My portfolio at the end of June
Here’s the summary of my positions at the end of June. I figured it out this time right to the end of the month, June 30th. Please note that the PE’s that I’ve given are based on adjusted earnings, usually as the company has given them, but occasionally with small modifications as I’ve calculated them.
I have to start off by remarking how humbling investing is. While I do well overall, I am constantly made aware at how flawed my individual decisions often are, but I have to be satisfied with the preponderance of my small correct decisions working out for the best, which they have by a large margin so far (fortunately for me). I’ve gone nowhere for the first 6 months of this year, and am currently at 97.1% for the year. The S&P is at 102.7% and the Russell is at 101.4%. They aren’t booming either. We’ve been going through a difficult and discouraging period of time in which to try to make money in the market (discouraging for me, I should specify). Let’s look at it for a minute or two:
The Russell 2000 was up a total of 57.0% during the two years 2012 and 2013. However, in the last two years (2014 and 2015) it was down a total of 2.4%. What a difference! Adding in the first six months of 2016 it is still down 1.0% in two and a half years. That’s a huge change from the two years before.
The S&P 500 was up a total of 47.0% during the two years 2012 and 2013. In the last two years (2014 and 2015) it was up a total of 10.6%. Better than the Russell certainly (showing lots of worry and a move to large secure companies), but certainly a weak result with no froth. If you add in the first six months of 2016 it is still up just 13.6% in two and a half years.
Averaging the two indexes, and thus pooling both groups of stocks (large caps in with small and mid caps), we get an advance of 6.3% for the total market in almost two and a half years (or about 2.5% per year).
We keep having people on the board warning that the market is frothy and extended. You might point that out to them that the small and mid-cap market has been flat for almost two and a half years in spite of a rising economy, rising employment, rising wages, more hours worked, falling unemployment, low interest rates, low oil prices, and rising revenues and earnings, etc.
Companies with rising earnings and rising revenues, but flat stock prices which result in falling PE’s, doesn’t sound like a frothy market to me. It’s not a euphoric market, but rather a depressed market where a penny miss can cause a 20% drop in the stock price. To me it seems like a coiled spring pushed down as far as possible, and ready to explode. But what do I know?
Here are some examples of PE compression:
Entering 2014, Arista had trailing earnings of 84 cents, now they are $2.61, more than triple. (It had trailing revenue of $361 million, which has now grown to $901 million, two and a half times what it was). It started trading in June 2014 and hit $94.50 during the year. Now it’s at $64.40. How’s that for PE compression, with triple the earnings, two and a half times the revenues, and a price that is not only down, but down 32%!? Does that sound like a frothy, overextended market to you?
LGIH started 2014 at $18 and is now at almost $32, which is up 78%. However earnings have gone from $1.07 to $2.74, up 156%. Trailing revenue has gone from $241 million to $671 million, up 178%. PE has gone from a reasonable 17 to a low 11.7. Euphoric market???
Twelve months ago, Skechers closed the month at $50. At that point, they had earnings at $1.17 and a PE of 43. Now they are at $29.70 with trailing earnings of $1.84, and a PE under 16. From a PE of 43 to a PE of 16? Now that’s PE compression! (And their earnings were up 75% last quarter!)
PayCom only has two years or so, having IPO’ed in April 2014, at which time it had 4 cents in trailing earnings, now it has 61 cents, up some ridiculous percent over 1,400%. It had $116 million in trailing revenue, now it has $261 million, up 125%. Its PE has dropped from 450 to a somewhat less wild 71. Again, we are seeing PE compression, not expansion.
Shopify had its IPO a year ago in May 2015. In one year its trailing earnings have improved from (-33) cents to (-13) cents, and its trailing revenues have risen 95%. Is the picture better with double the revenue and about a third the loss? Yes. Is the price better? Barely. It IPO’ed at $28.00 and is now at $30.75, up 9.8% with double the revenue and a third the loss. Is that a euphoric, frothy market?
Synchronoss had 2013 earnings of $1.34. Its earnings now are $2.24, up 67%. It finished January 2014 with a price of $34.30. It’s now is actually LOWER, at $31.85. Its PE has gone from 25.6 to 14.2.
The businesses performed admirably, but have shown marked PE compression. Yet we have people talking nonsense on the board about how the market is overvalued and extended! It’s hard to imagine a less overvalued market. My top two positions, LGIH and SKX have an average PE of 13.90!!! I’ve been investing a long time but I don’t remember EVER seeing such low PE’s for rapidly growing companies. (These two companies both grew earnings at over 70% last quarter).
These are compressed valuations, and a stock market that’s having a camouflaged bear market by not advancing as the economy grows, and as the companies that make up the market grow. There seems to me to be lots of room for growth in stock prices.
