Mid-Month Portfolio Update

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Mid-Month Portfolio Update

As there have been a lot more changes than usual in my portfolio these past two weeks, I thought I’d give you a Mid-Month Update. If you have comments or questions, please, please, please make them

When I did my end of September portfolio summary, this is what my portfolio looked like:


**Alteryx 		22.0%**
**Zscaler		 	18.8%**

**Okta			14.8%**
**Mongo 		 	12.6%**

**Twilio			 8.6%**
**Zoom      		 8.3%**
**Crowdstrike		 7.2%**
**The Trade Desk	 	 5.8%**

**Elastic 		 1.9%**
**DataDog			 1.0%**

And now, at mid month, it looks like this (bunched by approximate size):


**Alteryx 		20.1%**

**Okta			15.5%**

**Zscaler		 	11.7%**
**Mongo 		 	10.2%**
**DataDog			 9.4%**

**Crowdstrike		 7.5%**
**Zoom      		 7.5%**
**Twilio			 7.4%**
**Coupa			 6.7%**

**The Trade Desk	 	 4.8%**

So what happened:
I sold out of my 1.9% Elastic position. Elastic has always been one of my lowest conviction stocks because of its open source model, and when I was looking for cash, I looked there first. This may turn out to be a mistake, but it’s what I did.

I accumulated new 9.4% positions in DataDog and 6.7% in Coupa. I’ve written both of these up in the past two weeks, and TMF Cheesehead ran a nice Anti-Fragile Analysis of DataDog as well.

I dropped Alteryx from 22% (which was too big compared to others) to 20%.

Zscaler dropped from an 18.8% position to a 11.7% position, mostly because I trimmed the position quite a bit, but also because it didn’t bounce as much as the rest of my portfolio. I trimmed because I decided that it appeared that they were having to make major adjustments to their sales motion in order to sell to larger companies, and I’d rather have a smaller position at risk until I saw the results. While “smaller,” an 11.7% is still a big position.

I trimmed a little Okta, but it grew in size anyway as the stock price had a growth spurt from $97.00 to $116.24 in two weeks!!!

I trimmed 2.5% from Mongo.

Sold all the rest of Twilio that I had in tax free accounts, for reasons described in my end of month summary. Will keep the rest.

I’ve added to Zoom but its percent has decreased slightly. Zoom didn’t fall as much as the others in the meltdown, but it’s the only one of my stocks that has continued to decline these past two weeks (from $76.00 to $71.35). I don’t have a clue why, and would welcome others’ thought on this.

I continued to use TTD for cash, also for reasons that I wrote about in my end of the month summary. It’s now my smallest position. Also may turn out to be a mistake. Who knows?

Now let’s look at how the stocks themselves did as far as bouncing back during the two weeks. Note that there have been no earnings reports in the interim that would account for the price movements, and no company specific news except minor stuff like new product announcements and analysts raising or lowering targets:


**Alteryx 		20.1%		+  5.1%**
**Okta			15.5%		+ 19.8%**
**Zscaler		 	11.7%		+  2.4%**
**Mongo 		 	10.2%		+ 16.2%**
**DataDog			 9.4%		+ 10.5%**
**Crowdstrike		 7.5%		+ 12.7%**
**Zoom      		 7.5%		-  6.2%**
**Twilio			 7.4%		+  7.3%**
**Coupa			 6.7%		+ 23.0%**
**The Trade Desk	 	 4.8%		+  7.4%**
**Elastic			 0.0%		+  2.8%**

Looking at the bounces in order, we have:


**Coupa				+ 23.0%**
**Okta				+ 19.8%**
**Mongo 				+ 16.2%**
**Crowdstrike			+ 12.7%**
**DataDog				+ 10.5%**
**The Trade Desk			+  7.4%**
**Twilio				+  7.3%**
**Alteryx 			+  5.1%**
**Elastic				+  2.8%**
**Zscaler				+  2.4%**

**Zoom      			-  6.2%**

Coupa not only was up 23% in the two weeks, but finished at an all-time high, which for a SaaS stock, two weeks after the meltdown, is really strinking! I don’t know why it did so well, except for the reasons that I wrote about in my summary a couple of weeks ago. I would welcome any insights you might have.

My portfolio as a whole is now at up 33.2%, up from up 22.1% at the end of September, which comes to up 9.1% in the two weeks (133.2/122.1 = 1.091).

