My portfolio at the end of April 2017

My portfolio at the end of April 2017

Here’s the summary of my positions at the end of April. There are no more trading days this month, so you get the whole month of results. Please note that any PE’s that I give are always based on adjusted earnings, usually as the company has given them, but rarely with small modifications of my own. This month I hope to do a brief review of each stock too.

So how did my year start? At the end of February and March I wrote that results had been beyond my expectations. April has continued in the same vein. My stocks seem to be flourishing so far. The indexes that we “should be buying instead of growth stocks” have not done badly either, and have pretty good gains for the first four months of the year:

The S&P 500 is up 6.5% for the year (up 1.0% for the month)
The Russell 2000 Small Cap Index is up 3.2% for the year (up 1.1% for the month).
The IJS Small Cap Value ETF, which so excelled in 2016, is in last place, down 0.4% for the year (and up 0.6% for the month).
The Average of the three indexes is up 3.1% for the year so far.

My portfolio is up 26.1% for the year so far, rising from up 8.5% at the end of January, from up 13.9% at the end of February and from up 20.4% at the end of March. Let me point out that I’m aware that there’s no way this can continue all the way through the year. There are bound to be reverses. But I’m no good on timing the market and I don’t try.

Here’s a little table of my results so far:


**End of Jan 		+ 8.5%**
**End of Feb		+13.9%**
**End of Mar		+20.4%**
**End of Apr		+26.1%**

Here’s how it happened: There was nothing magical about it. The stocks I was in went up! I’m sure that some of you have done even better. Here’s how my stocks have moved in the four months since December 31. I’ve arranged them in order of percentage gain. I will also add a word about significant positions I exited since the end of February.

Positions I’ve been in since the beginning of the year.


**Shopify**   from 42.90 to 75.95, 		**up 77.0%**
**Arista**    from 96.80 to 139.65,         **up 44.3%**
**PayCom**    from 45.50 to 60.25, 	        **up 32.4%**
**Splunk**    from 51.15 to 64.30, 		**up 25.7%** 
**Amazon**    from 750 to 925, 		**up 23.3%**
**LGI Homes** from 28.73 to 31.83, 	        **up 10.8%**

**Ubiquiti**  from 57.80 to 51.50, 	        **down 10.9%**

Positions I’ve added since the beginning of the year


**Kite** I added a tiny position in mid-January at $47.50, 
and it is now at 82.10, so in three and a half months it’s      **up 72.8%**											

**ZioPharm** I added an even more tiny “play-money” 
position in mid-March at $5.88, and it is now at 7.04, 
so in a month and a half it’s 					**up 19.7%** 

**Talend** I started a half position in mid-February 
at $26.80. It’s now at 29.87, so in two and a half months it’s  **up 11.5%**										

**Square** I re-started a position at the beginning 
of March at $17.75 or so (convinced by Bert’s enthusiasm 
for it). It’s now at 18.24, so after two months it’s 		**up 2.68%** 

**HubSpot**After exiting in January, I re-started 
a small position in mid March, at an average price 
of $62.40, after reinvestigating it and liking what 
I saw. It’s now at 67.05, so after a month and a half it’s 	**up 7.5%** 

**Wix** I started a small position a couple of
weeks ago at about $73.25 average. It’s now at $82.45,
so in a couple of weeks its 					**up 12.6%**.

**A. O. Smith** I started a tiny position a couple 
of weeks ago at about $51.10 average. It’s now at $53.90, 
so its 								**up 5.5%**.

Significant positions I’ve exited since the end of February


**Signature Bank** It started the year at 150.0 and 
**I sold out in March** at an average price of $160, 
so when I sold it it was 					**up 6.7%**

**Twilio** was on the list last month. It started 
the year at $28.85 and **I sold out in April,** for 
reasons I’ll describe below, at an average price of 
about $30.00, so when I sold it it was 	                        **up 4.0%**  								

**Hortonworks** was also on the list last month. 
It started the year at $8.31 and **I sold out in** 
**April,** for reasons I’ll describe below, at an 
average price of about $10.44, so when I sold it it was 	**up 25.6%**				


Okay, you got an idea why my portfolio is up. Let’s look at my position sizes. At the beginning of the year I had 12 real positions, 1 half-position, and a couple of tiny ones. I’m still trying to keep the number of positions in my portfolio small and streamlined. However, I have trouble saying no to good new ideas so in spite of myself, I’m still at 12 real positions, and 4 very small positions. Nevertheless, as you’ll see, my portfolio is still very concentrated, as my top five positions make up 58.2% of my portfolio, and my top ten positions make up 88.8%. Here are my 12 real positions are in order of position size:


