My Brief Reviews for September

I posted brief informal reviews of the stocks in my portfolio in April, again in May, and again in July, and people seemed to find them valuable, so I thought I’d give you another pre-earnings review. Remember that I do them mostly for myself, so they will vary in quality, thoroughness, and length. The stock prices are as of Friday’s close. Please remember that my conclusions may change anytime. I welcome questions and comments!

I’ll start with a quick update on how my portfolio is doing. When I posted my brief reviews in July my portfolio had just hit a record high for the year of 100.9% (in other words, up 0.9%). As of now, two months later, I’m at 105.2%, up 5.2% on the year.

To put my various position sizes in perspective, I now have 14 positions, so an “average” position would be 7.14%.

The positions are listed alphabetically.

Sept 2016 – AMZN - My Review
I love Amazon and feel they have both online commerce and the cloud sewed up, as much as any one company can sew them up. I was adding small amounts whenever I could. However, AMZN was up to about 11.7% of my portfolio when I wrote in July, so I wrote that I was slowing down on adding. The price has risen further since then. I started my position this time at about $550. It was $711 when I wrote in May and $746 in July, and $806 now. It turns out that I continued to add small amounts to the position as well, in spite of my good intentions, and it is now up to 13.7% of my portfolio. I really need to quit adding. My only concern is the absence of significant earnings (which is a real lack). Even the $1.78 in earnings last quarter (up from 19 cents the year before) is a drop in the bucket for a $800 stock. They are however producing growing positive Cash Flow and I’ll accept that.

Sept 2016 – ANET - My Review
Arista used to have a much higher PE. A year and 8 months ago it had a PE of 80. In July, at $63.60, it has a PE of about 26 which was much more reasonable, and why I established a position in spite of the ongoing lawsuit with Cisco, and the (minimal?) threat of “white box” competition. My understanding is that a number of the principals had been working at Cisco and developed a revolutionary way of doing things, but Cisco, plagued by being the incumbent, didn’t want to implement something that would make its bread-and-butter products obsolete. So the members of the development group quit Cisco and opened their own company (Arista), which is taking market share by leaps and bounds. Cisco sued and has won some rulings, which was expected, but Arista has already issued its work-arounds, and the majority opinion seems to be that they won’t really be much affected by losing the patent cases (but what do I know?)

For the March quarter revenue was up 35% and EPS was up 36%. For the June quarter revenue and EPS were both up 37%. Trailing 12-month earnings are up 43%. I wrote in July that I was building my position slowly and it was at at 5.7% of my portfolio. Well, the price has risen 35% since July (from $63.60 to $85.70) and Arista now makes up 7.6% of my portfolio. Its PE is 30.5. I’m not a techie, and I can’t claim to understand the specifics of what they do, but what I do know is that they do it better than anyone else, and specifically better than Cisco does. I also understand that their special sauce is software rather than hardware.

Sept 2016 – BOFI - My Review
Bofi is a branchless bank (internet-only), which has been under a concentrated short attack for some time. It wasn’t on my list of brief reviews in July. I had started my position, but I was hesitant to discuss it because of all the hassle I had had about changing my mind about it previously. This is a very risky stock because of the danger that some of the shorts’ claims may turn out to be damaging enough to really hurt the company. (Management is clearly not clean as driven snow, but the question is, How will that coming out really affect the company?) On the other hand the company is growing rapidly, and earnings and book value are both growing rapidly, and its efficiency ratio is very low (good). I started buying a few months ago at $17.60. After briefly rising, it dropped to $15.50 but it has now risen 45% from that bottom to $22.50. Even at $22.50 its PE is just 12. I have a 5.1% position (below average size) and I don’t want to let it to get too much over 5%.

Sept 2016 – HUBS - My Review
This is one of those rapidly growing companies that isn’t profitable yet. Really rapidly growing. Neil brought it to the board a year ago. Here was his description of what they do (abbreviated):

HubSpot provides a comprehensive cloud marketing and sales platform aimed at medium-sized businesses (especially B2B) that is formed around the concept of “inbound” marketing, which its cofounders pioneered (and literally wrote the book on).

