AMS Portfolio review - June 2017
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”.
The overall US portfolio 2017 investing returns are now up +21.41% from 2016 year end through to 30th June market close – up 1.58% in the month. The HK port – has accelerated further ahead to reach +25.90% YTD – up 1.24% 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 +10.64% YTD and up 4.07% in the month (which has benefited from a strong dividend payout and post XD SP recovery). I have added new capital to all portfolios YTD but only to the US portfolios this month which I have adjusted out of the gains. The US portfolio activity has again seen considerable activity in terms of some new positions as well as top ups this month together with a number of holding exits.
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% **YTD +21.41% +8.24% +10.64% +12.0% +25.90% +17.11%** Yield 0.29% - 2.2% - 1.70% -
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 June as has the HK portfolio whilst the Singapore portfolio regained considerable ground in the month. The US port has yielded 0.29% year to date (not annualised) whilst SG has yielded 2.2% YTD and HK 1.7% - 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 has seen even greater volatility than last month with both the largest 1 day gains and largest 1 day losses in terms of % and $ movements I think I have ever experienced aside from perhaps the dotcom boom/bust era. I continue to fall behind Saul’s and Bear’s portfolio performance. 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 very active as I have: entered 4 new growth positions and topped up 2 others (that represent a cornerstone concentration play); exited 7 under-performing holdings and I have continued to shrink down my holding in my former employer.
In the last 2 months 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). This month 4 holdings feature in all 3 lists - TAL Education, Shopify and for the first time Ali Baba and LGI Homes, and there is much more overlap amongst the other holdings between the lists which I am getting 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 4.0% China/Cloud 59.8% 45.0% 54.45 1.21 15.5 Q1 2 Shopify 3.7% Cloud 75% - - - 18.7 Q1 3 NetEase 2.9% China/Cloud 72.3% 52.2% 20.18 0.38 6.01 Q1 4 TAL Ed Systems 2.1% China/Cloud 80% 103.3% 88.28 0.8 5.61 Q4 (to Feb) 5 PayCom 2.0% Cloud 32.6% 43% 76.73 0.65 10.69 Q1 6 LGI Homes 1.6% - (Growth) 0.3% -10% 11.93 0.39 1.02 Q1 7 KMI 1.9% Clean Energy 7.2% 42.6% 62.97 - 3.25 Q1 8 Mazor 2.3% Ageing 82.2% - - - 20.09 Q1 9 Imperva 1.7% Cyber Security 21.3% - - - 5.68 Q1 10 KKR 1.7% - (Yield) 34.2% 200% 10.36 - 2.51 Q1 11 C-Trip 1.7% China 46.1% 50% 1207 24.12 9.03 Q1 12 Sierra Wireless 1.5% IoT 13.3% 237% 62.95 0.82 1.41 Q1 13 CyberArk 1.6% Cyber Security 25.8% 21.7% 56.56 2.61 7.40 Q1 14 Audiocodes 1.7% IoT 7.5% 75% 11.33 0.28 1.33 Q1 15 Criteo 1.6% Cloud 29% 65% 41.3 0.85 1.69 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, internationalisation & Google collaboration in PRC & leverage as profitability emerges 4 TAL Ed Sys On Track Medium Huge/fragmented TAM & increasing growth rate, but hi valuation, lack of scale leverage & high SBC 5 PayCom On Track High Fastest growing HR Cloud play with lowest valuation but watching for competition from WorkDay 6 LGI Homes On Track High Undervalued & consistent growth record but declining growth rate, IR hikes and 2017 home closing target 7 KMI Off Track Medium Expect re-instatement of dividend + Trans Mountain project 8 Mazor On Watch Medium Benefiting from Medtronic agreement but challenging growth compares going forwards & still loss making 9 Imperva On Watch Medium Fast growth sector, differentiated player, top CEO but growth & profits have faltered in last yr with subscription transition 10 KKR On Track High High yield, high growth operation with exposure to infrastructure & O&G recovery 11 C-Trip On Track High Market leader in consolidated sector with great alliances but watch for post acquisition growth and high SBC 12 Sierra W. On Watch Medium Stretched valuation & struggling to recover 20%+ growth rates but outlook improving 13 CyberArk On Watch Medium Top line growing double digits but EPS growth only single digits and high SBC 14 Audiocodes On Watch Medium Increasing TAM in cloud space but growth falling to single digits and risk of design outs 15 Criteo On Track High Consistent top line growth, inconsistent EPS growth, concerns over ad blocking and Q1 guidance
In terms of the top 15 holdings – there has been some movement in the rankings and even the line-up – CyberArk re-enters and Box drops out. Generally these 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 and Mazor) though with mixed success.
