Bear's Portfolio at the end of February

[PaulWBryant]

One of my favorite things on this board is seeing Saul’s monthly summaries of his holdings and what he did during the month. I’m going to start compiling my own summaries, similar to his. I think I’ll learn a lot from it, and I’ll be able to look back instead of tricking myself into mis-remembering what I was thinking at any given time. I’ll post these here, and I’d love feedback…and I’d also love to see similar posts from other folks on this board.

Let me first say that, of course, I understand this is Saul’s Investing Discussions. By posting these, I am NOT implying that my investing activities are as instructive as Saul’s. But I think it does contribute something, and it will only be 1 post a month, so feel free to ignore it.

Since this is the first time I’ve done this, here’s a little background on me. Demographically, Saul and I couldn’t be much more different. I’m 35, and while I’ve had a 401k since my mid-twenties, only in the last year or so have I started taking the reigns and investing it in individual stocks. The results have been mixed…I was up 25% or so in the first half of 2015, but since then I am down 26% from the high. That’s a much bigger net loss than 1% (just to remind you how the math works there).

My investing strategy is similar to Saul’s – I would also describe it as “modified buy and hold.” I try to focus on growth AND value. I sell if I have a better place to put the money. I sell if something gains a ton and no longer fits the value side of my investing thesis. If a stock I’ve sold corrects and looks like a good buy again, I buy it back. I typically miss out on stocks like NFLX and FB. I try to keep no more than 20 positions at a time. 15 would be better, but it always seems to creep up.

I held INFN and SKX before finding this board in late 2015. Since then I’ve added to INFN and started positions in SWKS, SEDG, LIGH, INBK and DY. I would like to take this opportunity to express my gratitude to Saul and all of the contributors here, for all the great content. I’ve learned a lot in a few months, I’ve become a much better investor, and I’ve never felt more informed about my holdings.

So without further ado, my portfolio at the end of February:

Large Positions (8%+ of my portfolio)

INFN (12%) – This became my largest holding this month. I have added furiously as I sold some of the chaff formerly cluttering my portfolio. I purchased about half of my total position in the last month or so at under $14/share. I don’t intend for this to stay my largest holding, but it got big fast because I have been, so to speak, taking advantage of the sale.

TWTR (10%) – I first bought Twitter on Jan 20, and then continued to purchase at prices ranging from 15.16 to 17.22. Obviously with any company like this (or NFLX, FB, etc), it isn’t a value play at all, but depends greatly on what the market thinks. I don’t usually like this, because the downside risk is increased. But in this situation, I’m confident that the market’s temporary insanity will eventually abate. With its market cap down to ~13B, I’m looking for a double or more in the next couple years. If market cap got over 30B again (it’s been close to 50B in the past), I would sell it all, because I think that would be getting pricey and I could find better opportunities elsewhere.

EFOI (9%) – This is my biggest gamble. I don’t actually remember how I heard about the company, but I took a small position a couple months ago. Then I listened to their last conference call and felt very optimistic that the incredible growth through the last few quarters will continue. I added a bunch at 10.59, and more at 8.78, and with it back up to ~13 you can see why it has so quickly become my 3rd largest holding. It’s not a Fool rec, it’s tiny…I consider this high risk. But at a market cap of just over 150M, and with sales and EPS exploding in the last few quarters, the sky is the limit here.

AHGP (8%) – This is an “MLP,” a commodity producer (coal)…a dividend play…so basically, pretty off topic for this board. I’ll be brief. I’ve accumulated this holding in the last few months because the stock is down from 2014 highs around $73 to, currently, $13, and the dividend has not been cut, so it currently yields close to 30%. I think this is a huge market over-reaction. Am I missing something?

Large-ish Positions (5 -6% of my portfolio)

SWKS, LGIH, SEDG (5 - 6% each) – I think everyone is familiar with these. Simply dirt cheap and growing like weeds (esp LGIH and SEDG). The downside seems limited and the upside does not. Easy plays to make. I added to LGIH this month at 21.21 and SEDG at 24.12.