Inbound marketing is based on the idea of bringing customers to you, rather than going out and chasing them. As customers get more empowered with technology, reaching out to them isn’t as effective as it used to be: customers do their own research online, they don’t answer their phones if they don’t recognize the caller’s number, unsolicited marketing emails go to their spam folders, ad-blockers block your online ads, etc. Inbound marketing is about building up an online presence that will bring in leads over time.

HubSpot’s integrated applications include social media, search engine optimization, blogging, website content management, marketing automation, email, CRM, analytics and reporting — and everything is stored in a single database with full integration amongst all the tools.

In July I wrote that their 12-month trailing operating cash flow looks like this (in millions):
-12.5
-10.7
-06.8
-04.8
-00.4
+03.6

Now, after June earnings it’s
+10.6 million

So, as you can see, they’ve broken into positive trailing operating cash flow. On the other hand, 12-month trailing earnings still has a way to go, but trailing losses come down every quarter. Revenue was up 49% from 2013 to 2014, and up 57% from 2014 to 2015, and up 53% the first six months of this year. These are extraordinary rates of growth, and they don’t seem to be slowing much. Customer count rose 33% last year, so that 57% rise in revenue meant that each customer is spending a lot more on average from year to year. Bert wrote them up in June, which is when I bought in to stay.

Sept 2016 – LGIH - My Review
You don’t get much better than this! LGIH is a home building company that presents apartment renters with the proposal that they can own their own home for the same or less than they pay in rent. It’s hard offer to pass up.

Their annual revenues the last four years have gone: $143, $241, $383, $630 million dollars (and $385 million in the first 6 months of this year).

Their annual earnings of 43, 107, 138, 250 cents (and 153 cents in the first 6 months of this year). In the March quarter, earnings were up 73%. They had a “weak” June quarter with earnings only up 45%. The PE (at the current price of $36.60) is 12!!!

The stock price fell from $35.50 to $19.50 in the February panic, amid fears that the oil crunch would kill the market for houses in Texas and the west. That hasn’t happened at all, at all, at all !!! It’s my biggest position now at 17.2% of my portfolio. The price, which was at $25.60 when I did my review in May, is now back up to $36.60. I won’t be adding more because it’s such a big position, but I’m fairly comfortable living with 17%.

Sept 2016 – MITK - My Review
This a really small company (Market Cap $265 million) whose legacy business was depositing checks from a mobile phone, and it has gone into a growth business of verifying identity and helping filling out forms from a mobile phone. It has some great things going for it, and it is expanding as fast as it can. In fact, they said that expansion and hiring new sales teams for cross selling will cut earnings growth to zero this year, which I wasn’t happy with.

The good news is the news: They keep signing up large new clients. They keep introducing new products. They keep getting granted new patents. Their revenue keeps rising. The bad news is the expenses mentioned above, and the legal expenses that they are now not counting when figuring their adjusted earnings.

I bought at about $4.40 about eight months ago, and to my amazement they hit $9.30, up 110%, in May. This means their PE had grown to 34, which made me quite nervous! I reduced my position at prices from $9.20 to $8.10 and then bought back what I had sold from at prices from $7.80 to $6.80. They are now at $8.11, up about 84% from where I bought initially (but I’ve added at various prices along the way, of course). Granted, they have a huge open field in front of them, but a PE of 30 with little growth expected for this year, is a bunch. My position was about 4% in July, and is still about 4%. I plan to just hold.

This is a very high-beta stock. The price went up over 50% from $6.00 to $9.30 in 5 weeks, and the very next 5 weeks dropped back to $6.40. Now it’s back at $8.11. What a ride! Who knows where it will be tomorrow?

Sept 2016 – PAYC - My Review
PAYC has a SaaS business model. They sell solutions for small to mid-size companies to manage their payroll and Human resources. They are cloud-based and all of the tools can be accessed through a single web page. The company IPO’d in April of 2014 and has a Market Cap today of $3 billion. Their suite of tools allows businesses to manage the complete employment life cycle, from recruitment, to retirement. This is a full-service functionality, including data analytics that lowers labor costs, drives employee engagement, and reduces exposure.

