Disco Gator's June 2021 Update

June 2021 Portfolio Update

Monthly Disclaimer: I put together these updates as a sort of record keeping for myself. It helps me to think things through with my investments, and documents the reasoning for most of the moves I make. I do not want to come across as a know-it-all or a braggart just because things are going well. I have always kept records of my investing because I want to see how each of the decisions I make compares with the overall market. Having these records reminds me that it is an absolute certainty that things can and will go south at some point. This is now the fourth year that I have kept detailed information on a monthly basis. Every year, there have been periods of time where my portfolio has dropped from 15-30% and it will happen again. It happened twice in 2020, and it has already happened twice this year, with the most recent being in May. Now on to this month’s update…

We have developed a rating system for the stocks of the companies that we follow. Although we have partial portfolios completely following the recommendations given, I am personally meshing the two together for my main portfolio. Four of the last five positions I have added to my portfolio were all rated 5?? in our system. Roku was a 4?? when I added it. You can find more information about this on Twitter @PBMMInvestments This is off-topic for the board. If you have any questions/comments, please send them to me directly

After hitting our YTD low in May, we completely turned things around and had our best month of the year and our second best month since I retired. In June we were up 19.68%, only trailing May of 2020 when we were up 28.54%. It appears that investors have rotated back into the stocks that we hold so dearly. After the recent run-up, the inevitable questions started coming in. “Is it time to sell/trim some of our holdings now?” My answer is almost always, “no”. I have no interest in selling out of any of my companies as long as the fundamentals of the business remain the same. Yes, some of the price multiples are higher than they were a month ago, but these business are performing at an even higher level in most cases.

I didn’t sell as stock prices were dropping, and some cases plummeting. Why on earth would I sell while they are rebounding? We all know that this form of investing is volatile and it will have swings of varying highs and lows. I have no idea when these will come, so I stay invested at all times. I feel very confident about the companies I currently invest in, with the only one I have waning confidence in being Fulgent Genetics. I do believe this could be a big winner for me though so I am staying invested in it. Due to the level of my conviction, this is my smallest holding at roughly 5% of my portfolio.

As a reminder, I post results the last weekend of the month. This made June a four week period, with July being five. Our June high point occurred on the next to last trading day when we closed at +25.85% on June 24th. Our low for the month occurred on June 3rd when we closed at +1.19%.

Here is a snapshot of how my portfolio has performed over the past month, compared to the broader indexes. As usual, I’ll include the CNN Fear and Greed Index.

W/E Date        Portfolio     S&P 500 %     DJIA %      Nasdaq %    Russ 2000    Fear and
                % change       change       change       change     % change    Greed Index
  June           +19.68%       +1.82%       -0.28%       +4.45%       +2.88%        44
   May            -4.88%       +0.55%       +1.93%       -1.53%       +0.11%        39
  April           +5.63%       +5.20%       +2.42%       +6.27%       +2.02%        56    
  March          -12.01%       +4.29%       +6.92%       -0.41%       +0.93%        52
 February         +5.50%       +2.61%       +3.17%       +0.93%       +5.80%        48 
 January         +12.72%       -1.11%       -2.04%       +1.42%       +5.35%        35
   YTD           +25.82%      +13.97%      +12.51%      +11.42%      +18.21%        44 

It feels good to finally get back ahead of all of the indexes we track. You can see it has been a bumpy ride, but we are hoping to keep our current trajectory. The Fear and Greed index hit a low of 30 on June 18th and a high of 54 on June 11. Overall it mostly hovered in the neutral area.

June was the first month this year where we didn’t make a single change to any of our holdings. We did not open any new positions, we did not close any positions, nor did we rebalance at all. The past few months I have really been settling into these investments and have had increasing confidence in nearly all of them. I still have a few companies high on the radar and would be ready to make a change if news dictated it was necessary, but for now I plan to hold tight.

Of course, every time I say this, I end up making changes during the next month, and this could turn out to be the same. We will have some companies announce earnings in July and this could result in some changes. I feel very comfortable holding eight positions and plan to keep it at that number for the time being.

On to the individual results for each company that I invest in. They are listed by allocation from highest to lowest.

