My portfolio at the end of August, 2017

My portfolio at the end of Aug 2017

Here’s the summary of my positions at the end of August. As I usually do, I’m closing my books at the end of the last full week of the month, this time pushing the final four trading days into next month’s calculation. If you like, you can just think of it as a four-week summary. Please note that any PE’s that I give are always based on adjusted earnings, usually as the company has given them, but very rarely with small modifications of my own. This month I hope to do a brief review of each stock too.

We are now eight months through the year. At the ends of February, March, April and May, I wrote that results had been beyond my expectations. At the ends of April and May I wrote that I thought that this incredible pace was unlikely to continue. But even June was up 1.9%, July was another really strong month for my portfolio, and it closed August up another 3.0% at up 48.7%.

This is a little deceptive though, because, although individual stocks have had wild swings, and my portfolio has finished each month up from the month before, my portfolio as a whole has been trading in a range for seven weeks. Here’s what it’s looked like with weekly closes of my portfolio%:

July 07 – 39.4%

July 14 – 45.2% (this is where the range started)
July 21 – 46.3%
July 28 – 45.7% (with a mid-week high at 49.9%)
Aug 04 – 46.7%
Aug 11 – 42.4% (with a mid-week low at 40.2%)
Aug 18 – 44.5%
Aug 25 – 48.7% (which is the highest weekly close as well as the highest monthly close, but it’s still a tight range since July 14).

The three indexes that I’ve been tracking against aren’t doing poorly for the first eight months of the year, although all three were down this month.

The S&P 500 is doing best and is up 9.1% for the year, and down 1.3% for the month. (It started the year at 2239 and is now at 2444). For those who use dividend-added results, it would be up 10.4% for the year, but I will keep using actual price results for consistency with my earlier summaries.
The Russell 2000 Small Cap Index is up 1.5% for the year, and down 3.8% for the month. (It started the year at 1357 and is now at 1377).
The IJS Small Cap Value ETF, which so excelled in 2016, is down 3.5% for the year, and down 4.5% for the month. (It started the year at 140.0 and is now at 135.1).

These three indexes thus have averaged up 2.4% for the year so far (up 2.8% if you use the S&P with dividends added). Since my portfolio is up 48.7%, I’m feeling pretty good about this.

You may ask, “Why these three indexes?” When I started this board I started comparing to the S&P 500, as that is what the Motley Fool compares against. Then I started thinking that gave me an unfair advantage, as the S&P is all large caps, and the smaller caps that I largely invest in tend to do better over the long term, so I added comparisons against the Russell 2000, a standard for small and mid-size companies. Then last year, someone kept telling us that the IJS, which tracks the S&P 600 Small Cap Value Index, has the best long term results. So I figured okay, I’ll add in value oriented small cap stocks to compare against. This gives me 500 large caps (the S&P), 2000 small and mid caps (the Russell), and a 600 small cap value index with a very good past record (the IJS), which ought to give me a very representative set of standards to compare against. I’m sure some people will say “Why not drop this and add that?” but those are the three indexes I compare against currently, and I will probably continue to do so. I think they give me a pretty good approximation of how the market overall is doing.

I wrote in my April summary that I am aware that there’s no way this can continue like that all the way throughout the year, and that there were bound to be reverses. But I’m no good on timing the market, and I don’t try. If I did, I might logically have exited all my positions at the end of April, when I was up 26% in four months and was “aware” that it couldn’t continue like that (but it’s now up more than 20% more). That’s the trouble with trying to time the market. I have enough trouble trying to find great companies. A correction will come. They always do. But I don’t know when, and I don’t guess.

I should state here that I continue to believe that intelligent stock picking with a modified buy-and-hold strategy can beat any index or average. How could it not? When an “average” is just that: an average of good, mediocre, and poor companies?

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%**
**End of May		+36.2%**
**End of Jun		+38.1%**
**End of Jul		+45.7%**
**End of Aug		+48.7%**

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. I really am, as I made some bad choices along the way, like my purchase of BlackLine (BL), which immediately cratered.

Here’s how my stocks have done in the eight months since December 31. I’ve arranged them in order of percentage gain. In previous months I separated the stocks I’ve been in since the beginning of the year from those I’ve added since, but I don’t think anyone is interested in the historical details of when I added stocks. I’ll put them all together, using the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. At any rate, the stocks I’ve been in since the beginning of the year are Arista, LGI Homes, Shopify, Splunk, and Ubiquiti, and they make up 52.3% of my portfolio, including three of my top four positions.

