Portfolio performance
We are now ¾ of the way through 2018. My portfolio results are in the table below:
YTD Mo ch S&P YTD Mo ch YTD diff Mo diff
1/31/18 25.6% 25.6% 4.9% 4.9% 20.7% 20.7%
2/28/18 37.4% 9.4% 1.0% -3.7% 36.5% 13.1%
3/31/18 40.7% 2.4% -1.6% -2.5% 42.3% 4.9%
4/30/18 41.0% 0.2% -1.2% 0.4% 42.3% -0.2%
5/31/18 55.8% 10.4% 1.2% 2.4% 54.6% 8.0%
6/30/18 52.3% -2.2% 2.0% 0.8% 50.4% -3.0%
7/31/18 51.1% -0.8% 5.6% 3.6% 45.5% -4.3%
8/31/18 104.8% 35.5% 9.0% 3.3% 95.8% 32.2%
**9/30/18 93.4% -5.6% 9.6% 0.6% 83.7% -6.1%**
6/18/18 80.7% 1.4% 79.3% Local peak
9/4/18 111.9% 3.4% 8.9% 103.0% Global peak
August was just an unbelievable month with my portfolio increasing from +51.1% at the end of July to +104.8% at the end of August. The gain in one month was 32.2%! That’s a result that I would be VERY happy with for an entire year. The portfolio continued to rise peaking at +111.9% on September 4th before my stocks began dropping. Unlike most of the other drops during 2018, this drop seemed to affect my stocks but not the market (S&P500). Maybe there was a sector rotation happening. Toward the end of September my stocks started to recover, but the portfolio dropped 5.6% compared to +0.6% for the S&P 500. For the year, I am still +93.4%.
Previous portfolio updates
August 24, 2018: https://discussion.fool.com/gauchochris-82418-portfolio-update-3…
May 29, 2018: https://discussion.fool.com/gauchochris-portfolio-update-5292018…
March 2, 2018: https://discussion.fool.com/gauchochris-portfolio-on-322018-3300…
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…
Portfolio holdings
Stock (S+O) 8/24/18
NTNX 12.95% **16.50%** 2.0 17.23%
AYX 18.15% **18.15%** 1.0 17.56%
SQ 14.36% **16.66%** 1.4 13.20%
TWLO 10.05% **12.88%** 1.5 11.71%
NVDA 8.00% **9.21%** 1.4 10.77%
MDB 9.78% **9.78%** 1.0 8.26%
PSTG 5.04% **6.03%** 1.7 6.05%
ZS 6.07% **6.07%** 1.0 0.00%
NKTR 2.05% **2.95%** 2.5 3.67%
SHOP 0.43% **1.40%** 6.0 1.05%
PVTL **0.00%** 10.77%
options 10.60% 12.77%
cash 2.06% **2.06%** 0.97%
I currently have 10 positions, 9 of which I intend to keep; I plan on selling the rest of my SHOP position in October once these positions cross the 1-year holding period so that I can avoid paying short term capital gains taxes.
The above table shows (in the left column) only shares that I own with the options positions in their own row. As you can see, options are a net 10.6% of my portfolio. This net value is derived from the sum of the ITM value and time value and includes any negative value from short options positions (i.e. short puts and covered calls). Of the 10.6%, 6% is in-the-money value and 4.6% is time value.
The bolded column is the allocation including the value of call options (negative values of short put options were removed). I consider this column the most accurate measure of my allocations. The far right column contains what my allocations were as of my last portfolio update on August 24, 2018.
Finally, the percentages in the column between the bolded column and the August 24th portfolio allocations represents how many call options I have for each of my positions. For example, for NTNX I own approximately 1 call option share equivalent per share that I own (1+1=2), and, for SHOP, I own approximately 5 call option share equivalents per share that I own (5+1=6). So as you can see, even though I own more in actual SQ and AYX shares than in NTNX shares, my NTNX is close in allocation to SQ and AYX, and, in fact, with a move up in NTNX share price, my NTNX allocation would very quickly become my largest holding.
