AMS Portfolio review - July 2017

AMS Portfolio review - July 2017

Review approach
As usual I am starting with the portfolio level overview across 3 portfolios (US – growth oriented, Singapore – growth and yield oriented & HK – growth oriented). I’m focusing on capital change but will track the running yields from dividend income at the portfolio level. I am looking at portfolio performance vs local index benchmarks on a monthly and YTD basis as well as cross portfolio comparisons.

I then focus on the US portfolio with an overall summary of the month followed by a drill down into the top 15 holdings according to 3 ranking metrics: 1) Overall value allocation, 2) Overall % return & 3) 2017 YTD % return. I am excluding coverage of (a) my outsized holding in my former company which I am selling down and (b) ETFs that are holding pools for potential redeployment opportunities as well as giving me exposure to certain sectors. I will review the (rest of the) top 15 holdings and suspend coverage of the long tail that I am in the process of cleaning up.

I am also reviewing the performance and thesis of the leading holdings at a high level. Specifically, I am looking at: associated mega themes, revenue growth, earnings growth, valuation and a thesis status check. I am referencing latest quarterly YoY results in order to understand to what degree holdings are: delivering on a 20%+ growth in revenues, with commensurate earnings growth, possessing a reasonable P/E and P/S ratio and fit the PEG or high yield investment thesis - for growth stocks I am looking ideally at a Saul like 1YPEG of <1, for income stocks I am looking for yields >5% with dividend payout growth >5%. All stocks have now reported Q1 results and some Q2 - I have updated the information captured to reflect the latest performance.

Finally I am covering off buy & sell trades made in the month as well as reflections on my “Watch List”.

Performance review:-
The overall US portfolio 2017 investing returns are now up +25.09% from 2016 year end through to 31st July market close – up 3.03% in the month. The HK port – has accelerated further ahead to reach +31.62% YTD – up 4.55% in the month whilst the Singapore port (which is a combination of high yield and growth stocks) saw a return to growth and is up +10.09% YTD, down 0.50% in the month (which is being held back by a rights issue in progress). I have added net new capital to all portfolios YTD but have actually withdrawn capital this month from all 3 ports which I have adjusted out of the gains. The US portfolio activity has again seen minor activity this month with no new positions a few top ups, a stake reduction and one holding exit.

Overall 2017 YTD portfolio investment returns vs index benchmarks:-

 **US Port	        S&P		SG Port	        STI		HK Port	        HS**
Jan	-		+1.79%		-		+5.76%		-		+6.18%
Feb	-		+3.72%		-		+1.63%		-		+1.63%
Mar    	+2.49%   	-0.04%		+1.21%		+2.54%		+4.26		+1.56%
Apr	+3.62%	        +0.91%		-0.09%		+0.01%	        +4.94%		+2.09%
May	+2.77%	        +1.16%		-0.10%		+1.11%	        +4.03%		+4.25%
June	+1.58%	        +0.48%		+4.07%		+0.49%	        +1.24%		+0.41%
July	+3.03%          +1.93%		-0.05%		+3.19%	        +4.55%		+6.05%
**YTD	+25.09%         +10.34%	        +10.09%	        +15.58%	        +31.62%		+24.20%**
Yield	0.33%		-		2.2%		-		1.76%		-

Both US and HK ports are ahead of their indices but SG is behind for the year. The US portfolio performance has continued to beat the index in July, the HK portfolio lagged for the month whilst the Singapore portfolio lost ground in the month. The US port has yielded 0.33% year to date (not annualised) whilst SG has yielded 2.2% YTD and HK 1.76% - SG and HK yields tend to produce lumpy quarterly or half yearly payouts particularly around Q1/Q2 time.

On the index front whilst the US has been reaching a new all time high, HK and Singapore are getting closer to their 2015 highs but still a little away behind their all time highs reached prior to the global financial crisis.

Overall I am happy with how the HK and to a degree the US ports are doing and have renewed confidence in the SG portfolio.

