My portfolio at the end of March 2017
Here’s the summary of my positions at the end of March. The last week in this month ended on the 31st, so you get a whole five weeks 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. Specifically, I’ll try to tell you a little about their recent earnings reports, and how the stocks reponded to them.
So how did my year start? At the end of February I wrote that results had been beyond my expectations. March has continued in that vein. All those “Saul type” stocks, that so many people were so dismissive of at the end of the year, seem to be flourishing so far.
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 the first three months of the year:
The S&P 500 is up 5.5% for the year (down 0.2% for the month)
TheRussell 2000 Small Cap Index is up 2.1% for the year (down 0.7% for the month)
The IJS Small Cap Value ETF, which so excelled in 2016, and which was going to be our salvation, is in last place, down 1.0% for the year (and down 2.0% for the month).
My portfolio is up 20.4% for the year so far, rising from up 8.5% at the end of January, and 13.9% at the end of February. Here’s a little table
**End of Jan + 8.5%** **End of Feb + 13.9%** **End of Mar + 20.4%**
Here’s how it happened. There was nothing magical about it. the stocks I was in went up! Here’s how they’ve moved in the three months since December 31. I’ve arranged them in order of percentage gain:
Shopify from 42.90 to 68.10, up 58.7%
Arista from 96.8 to 132.3, up 36.7%
PayCom from 45.50 to 57.50, up 26.4%
Splunk from 51.15 to 62.30, up 21.8%
Amazon from 750 to 887, up 18.3%
LGI Homes from 28.73 to 33.91, up 18.0%
Hortonworks from 8.31 to 9.81, up 17.9%
Twilio from 28.85 to 28.87, up 0.1%
Ubiquiti from 57.80 to 50.25, down 13.1%
Kite I added a tiny “play-money” position in mid-January at $47.50, and it is now at 78.50, and up 65.3% in two and a half months.
ZioPharm I added an even more tiny “play-money” position a couple of weeks ago at $5.88, and it is now at 6.34, and up 7.8% in a couple of weeks.
Talend I started a half position in mid-February at $26.80. It’s now at 29.78, so it’s up 11.1% in one and a half months.
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 17.28, so it’s down 2.6% since then.
HubSpotAfter exiting in January, I re-started a small position a couple of weeks ago, at an average price of $62.40, after someone on the board (sorry, I can’t remember who) talked about meeting some very enthusiastic Hubspot employees in Singapore who were talking about how fast it was growing in Asia. This made me reinvestigate it and I liked what I saw. It’s now at 60.55, so it’s down 3.0% since then.
Signature Bank was on the list last month. It started the year at 150.0 and I sold out this month (as I told you) from $158 to $162.
Okay, you got an idea why my portfolio is up. Let’s look at my postion sizes. I’m still trying to keep the number of positions in my portfolio small and streamlined. At the beginning of the year I had 12 real positions, 1 half-position, and a couple of tiny ones. After reducing last month, I’m now back to 11 real positions, and 4 very small positions. Here they are in order of position size:
Shopify 16.5% LGI Homes 14.2% Splunk 10.2% Arista 9.4% PayCom 8.8% Ubiquiti 7.7% HortonWorks 6.2% Square 5.8% Talend 5.4% Twilio 5.3% Amazon 5.2%
As you see, if you bar graph these, the top six look like a ski-jump, while the bottom five look like a relatively flat landing area, with less than a percent difference between the five. You can also see that I’ve been holding to my decision to let Shopify run, even over a 15% position, 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.
Then I have four “tiny” positions, that all four taken together total barely more than one of the smaller positions above. These are:
Hubspot 2.0% Kite 2.0% Mulesoft 1.2% ZioPharma 0.8%
Let’s start with my six large 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 (13 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 now at $68, and 16.5% of my portfolio.
Here were their results for the December quarter,
Total revenue was up 86%. In the real world companies don’t grow revenue at 86%! 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 14.2%. It’s a small home builder that specializes to selling first homes to apartment dwellers. It started the year at $28.75, was at $31.75 at the end of Jan, and at $28.70 at the end of Feb. It’s now up to $33.91. It reported good December quarter earnings, and it’s 2016 earnings were up 36% from 2015. Its current PE is all of 10.0. It 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.
Splunk is now in third place at 10.2%. (It was fourth last month). 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 earnings but the market had a little hissy fit over low-ball guidance for the next quarter and it’s now at $62.30. This is what their quarter looked like:
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.