I continue to watch and reconsider Audiocodes as its growth record seems stuck in the slow lane. Cyber security plays (e.g. Imperva & Cyber Ark) which I am highly exposed to, had been experiencing a gradual slow down but most seem to have navigated the transition to a subscription model well and are hitting a reasonable constant 20%+ stride and benefiting from renewed focus on the sector following recent ransomware events. 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 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. Criteo and PAYC, IoT and cloud plays, 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 – with very high conviction.
Out of all of them 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.
2) Total % gain rankings
**# Holding % Mega theme Thesis Check Conviction** 1 CEVA 977.0% IoT On Track Medium 2 TAL Ed Systems 285.0% China/Cloud On Track Medium 3 C-Trip 250.4% China On Track High 4 Shopify 197.4% Cloud On Track High 5 Mazor 196.0% Robotics On Track Medium 6 NetEase 111.4% China/Cloud On Track High 7 Abiomed 108.5% Ageing On Track High 8 AMD 108.0% Big Data On Watch Medium 9 Palo Alto 107.0% Cyber Security On Track Medium 10 Noah 81.7% China/Cloud On Track Medium 11 PayCom 72.4% Cloud On Track High 12 LGI Homes 52.0% Growth On Track High 13 Imperva 50.1% Cyber Security On Watch Medium 14 Ali Baba 47.5% Cloud On Track High 15 Box Storage 46.6% Cyber Security On Track High
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 May position – the winners have kept on winning and I now have 9 double digit risers vs 7 in May but only 3 multi-baggers vs 5 previously.
3) 2017 YTD % gain rankings
**# Holding % Mega theme Thesis Check Conviction** 1 Shopify 102.7% Cloud On Track High 2 Safe Bulkers 99.1% - Off Track Low 3 Ali Baba 88.1% Cloud On Track High 4 Comm Heath Sys 78.2% Ageing On Watch Medium 5 TAL Edu. Sys. 74.4% China/Cloud On Track Medium 6 Tesla 69.2% Clean Energy On Watch Medium 7 Datawatch 69.1% Big Data Off Track Low 8 Micron 68.5% Big Data On Track Medium 9 Sierra Wireless 62.1% IoT On Watch Medium 10 SolarEdge 61.3% Clean Energy Off Track Low 11 LGI Homes 60.0% Growth On Track High 12 YY Group 55.9% China On Track Medium 13 Materialize 54.6% 3D Printing On Watch Medium 14 BITA 52.6% China/Cloud Off Track Low 15 Lightbridge 51.8% Clean Energy Off Track Low
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 remained as was in May although with considerable churn but are seeing some improved alignment between this list and the previous 2.
Buys and Sells:-
June has again been an active for me on the selling front particularly.
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.
Again I focused on pruning the portfolio in June with increasingly difficult decisions selling very long held stocks, former high conviction holdings and underwater positions and sold down more of my holding in my former employer.
Groupe Georg – has been a mid term holding for me and I exited at a 4.6% gain. I bought originally as part of my 3D mega trends play as well as exposure to drones and renewable energy. In the end I realised with its imminent floatation of its 3DP BU, it would leave me with a single digit growth business of fairly low margin engineering type activities which was not my intention.
Qualcomm – which I sold at an 18.9% loss was a holding from a number of years ago around its peak when Snap Dragon looked to be taking over the world and at the point of surpassing Intel as the world’s #1 Semiconductor. The Smart phone market hit saturation point, Qualcomm got embroiled in legal battles and SnapDragon 800/810 had overheating issues – the rest was history. I do worry that history might repeat itself with Nvidia.
