My portfolio at the end of February 2017
Here’s the summary of my positions at the end of February. This month I hope to do a brief review of each stock too. Specifically, I’ll try to tell you a little about their recent earnings reports, and how the stocks reponded to them.
As I often do, I’m figuring my “end of the month” on the last weekend of the month and missing a couple of trading days. If you prefer you can think of it just 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 rarely with small modifications of my own.
So how did my year start? Well, beyond my expectations! All those “Saul type” stocks, that so many people were so dismissive of at the end of the year, came back to life.
Let’s see. The indexes that we “should be buying instead of growth stocks” have not done badly at all and have exhibited pretty good gains for two months, so far this year:
The S&P 500 is up 5.7% for the year.
The Russell 2000 Small Cap Index is up 2.8% for the year.
The IJS Small Cap Value ETF, which so excelled in 2016, and which was going to be our salvation, is in last place, up 1.0%.
My portfolio is up 13.9% for the year so far, rising from up 8.5% at the end of January. Some stocks have done better than others. Here is how my stocks moved (mostly on the basis of great earnings reoports), in the a little less than two months since December 31. I’ve arranged them in order of percentage gain:
Shopify from 42.90 to 61.75, up 43.9%
Arista from 96.8 to 120.6, up 24.6%
Splunk from 51.15 to 62.80, up 22.8%
PayCom from 45.50 to 55.30, up 21.5%
Hortonworks from 8.31 to 9.93, up 19.5%
Amazon from 750 to 845, up 12.7%
Twilio from 28.85 to 32.26, up 11.8%
Signature Bank from 150.0 to 156.9, up 4.6%
LGI Homes from 28.73 to 28.70, down 0.1%
Ubiquiti from 57.80 to 49.60, down 14.2%
Kite I added a tiny “play-money” position about 6 weeks ago at $47.50, and it is now at 52.60. It’s up 10.7% since my first purchase.
Okay, let’s look at my postions. I’m still reducing the number and streamlining my portfolio. At the beginning of the year I had 12 real positions, 1 half-position, and a couple of tiny ones. I now have just 10 real positions, 1 half-position, and 1 tiny one. My top positions are still substantially the same, except that SBNY has moved down a few places. The order changes a bit depending on the ups and downs of stock prices, and what I may or may not add to or trim, but Shopify seems to have a lock on first place.
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 (8 weeks ago), it was at $42.90. When it ran up 30% to $56 or so before earnings, I trimmed a little, a little 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. It’s over 15% and I’m not worrying about it. Why? Here’s what earnings looked like:
Total revenue of $130 million, was up 86%. In the real world companies don’t grow revenue at 86%! That’s amazing.
Subscription revenue was $56.4 million, up 63%. This was due to the rapid growth in
Monthly Recurring Revenue (MRR), which was $18.5 million, up 63% from $11.3 million. Note that it’s “monthly.” …Three times $18.5 is $55.5 million, meaning that subscription revenue is almost all recurring.
Merchant Solutions revenue was $74.0 million, up 108%! This was due mostly to the growth of
Gross Merchandise Volume, which was $5.5 billion, up 94%!
Gross Payments Volume, which is the amount of Mechandise Volume processed through their Payments solution, grew to $2.2 billion, up 120%! from $1.0 billion a year ago.
The number of merchants topped 375,000, as a record number joined in the period.
I’m bombarding you with these figures so you can see the percentages of growth of each metric, which are stupendous(!) even as they slow slightly with size. (Revenue growth was 89% last quarter).
Gross profit grew 87% to $68.1 million from $36.5 million.
Adjusted operating loss was $0.8 million or 1% of revenue
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.
Merchants on average became more successful on Shopify, as GMV per merchant grew by 25% over last year.
Average Revenue Per User (ARPU) up 15% to $1,243, versus $1,077 for 2015.
In the conference call they said
If we look at the largest 20-plus shops who’ve been with Shopify for at least two years, on average these shops collectively sold 130% more this year than last year.
We plan to further take advantage of the ever improving cloud cost and capabilities. While this will result in some redundant cost in 2017, we expect to realize future benefits as we scale globally. Our second major area of investment in 2017 is focused on growth… we would be crazy not to capitalize on the evolutionary moment in the development of retail.
You can hardly blame them. Or blame me for having this as my top position, and growing. This is an incredible success story.
LGI Homes is still in second place at 13.1%. It’s a small home builder that specializes to selling first homes to apartment dwellers. It started the year at $28.75 and was at $31.75 at the end of Jan. It reported weak closings for the single month of January and dropped as low as $26.75. I added a bunch at about $27.45. It’s now back up to $28.70. It won’t be reporting December quarter earnings for another week, but it’s 12-month trailing earnings are up 47% through the September quarter. Its current PE is all of 9.1.
