stocknovice's November portfolio review

stocknovice · November 29, 2019, 6:51pm

First off, apologies to Saul and Bear. They’ve been doing these reviews much longer than I have, and I’ve made a habit of waiting for their summaries to show up before posting mine. However, my family is heading out for the weekend shortly and I wanted to post before I left. I hope everyone had a happy, healthy Thanksgiving.

It’s been said that sometimes you eat the bear and sometimes the bear eats you (https://quoteinvestigator.com/2016/11/10/bear-eats/). If that’s indeed the case, then November was a satisfyingly tasty month. Not only did the market bounce back in a big way for most SaaS names, but I thought some interesting conversations broke out on the board. The best one for me was the back half of this thread after DDOG’s earnings: https://discussion.fool.com/a-question-for-dreamer-if-he39s-stil…. It meandered through some CAGR and valuation banter before getting into some nitty-gritty that really clarified some personal thoughts on growth investing.

Tinker kicked it off by stating: ”Stocks go up, stocks go down…Follow the S curve and identify when the S curve either has a materially reduced slope or never develops as the narrative said it might. That is implicitly what Saul is doing. It is not "momentum” investing.”

This idea has always made sense to me. I believe many people unfairly equate momentum investing with growth investing. Momentum investing implies simply timing the market. I view true growth investing as much more involved. Growth investing – at least as I am trying to practice it – is driven much more by the business fundamentals of the companies I choose than any kind of attempt to time the market.

CMFSwift then chimed in: ”I don’t buy the whole value vs. growth blah, blah…The goal is to buy shares at a price below what we believe the market will offer sometime in the future and sell them when we believe the price of the stock has peaked.”

Amen, brother (or sister just in case).

Saul then gave two excellent responses to questions about his philosophy for holding a stock: ”There are all kinds of assumptions included in that which I don’t make, including whether I will still be in it in five years (normally I exit when the story has changed). However if I can make 50% in the first year (already have 31% in a month and a half), and 40% in the second year, and exit half way through the third year (typical pattern for me) at up another 20% compounded, I’ll be very happy (that put’s me at two and a half times what I started with in two and a half years).” and ”It’s not the ones that have the greatest potential for appreciation, but the ones I currently have most confidence in that I have the largest positions in.”

Two amazingly clear and simple points. First, hold a stock only while you think it is one of your best options for making money and no longer. Second, make your biggest positions those in which you have the most confidence. Pretty easy, huh?

Denny then wrapped up the entire conversation and put a pretty little bow on it by stating “… there is no reason to have a fixed five year outlook on a growth stock, just watch it develop and act accordingly.”

That crystalized the entire exchange for me. Denny’s hammered the S-curve untold times and rightfully so (his latest missive here: https://discussion.fool.com/denny-are-you-calculating-where-comp…). I have personally come to view the S-curve as the sweet spot of what I am trying to do. We might not always get it right, but I believe most growth investing is ideally trying to buy companies just as the curve starts upward and sell just before it flattens out. Every press release or earnings report is a chance to reassess where you believe a company resides on that curve and then buy, hold or sell accordingly. Call me crazy – don’t worry, I’ve been called worse – but I don’t view that as momentum investing at all. I view it as a very specific strategy for trying to own great businesses during their period of greatest growth (and hopefully by extension their greatest returns). That’s admittedly MUCH more difficult than buying an index fund and going to sleep.

One thing I’ve learned since finding this board is growth investing requires time, attention and more importantly adaptability. False starts are unavoidable since imperfect information inevitably leads to misjudgments regarding where a company sits on the curve. Please note I used “misjudgments” and not “miscalculations”. As Denny points out, there is no formula for figuring out where a company is on the curve. It’s a judgment call. So, when errors in judgment occur don’t dilly dally! You’d better pivot quickly because the market has proven time and time again that downward volatility for growth stocks is utterly ruthless and waits around for no one. The name of the game is consistently finding and holding names you believe are in the best spot to provide market-beating returns. It’s that simple and that complex all at the same time.

