Previous Month Summaries
January: I didn’t start doing this until February
February: http://discussion.fool.com/bears-portfolio-at-the-end-of-februar…
March: http://discussion.fool.com/bears-portfolio-at-the-end-of-march-3…
April: http://discussion.fool.com/bears-portfolio-at-the-end-of-april-3…
May: http://discussion.fool.com/bear39s-portfolio-at-the-end-of-may-3…
June: http://discussion.fool.com/bear39s-portfolio-at-the-end-of-june-…
July and YTD Performance
Well here we are again, and I have pretty disappointing numbers to report. I’ll throw them down first and then discuss.
June
My Portfolio -0.09%
S&P +3.56%
Nasdaq +6.60%
Russell 2000 +5.31%
YTD
My Portfolio -11.84%
S&P +6.34%
Nasdaq +3.09%
Russell 2000 +7.52%
So clearly nothing got better this month. Actually it did. I was beating all 3 indexes, up around 5% for the month, but then SKX and INFN took two big chunks out of my portfolio, and I ended up basically flat while the indexes continued to gain.
The results are clearly bad, but what can we learn from this? It’s tough to say if I’m doing a good job picking stocks or not. My goal is not to predict what will go up this month or next – that’s not why I pick individual stocks. I just put my money behind the ones I think are the most undervalued (in other words, the ones I think will grow the most and are not trading at crazy expensive PE’s), and wait. But while I’m waiting, I’m losing. I am VERY aware at the opportunity cost of this experiment so far. I would be much wealthier in 2016 if I was just invested in the market at large.
When the story of the month is told by just two stocks, I’m reminded that one month is not a significant time period to evaluate a strategy.
Something else that gives me some comfort is that, in Saul’s formidable record since 1993 (in which he’s beaten the Russell 2000 by close to 100% in 3 separate years), he’s actually lost to the Russell by as much as 28% (in 2008) and 25% (in 2010), and a handful of other times as well. So even a year is not enough to say whether you are doing a good or a bad job.
However, I do think about the fact that all 3 indices I track are UP for the year. And Saul is about even. All of those are a far cry from being down double digits. In July, for example, Saul managed to eke out a gain. I do have to consider that this is a game played on the margins. Ever loss must be considered and hopefully learned from.
So let’s take the two big losses I suffered this month. SKX dropped more than 20% on some pretty mild bad news. I’m not even 100% sure it was bad. I think they are just being a little more cautious than the market was expecting, but I still very much believe sales will continue to grow. The one thing that scared me a little is that their costs were up, but I am taking them at their word that this is because of investment for the future (more fulfillment centers and the like), and will actually facilitate growing sales. I bought even more, so that even after the drop this remains my largest position at 16.4% of my portfolio.
INFN was a much smaller position for me, but the drop was worse – well over 30% because they’re very uncertain about guidance going forward. I have not bought more. There is a reason the market doesn’t like uncertainty, and uncertainty is the quintessential word to describe this company right now. When I bought my first shares around 18 or 20 dollars a year or so ago, before I’d even found this board, I had no illusions that this stock was cheap. They had pulled in 668M in revenue in 2014 and taken almost none of it to the bottom line. Definitely a “story stock.” I had a smallish position and was content to “buy and hold.” INFN increased sales to 887M the very next year (2015), and multiplied the amount they took to the bottom line. I looked at sales projections and some great write ups on this board and concluded that INFN was an unstoppable force, that their margins were improving and that while enjoying great sales growth, they would also continue to drive more profit. The first chink in the armor was on the profit side. They spend like drunken sailors on R&D and such, so it began to seem unlikely that they would continue to increase net income as they did from 2014 to 2015 (this has certainly played out in the first 2 quarters of 2016). But I thought, no problem, as long as they keep growing sales by 20-30%. And they actually have! But they keep warning about demand dropping, and now everything is spooky. This certainly seems like peak negativity to me. Market cap (with stock price) has more than halved. This is in bargain bin territory. But if the business is dying, it doesn’t matter. Sales can be lumpy, that’s fine…but in tech, you can get replaced before you know it. Some people think INFN has a moat…well then why don’t they have pricing power? All this said, I think this is just too hard. There are better places to put money. I have decided not to add more, even as cheap as it looks, and I might very well reduce or sell out if there’s something else I want to buy. It seems it has nowhere to go but up. But it has seemed like that before.
The lesson I’d really like to learn, of course, is how to avoid companies like this in the future. Saul certainly got out, if not at the first signs of this major “uncertainty,” at least before the latest wave hit. I certainly haven’t figured out how to avoid losses, but I do think I need to have a category for investments that are especially hard to evaluate, and then I need to cap these positions at a VERY small percentage of my portfolio (say 3%), or just stay away if something is too dang hard. In view of this, I sold out of LC and reduced STMP this month. But I’ll get to all that below.