SSW (5%) – I actually really like this company, but I don’t know if it’s as good a buy as some of the “Saul Stocks” I’ve been adding recently. I sold more than half my position this month, because it was too big for my liking…and I wanted to re-allocate.

Small-ish Positions (3 -4% of my portfolio)

SKX, HRTG, GBX, SAVE, INBK (3 - 4% each) – no changes this month

XPO, FIT, PERI (3 - 4% each) – I started all these positions this month. Basically they all got too cheap to resist. PERI is the odd man out, but I have my reasons I like it.

Small Positions (< 2% of my portfolio)

DY, ARCO (2% each) – Starter-size positions. I’ve had ARCO for a few months. Bought DY at 51.76 on 2/16.

That’s about 90% of my portfolio. I have a few very speculative positions, so small (1% or less) that I don’t count them, and about 6% of my portfolio is in cash. I’m thinking about buying PN.

What have I been selling? In February, PII and GWR. The PE’s are reasonable for these two, but growth is not even close to what I’d want to see (in fact they are expected to be flat or shrink for the next year or so). When rapidly growing companies can be found this cheap, I don’t see any reason to hold things that aren’t growing. These ticked up a bit in February and I took the opportunity to divest.

Overall, I gained 4.9% in February while the S&P 500 was basically flat (moved from 1940 to 1932 in Feb). I’d like again to thank everyone on this board for helping me find some great companies to invest in.

Sincerely,
The Bear

[nevercontent]

Bear, let me first say that I’m not familiar with a lot of these companies. But I feel compelled to post this.

At first read, I’m concerned at your allocations, and how your largest holdings (which are really quite large) are also probably your most speculative or highest-risk.

I don’t want to speak for Saul, but I feel like a fundamental tenet to his approach is trying to maximize returns while minimizing risk. So much of what he talks about looking for in companies is all about reducing risk and trying to ensure the best possible shot at success.

It sounds like you’ve been investing on your own for about a year. First, congrats on that – it’s a great step. But I would highly recommend using smaller allocations as you learn, especially for anything speculative. Saul uses large allocations, but he is obviously a very advanced and experienced investor.

Finally, be careful about judging your decisions based on what happens in a month or a year. Investing is about the long term. As you’ve already seen, you can have a great year followed by a lousy year: that doesn’t necessarily mean your approach is wrong (though obviously we always want to reflect on what we can improve). Stocks don’t move up in a straight line.

If you like Saul’s approach, then my personal recommendation would to be to study the Knowledgebase more and look at all the ways Saul tries to minimize risk when he considers a business for investment, and start by applying that to your own investing. You don’t have to buy every winner: as Saul says, it doesn’t matter what the stocks you don’t own are doing as long as you’re happy with the stocks you do own. And I’d also reign in your allocations, probably capping them at say 5%. That’s going to mean more companies in your portfolio, true, but it will also make it easier to absorb mistakes, and I would argue that exposure to more companies at this stage will be good for your learning too.

All just my 2 cents, of course. Congrats again on taking control!

Neil

[PaulWBryant]

Thanks Neil! Other than EFOI, which investments are you referring to as speculative or high risk?

[strelna]

For a moment I did wonder if I had the time to be altruistic enough to reply but decided to simply shudder and move on.

[redsox2005]

Hi Bear - I am usually a reader versus a writer on Saul’s board and wanted to comment on your post, fwiw and IMHO. I agree with Neal’s comments. Couple of others for your consideration only and by no means am I an expert.

Your top positions are roughly 40% of total portfolio. Based on your investment experience, I consider this risky.

INFN - like it and own it.
TWTR - I don’t tweet so don’t invest in it. However, issue with TWTR is that engagement is down, revenue not moving the needle, mgmt. changes, and they haven’t figured out how to monetize the platform. Maybe they will. But I wouldn’t analyze something as a bargain when it went from $50B to current status. There are many, many reason why it has cratered.

EFOI - not sure on this one. It’s growing but off a real small base. Concerns are heavily concentrated on gov’t, secondary offering that diluted shareholders, can’t see what average deal size is, yet priced like it is a cloud based tech company.