Shopify   		17.2%
LGI Homes		12.8%
Splunk			 9.6%
Arista			 9.5%
PayCom			 9.1%
Ubiquiti		 7.5%
Square			 6.5%
Amazon			 6.0% 
Talend			 5.5%
Wix			 5.1%
Hubspot			 4.0%
Mulesoft		 2.8%

As you see, if you bar graph these, the top two are way oversized (especially Shopify), while the rest make a steady descending slope. You can also see that I’ve been holding to my decision to let Shopify run, but as the price keeps going up, I’m not sure how far I can let it go without getting nervous about how big a position it’s getting to be. Not yet.

Let’s start with my six largest positions:

Shopify is a company that helps small merchants, and increasingly larger ones, open and operate online stores. It’s growing VERY fast. It has grown to be my largest position. At the start of the year it was at $42.90. When it ran up 30% to $56 or so before fourth quarter earnings, I trimmed a little, partly out of prudence, thinking they might retrace even with good earnings, but mostly because it was over 15% of my portfolio. After earnings it rose even more, and I bought back part of what I sold and decided to just let it run. At the end of March it was up to $68, and 16.5% of my portfolio. In April they announced new things like a card reader integrated with their system and the Unity Buy SDK which lets game programmers insert a Shopify store right in their game to sell game emblazoned knick-knacks. Now it’s up to $76 and 17.2% of my portfolio. (When it got to 17.5% of my portfolio, I trimmed it down to 17%, but now it’s back up over 17% and I’ll probably let it run a little further). By the way, I have to thank the MF for this one. When they recommended it two months in a row in the middle of last year they got my attention as I’d never seen them recommend a stock twice in a row before.

Here were their results for the December quarter,
Total revenue was up 86%. In the real world companies don’t grow revenue at 86% per year! That’s amazing.
Subscription revenue was up 63%. This is almost all recurring revenue.
Merchant Solutions revenue was up 108%!
Gross Payments Volume, which is the amount of their subscriber merchants’ sales that is processed through Shopify’s Payments solution, was up 120%!
Gross profit was up 87%
The percentages of growth of each metric are stupendous(!) even as they slow slightly with size.

Adjusted net loss was $0.4 million, or 0 cents. They slipped up and broke even by mistake
Cash was $392 million up from $190 million a year ago.
Average Revenue Per User (ARPU) was up 15%.
The largest 20-plus shops who’ve been with Shopify for at least two years, on average sold 130% more this year than last year.
This is an incredible success story.

LGI Homes is still in second place at 12.8%. It’s a small home builder that specializes to selling first homes to apartment dwellers. It started the year at $28.75, and was $33.91 at the end of March, but fell back in April on what some felt to be low closings for March. It reported good December quarter earnings, by the way, and 2016 annual earnings were up 36% from 2015. Its current PE is all of 9.4. LGIH had weak closings in Jan and Feb, reflecting weak sales in Nov and Dec, but they said sales were strong in Jan and Feb and they held their guidance for the year. Some board members talked about selling out of their positions before earnings when LGIH got down in the $30 range during April, but I didn’t buy or sell any during the month. It’s now at $31.83, waiting for March quarter earnings .

Splunk is still in third place at 9.6%. This is a company that is riding the big data wave. It collects, organizes and analyzes loads of miscellaneous machine data for companies. Its pricing plan is based on the amount of data it analyzes for a company, rather than a number of seats purchased, and the secret sauce is that companies keep analyzing more and more data. Splunk had been range-bound for many weeks between $58 and $62, but then crashed in December and bounced back in January and February to reach $64.50. It then released great Jan quarter earnings in March but the market had a little hissy fit over low-ball guidance for the next quarter and it finished March at $62.30. They moved up just a little in April and are currently at $64.30. This is what their Jan quarter looked like:

Quarter
Total revenues - up 39%.
Adj op margin was 11.7%.
Adj earnings were 25 cents, up over 100% from 11 cents.
Op cash flow was $102.5 million
Free cash flow was $84.4 million.

Full Year
Total revenues - $950.0 million, up 42%.
Adj earnings were 40 cents, up over 100% from 18 cents.
Op cash flow was $202 million
Free cash flow was $156.5 million.

Note that Free Cash Flow is 16.5% of total revenue!

