Bear's Portfolio through 02/2024

It’s not…it’s just my thing.

The market often provides opportunities. I agree, I was lucky to get such a good one on ELF.

Bear

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Totally agree. Quality is just job #1. Not the only job.

I’d rather have a quality ~30% grower than a company that just grew 50% but I don’t know if they’ll grow 40% or 20% next year.

Slight correction Re: Monday, they guided for 28% growth this coming year, so it will likely be 30+.

Axon guided for 24% this year…but last year they guided for 20% and grew 31%.

Profitability is something to consider too. There are many companies (I would probably deem them low-quality) that I don’t believe will ever achieve profitability.

Agree…I think I even alluded to this. Again: quality is just the first step. I was just highlighting that it’s not a step to skip.

Bear

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I’d rather have a quality ~30% grower than a company that just grew 50% but I don’t know if they’ll grow 40% or 20% next year.

Predictability is certainly a good feature to have and SaaS is a nice market for this due to recurring revenues because the company’s numbers can become easier and more reliable to predict.

A couple examples come to mind of Zoom, and Fulgent Genomics. Zoom was growing 300%+ during the pandemic but that growth fell off. Fulgent reported revenue of 359M with 4,536% revenue growth (not a typo) in Q1’21, but feel off dramatically after this. They both had Covid related revenue which was not sustainable.

Slight correction Re: Monday, they guided for 28% growth this coming year, so it will likely be 30+.

Good callout, the 25% growth is what one analyst said the growth is if you pull out the price increases, and that was why 25% stuck in my head as the headline number. It’s also Monday’s first price increase and they are unsure how this will be taken by the market. The likely outcome is the customer pays and doesn’t notice the price increases, but it adds uncertainty.

Axon guided for 24% this year…but last year they guided for 20% and grew 31%

I would say this is a good indicator of companies we are looking for. They are consistently beating their expected targets. If they are projecting 24% under the same conservative standards per usual, we’ll probably see something like 35% revenue growth, and that will give some upside on the share price.

Profitability is something to consider too. There are many companies (I would probably deem them low-quality) that I don’t believe will ever achieve profitability.

Lately I’m favoring bottom line EPS growth over revenue growth. A lot of companies can boost revenue by spending more, but EPS growth is harder to manipulate because it takes into account the company’s spending.

I meant to bring up IOT on my previous response. Something stood out on a recent read through of their last earnings that employee headcount grew by 30% YoY in the last quarter. I’m actually concerned significantly by this because this is roughly the revenue growth rate as well. If the revenue growth rate is dependent on employee growth I think there is an issue here. Costs will get much higher with stock based comp, salaries and benefits at a “SaaS” company.

One more concern I have with Samsara is that Nvidia’s GTC conference was focused on physical operations and “digital twins”. Here’s a two minute video of the tech, but if you have time Jensen’s two hour keynote is also worth a full watch,

So right now, I’m selling some Samsara but keeping some position there. Employee growth and competition are enough to lower my conviction.

Again: quality is just the first step. I was just highlighting that it’s not a step to skip.

Great callout, quality should be always be a top level filter for our selections. It could be an interesting addition to the knowledge base to try and define quality.

I’m also thinking about how to rank certain metrics like EPS growth, revenue growth, gross margins, EBITDA, net income and other metrics we want to see growth in.

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There was a time when valuation was not all that important but the market has changed considerably. Market is valuing sustained positive cash flow (DCF) into the future vs just top-line growth, and SaaS (or other Hypergrowth) investors have to pay attention. Saul continues to evolve and so has his strategy.

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Bear, I’m curious if you consider NU a quality company. It’s one of my strongest convictions at this time. It has Strong Revenue growth, is profitable, and is expanding its margins. It has an impressive leadership team, and its valuation seems reasonable to me.

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NU is my top conviction by a country mile. Just this morning Brad Freeman’s Substack (StockMarketNerd) landed in my inbox and he initiated a position. I find that he can make very complex things (like banks) more comprehensible, so this might be helpful to others.

JabbokRiver
Long NU
20.29% position as of Friday’s close.

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There are always going to be different investing approaches and different thoughts on whether valuation is important or not. I’ve watched Saul for years now, and even at the peak, I contend Saul does consider valuation. For example, he avoided SNOW at its monstrous peaks when he cited its valuation was just absurd (to which I agreed — we both later bought in to SNOW once its valuation became less absurd). My observation of Saul’s approach is that he considers valuation in his factors but it is not the most important thing to him and he has no problems in investing in companies that have a high valuation if he feels the business warrants it.

Bear is obviously a lot more valuation sensitive than Saul is. I tend to consider it more as well, so in that respect, I’m more like Bear. However, I’m also fully invested at all times, so in that way, I am more like Saul.

We are all blends of different styles and that is OK. Good even, because it exposes the board to diversity of opinion which I think is critical.

I am personally reluctant to give any investment advice, particularly to people like bear and Saul. I’ll feel like I am qualified to give them advice when I have returns anywhere near what theirs have been. Until then, class is in session boys, and I’m learning as much as I can. And so thankful for it.

Rob

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I consider it a company I’m not capable of evaluating. I would have to do an untold amount of research just to get comfortable with where the revenue is coming from. I have no idea how to evaluate the quality of their underwriting. I don’t know if the rates they charge on loans are too high or to low. I don’t know if most of their revenue comes via credit cards, small business loans, personal loans, or what. And I don’t know how to get comfortable with it if I did know.

There are also geo risks and currency risks.

I also see that (on Stock Market Nerd’s numbers) revenue has more than 10x’ed in 3 years, but deposits + credit portfolio has not even 5x’ed? That seems odd. Can anyone explain why?

8 billion is a lot of annual revenue. I strongly suspect growth rate to slow. I don’t know what profit margin can approach. I don’t know what PE should be. Looks like NU’s trailing PE is 48. JP Morgan’s is 12. So is Bank of America’s. So NU’s growth hits a wall, expect to see that come down substantially. I think they should also trade at a discount due to the currency and geo risks.

None of this is conclusive at all. I obviously have more questions than answers. NU may be a quality company, but I may never know.

Bear

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Bear, that’s a great question. Here is my take. The reason NU’s revenue is increasing at a faster rate than its credit plus deposit portfolio is due to its focus on increasing revenue through upselling and cross-selling financial products to its growing customer base rather than solely relying on growth in its deposit and lending businesses. The key evidence is:

John

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Despite the evidence you give, the numbers seem to disprove this. A much larger percentage of their revenue is coming from interest income now than a few years ago. My guess is, they’re getting some very high interest rates.

Bear

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Thanks for outlining your process. That was very helpful.

I though you might enjoy this: https://www.youtube.com/watch?v=h7_QAXfv1OA&t=589s

I 100% agree with this analysis from Chit Chat money - ELF has super growth driven by low cost products and a clever marketing strategy - but there isn’t really any moat. They discuss valuation at around 44min mark in the video.

You emphasis quality companies - I personally would feel better putting my money in NVDA and sleeping well at night rather than in ELF (NVDA has PE of 73 versus ELF with PE of 71).

All the best.

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