On the US port side, this last month was looking great until the last week, I think I am down ~1.5% from the intra-month peak. I continue to fall behind Saul’s and Bear’s portfolio performances and probably others as well. This is in part due to: 1) some stock selections I have not participated in 2) entering into certain stocks later in the game and 3) continuing to hold some non performing stocks that I need to reconsider my conviction in or psychologically turn the corner with and sell out. This 3rd psychological barrier has been holding me back and whilst some of the stocks I can point to genuine conviction in future performance I need to get more ruthless in my selling decisions. I have started with the easier decisions so far this year and slimmed down the portfolio by exiting some successful gains, I am now taking the harder decisions where I am exiting non performers or holdings in negative territory. Ignoring past performance and treating existing holdings on purely go forwards investment merit together with a willingness to “buy high” are the 2 biggest psychological developments areas I am grappling with. As I continue to move my investments out of non-performing holdings into greater potential stocks I am at the same time haunted by the feeling that it could also be a signal of peak market mania.

US Portfolio investments review:-
This month has been seen relatively subdued activity levels as I have: entered no new growth positions and topped up 3 others (that represented buying opportunities and a concentration play); exited 1 holdings and a top slicing of one other holding.

In the April & May, TAL Education, Shopify and Mazor featured in all 3 Top 15 lists of my portfolio composition metrics (previous it was also 3 – TAL, SHOP & NetEase). Last month 4 holdings feature in all 3 lists - TAL Education, Shopify and for the first time Ali Baba and LGI Homes, This month 6 holdings feature in all 3 lists: TAL, Shopify, Mazor, LGI, Paycom & Ali Baba and there is much more overlap amongst the other holdings between the lists which I am a lot happier about.

In seeking to address the long tail as well as consider my re-allocation to existing and new stocks I have been mindful of 2 points:- 1) conviction and the significance of investing in a company that is has a rock solid fundamental business premise (I’m thinking Amazon, Mastercard etc), and 2) conforming to an investment thesis – whether it be high revenue and earnings growth from a capital perspective or high yield and dividend growth from an income perspective.

Having observed that much of my gains come from either very recent or very mature holdings and recounting how often I have seen strong gains evaporate when I haven’t made an exit as decisively as I should have (or certainly as Saul has), when the indicators point to a change in the thesis, leaving me with a non-performing holding; I am motivated to challenge myself on whether my holdings or even my watch list targets are conforming to a strong investing thesis. In particular, I am examining where 1) I have simply become smitten with a “story” and 2) where holdings are experiencing revenue/earnings growth deceleration and/or levels of significant over valuation and 3) If I were to invest now would I buy on the going forwards basis.

1) Overall portfolio value rankings

**#  Holding		%	Mega Theme	LQ Revs Growth	LQ EPS Growth   P/E	PEG	P/S	Latest Q Filed**
1  AliBaba		4.8%	China/Cloud	59.8%	        45.0%	        59.84	1.33	16.75	Q1
2  Shopify		3.5%	Cloud		75%	        -	        -	-	16.64	Q2
3  NetEase		3.0%	China/Cloud	72.3%	        52.2%	        21.16	0.41	6.36	Q1
4  TAL Ed Systems	2.6% 	China/Cloud	65%	        70.8%	        101.8	1.44	6.38	Q1 (to Mar)
5  LGI Homes		2.1%	- (Growth)	0.3%	        -10%	        13.22	0.36	1.14	Q1
6  Mazor		2.1%	Ageing		86.6%	        -	        -       -	22.73	Q2
7  PayCom   		2.0%	Cloud		32.6%	        43%	        81.5	0.69	11.21	Q1
8  KMI			2.0%	Clean Energy	7.3%	        0.0%	        65.9	0.16	3.39	Q2
9  C-Trip		1.7%	China		46.1%	        50%	        1339	26.78	9.91    Q1
10 KKR			1.7%	- (Yield)	39.3%	        282%	        7.3	0.03	2.20	Q2
11 Audiocodes	        1.7%	IoT		8.0%	        33%	        22.35	0.56	1.45	Q2
12 Splunk		1.6%	Cloud/Big Data	30.4%	        -	        -    	-	8.24	Q1
13 First Int Bnk        1.6%    Growth	  	70.7%	        7.0%	        14.7	0.84    2.43    Q2
14 Sierra Wireless	1.6%	IoT	        13.3%	        237%	        67.05	0.82	1.49	Q1
15 YY			1.5%	China	        37.4%	        109.6% 	        14.68	0.13	2.09	Q1