Portfolio changes
I have made some changes to the portfolio since the last portfolio report.
PVTL: By far the biggest change was my complete exit out of PVTL. I sold out completely the day after the earnings report. My exit included the sale of all of my shares, the sales of all of my Dec 2019 calls, and the repurchase of all of my short puts. That was a lot of cash suddenly available. I bought ZS, NVDA, and NTNX; I also increased my cash position in anticipation of a big tax bill in April.
ZS: I bought a substantial position in ZS, biting the bullet on its valuation. I don’t at all understand how ZS works; I bought based on the numbers and the last earnings report as well as what I read on this board. The discussion about ZS’s competitive advantage played a big role in my decision to add it to the portfolio. Because the valuation is higher than the valuations of my other fast growers, I expect the billings growth to remain very high; if the growth disappoints, then the stock price would be vulnerable to a big drop, IMO.
NVDA: NVDA recently announced so many new great products that are aimed at giant markets that I expect to grow. I expect continued great things from NVDA, and watching the progress and speed of product launches and the execution of the company just increases my confidence that they will grow for a long time to come. I added shares, sold shares, added shares a few times. These in and out moves have nothing to do with NVDA, but more to do with my opinion of my other positions relative to NVDA. NVDA makes be wish that my total allocations could sum to more than 100%! I am continuing to trade the weekly options on NVDA every week: just time value harvesting on the short puts and rolling the short $300 puts. I plan to continue this until the prices reaches $300.
NTNX: Ah NTNX. I recently posted some things about NTNX. Here are those posts:
https://discussion.fool.com/ntnx-thoughts-33995148.aspx?sort=use…
https://discussion.fool.com/i-am-not-saying-nutanix-would-be-in-…
I believe that NTNX is the most undervalued of my positions. The multiple is just way too low when compared to companies with similar growth rates, gross margins, and net promoter scores. The EV/Sales (TTM) ratio is about 1/3 of the ratio for TWLO and AYX. The only hesitation that NTNX gives me compared to say TWLO or AYX is that NTNX has a good competitor (VMWare) while TWLO and AYX do not have any real competition. But the numbers don’t lie: NPS of 90, no margin erosion, high growth levels maintaining or even increasing, and G2K firms flocking to NTNX. I think that the company will continue its growth and assuming that comes to pass, I expect the stock could be much higher within a year. So what did I do about it? I added trading positions in the mid $50s and again a little below $50. Then I stopped buying more shares, but I kept adding more call options in small amounts. On the last trading day of the month, I even sold some of my SQ shares to buy more NTNX at around $42.50. NTNX’s share price drop is the primary reason why my portfolio is down for the month of September. We will see what happens oven the next year…
NKTR: You may have noticed that my NKTR allocation dropped. I believe that NKTR-214 is going to continue to show great clinical results and that we will see more data this year. In the past week, NKTR just announced 2 new clinical trial for NKTR-214. It’s likely that NKTR will keep adding more clinical partners and more starting more clinical trials for NKTR-214 for a wide variety of cancers. I sold some of my call options to buy more call options in NTNX. Nothing against NKTR; I just think that NTNX’s stock has a better chance to go up within a year than NKTR’s stock. NKTR has always been a small holding, and I plan on keeping it that way.
SQ: SQ has been on a tear. My allocation rose close to 18% so I trimmed it to buy more NTNX on Friday. Fortunately, I had some shares in a tax deferred account so I sold those enabling me to keep all my shares in my taxable accounts.
AYX: AYX was getting close to a 20% holding. I wanted to trim it but I didn’t because all my shares are in taxable accounts and all my shares have been held for less than a year (first shares were purchased in January). Also, my conviction on AYX’s future growth is very high. It’s about 9.5% off of the peak price, but this doesn’t concern me.
