Bear's Portfolio through Mar 2019

PaulWBryant · March 30, 2019, 11:16am

My 2019 Portfolio Performance YTD as of


Jan +22.48%
Feb +33.46%
Mar +38.27%

I continue to do my discriminate portfolio jockeying. I base my trims, adds, buys, and sells on thoughts like I expressed in this post: https://discussion.fool.com/next-year39s-revenue-34169176.aspx

In March I nearly doubled my AYX position and sold out of my ZS position, at least temporarily. I know this is controversial, but I am decidedly NOT trying to time the market. If I never get back into ZS, so be it. I’m not going into cash or slow growing “safe” companies. I’m simply shifting money to favorites that I think are a better bargain at present. Speaking of which, I also increased my Okta position substantially.

Actually I’ve cut my cash position in half from last month from 34% (higher than I ever wanted it) to 17%. I’m becoming ok with keeping a 10% - 20% cash position. It has allowed me to take advantage of a bunch of dips.

Now let’s talk about what else has been going on in March.

Previous Month Summaries
Dec 2016 (contains links to all 2016 monthly posts): http://discussion.fool.com/bear39s-portfolio-at-the-end-of-2016-…
Dec 2017 (contains links to all 2017 monthly posts): http://discussion.fool.com/bear39s-portfolio-through-dec-2017-32…
Dec 2018 (contains links to all 2018 monthly posts): https://discussion.fool.com/bear39s-portfolio-through-dec-2018-3…
Jan 2019: https://discussion.fool.com/bear39s-portfolio-through-jan-2019-3…
Feb 2019: https://discussion.fool.com/bear39s-portfolio-through-feb-2019-3…

New 2019
January - DOCU
February - SAIL
March - TTD (again), ESTC (again) and MDB (again)

Sold 2018
January - SHOP, SQ
February - WIX, MDB
March - PSTG, ZS

My Current Allocations


Ticker	Curr%	Buy/S	Mo Ch	YTD Ch
TWLO	16.1%	6%	6.2%	44.7%
OKTA	11.4%	67%	-2.5%	29.7%
NEWR	10.9%	14%	-6.7%	21.9%
AYX	10.4%	80%	9.9%	41.0%
SAIL	5.6%	100%	-6.9%	22.2%
DOCU	4.7%	86%	-5.9%	29.4%
SMAR	4.2%	-38%	6.9%	64.4%
TTD	4.1%	NEW	0.1%	70.4%
TDOC	3.8%	0%	-13.5%	12.4%
ESTC	3.3%	NEW	-11.8%	11.7%
ZEN	2.3%	0%	7.6%	45.7%
MDB	2.0%	NEW	44.8%	75.6%
ARNA	1.9%	0%	-10.2%	15.1%
options	1.8%			
cash	17.4%

New again
Yes, finally! I got back into The Trade Desk for the first time in over a year. I still don’t completely understand it, and I’ll always feel like advertising is a crazy business, but I’m intrigued by their opportunity in what seems to be a time when walled gardens are on the way down.

I bought back into ESTC as the price has come way down, and I also re-bought a tiny MDB position just to do something with the cash (and honestly probably from fear of missing out).

The big 4
I added to OKTA and AYX as I mentioned above. Along with NEWR (which I also added to slightly) and TWLO, these are the 4 companies that I believe have the best balance of several factors.

They all seem to be priced reasonably. OKTA, AYX, and TWLO have PS ratios in the 20’s, while NEWR’s is in the low teens. Obviously NEWR is growing the slowest, but…
I think all have good prospects for rapid growth to continue (if not accelerate), which to me is the key to our type of investing. And…
I have confidence in management, and the business model for each of these makes sense to me.

Moving on from Pure
I sold Pure Storage after they reported a quarter that disappointed a bit. They still seem extremely undervalued, but I’m just not interested in following them anymore.

Closing ZS for now
I sold Zscaler based on valuation. There are too many other things that are just as good in my mind and much less pricey. When SaaS stocks rise, they tend to all rise. I do think Zscaler is one of our best. But I don’t think Zscaler is “better enough” than all the others to justify its current price. So I sold it, and bought others.

