It never ceases to amaze me just how many professionals are willing to chase growth by piling onto “go-go” stocks rather than being patient with value trades. Granted, Jim Simons’ management company Renaissance Technologies has generated better returns than almost every other manager in the last 30 years and uses automated technology to make trades.
HubSpot (HUBS, Financial), Shopify (SHOP, Financial), Twilio (TWLO, Financial) and Tableau (DATA, Financial) are four stocks near 52-week highs owned by RenTec that should be sold or avoided.
“You pay a very high price in the stock market for a cheery consensus.”
--Â Warren Buffett (Trades, Portfolio)
Each of these companies has a valuable position in its respective market and down the line, the stock price may warrant investment. With today’s technology companies, traders and fund managers are using different valuations, more strongly favoring revenue and growth prospects over underlying value and earnings.
HubSpot (HUBS, Financial) offers an alternative to Salesforce’s CRM solution and offers its basic level for free. I’m a user and it’s a great service, but without a real competitive advantage, it doesn’t warrant a $5.5 billion market capitalization, which is 13 times the company’s current revenue. Granted, Salesforce trades at 9x sales, but investors shouldn’t give a higher multiple to an inferior competitor, even if HubSpot’s growth is a little faster. At 9x sales, the market cap would land in the $3.6 billion range.
Simons' Renaissance Technologies owns 339,300 shares of HubSpot, and has added to his position in each of the last two quarters at $83 and $104. The stock is trading above $142 as of Thursday.
Shopify (SHOP, Financial) is an ecommerce payment processor in an already crowded space, serving the small business market, but being priced at $18.2 billion means it will need to achieve significant year-over-year growth while at the same time turning sales into profit.
Since going public in 2015, the company has produced incredible growth. But as the top line has massively expanded, the losses have continued to mount. Shopify generated $760 million in sales during the last 12 months, booking a loss of $42 million. Shopify trades at the ridiculous price-sales rate of 22.4, which is 11.6 points higher than Square (SQ). Square also offers similar services but has larger, more stable customers. The 10.8x sales rate of Square on Shopify would put the market cap in the $7.6 billion range.
Simons has a small stake in Shopify with 70,900 shares, but this is a new position. When the next 13F comes out for RenTec, we’ll see if he increased that position.
Twilio (TWLO, Financial) offers a platform-as-a-service (PasS) technology that allows businesses to engage in omnichannel communications by overhauling or replacing their legacy systems, resulting in substantial cost savings. Again, clients start with a free tier to test and build their own solution, then pay based on usage. This allows direct customers as well as developers to use Twilio at scale. The stock is priced at 12.5x sales, which have been growing at more than 40% quarter-over-quarter, with $441 million in sales over the last 12 months. In three years, sales could reach $1.2 billion at this rate, putting the cap above $15 billion if the same valuation multiple applies.
Simons owns close to 1% of the outstanding stock with 895,800 shares. He initiated this position in March around $31.67 per share.
Tableau (DATA, Financial) is a leader in big data visualization. It has a platform that allows new users to test it for 14 days and then move into the product that suits their needs. While there are other products on the market (like Domo), Tableau is the leader.
Since going public in 2015, the stock has been on a bumpy ride from $50 to $130 to $41 and back above $100. The company has a solid revenue stream, closing in on $1 billion a year. It also generates healthy free cash flow of $151 million and has grown book value per share to $11.16. The problem is that big companies IBM, Microsoft, Oracle and SAP have added similar functionality to their products and already have entrenched customer bases that put a ceiling on Tableau’s growth. Priced at 9x sales, any slow down will mean a turnaround in fortunes for investors.
Jim Simons (Trades, Portfolio) owns 1.52% of the outstanding stock with 1,246,300 shares, initially buying in 2015 at $90.86 and adding to his position last quarter below $80 a share.
Conclusion
While some of these positions would represent a sizable fortune to an individual shareholder, none of them even come close to moving the needle for Jim Simons (Trades, Portfolio) and RenTec. Now that each of these stocks is trading near its 52-week high, coupled with a long-term bull market that could be drawing to a close, it’s only a matter of time before capital is cycled away from them into other opportunities.
Disclosure: I am not long/short any stock mentioned in this article.