For those who want a time frame, current positions I’ve added since Jan 1st have been:
Jan – Kite
Feb – Talend
Mar – Mulesoft, Square, Hubspot
Aug – Twilio, Alarm, Nvidia


**Kite** from 47.50 to 139.10, 	**up 192.8%** 
**Shopify** from 42.90 to 103.75, 	**up 141.8%**
**Arista** from 96.80 to 173.70, 	**up 79.4%**

At this point you should note that those three stocks, which had had the biggest rises year-to-date at the end of July, had huge further rises in August, showing once again that **selling your best stocks because they have gone up is a bad idea**. To continue:

**LGI Homes** from 28.73 to 43.80,  **up 52.5%**
**Square** from 17.50 to 24.99, 	**up 42.8%** 
**Talend** from 26.80 to 38.20, 	**up 42.5%** 
**Splunk** from 51.15 to 65.40, 	**up 27.9%** 
**Ubiquiti** from 57.80 to 64.65,   **up 11.9%**
**Hubspot** from 62.40 to 68.85, 	**up 10.3%** 
**Nvidia** from $161.2 to $163.8    **up 1.6%**  (3rd time)

**Alarm** from 43.85 to $43.70, 	**down 0.3%**
**Twilio** from $30.90 to $28.93    **down 6.4%** (2nd time)
**Mulesoft** from 22.25 to 20.61,   **down 7.4%**

Note that with the exception of the rises in Splunk and Ubiquiti, the rest closed just up or down a little from their closes in July.

Okay, now you have an idea why my portfolio is up. 

**EXITED POSITIONS** (showing prices when I entered and when I exited)

PayCom from 45.50 to $69.00, 	   up 51.6%
Horton from $8.31 to $10.44,       up 25.6% (1st time)
Horton from $10.90 to $12.75,	   up 17.0% (2nd time) 
Nvidia from $146.3 to $166.1       up 13.5% (2nd time)
Signature Bank from $150 to $160   up 6.7%
A O Smith from $51.10 to $53.80    up 5.5%	
Twilio from $28.85 to $30.00	   up 4.0% (1st time)	
Nvidia from $149.5 to $154.4       up 3.3% (1st time)

Wix from $73.25 to $74.00          up 1.0%		
Amazon from 750 to 985, 	   up 31.3% 

Trade Desk from $51.90 to $50.65   down 2.4%
New Relic from 47.2 to 44.75,      down 5.2% 
BlackLine from 37.40 to 29.95,     down 19.9%

I also exited four biopharmas in July (Cellectis, ZioPharma, bluebird, and Matinas) at prices ranging from a gain of 20% (Cellectis) to a loss of 42% (Matinas). All of the positions were tiny and none of the results were material as far as my portfolio results.

I’d like to note that since 2010 (with fears of a double dip recession), well intentioned people have been warning us constantly that another bear market and/or recession is coming. “The bull market is too old.” or “The market is too high.” All of their charts and indicators proved it in 2010, 2011, 2012, 2013, 2014, 2015, 2016, and they still say they prove it now.

Of course a marked correction will come eventually. Look, it could come next week, for all I know! But we never really know when. And what a price those people have paid in staying out of this market for the past seven years. Picking good stocks makes much more sense than trying to pick good stocks AND trying to time the market too.

Now let’s look at my position sizes. I’m still trying to keep my portfolio concentrated and streamlined and I’m currently back down to 13 positions with no tiny try-out positions, but small positions in Twilio and Alarm that I haven’t committed to yet.

Here are the positions in order of position size. Okay, now you have an idea why my portfolio is up.
. You’ll see by observation that after the huge drop from Shopify to LGI Homes, the rest decrease more gradually from one to the next. When I wrote up New Relic, I explained why I was keeping it a relatively small position for now:

**Shopify   		21.6%**
**LGI Homes		10.5%**
**Square			 9.5%**
**Arista		 	 9.0%**
**Hubspot			 8.3%**
**Talend			 8.1%**
**Splunk			 7.8%**
**Nvidia	 		 6.8%**
**Mulesoft	         6.1%**
**Kite			 5.6%**
**Ubiquiti		 3.3%**
**Twilio			 1.5%**
**Alarm	 		 1.1%** 

Let’s start with Shopify, my very oversized position.

Shopify helps small merchants, and increasingly larger ones, open and operate online stores. It’s growing VERY fast, and has grown to be my largest position. When it got to be 20% I felt it was too big and trimmed it back to about 15% but then, this month, when it announced what seemed to me to be a “perfect” quarterly report, I built it back to 20%. It has since grown to 21.6%.