Andy first brought PayCom to the board in June of 2015, but I didn’t start a serious position until May of this year. I wrote in July that it was a 2.7% position at the then current price of $45.50. That made it a small, but not tiny, position. As with most positions that survive the cut, it has grown in size. Its price is now $50, and it is up to a 4.9% position. It has a current PE of roughly 70, which is much larger than I like, but it is growing trailing earnings currently at 118% yoy. I figure that for all of 2016, it will slow down to about 90%, and I’m willing to tag along. It does have a lot of things I like such as: significant ownership by founders who are still active, positive cash flow, renewable revenue, that kind of thing. And Bert wrote a nice article about them in May.

Sept 2016 – SBNY - My Review
I still believe that Signature Bank remains one of the best banks in the world! I’m not exaggerating about this. Forbes rates the largest 100 banks in America on a series of metrics, weights them mathematically, explains explicitly how they rated them, and publishes the results as “The Best Banks in America” or somesuch. SBNY has been in the top ten for six years running. In 2014 they scored 2nd in the Americas, in 2015 they were first, actually number one, and this year, in 2016, they scored 6th out of the hundred on Forbes’ metrics. In addition, this year they were named 1st Best Business Bank by the New York Law Journal in its annual reader survey. They also ranked 2nd in the Best Private Bank and Best Attorney Escrow Services categories.

Since the Law Journal introduced its reader survey in 2010, SBNY has always ranked in the top three in each category in which it was rated. This is the THIRD CONSECUTIVE YEAR it was voted the BEST BUSINESS BANK. Now, all of that is no guarantee about the stock price, but it’s a lot better than being rated “worst”.

In the March quarter they had very good, but not outstanding, earnings (up 23%), great growth in book value, incredible efficiency ratio of 32.2%. In the June quarter they took a precautionary write-off in case of losses on their taxi loans. This affected earnings, which were only up 7%, but the bank continued to have great growth in book value (up 22.6% yoy), an even more incredible efficiency ratio of 31.3%. The way I figure it, next quarter will be a great sequential comparison without the write-off. They are my 3rd biggest position at 11.3% of my portfolio, with a PE of 15 at the current price of $116.20 (Price has been as high as $162 and as low as $114. I’ve been in since January and I have bought from $144 to $116 and back. I’ve never sold a share.

Sept 2016 – SHOP - My Review
They have been doing wonderfully, doubling revenue every year compounded. From 2012 to 2015 revenue has gone: 24, 50, 105, 205 million dollars. (Take another look at that!)

In the first six months of this year they already have 159 million. Still no earnings, but losses are shrinking and are now only 14 cents for the last 12 months. Revenue seems to be all recurring. They dominate their space. Even AMZN closed their competing product in 2015 and told people to use Shopify. The stock is quite expensive with a P/S ratio of about 10. It’s very atypical for me, but I really like it. In July it was my 8th largest position out of 19 positions at 5.1%. and had a then current price of $26.50, which was down from $32.00 in response to an earnings report in which revenues were up 95% (!) Now the price is $43.30 and it’s my 4th largest out of 14 at 9.2%. They are still putting off positive earnings and concentrating on massive growth. I got into it when MF RB’s recommended it two months in a row. That got my attention. Bert wrote a nice article on it in May, but I already had my position. I bought my initial position at $26.50, and have accumulated more as it rose.

Sept 2016 – SKX - My Review
I really like Skechers, which makes comfort casual and sport shoes. It sold off because of apparent slowing in the US market last quarter, but they say some of sales moved to first and third quarters, and if you combine the first two quarters revenue is up 18% from last year, and earnings are up 25%. I’m comfortable with it as my 5th largest position at 8.75% at its current price of $22.10, down from a price of $30.80 in July. Its PE is 12.3, which I believe is a record low. This is a very good company, and selling at a very low price when compared to other companies in the same field. Its earnings growth from 2012 thru 2015 was amazing, running (in cents):


  06
  39
  91
 150

And, for the first six months this year earnings were 111 cents. Again, it’s at 12 times earnings!