**#  Holding	Thesis Check	Conviction  Comment**
1  AliBaba	On Track	High	    Good value on sum of the parts but challenge to maintain growth, diversify revs/earnings & SEC investigation
2  Shopify	On Track	High	    Massive TAM & fast growth but watch for EPS 
3  NetEase	On Track	High        Good value/fast growth but difficult growth compares, watch for internationalisation & Google PRC collaboration & op. leverage
4  TAL Ed Sys	On Track	Medium	    Huge/fragmented TAM & increasing growth rate, but hi valuation, lack of scale leverage & high SBC
5  LGI Homes	On Track	High	    Undervalued & consistent growth record but declining growth rate, IR hikes and 2017 home closing target
6  Mazor	On Watch	Medium	    Benefiting from Medtronic agreement but challenging growth compares going forwards & still loss making
7  PayCom   	On Track	High        Fastest growing HR Cloud play with lowest valuation but watching for competition from WorkDay
8  KMI		Off Track	Medium	    Expect re-instatement of dividend + Trans Mountain project
9  C-Trip	On Track	High	    Market leader in consolidated sector with great alliances but watch for post acquisition growth & high SBC
10 KKR	        On Track        High	    High yield, high growth operation with exposure to infrastructure & O&G recovery
11 Audiocodes	On Watch	Medium	    Increasing TAM in cloud space but growth falling to single digits and risk of design outs
12 Splunk	On Track	Medium	    At the heart of Big Data analytics & cybersecurity but could be just the latest next big thing
13 First Int Bk On Track        High        Consistent Rev & EPS grower, well managed - needs to improve a few core lending metrics
14 Sierra W.    On Watch        Medium	    Stretched valuation & struggling to recover 20%+ growth rates but outlook improving
15 YY		On Track	Medium	    Undervalued fast growing internet player, watch for earnings volatility & take private shenanigans

In terms of the top 15 holdings – there has been some movement in the rankings and even the line-up – Cybersecurity players dropped out (as usual failing the quarterly earnings release expectation – note to self I should probably take advantage of that) and Box drops out. Generally these top holdings are still performing well, (all of them are in the money) so I’m pretty happy on this front. So far this year I have been increasing my concentration in those with the highest conviction and strongest investment thesis + valuation (BABA, NetEase, Paycom & Criteo) and I have been more aggressive at lightening positions where valuations have become super stretched (Sierra Wireless, TAL, Mazor & Grubhub) though with mixed success.

I continue to watch and reconsider Audiocodes as its growth record seems stuck in the slow lane. Mazor – a play on robotics as well as ageing whilst growing fast needs to raise profitability and maintain the momentum from its Medtronic partnership (which could result in a buy out). KMI (fitting into my shale and clean energy mega theme) is going to be intrinsically affected by the O&G sector (and politics therein), as well as the regulatory outcome of its Trans Mountain pipeline project and is more of a turnaround, recovery and income generation play for me. Shopify, Ali Baba, TAL Education, C-Trip, YY and NetEase are all cloud/ecommerce and/or China plays that are doing very well. Shopify and Ali Baba are 2 of my highest conviction stocks, NetEase has been de-risked now it has the Activision Blizzard deal through to 2020 and is going like gangbusters – and growth is accelerating! TAL has a massive and fragmented addressable market to penetrate and consolidate and its financials are looking great if getting very stretched in its valuation – although they destroyed expectations with their latest report with 100%+ EPS growth. C-Trip whilst a stunning performer at the top line needs to be watched from a profitability and valuation standpoint. YY which I topped up earlier this year after a stunning earnings release timed with a pull back in the share price is undervalued, although management over there needs to be watched and Government media controls are a risk. Splunk and Paycom, big data and cloud plays respectively, again need to be monitored from a growth deceleration perspective whilst Sierra Wireless needs to continue its revenue acceleration. KKR (together with BX) is an infrastructure investment and yield play for me but also happens to be growing very fast – another I hold in very high conviction. First Internet Bancorp makes a welcome return after an amazing set of quarterly results with revenues accelerating to a 70% YoY growth rate. I have taken BOFI off my watch list as by contrast fell to a 7% growth rate whilst carrying a risk of legal challenge and potentially fraud – my FOMO is in complete remission on this one.