The two stocks I recently added, Coupa and DataDog ended up bouncing an average of 16.75% in the two weeks. The four I’ve made substantial reductions in in recent weeks, Elastic, TradeDesk, Twilio, and Zscaler only bounced an average of 5.0%, with not even one of them even coming up to the average gain of my portfolio. But that’s very, very, VERY, short term and may very well mean absolutely nothing at all.

How did the market averages do during this period?


**S&P				+0.3%**
**Russell			        -0.5%**
**IJS 				-1.7%**
**Dow				-0.0%**
**Nasdaq			        +1.5%**

They averaged down 0.1% while my portfolio averaged up 9.1%.

What can we deduce from this? Well it looks like “Sector Rotation” is either pausing, or is over. It looks like our SaaS stocks are either recovering from an oversold situation, or this is a dead cat bounce. (Up 9.1% in two weeks is one hell of a dead cat bounce however.) It looks like the acceleration in falling of the SaaS stocks in the last few days which would still settle in September were indeed Fund Managers prettying up their portfolios for their clients, as several people suggested on the board. Or if you have any other interpretations please suggest them.

I hope that this is of interest

Saul

A link to the Knowledgebase for this board is in the Announcements panel that is on the right side of every page on this board.

For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially “How I Pick a Company to Invest In,” and “Why My Investing Criteria Have Changed,” and “Why It Really is Different.”

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Saul,

Your ruthless momentum is part of the recipe for your remarkable outperformance, unless I miss my guess. By that I mean that you sold down ZS substantially because momentum in the bounce back wasn’t there, but it was for others. The investment thesis for ZS is still sound, but you traded some ZS for stocks with better relative strength.

Even though ZS is one of the best investment ideas there is in the SaaS space, it gets a haircut to buy other stocks – ones that have the qualities you are looking for, and crucially, have the momentum. Not being attached to a stock – even one of the very best picks there is – requires the investor to be ruthless, as opposed to falling in love with your darlings.

Thus, ruthless momentum is how I understand your operational logic. Is that apt, or is there a better way of describing it?

Warmly,
Wot

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Regarding COUP being up during the most recent rotation; here is a Forbes article that just recently ran at the end of this past week:

https://www.forbes.com/sites/robertdefrancesco/2019/10/11/co…

Among the trends powering digital transformation, BSM has quickly become a much more strategic initiative at many enterprises, according to Evercore ISI.

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Regarding Zoom’s lack of bounce and continued decline - a possible reason is that its IPO lockup expires on Oct 15.

From Seeking Alpha:
https://seekingalpha.com/article/4295315-zoom-speed-lower-ip…

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… By that I mean that you sold down ZS substantially because momentum in the bounce back wasn’t there, but it was for others. The investment thesis for ZS is still sound, but you traded some ZS for stocks with better relative strength.

Even though ZS is one of the best investment ideas there is in the SaaS space, it gets a haircut to buy other stocks – ones that have the qualities you are looking for, and crucially, have the momentum. Not being attached to a stock – even one of the very best picks there is – requires the investor to be ruthless, as opposed to falling in love with your darlings.

Thus, ruthless momentum is how I understand your operational logic. Is that apt, or is there a better way of describing it?

Hi Wot, you have some of it right and some of it dead wrong.

I mean that you sold down ZS substantially because momentum in the bounce back wasn’t there, but it was for others. The investment thesis for ZS is still sound, but you traded some ZS for stocks with better relative strength. Even though ZS is one of the best investment ideas there is in the SaaS space, it gets a haircut to buy other stocks – ones that have the qualities you are looking for, and crucially, have the momentum.

If you look back at my end of the month summary, you will see that I had already reduced my Zscaler position by more than a little, before there was a hint in the air of a bounce back, and I sold a bunch more early in the first week of October, before you could tell which would bounce the most. All things being equal, usually I’ll trim stocks that are holding up the best to buy those that I have equal conviction in, but have fallen more, which is the opposite of what you are proposing. The reason I sold so much of my position had zero to do with momentum, but had to do with worry, worry because in the conference call it sounded as if they had more than a touch of worry, and my worry about their lengthening sales cycles, and them getting past the early adopters and having to sell to the C-level and all the rest.

And agreed that it is one of the best ideas in the SaaS space, but there are better ideas, companies with software that sells itself, like Alteryx’s or Zoom’s or Datadog’s.