Sept 2016 – SNCR - My Review
This isn’t a company that is going to take over the world, but it’s an interesting, relatively unknown, boring sounding, but surprisingly innovative little company that is quite profitable, moving into new areas, and consistently growing revenue. It’s at a reaonable PE of 19 at its current price of $42. It also has started positive Free Cash Flow, which went from $0 in 2014 to over $60 million in 2015. Its cloud revenue, which is recurring, is now over 50%, and growing more rapidly than the legacy activation revenue. They have been spending a lot of money building out enterprise and cloud products with Goldman Sachs and Verizon. This spend affected EPS negatively in the first two quarters, so that it was flat with the year before. However, some of the new products were released near the end of the June quarter, and they seem to have turned the corner. They are my 8th largest position at about 5.3%.

What worried me at one point was whether they would be able to compete with the big boys in the cloud area (AMZN, MSFT, GOOGL, etc), but SNCR is in customer cloud, not enterprise cloud. The price dropped from $52 to $22.50 on these fears, but it’s now back to $42. (It was $33.70 in July, and a 3.3% position.) I got into this as a MF RB a year and a half ago (they recommended it at $45.70), but if you’d like to learn more about it, Bert has written an article on this one too. (How did he ever run across it?)

Sept 2016 – SPLK - My Review
This is a new position for me, but it was a MF RB recommendation a couple of years ago, and Bert recently wrote it up. Splunk licenses software that helps businesses monitor their performance. For example, its software helps companies to analyze shoppers’ behavior, fleet performance, and website security threats, among other random things. It collects, indexes, and analyzes unstructured machine data, which makes it a natural for all the data to come with the Internet of Things. Revenue in fiscal 2011 thru 2016 (Jan) went


 66
121
199
303
451
668

While earnings are miniscule, free cash flow has grown from $7 million to $104 million in that same time period. Last quarter revenue was up 44%. They are the top dog in what they do and no one does it better. As of 2014 they already had over two-thirds of the Fortune 100 as customers. And as companies collect more data they pay Splunk more to analyze it. Data grows sometimes 50% per year, compounded.

Splunk is my smallest position at 3%

Sept 2016 – SSNI - My Review
This is a little position I got into because of an article by Ophir Gottlieb. It’s an internet of things company that does smart lighting and stuff for utilities and cities. They’re the real thing! They signed up Con Edison for all of New York City, which is a big deal. They have cities from Manchester England, to Miami and Sao Paolo, and Stockholm and Copenhagen, and lots more. Lots of recurring income. Their trailing earnings were (-50) in Dec 2014, (-42) in Mar 2015, (-20) in June, +04 in Sept, +09 in Dec, +22 in Mar, and +24 after the recently announced Jun quarter. That’s pretty impressive but it still gives them a PE of 63 at their price of $14.00. (They were at $12.30 when I wrote in July). I have a 5.7% position, and they are my 7th largest. Bert wrote about them too.

Sept 2016 – UBNT - My Review
This is my third new position that wasn’t here in July. I had been in Ubiquiti before but got out when they stagnated for a while. For eight quarters actually, but they are finally accelerating again. They have an unusual business model where they have hardly any sales and marketing expenses but rely on crowd sourcing for that, and let their customers tell them what research they need, but it all works very well. The CEO seems to have gotten interested in the company again, and in the last three quarters they seem to have taken off. Last quarter, revenue was up 28% and earnings were up 38%. I’m not the only one who has noticed this as their stock price has taken off in the past six months or so. Their PE is 22 even after the price rise. They are my 11th largest position at 4.2%. There has been a lot of discussion on the board in the past month, if you are interested.

Positions Exited in July: I wrote extensively on the boards about why I was exiting each of these.

July 2016 – FB
I just can’t warm up to Facebook, and got out recently for a third and final time. Sorry. It’s just not my thing.

Jul 2016 – PN
Too many moving pieces and a buyout offer.

Jul 2016 – SEDG
I recently wrote about why I wasn’t interested

Jul 2016 – TSLA
I had taken a truly tiny position, but after reading up on Tesla, there were too many moving parts, way too many “if”s, to keep my position as a long term position.