AHGP - one word - COAL. Two coal companies have already gone bust, Peabody probably next, and I would almost be sure that the 30% dividend will be greatly reduced if not entirely eliminated. Huge market force that coal is going away…

Again - take the above for fwiw, other Fools could have contrasting opinions and hope it helps out in some way.

Sox Nation

[PaulWBryant]

Sox Nation,

I appreciate your concern (and Neil’s). Thanks for talking specifics.

I wrote a post on this board about TWTR and there was some discussion. Here’s the link: http://discussion.fool.com/today-is-the-day-to-buy-twtr-32098491…

To summarize, I think Twitter is here to stay and has TONS of engagement in the media and current culture writ large. Also, though users have plateaued a bit, revenue is growing like gangbusters. Like FB, it’s an already huge group of users that’s now steadily being increasingly monetized. I accept the risk here – I think there’s a LOT of upside.

EFOI – This is, as I said, my biggest gamble, for a number of reasons. It’s tiny, it’s only started to grow rapidly and become more profitable. One major reason is that they don’t provide guidance. But I think this also creates massive opportunity. Volatility goes both ways, and this company could crumble or double at any time based on a big quarter or a setback. Again, I accept the risk because I see unlimited upside.

AHGP – This is a weird one for me, esp because I have seen dividend cuts before and the damage they can do. That said, I’ve analyzed AHGP carefully, and I do believe their dividend is sustainable. Which is why I think the price drop is such an overreaction. Take a look. Yes sales and earnings are down, but nothing compared to Peabody or the rest of the industry. Sales were down like 1% in 2015. They will be down more this year and next, but this is still a profitable company. Margins have taken a hit, but they remain profitable. I guess if you think coal is dead, it’s a sell. But I don’t, and as others go bankrupt, I could even see Alliance’s fortunes improving. I accept the risk because of the upside.

All that said, I see Neil’s point. If you have a basket of less risky stocks and more risky stocks, why not be MORE allocated into the less risky ones? I guess for me, it’s because I’m 35. I’ll be working for a long time, probably (unless I can achieve Saul-like returns and retire early). I can afford to take on some risk now. That doesn’t mean I want to make bad investments, but it does mean that I’m not as conservative as some of you.

Thanks for the feedback!

• Bear

[nevercontent]

Thanks Neil! Other than EFOI, which investments are you referring to as speculative or high risk?

Hi Bear,

Risk is a detailed and complicated topic, and I think Saul does a good job of covering it in the Knowledgebase. But at risk (no pun intended) of over-simplifying, maybe turn the question around and look at what might be a lower risk business: a business that is already doing well; has a history of solid execution; a management team that is competent, tenured, and does what it says it will do; a business with a sustainable competitive advantage; that has a history of doing fine throughout the business cycle; that isn’t over-leveraged and is generally financially resilient; that isn’t exposed to some kind of serious systemic risk; that is easy to understand, including the accounting; that has the ability to reinvest in itself and grow, compounding capital over time; very likely has a solid future; and so on. These are just a handful of points, of course – there are many, many other considerations. As I said, Saul goes over a lot of things to look for (and beware of), and you can certainly find a wealth of this sort of information throughout TMF and in investing books.

It’s worth noting that nearly all of the above is grounded in fact and evidence: the numbers and track records speak for themselves. That’s different from the future “story” of the company, which can be very grand, optimistic, and filled with opportunity.

I think the popular view is that lower risk equals lower returns, but Saul has shown again and again that the market frequently offers opportunities to buy into solid, proven companies with great track records (and even good stories as well) for very reasonable prices. There’s simply no need to reach for unproven or optimistically-valued companies trying to chase returns. No company is perfect, of course, and all investments carry risk. Businesses need to be closely monitored for impairment (based on fact, not rumor). And a key way of mitigating your exposure to the missed, unknown, under appreciated, and unpredictable risks is through sensible allocation.

