Bear's Portfolio through 07/2024

Investment Analysis Clubs Saul’s Investing Discussions
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Important context for my portfolio reviews: I run a concentrated portfolio and WARNING the swings can be huge. From the 2021 high to the 2022 low, my portfolio fell more than 60%. For every $100 I had at the top I had just $40 left! Staggering. So, before trying this style, even with a small portion of your total net worth, please understand the downside – it’s much steeper than if you own an index, or a bunch of megacaps. Also, don’t follow or copy me, Saul, or anyone. We may sell a position or buy a new one at any time, so it’s impossible to follow anyway. Also, to succeed with a concentrated portfolio, you must rely on your own decisions.

At some point over the past several years, I think I got carried away with concentration. Sure, if you’re gonna have 50 stocks at 2% each, you’re wasting your time with stock picking. But it doesn’t really follow that 5 stocks at 20% each makes sense. Maybe it does when we can identify slam dunks – when we find something growing at 100% YoY with huge margins and durability. But there are times like this year when even the best companies (like CRWD, we thought) are only growing around 30% and yet the price gets ahead of itself. I see no reason to concentrate when that’s the case. I think a great question to ask with any position is: do I just want exposure or do I want concentration? If the former, maybe it’s time to trim the position a bit.

There’s also a lot to be said for having many positions. It creates more opportunities to add and trim. It forces me to follow more companies closely…and makes me constantly rethink whether my top positions are really so special. Sure, 2% or 3% positions don’t move the needle much, but if the company grows on me, maybe it’s a start of something bigger – something that never would have happened if I hadn’t dipped a toe in the water.

In July I sold Paycom and Docusign but added Upwork, AppLovin, Atlassian, Nvidia, Peloton, and Transmedics, so I’m now up to 16 positions. Adding positions has allowed me to get down to ~26% cash, which feels perfect. I could take that down to 10 - 15% if we get a bad August and I get lots of opportunities to add to positions…but I’d be happy with 30%+ cash if I end up mostly trimming on a rally. Let’s hope for the latter.

The companies I’m invested in, and how they did this month, and what I did

Amazon There’s not a ton to say about Amazon, other than that AWS seems to be re-accelerating, and that the company has rapidly expanding profits. Seems about as safe as it gets, and as AMZN was down (although just single digits) in July, I added.

ELF I’ve been taking advantage of the volatility here adding when it drops and trimming when it rises. As I said last month when the PE ended at 67, “I’m just not so sure we can pencil in super fast growth going forward. As has happened with Celsius, rough comps are ahead. I think the upcoming quarter will be very strong, but if the market keeps bidding ELF higher, I’ll keep trimming.” Well instead, ELF fell 20% or so and the PE dropped to below 55. I’m much more willing to take on those risks now as I see more upside, so I built the position up a lot this month.

SuperMicro I took a small position last month, but as the shares fell as much as ~20% lower at times in July, I’ve been adding. I’m not gonna make it a double digit position, though I do think it’s cheap, because it’s unfamiliar territory for me. Hardware, semi-commoditized (debatable how commoditized), falling gross margin (but growing net margin)…it’s just a different breed of company than what I’m used to. But man does it seem to have the wind at its back.

Other positions Everything else is between a 2% and 5% allocation. I’ll probably be adding and trimming to all, but I don’t see any slam dunks or standouts yet. That said, feel free to ask about any of them.

Wrapping up

Happy August, everybody!