As I look at my current holdings, I’ve been happy with where AYX, MDB, OKTA, TTD and ZS sit for quite some time (I’m admittedly slightly less happy with ZS than the others right now). I bought my first TTD (6/2017) and OKTA (6/2018) shares before even finding this board. AYX, MDB and ZS were added in August, 2018. Additional names have come and gone since. Some – like ROKU and PLAN – have been invited to stick around for a while. Others – like PS, EVBG and VCEL – barely settled in before being asked to move along. A couple have even been repeat offenders in filling a portfolio spot. While that might seem frenetic, I don’t see that being the case at all. I believe my selection criteria have remained both specific and consistent. In fact, I’d argue they’ve gotten even more stringent over time. It’s become increasingly hard for a company to earn my investment dollars, and that’s exactly the way it should be. Thanks to all on these boards who continue to help me refine those standards.

2019 Results:


	Month	YTD	vs S&P
Jan	21.0%	21.0%	13.1%
Feb	11.5%	34.9%	23.8%
Mar	7.9%	45.5%	32.4%
Apr	5.8%	54.0%	36.5%
May	-0.4%	53.4%	43.6%
Jun	10.5%	69.4%	52.1%
Jul	6.9%	81.1%	62.2%
Aug	1.2%	83.3%	66.6%
Sep	-23.7%	39.9%	21.2%
Oct	2.6%	43.5%	22.4%
Nov	18.1%	69.5%	44.2%

November Portfolio and Results:


	%Port	%Port			
	30-Nov	31-Oct	1st Buy		Return
AYX	18.5%	14.8%	08/27/18	53.0%	
TTD	16.3%	14.7%	06/08/17	72.6%	
ROKU	13.9%	15.3%	05/13/19	65.1%	
MDB	11.5%	11.7%	08/29/18	55.6%	
OKTA	9.2%	9.1%	06/15/18	87.5%	
ZS	6.7%	6.7%	08/27/18	2.7%	
PLAN	5.6%	5.8%	05/28/19	22.8%	
CRWD	5.2%	4.3%	06/12/19	-12.0%	
COUP	4.4%	3.9%	09/12/19	12.2%	
ESTC	4.2%	4.5%	07/15/19	-14.3%	
SHOP	3.2%	3.5%	09/12/19	-6.0%	
Cash	1.26%	5.65%			
			Return	vs S&P	
		Month:	18.1%	14.7%	
		2019:	69.5%	44.2%

Past recaps for anyone who’s interested:

Stock Comments:

My end of October TWLO sale left a fairly large chunk of cash to deploy entering November. I used about half to bump AYX immediately after their 10/31 earnings. I also drifted into a few more shares of CRWD and COUP over the first few days of the month. That left me carrying about 1.5% cash while I waded through the next set of reports to see if anything caught my eye. Nothing did, which meant I ended up holding that balance through the remainder of the month (it shrunk in percentage terms as the rest of my portfolio grew). I prefer being fully invested, so I’ve promised myself I’ll get that balance back down to zero by the time this final round of earnings concludes in early December.

AYX – As noted last month, I went overweight in AYX after hours on 10/31 following what I thought were stellar earnings. Alteryx seems to be clicking on all cylinders with no real headwinds in the foreseeable future. Right now, I feel this is about as plug and play a position as I could possibly find.

COUP – I added a tick to Coupa early this month when it dropped ~10% on news that Salesforce acquired a potential competitor. I viewed this as FUD, at least in the short term. COUP has a large lead in its space and its recent performance suggests business is not only fine but potentially accelerating. The price surge since suggests that was a good call. However, I’ll find out for sure whether my thesis holds any water when the company reports on 12/3.

CRWD – I wasn’t sure what I was going to do with CRWD entering November but ended up adding ~1% early in the month after reviewing the options for my TWLO cash. This decision was strictly a fundamentals play. It was also a decision influenced by Saul’s comments after last month’s review about not getting too focused on percentage allocations but instead remembering to judge each individual opportunity on its own merit. On the surface nothing has really changed for CrowdStrike other than some random media noise from Ukraine-gate. Until any issues show up in the numbers, I’m viewing this as a chance to grab a few shares at a discounted rate. So far, so good though I’ll be paying extra close attention to CRWD’s 12/5 report.