As I mentioned, I don’t know a lot (or anything) about many of the companies you’re invested in. But it concerns me to see, for example, that your allocation to Twitter, or to a coal company, or to your self-described “biggest gamble” is double that of something more solid, like Skyworks. I’m not recommending you increase your allocation to Skyworks, but merely pointing out that – to me, in my own opinion – you have your allocations somewhat upside down, with the largest ones going to the highest risk investments. I don’t know a lot about Twitter, but I’m pretty sure it does not have a proven track record of solid execution. I don’t know anything about that coal company, but commodity companies and cyclicals always carry unique risk, and it’s difficult to imagine that it has a bright future with a lot of opportunity to profitably reinvest in itself (though I may be wrong – I would just caution that you better really be knowledgeable about that business and have a super solid thesis if you’re investing so much in it; and is there really no place safer for that capital that you think could earn solid returns?).

I mean this with all due respect – genuinely – but it feels like you’re reaching for returns, trying to earn a lot quickly. That’s just not how investing works. It’s a long-term game, and achieving success is more about minimizing mistakes. Saul’s Knowledgebase is filled with things not to do, or to beware of. Those are hard-earned mistakes he made that you can avoid through his generosity. I wouldn’t look at his historical annualized returns and think “wow, I have to be making that!” but instead take heart from them that you can avoid higher risk investments and “gambles” and still earn solid returns doing so. You don’t need to achieve Saul’s level success to still do extremely well. As you refine your process over time, returns will eventually come (lumpily, as that’s the nature of the game).

I hope that clarifies a bit what I was thinking when I made that comment. Again, it’s just my 2 cents. I certainly don’t have all the answers.

Best of luck, whatever you decide!

Neil

[PaulWBryant]

it feels like you’re reaching for returns, trying to earn a lot quickly.

I guess to some extent I am, as we all are, hoping to earn a lot quickly. I guess it depends how you define that.

I think you’re right that my portfolio could be more conservatively allocated – I pretty much said that in my reply to Sox Nation. But I don’t think that what Saul has shown us is that risk and return are not related. In fact, Saul often states that one holding of his is more risky than another. For example, one of his riskier stocks is PN, which I bought this morning (pretty happy to get in under $4!).

If I were to hold ONLY stocks Saul holds, I would probably just allocate differently than he does. More LGIH, more INFN, more PN, and less SKX and SWKS. I have no problem with the increased risk, and I hope everyone would agree there would be more potential return.

As for the specific companies I’m invested in, let me know if my post to Sox Nation allays any of your concerns…or makes them worse!

And thanks again for the feedback!

• Bear

[vanliew]

Neil,

You are a good man, for so many reasons, a good man. Thanks for your input and example.

Fooling On!
KLVanLiew

[redsox2005]

Hi Bear - I wouldn’t compare TWTR to FB or Alphabet; two are printing money, TWTR is burning cash. Will it turn? I don’t know but to date they haven’t shown anyone they will make money - and that’s the reason they have been crushed. There’s been plenty of companies that had tremendous revenue growth and no earnings, and it eventually bit them in the you know what.

Wish you the best in your investment strategy.

[nevercontent]

Thanks, KLVanLiew, the kind words are appreciated.

Neil

[XMFKBecks]

Hello Bear!

Thanks for posting your summary, I think this is fun and a good exercise and reading Saul’s detailed monthly summaries are always fun. I enjoy seeing how he looks at things and how he allocates money.

Compared to Saul, I am a slower-paced investor, and I largely follow one of the Fool portfolio services that is known for calmness and a goal of steady returns over a 3-5 year period. I feel like slow and steady is my mantra for investing, although I do play around with a little bit of options and some smaller riskier things. I’m 10 years older which means I’ve had more time to make mistakes, and I also know that the years go by quickly and start to move faster. I’m also female and naturally more cautious in the market. The money we invest was not easy to earn and so we want to invest carefully. I sleep well at night holding fairly large positions in Disney and Starbucks, and plan to own these companies for a very very long time. (These are not Saul stocks, but they make me happy; different people like different things and that’s OK!)

I can’t give you advice on your portfolio but I will make a few comments.

Twitter – I don’t feel compelled by Twitter as an investor. I know that is mushy, but I don’t personally use Twitter and I don’t really see how it will come to dominate (and I like big fat hairy market dominators). I own a pretty big hunk of Facebook and plan to hold it very long term. I think FB will deliver satisfactory growth with less risk than Twitter, and FB’s fan base is basically addicted.

