Momentary Pause for Reflection

Greg Dean's picture

I recently spent three days in San Francisco at a Global Technology and Media conference. I was there to investigate sectors that I have yet to cover as an analyst. There were some very clear takeaways, including feelings of rampant euphoria for early stage, high-growth tech companies, and ideas to follow up on (more on these in subsequent posts). What I found really interesting was how big the appetite for risk is right now – this includes investors, analysts and company management teams. For example, investors were wondering why company revenues “only” grew by 30% last year. They were also interested in knowing about big acquisition or buyback decisions. It was an interesting contrast to a couple years ago when investors didn't want management teams spending money or buying back stock. Investors also didn’t seem worried about growth as much as they were about leverage and the impact that the “fiscal cliff” or U.S. defaulting on debt would have on their businesses. The answer was none in most cases.

With the market up nearly three-fold since the depths of the crisis and with 2013 having been a great year for most investors, animal spirits have returned and “good” isn't “good enough”. To help provide context, I looked back to see when the S&P 500 Index last experienced an official correction. It has been almost 2.5 years ago or 885 days since we saw what most would agree is a healthy correction. My point isn't to scare anyone. I am trying to highlight that now may not be the time to start investigating the riskiest segments of the stock market, or to pay 10 times revenue for a software business that doesn't generate any cash because it promises to grow revenue 30%. You can't pay your employees or dividends with revenue.

I actually came away from the conference with a number of ideas and leads in both tech and media. Although, these were not given away for free, and in many cases, I am doing the work hoping that they disappoint in the future by “only” growing revenue 28% so we can buy them 15-20% cheaper. I am being facetious but you get the point. Growth at a reasonable price is not easy to find these days but it's there for those willing to do the work. This year, we have had some great trades already with U.S. retailers that have disappointed the market by reporting weaker sales amidst harsh winter weather but whose underlying businesses are strong and already beginning to recover.

2013 was a year where the tide came in and lifted all boats. We were fortunate to have participated despite our significant cash levels (10-20% in most cases). For 2014, we will be ready and willing to buy those high-quality core companies run by smart management teams with meaningful amounts of insider ownership who do “good” but not “good enough” in the eyes of those focused too much on the short-term.

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