Bear

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” - Attributed to Albert Einstein

Previous Month Summaries

Dec 2016 (contains links to all 2016 monthly posts): Bear's Portfolio at the end of 2016 - Saul’s Investing Discussions - Motley Fool Community

Dec 2017 (contains links to all 2017 monthly posts): Bear's Portfolio through Dec 2017 - Saul’s Investing Discussions - Motley Fool Community

Dec 2018 (contains links to all 2018 monthly posts): Bear's Portfolio through Dec 2018 - Saul’s Investing Discussions - Motley Fool Community

Dec 2019 (contains links to all 2019 monthly posts): Bear's Portfolio through Dec 2019 - Saul’s Investing Discussions - Motley Fool Community

Dec 2020 (contains links to all 2020 monthly posts): Bear's Portfolio through Dec 2020 - Saul’s Investing Discussions - Motley Fool Community

Dec 2021 (contains links to all 2021 monthly posts): Bear's Portfolio through 12/2021 - Saul’s Investing Discussions - Motley Fool Community

Dec 2022 (contains links to all 2022 monthly posts): Bear's Portfolio through 12/2022

Dec 2023 (contains links to all 2023 monthly posts): Bear's Portfolio through 12/2023

Jan 2024: Bear's Portfolio through 01/2024

Feb 2024: Bear's Portfolio through 02/2024

Mar 2024: Bear's Portfolio through 03/2024

Apr 2024: Bear's Portfolio through 04/2024

May 2024: Bear's Portfolio through 05/2024

Jun 2024: Bear's Portfolio through 06/2024

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I think the thing that stands out most, Bear, is that you trimmed Axon aggressively. In June it was your largest position?

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I guess I just don’t see Axon as very different from MNDY or ZS. Solid 30%ish growth, but not undervalued.

Bear

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Bear, how do you compare valuation?

For instance, ZS is growing by 30% and trading at 14 times revenues. CRWD is growing by 30% and trading at 19 times revenues. That’s after all the fall off. It was trading at twice ZS’s valuation before.

Why do you think ZS is not undervalued?

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You mention CRWD was at twice ZS’s multiple before the fall. Pretty much. And I was pounding the table that CRWD was a sell, and not because I saw a problem coming, but because there was not much of anywhere to go BUT down. Here are some thoughts about how to look at valuation: My take on Valuation

It might be a little undervalued if growth holds up. But I guess even with a SaaS company, a normal growth deceleration starting from 30% isn’t nearly exciting as when you get to start from 70% or even 50%.

I’m not saying 30% growth isn’t great – I’m just I don’t want to “load up” on a 30% grower if the price is even in the range of reasonable. I think unless I strongly feel it’s mispriced, a 5% position is plenty. I would only want to slightly concentrate into a 30% grower as the price falls…and only to a point…unlikely I will make a 30% grower a double digit position…unless I think it’s gonna accelerate or something.

Bear

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I’m interested to see you’ve taken a stake in Peloton. I’ll always be grateful to you for getting me out of that when it was near the highs. What’s your rationale in getting back in? Too cheap to ignore hasn’t been your style. Are you encouraged by the growth in their rental business?

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Hard to even believe it was a $50b+ company then, but it was. Now the mkt cap is under $1.5b. But the company, from what I can see, is still beloved by many. The market just didn’t end up being as large as they’d hoped.

A couple years ago, they hired Barry McCarthy to right-size the company. He just stepped down and didn’t exactly say mission accomplished, but close: https://www.onepeloton.com/press/articles/peloton-news

I see a company with ~$700m revenue per quarter and ~300m gross profit. They’ve gotten their far too high OpEx down from 600m/quarter to 500m to 400m and going lower, and that includes restructuring costs etc. They just hit FCF break even last quarter. And they’re still doing layoffs. If they approach operating break even this quarter or next, I think the market could take note.

I don’t hope for much growth, but if they can pump out even say, 50m/quarter of FCF sometime soon, that’s a $200m/year run rate. What’s that company worth? $3b? 4b? Then, could they get to a $400m/year FCF level in a couple years? That would still only be like a 15% FCF margin…seems possible.

It’s not a high confidence position, but I think it’s worth a shot.

Bear

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My goodness Bear, that’s a BUNCH of positions. Seems like a lot of work. Are you moving to a larger basket of stocks permanently or is this an exploration phase for you?

