My Brief Reviews - November

I posted brief informal reviews of the stocks in my portfolio in April, in May, again in July, and most recently in September. People seemed to find them valuable, so I thought I’d give you a post-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!

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.

Nov 2016 – Amazon (AMZN) - My Review
I love Amazon and feel they have online commerce sewed up, as much as any one company can sew it up. In addition they have a really dominant position in cloud storage, which brings in a lot of their earnings, although they are starting to get some competition, especially from Microsoft. I started my position this time at about $550. It was $711 when I wrote in May, $746 in July, $806 in September, and it closed last week at 780. It’s now my fourth largest position and makes up 10.2% of my portfolio, down from 13.7% in September.

My biggest concern is the absence of significant earnings (which is a real lack). They do have positive earnings but they are a drop in the bucket for a $800 stock. However, in the September quarter, their results were as follows:

Revenue was up 29% yoy.
Earnings per share tripled to 52 cents, up from 17 cents.
Operating Cash Flow was up 49% from a year ago. And was $30.10 per share, up from $20.04.
Free Cash Flow was up 59% from a year ago. And was $17.73 per share, up from $11.23.
Operating Cash Flow was up 17% SEQUENTIALLY !
Free Cash Flow was up 16% SEQUENTIALLY.
And their Cloud Revenue from AWS was up 55%.

Those are pretty amazing results for a company their size!

Nov 2016 – Arista (ANET) - My Review
Arista used to have a much higher PE. A year and 10 months ago it had a PE of 80. I started this postion at about $62.70. When I wrote my Review in July, it was at $63.60, it had a PE of about 26 which was much more reasonable than 80, and why I had established a position in spite of the ongoing lawsuit with Cisco, and the (minimal?) threat of “white box” competition. It closed Friday at $94.65, up 51% from my initial purchases.

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, saying that they owned the patents on ideas that had been developed while the principals had been working at Cisco. Cisco has won some rulings, which was expected, but Arista has already issued its work-arounds, and the majority opinion seems to be that Arista won’t really be much affected even if they lose the patent cases. Cisco got an injunction against Arista importing parts that potentially infringed on Cisco’s patents, so Arista cautiously set up US manufacturing for their work-around parts just in case, even though costs would be higher and margins lower. However US Customs just ruled that Arista’s work-arounds no longer infringe on the patents, which is a big relief for Arista, and the price rose about 7% in a day on Nov 21 when it was announced.

For the March quarter revenue was up 35% and EPS was up 36%. For the June quarter revenue and EPS were both up 37%. For the Sept quarter, revenue was up 33% and EPS was up 41%. Trailing 12-month earnings are up 41%. All of those numbers sound really good to me. Its PE is now at 31. 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 a lot better than Cisco does. I also understand that their special sauce is software rather than hardware, which reduces the risk of it becoming a commodity.

Nov 2016 – Bank of the Internet (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 received about changing my mind about it previously. This is still 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 actually affect the company?) On the other hand the company is growing rapidly, earnings and book value are both growing rapidly, and its efficiency ratio is very low (good). I started buying this time a few months ago at $17.60. After briefly rising, it dropped to $15.50 but it has now risen 59% from that bottom to $24.67. Even at $24.67 its PE is just 13. I have a 5.2% position (below average size) and I don’t want to let it to get too much over 5%. While the shorts seemed to have backed off and the stock price is working its way up, just remember that the law suits haven’t reached a conclusion yet and that there is still plenty of risk.

Nov 2016 – Hubspot (HUBS) - My Review
This is one of those rapidly growing companies that while really rapidly growing, isn’t profitable yet. 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 Sept I wrote that their 12-month trailing operating cash flow looks like this (in millions):

Now, after Sept earnings it’s
+19.7 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 51% the first nine 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. Customer count rose 29% yoy in the most recent quarter. Bert wrote them up in June, which is when I bought in to stay.

There is a fly in the ointment though. Their quarterly losses look like this (remember these numbers are losses):

2014: 23 21 28 25 = 97
2015: 18 17 27 12 = 74
2016: 11 07 05 

It looks great, doesn’t it? As if losses are melting away rapidly (down from 27 cents to just 5 cents in the Sept quarter), and as if they will break even at least by next quarter. But hold on a minute:

They hold a huge advertising, networking, and conference event each year (called their Inbound Event). It is usually in the third quarter, and that’s when they have had their largest loss each year because of the associated expense. However, this year the big Event was scheduled for the fourth quarter, so that that loss in the Sept quarter was small and the comparison looked unbelievably good (from a loss of 27 cents down to a loss of 5 cents). But the trouble is that it was unbelievable, and was caused by the Inbound Event being in the next quarter, where they actually predict a larger loss than the year before. So don’t get carried away by the big reduction in loss in the September quarter. They still predict a loss of 43 to 45 cents for this year (2016). Of course that’s better than last year’s 74 cents, and the 97 cents the year before, but if you look at the series 97, 74, 41 (let’s say), at the end of 2017 we’ll probably still be looking at an annual loss of 5 or 10 cents. I decided to trim my position a little. It’s my second smallest at 3.4%.

