Chavez SaaS Index: Betting on the Cloud

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Chavez SaaS Index: Betting on the Cloud

posted Jul 27, 2016

Collaboration Request Asset Allocation

Hello quantopianites!

So my theory is pretty simple, and follows a few basic principles:

Principle 1: SaaS/Cloud is the future --- all the old on-prem players will ultimately be displaced by a new crop of Cloud/SaaS vendors. This is a mega-trend that will touch lots of industries and verticals in the coming decade.

Principle 2: Typical indexes, like the SP500, weight their positions based on market-cap; big companies with big market caps tend to dominate, which makes outsized gains from smaller, fast-growing companies, harder. If Exon & Apple are half the index, it's harder to get big gains from up-and-coming companies. Indexes that weight each stock the same tend to do better. One fund that employed this strategy using the SP500 has beat the SP500 by 2% for 20 years. (Story on Seeking Alpha: http://seekingalpha.com/article/3988438-fund-beat-s-and-p-500-2-percent-19-years?utm_source=twitterfeed&utm_medium=twitter )

Principle 3: It's better to invest in SaaS companies with very high gross revenue retention -- it speaks to operational effectiveness and customer success teams' quality, product-market-fit, , so I removed any with low retention.

Principle 4: If the product sucks in the mind of the intended buyer/user, it's not a good company to own. If I have knowledge about the products in question that leads me to believe that they don't have true product-market fit or solid customer happiness, I remove them.

I started with the BVP Cloud Index: https://www.bvp.com/strategy/cloud-computing/index

Then I removed any if they fit principle 3 or 4.
I also weighted each stock equally (rather than the typical approach of using the market cap) via principle 2.

The final list of stocks:
2U
Appfolio, Inc.
Atlassian Corporation
Benefitfocus
Box
Castlight Health
Cornerstone OnDemand
Cvent
HubSpot
Instructure
NetSuite
New Relic
Proofpoint
Salesforce
ServiceNow
Shopify
SPS Commerce
The Ultimate Software Group
Twilio
Veeva
Wix
Workday
Zendesk

I'd love to hear how others might take this concept and make it better; maybe adding hedges in cases of downturns, or dynamically adding SaaS stocks based on Morningstar data.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.