AMS Portfolio review - Nov 2017

AMS Portfolio review - Nov 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 pay out growth >5%. All stocks have now reported Q2 results and some Q3 - 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 +40.85% from 2016 year end through to 30th November market close – up 1.98% in the month. The HK port – has stayed out ahead reaching +47.66% YTD – up 2.64% in the month whilst the Singapore port (which is a combination of high yield and growth stocks) regained some momentum moving up at +3.92% YTD, down 2.73% in the month. I have added net new capital to all portfolios YTD but have withdrawn capital again this month from the US port which I have adjusted out of the gains. The US portfolio activity has seen major activity this month with a new position taken, a number of top ups, several stake reductions and several 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%
July	+3.03%         	+1.93%		-0.05%		+3.19%	       	+4.55%		+6.05%
Aug	+1.93%		+0.05%		-5.18%		-1.57%		+3.91%		+2.37%
Sep	+3.23%		+1.93%		-0.08%		-1.75%		+5.89%		-1.49%
Oct	+4.93%		+2.22%		+2.43%		+4.79%		-0.68%		+2.51%
Nov	+1.98%		+2.81%		-2.73%		+1.76%		+2.64%		+3.30%
**YTD	+40.85%         +18.26%	        +3.92%	        +19.19%	        +47.66%	        +32.62%**
Yield	0.50%		-		4.85%		-		3.32%		-

Both US and HK ports are ahead of their indices but SG is behind for the year. The US portfolio performance was continuing to beat the index in November up until the last few days when it suffered significantly, the HK portfolio gained again this month whilst the Singapore portfolio pulled back still tracking behind the index for the month. The US port has yielded 0.50% year to date (not annualised) whilst SG has yielded 4.85% YTD and HK 3.33% - 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 struck multi year highs catching up to their 2015 highs but are 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 I need to think hard about the SG portfolio where my growth stocks have proven extremely volatile in particular (compared with more stable and rewarding yield plays).

On the US port side, this last month was on course for another super strong showing, however I ended the month probably 5% off the portfolio high water mark. 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 and 4) withdrawing capital from the portfolio (~5% of total value) reducing the opportunity for compounding my gains. The 3rd point – a real psychological barrier has been holding me back and whilst some of the stocks I can point to genuine conviction in regards to 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 high activity levels as I have: entered 1 new growth positions and topped up 4 others (that represented buying opportunities and a concentration play); and exited 2 holding with 1 stake reduction.

The portfolio is ~5-6% off peak valuation and also off last month’s peak correlation record of 6 holdings featuring in all 3 lists with only 5 in November: TAL, Shopify, LGI, Nutanix, & Ali Baba; up from 4 in September. Whilst I would prefer to see greater overlap amongst the holdings between the lists, I would not want it to be at the expense of failing to exit holdings where valuations are too stretched or the growth story has played out/changed.

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  Shopify		5.6%	Cloud		72.2%	        350%	        -	-	17.22	Q3
2  AliBaba		5.2%	China/Cloud	61.0%	        -0.1%	        61.66	1.12	9.94	Q3
3  LGI Homes		3.1%	- (Growth)	69.2%	        62.7.0%	        12.85	0.27	1.42	Q3
4  TAL Ed Systems	2.2% 	China/Cloud	68.1%	        0%	        176.1	32	6.14	Q3
5  NetEase		2.2%	China/Cloud	35.3%	        0.0%	        22.0	0.76	5.6 	Q3
6  YY			2.1%	China	        47.8%	        42.0% 	        18.4	0.44	3.18	Q3
7  Nutanix		2.1%	Cloud/Big Data  61.7%		-	        -	-    	5.51	Q4
8  Square   		1.8%	Growth	        44.6%		-		-	-       7.2	Q3
9  Micron		1.7%	Big Data	99.0%	        580%		10.1	0.02	2.39	Q4
10 First Int Bnk       	1.6%    Growth	        13.7%	        27.3%	        14.48	0.84    3.60    Q3
11 KKR			1.6%	- (Yield)	21.4%	        -50%	        10.11	0.02	6.52	Q3
12 KMI			1.5%	Clean Energy	-1.5%	        250.0%	        31.68	0.08	2.95	Q3
13 Box			1.5%	Cloud/Big Data	28.5%	        -	        -	-	5.9     Q2
14 PayCom   		1.5%	Cloud		31.0%	        90%	        75.75	1.34	11.47	Q3
15 Talend	        1.4%	Cloud/Big Data  40.2%	        55%	        -	-	8.67	Q3