Best,
bulwnkl

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I guess we’ll see. I’m pretty happy with it now as it gets me to the level of cash I want. I guess I feel like I don’t have to watch the 2% and 3% positions as closely as I would watch 10% or 15% positions, but it can be a lot, especially on days like today when 4 of my companies reported after the market closed!

Bear

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Bear, 2 of the stocks we hold in common released confusing (to me) ERs since you posted this. Would love your thoughts on ELF and SMCI mid month.

SMCI: have pretty strong opinions that it has never had pricing power, but I’m surprised to see it cave so quickly on Liquid Cooling where I thought a leadership position and lack of competitive capacity would hold that up for a few years. My take is they don’t know how to stand up to the customer! I see this all the time especially with far east culture- they fail to understand when they have pricing power. TSM has always failed at this.

I suspect you have reduced your position in both of these, amirite?

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Yeah, I sold ELF as soon as I saw the report. 34% organic growth just isn’t enough to keep me interested in a consumer goods company – a company without recurring revenue, and one that has to deal with the rigors of manufacturing. No thanks.

Supermicro on the other hand grew 143% YoY. I share your concern about the gross margin and bottom line, but I didn’t sell. But I realize I might be making a big mistake. It doesn’t make sense to me that they’d be struggling with profitability right now when the world should be beating a path to their door. And usually when something doesn’t make sense, it’s time to move on. But man, it’s just been beaten down so hard. With a 100%+ growth guide for next year and a trailing PE of ~25, The PEG ratio is so miniscule that it just doesn’t feel right to sell now. I’ve enjoyed the discussion, but I don’t feel like I have much to add. I see the case for adding and the case for selling.

Bear

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Yes, I agree with you Bear, that with such strong growth in Supermicro contrasted with the much poorer growth in Elf it makes no sense to sell SMCI right now, but more sense to hold or accumulate.
I do actually believe management that they forsee a return to their normal GM of 14-17%. I’m sure it will be a gradual climb back over the next year or so. Supermicro was already a very large holding for me before earnings (I’ve owned it since April 23). But after ELFs report I sold the majority of ELF, leaving just 2% left of ELF, and I split the proceeds between buying more of Supermicro, Pagaya and Celestica.

Jonathan

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I also sold ELF and added a little to SMCI.
Saul

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Would love to have some feedback from Bear and Saul on SMCI issues from today. I broke a few of my own rules by loading up a bit. I have decided to not wait for the news to clear, as I have a lot of experience in high-end computing and these sorts of things show a lack of discipline by the company (at minimum) and big customers will not bet their computing future on SMCI and I suspect long term business will be at risk. They continue to act like they are a Chinese company, not a California company. So I’m out and cut losses.

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Not Saul or Bear, but usually Saul never gives us breaking news. It is not the style and he does NOT want to be perceived as leading us, or telling us what to do. He will make his update, but in the standard amount of time, and maybe in his end of month if he’s made up his mind.

To me, still not Saul or Bear, this was too many negatives in a row. First the big sell off after earnings, but I held cause it didn’t look terrible. Then the short report, but I held cause well not sure if I ever believe them. Now we have this paperwork announcement. That is the last straw for me, I lost about 25% selling out this morning, but I have places to put that that maybe it can grow back to a profit.

Paperwork is HUGE in the world of SEC and to just randomly say you are holding up paperwork a day after a short attack…yeah that is a group of market forces (a tsunami?) that I do not want to fight. I am not in love with this stock, I am not looking for reasons to continue to hold.

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Well said, guys. I was skeptical after gross margin took so much of a hit. Just didn’t make sense.

But the hits just keep on coming. When there’s smoke, I see no reason to stay in the building just hoping the fire gets put out. I took my lumps and sold, losing somewhere around $300 per share. Ouch.

Bear

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Same here. I sold out of the position today. In addition of what already been said, I also weigh in the history. It happened before and therefore new allegations need to be considered more seriously. I did hold after the short report was published yesterday, but with the postponement of the 10k I sold out. I lost some hard earned money this time.

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