My portfolio at the end of Oct 2017
Here’s the summary of my positions at the end of October. As usual, I’m figuring as of the last weekend of the month, so think of this as a four week summary if you prefer. 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 ten months through the year. I’m tired of writing about how unexpectedly good the results are, so I’ll just let them speak for themselves. My portfolio closed a month ago at up 64.8%, and this month (October) it rose almost another 12% and closed up 76.6%. This is far more than what I thought likely for the year, and I am more than pleased with it.
The three indexes that I’ve been tracking against had a good month as well.
The S&P 500 is now up 15.3% for the year. (It started the year at 2239 and is now at 2581). For those who use dividend-added results, it would be up 17.2% 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 11.1% for the year. (It started the year at 1357 and is now at 1508).
The IJS Small Cap Value ETF is up 7.3% for the year. (It started the year at 140.0 and is now at 150.25).
These three indexes thus have averaged up 11.2% for the year so far (up 11.9% if you use the S&P with dividends added). Since my portfolio is up 76.6%, I feel okay about not being in market-following ETFs.
You may ask, “Why these three indexes?” When I started this board I started comparing to the S&P 500. 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 small and mid-cap standard. Then last year, it was claimed 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 index and add that one?” but these 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 am aware that there’s no way this can continue like this forever, and that there are 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. It’s hard to remember now, but…back at the end of April, up 26% seemed like up an enormous amount, and way over-bought, but six months later my portfolio is now up more than 50% 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 this year:
**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%**
**End of Sep +64.8%**
**End of Oct +76.6%**
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, as I made some bad choices along the way that cratered as soon as I bought them, and others that continued going up after I sold them.
The stocks I’ve been in since the beginning of the year are Arista, LGI Homes, Shopify, and Ubiquiti, and they make up 45.5% of my current portfolio. including my top two positions. This is 3% less than a month ago because Shopify had that short attack.
For those who want a time frame, current positions I’ve added since Jan 1st have been:
Feb – Talend
Mar – Square, Hubspot
Aug – Alarm, Nvidia
Sep – Nutanix, Instructure
Oct – Wix, Splunk
I wrote last month that Alarm and Brinks were little positions that I wasn’t yet sure I’d keep. Well I’m still in Alarm, but sold out of Brinks, not because I found anything wrong with it, but because it wasn’t really my kind of company, and I wanted cash for a position in Wix. I was briefly in and out of another little position in Teladoc in September. I liked the story but then realized that they had just taken on a lot of debt to make a very expensive large acquisition of a no-growth company, and the story reminded me too much of Synchronoss. In October, I was briefly in and out of TFSL, a little bank stock. Nothing wrong with it, a good value stock, but just not my thing. Twilio was a tryout in August. I never built up my position and exited it in September. It was my second trial with it and I just wasn’t comfortable. I had held Kite since January but it was bought out in September for a huge gain. I exited Mulesoft and Splunk also in September. I had held Mulesoft since March and finally gave up on it. I started the year with Splunk. In fact I held it for about a year, and it went nowhere for most of that time. More recently it was reorganizing its business model, but diluting its stock a great deal, and I just had had enough. I liked the “story,” but I felt I had better places for my money. I dipped my toe back in this month (Oct), but it’s just a tiny 0.4% position.
Here’s how my stocks have done in the ten 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’ve 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. Note that the best four are all up over 100% so far this year
**CURRENT POSITIONS**.
**Shopify** from 42.90 to 107.3, **up 150.1%**
**LGI Homes** from 28.73 to 59.05, **up 105.5%**
**Arista** from 96.80 to 195.65, **up 102.1%**
**Square** from 17.50 to 35.20, **up 101.1%**
**Talend** from 26.80 to 40.70, **up 51.9%**
**Hubspot** from 62.40 to 84.10, **up 34.8%**
**Ubiquiti** from 57.80 to 65.85, **up 11.4%**
**NEWER POSITIONS taken in AUGUST, SEPT, and OCT**
**Nutanix** from 21.70 to 27.89, **up 28.5%**
**Nvidia** from 161.2 to 201.85 **up 25.2%** (3rd time)
**Alarm** from 43.85 to 46.95, **up 7.1%**
**Instructure** from 31.75 to 32.95, **up 3.8%**
**Wix** from $69.20 to 68.20, **down 1.4%**
**EXITED POSITIONS THIS YEAR** (showing prices when I entered and when I exited)
**Kite** from 47.50 to 179.00, **up 276.8%**
PayCom from 45.50 to $69.00, up 51.6%
Splunk from 51.15 to 67.75, up 32.5% (1st time)
Amazon from 750 to 985, up 31.3%
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)
Brinks from $79.70 to $85.65 up 7.5%
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%
TFSL from $15.80 to $15.79 down 0.1%
Trade Desk from $51.90 to $50.65 down 2.4%
New Relic from 47.2 to 44.75, down 5.2%
Mulesoft from 22.25 to 20.80, down 6.5%
Twilio from $30.90 to $28.75 down 7.5% (2nd time)
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 again this year in 2017. Eventually they’ll be right, and think “See! I was right all along!”
