This portfolio update has been abbreviated to respect Saul’s rule of not discussing options and leverage. The full portfolio update can be viewed on my website/blog:
https://gauchorico.com/2021-07-31-portfolio-update/
I had intended on posting my next portfolio after my portfolio companies with quarters ending on 30Jun (DDOG, NET, LSPD, and UPST) had reported their results. However, I’ve made some adjustments that I’d like to discuss, so I decided to write this relatively short write-up at the end of July.
PRIOR PORTFOLIO UPDATES
2021-06-30 Portfolio Update:
https://gauchorico.com/2021-06-30-portfolio-update/
2021-06-04 Portfolio Update:
https://gauchorico.com/2021-06-04-portfolio-update/
2021-05-07 Portfolio Update:
https://gauchorico.com/2021-05-07-portfolio-update/
2021-03-31 Portfolio Update:
https://gauchorico.com/2021-03-31-portfolio-update/
2021-02-12 Portfolio Update:
https://gauchorico.com/2021-02-12-portfolio-update/
2021-01-31 Portfolio Update:
https://gauchorico.com/2021-01-31-portfolio-update/
2020-12-31 Portfolio Update:
https://gauchorico.com/2020-12-31-portfolio-update/
All Portfolio Updates:
https://gauchorico.com/category/blog/portfolio-updates/
PORTFOLIO PERFORMANCE
**GR YTD S&P500 YTD**
Jan 3.1% -1.0%
Feb -1.2% 1.7%
Mar -13.2% 6.2%
Apr -1.5% 11.8%
May -17.5% 13.3%
Jun 28.0% 15.3%
Jul 33.7% 18.0%
Since the YTD low (-23.5%) on 13May, the portfolio roared back hitting an all-time high on 28Jul (+37.9% YTD). The increase from the 13May YTD low to the ATH was 80.3% in just 11 weeks (just under a quarter)! The explanation on how I managed an 80% return since 13May, please see the portfolio update on my blog.
Comparing the portfolio’s 28Jul ATH (+37.9% YTD) with the S&P 500 (+18.1% YTD) on that day, the portfolio outperformed the broad index by 19.2% or more than double the S&P 500’s return! That day marked the largest positive differential (+19.2%) between the portfolio and the S&P 500. However, it was not the largest differential during 2021; on 13May the differential was -33.6% so in 11 weeks the differential has swung 52.8% in favor of the portfolio showing that both the portfolio’s absolute return as well as the portfolio’s relative performance to the S&P 500 have swung hugely in a short amount of time.
The portfolio dropped in each of the final two days of the month finishing +33.7% YTD compared to the S&P 500’s YTD return of 18.0%.
Last month, I updated a table that detailed my portfolio’s big drops since the start of 2018 (when I began tracking the portfolio’s gains and losses in more detail). I wrote about such drops in a previous post:
https://gauchorico.com/big-drops/
That table is posted again below.
**PEAK — BOTTOM % DROP Days: Old Peak to New ATH**
4Sep2018 – 24Dec2018 -37% 176
26Jul2019 – 22Oct2019 -37% 207/291*
18Feb2020 – 16Mar2020 -45% 84
9Jul2020 – 16Jul2020 -14% 25
5Aug2020 – 11Aug2020 -25% 27
13Oct2020 – 10Nov2020 -27% 65
22Dec2020 – 3Jan2021 -14% 45
12Feb2021 – 17Jun2021 -35% 125
*Intraday recovery/Closing price recovery
Now that the portfolio has fully recovered from the big 2021 drop, it’s fair to ask when the next drop might start. Of course, no one can know that answer. The portfolio may continue to post more ATHs into August and beyond, or it may experience another big drop at any time. In the last portfolio update, I wrote that I thought it was more likely that the portfolio would post additional new ATHs before the next big drop. In fact, that’s exactly what happened in July: the portfolio had six additional new ATHs in July, and it currently sits just 3.1% below the ATH.
2021 Notable Days for the Portfolio
Below are some of the notable days in 2021.