The Coal Company – as others have said, this is risky. I listen to Cramer and he says that he would not touch coal. It is not the future. With so many possible investments I am not looking at coal as a way to grow my family’s assets. I would not buy something just because it is down. If something is down – does it have a catalyst that will bring it back to life??? Same for Twitter. What specifically is going to drive it upward?

Seaspan – I hold a small chunk of SSW and I am not sure what to make of it. If I were to reduce positions in my port today, SSW would be on the short list of stocks to dump. That said, I don’t mind letting it sit. It is under 3% of port. I don’t have a deep understanding of SSW and that is another reason to consider letting it go. For now, it sits.

I 100% agree with Neil about position sizing and your risk profile. In my opinion, my two riskiest long stocks right now are FB and SWKS, and those are both nice, successful and growing companies. Together, they are under 15% of my portfolio. Big enough to move the portfolio upwards but not so big as to ruin my life if they would crash and burn together.

I love Saul as a role model but I know myself well enough to know that I cannot and don’t want to follow his method in total – I like to see what Saul is doing and I might hold one or two of his selections in my port – right now I have SWKS, and I occasionally look at SKX or CASY or AMZN. I like my current portfolio and don’t need a lot of new stocks, so I just browse here for the most part, it’s a fun place to investigate and learn and explore the higher growth offerings.

Good luck!
Karen

Ticker Guide: AMTD • See my holdings here: http://my.fool.com/profile/CMF_KBecks/info.aspx

[XMFKBecks]

I will also say that as a more conservative investor, I make fewer moves per month than Saul. Since I work with options, most of my activity is related to those positions. (And options can be a good way to scratch the itch of wanting to do something in a port without touching your long term stuff.) I don’t fiddle with my allocations much. It’s pretty boring, actually! Not that much to write about.

For me a monthly summary might be very short, but a quarterly or semi-annual reflection could be a good learning / monitoring tool. The best thing would be to track not the stock performance and the trades, but to check the company’s progress.

Karen

Ticker Guide: AMTD • See my holdings here: http://my.fool.com/profile/CMF_KBecks/info.aspx

[PaulWBryant]

These are not Saul stocks, but they make me happy; different people like different things and that’s OK!

Karen,

Thanks for the feedback! I very much agree with the statement above. I think many core Fool recs like DIS and SBUX are great for the more passive investor. I recommended DIS to my dad. I think the Fool is great…my only complaint is that valuation gets glossed over a little too much. I hesitate to bite the hand that feeds me, but I feel I can speak very well of this great site while pointing out this one area that needs more focus.

I completely agree that if you’re looking back 20 years from now, you probably won’t care whether you bought DIS at 105 or 95. However, if you’re looking back 5 years from now, you might very much care if you bought NFLX at 130…because it might not be up to 130 again by then. Of course I could be very wrong, because stocks like NFLX are very dependent on what the temperamental Mr Market thinks of them. The cash flows and earnings won’t justify the price for a very long time…at least several more years of growth. It’s very, very, very expensive.

A new investor with no finance background, not particularly interested in learning the minutiae of the stock market, with a shiny new Fool subscription, seeing both these stocks recommended…well, probably won’t be able to tell the difference. I think this is where someone like Saul adds immense value. Even if one comes to this board and lurks and reads and never even understands half of what is being bandied about, one must at least understand that Saul is focused on finding the “best buys” at least a little more so than the Fool writ large. That said, SWKS, SKX, INFN, and many other “Saul Stocks” are also Fool recs. As he talks about, there is much value in the Fool’s stamp of approval on a company, and companies are really what the fool is recommending more so than just stocks.

That said, knowing just a little about valuation can really supercharge returns. I don’t know that SKX shares will increase in value more than NFLX over the next few years, but I know the correlation between the growth of each company and the multiples at which they are trading, and that tells me SKX is much, much cheaper – again, based on share prices vs the performance of each company.