Other adds and trims
I also doubled SAIL and nearly doubled DOCU. I think both are fairly priced or underpriced, and I’ll be interested to see what they do if the companies manage to accelerate revenue, which I believe they will (SAIL’s is down due to lumpiness, DOCU just seems to be tapping into latent potential).

I trimmed SMAR when it ran up to nearly $50 after earnings, which I thought was too much. I have bought some SMAR back around $40, but not as much as I had before. (Remember, I was buying it at $24 just a few months ago!)

Wrapping Up

One final question worth considering is what the market is seeing in ZS and MDB. MDB now sports a PS around 30, and ZS’s is in the high 30’s! They each went up 40%+ in March, while many of our others were down. As I said in my last post, the market seems to be pricing in continued acceleration from ZS and continued triple-digit Atlas growth for MDB. I’m not sure those things are such a foregone conclusion. I think these things are great, but are these two companies unique among our favorites? Their valuations are. What do you think?

I also hope to find new companies to invest in…but it does seem like the market is onto our little SaaS niche. Some people have posted about some upcoming IPOs. Slack especially seems interesting. We know from ESTC that we’re probably not going to get anything cheap on day 2 anymore. But, IPO or not, please keep bringing ideas to the board in thoughtful write-ups!

My best to everyone in April!

Bear

“I guarantee nothing but hard work.” - Bear Bryant, Alabama Football Coach, 1958 - 1982

“A man’s gotta know his limitations.” - Dirty Harry

“If you must tell me your opinions, tell me what you believe in. I have plenty of doubts of my own.” attributed to Goethe (but not sourced)

“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

“exponential compounded growth does not fit the analytical backward looking skill sets of most Wall street analysts” - mauser96

“I presume the thing is to ride the momentum for the short squeeze and exit fast with enough money for a few months supply of whisky before everyone realises it’s a value trap.” - Strelna

Jimb05 · March 30, 2019, 12:30pm

Hi Bear,

I need to look at SAIL again, last I looked I thought the growth rate was slowing down so I need to revisit.

Here is an idea for you, I have been building a position in TWOU.

Their last quarter grew 33%, down from a few quarters around 50% growth.

This quarter they started coming up against normal comps. in the short courses, thus the drop from 50% to 33%.

Since they bought the company in short courses a year ago, they have been able to double enrollment and increase the tuition 50%. This gives me a lot of confidence in management, as they spotted an opportunity and executed on it.

They have forecast growth for next year at 34% (top end of the range.) Last year they beat the initial year guidance by 2%.

I think they can grow in the mid 30’s for the foreseeable future.

Cash flow is staying around break even, investing all cash for growth.
Partnering with premier universities, 10-15 year contracts.
Clear leader with barriers to entry.
Benefit to customers: they get a degree from a good university at a lower cost.
Benefit to universities: income without doing anything extra.
Demand should increase because of student debt, need for lower cost higher education.
Trading at a P/S of about 10.
P/S expand to 12-13, with 34% growth, a 50% return in a year.

Bear Case

Companies no longer require a degree, give an aptitude test to hire.
Students don’t value the college degree anymore.
They learn the skills at lower cost or free on the internet, Khan Academy, ETC

Anyhow, one idea I like.

Thanks,
Jim (long TWOU)

SaulR80683 · March 30, 2019, 1:54pm

Hi Drew, I feel compelled to write to you about this as my approach is so completely different than the one you used. You sold out of Zscaler and doubled your position in Docu because you felt that ZS was “pricey” and Docu was “underpriced” (cheap).

You sold Zscaler because it had a huge rise of 40% this month based on superb results. Drew, that goes against every fiber in my body! They all scream out and say “No! You don’t sell a company because it is doing enormously well.” In my Hero Companies section I pointed out how I had a quintuple on Twilio in just over a year (among other stocks with large gains). I would never have seen up 400% if I sold out to capture a 40% gain. Think how many times Twilio had to have gone straight up to give me that 400% gain!