**#  Holding	Thesis Check	Conviction  Comment**
1  Shopify	On Track	High	    Massive TAM & fast growth but watch for EPS 
2  AliBaba	On Track	High	    Good value on sum of the parts but challenge to maintain growth, diversify revs/earnings & SEC investigation
3  LGI Homes	On Track	High	    Undervalued & consistent growth record but declining growth rate, IR hikes and 2017 home closing target
4  TAL Ed Sys	On Track	Medium	    Huge/fragmented TAM & increasing growth, but watch valuation, lack of op leverage & high SBC
5  NetEase	On Track	High        Good value/fast growth but difficult growth compares, watch for internationalisation & op. leverage
6  YY		On Track	Medium	    Undervalued fast growing internet player, watch for earnings volatility & take private shenanigans
7  Nutanix	On Track	Medium      At the heart of Big Data storage (hyperconvergence) with very strong growth & high TAM but not profitable
8  Square 	On Track	High	    Very fast growing Fintech disrupter – more B2B positioned than PayPal but competes with Shopify 
9  Micron	On Track	Medium      Fast growth in a consolidating sector, benefiting from cloud & big data but commoditisation & cycle risks exist
10 First Int Bk On Track        High        Consistent Rev & EPS grower, well managed - needs to improve a few core lending metrics
11 KKR	        On Track        High	    High yield, high growth operation with exposure to infrastructure & O&G recovery
12 KMI		Off Track	Medium	    Expect re-instatement of dividend + Trans Mountain project
13 Box Storage  On Track	High	    Fast growing recurring revs in a large + expanding TAM - needs to reach break/even & differentiate vs Azure & AWS
14 PayCom   	On Track	High	    Fastest growing HR Cloud play with lowest valuation but watching for competition from WorkDay
15 Talend	On Track	High	    Peerless in its offering and capability – needs to scale for market dominance

In terms of the top 15 holdings – there has been little movement in the rankings and the line-up – Jupai (China HNW investment) drops out; Square (Fintech) enter for the first time whilst Box Storage (cloud), PayCom (cloud); NetEase, TAL Education, YY, Talend, KMI and KKR hang in there whilst LGI Homes and Micron advance leaving Ali Baba, Shopify to consolidate at the top.

So far this year I have been increasing my concentration in those with the highest conviction and strongest investment thesis + valuation (Shopify, Ali Baba, NetEase, Blackstone & KKR) and that has continued this month with Square and I have been more aggressive at lightening positions where valuations have become super stretched (TAL, Abiomed, Mazor, PayCom & Grubhub) though with mixed success.

LGI Homes seem to just power on regardless and I have stayed with it. The housing market looks very strong despite interest rates rising.
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, 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 consolidating its market position – although needs to find further growth avenues! 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, none the less I trimmed at its recent peak.
Micron, Box and Nutanix are all riding the Big Data/Cloud wave and in particular the shortage of data storage and need for computing at the edge. Micron whilst an old position for me has come alive thanks to the 100% growth trend it is hitting. I have added to the holding during the year as results accelerate and feel more comfortable about Micron being less commoditised and less cyclical than ever. 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.
KKR 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 which I admittedly trimmed is still a strong performer although the headline revenue growth has moderated, the bottom line and all key metrics look great.
Talend I feel is very under rated and has already done very well for me with a 40%+ rise since purchase – I much preferred Talend to Hortonworks.