Nov 2016 – LGI Homes (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 12-month trailing revenues are $778 million, up 38% yoy !!!.

Their annual earnings have been 43, 107, 138, 250 cents. Their 12-month trailing earnings are $3.14, which are up 47% from $2.14 a year ago. The PE at the current price of $33.23 is 10.6!!! Their Conference Call was VERY positive (and you should read the transcript… if you are interested in investing in the company)

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 at 14.2% of my portfolio. The price, which was at $25.60 when I did my review in May, hit $39 in Sept, but fell back to $29 in October, and closed Friday at $33.23. This position was once over 20% of my portfolio and I have trimmed it some. I probably won’t be adding more because it’s such a big position, but I’m quite comfortable with it at 14%.

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 was not really 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 bouncing around $6.00. I’ve been uncomfortable with the wild price swings, and the big price drop, and have reduced my position to where it’s in the range of just 2% (my smallest position). Granted, they said they’d be investing this year, and they have a huge open field in front of them, but revenue up 37% with no growth at all in earnings for about five quarters, I think has everyone a little discouraged. I plan to just hold.

This is a very small company and an enormously high-beta stock. Be cautious.

Nov 2016 – Paycom (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 $2.6 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, and it’s easy to use.

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. 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 $43.30, and it is up to a 5.5% position. It has a current PE of roughly 55, which is much larger than I like, but it is growing trailing earnings currently at 119% yoy !!! I figure that for 2017, 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 and another in November.

In the Sept quarter revenues were up 40%. And 98% of revenues was recurring revenue! (READ THAT AGAIN!) Gross margins were 83% of revenue. Adjusted net was up 91%. Their only debt is the mortgage on their corporate headquarters. They are buying back stock.

I don’t usually like high PE stocks, but this one has a lot going for it and I recently added to my position when the stock price fell after those earnings (some people are never satisfied).

Nov 2016 – Signature Bank of NY (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, Signature has always ranked in the top three in each category in which it was rated. This is the third consecutive year that it was voted the Best Business Bank. Now, none of that gives you any 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 small precautionary write-off in case of losses on their Chicago taxi medallion loans. In September they decided to basically write off almost their entire loan portfolio of Chicago taxi medallion loans, and put it behind them, but the bank continued to have great growth in book value (up 18% yoy to $65 per share), and an even more incredible efficiency ratio of 31.9%.

After the election the stock price rose from $118 to $150 in a few days, which I thought might have been a bit of irrational exuberance and I trimmed my position a little, but they are still my 2nd biggest position at 12.7% of my portfolio, with a PE of 19 at the current price of $150 (I’ve been in since January and I have bought from $144 to $116 and back.

This is one of my highest confidence stocks. Look: medallions make up just 2% of their total loans. The rest of their loan portfolio is $26 BILLION (!) And they have less than 0.1% of that remaining $26 billion in non-accrual! (That’s less than a tenth of one percent!) Most banks would kill for a loan portfolio like that!

They are growing loans, book value, etc, incredibly. Their efficiency ratio is like a branchless bank. In fact, it’s even lower than Bofi’s. I’ll be happy with adding again if it pulls back again. Just my way of seeing it.

Nov 2016 – Shopify (SHOP) - My Review
To over simplify, they set up and license websites for businesses that want to have an internet sales presence, and then they take a little cut off each sale. That’s ultra-simplification of what they really do. Shopify has been doing wonderfully, roughly doubling revenue every year compounded. From 2012 to 2015 revenue has gone: 24, 50, 105, 205 million dollars. (Take another look at that!)

After three quarters of 2016 their trailing 12-month earnings are up 93.3%. Still no earnings, but losses are shrinking and are now only 13 cents for the last 12 months. Revenue seems to be almost all recurring. They dominate their space. Even AMZN closed their competing product in 2015 and told people to just 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 it had a price of $26.50, which was down from $32.00 in response to an earnings report in which revenues were up 95% (!) I bought my initial position at $26.50, and have accumulated more as it rose. Now the price is $43.30 (up 63% from my initial purchase) and it’s my 3rd largest position at 11.0%. I’ve still been adding. 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. He wrote another in November.