**Date YTD Change Notes**
01/27/21 -2.2% local bottom
02/05/21 +12.6% new ATH
02/08/21 +14.0% new ATH
02/09/21 +16.6% new ATH
02/10/21 +16.8% new ATH
02/11/21 +17.8% new ATH
02/12/21 +18.3% new ATH (current ATH)
02/25/21 -3.4% -6.3% on the day
03/03/21 -6.3% -7% on the day
03/04/21 -13.6% -9.2% on the day
03/05/21 -17.1% -4.1% on the day
03/08/21 -22.8% -6.9% on the day
03/09/21 -11.0% +15.3% on the day
03/11/21 -4.3% +9.6% on the day
03/18/21 -10.2% -6.7% on the day
03/24/21 -15.6% -8.6% on the day
03/29/21 -19.0% close to 3/8/21 trough
03/31/21 -13.2% +6.6% on the day
04/13/21 +4.0% +8.0% on the day
05/04/21 -10.9% -6.1% on the day
05/06/21 -21.1% -9.6% on the day
05/07/21 -17.5% +4.6% on the day
05/13/21 -23.5% new YTD low
05/14/21 -16.3% +10.9% on the day
05/20/21 -5.3% +7.1% on the day
05/24/21 -0.1% 7th consecutive up day
06/10/21 +11.3% +5.4% on the day
06/17/21 +19.8% new ATH (finally!)
06/18/21 +23.2% new ATH; +5.1% on the day
06/22/21 +27.4% new ATH; +6.2% on the day
06/23/21 +28.0% new ATH
06/24/21 +28.5% new ATH
06/28/21 +30.8% new ATH
06/29/21 +31.2% new ATH
07/06/21 +33.4% new ATH
07/09/21 +33.9% new ATH
07/14/21 +25.6% -4.0% on the day
07/22/21 +34.2% new ATH
07/23/21 +36.9% new ATH
07/26/21 +37.0% new ATH
07/28/21 +37.9% net ATH
*2021 portfolio peak (ATH)
Weekly YTD Performance
**DATE GR S&P500 DELTA**
01/08/21 6.5% 1.9% 4.6%
01/15/21 6.4% 0.4% 6.0%
01/22/21 10.2% 2.4% 7.9%
01/29/21 3.1% -1.0% 4.2%
02/05/21 12.6% 3.6% 9.0%
02/12/21 18.3% 4.9% 13.3%
02/19/21 14.2% 4.2% 10.0%
02/26/21 -1.2% 1.7% -3.0%
03/05/21 -17.1% 2.6% -19.7%
03/12/21 -6.3% 5.3% -11.6%
03/19/21 -7.7% 4.5% -12.3%
03/26/21 -15.8% 6.2% -22.0%
04/01/21 -9.5% 7.4% -16.9%
04/08/21 -3.3% 10.4% -13.6%
04/15/21 0.0% 11.9% -11.9%
04/23/21 3.1% 11.8% -8.7%
04/30/21 -1.5% 11.8% -13.4%
05/07/21 -17.5% 13.3% -30.7%
05/14/21 -16.3% 11.7% -28.0%
05/21/21 -2.4% 11.3% -13.7%
05/28/21 3.4% 12.6% -9.2%
06/04/21 2.3% 13.3% -11.1%
06/11/21 12.6% 13.8% -1.3%
06/18/21 23.2% 11.7% 11.5%
06/25/21 28.0% 14.8% 13.2%
07/02/21 28.9% 16.7% 12.1%
07/09/21 33.9% 17.2% 16.6%
07/16/21 23.8% 16.1% 7.6%
07/23/21 36.9% 18.4% 18.5%
07/30/21 33.7% 18.0% 15.7%
ALLOCATIONS
**TICKER 7/31/21 6/30/21 5/31/21 4/30/21 3/31/21 1/31/21 12/31/20**
CRWD 19.1%* 19.9%* 20.0%* 30.2%* 27.7%* 31.2%* 31.5%*
DDOG 16.4%* 15.7%* 16.7%* 12.0%* 12.9%* 10.7% 10.4%
NET 13.4% 15.9% 15.2% 16.6% 15.2% 17.9%* 17.8%*
DOCU 13.2% 12.6%* 6.6%* 5.7%* 5.6%* 16.2%* 16.4%*
UPST 13.0% 7.8% 6.3% 4.4% 5.7% — —
LSPD 11.1%^ 11.3%^ 12.1%^ 13.1%^ 13.2%^ 4.8%^ 3.3%
SNOW 6.0% 5.6% 6.8% 6.9% 3.0% 0.5% —
ZM 5.5% 5.8% 10.8%* 11.0%* 12.3%* 11.5% 11.0%
GOLD 2.0% 2.0% 2.9% 1.6% 1.7% 1.4% 3.0%
NEM — — — 1.0% 1.1% 1.0% 1.0%
PATH — — — 0.1% — — —
PTON — — — — 4.0% 4.0% 4.2%
BPRMF — — — — 1.2% 1.3% 1.4%
Cash 1.4% 6.5% 3.0% -0.2% 1.2% 0.8% 0.7%
* includes 2023 LEAPS; ^ includes 17Dec call options
PORTFOLIO CHANGES SINCE 30JUN
*** Sold all DOCU Jan 2023 calls: Used all of the proceeds to purchase DOCU shares.
*** Sold NET shares: Reduced allocation by about 3.5% from an allocation of 16.8%. Also sold some covered calls. My target allocation is now 10%.
