Zillow had to say this
“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility. While we built and learned a tremendous amount operating Zillow Offers, it served only a small portion of our customers. Our core business and brand are strong, and we remain committed to creating an integrated and digital real estate transaction that solves the pain points of buyers and sellers while serving a wider audience.”
The wind-down is expected to take several quarters and will include a reduction of Zillow’s workforce by approximately 25%. “The most difficult part of this decision is that it will impact many of our colleagues,” Barton said. “This is not something we take lightly. We are grateful for their efforts, and we are committed to providing a smooth transition.”
You can read more here. So basically, they tried an experiment for five years and failed at it comprehensively and now they are going back to the drawing board. Not only that, they were using their own estimates (Zestimates) to buy back those houses and it turns out that those estimates are wrong because they are not able to sell those houses at those prices.
Thankfully, I did not own Zillow but if I did, I would sell it even after the 30% drop after the earnings. This is not a management that I want to be associated with.
Now, let’s look at the earnings report of another company that fell 30% the day after they reported earnings. This company is Upstart Holdings (UPST) which I wrote about here.
This is what their Q3 2021 report states
“Since Upstart’s IPO a year ago, we’ve more than tripled our revenue, tripled our profits, tripled the number of banks and credit unions on our platform, and tripled the number of auto dealerships we serve,” said Dave Girouard co-founder and CEO of Upstart. “With that many 3s, Upstart is becoming the Steph Curry of the FinTech industry.”
Third Quarter 2021 Financial Highlights
Total revenue was $228 million, an increase of 250% from the third quarter of 2020. Total fee revenue was $210 million, an increase of 235% year-over-year.
Bank Partners originated 362,780 loans, totaling $3.13 billion, across our platform in the third quarter, up 244% from the same quarter of the prior year.
Conversion on rate requests was 23% in the third quarter of 2021, up from 15% in the same quarter of the prior year.
Income from operations was $28.6 million, up from $12.2 million the prior year.
GAAP net income was $29.1 million, up from $9.7 million in the third quarter of 2020.
Basically every single metric that they track was up significantly from Q3 2020. This is how their revenue growth has trendeded.
|2020||64 (220%)||17 (-49%)||65 (32%)||87 (38%)||233 (41%)|
|2021||121 (89%)||194 (1041%)||228 (250%)||255-265||~800m|
On top of these results, they announced that they are moving into auto lending quicker than they anticipated so their 2022 revenues will get a boost from auto loans. With results like this, you might be wondering why the stock price fell 30% the day after earnings and has continued falling. I have no idea. But as of this writing, this is about a $16B company with this year revenues to be 800M approximately. That is Price to Sales ratio of 20. With a company that is growing in triple digits that is a very reasonable valuation and I am a buyer at these prices.
That is the beauty of the stock market. It is not efficient over the short-term. In fact it is irrational during the short-term. Due to a combination of factors (inflationary concerns, Omicron, money tapering by the Federal Reserve, year-end window dressing), we are getting some great bargains but at the same time there are some genuine clunkers which I would avoid. It is difficult to stay sane and keep investing when whatever I buy is 20, 30% cheaper the next week but I have to remind myself that I am not investing for a week or ten days. I am investing for at least 3 years and even longer.