AMS Portfolio review - Sep 2017

AMS Portfolio review - Sep 2017

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

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

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

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

Performance review:-
The overall US portfolio 2017 investing returns are now up +31.62% from 2016 year end through to 31st September market close – up 3.23% in the month. The HK port – has accelerated further ahead to reach +44.84% YTD – up 5.89% in the month (where some new and old positions saw some substantial gains which I took off the table), whilst the Singapore port (which is a combination of high yield and growth stocks) saw went sideways at +4.30% YTD, down 0.08% in the month. I have added net new capital to all portfolios YTD but have withdrawn capital again this month from the HK port which I have adjusted out of the gains. The US portfolio activity has seen major activity this month with new positions taken, a number of top ups, no 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%
**YTD	+31.62%         +12.53%	        +4.30%	        +11.77%	        +44.84%	        +25.24%**
Yield	0.42%		-		2.81%		-		2.98%		-

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 August, the HK portfolio had a ripper month whilst the Singapore portfolio lost ground in the month. The US port has yielded 0.42% year to date (not annualised) whilst SG has yielded 2.81% YTD and HK 2.98% - 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 have retreated back and are further behind their 2015 highs and 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 as strong a month as you could ask barring a drastic dip and recovery towards the end, I ended the month at the intra-month 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. This 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.

At peak correlation in August a record 6 holdings featured in all 3 lists: TAL, Shopify, Mazor, LGI, Paycom & Ali Baba featured in all 3 lists. This month a reduced number of core holdings feature in all 3 lists: TAL, Shopify, LGI & Ali Baba as I reduced my holdings in Mazor and PayCom – I would prefer to have greater overlap amongst the other holdings between the lists but not at the expense of failing to exit holdings where valuations are too stretched or the growth story has played out.

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		5.2%	China/Cloud	56.0%	        65.0%	        58.16	0.89	16.9	Q2
2  Shopify		4.9%	Cloud		75%	        -	        -	-	22.54	Q2
3  TAL Ed Systems	3.3% 	China/Cloud	65%	        72.0%	        130.0	1.80	8.44	Q2 (to Jun)
4  NetEase		2.5%	China/Cloud	46.0%	        5.0%	        17.77	0.59	4.88	Q2
5  LGI Homes		2.3%	- (Growth)	45.0%	        25.0%	        12.85	0.37	1.11	Q2
6  YY			1.8%	China	        28.9%	        53.0% 	        16.01	0.30	2.41	Q2
7  First Int Bnk        1.8%    Growth	  	70.7%	        7.0%	        14.48	0.84    2.58    Q2
8  KMI			1.8%	Clean Energy	7.3%	        0.0%	        61.87	0.15	3.18	Q2
9  KKR			1.7%	- (Yield)	39.3%	        282%	        8.44	0.03	2.74	Q2
10 Splunk		1.7%	Cloud/Big Data  31.6%	        60.0%	        -    	-	8.65	Q2
11 Micron		1.6%	Big Data	99.0%	        580%		9.1	0.02	2.14	Q4
12 Abiomed	        1.5%	Ageing		32.7%	        27.3%		99.76	3.0	15.65	Q2
13 Talend	        1.5%	Cloud/Big Data  41.1%	        85%	        -	-	9.42	Q2
14 Blackstone   	1.5%	Growth	        29.1%	        34.1%	        15.0	0.04	3.24	Q2
15 C-Trip		1.5%	China		43.9%	        171.6%	        1135	6.61	8.12    Q2

