Removing Several Stocks From Watch List

A few times a year, it is going to be necessary to "prune" the Watch List of certain stocks that no longer meet our criteria. Otherwise, the list is going to become too big to manage.

This will be the first of a regular "house cleaning" throughout the year (probably once a quarter or so).

Remember, the criteria for a stock to be added to the Watch List is as follows:

1. The stock must appear in one of the Green Screens.
2. After a detailed review, it must pass all criteria to be considered a "Green Dot" stock.
3. Then it gets placed on the Watch List until it reaches an attractive price for purchase.

Given those rules, there are really only two reasons to remove a stock from the list. One, if there is some business development that causes it to no longer pass all of our "green dot" criteria. Or two, it is no longer part of the Green Screens.

For all 3 stocks we are removing today, only the second reason applies. These all remain excellent businesses and I’ll be happy to re-add them if they return to our screens!

Here are the 3 being removed, along with some brief comments on each…

ASML (ASML)

Little has changed with the original thesis on ASML. It remains the world’s premier supplier of semiconductor photolithography equipment, and the ONLY supplier of next generation EUV machines. ASML has fallen out of the Green Screens due to a downturn in demand in the semi space, a very typical cyclical pattern that has repeated throughout the industry’s history. This has led to single-digit revenue growth expectations for this year, after 30% growth last year. I still think this is an outstanding company with a great future, but the stock has rebounded substantially after bottoming out in the high $500’s (we probably missed our only chance to buy it for a few years).

Veeva Systems (VEEV)

Veeva, a data management and customer relationship software suite for life sciences firms, is probably one of the "stickiest" businesses we’ve looked at, managing some of the most business critical data for the pharmaceutical space. I have a feeling this could be a short-term removal from the Watch List, as 2023-24 revenues are predicted to be right around the 10% threshold set in the Green Screen criteria. It’s still a fantastic business and a clear hold for anyone that already owns it. For those waiting to own it, it is rarely a buyable stock. At 25% over fair value presently, now is no exception.

HubSpot (HUBS)

HubSpot recently reported its Q4 results, with revenue up 24%, but the firm still reporting a GAAP loss and a free cash margin below 13%, well below my 23% long-term expectation. HubSpot is a customer relationship management and digital marketing management platform for growing small-to-medium sized businesses, essentially a "Salesforce.com" for smaller firms. That gives it a very strong switching cost moat, and the wide applicability of the platform across different types of businesses affords it a long-tail growth opportunity. My problem here has always been that the valuation in no way computes to the business results. In fact, had we kept the stock, I would have LOWERED the fair value price from $313 down to $266 - less than half of the current stock price. No need to now, as it has fallen out of the Green Screens and will exit the Watch List today.