AMS Portfolio review - Oct 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 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”.
The overall US portfolio 2017 investing returns are now up +38.12% from 2016 year end through to 31st October market close – up 4.93% in the month. The HK port – has stayed out ahead reaching +43.85% YTD – down slightly at -0.68% in the month whilst the Singapore port (which is a combination of high yield and growth stocks) regained some momentum moving up at +6.84% YTD, up 2.43% 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 I have added net new capital to all portfolios YTD but have withdrawn capital again this month from the US port which I have adjusted out of the gains.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% **YTD +38.12% +15.03% +6.84% +17.12% +43.85% +28.39%** Yield 0.45% - 2.77% - 3.34% -
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 October, the HK portfolio consolidated this month whilst the Singapore portfolio rebounded although still tracking behind the index for the month. The US port has yielded 0.45% year to date (not annualised) whilst SG has yielded 2.77% YTD and HK 3.34% - 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 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 another super strong a month, I ended the month at the high for the portfolio. 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 reducing the opportunity for compounding my gains. The 3rd 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 6 others (that represented buying opportunities and a concentration play); and exited 2 holding with no stake reductions.
The portfolio is back up to peak correlation matching August’s record of 6 holdings featuring in all 3 lists: TAL, Shopify, LGI, Nutanix, Jupai & 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 AliBaba 5.4% China/Cloud 61.0% -0.1% 61.66 1.12 9.94 Q3 2 Shopify 5.4% Cloud 72.2% 350% - - 16.86 Q3 3 LGI Homes 2.7% - (Growth) 45.0% 25.0% 12.85 0.37 1.38 Q2 4 NetEase 2.6% China/Cloud 46.0% 5.0% 17.77 0.59 5.2 Q2 5 TAL Ed Systems 2.2% China/Cloud 68.1% 5.5% 176.1 32 6.14 Q3 6 YY 1.8% China 28.9% 53.0% 16.7 0.32 2.51 Q2 7 Nutanix 1.8% Cloud/Big Data 61.7% - - - 5.51 Q4 8 Micron 1.8% Big Data 99.0% 580% 10.1 0.02 2.39 Q4 9 KMI 1.6% Clean Energy -1.5% 250.0% 31.68 0.08 2.95 Q3 10 KKR 1.6% - (Yield) 21.4% -50% 10.11 0.02 6.52 Q3 11 Box 1.6% Cloud/Big Data 28.5% - - - 6.46 Q2 12 First Int Bnk 1.5% Growth 13.7% 27.3% 14.48 0.84 3.60 Q3 13 Jupai 1.5% China 78.4% 120% 14.48 0.1 3.41 Q2 14 Talend 1.5% Cloud/Big Data 41.1% 85% - - 9.81 Q2 15 PayCom 1.5% Cloud 31.0% 90% 75.75 1.34 11.47 Q3
**# 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 LGI Homes On Track High Undervalued & consistent growth record but declining growth rate, IR hikes and 2017 home closing target 4 NetEase On Track High Good value/fast growth but difficult growth compares, watch for internationalisation & op. leverage 5 TAL Ed Sys On Track Medium Huge/fragmented TAM & increasing growth, but watch valuation, lack of op leverage & high SBC 6 YY On Track Medium Undervalued fast growing internet player, watch for earnings volatility & take private shenanigans 8 Micron On Track Medium Fast growth in a consolidating sector, benefiting from cloud & big data but commoditisation & cycle risks exist 9 KMI Off Track Medium Expect re-instatement of dividend + Trans Mountain project 10 KKR On Track High High yield, high growth operation with exposure to infrastructure & O&G recovery 10 Nutanix On Track Medium At the heart of Big Data storage (hyperconvergence) with very strong growth & high TAM but not profitable 11 Box Storage On Track High Fast growing recurring revs in a large + expanding TAM - needs to reach break/even & differentiate vs Azure & AWS 12 First Int Bk On Track High Consistent Rev & EPS grower, well managed - needs to improve a few core lending metrics 13 Jupai On Track Medium Small but very fast growing play on Chinese HNWI investment market with Western alliance partners 14 Talend On Track High Peerless in its offering and capability – needs to scale for market dominance 15 PayCom On Track High Fastest growing HR Cloud play with lowest valuation but watching for competition from WorkDay
In terms of the top 15 holdings – there has been some movement in the rankings and the line-up – Blackstone (PE), C-Trip (China travel), Splunk (Big Data) & Abiomed (Med tech) drop out; Jupai (China HNW investment) and Nutanix (Big Data) enter for the first time whilst Box Storage (cloud) and PayCom (cloud) return; 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 Shopify and I have been more aggressive at lightening positions where valuations have become super stretched (TAL, Abiomed, Mazor, PayCom & Grubhub) though with mixed success.
I reconsidered Splunk as its bottom line seems without the leverage I would want to see and SBC seems high so it was cut.
I expected LGI Homes to announce some pain – but they seem to just power on regardless and I have stayed with it.
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 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, 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.
Abiomed continues its steady metronomic 30% growth rate although whilst trying hard to grow into its valuation the P/E, continues to be getting stretched and at over 100 I trimming back.
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 and PayCom.