Out of all of my top holdings I would be most comfortable adding to Ali Baba (which I have been) and KKR. I am closest to selling Audiocodes, Mazor, LGIH and potentially Sierra Wireless and I am most anxious that that: Splunk’s growth rate doesn’t decline any further after this quarter’s dramatic drop back, LGI makes its full year closing target and PayCom’s customer additions do not taper off. Cypress is a potential replacement if Sierra Wireless doesn’t regain its double digit growth and Work Day a potential replacement for PayCom.

2) Total % gain rankings

**#  Holding		%		Mega theme	Thesis Check	Conviction**
1  CEVA   		996.0%		IoT		On Track	Medium
2  TAL Ed Systems	393.5%		China/Cloud	On Track	Medium
3  C-Trip		288.6%		China		On Track	High
4  Mazor		242.2%		Robotics	On Track	Medium
5  Shopify		216.1%		Cloud		On Track	High
6  AMD		        126.8%		Big Data	On Watch	Medium
7  NetEase		118.9%		China/Cloud	On Track	High
8  Abiomed 		115.5%		Ageing 		On Track	High
9  Palo Alto		103.9%		Cyber Security	On Track	Medium
10 Noah		        102.8%		China/Cloud	On Track	Medium
11 PayCom		76.6%		Cloud		On Track	High
12 LGI Homes	        67.5%		Growth	        On Track	High
13 Ali Baba		62.3%		Cloud		On Track	High
14 Materialise	        52.3%		3D Printing	On Track	Medium
15 Box Storage	        51.5%		Cloud		On Track	Medium

This list includes a lot of Saul method stocks. I also note and won’t comment any further that Team China is doing very well in this medals table. I’m probably closest to taking my gains and exiting from CEVA, AMD & Abiomed (which I already top sliced at 130). Interestingly this list includes some long held positions (CEVA, CTRP & AMD) as well as one very young position (SHOP & Box). The total gains % increases have mostly moved upwards since the June position – the winners have kept on winning and I now have 10 triple digit risers vs 8 in June and 7 in May and I’m back to 5 multi-baggers.

3) 2017 YTD % gain rankings

**#  Holding		%	        Mega theme	Thesis Check	Conviction**
1  Safe Bulkers		124.3%	        -		Off Track	Low
2  TAL Edu. Sys.	123.5%	        China/Cloud	On Track	Medium
3  Ali Baba		117.8%          Cloud		On Track	High
4  Shopify		115.5%	        Cloud		On Track	High 
5  Datawatch		106.4%	        Cloud/Big Data	Off Track	Low 
6  YY Group	        106.2%	        China		On Track	Medium
7  Materialize	      	98.0%	        3D Printing	On Watch	Medium 
8  SolarEdge		85.1%	        Clean Energy	Off Track	Low
9  LGI Homes		83.9%           Growth		On Track	High 
10 Sierra Wireless	69.1%	        IoT		On Watch	Medium
11 BITA                 67.7%           China/Cloud     Off Track	Low
12 Mazor		60.4%	        Ageing/Robotics	On Track	Medium	
13 Mitek		54.5%	        Growth		On Track	Medium
14 Paycom	        54.1% 	        Cloud 		On Track	High 
15 Hubspot		53.9%	        Cloud/Big Data	On Watch	Medium 

My 2017 strongest advancers include both current high momentum stocks as well as some older positions that have bounced back with the oil price and cyclical recovery in play (admittedly a few from some very bombed out positions – including some horror stories you might recognise which I should never have entered or should have exited a lot earlier in the face of a downturn). The 2017 YTD % increases have continued to make further progress versus June and participating in the ongoing bull run and although with considerable churn there is improved alignment between the constituents of this list and the previous 2.

Buys and Sells:-
July has again been relatively inactive for me on the buying and selling front.

