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The Pernas Portfolio was down 6.4% in the first quarter vs. a 4.3% decline in the S&P 500. The year started strong, but we sold off sharply at the onset of the US/Iran war as commodity prices surged and inflation fears took center stage.
We love risk but, like many investors, hate uncertainty. With risk, there is an ROI that derives from the time and effort spent on the analytical process. One can gain a clearer understanding of the range and likelihood of outcomes, and respond with the correct portfolio adjustments. With uncertainty, analysis quickly turns into “pushing on a string,” and beyond a certain point there is little investors can do other than stay invested and avoid unforced errors. Because of the uncertainty introduced by the war, we avoided a “buy the dip” mentality early and waited for tangible signs of de-escalation. We received this on April 7th as Iran and the U.S. agreed to a two-week ceasefire resulting in the aggressive rebounding of markets along with our portfolio as the path to escalation has been diverted. It is also worth highlighting a recurring feature of modern markets: traditional flight-to-safety assets such as gold and long-dated Treasuries were down 13% & 4.5% respectively 3 weeks into the war, once again failing to provide the protection many investors assume they will in periods of stress.
SaaSpocolypse
The more structural story of the quarter, and one that we believe can create opportunities for outsized returns, has been dubbed the “SaaSpocolypse.” Just six months ago, we dedicated an entire quarterly letter to pushing back on the widespread fear that the AI bubble would burst. Today, the narrative has flipped entirely. Markets are no longer worried that AI is overhyped; they are worried it is moving too fast, to the point where it structurally undermines the economics of SaaS.
The shift began in January, when SaaS broadly sold off as agentic coding tools tied to Anthropic’s Claude started to proliferate. Investors began to price in a world where the marginal cost of producing software compresses toward zero. If code is abundant, the logic follows that application-layer software becomes commoditized. As is often the case, however, sharp selloffs tend to begin from elevated starting points. SaaS entered the year trading at over 5x EV/Sales and, after the initial leg down, settled closer to ~4x. That reset alone did not make the space compelling.
The second leg lower, beginning in February, was more consequential. As agentic capabilities improved, the drawdown accelerated. The application SaaS cohort we track (names such as Adobe (ADBE), Salesforce (CRM), and ServiceNow (NOW)) is now down ~38% YTD on a median basis. At this point, we can say with conviction that pockets of the sector are screening cheap.
SaaS companies are not static, 100-year-old industrial businesses. They are adaptive, engineering-driven organizations that have already navigated multiple platform shifts—from on-premise to cloud, from desktop to mobile, and from monolithic to API-driven architectures. The idea that they will passively accept existential disruption from agents misunderstands how these companies operate. They are actively incorporating agentic layers into their own products. On April 16th, the CEO of Salesforce Mark Benioff announced Salesforce Headless 360 where their agents will be able access data and be tasked directly from Slack to do work. We expect more announcements like these in the coming quarters from the broader SaaS complex.
These adjustments are also being seen across smaller SaaS companies, where the selloff has been more pronounced. Dispersion within the cohort has widened meaningfully, and the single factor that best explains performance this year has been size. Smaller players, fairly or unfairly, are being discounted as more vulnerable, as the market assumes they are more exposed to disruption.
This is precisely where the opportunity lies. There are smaller SaaS companies with structural advantages whether through system-of-record positioning, embedded workflows, or privileged data access that trading at a fraction of the valuation of their larger counterparts while actively adapting to the same technological shift. Sprout Social (NAS:SPT) is a clear example. The stock is down ~50% since our purchase in December, and we have added aggressively. The market is underestimating the company’s ability to adapt and overlooking a core piece of its moat: privileged API access to a wide network of social platforms. At ~0.5x EV/Sales, the bar for re-rating is low, and it does not require heroic assumptions for the equity to work from here. See here where we discuss this thesis along with the broader SaaS complex.
Lessons in Portfolio Management
As a portfolio manager, you are required to own things that others do not expect to work. We have heard repeatedly that “this is not the time to own SaaS” or that one should wait until SaaS starts going up again before entering. That framing misses the entire point of portfolio construction. A portfolio approach allows you to own assets that are unloved/hated alongside those benefiting from momentum, rather than waiting for consensus to turn. If we had to wait for consensus to bless any position before inclusion, we can promise you that our returns would be nothing to write home about. At the end of the day, for long-to-medium term investors, perception/flows/sentiment only matter to the extent that they impact the underlying fundamentals of the business (i.e. reflexivity). Is the company cash constrained such that a lower stock price impairs its ability to fund operations? Does negative sentiment toward SaaS actually reduce customer adoption or usage? We have owned many positions through periods of poor sentiment where the sentiment proved to be short lived, and many where the sentiment became worse before ultimately working, and that is why for us it is critical to be able to add into weakness.
Our own analysis over the past nine years suggests that without the ability to add into weakness, roughly 20–30% of our alpha would erode. The standard caveats apply, namely having the discipline and self-awareness to admit when you are wrong and avoid value traps, but for concentrated managers such as ourselves, stock selection alone is not sufficient; you have to be willing to lean in when positions move against you.
References
- *The ”Pernas Portfolio” is a private account managed by Pernas Research LLC. Performance inception date is 01/01/2017. Periods longer than a year are annualized.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