DDOG – I don’t own it but WOW!! There’s not much to say other than what a great quarter. Datadog has clearly sprinted from the starting blocks as a public company. I won’t rehash the results since they were covered so thoroughly in this 60+ post thread: https://discussion.fool.com/ddog-with-a-nice-ah-bump-34341032.as…. Some of the comments also addressed valuation, which is really the only potential hickey you can point to in DDOG’s debut. The business itself looks phenomenal so far.

Last month I stated, “Given the path travelled by the majority of recent IPO’s, I’m banking on the likelihood I have time to let this one simmer a bit.” It looks like DDOG blew right through simmer and went directly to boiling over. Oh well. Good for them and good for everyone who got in as it bounced around prior to earnings (including Saul’s very prescient build up). My hesitation in climbing aboard the DDOG train has always been the fact ZM, CRWD, ESTC and PD all did something eerily similar before dropping back sharply and working through some post-IPO hangover. In fact, you could argue all four remain somewhere in that process with varying degrees of success in coming back around (be warned Elastic – This. Is. Your. Last. Chance!). I can’t say for certain DDOG will follow that same path – no one can, really – and those who bought on the dip below $30 might never have to worry about anything other than normal volatility anyway to still post excellent returns. Having missed this jump, I’ve decided to stay in watch mode for now. If Datadog gets to an entry point I’m more comfortable with, great. If not, I remember someone mumbling something about not being able to own them all. Rest assured I’ll be watching keenly for any DDOG dips or a stumble by another of my holdings. In the meantime, a sincere congratulations to those who got in early on this name.

ESTC – Easiest write up this month. ESTC either shows strong growth and improved leverage in its 12/4 report or it gets the boot. I’m growing weary of the constant Elastic tease (see what I did there? https://discussion.fool.com/one-thing-im-a-bit-weary-about-is-th…).

MDB – A nice month (+16.4%) on no real news. No complaints here though. I’d say Mongo was probably due for a run after what’s been a pretty blah stretch. Earnings 12/9.

OKTA – November saw yet another strong rise by Okta. The stock has surged 30%+ over the last six weeks or so and has now gotten back within shouting distance of its highs. I don’t know much about technical analysis, but when I squint at the chart it looks to me like some sort of shrug shape. I think that means “who knows?” and implies the stock could go either up or down when Okta reports on 12/5.

As we head into those earnings, I do have some concern where Okta might land. I’ve noticed the beats we’ve grown accustomed to for many of these firms have gotten noticeably smaller the last few months (as an aside, anyone else feel similarly?). I’m not quite sure what to make of that, but anything short of Okta’s usual $8M-$9M revenue beat would mean a pretty sharp slowdown. If that happens, they’d better show serious leverage somewhere else given they aren’t yet profitable. I can’t see the market taking too kindly to a disappointing result, especially given the recent markup. Hang on to your hat folks…

PLAN – This first piece of Anaplan news this month was a commissioned study by Forrester concluding PLAN’s platform can deliver the average user a 3X return in savings and benefits over a three year period (https://investors.anaplan.com/news/news-details/2019/Anaplan…). I realize this study is commissioned rather than independent, but 3X is a pretty impressive figure regardless. This not only suggests Anaplan’s offerings are hitting the mark for customers but also providing real, measurable bottom line impact. That can only help future sales and marketing efforts.