**#  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  TAL Ed Sys	On Track	Medium	    Huge/fragmented TAM & increasing growth, but watch valuation, lack of op leverage & high SBC
4  NetEase	On Track	High        Good value/fast growth but difficult growth compares, watch for internationalisation & op. leverage
5  LGI Homes	On Track	High	    Undervalued & consistent growth record but declining growth rate, IR hikes and 2017 home closing target
6  YY		On Track	Medium	    Undervalued fast growing internet player, watch for earnings volatility & take private shenanigans
7  First Int Bk On Track        High        Consistent Rev & EPS grower, well managed - needs to improve a few core lending metrics
8  KMI		Off Track	Medium	    Expect re-instatement of dividend + Trans Mountain project
9  KKR	        On Track        High	    High yield, high growth operation with exposure to infrastructure & O&G recovery
10 Splunk	On Track	Medium      At the heart of Big Data analytics & cybersecurity but could be just the latest next big thing
11 Micron	On Track	Medium      Fast growth in a consolidating sector, benefiting from cloud & big data but commoditisation and cycle risks exist
12 Abiomed 	On Track	Medium      Very high & consistent top line growth, but valuation stretch & competitive trial results underway
13 Talend	On Track	High	    Peerless in its offering and capability – needs to scale for market dominance
14 Blackstone   On Track        High	    Market leading PE performance, massive deal maker, well positioned for property, O&G recovery and infra
15 C-Trip	On Track	High	    Market leader in consolidated sector with great alliances but watch for continued growth & high SBC

In terms of the top 15 holdings – there has been marginal movement in the rankings and the line-up – Imperva (cyber security) and Box Storage (cloud) drop out; YY is racing up the rankings with its $100-120 target in view; Blackstone, Talend, Splunk and First Internet Bancorp retain their recent entries into the list, Abiomed returns and Micron enters thanks to top ups and share price performance enters for the first time.

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 I have been more aggressive at lightening positions where valuations have become super stretched (TAL, Mazor, PayCom & Grubhub) though with mixed success.

I continue to watch and reconsider Splunk as its bottom line seems without the leverage I would want to see and SBC seems high. I expect LGI Homes to announce some pain – although I can’t figure whether actually in the mid term Harvey might increase demand for houses as replacements for those badly destroyed by the floods. KMI (fitting into my shale and clean energy mega theme) is going to be intrinsically affected by the O&G sector (and politics therein), as well as the regulatory outcome of its Trans Mountain pipeline project and is more of a turnaround, recovery and income generation play for me. Shopify, Ali Baba, TAL Education, C-Trip, YY and NetEase are all cloud/ecommerce and/or China plays that are doing very well. Shopify and Ali Baba are 2 of my highest conviction stocks, NetEase has been de-risked now it has the Activision Blizzard deal through to 2020 and is going like gangbusters – and growth is accelerating! TAL has a massive and fragmented addressable market to penetrate and consolidate and its financials are looking great if getting very stretched in its valuation – although they destroyed expectations with their latest report with 100%+ EPS growth. C-Trip whilst a stunning performer at the top line needs to be watched from a profitability and valuation standpoint as well as recent regulatory developments as well as for Ali Baba’s deal with Marriot hotels. 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 (together with BX) is an infrastructure investment and yield play for me but also happens to be growing very fast – another I hold in very high conviction. First Internet Bancorp makes a welcome return after an amazing set of quarterly results with revenues accelerating to a 70% YoY growth rate. 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 ascent with its metronomic 30% growth rate although is whilst trying hard to grow into its valuation the P/E continues to be getting stretched and at 99 could be due for trimming back. 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.

Out of all of my top holdings I would be most comfortable adding to Ali Baba, Shopify, Blackstone and KKR (which I have been)… I am closest to selling Splunk, YY and potentially LGI Homes for fundamental reasons and Abiomed for valuation reasons.

2) Total % gain rankings

**#  Holding		%		Mega theme	Thesis Check	Conviction**
1  CEVA   		914.2%		IoT		On Track	Medium
2  TAL Ed Systems	536.6%		China/Cloud	On Track	Medium
3  Mazor		322.6%		Robotics	On Track	Medium
4  C-Trip		243.1%		China		On Track	High
5  Shopify		215.7%		Cloud		On Track	High
6  Abiomed 		145.3%		Ageing 		On Track	High
7  Palo Alto		122.9%		Cyber Security	On Track	Medium 
8  AMD		        112.5%		Big Data	On Watch	Medium
9  PayCom		88.9%		Cloud		On Track	High 
10 NetEase		85.5%		China/Cloud	On Track	High
11 LGI Homes	        83.7%		Growth	        On Track	High 
12 Ali Baba		80.8%		Cloud		On Track	High
13 Box Storage 	        55.3%		Cloud/Big Data  On Track	Medium
14 GrubHub		54.0%		China/Cloud	On Track	Medium
15 Five Below		53.7%		Growth  	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 CEVA, AMD & Abiomed (which I already top sliced at 130), PayCom and Mazor (which I have reduced as well). Interestingly this list includes some long held positions (CEVA, CTRP & AMD) as well as one very young position (LGI, SHOP, Talend, & Box). The total gains % increases have mostly moved upwards since the June position – the winners have kept on winning and I now have 8 triple digit risers vs 8 in August, 10 in July, 8 in June and 7 in May and I’m back to 5 multi-baggers.