Arista is still in fourth place, at 9.5%. It does something tech-wise that I don’t understand, but what I do understand is that it was founded by a small group of very smart guys who used to work at Cisco. They developed a better way of doing whatever it was, but Cisco didn’t want to deploy it (the legacy dinosaur’s dilemma) because it would undermine their legacy products. So the Arista guys (and gal) left, and started their own company, and got sued by Cisco because they are taking market share left and right.

Arista got up to about $100 in January, but then US Customs reversed a previous decision and decided to provisionally bar their imports as possibly infringing on Cisco, and the price dropped to $88 in a day. They worked their way back to $100 as people realized they can manufacture in the US (which may be at a slightly lower margin). In February they announced December quarter earnings and the price jumped 18% in a day and finally closed the month at $120.60. They are still moving up and finished March at $132.30, and this month they kept moving up and closed the month at $139.65.

In April the International Trade Commission staff recommended in their favor and the US Customs reversed itself again, and is again allowing importation of Arista’s reworked products. I didn’t add or sell any shares this month. The great December quarterly results that pushed the stock price looked like this:
Revenue up 33.6% and up 13.0% sequentially!
Adj gross margin of 64.4%, up 0.4% from the year before
Adj net income up 35%.
Adj earnings of $1.04 cents, up 30% from 80 cents.
Adj op marg was 32.3%, up from 29.1% yoy, and from 30.0% sequentially**!!!**
They seemed pretty euphoric, gave great guidance, and the price took off.

Paycom is still in fifth place at 9.1%. It helps small and mid size companies do payroll and human services with an integrated solution, and has been growing like mad. As a sideline of sorts it helps its customers with paperwork for the Affordable Care Act. After the election it fell 25% from $52.50 to $39.50 in two weeks, in spite of revenue up 40% and EPS up almost 100% because guidance wasn’t up to expectations, but mostly because the Affordable Care Act looked like it was going to be repealed.

Then revenue for the December quarter came in up 35%, and up 13.6 % sequentially. GAAP EPS for the year was up 100% from 37 cents to 74 cents, and adjusted EPS was up 117% from 40 cents to 87 cents, and people stopped obsessing over the ACA when the company pointed out it was only a small part of their business, and the price rose to $57.50 at the end of March, and is $60.25 now. I added a bunch in February, mostly from $43.50 to $48.50, and added tiny amounts three times in April.

Ubiquiti is still in sixth place, at 7.5% of my portfolio. In February it fell from $64 to $49 in a couple of weeks after announcing results, a drop of over 23%. Why? I’ll let you figure it out. Here were the results they announced:

Their revenues were UP, not down, and up 32% from the year before.

And their earnings were 72 cents, which was up 24% from 58 cents the year before.

Its gross margins fell from 48% to 44% because of three one-time reasons the CEO enumerated and spelled out clearly.

It’s revenue guidance was $210 to $220 million. That’s pretty terrible, right? Well they year before they had $167 million, so they were guiding up 29% at the midpoint, which they surely hope to beat.

Earnings guidance? They guided to 73 to 79 cents. Let’s see, the year before they had 63 cents. That’s down… Oh no, it’s UP 20.6% at the mid-point and up 25% at the top of the range. And we all know that they put it up as a value that they know they’ll beat. And on the basis of these terrible results… and horrible guidance… Ubiquiti lost 23% of its market capitalization and their PE is well under 20.

Some have suggested that the problem is a lawsuit against them, by some little company that is accusing Ubiquiti of using some of their software without paying for the license. You’ve got to be kidding!.. Arista is being sued in multiple suits by a much, MUCH, more formidable opponent (Cisco), with much deeper pockets, who is accusing Arista of having stolen the basics of Arista’s company from Cisco, and Cisco has been basically trying to shut Arista down. Arista is making new highs. And you think Ubiquiti using a piece of software without paying a licensing fee is a big deal? Give me a break!

I added a tiny amount on the drop and I’m willing to ride it where it takes me. It feels relatively safe with good revenue growth and good earnings. However I’m not adding more, in spite of Ubiquiti’s unusual business model and adoring fans, because, after all, they do manufacture internet hardware, they are moving into new markets, and they don’t really have recurring income. Their current price is $51.50.

Note that my top six positions, making up 65.7% (or roughly two thirds) of my portfolio, are still the same top six, and in the same order. The fiddling around that I’ve done, as is so often the case, is almost all around the edges in the bottom third of the portfolio. My Shopify position is obviously too large, being almost double the size of third place, but Shopify keeps running up, and keeps coming out with great new products. It is what it is. I am aware of it and concerned, but unlikely to do much about it unless something happens which will force me to do so.