The second – and more important – piece of news was Q3 earnings on 11/21. I thought the report was positive, and the market apparently agreed. Most of PLAN’s performance numbers have been remarkably metronomic thus far in FY20 (Yeah, I admit I looked it up to make sure it was a word. So what?). Total revenue growth the last three quarters: 47%, 46%, 44%. Subscription growth: 45%, 48%, 47%. Subscriptions as a percentage of revenues: 86%, 87%, 89%. Total gross profit growth: 47%, 51%, 50%. Subscription gross profit growth: 47%, 52%, 49%. I can’t find a reliable Q1 figure for customer growth, but it’s been 27%, ???, 28%, 30% the last four. Growth in customers with ARR >$250K: 43%, 40%, 42%. Net revenue expansion: 123%, 121%, 123%. Looking broadly, I can’t help but admire the consistency.

At the same time, leverage has steadily improved throughout the year. Gross margins: 73%, 75%, 76%. Subscription gross margin: 84%, 84%, 85%. Expenses as a percentage of revenue: 99%, 95%, 86%. Operating margin: -27%, -20%, -10%. Net margin: -27%, -19%, -12%. As you’d expect, this leverage is having a positive effect on the bottom line with EPS of -$.16, -$.12, -$.08 over that span.

Most importantly, the future doesn’t look too shabby. Calculated billings grew 59%, RPO growth 55% and deferred revenue 61%. Those figures were backed by several call comments I found very bullish. Management touted a record number of 7-figure expand deals this quarter. They specifically stated, “we’re seeing the expands happen faster and we’re seeing the expands larger.” Customers spending >$1M in ARR grew 57%. They also noted their top 25 customers now have an average ARR >$3.5M and their top 10 average ~$5.3M. In addition, this exchange caught my attention:

Aleksandr Zukin
”Perfect. And then just a quick follow-up. Dave, on the numbers, if I look at some of the year-to-date billings and subscription billings growth year-over-year. And then I look at the RPO growth in the mid-50s type level. I’m curious, how long should it take that kind of growth trajectory to waterfall into subscription revenue? And what are some of the puts and takes there as we think about those numbers?”

David Morton
”I think you’ll see the waterfalls. We continue to gain scale. Clearly the RPO is something I continue to orient folks around because it’s less. I’ll call it a seasonal, if that’s a proper word even because you don’t get into the in-quarter out-of-quarter. And so even their appropriate wording year-to-date, clearly above 50%.
And so that performance does yield in waterfall. And as you know, our standard contracts are approximately three years, so you’ll see some near-term as well as longer term sustainability and continued rate of pace of the subscription revenues as you’ve seen thus far.”

My layman’s ear takes that to mean the metronome has a better than average chance to keep ticking for a while. I’d anticipate PLAN retaining its spot in my portfolio as long as that continues to be the case.

ROKU – Face it people, ROKU is a volatile little scamp. The company reported good numbers on 11/6 with small beats in several areas and a FY raise. Active accounts and streaming hours continue to climb, with Roku now serving 32.3M users who spent 10.3 billion hours on their platform last quarter. Average revenue per user (ARPU) climbed sequentially from $21.06 to $22.58 and ARPU growth accelerated to +30.2% YoY. This tells me they are clearly finding ways to monetize their eyeballs. Operating expenses climbed a tick, but they do not appear to be overpaying for the growth they are creating. And despite guiding all year toward breakeven EBITDA they are likely to end up closer to +$35M when all is said and done. On the whole I believe Roku continues to deliver on its promises with plenty of room to continue outperforming.

Unfortunately, a finicky market for highfliers didn’t seem to immediately share my opinion. The stock dropped ~15% after hours, which wasn’t a shock to me considering the smoking hot ~40% rise the month or so leading into the report. I’m also not surprised it has rebounded quite nicely as the news has settled in, even with Roku announcing a very small secondary offering mid-month to help cover a recent acquisition. I’m perfectly happy with the results and believe Roku has lined itself up well heading into its seasonally large Q4. Ultimately, their stated plan of “trading player margin for account growth and platform revenue growth” appears to be very much on track, and a strong holiday season in smart TV and/or player sales could fuel continued hyper growth in platform revenues during 2020. Their recent release of Roku TV’s in the UK should help in that regard (https://ir.roku.com/news-releases/news-release-details/hisen…). A reasonable Q4 beat would have Roku exiting 2019 as a 50%+ overall grower with >$1.1B in revenues and plenty of tailwinds behind it. I trimmed ~.5% just before earnings while rebalancing accounts after last month’s TWLO sale, but have no problem keeping the remaining shares as one of my largest positions.

