Volatility is back so I thought I’d given an update. In this update, I’ll focus on the portfolio changes that I have made since the beginning of Q4 2018. This is because none of my companies have yet reported earnings so portfolio changes had to do with other factors than updated company financials.
My past portfolio updates are here:
September 30, 2018: https://discussion.fool.com/gauchochris-93018-portfolio-update-3…
August 24, 2018: https://discussion.fool.com/gauchochris-82418-portfolio-update-3……
January 3, 2018: https://discussion.fool.com/gauchochris-portfolio-132018-3294101……
November 20, 2017: https://discussion.fool.com/gauchochris-portfolio-112017-3290110……
September 30, 2017: https://discussion.fool.com/gauchochris39s-portfolio-9302017-328……
Below is a table with my YTD portfolio performance compared to the S&P 500. I use the S&P 500 total return so the performance of the S&P 500 includes dividends. I’ve also included a few extra dates that show some of the big swings that we’ve seen in 2018. The portfolio peaked on Sept 4th at +111.9% YTD and then dropped down to +40% YTD in late October. The swings in my portfolio are amplified because I hold non-trivial options positions. The portfolio has started roaring back over the past week.
DATE YTD 1 mo S&P YTD S&P 1 mo YTDdiff 1 mo diff Jan18 25.6% 25.6% 4.9% 4.9% 20.7% 20.7% Feb18 37.4% 9.4% 1.0% -3.7% 36.5% 13.1% Mar18 40.7% 2.4% -1.6% -2.5% 42.3% 4.9% Apr18 41.0% 0.2% -1.2% 0.4% 42.3% -0.2% May18 55.8% 10.4% 1.2% 2.4% 54.6% 8.0% 6/18/18 80.7% Jun18 52.3% -2.2% 2.0% 0.8% 50.4% -3.0% Jul18 51.1% -0.8% 5.6% 3.6% 45.5% -4.3% Aug18 104.8% 35.5% 9.0% 3.3% 95.8% 32.2% 9/4/18 111.9% Sep18 93.4% -5.6% 9.6% 0.6% 83.7% -6.1% 10/24/18 40.0% Oct18 62.9% -15.8% 2.2% -6.8% 60.8% -8.9% 11/2/18 66.9%
Below are my allocations (Nov 2, 2018).
Stock S+O 9/30/18 (S+O) AYX 19.32% **19.02%** 1.0 18.15% NVDA 14.92% **17.55%** 1.6 9.21% SQ 13.77% **15.39%** 1.3 16.66% TWLO 11.37% **13.91%** 1.5 12.88% NTNX 9.05% **13.44%** 2.6 16.50% MDB 11.12% **11.12%** 1.0 9.78% ZS 7.75% **7.75%** 1.0 6.07% NKTR 1.52% **2.13%** 2.9 2.95% PSTG 0.06% **0.83%** options 6.03% SHOP 1.40% options 10.18% 10.60% cash 0.38% **0.38%** 0.38%
The table above shows my current allocations. The set of numbers on the left shows my Nov 2nd allocations of stock shares only, and the options net value is broken out on a separate row (above the cash row): the combined value of my options comprises about 10% of my portfolio. These options positions were slowly built up over the past 18 months; the long calls were mostly paid for by selling in the money puts, and I added more calls only when then put positions were closed out as a profit. I look at my calls as gravy since I have taken most of the profits of the short put positions. The allocations in the second column of numbers include the value of my options positions (as of Nov 2). I currently own long calls (2020 or 2021 leaps) on NVDA, TWLO, NTNX, SQ, NKTR, and PSTG. I sold essentially all of my PSTG shares and have kept my leaps for now. I currently have short put (expiring in Nov 2018) positions on TWLO, MDB, NVDA, and SQ. The 4th column shows how many call option equivalents I own per share that I own. For example, for NVDA I own 0.6 call share equivalents for every share. The fifth (last one) column shows my allocations from my last update on Sept 30, 2018; it is there so you can see how my allocations have changed in the past month.
I’ve made some changes over the past month. Below I’ll explain the changes and why I made them.
Bought a lot more NVDA in late October
I’ve written a lot about NVDA for more than a year now, and I’ve owned shares continuously since the end of May 2017 (but I have added and traded in and out of partial position at times). I think that I understand the company very well, and I think I can see where they are going. I see them as executing very well, and I’m continuously amazed at the pace of their progress. In late October, the shares really sold off. They went as low as about 35% below the recent all-time high of $292.76 to around $180. A drop from the high is not a sufficient reason to buy more. I have other stocks that have fallen more from their 52 week highs: NKTR (currently down 65%) and NTNX (currently down 34% but was down over 40% when NVDA was only down 35%). As I said, the drop alone was not a sufficient reason for me to buy more NVDA. The primary reason was that I see NVDA’s recovery to the recent peak as much more sure. I believe it to be likely that NVDA will recover faster than my other stocks. So I saw the move as reducing risk while also giving me an opportunity to use NVDA as a stronger currency to trade back into other stocks whose recoveries will probably, prediction IMO, lag behind NVDA’s recovery. Let me elaborate on why I see as NVDA as lower risk. First, NVDA has more financial strength than any other stock that I own. It has $6 billion in net cash, has stable and high gross margins, has huge operating margins, pays a dividend, and doesn’t dilute its shares (buybacks exceed share grants). The low financing risk doesn’t get any better than NVDA because NVDA doesn’t need any future financing because it generates far more cash flow than it needs to operate and reinvest for growth. I can’t say that about any of my other stocks. This reduced financing risk will be important if the economic environment changes to a situation where companies have trouble raising cash through either debt issuance or stock secondary offerings. I don’t think NVDA will ever need to get cash from outside because it can generate more than enough cash from its operations. The valuation just got too low for me to ignore the opportunity to add more shares. NVDA’s TTM P/E (based on adjusted earnings) has typically been in the high 30s. Recently it dropped to around 25 and with an earnings growth rate of 79% (that’s full year growth over the full prior year). That means that the P/E in early August 2019 will be 14.3assuming growth rate is maintained!! At the bottom when the shares were at $180 and the P/E was 25, the 1-year PEG was only 0.32! For a company attacking so many new huge vertical markets without any competition and being completely dominant in gaming and data center, how could I ignore the opportunity? Last week, I used up all the cash that I had been saving for my April tax liability. I also added back all of the leverage that I had been unwinding in August and early September. However, I wanted more NVDA than I had cash for and I have set limits to the leverage that I am willing to take on so I had to sell something to add as much as NVDA as I wanted. In total, my NVDA position increased from 9.2% at the end of September to 17.6% today. I also added more call options. Where did the money come from? I took most of it from PSTG and some from NTNX (I will explain that decision below).