Here’s where we move further down the slope to my four mid-size positions, Amazon, Square, Talend, and Wix, which roughly run from 6.5% to 5.0% of my portfolio each:

Square is in seventh place, where it was last month, at 6.5% and at a price of $18.24, up from $17.28 a month ago. I had taken a tiny position in Square in January, but sold it in early February. My reasoning at the time for getting out was: It lives in a crowded space, and a tough neighborhood. It’s growing revenue and adjusted EBITDA okay, but I’m not sure that they will have a large TAM to grow into in this space.

I bought back in in March and added to my position in April. So why did I buy back in? Matt brought Square to the board in December. What follows is mostly taken from his post (slightly edited):

Square’s original purpose was to allow any vendor or merchant with a mobile device to be able to accept card payments “anywhere, anytime”. Since then, Square has evolved into a much more robust payments solutions business.
It offers basic payments solutions:
point of sale (POS),
online, and
mobile.

It also provides more sophisticated services under software and data products that their merchants seem to love, like
customizable platforms for merchants;
business loans,
instant pay features, and even

Restaurant delivery services (“Caviar”). This is their fastest growing revenue category, and grew an incredible 140% yoy in its most recent quarter.
Three of the company’s fastest growing services are: Instant Deposit, Square Capital, and Caviar. Let’s take a closer look at these:
Instant Deposit - This service allows retailers to receive money instantly in their bank accounts upon swiping a customer’s credit or debit card, instead of waiting up to four days, which creates cash flow problems for small businesses. In the first year, over 200,000 merchants already have made almost 4 million instant deposits. For each instant deposit, Square charges 1%. This is an incredibly lucrative area for Square, as it amounts to little more than a three-to-four day loan at 1% (which is a huge compound rate, at little risk).

Square Capital - is a service that facilitates loans to its business customers. The merchants can then pay the loan back gradually, as a percent of transactions. In the third quarter alone, Square processed over 35,000 loans totaling more than $200 million, up 70% y-o-y. The average loan size is about $6,000. These loans especially appeal to small businesses that don’t normally have access to capital to cover unexpected expenses, or purchase new equipment. There is almost always a transition time from the day they open for business to when they finally begin to make a profit. This service can help them bridge this gap, making it a lifeline hard to pass up.

Because Square is so familiar with its customers’ businesses, it can choose whom to offer these loans to with a high amount of accuracy. It has maintained a loan loss rate that’s less than half the national default rate for small businesses.
Caviar - might seem an odd addition to this list of catalysts for a payments solutions company. After all, restaurant delivery service is fiercely competitive. However, Caviar has quickly grown since coming aboard. Weekly order volume is up eleven-fold since its acquisition in Aug 2014. The most important thing is that restaurants that use it often sign up for all the rest of Square’s services.

Square’s revenues were up 43% for the December quarter and up 52% for the year. Revenues from subscriptions and services grew the fastest, up 81%, and are immensely profitable, with gross margins of 83%. They now make up 21% of revenue and this percentage is growing fast. Square is still losing money but margins and expense ratios are constantly improving and adjusted EBITDA has been positive for the last three quarters and growing.
Square launched in the UK in March.

Amazon is in eighth place at 6.0%. That’s up from eleventh place, because I bought back a little of what I trimmed in March, and because the price rose in April. It closed at $887 in March and is now at 925.

It seems like a steady grower to me. No longer a wild grower like Shopify, but more an anchor type stock for my portfolio. That’s not because it’s a staid company or out of ideas, but simply because of the size of the company. That makes it not one that I can see tripling in price in the next few years, which is part of why I chose it as the one to trim to raise cash when I needed cash in March. I have no current plans to trim it any further.

Amazon just announced their first quarter and it looked good to me: Revenue for the quarter was up 23%, compared to up 28% the year before, but to keep that in perspective, we are talking about a company with revenue over $30 billion dollars growing at 23%. AWS revenue was up 43% for the quarter. GAAP earnings for the trailing twelve months were $5.32, up 118% from $2.43 a year ago. That’s not much earnings for a $900 stock, and thus it’s a long, long, way from a value stock, but it’s certainly moving in the right direction at a good clip.

From 2013 to 2017:
Trailing Twelve-Month Operating Cash Flow for the first quarter has gone from year to year (in billions of dollars): 4.2… 5.3… 7.8… 11.3… 17.6 !
Trailing Twelve-Month Free Cash Flow for the first quarter has gone from year to year: 0.2… 1.5… 3.2… 6.4… 10.2 !

