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How To Be A Topp Growth Investor (Cestrian Stocks Bulletin #77)

Cestrian Stocks Bulletin
How To Be A Topp Growth Investor (Cestrian Stocks Bulletin #77)
By Cestrian Capital Research, Inc • Issue #77 • View online
Ten Thousand FinTwitters can be wrong.

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.
When Genius Flails
Successful investing in growth stocks is, as any fule kno, difficult. The whole of FinTwit may tell you it’s easy, but they are lying to you. Fortunately, help is at hand. Here we explain our own methods, some or all of which you may wish to factor into your own work. We make no claim to genius or to guru status, but we do eat our own cooking in our published work, and thus far, we have dined well. Read on!
We’re Not Proud.
Lately we’ve been flattered by many very kind words in the comments to our free research notes - in addition to the consistently great reviews we get for our subscription services Growth Investor Pro and Space Select. We’re happy our members and our readers are happy. But in truth all we are doing is explaining our methods and sharing the ideas arising from those methods - the ideas we use to invest our own staff personal accounts.
A Guru-Free Zone.
Investing as you know attracts more than its fair share of wannabe gurus; you’ll know one when you see one, insofar as the one thing they won’t share with you is their workings-out, the explanations of why they think their methods and conclusions are correct, and still less will they be prepared to engage and actually debate those things with you. “My way or the highway” is the refrain of the guru. If you see that kind of thing when you’re reading folks’ investment ideas? We suggest you take the highway. Because you are a lot smarter than you think you are - if you give yourself the chance to be.
Everyone Tells You This Stuff Is Too Difficult For You. 
It Isn’t.
Check in on FinTwit sometime - everyone’s a genius, right? Fancy charts, commentary, “insight”, whatever. All designed to convey one thing - the Tweeter is very clever and/or clued-in, and you aren’t. Follow!
But here’s the thing about investment research methods: they aren’t at all difficult at their core. Yes, you might have to think a little, and in some cases the logic seems upside down at first, until you realize it’s usually Opposite Day on most days of most weeks in most markets. But if you can do basic math, if you can count to 5 and know your A-B-C, if you can keep reminding yourself that the stock and the underlying company are different things, and most importantly at all if you can leave your emotion at the door, avoiding thinking of a stock as a living thing but rather just a number on a screen that might go up, down or sideways? Then you can understand any well-explained method of investment research and factor it into your own decisions. 
We thought we would take the opportunity here to lay out the basis of our own work. We have two not-mutually-exclusive goals in mind here. 
First, we think anyone sensible is capable of being a successful public stock investor if they just (1) start believing they can do so and (2) arm themselves with the necessary methods and tools. And we’re always happy to share our work in furtherance of that.
Second, naturally enough, we’d like you to subscribe to one or another of our subscription services. They’re low cost, very well reviewed, and we know that as a basket the ideas in them work out well, because we eat our own cooking and thus far we have dined well. Guru-ism is notable only by its absence in our services; debate is busy and encouraged and the outcomes improved all the time as a result of our members bringing different ideas and perspectives. Better yet, you won’t find any bravado, braggadocio, SHOUTING, profanity, personal politics, or reluctance to ask the apparently dumb question. Think this is marketing-speak? Check our reviews.
Anyway - without further ado - here’s how we go about our day job of selecting great growth stocks.
Start With The Company
Companies are not stocks, and stocks are not companies. Companies develop products and services and sell them, employ people, and publish financials. Stocks are just numbers on a screen which to quote a recent favorite Tweet “mean that if you do it right you can turn them into useful stuff like houses and cars”. What makes a great growth business? Easy. Big and growing market, ideally a market which is deflating the way things have been done for a long time, differentiated intellectual property, pricing power, great manageme…. waitaminute, how are you supposed to be able to spot all that at a distance? Well - two ways actually. If you’ve spent your entire professional career on investment matters, as we have, then it becomes second nature. But if you haven’t, don’t worry, there’s a shortcut. It’s called the financials. If you have a company that is growing consistently every quarter, at high gross margins (meaning it probably has a lot of intellectual property), generating either positive account profits and cashflow or looking like they might do soon? Great. If the balance sheet has a lot of cash on it? Good. If they aren’t issuing piles of new stock every three minutes? Even better. When we cover a stock, as you’ll have seen from our work, we publish company financials in great detail. Here’s CrowdStrike ($CRWD) for instance.
Source: Company SEC filings, YCharts.com, Cestrian Analysis
Source: Company SEC filings, YCharts.com, Cestrian Analysis
That is in essence what good looks like, save that growth appears to be slowing a little which if it continues can hurt the stock. If you don’t know what deferred revenue or TTM UFCF is? Don’t worry, it’s easy. Deferred revenue is prepaid contracts. Customer has paid the company upfront, company has yet to deliver the service, so can’t recognize the revenue. Prepaid backlog you might say. Easy. Big deferred revenue is good. TTM UFCF? Trailing-twelve-month unlevered pretax free cash flow. Hard to say, easy to understand. The most recent twelve months’ worth of actual money the company produced before it paid lenders, dividends or the IRS. Easy. In our services we explain all of this all the time including why it matters to … the stock.