Not being attached to a stock… requires the investor to be ruthless, as opposed to falling in love with your darlings.

I agree completely. If the story changes you must pay attention and react.

Thus, ruthless momentum is how I understand your operational logic. Is that apt, or is there a better way of describing it?

That’s completely wrong: I started buying Coupa at $129, two weeks ago. How the heck was I supposed to know that they’d end up over $157? It had nothing to do with momentum. I bought it because stock novice wrote about it in his monthly summary and I saw that its growth rate had been accelerating instead of slowing down, and then I went back and reread Bert’s writeup from January, and read their quarterly reports, etc.

As far as Datadog, I explained very clearly why I bought into it. It’s grew revenue last year at about 100% and was almost breakeven (how’s that for a Rule of 40), in spite of the rate of growth, because its products sell themselves. Read my write-up for God’s sake. As far as momentum, it just IPOed two weeks ago at $27 or so, went up over $40 the same day and had steadily fallen until I started buying at $32, and $31.92 is where my average price was (the low was $30.20 or so). That’s the opposite of buying momentum. I was buying a steadily decreasing price.

I would call my method trying to buy the best companies, and reacting when I worry about material changes in a company’s story (as I did with Zscaler). If Zscaler goes way up, with an 11.7% position I still have a plenty big enough position, and I won’t regret my decision which seemed like reducing my risk to me.

I hope that that clarifies it.

Saul

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Regarding COUP being up during the most recent rotation; here is a Forbes article that just recently ran at the end of this past week:

Thanks hmc, that’s an interesting good article, and an article in Forbes about Coupa may itself be part of the explanation for the huge rise in stock price.

Saul

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There seems to be a recurring pattern of people trying to reduce Saul’s method to some kind of simple formula … possibly because they hope that they can imitate that formula … when the reality is that Saul’s decision making is much more nuanced and based on the individual characteristics of the companies in question at the moment.

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Regarding Zoom’s lack of bounce and continued decline - a possible reason is that its IPO lockup expires on Oct 15.

Thanks Soludag, for the probable explanation. With these companies the drop is often BEFORE the lock-up expiration, in anticipation, and the stock often starts back up almost immediately after as the huge outpouring of stock doesn’t materialize. Friday or Monday just might be the low in this swoon, but who knows for sure? Not me.

Saul

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There seems to be a recurring pattern of people trying to reduce Saul’s method to some kind of simple formula … possibly because they hope that they can imitate that formula … when the reality is that Saul’s decision making is much more nuanced and based on the individual characteristics of the companies in question at the moment.

Thanks Tamhas, that’s the way I see it too, and the way I certainly hope that it is.
Appreciate you spelling it out.
Saul

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Thank you Saul, for your kind reply. I appreciate your clarifications. I regret I was not more clear in my question, as I was asking only about your mid-month update trade regarding ZS, and not your initiating positions. I agree that your explanations of your original purchases to Coupa and Datadog were clear and had zilch to do with momentum; I was simply thinking of your point about bounceback with regards to the ZS trade.

In particular, I appreciate your restatement of your method: trying to buy the best companies, and reacting when I worry about material changes in a company’s story. Part of a company’s story, from the investor’s perspective, however, seems to be informed by stock performance – whether it is bounceback, or market conviction that gets an investor reconsidering a company a few quarters down the road. I’m not saying it is the whole story; I am saying that you have pointed out stock performance before as something that has informed your idea of where to look or part of how to weigh your conviction in a trade, and I thought you were doing so again with the bounceback discussion, hence my notion of momentum being a factor.

There seems to be a recurring pattern of people trying to reduce Saul’s method to some kind of simple formula … possibly because they hope that they can imitate that formula … when the reality is that Saul’s decision making is much more nuanced and based on the individual characteristics of the companies in question at the moment.

Tamhas, I simply asked about some of the thinking behind one trade. I had no intention of trying to reduce anything, but to understand operational principles for that trade. It’s not reductionism, but comprehension that I am after. If I can synthesize or restate something in a way that is useful to the board, then I have contributed to the discussion. So far, I have failed to do so. I hope no one minds me trying.