Many companies would think this was a great report. They also announced a well received new product in April, designed (as I understand it in my limited way) to bring the AWS cloud to smaller businesses. In fact they announced so many new things that I can’t keep track of them and I’m just sitting back and enjoying the ride.

Talend is still my ninth largest position at 5.5%, pretty much unchanged from 5.4% at the end of March. Its price is $29.87, also pretty unchanged from $29.78 at the end of March. I added a some to my position during April. Bear had brought it to the board in February. Here’s his explanation of what they do:

Data Integration is another rapidly growing area within the “big data” landscape, and Talend is carving out a niche, especially integrations including cloud sources, and with Hadoop…or at least that’s my take after reading Bert’s article, with his thoughts on what their secret sauce is… I think Talend’s growth thus far speaks volumes, and I also believe big data is such an emerging tsunami that there will be plenty of integrations to go around, whether Talend gets all of them or not.

I (Saul) wrote it up earlier this month, which I won’t repeat, but briefly, what I like most about it is that its revenue growth is actually accelerating each quarter. The percent of year-over-year growth of revenue for the last eight quarters looks like this:

15%
19%
22%
28%
34%
38%
40%
45%…

That’s awfully impressive as it seems to be massively overcoming the Law of Big Numbers for the time being.

Wix is a new position that is in tenth place at 5.05% of my portfolio. It was brought to the board by Bear, earlier this month, and there is are several long threads associated with it. If you are interested, I suggest that youread the threads. What especially impressed me about it was that its revenue growth year-over-year is also accelerating like Talends! I’m sure it’s due to some of their new products.

Here’s the percent growth in revenue quarter by quarter, for the past four quarters:


2016:   37.7%    40.8%    40.7%    47.4%

There recently was a short attack in an article on Seeking Alpha. For a very knowledgeable rebuttal I’d recommend:

Spruce Point’s short report on WIX: 13 points I disagree with:

Here’s a link to that rebuttal.

http://www.sleeperthoughts.com/single-post/2017/04/20/Spruce…

Now we drop down to my three medium to small positions, Hubspot, my three CAR-T stocks which I will lump together as a single position, and Mulesoft. Moving down from the mid-size positions which clustered around 5.5%, these are each closer to 3.5% of my portfolio, ranging from 4.0% to 2.8%.

Hubspot is in eleventh place at 4.0%, double its portfolio share of a month ago. I’ve obviously been adding to my position. Hubspot pioneered inbound marketing. What’s that? Inbound marketing refers to bringing customers to you, rather than going out and chasing them. As your customers get more technically savvy, reaching out to them isn’t as effective as it used to be (they do their own research online, they don’t answer their phones if they don’t recognize the number of the caller, 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.

Hubs’ 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.

Traditionally, businesses use separate tools for each of these functions, which makes it very difficult to pull together a total view of marketing performance, and followup sales performance, for various marketing channels. As the CEO put it:

Our customers, need a blog, need a website, need social media monitoring and need search engine optimization, and typically that will be four different vendors they’ll have to deal with in order to get that right. And that’s pretty painful.

Hubs pulls everything together into a unified, easy-to-use, platform. They say clients increased the number of leads generated by 5.7 times after one year of using the platform, on average.

That’s what they do. I’d recommend you read Bert’s deep dive from last June, and the most recent conference call.

CAR-T These stocks have been discussed extensively on the board. They were brought to the board by bulwinkl, and Ray (imuafool) has done a series of incredible deep dives on the CAR-T opportunity, so I won’t duplicate that. The three together make up 3.9% of my portfolio and thus qualify for twelfth place.

In order the stocks are Kite at 2.4%, ZioPharma at 1.15% and Cellectis at a tiny 0.3%. Kite as the likely first to be approved by the FDA, ZioPharma as the developer of the Sleeping Beauty system, which should cut time and expense enormously, and Cellectis, working with Pfizer to develop off-the-shelf CAR-T treatments (I’m not sure if it can be done, but if so it would be beyond enormous!). In April, I’ve added tiny bits to my Kite and Zio positions and started a position in Cellectis, just enough to keep it on my radar, and added just a tiny bit more when they said they’d be presenting early results at a conference.