Company                Allocation       Initial         Purchase         June         % Change
                                       Purchase          Price         % Change      since Pur
CrowdStrike (CRWD)         21%         01/01/21         $211.82        +14.00%         +19.55%
DocuSign (DOCU)            16%         01/01/21         $222.30        +38.48%         +25.60%
Roku (ROKU)                14%         05/07/21         $327.00        +23.16%         +30.58%
Pinterest (PINS)           14%         03/08/21          $67.38        +17.67%         +14.04%
Square(SQ)                 11%         01/04/21         $219.15         +7.83%          +9.49%
Zoom (ZM)                  10%         01/01/21         $337.32        +12.35%         +10.42%
Digital Turbine (APPS)      8%         02/02/21          $60.76        +17.12%         +27.55%
Fulgent Genetics (FLGT)     5%         03/12/21          $93.86        +10.90%         -12.49% 

On the chart above, you get a clear picture of how things are currently allocated. For the “Initial Purchase” column I default to the stock price when the year started for stocks I have owned prior to this year, instead of when I purchased it. I want to see how things go from this point forward. Overall an outstanding month across the board. DocuSign and Roku both went on absolute tears, and all but one of my companies had double digit increases. As mentioned before, this was the second best month I have had since retirement.

Now on to the discussion of the individual holdings in my portfolio, listed in alphabetical order.

CrowdStrike (CRWD) - CrowdStrike Holdings offers cybersecurity services through its Falcon platform, which monitors client operations at their endpoint connections to the internet and works to identify and stop threats. The platform learns from attacks made on it and then warns the entire CrowdStrike cybersecurity network about likely avenues for future security issues. Announced earnings the first week of June and once again impressed the masses. Revenue was up 70% Y/Y, Subscription Revenue grew 73% Y/Y (making up 93% of total revenue), while ARR increased 74% Y/Y. Free Cash Flow was $117 million, on $303 million in revenue. 64% of subscription customers utilize 4 or more modules, 50% use 5 or more, and 27% use 6 or more. Gross margins continue to improve, increasing to 77% in Q1.

This business continues to demonstrate a lot of momentum. It seems every month news of a new security breach surfaces. Cybercrime is big business and Crowdstrike is there to benefit from it.

Crowdstrike had a great month, increasing by 20%. They have been recently moving up our rankings as well, closing June as a high 4??

Digital Turbine (APPS) - Digital Turbine simplifies content discovery and delivers it directly to the device. Its on-device media platform powers frictionless app and content discovery, user acquisition and engagement, operational efficiency and monetization opportunities. Announced earnings on June 1st for Q4 as well as their Fiscal 2021. Q4 revenue increased by 142% Y/Y, while Fiscal 2021 was up 126% Y/Y. This is a company that is accelerating and hitting on all cylinders. They have completed a couple acquisitions, but have been very clear about where the revenue is coming from. The business now consists of revenue from Digital Turbine, Appreciate, AdColony and Fyber and will send their revenue increasingly higher. In fact, it is expected that 22Q1 revenue will increase by 223% or more.

This is the #1 ranked company in our system with a 5?? rating in 20 of the past 21 weeks. I keep telling myself I need to add to my position, but I am not sure where to take it from. I could easily see myself rebalancing in the next week or two to get a larger position here.

DocuSign (DOCU) - DocuSign is the market leader in providing electronic signature technology and automation of the agreement process through its cloud platform. DocuSign’s solution addresses the core of every business transaction - the agreement - and makes the process much more efficient, resulting in lower processing cost and time. DocuSign announced earnings on June 3rd and is firing on all cylinders. Revenue increased 58% Y/Y which was an acceleration from the previous quarter. Subscription Revenue increased 61% Y/Y and now makes up 96% of all revenue. Last month I mentioned a number that I was really interested in was the Net Dollar Retention rate. This growth continues, reaching 125% in Q1. This is a great sign and is demonstrated in their current growth acceleration. While others were afraid of this being a Covid play and revenues declining, I stated the writing was on the wall for the opposite to happen.

International Revenue grew 84% Y/Y, making up 21% of Total Revenue. Profitability and cash flow continue to improve as well. Operating Income was 20%, Operating Cash Flow of 29%, and Free Cash Flow of 26%.

DocuSign also increase guidance moving forward for Q2 as well as Fiscal 22. CEO Dan Springer, estimates that the company is well less than 10% penetrated in its market. As the TAM continues to grow, DocuSign continues to dominate the market.

They end April as the lowest ranked stock that I hold, as a very high 3??.

Fulgent Genetics (FLGT) - Fulgent Genetics is a technology company that provides comprehensive diagnostic genetic testing using its proprietary platform, which integrates data comparison and suppression algorithms, adaptive learning software, advanced genetic diagnostics tools, and integrated laboratory processes. Not much was heard from Fulgent in June, but that wasn’t necessarily a bad thing. It is expected that COVID testing will continue to decline, so it shouldn’t be much of a surprise when they announce this coming quarter. That said, I finally took my first Covid Test this past month. In fact, I had two. The first was prior to our trip to Belize and the second was prior to our return. As mandatory testing remains in place for international travel, there will still be a need for testing. During this time, Fulgent is continuing to build in roads for their core business of next generation sequencing (NGS). Revenue in this area continues to grow at a fast pace, but pales in comparison to their Covid business. I look forward to seeing how they report in the next month or so. They finish June ranked as a 4?? in our system and are the only stock we are currently negative in year to date. That is a little misleading though as we held it earlier this year and sold after a 165% gain.