Warmly,
Wot

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Hi Wot,
I understood what you were trying to do and hopefully nobody was offended. And I am not trying to offend Tamhas or anyone else, but I don’t think you were trying to simplify at all. Although some detractors who have come to the board occasionally have. In fact, you were doing the same thing that I have been doing for about 3 years. Which is trying to really understand what Saul does. To understand the “secret sauce”.

I have read the knowledgebase a number of times and in my opinion Saul’s portfolio management is constantly evolving. What was in the knowledgebase 3 years ago would not have led you to the SAAS companies. My guess is that in 3 years it will have evolved again.

Saul, I hope you were not offended by Wot’s Questions, I believe they were sincere. When I read your midmonth update I was also struck by how much discussion there was on stock price. There has been other months when you have almost scoffed at the idea of worrying about fast growing companies being too expensive.

But let me be clear, I am not trying to catch you in inconsistencies. I know the reasons are always different. I know it is very clear to you and I believe the ruthless part was dead on right. Your ability to zig and zag quickly astounds me, but then on other stocks you ride then for a couple years with no thought of selling. My belief is that you definitely use stock price movement as a discriminator as to whether your understanding is correct. That doesn’t mean that you don’t buy on the way down. But it does mean that if it kept going down you would question your beliefs a little harder and most probably eventually decide you were wrong and get out.

Having said all that, I will say watching you work has been both an incredible learning experience for me and fascinating at the same time. I know that I am a better investor than I was a couple years ago because of you.

I thank you for that…

Randy

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Thanks Saul for the portfolio update and the detailed explanation as always. It’s always a great learning opportunity.

Of the holdings in your current portfolio, I feel ZM may have the most vulnerability. Its still very high valuation and what o believe to be relatively shallow moat, may make its price recovery longer than the other stocks.

ZS may have the greatest uncertainty a couple months ago due to its sales model, but since its price has almost halved, its reward to risk ratio is probably attractive at present.

I’m eagerly waiting for the new earning season. Should be more interesting than usual given that it’s the first one after the big “rotation”.

Bashuzi

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I agree with Saul on the Zscaler issue. If your holding and just adding, more likely than not Zscaler will fix its chasm crossing issues and be materially more valuable than it is now. Heck, even its minimal guidance is only 11% below my 2020 expectations. Thus even the guidance was not nearly as bad as it seems.

But there are companies out there with products that are over the chasm and sell themselves as Saul indicates. Elastic is one such company, but each to their own in regard.

We are not rooting for the home team here. Obviously I think a lot of Zscaler and may just stick with all I have (which is still up more than 50% in the last 12 months or so) but there is less execution risk with many other companies to weigh against.

Yeah though, I do think Zscaler will at least equal what Palo Alto did since 2012, which is quadruple. Their shares fell 45% or so roughly during the same period after becoming a public company as Zscaler’s now has (but still at a nice profit from the IPO). Palo Alto was an easier sale though as it is a continuous innovation. Buy our appliances and not old fashion firewalls.

Zscaler is much more disruptive and its growth potential judg d by he Wall of Worry is greater. Look at all the resistance a blow back from those who work in the industry. “If you take our firewalls from us we will be naked and our network destroyed.” That is clearly not true however. As this resistance loosens that WoW will be climbed. But hey, AYX has no such resistance just struggling to increase rate of diffusion of its solution through the industries. One thing that is quite impressive is how Alteryx is just starting to penetrate Fortune 2000 companies internationally (someone correct me but 50% of Fortune 2000 sales this Q was to international companies - a large runway there to maintain growth).

Risk/reward. Albeit there is a ton to like w Zscaler. Particular as they sell a greater percentage of new customers to Fortune 2000 and a larger percentage of sales are the full transformation package. This easily increases revenues per new customers. And if existing customers start to move transformational package upsell as well, Zscaler will blow away current FUD issues.

“If” sucks. That is the only current issue between a Zscaler and an Alteryx, as an example. Much smaller ifs.

Tinker

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Btw/ this said, my only real mistakes over the past 5 years were either (1) playing earnings or (2) selling companies (like SHOP - which I decided to sell w Arista and Nvidia (who had real reasons I sell) w out a real reason but simply boredom).

There is no fundamental reason to sell Zscaler. It is simply a presence issue based upon the size of the current “ifs”. So I understand Saul’s perspective. Doesn’t mean I will follow it (or maybe I will - but have not yet as I bought more) but it is excellent reasoning depending on your portfolio methodology and time frame.