Mulesoft a recent IPO which I took a position in in March, is my thirteenth largest position at 2.8%. I wrote it up the board on March 25th. Here is a link to the thread.
http://discussion.fool.com/mulesoft-mule-32651015.aspx?sort=whol…
Bert also wrote it up, liked everything about it, but then said he couldn’t recommend it because it was overvalued (one of the MF Rule Breaker criteria for a good purchase, by the way).

Finally A.O. Smith at 1.0% is a new little try-out position. This is a water technology company, brought to the board by Matt (CMF Cochrane) a couple of weeks ago. It’s an atypical position for me and I’m not yet sure I’ll stay in it, but at any rate, it’s up since I started it. They recently reported very good (for them), and accelerating earnings. If you are interested in looking at them, I’d follow the link in Matt’s post, and also read the earnings report.

Stocks I exited this month:

Twilio was in tenth place last month. I had been trimming it but I finally sold out in April. So why did I sell it? This is a battleground stock. It’s doing great right now, but a lot of people (like Bert) feel they have no moat or will be replaced by some new technology. When Amazon annouced their new Amazon Connect product, which used Twilio as well as the products of some of their competitors (Amazon not wanting to rely on one supplier), some people thought this is great. Others said Amazon could replace them if they wanted to with their own product. I didn’t know enough about the technology to know who was right and took advantage of a recent bounce in the price to sell out and reinvest elsewhere. It may have been a mistake, but that’s life.

Hortonworks Yes, Bert really likes it, and yes, it grew revenue by 51%, and yes, they have a lot of deferred revenue, and yes, it reached breakeven Adjusted ABITDA (whatever that is) and yes, it’s gone up pretty well in price since I bought in a little less than five months ago. But I just can’t get my mind around what this company does. I know it uses Hadoop, which is in the public domain, and is something to do with big data. But what is Hadoop? I haven’t the faintest idea. And I know Horton has a lot of competitors. So does it have any kind of leading position in the field? Darned if I know. Does it have any moat? There’s no way I can tell, but I don’t think so, the idea being that Hadoop is growing, so therefore all the Hadoop providers should do well. But this company lost an adjusted $2.48 per share last year and has a price of $10.10 per share or so, so its loss per share is a quarter of its stock price. In fact 2.48 times 57.2 million shares means they lost $142 million, which is 77% of their revenue. In fact their GAAP loss $4.40, or $252 million dollars, which was gives them a negative margin of 137% (GAAP-wise they spent 237% of what they took in!). I decided to put my money elsewhere.

When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit after months, or sometimes years, but I’m talking about what my intention is when I buy.

I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.

You should never just try to follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.

Since I began in 1989, my entire portfolio has grown enormously. If you are new to the board and want to find out how I did it, and how you can do it yourself, I’d suggest you read posts #4 through #8 at the beginning of the board, and especially the Knowledgebase that Neil keeps for us, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven’t yet.

I hope this has been helpful.

Saul

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

58 Likes

After seeing Bear’s portfolio up 25% and mine up about the same, at a point when the average of the indexes is up just a few percent, I’d have to conclude again that stock picking does work, and that a concentrated and intelligently watched and cared for portfolio will do better than a mixed bag of good bad and indifferent stocks.

Saul

7 Likes

Hello Saul,

I would have a question regarding Shopify.

While I have traded the stock in and out since $40 (thanks to this board!) I have always been uncomfortable with the valuation. Numbers reported by Morningstar indicate a stock selling for over 430 X cash flow.

Any thoughts on this?

Best,
Dominic

Hi Saul,

Congrats on another great month. Thanks for sharing as always.

One point I am still trying to get my head around - how do YOU contrast between say Talend which you like vs HDP and (and to some extent TWLO - although Amazon chatter can helps making a call) which look and feel similar and come to opposite conclusions.

Every question you have for HDP is valid for Talend, isn’t it?
Similarly each positive you list for Talend applies to HDP as well, right?

And yes there is Mulesoft seems like in-between conviction stage for you.

(Btw - I get the explanation on SPLK - more data processing and price on amount being processed - thanks for making it easier to understand)

Can I also request Bear to chime in on this because it seems Bear has high conviction on some of these names.

Nilvest
Facing Big Confusion Big Data companies

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One reason that stocks like Shopify have risen so much in a short period of time is that they IPO’ed at cheap prices. Here are my thoughts about that from the Knowledgebase’

Little companies that are doing IPO’s or secondary distributions get ripped off by the underwriter (investment bank). It’s not that investment banks are evil. You might as well call a wolf evil because he eats rabbits. It’s the nature of things.

