Just a Fool’s March Update
Portfolio Performance as of March 31, 2019
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Jan +22.7%
Feb +34.5%
Mar +37.6%
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Plotting Manageable Cash (Gross Margin * Growth Rate) by Valuation (P/S)
In my effort to better understand “relative value”, I have formed a way to compare / contrast high growth, high margin companies by their valuation.
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.
P/S vs Manageable Growth Plot:
http://imgur.com/a/4BXjlan
1 Year Forward P/S vs Manageable Growth Plot:
http://imgur.com/a/n6mvjDN
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 - 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.
Comments about Changes from February to March
There were not many changes to these charts, as most companies have reported and growth rates are what they will be for the quarter. ZS saw acceleration in its valuation, while OKTA, TTD, and others saw some contraction. Nothing material.
MITK, TTD, AYX, TWLO continue to look like opportunities relative to the best-fit line. MITK is either a hidden gem or there is a variable missing – such as having a shorter runway left in the TAM.
If the market contracts its valuation tolerance, then all of these companies should experience contraction. My focus is not on the macro waxings and wanings, but rather, the relative performance.
March Portfolio Overview
March was admittedly less action oriented than February as less of my companies reported, and while there were some companies reporting that I watch, nothing jumped out at me as a “must buy”. In fact, I spent much of March doing the hardest thing – nothing.
I am at a point in my portfolio where I feel “solidly bought in” to my top positions (those >10%). I’m willing to let any/all of those positions run as high as they want to run. But I’d rather use the remaining 35% of my portfolio buying into the next generation of high conviction stocks. While many here would encourage me to add to my greatest earners, my feeling is that I am not shying away from them (10% feels meaningful to me), rather I am allowing them to run. At this point, I feel most comfortable adding to emerging positions or taking on tryout positions. I could be talked out of this position, but I would really only see that occurring during a market downturn when I would probably concentrate my portfolio into higher conviction stocks as my preferred defense strategy (this is how I went from a 25+ portfolio of large caps to what I have today over the course of the past year).
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
Performance
Here is my companies and how they have performed:
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Portfolio % Ticker Notes
14.7% AYX up 41% YTD
11.8% TWLO up 45% YTD
11.6% ZS up 81% YTD
9.6% TTD up 71% YTD
8.6% SQ up 34% YTD
6.4% SHOP up 49% YTD
6.0% OKTA up 30% YTD
6.0% AAXN up 24% YTD
5.3% EVBG up 32% YTD
3.6% APPN up 29% YTD
3.1% TDOC up 12% YTD
3.1% IQ up 61% YTD
2.8% MITK up 2.2% YTD (since adding)
2.7% ABMD down 12% YTD
2.3% ESTC up 12% YTD
0.9% BZUN up 42% YTD
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Closed Positions
NTNX sold at $33.53 for a loss of 15%
Added Positions
OKTA bought at $79.06
EVBG bought at $69.76
MITK bought at $11.98
Notes on Actions Taken in March
NTNX:
I exited NTNX rather quickly after reading further into their sales cycle issues and rereading the conference calls, as well as, prior conference calls. I suspect I will one day be back in NTNX if they can right the ship, but in the interim, I felt better about other stocks that I added. I had been wanting to move from half to full positions in OKTA and EVBG, so I did so.
OKTA:
Strong quarterly report and I approved of the acquisition that will deepen its “stickiness” into tying together complex work products (my read). The sell off following the quarterly report felt too opportunistic to ignore, and this alone felt like reason to justify selling NTNX.
EVBG:
Continuing to be the little engine that is, can, and will, I added to EVBG following the NTNX sell to push it into a full position in the portfolio. Note: For me a full position is 6%.
MITK:
I took a half position in MITK. My influences were based on the testing of my value curve below. MITK is by far and away the most under value investment that I follow given its high growth rate and high gross margin. Furthermore, I liked that MITK has what I perceive to be an established floor of an outstanding offer of $11.50/share. I’m not sure if they will, or won’t, be subject to a takeover bid. However, if they are, it will be very interesting to see what they are valued at.
The rest of my cash, as well as potential trades, is waiting on and observing the impacts of share lockup from ESTC. I am very interested in growing the position, however, I don’t feel the urgency to “hurry up and do it now” when I am uncertainty what the market action may be.
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
Chopping Block
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.
AAXN and APPN are patient positions for me. AAXN seems to have a long future ahead of it, and it continues to innovate its offerings, but it pushes further and further out its subscription revenues with including multiple years of software solutions with its refresh of a departments hardware. Nevertheless, it is addressing an extremely topical and timely need in the community with no competition in sight. I can’t see any reason, other than feeling like I could jump in and out of another company during the interim, to give it up. The same may hold true of APPN. I’m convinced of its valuation and hidden growth in subscriptions – the MF’s reviews have been very helpful here as well – and as a user of low-code solutions, I can see the benefits into the future. I’m also a fan of their founder. If I had to raise cash, it would probably come from the order above.
Shopping Cart
TTD, TWLO, ZS, AYX, ESTC. As stated above I’m waiting for stock lockup on ESTC as I want to add opportunistically. Further, I would add to these names as a defense strategy during a stock downturn as I think it would be opportunistic to add to my highest performers.
Now that earnings season is officially past us, I also plan on rescreening for high growth (>40%), high margin (>70%) companies in the space. I will post what I find.
Just a Fool