I often like to re-visit my conviction levels and see that my allocations are in line. With the few exceptions I will note below, they match quite well at present.
High Conviction - 8%+ range
Wix
Twilio
Talend
New Relic
Square*
Paycom*
Mid Conviction: 5% range
Shopify
Mongo DB
Alteryx
Elastic
Zscaler
Nutanix*
Low Conviction: 2% to 3% range
Arista
Instructure
Teladoc
Arena
(Elastic and Teladoc are positions I’ve started (well, re-started TDOC) in October.)
*With Square, Paycom, and Nutanix, my conviction doesn’t match my allocation. I reduced Square considerably this month, for many reasons, but mainly because I wanted to free up cash to buy other things, like Elastic. Paycom was already only a 4% position, mostly because I like other stuff to grow faster, despite my confidence in Paycom. Nutanix, on the other hand, is my second largest position after Wix, because the value just seems too good to pass up right now, despite my only mid-level conviction.
This is an interesting way to organize and prioritize your investments. Though, I’d be very interested in an explanation of why your conviction levels are what they are for each company.
Quick question on Elastic - From your post it looks like you have established a ~5% position. Etrade never allocated me shares at the IPO price (to my dismay). Were you able to participate in the IPO, or have you bought shares on the open market? If so, you still feel at the current price of the company is worthy of 5%? I have been back and forth internally (ha!) on opening a position (1-2%) but even at $60 it is very rich. They dont seem to have the same disruption power of a similarly richly priced stock, like Z-Scaler, who is disrupting an entire massive market (network security).
Are your conviction levels based on the business, the stock price, or both? Seems to be more based on the success of the business, and that you have more faith in NTNX the stock because of its apparent hidden growth (with which I agree).
IRDoc: Are your conviction levels based on the business, the stock price, or both? Seems to be more based on the success of the business, and that you have more faith in NTNX the stock because of its apparent hidden growth (with which I agree).
100% correct, and I should have made that clear. Conviction is based on my current outlook for the company. It’s obviously not a perfect science, but (esp since Paul asked) I’ll elaborate.
All the stocks in the high conviction section I’ve known and owned for well over a year, and some more like 2 years (or even longer). That gives me a level of security about these companies I simply can’t have for ZS or MDB, which are not only newer to me, but haven’t even been public companies for a year yet – and for Elastic it hasn’t even been a month! Newer companies will not make it to high conviction for a while, though like you mentioned with NTNX, they might get a higher allocation if the price is right! Teladoc and Arena are fliers, so to speak, and I just can’t quit ANET or INST because I believe both have a ton of potential to rebound and are drastically undervalued.
Matt: Quick question on Elastic - Were you able to participate in the IPO, or have you bought shares on the open market? If so, you still feel at the current price of the company is worthy of 5%? …They dont seem to have the same disruption power of a similarly richly priced stock, like Z-Scaler, who is disrupting an entire massive market (network security).
No IPO for this guy, sigh. Bought some at $70 and more at $59. I’m happy to have 5%. If I didn’t, I’d buy 2 or 3% now and hope for a cheaper price to buy more. (That basically is what I did.)
As for the disruptive power, IDK…their revenue has been growing faster than ZS’s. I wouldn’t be surprised to see them keep the momentum. Remember that ZS’s PS ratio was over 30 (!) a few months ago. ESTC at 24 might be a bargain! (Tongue in cheek)
> and I just can’t quit ANET or INST because I believe both have a ton of potential to rebound and are drastically undervalued.
Based on this, is it fair to say your conviction is more of a “comfort to allocate funds” then? It sounds like you have great conviction in ANET, but a low allocation. Or am I still not getting what you’re saying? If so, maybe it would prove helpful if you discussed what rate of return you anticipate (have conviction for) for each stock or each stock group.
I think what I’m wanting to say is that I see high conviction and high %allocation as not having close to a 1-1 relationship.
-FrickNFool (who hopes soon to update the additional info section for September…)
Conviction is based on my current outlook for the company.
Hi Bear. Is there a timeline associated with these conviction levels? For me, I have high conviction in Arista, but that’s a long term outlook. In the short term I expect the stock to be volatile as Nervous Nellie’s trade based on Cisco competition, overall cloud spend reports, etc. But, Arista management is too smart, in my view, not to do the right things for the business in the long term. Even with this high conviction, I don’t allocate too much to Arista due to short term pains.
And speaking of Nervous Nellies, I think SHOP owners win the prize. Could it be that while everyone has seen Shopify continue to do well, everyone is nervous that the run will end? Heck, consensus on this board was previously established that the glory days are over, it’s not unlikely that others have seen the same in the financials, and so if they stayed in, they’re nervous.
Consistent, high rate of revenue growth – possibly even accelerating
High gross margin
Demonstrated ability to rein in spending
Understanding why its customers love the company
For Arista, here’s my checklist:
miss – mostly not recurring
hit – I’ve followed for a couple years
miss – revenue growth rate is high, but not consistent and certainly not accelerating
half point – gross margin is solid but not spectacular (in the 60’s)
hit – excellent leverage is one of my favorite things about ANET
miss – I’m not a techie. I don’t really understand the product line that well.
So call that 2.5 out of 6. As you can see, no, my conviction really isn’t very high with ANET. I’d say the lumpy revenue growth and large amounts of product-based revenue are the biggest impediments to my conviction. I think Arista will keep coming out with awesome products and growing, but I have very little idea if that means increasing revenue 20% each year, or 10%, or 30%, or what. With SaaS companies, especially those growing at 40%+, it’s very likely that they continue growing at 30%+ or more. I can’t say that for Arista.
However, with a PE of roughly 35, I’m willing to stick around a couple quarters and see if revenue keeps growing at more like 30%. I even increased my position a few days ago when shares dipped under $220. I don’t think it deserves a PE of 50+ anymore, but the profits are still growing nicely so I think maybe the cigar has a few more puffs in it.
I often like to re-visit my conviction levels and see that my allocations are in line.
When I was younger I used to do the same.
At the time, part of me was curious whether conviction and allocation actually made a difference.
So I used to keep a record of my positions at the beginning of the year as if they were
equal weight at that point. Then I’d compare the results of that static port to my actual
port – the one with all the maneuvering throughout the rest of the year.
Take your port, for example. You started the year with 14 positions. If we give them equal weight
at that point – and don’t do any buys or sells – and look where they were at the end of September,
that port as up 79%. Your actual port was up 82%.
When I got older I realized sample sizes like this are too small. The results are meaningless
for decision making…in fact, they can lead one into making a wrong decision!
When I got older I realized sample sizes like this are too small. The results are meaningless for decision making…in fact, they can lead one into making a wrong decision!
So do you make allocation decisions randomly? Allocate the same to every company regardless of how well you think the company will do, as long as you deem it a good investment?
Hi Bear - where would such concepts as a Moat come in? Ie not having a product that is just instantly substitutable e.g. hardware designs like Cisco vs Arista?
Or Total addressable market or market growth tail winds or monopolistic situations?
“I don’t think it deserves a PE of 50+ anymore, but the profits are still growing nicely so I think maybe the cigar has a few more puffs in it.”
I thought that this analogy missed the mark. Arista is still a ‘growth’ business and Buffet would not have employed that analogy in this case. Despite not having ‘recurring’ revenues, it is well-position and on the cusp of capturing the next technology wave and/or market. I don’t think this company could have faced Cisco and won if it did not have that innovative streak, and I think it still has it. Revenue can and will re-accelerate.
‘xaaS’ and subscription businesses are great business models but it is and will become a norm and not a competitive advantage per se. It will be a generality that many businesses will share. So no outsized gains to be had there.