*** Bought more UPST: Bought more UPST shares on several occasions during July using cash and proceeds from the NET shares sales to fund these purchases.
*** Paid estimated tax on capital gains: About 2% of the cash allocation was used to paid capital gains taxes.
Explanation of Portfolio Changes
The two changes that I want to explain are the NET allocation reduction and the UPST allocation increase.
NET Allocation Reduction
I wrote this a month ago:
I have no leverage and no options positions on NET. In my opinion, NET is highly valued compared to other hyper growth companies. NET’s EV/S is among the highest among its cohort companies. In addition, since 12Feb, NET’s stock price appreciation has outpaced its growth. Even adjusted for a 51% growth quarter (reported on 6May), NET is trading 111% above its 12Feb closing price. Even though NET has shown steady revenue growth for a year and a half, I believe that lots of future success is already baked into the stock price. I have zero interest in leveraging my NET position. All of my shares are in taxable accounts, and my highest cost basis shares will go long-term in about five weeks. I may consider reducing my position then.
The NET share price continued to increase in July even rising as high as $122.77 on 29Jul. This price is 143% of the 12Feb price and 29% higher even after adjusted for Q1’s revenue growth. In my opinion, NET’s shares have growth far more than is justified for its demonstrated growth. The shares were already frothy at the end of June ($105.84) with much future growth baked in. NET needs to show us some nice growth acceleration to justify its valuation. I do like all the new products. I like their plans and strategy. I like how NET is doing good in the world. But, in the end, I’m an investor looking to maximize my portfolio’s growth. NET needs to show us the money, and until it does so in a big way, I needed to cut back the allocation which I started doing at $115/share. I intend to decrease my allocation further to about 10%, and I intend to do so prior to the 5Aug earnings release.
UPST Allocation Increase
I wrote this a month ago:
In summary, UPST is definitely on track, and it’s a company with great progress and potential but also some risks that I’d like to see mitigated. Interestingly, with this stock comes great temptation: temptation to sell some after a huge stock price gain in a very short period and temptation to add to a “winner”. While I added a small allocation to my shares after earnings when the stock dipped back into the $80s, I’ve mostly resisted trading in and out on the swings. As long as the business continues to perform, I’d be hard pressed to sell any shares (unless the price gets too crazy….what’s crazy? Maybe $225 in the near term). Until I see some of the risks mitigated, I’ll likely not add shares (unless the price gets too cheap….what’s cheap? Maybe sub-$90).
Prior to the above summary, I detailed both UPST’s growth potential as well as its risks. I didn’t want to invest too much into UPST until some of the risks were mitigated. Further details of my analysis can be found in my 2021-06-04 Portfolio Update. So why did I change my mind and add quite a lot to my UPST allocation in July?
First, with the share lockup expiration behind us, UPST’s extreme volatility settled down with UPST trading in a tighter range (about $110-$130) for several weeks. With this share price stabilization +/- $10 of the price of the 15Apr $120 follow-on equity offering, I became more comfortable adding to my position. In addition and more important, the positive news on UPST has been building with more new customer announcements, most recently the addition of Associated Bank with 220 customer locations:
https://ir.upstart.com/news-releases/news-release-details/as…
In addition to being one of UPST’s largest bank partners, Associated Bank will be using Upstart’s lending platform on its own website rather than having customers passed to it by Upstart. As an investor, I love this and want to see more and more of these types of arrangements. The partnership between UPST and Associated Bank began in February 2021, five months before it was announced. This delay makes me wonder how many other partnerships are already in place but not yet announced.
I expect that the lending environment has already improved (this week I read that consumer confidence in the U.S. in July has hit a 17-month high). Also, the U.S. Bureau of Economic Analysis (BEA) on 29Jul issued a news release that contains some information that bodes well for the possibility of increased demand for unsecured personal loans:
https://www.bea.gov/news/2021/gross-domestic-product-second-…
The release notes an increase in personal consumption led by spending on food services and accommodations. Specifically, personal outlays (i.e. spending by individuals) increased by $681B while their disposable income decreased by $1.42T. Now that’s interesting. People are itching to spend but they earned less so how do you think they’re going to fund all that spending? Furthermore, I would think that spending will continue strong as the economy continues to open.