CREE – Ugh where to start. This was one of my longest held US stocks – one which I thought was going to change the world. It had fantastic technology and was at the forefront of the LED and high bandwidth super semiconductor space. I was too emotionally attached to this firm for too long. Long after double digit performance evaporated, long after atrocious business decisions were all to see and long after the management was proven to be incompetent and self serving. Plenty of lessons in this one. I failed to take a one time 100% profit and exited at a 15% loss. Selling this was truly a hug your bears moment.
Whole Foods Market – which was another formerly high conviction holding that I was too emotionally involved with the underlying business theme. I sold out at a 13.2% loss. Just because you believe in the company values and overall theme doesn’t make for a high performing business. Market forces and competitors prevailed in harming the potential of this company. Unfortunately I sold days before the Amazon offer which could have got me back to breakeven – oh well.
Sensata – I sold out at a 13.5% loss. It was a mobile IoT mega theme play unfortunately it didn’t manage to maintain a lock or moat on its sector like so many other mobile chip set supply chain players and its growth rates fell from double digits to nowhere.
Leucadia, LUK – I sold at a 6.9% gain – it was a company story I liked but lacked the growth opportunity I was hoping for so it had to go. Quality company but just not growing fast enough.
California Amplifier, CAMP – I sold at a 4.3% gain after realising that the illusory double digit growth was actually coming from acquisitions. Much of its business is relying on track and tracing stolen cars – I mean that’s such a 20th century crime it must be a dying business. Besides I have Sierra Wireless which I have more confidence in generating organic growth.
I expect to continue to make headway on the long tail in coming months – Audiocodes, AMD, Synaptics, Lending Club and Hain are now top of mind to address and I need to make my mind up after the next set of results on 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 active month for me on the buy side where I made some top up decisions as well as taking new positions whilst leaving me with net fewer holdings.
The top ups include:
Splunk, SPLK – again one that I’ve been tracking for a long time. I bought a first tranche in May but added after the drop in June as well. The latest results were very good and their relevancy to cyber security a good second string to the bow. Leaving aside the gains I have missed out, the one concern I have over Splunk is whether they are just the latest next big thing in a long line of next big things in the area of big data analytics; (Tableau, Apperture etc.).
First Dow Internet ETF – FDN; which I added to, bringing this to 2% of my portfolio – increasing my exposure to the mega corps I don’t hold on an individual basis including Amazon, Facebook, eBay, PayPal etc.
I also took 4 new positions in June:
Nvidia, NVDA – I should have entered this a few years back however I was tormented by my experience in Qualcomm (see above). Chip plays can turn on a dime and it has taken me a long time to see the emergence of new markets beyond computers and mobiles. Servers look ripe for the taking and now with graphics and gaming/visualisation, AI and smart cars – Nvidia seems to have found whole new markets. I just need to watch for any stalling in this progress like hawk to avoid a Qualcomm like retreat.
Cognex, CGNX – This is on an accelerating curve with computer vision and AI together with robotics forming a perfect storm in industrial applications. This looks like it is in a sweet spot but is fully valued and could represent peak hubris – it could be first in line should there be a downturn and will watch for that.
MuleSoft, MUKE – I’m not sure I can add much to what Saul and Bear have said but suffice it to say that the growth rates are unparalleled, the API and application integration market only growing in complexity and addressable need and MULE appears to be very high up in the food chain.
Square, SQ – this was a long struggle I was having between the merits of PayPal vs Square. A few of the reasons that swung it for me was – 1) Square seems more merchant aligned whilst PayPal more consumer aligned 2) Square seems to be monetising everything it does whilst PayPal struggles to monetise key assets 3) Apple and others are likely to compete with PayPal on wallet storage functions as well as peer to peer money sharing etc with the next IOS release etc. 4) Square also includes food delivery giving me an alternative play to GRUB should I want to exit that position.
My watch list has evolved and I am close to pulling the trigger on Nutanix and possibly Atlassian and a top up of Square and re-entering BOFI; although I want to continue to address my long tail and at a minimum allow a one in one out.
Feb Review: http://discussion.fool.com/ams-portfolio-review-feb-2017-3261710…
Mar Review: http://discussion.fool.com/ams-portfolio-review-march-2017-32660…
Apr Review: http://discussion.fool.com/ams-portfolio-review-april-2017-32695…
May Review: http://discussion.fool.com/ams-portfolio-review-may-2017-3273205…