Amazon is now my third largest position at 11.2%. It had a wild month in January, rising $86 from $750 to close the month at $836. This month was much calmer and it stayed between $810 and $857, finally closing at $845. It had a quarter which disappointed some, but it seems like a steady grower to me. No longer a wild grower like Shopify, but more an anchor type stock for my portfolio. By the way, the earnings report wasn’t as disappointing as all that: Revenue for the year was up 27%, compared to up 20% the year before. AWS revenue was up 47% for the quarter. GAAP earnings for the year were $4.91, up from $1.24. A long way from a value stock, but not bad growth. Trailing Operating Cash Flow was up 38%, and there’s plenty more. Many companies would think this was an amazingly good report.
Splunk is now in fourth place at 9.35%. 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 to $51, but bounced back in January to finish at $57. It finally broke out in February to $64.50. It then released great earnings but the market had a little hissy fit over low-ball guidance for the next quarter and it finished the week at $62.80. This is what they reported:
Quarter
Total revenues - $306.5 million, up 39%.
License revenues - $190.5 million, up 35%.
Adj op income - $35.8 million;
Adj op margin - 11.7%.
Adj earnings - 25 cents, up over 100% from 11 cents.
Op cash flow - $102.5 million
Free cash flow - $84.4 million.
Full Year
Total revenues - $950.0 million, up 42%.
License revenues - $547 million, up 35%.
Adj operating margin was 6.2%.
Adj earnings were 40 cents, up over 100% from 18 cents.
Op cash flow - $202 million
Free cash flow - $156.5 million.
Note that Free Cash Flow is 16.5% of total revenue!
Arista moved up to fifth place, at 8.8%. Arista 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 however may be slightly lower margin). And then in February they announced earnings and the price jumped 18% in a day and finally closed the month at $120.60. Results looked like this:
Revenue of $328 million, up 33.6% and up 13.0% sequentially!
Adj gross margin of 64.4%, up 0.4% from the year before
Adj net income of $77.5 million, 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**!!!**
And they seemed pretty euphoric, gave great guidance, and the price took off.
Signature Bank is now sixth at 8.6%. This is a very efficient mid-size commercial bank in New York City. In fact, it’s so efficient that its efficiency ratio was 31.25%, which is so good that it’s hard to explain. Sort of like having an operating margin of almost 70% of revenues. It’s had a bit of perhaps “irrational exuberance,” as four months ago it was at $115 or so and it’s now roughly $157. It slipped in rank partly because the others gained more than it did so far this year, but also because I have been trimming some during the past four months. I still certainly have a substantial position. In January they announced December results, which were good but not great, but were good enough to make me and others feel that they had gotten past the worst of the problems stemming from their taxi loan portfolio, which I’ve discussed before. Their taxi problem becomes a smaller and smaller percentage problem every quarter as the company’s total loan portfolio grows.
Paycom moved up to seventh place at 8.4%. It helps small and mid size companies do payroll and human services with an integrated solution, and has been growing like mad. It also makes money from helping companies 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 was apparently going to be repealed.
Then revenue for the December quarter came in up 35%, and up 13.6 % sequentially, and 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 and the price rose to $55.30. I added a bunch this month, mostly from $43.50 to $48.50, and some at about $52.
Twilio moved up to eighth place at 7.4%. I should start off by telling you that Bert felt it was a short candidate back in August, and continued negative about it in November. Twilio is run by its founder who is an ex-Amazon guy, which may explain their close ties with Amazon. What it does, from a totally over-simplified point of view, is help with app-to-person communications. (Just for example, a text message from Uber telling you that your driver is arriving). After its IPO eight months ago the stock price shot up to over $70, but then fell to as low as $26.50 in January and now, after earnings, has been as high as $35 and closed the month at $32.26.
To give you a more positive point of view than Bert’s, here’s a quote from Tinker in November: Twilio by far dominates in developers and user interest. Every decision made to choose an API platform will have Twilio in it. There will be no such decision that this will not be the case for. Once you learn to use it, you don’t want to learn to use anything else. And frankly, why would you? Practically everyone is using Twilio, and taking the time to learn something else has less value. And if everyone is using it, it means that finding new developers will be much easier than if you use a competitor.
And once you start building out infrastructure with Twilio, you’re certainly not going to stop and add unnecessary complexity by adding a competing second or third platform. The network effect is funny that way. … Twilio has managed to continue to grow its market dominance, and grow in valuation, much faster than anyone predicted. I guess it is possible a competitor will create a viable alternative sufficient to overcome the very large first mover and clear and overwhelming developer lead that Twilio has created. …But it’s a long shot!
