As a follow up to my previous portfolio review in February and embracing the commitments I made to myself in getting more disciplined in my approach, my March review follows along the same lines of the prior format but includes more performance analysis and thesis commentary on my core holdings and trades.
Review approach 2.0
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 am then focusing 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 my outsized holding in my former company stock which I am selling down and 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%.
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 up 12.24% from 2016 year end through to 31st March market close. The HK port – has pulled ahead at +13.91% whilst the Singapore port (which is a combination of high yield and growth stocks) is up 6.52% over the same time period. I have added new capital to all 3 portfolios which I have adjusted out of the gains.
Overall 2017 February 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% YTD +12.24% +5.53% +6.52% +10.22% +13.91 +9.6% Yield 0.15% - 0.62% - 0% -
Both US and HK ports are ahead of their indices but SG is behind. I have noticed that the US portfolio performance has “alpha” that Saul observes (up more than the market on up days, down more on down days), whilst the HK portfolio seem to be up more on up days (alpha) and down less than the market on down days, (I don’t know what the term for that is – aphabeta?). The Singapore portfolio seems to lag the up days but also lag the down days – although it has more of a yield (REITs) skew to it. The US port has yielded 0.15% year to date (not annualised) whilst SG has yielded 0.62% YTD. The HK port has not had any dividend payers yet this year.
FWIW on the index front whilst the US and the UK are reaching new all time highs, HK and Singapore are only reaching 52 week highs which are a little down from their 5 year highs reached in mid 2015 and further still behind their all time highs reached prior to the global financial crisis.
US Portfolio investments review:-
This month has been pretty active as I have: made some headway addressing the long tail of the portfolio (declaring victory or failure on some long held stocks in the process), increased the concentration in some core holdings, encountered some buy out activity and explored new positions.
Last month TAL Education, Shopify and NetEase featured in all 3 Top 15 lists of my portfolio composition metrics which, whilst validating my selection of those specific stocks, in itself highlighted how unaligned my investing concentration and focus vs short and long term performance had become with the rest of my holdings. 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.
1) Overall portfolio value rankings
__# Holding % Mega Theme LQ Revs Growth* LQ EPS Growth* P/E PEG P/S__ 1 NetEase 3.0% China/Cloud 53.1% 68.0% 21.9 0.32 6.58 2 Shopify 2.9% Cloud 85.8% - - - 15.9 3 AliBaba 2.5% China/Cloud 54% 38.0% 45.7 1.2 12.95 4 Mazor 2.4% Ageing 53% - - - 19.53 5 KMI 2.3% Clean Energy - - 85.3 - 3.66 6 TAL Ed Systems 2.3% China/Cloud 83.8% 36.8% 89.3 2.42 9.28 7 Audiocodes 1.9% IoT 6% 14.3% 14.2 0.16 1.51 8 PayCom 1.8% Cloud 34.8% 80% 77.6 0.66 9.96 9 LGI Homes 1.8% - (Growth) 34.0% 34.7% 9.46 0.27 0.86 10 KKR 1.8% - (Yield) 42.8% 400% 34.0 - 3.11 11 CyberArk 1.6% Cyber Security 25.1% 5.1% 65.2 10 7.01 12 Norw. Cruise Lines 1.6% Ageing 8.7% 10% 18.3 0.23 2.39 13 Criteo 1.6% Cloud 43% 17% 39.3 0.76 1.78 14 First Internet Banc 1.6% Cloud 27% 28% 12.8 0.81 5.04 15 C-Trip 1.6% China 74.1% 50% 90 1.8 8.55
- LQ = Latest Quarter’s growth rates over year ago quarter
**# Holding Thesis Check Conviction Comment** 1 NetEase On Track High Good value in fast growth sweet spot but difficult growth compares, internationalisation & Google collaboration in PRC 2 Shopify On Track High Massive TAM & fast growth but watch for EPS leverage as profitability emerges 3 AliBaba On Track High Good value on sum of the parts but challenge to maintain growth, diversify revs/earnings & SEC investigation 4 Mazor On Track Medium Good growth benefiting from Medtronic agreement but challenging growth compares going forwards & still loss making 5 KMI Off Track Medium Expect re-instatement of dividend + Trans Mountain project 6 TAL Ed Sys On Watch Medium Huge/fragmented TAM & increasing growth rate, but hi valuation, falling margin & lack of leverage & high SBC 7 Audiocodes On Watch Medium Increasing TAM in cloud space but growth falling to single digits and risk of design outs 8 PayCom On Track High Fastest growing HR Cloud play with lowest valuation but watching