So allocating more to safer companies is a good lesson. But another is simply that the only reason to have risky positions is if the reward potential crushes all the less risky stuff you own. Otherwise just own the less risky stuff and forget the challenging / uncertain businesses. I think INFN’s reward potential has begun to look less attractive. It certainly isn’t growing sales as fast as SHOP or PAYC or something. What would they have to do to increase margins? Will it ever happen?
Despite all the craziness I had 12 positions unchanged in July. But I’m also up to 25 positions from 22 last month. LC is the only one I sold out of, and I bought 4 new stocks: IDTI, INUV, YELP, and P. More on that below.
Changes this month, and why I made them
Sales:
LC - Just seems to have a zillion risks. And it’s recently gotten AXP and GS as new competitors. I doubt that’s going to work out well for LC. In my opinion their best hope is to get bought…but why would anyone need them?
Trims:
LGIH - I’ve taken profits…maybe more than I should have. But this is an inherently cyclical industry, and prices are capable of swinging wildly on cyclical fears without any basis in what is going on with the business (they’re killing it). This stock is up nearly 40% this year, and almost 20% in the last month or so.
STMP - This is a company that people love to hate. I initially bought a little more when the price began to fall, but quickly cut back in a big way. I think it likely there will be a cheaper price due not to fundamentals but sentiment. Maybe I’m wrong, but I just thought I’d lighten up a little, as this is one that will give you heartburn often.
SHOP - This was up just slightly so I sold some to buy more SKX and AMZN. I like SHOP, but it has a lot more to prove. I may have sold too much…will probably buy a little back soon.
CBM - I just had a feeling $58 was about as high as this thing would be getting for a while. I actually sold out completely to raise funds for purchases, but then I limped back in after the GILD-related drop. Just a steady, steady company. I’ll probably keep this position small, or maybe sell eventually to buy something more exciting / high-growth.
Buys:
(I haven’t taken the time to do a thorough introduction to the board for any of these, because work has been busy lately. That’s also why I’m keeping them very small for now. Hopefully I get a chance to learn more and share my knowledge in the next month or two.)
IDTI - I just noticed this stock because their share count had come down 10% in the last year. I looked into it, and it’s very cheap, grew 20% last Q, and has very modest expected growth. It’s also down 20% or so this year, so I like the entry point.
INUV - This is a company in the mobile ad space that I’ve been watching. They’ve dropped almost 50% this year, and 10-15% in the last month or two, so I bought a starter position.
YELP and P - These are companies that I cannot figure out how to value, so I’m barely dipping a toe in. But they are widely used and they have the potential to be very profitable. Small positions, even for starters, but I decided I wanted to own these. Probably won’t worry about adding for a while.
Adds:
SEDG - So crazy cheap right now, and growing fast. I just feel like they’re in the right spot in the solar industry, well-run, and actually (very) profitable. This isn’t a company that deserves to be down 30% on the year and 15% in the last month or two.
SUNW - I really do feel the AMZN contract, while it might not make a huge impact financially, does lend a lot of credibility to this tiny company. It was enough for me to substantially increase my stake. If they keep growing revenue at a SHOP-like pace, this very cheap stock could take off.
AMZN - They’re just taking over the world, man. I just don’t see this NOT growing into a 500B+ market cap. It’s definitely expensive, but they’re growing earnings fast. I added a ton. This is also one I feel I can easily understand
SKX - Even though I have a ton, I added. I understand this business. The 20% drop was ridiculous, and quite an opportunity, in my view. PE is below 14 now. If it stays at this price (or lower) for a few weeks, I’ll probably end up adding even more.
My Current Allocations
Skechers 16.40%
Amazon 15.40%
Solaredge 8.80%
LGI Homes 7.60%
Sunworks 6.10%
The Rubicon Project 4.90%
Patriot National 4.40%
XPO Logistics 4.10%
Mitek Systems 4.00%
Infinera 2.90%
Paycom 2.50%
Integrated Device Technology 2.30%
Inuvo 2.30%
Fitbit 2.20%
Veeva Systems 2.00%
Cambrex 1.70%
Dycom 1.60%
[Stamps.com](http://Stamps.com) 1.60%
Golden Entertainment 1.40%
AMN Health 1.20%
Shopify 1.20%
Yelp 1.10%
Energous 1.00%
Pandora 1.00%
Perion 0.90%
CASH 1.50%
Random Thoughts and Conclusions
As I said, I definitely cringe that my portfolio is down almost 12% this year. But I do agree with Saul that some of these stocks we share, and some we don’t, have incredibly compressed PEs, and the potential is just through the roof. Still hopeful.
Bear