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 moved up to fourth place from fifth, at 9.4%. 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). And then in February they announced 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. Those great 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 moved up to fifth place from seventh at 8.8%. 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, 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 when the company pointed out it was only a small part of their business, and the price is now at $57.50. I added a bunch in February, mostly from $43.50 to $48.50.
Ubiquiti is now in sixth place, up from ninth place, at 7.7% of my portfolio. In February 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 UP, not down, and up 32% from the year before. It was organic gain, not due to an acquisition.
Well then its earnings must have been way down? Actually it made 72 cents. This was up 24%, not down anything from 58 cents the year before.
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 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 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. Their current price is $50.25.
Here’s where we drop off the ski jump onto the relatively flat landing area of my five mid-size positions, which are within 1.2% of each other from top to bottom:
Hortonworks is now in seventh place at 6.4% of my portfolio, up from tenth place last month. This company 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 $9.81. It provides open source Hadoop and is growing very rapidly, another beneficiary of the big data explosion. Here’s a synopsis of their quarter results, for anyone who is interested:
Total revenue was up 39%.
Operating billings (the aggregate value of all invoices sent to their customers), were up 56%.
Adj gross profit was up 56%.
Adj gross margin percent 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 had promised).
Deferred revenue was $185.4 million, up 18% sequentially, and up 74% from a year ago.
Cash Burn was only $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”.
Square is in eighth place at 5.8% and a price of $17.28. 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.
So why did I buy back in and take a real position? 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),
It also provides more sophisticated services under software and data products that their merchants seem to love, like
customizable platforms for merchants;
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.
Talend is now my ninth largest position at 5.4%. At the end of last month it was the one I wasn’t ready to talk about yet. 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 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:
That’s awfully impressive…
Twilio dropped from eighth place to tenth at 5.3%. That’s partly because its stock price hasn’t risen as much as some others, but it’s also partly because I’ve trimmed it somewhat. I should start off by explaining 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. (For example, a text message from Uber telling you that your driver is arriving). After its IPO nine months ago the stock price shot up to over $70, but then fell to as low as $26.50 in January, bounced back to $35 after earnings, and is now back down to $28.87.
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 consider Twilio. 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.
Twilio has managed to continue to grow its market dominance…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…
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. 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. So why have I trimmed it. This is a battlefield 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. I like what I see so far but decided that a 5% positionwas enough for me.
Amazon is now my eleventh largest position at 5.2%. That’s down from third largest, because on those few days that the market really tanked and some of my stocks were really on sale, it remained locked in a tight trading range, between $840 and $860, where it had been for six weeks until the present week (that’s like a stock being between $84 and $86 for six weeks). Trimming it turned out to be a mild error, as it finally broke out of the trading range this week and closed at $887, up over 4% from $850, the midpoint of its previous range.
It seems like a steady grower to me. No longer a wild grower like Shopify, but more an anchor type stock for my portfolio. It’s not one that I can see tripling in price any time in the next few years, which is part of why I chose it as the one to trim to raise cash. I have no current plans to trim it any further.
The earnings report earnings report was not bad at all: 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 a very good report.
Now we drop down to my four very small positions. These are really much more speculative than the others.
Kite is the first of these and is my twelvth largest position at 2.0%. It was recommended to the board by Bulwinkl about two and a half months ago, in mid January, if I remember correctly. It’s a small pharma which is working on a type of anti-cancer treatment which it seems to have a good chance of revolutionizing the field of cancer treatment (if it’s not dropped because of too many side effects and high cost of treatment). 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. I figured it was VERY speculative. Most of these don’t work out, but this one seemed to have decent prospects. If its first treatment, which is now being submitted to the FDA, gets approved and is successful, Kite might also be acquired. The price had risen to $52.60 at the end of February, but they annouced the results of their study and the price shot up to $76, before settling back to its current price of $69. In spite of my sensible intentions, I’ve added teensy weeny amounts to my position, and with that plus the price rise, its now up to 2.00% of my portfolio.
Hubspot is next at 1.9%, followed by Mulesoft at 1.2% and ZioPharma at 0.8%. I’ve recently written up both ZioPharma and Mulesoft, and most of you are familiar with Hubspot. These are all very small positions that I have less commitment to. Mulesoft and Hubspot especially are ones which I could change my mind about (although that isn’t my intention at present).
Stocks I’ve exited. Signature Bank is the only one this month, and I’ve discussed already why I got out. I did buy a few shares of Bofi, but after a few days I thought to myself: “What am I doing?” and got right back out at about the same price.
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.
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