My portfolio at the end of May
Here’s the summary of my positions at the end of May. As I often do, I calculated the summary during the last weekend of the month when I have more time. We will just miss the 31st since the 30th is a market holiday.
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 are, how often I’ll buy a stock and have it go right down, and how often the reverse happens: I’ll sell something and it goes straight up from there. 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’m now at 98.0% for the year. The S&P is at 102.7% and the Russell is at 101.2%.
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 five months of 2016 it is still down 1.2% in two years and five months. 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 no froth. If you add in the first five months of 2016 it is still up just 13.6% in almost 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% in almost two and a half years of investing (or about 2.4% 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, 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 $72.85. How’s that for PE compression, with triple the earnings and a decreased price!?
LGIH started 2014 at $18 and is now at $27, which is up 50%. 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 ridiculous 9.9. Euphoric market???
Eleven 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 $30.70 with trailing earnings of $1.84, and a PE under 17. From a PE of 43 to a PE under 17? 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 67. 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? No. It IPO’ed at $28.00 and is now at $28.57, essentially unchanged. 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 at $35.70. Its PE has gone from 25.6 to 15.9.
My top three positions, LGIH, SKX and SWKS have an average PE of 12.75!!! I’ve been investing a long time but I don’t remember EVER seeing such low PE’s for rapidly growing companies. (LGIH and SKX 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.
LGIH, SKX, and SWKS are still my three largest positions, in that order, at roughly 16% to 14% of my portfolio. I added to all three during this month, in spite of their large position sizes.
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! It’s now at $27.10.
SKX fell from $33 to $29 after earnings that were up 75%. It’s now back to about $30.70, with a PE of 16.7. I added to it too.
SWKS fell from $66.80 to $60.70, after earnings and guidance that were just what they said they’d be. I added to it too. It’s now back to $66.50, just about where it started the month.
AMZN and SBNY are still my 4th and 5th largest positions, at roughly between 10.6% and 9.0%. Signature Bank’s price ended roughly unchanged for the month, but Amazon’s was up 8% from $660 to $712. I continue to add to it as it goes up. (The bulk of my purchase was at about $540, roughly four months ago, but I added considerably at about $570, and then steadily added more in small amounts all the way up). These top five are high conviction stocks (as you’ve probably picked up from my posts about them).
Last month PN and CBM were in 6th and 7th places. CBM is still there, in 6th place, at 7% of my portfolio, but I sold out of PN because of all the lawsuit stuff and other things going on that I didn’t understand. I like CBM, but it isn’t quite as high conviction as my top five (see my recent Brief Reviews for more color).
(Excluding Amazon, which I consider a special case), the PE’s of the rest of these current top six are, respectively: 9.9, 16.7, 11.7, 18.0, and 19.2, which is quite respectable and gives them an average PE of roughly 15.
Their average rate of TTM earnings growth is 45.4%. A rate of growth of over 45% and a PE of 15 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%, 23%, and 40%, with an average of 30.6%. Of course, if the prices are the same a year from now, that rate of growth will give an average PE of 11.6.
These big six make up about 71.6% of my total portfolio. This doesn’t seem 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, microchips and IoT, Internet marketing and cloud services, commercial banking, , and pharmaceuticals. This wasn’t by design, but it spreads the risk. Also I’ve reduced the top two to about 30% where at times they have been much more, and four months ago were perhaps 42% of my portfolio. All together it’s more balanced and less risky, and I sleep better at night.
Now we come to Arista (ANET) at about 5.75%, and then five more stocks that are all between 4.7% and 3.9%. These are Shopify (SHOP), Mitek (MITK), Syncronoss (SNCR), Rubicon (RUBI) and Silver Spring Networks (SSNI). The first four (ANET, SHOP, MITK, and SNCR) all were right behind CBM last month too. They’ve increased percentage-wise because I added to three of them during the month… …and because MITK rose 24% during the month! In fact it’s up 49% in the past five weeks! I took profits on 5% of my position but I’m still holding 95% of it.
ANET went straight up 9% from $66.60 to $72.80 during the month.
SHOP fell on quarterly results from $32 to $26. It’s revenues were up 95%…that’s REVENUES, up 95%… but they are still losing a few pennies per share so it sold off. (You’ll remember from my Brief Summary that this is the one that’s been doubling revenues every year compounded…$24, $50, $105, $205 million, and on their way again this year). I added at $26.25. It’s now back to $28.50.
SNCR bounced a lot this month. It started at $31, dropped to $29 before shooting up to $36.50, and finished at $35.70. Its PE is only 16 and it’s been growing at a consistent 25% per year. I sold a tiny amount for cash during the month.
RUBI was one of those “put it on the radar” positions last month. Now it’s up to a 3.9% position. It fell from about $20 to $14 after earnings which were up 1,450%…(that’s not a misprint, they went from 2 cents to 31 cents)… and revenues which were up 73%…! So why did they drop 30% to a PE of 10.6? Well they gave obsessively conservative earnings again. (They’ve beaten estimates by over 100% each quarter as a public company, and I guess the analysts finally got fed up… The CFO finally left to take a different job last week. Maybe the company got fed up too?) I added a lot when the price fell so much.
SSNI is a new position, also about 3.9%. It’s an IoT company that focuses on smart energy and smart lighting. Its customers are cities and utility companies, and some of its customers for smart lighting are Miami, Singapore, Calcutta, Sao Paolo, Copenhagan, and Washington DC. Recently it was selected by Con Ed to deploy its network canopy and advanced metering infrastructure to 3.9 million electric and 1.3 million gas customers over Con Ed’s entire New York City service territory. (This is a big deal). SSNI’s 12 month trailing earnings have gone (-50), (-42), (-20), +04, +09, and +22 cents, during the last six quarters, and they are building up recurring annual revenue that will continue for the life of the points that they install, that is for 15 to 20 years.
Then I have PAYC and FB as new small positions at 2.4% and 1.8%. That makes a total of 14 real positions. Finally I have two tiny positions that don’t add up to 1% between them. I won’t say more about them because I’m just looking at them and don’t want to mislead anyone.
In April I told you I had reduced CASY and INFN. In May I closed both positions. Check my brief reviews for more about them. I like CASY. It’s just that I had other places for my money that called louder and more urgently to me.
Last month I wrote: Finally I have four tiny “put-it-on-the-radar” positons. They include CYBR and GBX… CYBR is a very high PE, and GBX is a value type stock which is usually not my style at all, which is why they’re still both quite small. I sold out of both of them during the month.
To summarize, this month my big five are still the same (LGIH, SKX, SWKS, AMZN, SBNY). Then, CBM, ANET, SHOP, MITK and SNCR are still following in the same order. Then there are four newer positions: RUBI, SSNI, PAYC and FB. I sold out of PN, CASY, INFN, which were no surprise to you after my comments last month. I sold out of two of my “on the radar” positions, about which I also expressed doubts last month. The money from my sales went into new positions in FB, PAYC, and SSNI, into adding to RUBI, SHOP, ANET, and AMZN, and into adding to each of my big three positions: LGIH, SKX, and SWKS, which had all fallen on good news.
What I do is “modified buy-and-hold” . Of my top positions, I’ve had SWKS and SKX for about 1 year 11 months, and 2 years, and LGIH for 8 months. I’ve had SNCR for 15 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
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