Shopify started the year at $42.90. It closed Friday at $103.75, which is up about 142% year-to-date.

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.

Shopify’s growth is slowing slightly with size but it remains an incredible success story. I know that it’s a VERY large position but you don’t see to many Shopifys in a lifetime of investing, so for now it is what it is.

LGI Homes is still in second place at 10.5%. It’s a small home builder that specializes to selling first homes to apartment dwellers. Its 2016 annual earnings were up 36% from 2015. It started this year at $28.75. LGIH had weak closings in Jan and Feb, reflecting weak sales in Nov and Dec, but they held their guidance for the year. During April when LGIH got down in the $30 range, some people talked about selling out of their positions before earnings (which I advised against). They did well in the first quarter and have had huge closings numbers in May, June and July.

I realize that this is a cyclical industry, and that it eventually will get overbuilt, but there is a nationwide shortage of homes now, and they are selling them as fast as they can build them. Their current PE is only 11.6 although revenue and EPS were both up 45% in the June quarter. This shows there’s still a lot of skepticism and lumping them with some mythical average for the housing industry. I added a little this month.

Square is in third place, at 9.5% and at a price of $24.99, which is down $1.20 from last month. At first I worried that it lives in a crowded space, and a tough neighborhood. It’s growing revenue and adjusted EBITDA okay, but I wasn’t sure that they will have a large TAM to grow into.

I bought my position in March at an average price of about $17.50, and added to my position in April, and added more in May at about $19.75, on the way up. I hadn’t bought or sold any since, but this month I added a little at $25.50.

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, it has evolved into a much more robust payments solutions business.

It offers basic payments solutions, but it also provides more sophisticated services such as

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. For each instant deposit, Square charges 1%. This is incredibly lucrative 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 Square’s merchants, who can pay the loan back gradually, as a percent of transactions. The average loan size is about $6,000. These loans especially appeal to small businesses that don’t normally have access to capital. And, because Square is so familiar with its customers’ businesses, it can choose whom to offer these loans to with a high amount of accuracy.

Caviar – which might seem an odd addition to this list of catalysts for a payments solutions company. After all, restaurant delivery and pick up services are fiercely competitive. However, Caviar has quickly grown since coming aboard. The most important thing is that restaurants that use it often sign up for all the rest of Square’s services.

Square’s June quarter results were absolutely great, which is why I added a little to my position after they were announced.

Arista is up to fourth place at 9.0%. I used to write that Arista does something tech-wise that I don’t understand, but smorgasbord explained it incredibly clearly. Here’s what he wrote:

They make ethernet switches, which has been Cisco’s bread and butter for decades. However, instead of each switch being its own separate entity, Arista’s switches use SDN (Software Defined Networking), which enables the entire network (no matter how complex) to be modeled and controlled via software. In a typical non-SDN setup, routing is based on packet destinations, but in an SDN world, you can control routing based on both source and destination, and thus be more flexible or treating certain sources with higher priority, etc. Security is also improved since you have more control.

What I always understood though is that Arista was founded by a small group of very smart people who used to work at Cisco. They developed a better way of doing something (using SDN), 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, started their own company, and got sued by Cisco because they are taking market share left and right.

They have been moving up steadily and were up another $23 this month to $173.70, as the threat from Cisco’s law suits diminishes.

This was an incredible quarter with revenue up 51%, and up 21% sequentially, with net income up 96.5%, and EPS up 81% year over year. I bought some after earnings, even though it had already shot up.

Hubspot is in fifth place at 8.3%. What does it do? 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 your 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 through social media, search engine optimization, blogging, etc, etc, 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.

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.

Their earnings report was great, breaking into positive territory much sooner than guided, and raising guidance by large jumps.

I added to HubSpot after earnings were announced this month. I haven’t sold any at all since I took this position in March.

Talend is in sixth place at 8.1%, and a price of $38.20. It’s been rising steadily and I’ve been adding to my position as well.

It’s too hard for me to explain what it does, but I wrote it up early in May, which you can probably look up. I consider it a category crusher as well as a disrupter, as it seems to have no effective competition at present. In the May conference call the CEO said:

…our win rates remain ridiculously high, which is evident from the growth rate… The market dynamic is that the large (legacy) players continue to be challenged, and long term I think most of the competitive battle is going to be fought with very small players that are trying to get up to scale right now. So we’re in this kind of special period in the middle right now (with no functioning competitors) and we’ll see how long that lasts.