Going back to Zscaler and Docu. Why is Zscaler pricey and Docu cheap?

Well could it have something to do with Zscaler’s revenue growing at 65% and Docu’s growing at 34%. But that’s only part of it.

Zscaler’s revenue growth is massively accelerating while Docu’s revenue growth is decelerating.

Zscaler’s revenue was up 65%. This was an acceleration from 53% growth a year ago, and an acceleration from 59% sequentially, from 54% the quarter before that, and from 49% the quarter before that. That’s awesome!

How about Docu? Their revenue growth of 34% was down from 37% sequentially and from 37% the year before. If you buy something for a cheap price, you get something cheap.

Oh there’s more: Zscaler’s

Calculated billings grew 74%!!! And this growth accelerated from growth of 49% the year before…
Adj net income was plus $11.6 million, up from a LOSS of $2.8 million.
Adj operating income was 13% of revenue, improved from a LOSS of 6% of revenue.
Adj EPS was 9 cents, improved from a LOSS of 3 cents.
Free cash flow positive 16% of revenue, up from a LOSS of 10% of revenue.
Cash was $340 million, up $26 million sequentially, and No Debt.

And on this news, you sold??? To buy something cheap?

Why is Zscaler’s revenue growth accelerating like that instead of slowing down by the law of large numbers. Well their revenue last quarter was only $75 million. It’s a small company. And they aren’t selling something trivial like Docu. For a big company to trust Zscaler with the family jewels of its security system requires an act of faith. Therefore, as Zscaler grows and signs up more and more large companies, they have more revenue, and more large company references, and other large companies feel better and better about trusting them. So it snowballs, and it’s easier and easier to sign large customers and they seem to have passed that inflection point.

And their quarterly revenue of just $75 million means that they have a very, very, small part of the pie, and a long, long, long, way to go.

And a quick look at Docu. Their quarterly revenue is already $200 million and they are totally dominant on document signing. How much is left? Sure, they are introducing an attempt to do document managing too, but how many doubles do they have left in them? Of course they are slowing down, they own almost the whole market.

Anyway, selling a company accelerating to 65% growth, to buy a company with decelerating 34% growth goes against everything I believe in, but do with it whatever you want.

Best,

Saul

PaulWBryant · March 31, 2019, 10:11am

You sold out of Zscaler and doubled your position in Docu because you felt that ZS was “pricey” and Docu was “underpriced” (cheap).

Saul,

I don’t disagree with most of your points, but thinking that I added to DOCU because it’s underpriced or “cheap” is just 100% wrong. I added because I like what the company is doing.

First up, I don’t think DOCU is decelerating.


        Mar  Jun  Sep  Dec
2017    114  126  131  149
2018    156  167  178  200

I think what we’re seeing is just some lumpiness. Going from 37% to 34% is just noise. They actually guided for 35% growth next quarter. I’m not sure if I’d call that an acceleration from 34%. Dec17 was just strong and Mar18 wasn’t so strong.

However, I do believe DOCU’s revenue really could accelerate. For one, we all expect them to beat guidance, but there are also some good growth drivers. A partnership with Salesforce, the acquisition of SpringCM, Federal customers, and international opportunities were all mentioned by Bert here: https://seekingalpha.com/article/4250021-docusign-understand…

So it’s really not a competition between ZS and DOCU where I just bought the cheaper of the two. But I did sell ZS mostly on valuation, and just for conversation I’ll compare it to DOCU.

DOCU is a ~$9 billion company with 700m+ in revenue, that everybody expects to grow mid-30’s % or maybe low 30’s %
ZS is a ~$9 billion company with < 250m in revenue, that everybody expects to grow mid-60’s % or better

Which is more likely to surprise to the good?