Positions Exited Since July:
July 2016 – CBM
Cambrex supplies little pieces of drugs, and finished compounds, and generic meds to big drug companies like Gilead, and many others, but Gilead is still a big part of their business, and Gilead has had some poor quarters and guidance. Cambrex just built out a large facility with plenty of empty space so they can “keep up with demand”. But at the same time they give very conservative guidance of maybe 15% annual revenue growth. I decided to find a better investment.

Sep 2016 – CRM
I was concerned about a weak quarter in June, and then they lost a big customer, HP, to Microsoft. And they have a huge PE. I asked the board for help in analyzing the situation and ended up selling out.

Sep 2016 – CYBR
This was my smallest position at the time of my July review at just 0.5%. I sold out.

Sept 2016 – PYPL
I only had a position for a couple of weeks. I bought them for keeps, but then they gave in to threats from Visa, the way I saw it, and gave away their future. I reversed course.

Sept 2016 – RUBI
I discussed at length why I exited.

Sept 2016 – SWKS
Although I really liked the company and the management, I decided I had had too much in SWKS (and in other companies that make and sell physical tech products that can be commoditized). I also was concerned about all the competition that seems to be coming out of the woodwork, while on the other hand management keeps saying “Nothing to worry about”. They seemed to be a company that wasn’t in control of their own future. I’m not tech savvy enough to evaluate the competing claims so I nibbled away at my position for cash, eventually selling all the way out. I wasn’t interested in keeping a position just on the possibility that Apple has a good product launch. That seemed like very short term thinking.

Thus, compared with July’s Brief Reviews, there were six position exited and three new positions listed (BOFI, SPLK, UBNT). My other 11 positions are carried over from July and have mostly grown in the size of the positions.

I hope you found this useful! Please comment or ask questions if you have any questions to ask.

Saul

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Saul, what’s your disposition of TEAM? You started a small position in July then added a small amount in August. Now it’s not referenced.

Many thanks.

Saul, what’s your disposition of TEAM? You started a small position in July then added a small amount in August.

Sorry, I forgot about it as it wasn’t one of my July brief reviews. It was just a small try-out position and I didn’t keep it. There was no fatal flaw with it that I can remember. I just had other stocks that I preferred to put my money in.

Saul

Thank you, Saul, for your post.

Regarding SBNY, I also own shares. I recently posted that my investment in SBNY has been in the red for much of the time I’ve owned shares.

You noted in your post above:

“I’ve been in since January and I have bought from $144 to $116 and back. I’ve never sold a share”…as well as that it is your 3rd largest position.

Given that the current share price is just slightly above $116, are you at all concerned about your investment? I understand that you think the next quarter’s results will be much better, in light of the taxi medallion issue, but are you that confident that this will turn out to be a good investment for you in the foreseeable future?

SBNY is no where near being my 3rd largest investment, so it seems to me that you must be in the hole far deeper than me at this point.

Thanks for any light/encouragement you can offer on this.

Given that the current share price is just slightly above $116, are you at all concerned about your investment? I understand that you think the next quarter’s results will be much better, in light of the taxi medallion issue, but are you that confident that this will turn out to be a good investment for you in the foreseeable future?

Hi Speedy, In looking at all my purchases, my average price seems to be about $130 give or take a little, which puts me down about 10.6% at the current price on this investment. That doesn’t seem like a huge percent to me. As to my expectations for the future, look, medallion loans were only 4% of their loans 6 months ago, and as they grow their business every quarter, those loans become even less. Even as they took a write-off, they didn’t show a loss, they didn’t even show a decline in earnings, they just grew more slowly for the quarter. Meanwhile, book value per share was up 22.6%! The efficiency ratio was 31.3%! You just can’t imagine how incredibly good those numbers are!

Efficiency ratio is very simplistically non-interest expenses (SG&A, etc), as a percent of revenue, the inverse of operating margin. This means that SBNY has an operating margin of about 69%…Operating Margin! An ordinary large bank like Bank of America had an efficiency ratio of 88% in 2014 and 66.5% in 2015. That means that their expenses were 88% of their revenue(!) in 2014 and 66.5% in 2015. SBNY’s was 35.1% in 2014, 33.6% in 2015, and 31.3% last quarter.