SHOP: I still hold a small position in SHOP which I plan to sell out of within a couple of weeks. The reason is slowing growth. The shares have been going higher. I think there may be 2 reasons for the recent increase. First, there is a lot of cannabis hype in the market, and SHOP is heavily involved in the cannabis marketplace in Canada. Second, the recent augmented reality announcement with Apple may have something to do with the share price increase. I still plan on selling my position completely, and I will probably be fortunate to get a good price in a couple of weeks.
How I make allocation decisions
I thought that I would share some thoughts on how I decide how to allocate and how I decide to shift the allocations amongst my holdings. First, I will say that I have learned a tremendous amount from Saul. It’s coming up on 5 years ago when Saul started this board. For me it’s been an incredible journey in learning how to make good investment decisions. I know that my decision making has improved and I feel that it’s now very easy for me to decide what to do. I have found that I have left behind much of the thinking that lead most investors to underperform the market. But there is always room for improvement and always more one can learn. Never stop learning.
OK. So how do I decide that A is better than B. For example, why did I move so much more into NTNX. To answer that I have to get into what I think is important in a company.
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First, it starts with the growth rate. What was the growth rate? If it’s above 40%, that’s great. But that’s just the starting qualifying factor.
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Second, what has been the change in the growth rate in the past 6-8 quarters or so. Has it been slowing, maintaining, or increasing? This is really, really important, I think. Maintaining growth is very good but accelerating growth says a lot about where the company is heading. SQ and NTNX have been accelerating their growth. ZS too. So far we’ve been looking only at revenue.
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Third, I look at the gross margins. High growth in revenue doesn’t mean much unless the gross margins are high. AYX, NTNX, SQ, and ZS all have incredible margins. TWLO’s margins are lower and that’s limited my allocation in the company until I heard on the last conference call that TWLO is intentionally keeping its margins lower (55%) than what it expects to do in the longer run (65%). 65% is still considerably lower than the GMs of the other companies, but that statement gave me more confidence to not trim TWLO after the recent run up in share price. The reason is that it tells me that TWLO believes that it has pricing power. High gross margins are critical because they a) enable reinvestment into the fast growth in revenue and b) enable future profits and cashflow.
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Fourth, I try to get a read on the company’s competitive advantage. Does the company have a differentiated product or service offering? And are they innovating fast enough to maintain their competitive advantage? If the answers are “no” then I won’t invest. A “no” answer tells me about 2 risks: disruption (they might get disrupted) and margin erosion (due to competitive pressures); both would lead to deteriorating financials and a risk of a stock price decline. This is the reason that I never bought OKTA. I felt that OKTA might get disrupted because security technology could well change very quickly. This is also the reason why I like NVDA so much: they are innovating at a lightning fast pace which makes it really, really hard for a competitor to disrupt them.
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Fifth, I look at valuation. What is the valuation compared to similar companies or compared to the other companies that I own or could own? This fifth factor, with consideration with the first four factors, drives much of my decision making.
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Sixth, a special circumstance such as what I perceive to be misreading by the market can offer an opportunity. This happened with TWLO in 2017 through early 2018. This sort of thing can lead to big moves in the stock price once the “market” catches on. I think this is happening with NTNX, and, since factors 1-5 all seem solid, factor 5 and 6 pushed me to add a bunch to my already large position.
Final thoughts
All the companies have reported the June/July quarter now. Since PSTG and NVDA close the books about 1 month after the other companies, we get an extended earnings season for my companies. In fact, the quarter just ended again so there’s just a small break between earnings period as long as I continue to hold PSTG.
I continue to be optimistic about the portfolio because the business results of these companies continue to be outstanding. As investors in a small number of companies (highly concentrated portfolio), we have a duty to closely monitor the news about the companies that we own (and their competitors), related news that might affect our companies and their markets, and their financial/business performance. This constant stream of incoming information, the movement of the stock prices, and the changes in relative prices (relative prices of companies that we can invest in to each other) give us the opportunity to make new decisions on an ongoing basis.
Chris