Also, in 2 years or so when ZS has as much revenue as DOCU, do you really think it will still be growing at 65%+? It’s fun to hope so, but now it’s priced in! Look at SHOP…they’re not growing at 100% any more. There’s a limit to what even the fastest growing companies can sustain. You can’t just say that you’ll worry about that in 2 years, or whenever their results falter, because the market is constantly trying to price in how fast they’ll grow. I’m not sure how much higher the hope can build, but a $9 billion market cap is enough for me.

Lastly, let’s compare ZS to other companies you’ve wisely bought as the share price went up. Last February, TWLO shot up from $26 to $34 in a single month. You bought more, and wisely so: it was still only a $3b company. Then it shot to $54 by May of last year. You were still buying I think. Made sense to me because it was still only a $5b company. At the end of August last year it was up to $80, and it was still only an $8 billion company.

Now TWLO is a ~$16 billion company. But TWLO has 650m in TTM revenue vs 243m for ZS, and TWLO is actually growing faster than ZS! TWLO is by no means cheap, but it looks cheap compared to ZS.

Maybe in a year or two I’d buy ZS at $9 billion. Today, that is just too dear.

Hope this makes sense. Wouldn’t want you to think I just sold it 'cuz it’s pricey.

Bear / Drew

SaulR80683 · March 31, 2019, 10:42am

Thanks for explaining Drew. I guess I just see Zscaler as one of the highest conviction stocks there is, and with revenue growth accelerating as they a) Got listed, giving them more name recognition. b) Grew in revenue and finances, and enterprise customers were willing to trust that they’d be here tomorrow. and c) Have more large enterprise customers, which snowballs into other large enterprise customers trusting them (If so-and-so thinks they are good enough for their security, maybe we can trust them too). They just seem like they are taking off.

I just couldn’t imagine selling Zscaler. But I could be entirely wrong.

Saul

Jimb05 · March 31, 2019, 11:24am

Also, in 2 years or so when ZS has as much revenue as DOCU, do you really think it will still be growing at 65%+?

Amazingly, if DOCU grows 35% and ZS grows 60%, it takes over 6 years for the revenue of ZS to catch up to DOCU.

And at that point, the revenue is over $4 Billion!!!

Obviously the odds of ZS still growing at 60% with over $4 B in revenue is close to zero.

You could make the argument that ZS will never catch DOCU in revenue, DOCU basically has to stop growing for it to happen.

I’m at the point where I think the valuation of ZS is stretched enough that I am uncomfortable, so I have been reducing my allocation.

Maybe the growth rate keeps accelerating and it can hold this valuation for awhile (so I still want to own some ZS)

But I see a lot more risk here.

Jim

thejusticier · April 1, 2019, 4:06pm

I think both Docusign and Zscaler are in their very early innings and it is difficult to say which will have a larger market cap in a few years. The difference could be very large.
Both are in a growth and market-capture stage. I don’t know how one could talk about lumpiness or decelerating growth by looking at such a short a timeframe.
Is there anything that could be said about the market each is tackling and how they compare in terms of potential? Their respective potential definitely doesn’t seem to be the same so maybe the valuation comparison just in terms of the numbers is not very meaningful at least if one has a several-years outlook.
tj

brittlerock · April 4, 2019, 2:22pm

. . . what the market is seeing in ZS and MDB.

The difference between ZS and MDB vs DOCU is not just a matter of ratios. ZS and MDB are fast becoming enterprise imperatives. DOCU is not. DOCU brings efficiencies to the signing of documents, but it is not business critical. Every business out there already has a way of dealing with signatures. The functionality offered by both ZS and MDB is new and mandatory in order to remain competitive.

DOCU wants to go further than electronic signatures and become a document management system. I’m not sure how they will succeed at that. The vast majority of business documents that require legal signatures and/or multi-party concurrence are transactions. That would be routine business activities such as purchasing of goods and service. Agreements of different sorts. Official buy-off such as inspections, regulatory approvals and such. The reason I question DOCU’s ability to prosper in this market is that most all these types of documents are already managed by one application or another. What exactly is DOCU going to bring to the table that supersedes the storage and management capabilities already provided by other s/w?