No, I may turn out to be very wrong, but I’m really not worried at all about my SBNY stock.

Hope this helps.

Saul

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Hi Saul,
Their trailing earnings were (-50) in Dec 2014, (-42) in Mar 2015, (-20) in June, +04 in Sept, +09 in Dec, +22 in Mar, and +24 after the recently announced Jun quarter. That’s pretty impressive but it still gives them a PE of 63 at their price of $14.00.

I am looking at your SSNI numbers. If I use your eps numbers I get a p/e of 24. The company shows adjusted earnings of .02 .02 .08 .10 for the last four quarters. I know you sometimes adjust the earnings yourself but the difference seems to be large. What am I missing?

Andy

Their trailing earnings were (-50) in Dec 2014, (-42) in Mar 2015, (-20) in June, +04 in Sept, +09 in Dec, +22 in Mar, and +24 after the recently announced Jun quarter. That’s pretty impressive but it still gives them a PE of 63 at their price of $14.00.

I am looking at your SSNI numbers. If I use your eps numbers I get a p/e of 24. The company shows adjusted earnings of .02 .02 .08 .10 for the last four quarters. I know you sometimes adjust the earnings yourself but the difference seems to be large. What am I missing?

Hi Andy, nice to see you on the board.

I said current trailing earnings are 24 cents, but they were only 22 cents (2+2+8+10=22). My error.

22 cents into a share price of $14 gives a PE of 63.6. I don’t see where you get a PE of 24.

Best,

Saul

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Thanks Saul,
I misunderstood. I thought you were giving earnings by quarter. Thanks for the help. Looks like an interesting company.

Andy

Saul,

You are making an a great case for SBNY. If one subscribes to “Buy low sell high”, this appears to be a ripe opportunity for an initial investment in a high quality business…which I intend to do this morning.

Thank you.

Jim

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You are making an a great case for SBNY… this appears to be a ripe opportunity for an initial investment in a high quality business

Thanks Jim, but remember that’s just the way I see it, and there are no guarantees, so take that into account. I have certainly been wrong before, and will be again.

Saul

Thank you, Saul…this DOES help!

As always, I appreciate it!

Saul,

Great write up, thanks.

It is hard to argue against your case with SBNY on those numbers

Not sure I understand your case re PYPl however. You said you “bought them for keeps, but then they gave in to threats from Visa, the way I saw it, and gave away their future. I reversed course.” Do you lose faith so quickly considering PYPL’s early mover advantage and the increasing ubiquity?

Do you lose faith so quickly considering PYPL’s early mover advantage and the increasing ubiquity?

Hi fireblade, I bought PYPL as an independent company, competing on all levels. Then the Visa CEO said “If they don’t give in we’ll attack them in ways they haven’t dreamed of!” - And PYPL came to an agreement with Visa which I couldn’t completely evaluate, but I knew they were giving up some of their future to make peace. So it was no longer the company and opportunity I invested had invested in, so I sold it. I may have made a mistake, and misinterpreted completely, but to tell you the truth I never looked back.
Saul

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My understanding is that PayPal cannot afford a fight and need to be everybody’s best friend if they are going to continue to increase their reach. They agreed a similar deal with MasterCard. That said, I recently sold on the basis of price but will look to get back in at some lower point

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Some more color on the Visa deal’s implications for PayPal here:

http://www.msn.com/en-us/money/topstories/the-market-is-miss…

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Some more color on the Visa deal’s implications for PayPal here:

I had seen that article on the Visa PayPal deal (and others) and I didn’t know how to evaluate the balance between the clear immediate negatives and the hoped for eventual positives. But clearly the company and its prospects had changed, and I couldn’t be sure whether it was for better or worse, which was why I sold.
Saul

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Jim: with a certain effort I can just about accept your premise that it may be possible to be a high quality business and a bank at the same time but the corollary you imply that this state of grace can be determined at the time of investment is too much of a strain and goes much too far!

Saul, Thanks for your generosity of sharing the monthly reviews. They are fabulous learning pieces and fascinating to read. I am invested in ANET, BOFI, SHOP and SKX as well. Looking to get in SBNY and HUBS.

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