Move On To The Stock
Having found yourself a great company, now look at the stock. You need to know three things. One, the absolute valuation. What multiple of revenue or earnings or cashflow are you being asked to pay for the thing, and does that look wise to you? Well, you might say, how can I answer that? How would I know? The answer is, do the work. Figure out whether you think the market is going up (in which case a dollar of revenue is likely to be worth more next month that it was last month) or down (the converse). And then, look at all the companies that look like the one you have in mind and say, well, is this company cheap or expensive compared to those? This is fiddly and time consuming but we do it for our members - we provide a real-time (the dots move!! by themselves!!) graphics for the whole cloud cohort showing which stocks are relatively cheap and which relatively expensive. Here it is - this is as per the most recent close (Friday 8 October) by the way.
Source: Company SEC filings, YCharts.com, Cestrian Analysis
Source: Company SEC filings, YCharts.com, Cestrian Analysis
Now as analyses go that’s not a bad line of best fit. It tells you that CRWD is looking about right vs its peers on the basis of its growth right now; and it tells you that Cloudflare (NET) is looking a little pricey, Twilio (TWLO) inexpensive. All relative you understand. If the market dumps that line will just move down; market rallies, the line moves up. (By itself!)
So far what you have is fundamental analysis. Company financials and stock valuations based on those financials.
“That’s Just Coloring-In. That’s Not Analysis”.
Next, we move onto technical analysis. Now, at this point the guru community gets radicalized. One side says technical analysis is just voodoo with crayons. The other says there’s no point even reading financials. But like most radicalized communities? Both sides are wrong. You need both. The financials are important. And the technicals are important. Because technical analysis isn’t voodoo. It is a basic method to try to interpret the historical behavior of buyers and sellers of that stock, to recognize a few basic shapes, and to spot recurring patterns such that if shape X happened in the past then the stock went up, or down, then, probably, the next time shape X happens, the stock will do the same. That’s it - technical analysis is no more complicated than that.
Here’s a simple stock chart for Boeing (BA).
Source: Trading View, Cestrian Analysis
Source: Trading View, Cestrian Analysis
That pattern means the stock is likely to break to the upside soon. You have a rising level of support and a descending level of resistance. Think of the stock as punching up at the ceiling. The trend is up; the ceiling is getting in the way; it’s likely to get punched through soon, once there is enough volume (number of punches) trying to get there. 
That’s called classical technical analysis and we use it all the time. It’s not perfect as a method and we certainly aren’t perfect practitioners but if the fundamentals look bullish and the technical analysis looks bullish then our confidence in a stock rising moves up.
“Now You’re Just Drawing Any Lines You Like”.
The third method we use - the first being fundamentals and the second classical technical analysis - is Elliott Wave analysis. Most everyone thinks this really is voodoo. To which we say, not if you do it properly. There are way better Elliott Wave analysts than us but we don’t know anyone who triangulates (that’s a stock chart joke!) fundamentals, classical technical analysis and Elliott Wave analysis like us. With each layer of analysis we are trying to reduce the risk of being wrong and increase the probability of being right.
Elliott Wave analysis is at its heart simple. It says that human behavior moves in fives and threes. In an up-market, stocks move up in five waves up, three waves down. In a down-market, down in five waves, up in three. And the length of those waves seems to be determined by some natural numbers called the Fibonacci sequence - natural because they seem to crop up in all sorts of places in the natural world.
Here’s MongoDB (MDB).
Source: Trading View, Cestrian Analysis
Source: Trading View, Cestrian Analysis
Looks like those 5-waves up have completed for now. Meaning maybe some weakness for a while, before moving up again. Don’t worry, if you’re a member of ours we explain all the coloring-in, it looks a lot harder than it is. Again - you can do all this stuff if you just sit back and think for a minute. Don’t let anyone tell you it is too esoteric for you. It isn’t. Matter of fact we have a bunch of subscribers who have learned these methods whilst a member of our services, who contribute chart analysis all the time. Sometimes we agree sometimes we don’t but the groupwork always leads to a better quality conclusion on a stock.
Learn To Invest Like A Pro. Join Us.
Want to learn to invest like a pro, and get all our real-time commentary and trades in our own staff personal accounts? Then join one of our services.
  • Growth Investor Pro is one of the fastest-growing services on Seeking Alpha right now. It helps you invest in growth stocks - tech and space - like a pro. You get all our workings-out, specific investment notes, all the background data available 24/7 online, real-time alerts when we buy or sell any covered stock in staff personal accounts, the whole thing. In essence you get to work alongside us. Costs from $133/mo if you take the annual, or $159/mo for the monthly. CLICK HERE TO LEARN MORE ABOUT GROWTH INVESTOR PRO.
Cestrian Capital Research, Inc - 9 October 2021.
DISCLOSURE - Cestrian Capital Research, Inc staff personal accounts hold long positions in BA, CRWD, NET, TWLO.
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