Just a Fool’s February Update
Portfolio Performance as of March 1, 2019
``` Jan +22.7% Feb +34.5% ```
February and its earning results have served to further validate my investing theories in companies that are exploiting larger corporations desires to reduce non-essential internal costs by offering lower cost, higher value solutions for fundamental business operations. Largely, this is the SaaS value offering, although the industries below have their own flavor into what they are enabling.
It is my overarching thesis that data, transparency, customer choice, and computational power is driving business to push solutions to the customer edge faster and more open ended that at any point in the past. In other words, instead of internal departments (i.e., overhead) spending time focused on data management, these responsibilities are outsourced and company end-users are empowered to utilize the tools to solve business problems that best deliver solutions to their customers.
For evidence, I focus on the following factors
- Revenue Growth
- Customer Growth
- Net Retention Rate
- Net Promoter Score (where available)
Characteristics of companies that I prefer to invest in include
- High Gross Margins
- Founder-led / High Conviction in Management
- Strategy that is either in land or early stages of expand phase (innovative companies are always in one or the other and typically both)
- Large TAM to grow into
In other words, what I am seeking is an innovative company that is growing significant amounts of cash from revenue (high margins * high growth) that the management team can allocate as they see fit. I am no financial expert, but to me, it comes down to “how is management growing its war chest”. I am thinking this can help me marry my conviction for a company with the financial firepower that management has at its disposal to build a world class company.
Here are the plots for critical feedback. I use FinViz for all my P/S because I frankly don’t have the time to update this every single day. I look at the P/S at the close of the last Friday of the month I report. I pull revenues directly from Company Financial Results.
To calculate a year forward, I look at the growth rate over the past year. If it has decelerated, I assume that deceleration will continue at a rate that is 50% of the past year. If it has accelerated, I take the average of the past two quarters and hold flat for the year. I have two exceptions to this rule which is APPN and NTNX, where I focus only the subscription revenues and margins in my calculations of the company’s value and forward value. For NTNX, I severely degraded the growth moving forward given their latest guidance.
Here is my companies and how they have performed:
``` Portfolio % Ticker Notes 13.3% AYX up 24% YTD 11.5% TWLO up 38% YTD 10.1% ZS up 55% YTD 9.7% TTD up 68% YTD 9.1% SQ up 38% YTD 6.1% AAXN up 25% YTD 6.1% SHOP up 38% YTD 4.8% OKTA up 36% YTD 4.0% EVBG up 27% YTD 3.9% TDOC up 36% YTD 3.9% APPN up 37% YTD 3.7% NTNX down 19% YTD 3.6% IQ up 83% YTD 3.3% ABMD up 7% YTD 2.8% ESTC up 30% YTD 0.8% BZUN up 27% YTD ```
ALGN sold at $189 for a YTD loss of 10% (long-term gains)
ISRG sold at $490 for a YTD loss of 0% (long-term gains)
MDB sold in mid-January at $73 for a YTD loss of 13% (long-term gains)
Notes on Actions Taken in January / February
Sold out due to pressure on ASP and longer cycle for new products in the earnings call. See better opportunities in the near term after looking further into portfolio. I believe ALGN will continue to beat the market, but feel better about the competitive position of other companies.
Phenomenal low-risk company, but felt I could find higher reward companies along the way. That’s just the status of the land I am mining these days. Spoiled perhaps.
following the company’s statements and Needham presentation in re: AMZN to cash in my gains. I felt management’s focus on technical superiority might be analogous to NVDA’s over engineering of the Graphics card beyond what the market is seeking. My feeling was that AMZN might be able to leverage pre-license technology and still arbitrage the Atlas offering, where I based my investment thesis. Even after the price rebound, I am comfortable with my reasoning and will continue to monitor upcoming quarterly performance.
I took the money raised from the above sales and allocated it to OKTA, TTD, TWLO, EVBG, and left some on the sideline in cash.
Thoughts on Future Actions
My top 5 positions represent ~54% of all my holdings, meaning that I have a very long tail that can be improved upon
I will probably be out of IQ and BZUN shortly after diving deeper into the China reporting challenges and risks. I think the play has upside, but how would I know what is real? If I’m honest with myself, I’m being spectulative, moreover, for every $1 IQ earns in revenue is it costing them $1.20!!! The rising content costs is terrifying, yet… here I am riding the China wave because I feel politics has artificially depressed the market. I’m human, can improve. BZUN position size is just embarrassing, either commit or don’t.
NTNX is the other position I’m considering exiting. For obvious reasons, but those reasons feel like “timing” reasons for me. The tradeoff is “how much more could I make in 9 months before buying back in”. What makes this easier, is my entire NTNX is socked away in retirement accounts, so taxes don’t matter. I expect some action this month here. The conference call frustrated me because no analyst asked about the growth in the expansion products, which was the entire drumbeat the past several quarters. So I really don’t have anything to evaluate that against. That said, NTNX has a technology that wins in the marketplace.
TTD, TWLO, ZS, AYX, ESTC were all extremely impressive to me in their earnings reports. I also want to add to EVBG as it takes on its expansion strategy in the early innings with significant tailwinds. I will miss the CEO whenever they announce a new one (one of my hesitations), but I am very encouraged by that Jamie E. will be staying on the Board of Directors. I’d probably add in the order listed above, waiting for stock lockup on ESTC as I want to add opportunistically.
Browsing in the Aisle
INSP and MITK are my sleepers as INSP continues to find success in insurance approvals, but want to see sales growth traction.
MITK continues to have such phenomenal numbers but a depressed P/S valuation, probably related to its size. It has also publically rejected a takeover cost of $11.50/share, slightly above its current trading price. Feels like a safe place to park some cash. But is safe what I’m really seeking?
Further, I have started work documents to try and capture the metrics that I follow for each company. It takes longer than I thought, but I recognize the value that once it is built, its easier to manage.
Just a Fool