for competition from WorkDay 9 LGI Homes On Track High Undervalued & consistent growth record but declining growth rate, IR hikes and 2017 home closing target 10 KKR On Track High High yield, high growth operation with exposure to infrastructure & O&G recovery 11 CyberArk On Watch Medium Top line growing double digits but EPS growth only single digits and high SBC 12 Norw. Cr. On Track High 20% rev & earning growth driven by Ageing, China & Cuba but latest Qtr rev growth below 10% and oil prices rising 13 Criteo On Track High Consistent top line growth, inconsistent EPS growth, concerns over ad blocking and Q1 guidance 14 First Int B On Track High Consistent Rev & EPS grower, well managed - needs to improve a few core lending metrics & any decline in growth rates 15 C-Trip On Track High Market leader in consolidated sector with great alliances but watch for post acquisition growth and high SBC
In terms of the top 15 holdings – these have been reasonably stable and well performing, (all of them are in the money) so I’m pretty happy on this front – although I am trying to increase my concentration levels in those with the highest conviction and strongest investment thesis. (Sierra Wireless and Imperva have made way for LGI Homes and Criteo in this list).
As a result I am watching Audiocodes as its growth record is sporadic and could retreat very quickly on a disappointing earnings release, together with my cyber security plays (e.g. Imperva, Palo Alto & CyberArk) which I am highly exposed to and which appear to be facing some sector wide slow down. 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 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. NCLH whilst sound and of high conviction for me is probably the most long term and least “high” growth oriented of the lot and will be affected by tourism trends as well as oil price however it is a play on China, population ageing and the re-emergence of Cuba. Shopify, Ali Baba, TAL, C-Trip and NetEase are all cloud/ecommerce and China plays 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, 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. C-Trip whilst a stunning performer at the top line needs to be watched from a profitability and valuation standpoint. INBK, Criteo and PAYC (my IoT and cloud plays again need to be monitored from a growth deceleration perspective). 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), KMI (which I did) and KKR followed perhaps by LGIH (which again I have also added to) and INBK.
2) Total % gain rankings
**# Holding % Mega theme Thesis Check Conviction** 1 CEVA 741.2% IoT On Track Medium 2 TAL Ed Systems 235.5% China/Cloud On Track Medium 3 C-Trip 219.8% China On Track High 4 Mazor 154.8% Robotics On Track Medium 5 AMD 142.5% Big Data On Watch Medium 6 Shopify 133.0% Cloud On Track High 7 NetEase 99.7% China/Cloud On Track High 8 Abiomed 82.2% Ageing On Track High 9 Palo Alto 74.3% Cyber Security On Track Medium 10 Noah 61.0% China/Cloud On Track Medium 11 Carnival Cr. Lines 55.5% Ageing On Watch High 12 Norw. Cruise 45.3% Ageing On Track High 13 PayCom 44.9% Cloud On Track High 14 Fortinet 39.5% Cyber Security On Track Medium 15 AMN 31.3% Ageing On Watch Medium
This list includes a lot of Saul method stocks. I also note and won’t comment any further that Team China seems to be doing very well in this medals table. I’m probably closest to taking my gains and exiting from Carnival, CEVA & ABMD (which I already top sliced at 130). Interestingly this list includes some long held positions (CEVA, CTRP & AMD) as well as some very young positions (SHOP & AMN). The total gains % increases seem to have spread out somewhat over February’s position.
3) 2017 YTD % gain rankings
**# Holding % Mega theme Thesis Check Conviction** 1 Safe Bulkers 91.3% - Off Track Low 2 Golden Ocean Grp 62.4% - Off Track Low 3 Shopify 58.8% Cloud On Track High 4 Comm Heath Sys 58.7% Ageing On Watch Medium 5 Micron 57.2% Big Data On Watch Medium 6 Sierra Wireless 54.3% IoT On Watch Medium 7 Datawatch 52.7% Big Data Off Track Low 8 TAL Edu. Sys. 51.9% China/Cloud On Track Medium 9 BITA 35.9% China/Cloud Off Track Low 10 Mazor 35.8% Robotics On Track Medium 11 NetEase 31.7% China/Cloud On Track High 12 Tesla 30.2% Clean Energy On Watch Medium 13 HubSpot 28.8% Cloud On Track Medium 14 AMD 28.3% Big Data On Watch Medium 15 Fortinet 27.3% Cyber Security On Track 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 - which I should have never entered or exited a lot earlier in the face of a downturn). The 2017 YTD % increases have advanced in March over February’s % levels consistently.