SHOP – A relatively quiet month for Shopify. I’ve owned it twice this year, and its overall returns have been excellent for me. I viewed my small September purchase as more of a better-than-cash placeholder at the back of my portfolio than a spot that was going to drive my returns. Unfortunately, it turns out cash would have been a tick better. I’d like to find somewhere else for the money but haven’t stumbled upon a clean solution yet. First, last month’s TWLO funds have taken a little longer than I thought to redeploy. Second, Elastic’s wobbly hold on its current spot has me taking pause as well. That means reallocating SHOP keeps getting bumped to the back burner. I’m hoping ESTC, SMAR and/or ZM have strong enough reports to alleviate this issue for me. Regardless, I’m entering December looking to swap this position out at some point.

TTD – An interesting month for The Trade Desk. Color me a tad disappointed by TTD’s 11/7 earnings. They beat slightly with revenues of $164.2M but working off their guide I anticipated something more like $167-$168M. While spend on CTV and mobile appears to be coming along fine, overall growth that I hoped would hold at 41-42% drifted down to 38.2%. They continue to churn out profits though with $47.8M in adjusted EBITDA and an EBITDA margin of 29.1%. That’s good because profits do seem to matter to this market. The guide for their seasonally large Q4 was just OK and even a decent beat likely means another small decline next quarter. In some respects, I feel a little spoiled here. TTD’s business model is really tight and it remains one of the few companies that can tout such a strong combination of growth and profitability. However, I have to admit I’d expected a bit more.

As usual though, Jeff Green nailed the conference call. Every CEO should wish for his consistency and clarity of messaging. He very concisely outlined the reasons for optimism and their upcoming areas of opportunity. Whether it be China, the Summer Olympics, next fall’s elections or the new partnerships with Disney and Amazon, TTD has created multiple avenues for continued or even improved success in 2020. Green really does has a knack for very simply telling The Trade Desk’s story. Given the stock’s ~37% rise since, that story apparently resonated with a lot of listeners.

Being totally honest I wanted to trim TTD right after earnings. As mentioned however, I already had cash to work through and didn’t immediately have a better place for the money. Lucky me as it turns out. Apparently, Tinker’s “do-nothing” strategy wins again! My present feeling is TTD will remain a market-beating investment, but its alpha might not be quite as large as I thought a few months ago. I still believe in the thesis enough that it will remain a core holding. The question is whether I look to lighten up what has become a rather large position if and when other opportunities present themselves.

ZS – The main ZScaler news this month was their ZPA product achieving FedRAMP “Ready” Status at the High Impact level (https://ir.zscaler.com/news-releases/news-release-details/zs…) as well as being added to the approved product list for the Department of Homeland Security (https://ir.zscaler.com/news-releases/news-release-details/zs…). The company was also named a Gartner Leader for Secure Web Gateways for the ninth year in a row. These are yet a few more feathers in ZScaler’s cap and should significantly increase their access to potential government clients. As has been pointed out on these boards, ZS’s technology doesn’t seem to be the problem. It’s more a matter of cleaning up their recent sales stumble. News that expands their addressable market surely doesn’t hurt. Now let’s see if they can take advantage of it. Next earnings installment 12/3.

My current watch list in rough order is ZM, SMAR, DDOG, DOCU and PAYC (man, Paycom is torching it lately). TWLO’s recent results put it in more of the Honorable Mention pile even if the stock has rebounded a bit. A couple of board mentions have started me digging on AVLR. The numbers are interesting and customer growth bodes well. However, I haven’t gone through their calls yet so it’s still TBD. While Zendesk and Everbridge aren’t hyper growers anymore, they still occasionally flicker on the edge of my peripheral vision. In both cases the secondary metrics rather than headline numbers would have to drag them back into full view. The next quarter for each company probably determines whether they burn a little brighter or ultimately fade from view.

