2021 returns: +22.8%
Jan 2022 returns: -13.2%
Portfolio allocation as of 31 Jan 2022:
Datadog: 13.2%
ServiceNow: 11.8%
Zscaler: 11.5%
Monday.com: 9.4%
Digitalocean: 8.4%
Crowdstrike: 7.9%
Microsoft: 7.8%
Zoominfo: 5.4%
Cloudflare: 5.4%
Okta: 4.9%
Snowflake: 3.8%
Cash: 10.5%
What a month, with enough roller coasters to scare the paws out of me. I entered January with about 50% cash after selling my positions aggressively in November and December (due to my views about valuation and the changing interest rate environment). In January, as best as my courage could muster, I bought on intra day lows and now I’m down to about 10.5% cash.
I won’t be talking much about individual stocks, but will discuss several themes which I think should work in 2022.
(1) Improve Labor Productivity, Reduce Wage Inflation or the Effects of the “Great Resignation”
The labor market is tight and Corporate America is feeling the pinch. Servicenow is in prime position to benefit here as the de facto SaaS stock for “workflow automation” which helps people work faster and reduce the need for labor. Its stock was up 10% after hours on the day of its earnings and is one of my better performing positions in January. It also guided to year on year acceleration in 2022 versus 2021 which I think will be a rarity in SaaS land this year
I think Monday.com would also fall under this theme. 2022 is the year of hybrid work - in surveys after surveys, anywhere from 50-80% of employees are demanding hybrid work and will resign if not offered that. https://sdtimes.com/softwaredev/2022-the-year-of-hybrid-work…
With record low availability of workers, 2022 is the year where workers will flex their collective muscles and Corporate America will try to accede to their demands. Work Collaboration software like Monday, Asana and Atlassian (which just announced a massive earnings beat) are the prime beneficiaries of hybrid work and should do well this year.
(2) Cloud migration and Proliferation of Cloud Workloads
We have heard it from the earnings calls of both Microsoft and Google. Cloud migation is a long lasting trend where the pandemic has accelerated, but is only just starting with only about 5-10% of workloads in the cloud - this trend is not decelerating in 2022.
Stocks which benefit from this trend: Digitalocean, Datadog, Zscaler, Snowflake, Cloudflare, Microsoft.
(3) Cybersecurity
This is from the channel checks of Wedbush conducted last month : “our checks over the last few weeks have been the strongest for the cybersecurity sector heading into a given year we have seen in over a decade. The firm sees cybersecurity budgets increasing approximately 21% in 2022, a roughly a 100 bps year-over-year increase from 2021.”
Unless their checks are wrong, I think this is a resounding endorsement of cybersecurity. My preferred play here is Zscaler as I think network security has less of a demand pull-forward compared to endpoint security (Crowdstrike, Sentinelone) but I believe both should do well.
(3) High Margins and High Free Cash Flow Stocks
In a rising rate environment, Free Cash Flows further out in the future are worth less when discounted to the present. This is why I think SentinelOne despite having best in class revenue growth, has sold off badly as it is deeply unprofitable as of now. Focusing on its low EV/sales (relative to sales growth) may not be the whole picture as investors are also looking at operating profit and free cash flow multiples this year. I didn’t hold SentinelOne for that reason although I will re-evaluate when the market environment changes (and I’m not doubting its technological edge in any way)
My preferred plays: Servicenow, Zoominfo, Microsoft, Crowdstrike, Datadog, Zscaler.
(4) What I would avoid
I would avoid ecommerce, gaming, ad tech, e-payments and social media related stocks. These benefited from individual consumers nesting at home (and FB’s results, announced just today, were abysmal). In fact anything with a huge bump in 2020 and 2021 H1 sales which are way above their historical growth trends are suspect to me (like square, docusign, zoom, shopify, roku, peloton, netflix). They need to cycle past those tough comps in 2022 before they can start to work again (maybe 2023).
=^…^=
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