The way I see it is that Shopify purposely spends just over revenue each quarter in order to show a tiny loss of 1% or 2% each quarter so that they can keep investing in grabbing greenfield market share. They know that if they ever report a profit, even a penny, everyone will expect them to make more and more profit each quarter, and they’ll have to limit expenses, but they want to focus on grabbing market share, at least for the next four quarters. They say they are comfortable with their profitability target for the fourth quarter of 2017. Sure they are! They can turn profit on whenever they want by just limiting expenses a tiny bit.

Nov 2016 – Skechers (SKX) - My Review
I really like Skechers shoes, but I’ve been getting discouraged about Skechers stock. It sold off because of apparent slowing in the US market. I’ve sold some of my shares, so it’s down to a mid-size position at 5.7% at its current price of $22.14. Its PE is 13, which is quite low for them, but their earnings have been down for the last two quarters yoy. This is a 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):


And, they are still up for the first nine months this year because of a very large first quarter. However that large first quarter of 2016 will make a very bad comparison in the March quarter of 2017. Some mitigating factors are that they were affected by the bankruptcy of Sports Authority, which flooded the market with going-out-of-business sales. Also they are changing their Korean business to a joint venture instead of distributors (which delays revenue recognition). And they were hurt by foregn exchange as the dollar rose against other currencies where they were selling lots of shoes. We’ll just have to see where it all goes from here.

Nov 2016 – Synchonoss (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. They had a legacy business of activating new smartphones, which was stagnating, but before it stagnated totally they expanded into running clouds for the phone companys’ customers, which is growing much faster and is much higher margin, and all recurring. Now it has formed a partnership with Goldman Sachs (which gives it gravitas), and with Verizon, to produce and market high security cloud and enterprise products, and seems to have turned the corner on that. In response to the last earnings and conference call it rose from $39 to $45 in a day (about two weeks ago) and it is now at $49. Even with the rise it’s at a reaonable PE of 21 at its current price of $49.

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 those enterprise and cloud products with Goldman Sachs and Verizon. This spend affected EPS negatively in the first two quarters, so that they were flat with the year before. However, in the Sept quarter they clearly turned the corner. They’ve jumped up to be my 5th largest position at about 7.4%.

Their guidance for the Dec quarter is as follows (percents refer to the midpoints):

Adj revenues - up 25%.
Cloud revenue - up 36%.

If we exclude the one-time payment of our Verizon’s strategic partnership announced in the fourth quarter of 2015, our guidance implies cloud growth of roughly 60% at the midpoint.

Activation revenue - up 11% given the seasonal strength expected from both AT&T and DIRECTV channels in the holiday period.
Adj gross margins – 62.5% .
Adj operating margins – 28.5%
Adj Earnings – up about 35% to 82.5 cents from 61 cents

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?)

Nov 2016 – Splunk (SPLK) - My Review
This is a relatively 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 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


That’s a ten-bagger on revenues in five years! While earnings are miniscule, free cash flow grew from $7 million to $104 million in that same time period. They are on a Jan, Apr, July, Oct calendar and the Oct quarter isn’t out yet, but July 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.

Splunk has a somewhat unique pricing model in that users buy a license for a fixed amount of data to go through software indexers, and then must pay overage charges when additional data goes through. Every year, the volume of data rises at most enterprises by as much as 50%. The bet that Splunk is making is that the huge costs associated with customer acquisition are going to be amortized over the years, over a substantially higher amount of revenue than that which is being currently reported (and with no further costs of acquisition). This is very different than companies that depend on selling more seats to each customer for organic growth. That’s a difficult sell. Splunk doesn’t care how many seats you have, just how much data is being analyzed. And that keeps going up.

Splunk was new and my smallest position, at 3%, when I wrote these reviews in September, but it’s now up to 4.6% of my portfolio.

Bert wrote about it in March and again in August.

Nov 2016 – Silver Spring (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 potential recurring revenue. Their trailing earnings, after growing like mad, have flattened out some as they try to implement all these huge orders they’ve received. I have a 5.4% position, which puts them in my middle group. Bert wrote about them recently for the second time, and discussed their method of recognizing revenue, and how it doesn’t really show how well they are doing.

Nov 2016 – Ubiquiti (UBNT) - My Review
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 be taking his tranquillizers again, and has quit challenging NBA stars to one-on-one basketball matches, has calmed down, and has gotten interested in the company again, and in the last four quarters they seem to have taken off. Last quarter, revenue was up 36% and earnings were up 55%. I’m not the only one who has noticed this as their stock price has taken off. Their PE is 21 even after the price rise. They are my 8th largest position at 5.6%.

Positions Exited Since Sept:
I haven’t added or exited any positions since the last Brief Reviews.


For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board


Thank you, Saul.
As always, your time, effort, and generosity are very much appreciated.


Saul, you’re looking prescient regarding HUBS – it’s down almost 20% this month. Do you think what you said here (about the conference) has anything to do with it? Or is the market seeing other problems?