What people don’t seem to see is that TWLO is not selling one time licenses but long-term recurring revenue products. Once a product is built in, TWLO will get paid for it every time it is used. TWLO’s methods of billing varies, but for the most part it will be long-term recurring revenue for each app that makes it into operation and succeeds.
And Twilio became a recommendation from a MF paid service in January.
What did December quarter results look like (compared to a year ago)?
Total revenue of $82 million, up 60% and up 15% sequentially.
Base revenue of $75 million, up 73% and up 17% sequentially.
Gross Margins of 59%, up from 56%.
Adj operating income of positive $0.1 million up from a loss of $5.0 million.
Adj net income of 0 cents, up from a loss of 7 cents.
Dollar-Based Net Expansion Rate was 155% for the quarter.
What can I say? It looks very good. My take was: that I thought they were almost apologetic about having made positive earnings, and wanted to make sure no one expected them to continue doing so, before their planned profit in Q4 2017. It reminded me a lot of Shopify, who seem to make sure they have a tiny loss every quarter so they can go for broke on grabbing market share. And coincidently also forecasting profits starting in Q4 2017. The very fact that both of them forecasted way in advance that they expect to turn profitable in Q4 2017 means to me that they can turn on profits whenever they choose. But that’s just the way I see it.
Ubiquiti is now in ninth place at 6.8% of my portfolio because this month it fell from $64 to $49 in a couple of weeks after announcing results, or a drop of over 23%. Why? I’ll let you figure it out. Here were the results they announced:
Their revenues were $213.5 million. This was UP, not down, and up 32% from $162 million the year before. It was organic gain, not due to an acquisition.
Well its earnings must have been way down? Actually it made 72 cents. This was UP, not down, and up from 58 cents the year before. This was up 24%, not down anything!
And its gross margins fell from 48% to 44%…ooooh! Because of three one-time reasons the CEO enumerated and spelled out clearly.
Well maybe its guidance was terrible? Well its 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 up 29% at the midpoint, which they surely hope to beat.
Earnings guidance must have been way down then? They guided to 73 to 79 cents. Awful! 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.
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 was up 18% in a day after earnings. 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, and they don’t really have recurring income.
Hortonworks got as high as $30 after its IPO and fell as low as $6.30 in October. I got involved in December at $8.60. It got as low as $8.00 and I bought all along the way, and then I continued buying as it rose. It’s now at $9.93 and is in 10th place, or last of my full positions, at 6.4% of my portfolio. It provides open source Hadoop and is growing very rapidly as well, another beneficiary of the big data explosion. Here’s a synopsis of their quarter results, for anyone who is interested:
Total revenue was $52 million, up 39%.
Operating billings, (the aggregate value of all invoices sent to their customers), were $81.4 million up 56%.
Adj gross profit was up 56%.
Adj gross margin was 68% up from 61% a year ago.
Adj net loss was $30.6 million.
Adj EBITDA was minus $0.1 million (essentially breakeven, as they promised).
Deferred revenue was $185.4 million up 18% sequentially, and up 74% from a year ago.
Cash Burn was $0.6 million, compared to $18.8 million a year ago.
We continue to target operating cash flow breakeven sometime between Q3 and Q4 of 2017.
Kite was recommended to the board by Bulwinkl about six weeks ago. It’s a early stage pharma which is working on a type of anti-cancer treatment which it seems will either revolutionize the field, or be dropped because of too many side effects. I decided to take a little “play money” position of 0.5% at a price of $47.50. I figured that if it crashed it wouldn’t be the end of the world, and if it worked out, 0.5% would be enough. It’s VERY speculative. Most of these don’t work out, but this one seems to have decent prospects. If its first treatment to reach the FDA gets approved and is successful, my guess is that it would be acquired. The price closed this month at $52.60, after getting as high as $55.50, and in spite of my sensible intentions, I’ve added teensy weeny amounts to my position, so its now up to 0.94% of my portfolio.
I have one more new half-position that I’m not ready to talk about yet. Perhaps in a week or two.
Stocks I’ve exited. These were my two little positions last month, each of which I had only been in fow a few weeks. The first was Square, which was in 11th place last month. I wrote: 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 decided to find something which I felt would have more relatively unimpeded room to run. The other stock I got out of was Antero Midstream, which I got out of because my accountant said the trouble it would cause as far as accounting (because it was a Master Limited Partnership) wasn’t going to be worth it for me.
When I take a 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