In January and February I sold out of SWKS and BOFI and redeploying money into Twilio and PayCom

In March I sold a further 6 holdings – Cypress (CY), Dell VM Tracking stock (DVMT), MobilEye (MBLY) and NetApp (NTAP), Aphria (APHQF) and Aurora (ACBFF) together with a top slicing of Sierra Wireless and topped up 9 positions- Criteo, LGI Holdings, Micron, Ubiquiti, Barret Business Services, KMI, NetEase, Ali Baba & Pure Storage and buying Talend

In April I reduced stakes in 3 holdings - my previous employer, Mazor & TAL Education Systems, added 2 new holdings (2 ETFs – S&P small caps & First DJ Internet) and topped up 5 positions - Blackstone, Ali Baba, Enviva, Hannon Armstrong & Monroe Capital

In May I continued to clean house – selling out of Carnival, Norwegian Cruise Lines, Natural Health Trends Corp, AMN, and QQQ’s clean energy ETF and reducing my stake in my previous employer and started new positions in: The Trade Desk, Impinj, Ziopharma, Mercadolibre & Splunk and topped up: YY, Twilio, Ali Baba and an S&P small cap ETF

In June I continued taking difficult decisions in selling out of 7 non-performing holdings sometimes at a loss including: Georg Group, Qualcomm, Cree, Whole Foods, Sensata, Leucadia, and California Amplifier; adding 4 new positions including: Nvidia, Cognex, MuleSoft and Square and again topping up First DJ internet ETF and Splunk.

In July I wasn’t able to able to make much headway in reshaping the portfolio beyond a few nips and tucks. I sold out of 1 holding - Lending Club, reduced my position in another – GrubHub and took the opportunity to top up MercadoLibre, Splunk and Micron with no new positions taken.

Between my available attention and the lack of exit opportunities my pruning of the portfolio was muted this month. I made just one sell and one stake reduction.

Lending Club – has been a 1-2 year holding for me and I exited at a 26% gain. I bought originally after its share price collapse and a change in leadership. I believed in the potential for peer to peer lending especially during economic growth years and a credit expansion cycle. However, their recovery progress has been slow, more and more competitors are launching peer to peer lending platforms and the credit, interest rates and economic expansion are all tightening – resulting in share price stagnation. I decided to take my money off the table on this one. I should have sold earlier and might have exited with more like a 50% gain but c’est la vie.

GrubHub – I decide to redirect some of my money away from GRUB into Square allowing me to fund another holding and de-risk the potential threat from Uber and Amazon as well as extract some much needed cash from my portfolio allowing me to take a 34% gain off the table.

I expect to continue to make headway on the long tail in coming months – Audiocodes, AMD, Synaptics and Hain are now top of mind to address and I need to make my mind up after the next set of results on the remainder of GRUB (which has overlap with Square) and FIVE (although FIVE seems to have re-confirmed its thesis as immune from the Amazon factor it has benefitted from the fidget craze which looks like it is over).

It was a relatively inactive month for me on the buy side where I made some top ups but no new holding purchases.

The top ups include:

Splunk – SPLK; again one that I’ve been tracking for a long time. I bought a first tranche in May, added after the drop in June as well and topped up again in July. Whilst the latest results beat expectations I didn’t like the deceleration in growth from 40% to 30%. I am hoping this isn’t the kind of company that experiences hyper growth but which tails off to nothing just before reaching profitability and then gets overtaken by the next big thing. I’m going to watch this one closely.

MercadoLibre – MELI; seemed to suffer a crisis of confidence earlier in the month with a significant pull back allowing me to gain a nice entry point to add to this holding. With growth rates accelerating I like how this is positioned. It’s producing AliBaba like results but without the risks associated with China.

Micron – MU; after producing amazing results (92% revenue growth), was I felt, unfairly punished with some pessimistic coverage and after the share price pulled back I topped up. I might well add to this holding further if the SP continues to languish.

Watch List:-
My watch list has evolved and I am close to pulling the trigger on Nutanix and possibly Atlassian. I like the look of PayPal after their blizzard of partnership announcements and I am very interested in New Relic. I would also jump into Align Technology at a heart beat if they weren’t always so expensive.

One serious pondering I have which could be of potential interest to this board is to switch over my exposure in Ali Baba from BABA paper in the VIE structure to Altaba shares which owns the underlying Ali Baba holding rather than the US listed notes. Its exposure might be diluted by other interests (SNAP and Yahoo Japan), but for those that shy away from BABA for fear of the VIE issue but would like a piece of the action, Altaba might be the answer.

Feb Review:…
Mar Review:…
Apr Review:…
May Review:…
June Review:…