Here’s why: Sure the investment bank gets a fee for sponsoring the IPO and arranging to sell all the shares. But it still has to get rid of all those shares, which normally it sells to its own clients. Now if it’s a big popular company like FB that is having the IPO, everyone wants shares, and all the investment banks compete for the prestige of taking part in the IPO. That gives the company having the IPO a lot of negotiating power.

However, if it’s a little company that no one has ever heard of that is having the IPO, how is the investment bank going get rid of millions of shares? The answer is to pressure the little company to sell its shares as cheaply as possible. Well below what they are worth. What matters to the investment bank is how its own clients who get the shares will do, not how the company who is having the IPO will do. And it’s not only worried about its clients! The underwriter will take some of the shares itself, for its own book, if the price is low enough.

The IPO company is a one-time customer. However, the favorite clients will hopefully be there indefinitely and the investment bank wants to keep them happy so that they will take IPO stock in the future too. That insures that they, the investment bank, can keep getting those IPO fees, etc. In addition, if the favored customers can make instant money on the IPO, that gives them a good reason to keep their banking and investing relationships at the investment bank.

So that’s why you’ll hear of stocks going up 30%, 40% or more on the day of the IPO. The underwriter (think Goldman Sachs, Morgan Stanley, etc.), succeeded in getting a great deal for its clients by pricing the stock very low. Remember that the underwriter’s customers don’t know anything about the company. They just know they are getting a stock cheap and that they will be able to sell it at a profit almost immediately. Pretty good deal for them, isn’t it?

Shopify IPO’ed at $17, and opened at $25. At $75.90 you could say that it’s gone up 346% from its IPO. Does that mean its wildly inflated, or that the investment bankers priced a stock growing insanely fast, with almost unlimited future, wildly low? For you to decide.

Saul

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True that Shopify may have been priced too low when it IPO’ed but at more than 400 x cash flow it may be now be at the other extreme. I don’t know, I don’t understand how a stock could be valued that way. Cash flow could quickly grow but still, it seems an extreme valuation.

Cheers!

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Finally A.O. Smith at 1.0% is a new little try-out position. This is a water technology company, brought to the board by Matt (CMF Cochrane) a couple of weeks ago. It’s an atypical position for me and I’m not yet sure I’ll stay in it, but at any rate, it’s up since I started it. They recently reported very good (for them), and accelerating earnings. If you are interested in looking at them, I’d follow the link in Matt’s post, and also read the earnings report.

Hi Saul,

Do you happen to have the link to this post handy? Not having any luck finding it, scanned back a couple of months. What I’d give for better search functionality on these boards!

Thanks,

George

but at more than 400 x cash flow it may be now be at the other extreme. I don’t know, I don’t understand how a stock could be valued that way. Cash flow could quickly grow but still, it seems an extreme valuation.

Hi Bartolo, Coming off a small base that 400 x could be meaningless. For example, look at the figures I posted on my review of Amazon in my portfolio review:

Trailing Twelve-Month Free Cash Flow for the first quarter has gone from year to year: 0.2… 1.5… 3.2… 6.4… 10.2! — So, in four years, from 2013 to 2017, Free Cash Flow went from $0.2 billion to $10.2 billion, or “up 50 times”. And just from that sequence, next year this time it will probably be $15 billion or up 75 times (7500%) from 2013. That was Amazon that isn’t growing nearly as fast as Shopify. But that’s just the way I look at it…

Saul

Every question you have for HDP is valid for Talend, isn’t it?
Similarly each positive you list for Talend applies to HDP as well, right?

Hi Nilvest, This is what finally got me out of Horton (as I wrote above):

“But this company lost an adjusted $2.48 per share last year and has a price of $10.10 per share or so, so its loss per share is a quarter of its stock price. In fact 2.48 times 57.2 million shares means they lost $142 million, which is 77% of their revenue. In fact their GAAP loss $4.40, or $252 million dollars, which was gives them a negative margin of 137% (GAAP-wise they spent 237% of what they took in!). I decided to put my money elsewhere.”

Talend, on the other hand, had adjusted loss of 20% of revenue for the year, not 77% like Horton. And it was just 12% of revenue for the last quarter.
And their IFRS loss (equiv to GAAP) was only 23% for the year, not 137% like Horton.
Horton’s adjusted annual loss was 25% of its stock price. Talend’s was 2.8% of its stock price. There’s no real comparison as I see it.
It’s a lot easier to see a rapid path to profitability with Talend. That was the main thing!!!

