(If you find the notes below difficult to follow, the video will help).
To start, our current market risk assessment:
- Fairly High Risk, New Purchases 6% Of Cash Position.
- SPY currently trading at $412.38. Indicated BuyAt $384.45 (6.77% below current market), SellAt $430.72 (4.45% above current market).
- Risk calculation based on proximity of current price to the Algo-indicated BuyAt and SellAt prices of the S&P 500 and the fifty fastest-growing, low-debt, highly profitable companies trading on US exchanges.
- The Risk Research portfolio is currently 90.57% in cash. It is up just over 7% this year, year to date. A couple of weeks ago we were 93% invested and have been selling into the recent market strength. Much of this selling was driven by a desire to get out of companies with high but declining rates of growth, and into companies with accelerating growth.
- Click on images to expand.
For a brief introduction to our research, scroll to the end of this post. It will put the following analysis in context.
SuperGrowth MultiBagger: APPS – Digital Turbine Inc
Our selection for today, APPS – Digital Turbine Inc, ranks 2 out of 82 SuperGrowth MultiBaggers in terms of financial statement momentum. A brief description of their business from a recent Seeking Alpha article:
Company products enable mobile operators, application advertisers, device original equipment manufacturers (OEMs) and other third parties to monetize their mobile content. Advertising is the firm’s primary source of revenue within their Operator and OEM (O&O) business segment. Their O&O model is an advertiser solution for carriers and OEMs that is consists of Ignite (a mobile device management platform) and Discover (an intelligent application discovery platform) services.
Through March 31, 2020, Digital Turbine’s technology platform has been adopted by more than 40 mobile operators and OEMs, and has delivered more than 3 billion application preloads for tens of thousands of advertising campaigns. With respect to customer revenue concentration, during the fiscal year ended March 31, 2020, one major customer, Oath Inc., a subsidiary of Verizon Communications, represented 15.3% of net revenues.
- Seeking Alpha, Digital Turbine: Sandwiched Between The 5G Revolution And Mobile Commerce, December 4, 2020.
The company’s financial statement trends are particularly strong, as indicated by the Summary report below.
Digital Turbine’s growth numbers are truly exceptional. In each of the last three quarters, the twelve month revenues and gross profit have grown at over 20% from the twelve month period ended three months later. As someone who looks at a lot of companies with very high rates of growth, this is truly exceptional.
These rates of growth are mirrored in the company’s financial strength trends. Again, consistent and exceptional.
Based on the patterns our software sees, a BuyAt price of $67.24 is indicated, 3.22% below the current market of $69.48.
It is important to note that the Algo updates every few minutes throughout the day based in part on volatility. Higher volatility means and the bid drops, lower volatility and the Algo will pay more.
A Brief Introduction To Our Investment Approach and Research
Our approach has two primary elements:
- Fundamental analysis of financial statement trends. This is basic Graham & Dodd credit analysis. In order to compare the financial statements of every public company to all others, we’ve created software.
- Buy on weakness, particularly extreme weakness, in high-quality growth companies. To accomplish this, we’ve developed AI pattern-recognition software that takes advantage of investor emotion. This software works on the assumption that the higher the market goes, the less the perceived risk and the higher the actual risk, and the lower it goes, the opposite (higher perceived risk, lower actual risk).
We view investing as probability analysis. The market is driven by randomness, emotion and fundamental business principles. All three. We’ve developed software that takes advantage of all three. Though their strategies differ widely, a common characteristic of every master investor we are aware of, for instance Warren Buffett, George Soros and Jim Simons, is that they follow approaches designed to take advantage of the emotions of others.
The market’s randomness derives largely from the fact that only a tiny percentage of shares trade on any particular day, so any preponderance of buyers or sellers, some of which may buy or sell for idiosyncratic reasons not related to the performance of any particular company (the need to raise cash for unrelated reasons), fear, perhaps due to a concern about the health of the economy, disproportionately affects stock prices.
In the short term, randomness and emotion have an outsized impact. In the medium term, say two months to two years, randomness and emotion gradually get supplanted by fundamentals. In the long term, two to five years, the market is driven almost entirely by business performance. Time is therefore on the side of the fundamental investor in business quality.
We’re one-to-six-month investors, and as such we seek to profit from fundamental analysis, emotion and randomness. To illustrate, consider Netflix (NFLX) in the ten-year period 2010 to 2020. The stock increased in value over 37 times in that period, making it the top performing S&P 500 stock.The point is that even the top-performing stock of the decade experienced significant declines. We’ve developed artificial intelligence software designed to take advantage of those declines. The fundamental financial statement trend analysis identifies SuperGrowth MultiBaggers like Netflix; the AI pattern recognition software identifies declines in the stock driven by fear. It also identifies stock price rallies that are unusually intense, and thus likely driven by FOMO (fear of missing out), by irrational exuberance, although many of our subscribers are long term investors and ignore those sell signals.
In back tests, however, taking advantage of the sell signals contributes significantly to performance. It also allows for the taking of larger positions, gradually, on price declines because cash is raised during sharp rallies. The market has a habit of going up and down, both, although the long-term trend is obviously up.
In the discrepancy between stock performance and business performance opportunity lies.
To sum up:
- We don’t predict the future, or earnings or the economy or the market. But we’ve run businesses, studied accounting and know how to develop software.
- We utilize two different types of software in preparing our research:
- We compare the financial statement trends of every public company to the thousands of others looking for particularly promising characteristics.
- We buy on weakness, often extreme weakness, and sell on strength. We often get comments by readers that we are trying to “catch a falling knife,” etc. and are therefore foolhardy. Our software follows, on a minute-by-minute basis, price fluctuations of the 50-100 companies with the strongest financial statement trends, searching for inordinate opportunity. It utilizes thousands of calculations per company assessing probabilities.
- We try to express our conclusions with as few words as possible, and back them with graphs that can be understood at a glance. Conjecture, complexity and obscurity are the travel companions of half-baked analysis.
- We do very little research into specific companies. There’s already lots of that on Seeking Alpha and other venues for those who want that.
Risk Research provides inexpensive risk analysis of client portfolios, and publishes SuperGrowth MultiBaggers, a publication about companies with significant positive financial statement trend momentum.
Average business quality. Average risk. Exceptionally strong growth trends. Growth momentum: accelerating. Slightly above average upside potential. Profitability trends extremely strong. Financial strength above average, trend particularly strong. Margin trends very positive. Twelve-month liabilities trend exceptionally favorable. Two-year leverage trends very favorable. Overvalued.
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