While the risks that I outlined a few weeks ago are still present, I’ve reassessed the reward versus the risk and increased my position. I was eager to increase the allocation prior to the 10Aug Q2 earnings announcement date.
GOING INTO EARNINGS
In the past, I’ve typically posted portfolio updates after a cluster of earnings announcements by my portfolio companies. This practice has given me the opportunity to explain my revised thinking on my holdings. In contrast, this portfolio update is just before my portfolio companies will begin to report their results (starting next week on 5Aug). This enables me to explain my thinking just before an earnings result.
Date
LSPD 5Aug BMO
DDOG 5Aug BMO
NET 5Aug AMC
UPST 10Aug AMC
SNOW 25Aug (Est)
ZM 31Aug (Est)
CRWD 1Sep (Est)
DOCU 1Sep (Est)
The table above shows the earnings release dates for my portfolio companies; those companies with an “Est” after the date have not yet confirmed the release dates, so these dates are my own estimates. The first four companies have quarters ending in June, and the last four companies have quarters ending in July.
For the companies reporting their June quarters, I have formed opinions on how good the results might be in light of expectations, valuations, and recent stock price movements. In particular, I am very optimistic about the upcoming results for LSPD, DDOG, and UPST.
I expect LSPD to have a blowout quarter with strong guidance, and I wouldn’t be surprised to see the stock price rally after the earnings announcement in spite of recent share price appreciation. However, I’ve decided not to make any additional bets on earnings because I already hold a significant number of 17Dec call options that I bought early in 2021. If I did not already own these options, I might be inclined to make some bets on earnings.
I expect DDOG to report a strong quarter with a good chance for revenue growth re-acceleration. DDOG’s valuation, adjusted for revenue and revenue growth, is favorable compared to most other SaaS companies. In recent weeks, I’ve made profits on trading DDOG short straddles and deep-in-the-money puts. I’ve reinvested some of these profits in long in-the-money call options that expire on 20Aug. I think it’s likely that DDOG shares will rally after reporting the Q2 results.
Earlier in this portfolio update, I’ve shared my opinion that NET shares are overvalued compared to the growth that the company has thus far displayed. I’ve been reducing my allocation, and I’m not interested in betting on the upcoming NET earnings report.
UPST’s volatility has settled down, and, as I mentioned, there’s been a lot of good news reported recently. In addition, I think that the lending environment could be very favorable for UPST. It’s really hard to predict what UPST might report because the company is growing so fast. I think there’s a solid chance that UPST will report another blowout quarter and significantly raise its full year guidance as it did last quarter. For more than a month, I’ve been harvesting premiums via options trades, and, in addition to significantly increasing my share allocation in UPST, I’ve placed a number of long call option bets.
Note that I’m careful not to make these earnings bets too big; as I mentioned, these bets on DDOG and UPST are more than funded by recent trading profits. In aggregate, these bets cost less than 0.5% of my portfolio.
I haven’t yet considered whether I want to make earnings bets on the companies with July quarters. My current inclination is to pass on making such bets unless we see a significant drop in their share prices prior to the earnings announcements.
FINAL THOUGHTS
The portfolio has rallied strongly for the past 11 weeks. The fundamentals of the portfolio companies has been super strong, and, as we enter the period of next earnings results, I’m expecting them all to continue their very strong growth. The cloud titans (MSFT, GOOG, and AMZN) all displayed very strong growth in their respective cloud businesses; the results were released this past week. In addition, some of the larger SaaS companies (e.g. NOW and TEAM) showed continued strength in their earnings reports that were released in the past few days. While share prices of several of my portfolio companies (CRWD, DDOG, DOCU, LSPD, and NET) are near all-time highs, I’m optimistic about their future prospects (although NET shares have gotten ahead of themselves, in my opinion).
On the macroeconomic front, which I follow but don’t really use to make investing decisions, we’ve had several significant developments. The U.S. economy continues to reopen even in the face of a resurgence of COVID cases; I think we’re now past the point where COVID could derail the reopening (at least in the U.S.). Inflation continues to run hot, but U.S. Treasury interest rates remain very low; we’ll likely find out in the next six months whether Powell is correct about inflation being transitory (I think so); if I’m right about this then the environment will remain very favorable for stocks in general. The U.S. Federal government now seems poised to pass a $1.2T hard infrastructure spending plan which will add further stimulus to the economy The debt ceiling limit could capture increasing attention in August, but that issue will likely get solved. Overall, I’d say the environment continues to look really good for stocks in general. There could speed bumps, but the larger focus for me will be the upcoming earnings results for the portfolio companies. I’ll discuss my take on these results in my next update in early September.
GR
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