2) Total % gain rankings
**# Holding % Mega theme Thesis Check Conviction** 1 Mazor 452.6% Robotics On Track Medium 2 TAL Ed Systems 419.4% China/Cloud On Track Medium 3 C-Trip 211.6% China On Track High 4 Abiomed 180.7% Ageing On Track High 5 LGI Homes 128.2% Growth On Track High 6 Palo Alto 127.7% Cyber Security On Track Medium 7 PayCom 107.1% Cloud On Track High 8 NetEase 98.3% China/Cloud On Track High 9 Jupai 95.5% China On Track Medium 10 Ali Baba 93.6% Cloud On Track High 11 Nutanix 88.7% Cloud/Big Data On Track Medium 12 Shopify 87.7% Cloud On Track High 13 AMD 83.1% Big Data On Watch Medium 14 GrubHub 78.5% China/Cloud On Track Medium 15 Box Storage 76.4% 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 all moved upwards since the September position – the winners have kept on winning and I now have 7 triple digit risers and 3 multi-baggers with nothing less than 75% 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%).
3) 2017 YTD % gain rankings
**# Holding % Mega theme Thesis Check Conviction** 1 Safe Bulkers 208.7% - Off Track Low 2 BITA 139.8% China/Cloud Off Track Low 3 TAL Edu. Sys. 135.2% China/Cloud On Track Medium 4 Datawatch 128.2% Cloud/Big Data Off Track Low 5 YY Group 107.3% China On Track Medium 6 LGI Homes 102.2% Growth On Track High 7 Materialize 102.2% 3D Printing On Watch Medium 8 Jupai 95.5% China On Track Medium 9 Nutanix 88.7% Cloud On Track Medium 10 Ali Baba 86.3% Cloud On Track High 11 Hubspot 84.1% Cloud On Track Medium 12 Golden Ocean 74.1% - Off Track Low 13 Mazor 64.8.% Robotics On Track Medium 14 The Trade Desk 60.4% Cloud/Big Data On Track High 15 Shopify 60.2% Cloud On Track High
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 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:-
October was a 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.
Neogen (NEOG) – 47.7% gain. This was a sale I discussed with the group – I felt the valuation was getting highly stretched and increasingly so over the years. The growth was not accelerating at the top line leaving a very high expectations for leverage to do the rest on the bottom line. So far this hasn’t kept the P/E ratio in check and so I exited. Still, it’s a class company and would happily re-enter on a better valuation.
Cognex (CGNX) – 20% gain. Cognex was facing a very high set of earnings expectations of a step change in revenues and earnings. I couldn’t see it making it. I sold but I was wrong. They hit their earnings and the SP has continued upwards – it is still priced to perfection though!
Splunk (SPLK) – 9% gain. I was concerned about them always being the next big thing that would be superseded by the next next big thing. The leverage was not there and the SBC was massive. I chose to exit as it happens at the same time as Saul re-entered so I again face the awkwardness of being the other side of the trade from an infinitely better investor than me.
Ceva (CEVA) – 1016% gain. This is a long term holding for me from days way back when. It was a tiny original investment that did very well. It is on a stronger footing than ever but it had reached a very stretched valuation and there is a lot of uncertainty in the air as we wait for the iPhone X. If uncertainty gets removed and valuation improves I might re-enter this one.
Whilst I didn’t get further than these sales, I am also reaching a similar sell urge with YY.
Abiomed (ABMD) – 594% gain. This the second top slicing I have done with Abiomed. The firm is incredible – growing at exactly 30% every single quarter on the top line. Unfortunately, despite some excellent leverage it has reached a p/e of over 100 so I took the decision to slim down on this one.
First Internet Bank (INBK) – 40% gain. I enthused about this company after the Q2 results and whilst all the Q3 results looked excellent, I couldn’t shake the slow down in the top line growth to low double digits (14%). I took some money off the table whilst I consider this one. Even so the valuation is really not that high here so it isn’t the greatest risk in the world.
TAL Education Systems (TAL) – 565% gain. This stock was reaching stratospheric valuation levels and I felt uncomfortable with a relatively high sized position tied up in something that could drop 80% should significant risk or weakness materialise. I took 15% off the table at around the all time high which was good timing considering the drop in the share price recently around the Q3 results (which were actually pretty good). The historic P/E was over 200 and the prospective around 150. I got out before a 20%+ drop in the price.
It was a relatively active month for me on the buy side where I made 1 new purchases and further top ups.
Wix (WIX). I have liked WIX for a while despite Saul not appearing interested in them until last month. My concern was the overlap with Shopify but a couple of considerations help me on this front. 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.
Shopify (SHOP). This was already my second largest holding and I took the opportunity both after the short attack and after the earnings release price collapse to pick more up in the 90s. I would add more if the fall continues further.
Sierra Wireless (SWIR). This is a holding I have maintained even though I have top sliced gains and re-entered as value re-emerged. It’s a risk prior to the earnings release but I’m hoping for a return to the 20% growth rate and as IoT/edge computing and 5G becomes a reality these guys could be one of the winners.
My watch list has evolved and I am interested in possibly a stake in Gilead, Celgene, IB 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 interested in topping up The Trade Desk, Mercado Libre and Shopify.
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: 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…
June Review: http://discussion.fool.com/ams-portfolio-review-june-2017-327678…
July Review: http://discussion.fool.com/ams-portfolio-review-july-2017-327958…
Aug Review: http://discussion.fool.com/ams-portfolio-review-aug-2017-3282612…
Sep Review: http://discussion.fool.com/ams-portfolio-review-sep-2017-3285074…