Sold most of my PSTG
I explained that I wanted to buy a lot more NVDA and why. The other side of this is that I had to sell something. Why did I sell PSTG? It’s valuation looks incredibly cheap on the EV/Sales multiple. PSTG was only about a 6% position so why trim the small on? There are 4 reasons, and here they are in order of importance. First, I question whether PSTG will be able to maintain its margins in the future. There are many other companies offering storage, and the competition could, in the future, mean lower prices that will mean lower margins that will mean lower profitability. This would make PSTG much less attractive. Compared to NVDA, PSTG is in a much worse competitive position. I like my other companies more so I didn’t want to sell those even though they had larger allocations in my portfolio. Second, PSTG has a partnership with NVDA. PSTG’s storage devices are attached to some of NVDA’s GPUs. Thus, PSTG will be more successful if NVDA’s GPUs (for data center and HPC) sell like gangbusters. So I figured, if PSTG is going to be dependent on NVDA then PSTG is sort of like a derivative of NVDA….the 2 are linked. Therefore, I should just sell the derivative company and go with the one that I think is a surer bet….go with the dog and not the tail. Third, the earnings release dates for NVDA and PSTG are 11/15 and probably 11/27-11/29, respectively. They are about 2 weeks apart. Since NVDA reports first, it can get a stock bump on good earnings and guidance; this would give me the option to sell some NVDA and buy back PSTG 31 days after I sold but before PSTG earnings. While this was a consideration at the time that I made the switch, I don’t think that I’m going to buy back any PSTG shares even if NVDA shares go up a lot after 11/15. Fourth, I had an unrealized tax loss on PSTG that I could harvest to reduce my April 2019 tax liability; the NVDA drop was similar (percentage-wise) to the PSTG drop so switching seemed like a good way to reduce my taxes and switch to a better company.
Sold a fair amount of NTNX
At the end of September, NTNX was essentially my largest position at 16.5% of my portfolio. I also had most of my short put positions in NTNX. The stock had dropped sharply after the last earnings report and several weeks after the drop I added a small amount of new NTNX shares and a few more call options. Near the end of October, I decided to sell some NTNX to buy more NVDA. I still like NTNX very much, and I see the hidden value in NTNX. However, I think the hidden value may not be recognized until next September when the year over year comparisons will be apples to apples. I’m more confident that NVDA, which dropped by a similar percentage amount compared to NTNX, was/is a better candidate for a speedier recovery in its share price. NVDA reports earnings on 11/15 while NTNX is expected to report earnings in early December. I usually like to go with the earlier catalyst all else being equal.
Closed NTNX short puts and opened short puts on TWLO, AYX, SQ, and MDB
I had some short put NTNX positions which I bought back less a couple of weeks ago. The trade allowed me to book a loss to offset part of my tax liability. I decided to sell puts on TWLO (Nov 9 $80 puts), AYX (Nov 16 $55 puts), SQ (Nov 16 $80 puts), and MDB (Nov 16 $80 puts). The reason is that the shares of these companies had also dropped significantly (by around 25% compared to a 35% NTNX drop), and I thought that the four companies could rebound in November while NTNX probably would not rebound until later, maybe much later. This swap is working so far and earnings releases for TWLO, SQ, and AYX all coming this coming week.
Sold my remaining SHOP
I was only waiting for my positions to cross the 1 year holding period which happened in mid-October. I no longer have any position in SHOP.
It has certainly been a crazy market between early August and today. It’s been very volatile, even wild intraday swings. I watched my portfolio rise about 40% between the end of July and September 4, then drop by 35% by October 25, and then gain back half those loses in the past few days. Such times can bring opportunity which I tried to take advantage of as I described above. Next week, we will get more information. The election will be over which will reduce uncertainty which may well result in a reduction in volatility just because the uncertainly will be removed…this may be so regardless of which party ends up controlling the House of Representatives and the Senate. A split Congress means gridlock which is generally good for business; a Republican controlled Congress is likely also to be favorable for stocks; if the Democrats manage to win both chambers then stocks may have a tougher time because the market may view this negatively because the Trump administration will have a more difficult time implementing its business-friendly economic agenda. These are my personal opinions, and I see them related to the business environment that affects our investments. I know some people can be passionate about politics, but let’s not start a political debate or discussion on Saul’s board. Please don’t respond with any political posts. The actual business results are starting to come this week; I am essentially down to 8 stocks in my portfolio if we exclude PSTG which now is just a tiny position; these companies begin reporting earnings with TWLO on Tuesday, Nov 6 and will have completed the reporting probably in the first week of December.