And there you have it. Once some initial earnings jitters for ROKU and TTD subsided, November turned out to be most excellent. In fact, it was my second-best month this year. Every company I own beat the market handily – a clean sweep! Knowing many here hold similar names, I am certain others experienced the same. If so, bully for you. We all endured the September pummeling together, so there’s no harm in savoring a quick November victory lap before we start off again.

Alas, quick it will have to be. There ain’t no rest for the wicked as I have six holdings and three watch listers reporting between 12/2 and 12/9 (https://www.youtube.com/watch?v=HKtsdZs9LJo). That’s a lot of info in a fairly short amount of time. Here’s hoping there’s a lot more nice than naughty in the packages they deliver.

Thanks for reading, Happy Thanksgiving weekend and I hope everyone has a great December.

12x · November 30, 2019, 2:38am

Stock novice, I believe you meant workday acquired ScoutRFP to compete with Coupa or did CRM just enter this space too?

brandonwahl · November 30, 2019, 10:43am

Such a wonderful writeup, as previous months have also been. I wanted to play devils advocate to your DDOG thoughts where you wrote:

a sincere congratulations to those who got in early on this name.

While the “official” IPO price may have been $27, the first realistic crack any of us had was around $36 just a few moments after the opening bell that morning. In that regard, the stock price has only appreciated about 10% above the first opportunity you would have had to purchase it.

You also went on to write:

I don’t own it but WOW!! There’s not much to say other than what a great quarter…The business itself looks phenomenal so far.

With revenue growth increasing from 76% to 82% to 88% last three quarters, and the stock being just 10% above where we first had the opportunity to acquire some, I don’t think you’ve missed anything quite yet, especially if you truly feel the way you wrote. Sure it would have been nice to grab it when it was below $30/share, but there is nothing wrong with missing the first +/-50% but going on to catch the back hundreds of percents, if the story plays out. If this stock goes to 60 or 80 or whatever, I doubt you’d lament getting in at the current price versus not getting in at all.

Thanks again for your excellent monthly write-ups. I really enjoy reading and learning from them.

Brandon
Long DDOG, with purchases at 36, 33, 32 and 40

nilvest · November 30, 2019, 1:28pm

excellent writeup StockNovice.

I particularly liked the summary of growth investing discussion over last few weeks… I have cut and paste it in my investing reading (re-reading… hopefully)…

thanks for sharing and congrats for great results in November.

stocknovice · November 30, 2019, 9:00pm

I believe you meant workday acquired ScoutRFP to compete with Coupa or did CRM just enter this space too?

Good catch, 12x. Both Salesforce and Workday participated in ScoutRFP’s January funding round, but it was Workday and not Salesforce who acquired them in early November. I listed the wrong company as the buyer in my notes. Thanks for the correction.

thejusticier · December 2, 2019, 7:57pm

What timeframe are you talking about for the full S-curve to unfold? Depending on the type of business, that can take many years to decades.
I don’t think the S-curve is very relevant to the timeframes we are talking about here. It might be if the business in question is right at a transition but that also occurs over a period of time, and by time I don’t mean just a few quarters. All the business talked about here would be on the left part of the curve where the 2nd derivative is growing and for many of them it is just starting to grow.
The growth of the stock in the short period of time (a few to several quarters) has nothing to do necessarily with the S-curve. And I think the S-curve speaks about technology rather than market saturation. Basically in the shorter period, attention is gathered around certain stocks that is growing very fast and when there is a little hiccup the stock reverses. There is a lot of should I? should I not?…it’s highly volatile and the direction if any has nothing to do with the S-curve.
Things like nonSQL DB, AI automation, cybersecurity, data analytic softwares etc… delivered over the Cloud are technologies that are relatively new and their usage is growing and will continue to grow for a while. Many businesses are exploiting these technologies. S-curves will not say that much about a particular business and its stock. They are all using it.