I’d never heard a CEO say “our win rates remain ridiculously high” before. I can’t say I mind it.

Splunk is in seventh place at 7.8%. Splunk, like Talend, 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 wins an incredible number of awards. Forrester awarded their enterprise security solution their highest possible score. They got a 5-star review from SC magazine. They won three awards in TechWorld’s Techies 2017: Best Security Technology of the Year, Best Cloud Technology of the Year, and the Grand Prix Award. They won Best Hybrid Cloud solution in The Cloud Awards. LinkenIn named them one of the best companies in the US at attracting and keeping top talent. And the list goes on…

The stock price has been stuck going up and down across the page for a year now, but the recently announced earnings report caused a dozen analysts to raise their price points and the price rose almost 10%.

I’m back into Nvidia again. I couldn’t make up my mind to stay out. It’s in eighth place at 6.8%. I was talked into it this time by all the great write-ups by members of the board. It’s been very well discussed at great length on the board, and I have nothing that will add to the discussion, except that I’m making a real exception in buying shares in a “chip” company.

Mulesoft, which I took a position in in March, is in ninth place at 6.1% of my portfolio. Mulesoft is a disruptor and an unrecognized category crusher. It’s in a field where the legacy companies have essentially no growth at all, and Mulesoft grew revenue 71% last year. It basically has no effective competition in what it does. I wrote it up the board on March 25th. Here is a link to the thread.…

Bert also wrote it up, liked everything about it, but then said he couldn’t recommend it because the stock price was too high.

Because last quarter revenue was only up 57%, the stock sold off. I added a little.

Kite is in tenth place at 5.6% at a price of $139.10, up about $28 for the month. In July, I explained on the board, in a long thread, why I had exited the other three CAR-T stocks this month and focussed my position in Kite, so I won’t repeat my explanations. I do think it has the potential to be a dominant company in the CAR-T space, for reasons I’ve talked about.

Ubiquiti is in eleventh place, at 3.3% of my portfolio. That’s down about 2% from last month. When it rose 20% in a day after earnings, which didn’t seem very exciting to me at first glance, I at first thought it was a misprint. When I saw the rise was real, I sold most of my position. I’m cautious since this is still an internet hardware company, after all, with no recurring income and moving into new fields which involves some risk, given their crowd sourced sales model.

Then I took another look, realized that they have two businesses, a cash-cow stable business, and a new enterprise model which is growing very fast and will soon be the major part of the company, and I bought back most of what I had sold.

Twilio and Alarm are small positions in 12th and 13th place, at just 1.5% and 1.1% of my portfolio. I’m not sure yet that I’ll stay in either.

Positions I’ve exited this month

New Relic was a new position and in last place at the end of last month. When I wrote it up, I explained why I had doubts about it and I was keeping it a relatively small position. I decided I had better places for my money and sold out.

BlackLine was a new position I took at the end of July. I wrote a long evaluation of it, which I won’t repeat. I liked the company a lot. I was wrong. They reported lackluster results, problems with customer satisfaction, increased competition, lengthening sales cycle, etc, etc. The price sold off and I took my lumps and got out.

Paycom is a company I had had for a long time and liked a lot, but there comes a time when even the best of friends must part. It’s growth has been massively slowing, and in addition they have had to increase their R&D spend massively (up 80% to 100% each quarter), but the big thing is that they only seem to grow by opening more sales offices, and with that you get the restaurant syndrome (when you have 25 offices you can add 5 and grow by 20%, but when you have 50 offices, adding 5 only gets you 10% growth, and how can you keep adding more and more offices each year. I was sad, but I sold out.

Amazon. As I wrote in a previous post, I have a number of reasons for selling out:

Danger of anti-trust action in a company that controls 45% of online commerce, and is feuding publicly with a powerful politician.

Their size makes tripling anytime soon seem pretty remote.

Their cash cow AWS is no longer the only frog in the pond. It is getting significant competition from Microsoft, and even a bit from Google.

And quite important to me, after being profitable for a couple of quarters, they have made it abundantly clear that they have abandoned that dull and boring course of action.

Finishing up. 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 try to 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.


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


If anyone is curious about what that line that ran off the page said, here it is:

“At this point you should note that those three stocks,
which had had the biggest rises year-to-date at the
end of July, had huge further rises in August, showing
once again that selling your best stocks because
they have gone up is a bad idea. To continue:”