Buys and Sells:-
March has been especially active for me on the buying/selling front.
After selling just 2 stocks in January and February (I sold out of SWKS and BOFI) and redeploying money into Twilio and PayCom, this month I have sold out of a further 6 holdings – Cypress (CY), Dell VM Tracking stock (DVMT), MobilEye (MBLY) and NetApp (NTAP), Aphria (APHQF) and Aurora (ACBFF) bringing my holdings rationalisation total to 8 for the year to date. I also top sliced Sierra Wireless as it seems to be getting ahead of itself with its rehabilitation – which I might well top up again when valuations and business growth get back into proportion.
CY – I exited at a 64% gain. I originally bought Spansion which got taken out by CY as an IoT/M2M mega theme play. The acquisition no doubt makes it a stronger semiconductor company - Cypress was always a very well run high quality firm, but it has diluted the investment thesis. Whilst merger integration savings and business performance has been strong and with ongoing semiconductor industry consolidation taking place it still appears attractive but really it is becoming a sector average proxy with all the vagaries of the semiconductor cycle, single digit growth profile and potential risk of being designed out etc and just like Skyworks I felt money was better off in faster growing holdings and holdings with more conviction. I’m prepared to miss out on a takeout bid of which there are multiple rumours circulating and skip the semiconductor play.
DVMT – This was a holding coming from my EMC stock that was bought out by Dell. They paid out cash for EMC but re-floated the VMWare tracking stock which I was left with. I exited with a 30% gain (excluding the EMC takeout gains). Whilst the VMWare and the cloud is an attractive business to be in and with the tracking stock trading at a discount to the VMWare stock it was tempting to hold but with VMWare only producing 8% revenue growth in the latest results I felt this goose was fully cooked.
MBLY – was a great ride whilst it lasted, I exited with a 53% gain. MBLY certainly met the Saul revenue and earnings growth rates and investment thesis however there was always the uncertainty of its long term success even if self driving cars are a given. It was getting a stretched valuation which seemed to be pricing in a successful endgame for MBLY as though it was a sure thing, but then Intel came along with its buy out. I will let Intel worry about MBLY now and will take the money off the table on this one.
NTAP – this was an older holding of mine that I had alongside EMC. They were classic Saul stocks back in the day but as with many of my holdings I failed to exit when the music stopped. Well it traded through the trough and was starting to look up again with the all flash array boom in data storage. Whilst I could have held on for the next leg of the journey, the growth rates are still single digits (due to the self-cannibalisation of its traditional business) and again I felt my money is better positioned elsewhere. I exited at 92% gain which sounds a lot but was over a substantial time period, which I could have secured many years ago.
Aphria & Aurora were 2 cannabis stocks that I bought last year when the elections took place. They did very well for me (up 80% and 64% respectively) and I am sure this sector will make investors a lot of money, however I realised this was a classic “story”. I’ve seen this movie before where I get attracted to a story, make a lot of gains in a short space of time, lose track of the fundamentals, see $$$ signs and then suddenly before I know it I’m nursing a loss when the whole thing craters. I looked at the price to sales ratios and it looked insane. I got out and I am not looking back until some reality bites.
SWIR – whilst at one point Sierra Wireless was a Saul method stock it has lost a lot of its growth track, although looks to be making a come back. When the stock got above $30 after an amazing run this year and with a super stretched P/E, I top sliced 25% and took profits with a 21% gain. If it comes back to a reasonable value and the growth recovery is confirmed I might well buy back in.
I have used those proceeds to top up 9 holdings to increase my concentration and exposure where I felt it was needed and deserved; (CRTO, LGIH, MU, UBNT, BBSI, KMI, NTES, BABA & PSTG). I have also started a new position in Talend which frankly with its accelerating growth trend and current strength was too inviting to resist.
Talend – I don’t need to cover as others have already highlighted the opportunity here to the board.
