Stocks I Wish I'd Never Sold Part II

As promised, here is analysis of the gains made by the stocks I sold too early. Below is a comparison of the historical revenue multiple of these stocks when I first purchased them compared to today as well as the total share price return over the same time period. I used a revenue multiple as a valuation metric because some of the stocks do not earn profits. I have not included PNV as it had not registered any revenue when I first bought it.

CodePurchase PriceCurrent PriceCapital ReturnStarting Rev MultipleCurrent Rev MultipleMultiple Expansion

Figures are taken from Stockopedia. The starting revenue multiple is calculated using average shares on issue and revenue from the financial year prior to purchase. The current revenue multiple is based on average shares on issue and revenue from the last twelve months of reported figures (ie including half-year accounts).

In all cases except for XRO multiple expansion has been a major contributor to returns so these stocks are much more expensive now than they once were. Will they get more expensive, keep trading on current multiples or be derated from here?

The group will continue to perform well as long as they don't get derated given the speed at which the underlying companies are growing. Over the very long-term it won't even matter if multiples fall assuming the businesses keep winning. The problem is that in the latter scenario it is likely that such shares would underperform for several years (as happened to quality tech stocks after 2000).

Where I have had success it has been in buying cheap stocks with good near-term prospects and selling them when they either become expensive or stop performing. With this approach I do not need to worry about multiple contraction because I am rarely holding richly valued stocks. I have shorter holding periods and end up owning a lot of duff businesses, but I rarely lose much money owning such rubbish as I usually manage to spot problems quickly. It is a strategy I'm comfortable with and so I don't mind missing out on the big gains that quality expensive stocks are making at the moment.


  1. Hi Matt, I would contend that SAAS stock high EV/S ratios are often justified. Remember, XRO has gross margins over 80% - EV/S should be 3 times higher than a company with GMs of 25%. Over 90% of XRO's revenue is recurring, its revenue is more valuable than a non-SAAS company. XRO is growing over 35% pa, it should have a higher EV/S ratio than a company growing at 10% pa.

    1. Agree with all that Sean. The exercise was about seeing how sales multiples have changed over time. Whether today's multiples mean specific stocks are overvalued is a different conversation. Of all the companies above, XRO is the only one that has maintained its multiple so price appreciation has been matched by sales growth. However, % growth has slowed considerably since 2015 so I'd argue that XRO ought to trade on a lower multiple than it did back then. Perhaps the multiple should have been higher in 2016 and today's valuation is appropriate or perhaps both multiples are too low, I don't know.


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