But Talend also had this amazing run of figures: "what I like most about it is that its revenue growth is actually accelerating each quarter. The percent of year-over-year growth of revenue for the last eight quarters looks like this:

15%
19%
22%
28%
34%
38%
40%
45%…"

Hope that helps

Saul

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Finally A.O. Smith at 1.0% is a new little try-out position. This is a water technology company, brought to the board by Matt (CMF Cochrane) a couple of weeks ago. It’s an atypical position for me and I’m not yet sure I’ll stay in it, but at any rate, it’s up since I started it. They recently reported very good (for them), and accelerating earnings. If you are interested in looking at them, I’d follow the link in Matt’s post, and also read the earnings report.

Hi Saul,

Do you happen to have the link to this post handy?

Hi George,

It’s #26932, or if you prefer, here’s the link: http://discussion.fool.com/from-yesterday-let39s-talk-about-one-…

I found it by the way by looking for posts by CMF Cochrane. It was the third or fourth back I think, but it was stuck on an odd thread.

Saul

Thank you Saul. When we look at it that way it sure tells a different story.

Best,
Dominic

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Thanks Saul! Wasn’t thinking it would be in a thread on BioTech, so I skipped right by that one!

George

Hello Bartolo,

High growth sector leaders are very difficult to value. SHOP performs very well and seems to have
prospects to continue that great performance for a long time. As many investors have not
even heard of the company, “normal” metrics don’t apply in this situation. Morgan Stanley put out
an investment note on SHOP this past week that ranged today’s value from 42 to 100 depending on a
10 year DCF model with varying assumptions. They said that 100 represented the bull case, 80 the
“base” case, and 42 the bear case. For those familiar with the DCF model they used in the base case a beta of 1.4,a weighted average cost of capital of 10.7% and a terminal value of 4%. In that scenario, the terminal value amounted to nearly 80% of the total value. IMO, their assumptions were conservative. On that basis, SHOP is not currently over-valued.

I believe that investors are best served by ignoring valuation exercises, adding to positions on
dips and riding the horse as long as the business case warrants. When one reaches a point, like
Saul, that position size becomes too large for comfort, then (as Bernard Baruch advised) sell to the sleeping point. There is no question in my mind that selling too soon in stocks like SHOP is very harmful to our goal of maximizing wealth.

Best regards,

Mike

2 Likes

Thank you Saul, appreciate your response.

Every question you have for HDP is valid for Talend, isn’t it?
I don’t know about Talend. SO I cannot compare. Here are my views on HDP.

HDP is a pure play Hadoop vs Cloudera who add their own tools, flavors and I would say about 80% Hadoop and 20% propitiatory. So why it matters? Cloudera claims they are “enterprise software” company, meaning they are investing in building software, in their growth phase they are investing therefore they are incurring loss, hence their valuation, i.e., almost 9x revenue vs 3x for HDP. On the other hand, a pure-play hadoop provider who primarily makes their revenue through “professional services”, support and subscription should not be incurring such heavy losses.

However, HDP, is involved in Hadoop initiatives much deeper than anyone else and they incur significant cost on that but that is not recognized as “enterprise software” building because most of their work goes towards “open source”. While HDP model is slightly different from “enterprise software” companies, I think HDP margin’s can change dramatically. In the last Qtr HDP incurred $57m loss vs $54M revenue or 100% of revenue.

I think there is a land grab happening in Big data, “hadoop” world. So every player is investing or spending heavily on SGA. Once the market matures, say in a year or two, they should be able to cut off SGA significantly and it should come down to 20% to 25% of revenue.

Next R&D, which is about 50% of revenue, could scale down to 15% to 20%. So between SGA and R&D there are lot of levers for the company to pull and become profitable. But they will not be doing that for at least another 2 years. I expect in 2 years they could do $300 m in revenue and 20% operating margin. Depending on the dilution they could potentially make anywhere between $0.5 to $1. If they are profitable and doing $1 EPS and has 10% revenue growth, is 15 to 20 x valuation too much? That is 50% to 100% from today’s share price. There are lot of risks here. But it is possible.

Between their ability to grow revenue very fast and accumulated loss of $700m, HDP has a floor underneath its share price. If the stock falls to $7 low, I am sure someone will make a play. I believe it will get 4 to 5x sales.

I don’t own HDP at this time. I am hoping for the shares to fall below $10 preferably to $8. Of course someone can come in and make an offer and I might miss on this. I guess that’s the difference between someone like me and Saul, if he has the same conviction on this name like me, probably he will be buying.

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