CRTO – I thought produced incredible results and I feel it is one high growth stock that is of pretty reasonable value. I also have high conviction in this one - advertising is definitely not going away, has too many players interests to get blocked wholesale and the direction of travel is certainly towards digital advertising. Criteo has a good value proposition and a good position with strong channel partners and clients. I was stalking Criteo for a decent dip - I didn’t quite get the best opportunity but happy to top up.
LGIH – I agree with Saul, of all of his holdings and Saul method stocks out there this one assuming the full year target is to be achieved is exceedingly good value.
MU – Micron is on a roll right now. It is a holding I have been in and out of and which has done well for me. My thesis on this is that with the consolidation in the memory industry, and the growth of memory required for digital devices, data storage and IoT units, the cyclical nature of pricing (usually determined by the supply side of the supply & demand equation) is going to be if not suspended then at least favourably elevated for the near to mid future with a state of undersupply and Micron is by far the best positioned. Its results and guidance also look terrific, (I upped my stake prior to earnings release in case you’re asking yourself although I still think it holds potential after the pop).
UBNT – again this needs no introduction. I took advantage of the recent price collapse to increase my holding to a more decent level of exposure. Business performance still looks great, it just needs faith.
BBSI – ok this one may not be well known on this board. Barrett Business Services is in itself a catalogue of investing lessons. It was a high flying Saul method stock until it hit some regulatory hurdles, legal issues, impairments and financial restatements. That probably puts most of you off but it is getting back to its 20% growth track, is seeing profits impact the bottom line as impairments recede and frankly I always believed in the propriety of this firm and its management. I topped up with the recent pull back on the results announcement.
KMI – This is a value and income play as well as growth play for me. I see this as an infrastructure and O&G recovery opportunity that is relatively Trump proof and due to be restarting dividends soon. I won’t dwell on it as it is not a Saul method stock.
NTES – NetEase has to be one of the cheapest fastest growing stocks on the planet and after a 10% pull back from its recent high I topped up
BABA – Ali Baba is one of my highest conviction stocks and whilst I topped up previously on the retreat below 90, I added again when it cleared a 105 buy point.
PSTG – Pure Storage is a stock I bought after the pull back from its IPO pop. They are a digital storage play that is outgrowing the traditional competition with all flash products. Whilst their meteoric growth is easing, they are due to reach profitability towards end of the year. (Bert likes this one).
I’d also like to raise my position in BX to a full position from a current half position as well as add to KKR. I still find Ali Baba and NetEase of stunning value with high conviction (especially BABA) and may add further. I’m also considering initiating positions in FB and PayPal (if I can get my head around their market capitalisations) and perhaps Square and Hortonworks; although I want to streamline my long tail before or in the process. I’m also intrigued by Atlassian (top rated cloud play), Zillow (people always need houses) and Stamps.com (although it sounds like a dot com business that should have gone bust in Y2K) as well as Impinj (see Bert’s latest on that company). Whilst I exited BOFI above the $30 mark, I might well consider a re-entry if gets down to a good value point again – it does seem to gyrate around and I won’t rule it out.
As a sector – there may well be some emerging value in Healthcare REITs (and possibly health insurers) with ACA reform and rising interest rates (as well as potentially in Data Centre REITs). I’m also seeing some interesting value come back into some Biopharma plays like Amgen, Regeneron, Illumina, Biogen and Gilead – although they are all experiencing respective car crashes such as patent infringement law suits, disappointing trial results etc. The one I really want is Celgene unfortunately that seems forever at an all time high. I also see opportunities in: financials with interest rates rising; infrastructure with Trump’s plans for US spending priorities, (possibly the military industrial complex too) and companies that will disproportionately benefit from reduced corp tax and overseas profits repatriation (e.g. Microsoft).
One additional action I took was to reference the thinking around mega themes as an investing concept. I originally posted this on NPI but I summarised it here on Saul’s board for easy access. I can’t tell you how long it took to search for it as the TMF search function is appalling and somehow Google’s TMF back history has vanished. Anyhow it is laid out here:
Effectively when I started constructing my US port I was arranging my thinking around 10 mega themes that I was interested in at the time… 1) 3D Printing, 2) Clean Energy, 3) IoT/M2M, 4) Robotics, 5) Cloud, big data & cyber security, 6) Ageing, 7) Water & Natural Resources, 8) China & Emerging Markets, 9) Visualisation, lighting & VR/AR and 10) Genetics & Stem Cells.
Anyhow – as ever thanks for reading and hope it was interesting/useful. All comments welcome.