When you talk about Twitter, I like it for all the reasons you don’t like it. FB is much beloved my all, as you say, which is why it trades at a super-premium price. The P/S is over 17, which is basically in the stratosphere. Twitter has been in that range before too, but based on the market’s current disfavor, its P/S is currently 6. This is simply to say that the market isn’t putting such a premium (or expecting quite as much from) Twitter as FB. Personally, I believe both companies (and I’m basing this on past and present growth as well as future expectations) will continue what they’ve been doing to increasingly monetize their user bases…even though user growth for both has slowed down. They’re different companies of course, but so much more is expected from FB, Twitter only has to be about 1/3 as good (sales-growth wise) to keep up. Instead, it’s basically keeping pace so far. Interesting and important point to note, in this Fool/fool’s opinion.

Then there’s The Coal Company. You make great points about coal, and I agree, but we have to look at each company individually. The reason AHGP is a Fool recommended company, in my opinion, is because it is the one most likely to survive as the rest of the coal industry drowns. That may not sound like a rosy place to invest – it isn’t! If you had to pay premium prices, like for a TWTR, it would be a terrible investment. If you had to even pay average prices, like for a DIS, it would be a bad investment. But remember how I said FB has a P/S of 17, and TWTR’s is 6? AHGP’s is 0.37. Their P/E is a 4. FOUR. You would expect to see a company whose sales are dropping by double digits. They dropped by 1% last year. It’s priced for the coal apocalypse. Anything short, and it’s a bargain. This is not a company for you or for most investors. You’re perfectly correct that it is more risky (though the 30% dividend yield helps mitigate that, at least for as long as the company can pay it…it’s well covered now). Anyway, this is very different than Saul Stocks, and very different than anything I’d recommend to my almost retired dad, or a passive investor friend, or almost anyone…but it’s interesting, if for no other reasons, because it’s a leader in its (admittedly struggling) space and it’s incredibly cheap. Of course that doesn’t mean it’s a good investment…but knowing the “price” opens the door to asking that question about even a struggling company in a troubled industry.

Karen, I just want to reiterate how much I agree with your notion I quoted above: different strokes for different folks, yes absolutely! I considered in a recent post on this board that DIS may very well be a good buy right now, even at a 1YPEG of 0.79 (much more expensive than SKX, SWKS, and INFN, all around 0.2 or something), because Disney’s future is much more certain than any of these, and that’s worth a lot. But we could all stand to understand more about not just the companies we love and invest in, but what Mr Market is expecting from them, and what this should say about our investing thesis. I applaud you for owning the right kind of companies – those “big fat hairy market dominators” as you said, that will keep on keeping on, even if they’ll never give you Saul’s out-sized returns. It’s a safer investing style, and not just equally good, but actually better for most investors than a more aggressive one. Because you get something back for your conservatism – less volatility. And probably a good night’s sleep.

Best of luck, and thanks again for the thoughtful comments.

Bear

[TMFTiptree]

Bear,

When you talk about Twitter, I like it for all the reasons you don’t like it. FB is much beloved my all, as you say, which is why it trades at a super-premium price. The P/S is over 17, which is basically in the stratosphere. Twitter has been in that range before too, but based on the market’s current disfavor, its P/S is currently 6. This is simply to say that the market isn’t putting such a premium (or expecting quite as much from) Twitter as FB. Personally, I believe both companies (and I’m basing this on past and present growth as well as future expectations) will continue what they’ve been doing to increasingly monetize their user bases…even though user growth for both has slowed down.

P/S is typically used for companies that don’t have positive earnings (or even positive cash flows). When you can’t judge a company by how effective it turns a dollar of sales into a earnings or cash, you are left judging it only by how many dollars of sales it makes.

But FB is cash-flow positive and earns a lot of money. More traditional relative valuation metrics apply to Facebook, like P/E, PEG, P/FCF, etc. I wouldn’t use the P/S metric for FB, nor would I compare FB and TWTR on that metric.

Either you like Twitter, or you don’t, but it is really hard to make a valid comparison to a company that is burning cash to one that is making it by the boatload.

Tiptree, Fool One guide, no position in either company (but long FB calls)