Now let’s get back to my positions: On Thursday, I was appalled to realize that my two largest positions, LGIH and SKX, made up over 33% (one-third!) of my total portfolio. LGIH was up to about 18.4% and SKX was 14.7%. They towered over my other positions. Much as I loved these two, in fact much as I love all of my top five, this was too much. And 18.4% especially was too much. In fact, that was 25% larger than the SKX’s second place position, and a 61% larger position than my third place position. So I sold a little more of LGIH, bringing the total shares sold since Brexit to 6.5% of the shares I had before Brexit. However, LGIH has done so well over the past week compared to other stocks that it still makes up 18.0% of my portfolio. Looking back at what I wrote last month:
During the four weeks LGIH fell from $28.20 to about $25 after superb earnings, on the usual fears about the oil patch, despite the CEO clearly stating that they expect to continue growing like mad. I added a bunch at $25.40 in spite of it being my biggest position. Its quarterly earnings were up 73% and it was at a PE of 9, for gosh sakes!
I think the reason my LGIH position got so big was that I added so much to it in May, in spite of it being my biggest position. What I sold off this week was at 15% to 20% above the price I bought at the month before.
At the end of the month, SKX was in 2nd place at 14.4% of my portfolio.
LGIH, SKX, AMZN, SWKS, and SBNY are still my largest five positions, but during the month AMZN passed SWKS, which fell to 4th. To summarize their sizes are
LGIH – 18.0%,
SKX – 14.4%,
AMZN – 11.5%,
SWKS – 9.2%,
SBNY – 8.9%.
(Excluding Amazon, which I consider a special case), the PE’s of the rest of these current top five are, respectively: 11.7, 16.1, 11.1, and 16.4, which is quite respectable and gives them an average PE of roughly 13.8, or 14 if you round it off.
Their average rate of TTM earnings growth is 45.4%. A rate of growth of over 45% and a PE of 14 sounds very underpriced, but I expect all the rates of growth, (except SBNY’s), to slow somewhat in 2016. My own predictions for their 2016 rates of earnings growth are 30%, 35%, 25%, and 23%, with an average of 28.25%. Even allowing for a lot of slowing of growth (which may be too conservative), the growth rate will still be double the PE (probably close to triple if the stock prices stay the same).
These big 5 make up about 62% of my total portfolio. This seems excessive, but yet doesn’t seem too unreasonable to me, as they are high conviction stocks as well as being my biggest positions, and they are at reasonable PE’s. They are in fairly different fields: home building, retail shoes and sneakers, Internet marketing and cloud services, microchips and IoT, and commercial banking. This wasn’t by design, but it spreads the risk. Also I’ve reduced the top two to about 32.4% where at times they have been much more, and five months ago were perhaps 42% of my portfolio. All together it’s more balanced and less risky, and I sleep better at night.
This brings about a reflection. I note that I waver about position size. When I was younger, and my portfolio size was smaller, I was more willing to concentrate my positions, and I think that enabled better returns. However, it meant more risk, and now that I have a larger portfolio, and it is harder to exit a position in an emergency, and I’m retired as well, without new money to make up for losses, I find myself being more cautious. So I may not be consistent in my thoughts about position size. Just saying…
We then step down to my middle size positions: Cambrex (CBM), Arista (ANET), Shopify (SHOP), Silver Spring Networks (SSNI), and Mitek (MITK). These range down from 5.7% to 3.8% of my portfolio. SSNI has moved up a few places, but the others are pretty much in the same order as a month ago. I like all of these companies, obviously, but don’t have the same conviction about them as I do about my top five.
Now some smaller positions, including, among others: Synchronoss (SNCR), Rubicon Project (RUBI), Salesforce (CRM), Paycom (PAYC), Hubspot (HUBS) and SolarEdge (SEDG), ranging in size from 3.2% down to 1.2%.
Finally, there are three tiny positions that just total 1% of my portfolio all together. Really tiny. These include CYBR, TSLA, and FB.
I discussed RUBI, SSNI, and SHOP last month as newer positions. New small positions this month include CRM, HUBS, SEDG, CYBR and TSLA. As you may remember, I’ve been in and out of SEDG, CYBR and TSLA in the past. CRM and HUBS are totally new to me. I especially like CRM. I haven’t sold out of anything completely, so I have more psitions than I like to have, but don’t have plans for exiting any at present.
To summarize, this month my big five are still the same (LGIH, SKX, SWKS, AMZN, SBNY). Then, CBM, ANET, SHOP, MITK, SNCR, RUBI and SSNI, are still following in almost the same order as last month (SSNI has moved up three places, while all the rest have remained in the same order). Then there are four newer and smaller positions: CRM, SHOP, HUBS and SEDG. I reduced my position in FB again. I’ve said before that every time I sell out of FB it turns out to be a mistake, but I just can’t warm to the stock.
What I do is “modified buy-and-hold” . Of my top positions, I’ve had SWKS and SKX for 2 years, and 2years and a month, and LGIH for 9 months. I’ve had SNCR for 16 months. I had INFN for a year and INBK for a year and a half before I sold them. I had BOFI for about three years before I sold it. I held CELG and WAB for over two and a half years each. When I buy a stock, it’s with the idea of holding it indefinitely, as long as circumstances seem appropriate, and NEVER with a price goal, or with the idea of holding it a few days or a few weeks, or with the idea of trying to make a few points and selling. If I try out a stock in a small position, and later decide it doesn’t fit, 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. I’m not trying to trade it and make a dollar on it, I’m just trying to decide if I want to keep it long term.
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 if you haven’t yet.
I hope this has been helpful.
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