3) 2017 YTD % gain rankings

**#  Holding		%	        Mega theme	Thesis Check	Conviction**
1  TAL Edu. Sys.	188.4%	        China/Cloud	On Track	Medium 
2  Safe Bulkers		138.3%	        -		Off Track	Low
3  Shopify		137.6%	        Cloud		On Track	High 
4  BITA         	137.2%          China/Cloud     Off Track	Low
5  Datawatch		110.0%	        Cloud/Big Data	Off Track	Low 
6  YY Group	        99.1%	        China		On Track	Medium
7  Materialize		89.6%	        3D Printing	On Watch	Medium
8  Hubspot		78.8%	        Cloud		On Track	Medium 
9  Ali Baba		74.0%	        Cloud		On Track	High
10 Golden Ocean	        66.5%	        -		Off Track	Low
11 LGI Homes		62.8%           Growth		On Track	High 
12 Talend	       	59.6% 	        Cloud/Big Data 	On Track	High 
13 Tesla		59.6%	        Clean Energy	On Watch	Medium 
14 Avigilon		50.6%	        Computer Vision	On Watch	Medium
15 Pure Storage	        50.1%	        Cloud/Big Data	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 – 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:-
September was relatively 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 my remaining cash position. 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.

Qualys (QLYS) – 40.3% gain. This was part of my clutch of cyber security stocks. Whilst its profitability levels are relatively good and it demonstrates operating leverage, the growth rates have been dipping to low-mid teens and whilst the bottom line is growing at ~20% I just couldn’t see why it warranted a 50+ p/e ratio. I worry that when the music stops this kind of stock will drop back to a 25 p/e wipe out all of my gains. It was a good holding but became too stretched in its valuation.

Holly Frontier Corp (HFC) – 40.2% gain. HFC was a recovery play that has done very well for me however with its recent strength offering a decent return, still no prospect of a recovery in the oil and gas prices and a track record of gradually declining margins, I lost confidence of this reverting to its former valuation levels so I took my gains off the table.

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

Stake reductions

It was a relatively active month for me on the buy side where I made some new purchases and further top ups.

Nutanix (NTNX). Finally I bit the bullet. I had these on my watch list all year and after another great earnings release and bizarre drop in the share price I took the opportunity to enter this stock which seems to be offering all of the tornado growth opportunities in hyperconvergence that the storage players were 10 years ago and virtualisation players 5 years ago and appears untouchable by the competition. I bought in at the beginning of the month and added to the holding when cash freed up. (It is at #16 on my US portfolio list by value %)

Top ups
Arista Networks (ANET). I bought in as outlined in August but it wasn’t a full purchase and the performance of the business deserves a greater conviction level thus I made this a priority to top up.

Applied Optoelectronic (AAIO) – was a stake that I took in August and added to in September. They have still a very small market cap despite their gains in the last year and I expect them to benefit from the 5G build out. Need to watch this carefully though.

Jupai Holdings (JP). This was my replacement for NOAH. As the Chinese produce HNW Individuals like never before they have to park their money somewhere. I outlined my buy considerations last month and added to them this month. It is quite a volatile counter and quite small so comes with risks attached.

MuleSoft (MULE) – was a holding which I hadn’t completed a decent stake in. I’m conscious I am adding to a holding in a month when Saul has given up on them. I remain convinced by the fundamentals at this stage and would hope with another quarter of results the market will start to appreciate the company more and the share price to respond.

Micron – (MU); after having topped up during the course of the year to reach a reasonable sized holding, I wanted to see how strong the results would be and whether it could take out its multi year high. The results and guidance were a complete beat and the share price surpassed its multi year high and so I added further – a classic case of buy high, taking it into my top 15 US holdings by portfolio value%.

Watch List:-
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!

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