Pinterest (PINS) - Pinterest is an image-sharing social media site that allows users to collect links and create virtual pin boards for personal photos, ideas, decorations, places to visit, recipes and other items. Advertisers use Promoted Pins to reach users across the full purchasing funnel. I’m sure we all know people that use Pinterest on a regular basis as a source of inspiration for projects around the house, or recipes to prepare. Later this year, Pinterest plans to implement seamless on-platform transactions for their users to be able to purchase merchandise that has inspired them. I am very curious to see how this catches on as it has been one of the main factors for me not being discouraged by user growth. My expectation is that they will continue to expand the monetization of their current users while continuing to grow their user base.

After their drop from what some deemed as a disappointing earnings call, they rebounded nicely in June increasing by 18%. They’ve been ranked as a 5 ?? in our system for 12 straight weeks.

Roku (ROKU) - Roku is a key player in the growing over-the-top (OTT), or video streaming services market. Through the sale of streaming players and offering the Roku TV operating system on select smart TVs, Roku offers users a way to access various applications, primarily streaming services including Netflix, Hulu, and Amazon Prime Video, among others. Roku’s strategy focuses on acquiring active accounts and then monetizing them primarily through advertising revenues. Roku has continued to display a lot of momentum since their earnings report in early May. In fact, it is up more than 30% since I sold out of Etsy and moved into Roku. Late in May, Roku Originals launched and is somewhat incorporated into their acquisition of Quibi. They have started streaming both and will get even more revenue through these streaming avenues.

Personally, I am a huge proponent of Roku and we now have 10 devices in use at our house. The software is far superior to the Samsung TV interface and I also like it better than Apple TV or Amazon’s fire stick. As more people get on board, Roku will continue to find ways to improve their ARPU numbers as more and more streaming services continue to come online.

They end June ranked as a 4?? in our system.

Square (SQ) - Square is a commerce enablement platform focused on providing card acceptance, business analytics, and other ancillary products to help small merchants grow their businesses, as well as well as utilizing the Cash App ecosystem to broaden their reach to people that are under banked, and wanting to trade including crypto currencies etc. As I’ve mentioned before, top line revenue for Square is always going to be skewed due to the effects of how crypto trading is recorded. I try to focus on the growth of gross profit Y/Y and Q/Q as a better indicator of how things are going. After their earnings report last month, I mentioned that gross profit was up 79% Y/Y. One thing I failed to mention was that it was up 20% Q/Q. This was led by Cash App which was up 171% Y/Y and 31% Q/Q. I absolutely love the Cash App part of the business and it is my number one reason to be invested here. I look forward to this continued growth moving forward.

They end June on a four week streak of being ranked a 5?? in our system.

Zoom (ZM) - Zoom Video Communications provides telecommunications services that allow people to connect via video, voice, and chat as well as sharing content. The dedicated cloud-based platform aims to offer a superior user experience compared to traditional teleconferencing options, and its device-agnostic features offer high-quality communications regardless of how users connect to the platform. Zoom announced earnings on June 1st. Revenue was $956.2 million compared to the consensus estimates of $905.7 million. This represented an increase of 191% Y/Y, but only an 8.4% Q/Q increase. The latter was likely the only reason that people had complaints about this quarter, as it represented a noticeable slowdown from prior quarters. They guided for Q2 revenue of $985 - $990 million, which with a small beat will get them their first $1 billion quarter.

Their gross margin improved by 446 bps to 73.9%. This was something that I was expecting to see as it had dropped during the pandemic as usage shot up. Now that usage has backed off a bit, this should resulted in more cash coming in. Speaking of which, most notable from Q1 was Zoom’s free cash flow (FCF). They generated a staggering $454 million of FCF which has them closing in on $5 billion of cash on hand. Much of their FCF went straight to the bottom line, sky rocketing their operating margin to 41.9%. Enterprise customers (+$100,000 per year) increased 160% and now approaches 2,000 in number.

I plan to give Zoom at least one more quarter to see how things continue to develop/evolve. I’m pretty happy with the direction they are heading and the finish the month ranked as a 5?? in our system and the stock price increased 17% in June.

After getting my butt kicked in May with trying to keep up with earnings reports from all of the companies we track, I found June to be much more manageable. I guess I can look forward to another brutal month in August as things will start picking up towards the end of July. I’m very happy with where I currently stand, but feel like I need to find away to increase my position in Digital Turbine. I may rebalance a little this coming month as things settle in a little more. I guess we will see.