Tinker

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I’m just in a compulsive mood. Whether reviewing televisions (don’t ask) or talking Zscaler.

One thing Zscaler has is a lot of people with no pecuniary interest in Zscaler talking about Zscaler. Whether GE, Microsoft, or even Palo Alto.

Cisco’s VP in charge of their cloud security offerings is on record stating that Zscaler is the leader and that both Zscaler and Cisco would be billion(s) dollar a year companies in this industry. He also mentioned that Bluecoat (now Symantec) might be as well (as a third wheel).

For whatever it is worth and whatever you take it for. For the most part - for me - doing “nothing” {as I define it} is the best thing I can do and doing something {again as I have defined it - has almost always cost me}.

So good discussion.

I would like to know if anyone has heard of or knows of a security job that NGFWs can do that will make the enterprise network (1) more secure, or (2) less expensive, or (3) less difficult to manage, or (4) provide better user experience than what Zscaler provides.

I’d be really interested to know of such a use case.

Tinker

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BigECat: My belief is that you definitely use stock price movement as a discriminator as to whether your understanding is correct.

I can’t speak for Saul, but I do think that is a pretty good way to describe what a lot of folks seem to do around here. Most of us have seen the quote “In the short run the market is a voting machine, but in the long run it is a weighing machine.” I believe most on this board select stocks through the weighing lens (I know I try to at least). Purchases are made with the intent of investing rather than trading. When the underlying thesis is matched by increasing price – i.e. the voting matches the weighing – full steam ahead! However, when the price action falters or lags for a reasonable period, I tend to view that as the market telling me it’s time to double check my work. Especially when everything I own is moving one way, but something else is not (as Saul has recently encountered with ZM). I don’t always sell on that signal but will sometimes adjust an allocation or conviction level. For example, a lengthy price lag led me to exit PD but only trim TWLO.

I like it when what I believe is a market-beating company responds with a market-beating price. Otherwise, I’m simply gambling that I’m right and the entire rest of the market is wrong. One, I’m not good enough to make that bet very often. And two, there are enough good companies out there that I don’t really need to.

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Great thread on both Saul’s methodology.

I watch what Saul does because he is successful and there is something to learn. I wouldn’t want to duplicate what he does, because I have my own ways of investing that I’ve honed over 2 and a half decades so I can only modify what I’m doing based upon what I am learning from what he is doing. IMO, the best thing Saul has done is to bring together a group of investors with a great deal of skill and to moderate the conversation to keep it productive.

And I expect to continue to see Saul make successful investment decisions that I don’t see a complete pattern for. Some of what he is doing appears intuitive based on the full knowledge base in his head from his experiences, a knowledge base that could never be completely written down, and that I will never fully understand. I’m OK with that.

Enjoy,
Brian

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Wot, please understand that my remark was intended to point to a general pattern, not specifically to you.

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Great discussion. I want to thank you all for it. It inspired me to look back at what I actually did with Zscaler and why, and when.

I’m busy today but I’ll have more for you tomorrow.

Best,

Saul

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However, when the price action falters or lags for a reasonable period, I tend to view that as the market telling me it’s time to double check my work. Especially when everything I own is moving one way, but something else is not (as Saul has recently encountered with Zoom).

I don’t buy explanation of negative price action blamed on lock-ups expiring two or three months from now. But the lock-up expiration ending this Tuesday, the day after tomorrow, explains last week’s divergence of Zoom from the rest of the SaaS companies totally, completely, and to my full satisfaction.

Of the holdings in your current portfolio, I feel Zoom may have the most vulnerability. Its still very high valuation and what I believe to be relatively shallow moat, may make its price recovery longer than the other stocks.

Sorry, but companies with “shallow moats”, “lots of competition”, “easy to commoditize”, etc SIMPLY DON’T:

Grow revenue at 96% last quarter

Especially with an annual revenue run rate at present of close to $600 million

Have gross margins of 82%

Have positive earnings while growing said revenue at 96% !!!

Have positive operating cash flow of $51 million last fiscal year, and $31 million just last quarter alone

Have positive free cash flow of $30 million last fiscal year, and $17 million just last quarter alone

Have customers growing at 78% last quarter and 466 customers over $100,000 ARR, which number grew at over 100% from a year ago

And have a net retention rate over 130% every quarter.

Sorry but those things just don’t happen with a shallow moat. Too many competitors would already be there.

Saul

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