Out of all of my top holdings I would be most comfortable adding to Ali Baba, Shopify and KKR (which I have been). I am closest to selling YY, NetEase and PayCom.

2) Total % gain rankings

**#  Holding		%		Mega theme	Thesis Check	Conviction**
1  TAL Ed Systems	426.5%		China/Cloud	On Track	Medium 
2  Mazor		397.1%		Robotics	On Track	Medium
3  C-Trip		199.8%		China		On Track	High
4  Abiomed 		183.5%		Ageing 		On Track	High
5  LGI Homes	        165.5%		Growth	        On Track	High 
6  Palo Alto		125.5%		Cyber Security	On Track	Medium 
7  Nutanix   		117.2%		Cloud/Big Data  On Track	Medium
8  PayCom		106.6%		Cloud		On Track	High 
9  GrubHub		97.6%		China/Cloud	On Track	Medium 
10 Shopify		95.9%		Cloud		On Track	High 
11 Ali Baba		85.4%		Cloud		On Track	High
12 NetEase		84.7%		China/Cloud	On Track	High
13 AMD		        81.5%		Big Data	On Watch	Medium 
14 Five Below		73.1%		Growth  	On Track	Medium
15 Box Storage 	        69.0%		Cloud/Big Data  On Track	Medium

This list includes a lot of Saul method stocks. I also note and won’t comment any further that Team China continues to do well in this medals table. I’m probably closest to taking my gains and exiting from AMD & Abiomed (which I already top sliced at 170), PayCom and Mazor (which I have reduced as well). Interestingly this list used to include some long held positions as well as one very young position but now it is almost completely dominated by recent vintages. The total gains % increases have mostly moved upwards since the October position – the winners have kept on winning and I now have 8 triple digit risers and 3 multi-baggers with nothing less than 69% total gain in the top 15 (it has been on a rising trend since the beginning of the year when the bottom of the table was a lifetime gain of 47% - which is after selling a 1000% gainer).

3) 2017 YTD % gain rankings

**#  Holding		%	        Mega theme	Thesis Check	Conviction**
1  Safe Bulkers		175.7%	        -		Off Track	Low
3  TAL Edu. Sys.	138.5%	        China/Cloud	On Track	Medium 
4  YY Group	        136.7%	        China		On Track	Medium
5  LGI Homes		135.4%          Growth		On Track	High 
6  Nutanix		117.2%	        Cloud		On Track	Medium 
7  Whiting Petroleum	107.6%	        Clean Energy	Off Track	Medium
8  Materialize		90.1%	        3D Printing	On Watch	Medium
9  Ali Baba		78.4%	        Cloud		On Track	High
10 Pure Storage	        73.5%	        Cloud/Big Data	On Track	High 
11 Golden Ocean	        72.2%	        -		Off Track	Low
12 Datawatch		67.3%	        Cloud/Big Data	Off Track	Low 
13 Shopify	       	67.2% 	        Cloud		On Track	High
14 The Trade Desk	60.4%	        Cloud/Big Data	On Track	High
15 BITA         	57.3%           China/Cloud    	Off Track	Low

My 2017 strongest advancers represent 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 progress participating in the ongoing bull run although some averages have dropped as I have continued adding to holdings and although with considerable churn there is improved alignment between the constituents of this list and the previous 2.

Buys and Sells:-
November was very active 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.

In August I made quite a bit of progress re-allocating my portfolio. I sold out of: Solar Edge, Mitek, SilverSpring Networks, Noah and Virtu Financial and Audiocodes; reducing stakes in Mazor and PayCom; buying Jupai holdings, Arista Networks and Applied Optio and increasing my positions in Blackstone, Shopify, First Internet Bancorp and Micron.

In September I mostly deployed remaining cash positions. I sold 2 holdings: Holly Frontier (HFC) and Qualys; bought Nutanix and topped up recently acquired positions into more sizeable stakes: Jupai, Mulesoft, Nutanix, Arista Networks, Applied Optio and Micron.

In October I sold out of some extended gains in stocks I felt were stretched and held concerns over earnings expectations including: Neogen, Cognex, Splunk and Ceva and I slimmed down my holdings in Abiomed, First Internet Bank and TAL Education Systems. I topped up 2 holdings Sierra Wireless and Shopify since the short attack was launched and I bought 1 new purchase – Wix.

In November I sold out of Avigilon and Baracuda taking advantage of some share price recovery and bid activity, slimmed down on NetEase and topped up Wix, The Trade Desk, Hubspot and Square and added a new position – Xinyuan.

Avigilon (AIOCF) – 4% loss. This at one point had done very well but despite making their numbers and commitments, the market lost interest in this and the share price suffered. Then they hit a growth speed bump and I was done with them.

Baracuda (CUDA) – 7% loss. Baracuda had seen the most deterioration in growth rates from the Go Go days of Cyber Security and had been punished for it. I took advantage of the bid approach and sold out to redeploy elsewhere – the only loss I have suffered in Cyber Security. In the end – not a material direct loss but plenty of opportunity cost.

Whilst I didn’t get further than these sales, I am also reaching a similar sell urge with Mazor and YY.

Stake reductions
NetEase (NTES) – 83% gain. This was a top slicing after the share price pop following the results The firm is growing on top line but really failing to drive bottom line growth. The P/E is not stretched but it isn’t getting the leverage it should so I am re-allocating somewhat. I might exit this position in the near future.

It was a relatively active month for me on the buy side where I made 1 new purchase and 4 top ups.

Xinyuan (XIN). This is property developer that is offering good value and exposure to the fastest growing China cities together with an emerging US business. Their record looks good. I had been light on China property development and after 8 years in Asia where I have basically observed ~80% of the wealth created going from 3rd world to 1st world coming from property I felt it was high time to get exposure to the biggest emerging market play of all. The urbanisation trend and the middle income growth trend in China is insane.

Top ups
Square (SQ). Whilst I have been in SQ for a while I wanted to add some concentration as well as take advantage of the 20%+ pull back. It now is a top 15 holding. Growth and now profits. Like it.

The Trade Desk (TTD). I actually topped up twice in TTD once to increase my exposure and a second time to take advantage of the price falls. I rate the company and what they do despite recent detractors making challenging headlines to the contrary.

Hubspot (HUBS). Again I had a relatively small holding here and after a great quarter – again growth and profits. This is where we wanted to get to!

Wix (WIX). I added to Wix after suffering a similar deflation after the Shopify short attack. 1) They diversify the risk away from Shopify particularly during a short attack 2) The board helped clarify the market difference between Shopify and Wix. Wix is for information based websites whilst Shopify is for eCommerce. I like their growth rate and how they are tracking plus they don’t feature in my internet ETF as a heavily weighted holding.

Watch List:-
My watch list has evolved and I am interested in possibly a stake in TREE, Gilead, Celgene, Interactive Brokers and Atlassian. I like the look of PayPal after their blizzard of partnership announcements. I would also jump into Align Technology at a heart beat if they weren’t always so expensive. I’m most interested in topping up BOX, Pure Storage, Mercado Libre and Shopify. Also gone back to considering Zillow again.

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.

Anyhow – thanks for reading and hope it was interesting/useful. All comments welcome!

Feb Review:…
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Would be interested to know why you sold Qualys . I recently picked up FEYE as their story seems to be going right now and already have Qualys in my porfolio for a while


Hi Rajesh

Partly to re-invest elsewhere partly to liquidate some capital. I saw it as the second most at risk cyber play after Barracuda. Clearly it wasn’t the best move as it went up another 10% but hey ho.

I know its rating was coming around and they seemed to be positively positioned for the European regulations but it didn’t seem too positive.