Last month I read a thread on another MF board in which some guys were commiserating over the future fate of the “naïve” investors on Saul’s board who are investing in all these aggressive companies, and who will be panicked when the correction, or bear market (that these posters have been expecting for years), arrives. I thought to myself that these poor guys are SO JEALOUS! They’ve believed all this scary stuff for years, and have seen us make large gains by ignoring it, and they just have to comfort themselves by believing we’ll be spanked for being bad boys, and not listening to the conventional wisdom like they did.
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 eight years. Picking good stocks makes much more sense than trying to pick good stocks AND trying to time the market too. And being up 76% year-to-date, when the market averages are just averaging up 11%, gives me a big cushion.
As I wrote on another thread, I don’t see ANY euphoria. All I hear is warnings! It seems to me the market is climbing a wall of worry. Also large caps (S&P) are up much more than small caps (Russell), which doesn’t sound like people are wildly casting aside caution. But what do I know?
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, of which 10 are regular postions, 2 are small positions, and Splunk is a tiny try-out position.
Here are the positions in order of position size.
**Shopify 17.7%**
**LGI Homes 11.9%**
**Hubspot 11.5%**
**Square 10.0%**
**Arista 9.5%**
**Nutanix 9.0%**
**Nvidia 8.2%**
**Talend 7.4%**
**Ubiquiti 6.3%**
**Instructure 4.9%**
**Alarm 1.7%**
**Wix 1.2%**
**Splunk 0.4%**
Eye-balling that list you can see that there is one over-sized position (Shopify), then nine positions tapering from 12% to 5%, and finally three small positions (of which Wix and Splunk were just recently started), which are MUCH smaller than even the smallest of the first ten.
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 by far. I know that it’s a very large position, and above what I recommend, but you don’t see too many Shopifys in a lifetime of investing, so for now it is what it is.
I bought Shopify last year at about $27 as I remember. It started this year at $42.90. It closed Friday at $107.30, which is up about 300% since I bought it. Shopify’s growth is slowing slightly with size but it remains an incredible success story.
This is a SaaS company with no GAAP earnings. It only lost a penny a share last quarter non-GAAP, and said it would have positive adjusted earnings in the December quarter. I think they will surprise and have positive adjusted earnings a quarter early (Sept quarter), but that’s just a guess. Revenue is almost all recurring in one sense or another. They weathered a short attack from Citron in October. It’s a smaller percent of my total portfolio than it was last month, mainly because its price was hit by the short attack while the rest of my portfolio was going up, but I also sold a small amount for cash. It’s still about 50% larger than my next biggest position position.
LGI Homes is still in second place at 11.9%. 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 and is now at $59.05, which is up 105%. You know the story about their weak closings in Jan and Feb. They had huge closings numbers in May, June, July, August and September. They seem to have “weathered” the Sept hurricanes without excessive damage, and they are opening new communities like mad. I pleaded with guys on this board who had “lost faith in management” and sold out earlier this year, 100% ago, not to do it. I did try!
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 15.6 although revenue and EPS were both up 45% in the June quarter. This shows there’s still a lot of skepticism and a lot of lumping them with some mythical average for the housing industry.
Square is now in third place, at 11.5% and at a price of $35.20, up $6.40 from last month. I started my position in March at an average price of about $17.50, and have added several times along the way. This company is also growing revenue like mad (41% last quarter), and also has a lot of recurring revenue. It is already profitable.
Square’s original purpose was to allow any 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 still offers basic payments solutions, but it also provides more sophisticated services such as:
Instant Deposit, which 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. For each instant deposit, Square charges 1%. This is incredibly lucrative for Square, as it’s 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 pay the loan back gradually, as a percent of transactions. 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 decide whom to offer loans to with a high degree of safety.
Caviar – this might seem an odd service for a payments 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.
Hubspot is in fourth place at 10.0%. It’s another SaaS company with very rapid growth, lots of recurring revenue, and just breaking into positive adjusted earnings.
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. Reaching out to customers 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 used separate tools for each of these functions, which made it very difficult. Hubs pulls everything together into a single 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 last 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 in August, and added again in September after their big conference where they announced a lot of new products and raised guidance…again. I haven’t sold any at all since I took this position in March.
Arista is in fifth place at 9.5%. I’ll let Smorgasbord explain what they do:
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 treat 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 $16 this month to $189, as the threat from Cisco’s law suits diminishes.
Their last quarter was incredible 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.
Nutanix has moved up to sixth place at 9.0%. It’s was a new stock in September, and it was discussed at great length on the board. While Nvidia has gotten all the hype, Nutanix has risen more since September than Nvidia has since August, when I took the two positions.
Nutanix is growing revenue at a great rate, has loads of deferred revenue ($369 million last quarter, up 69% from the year before), but no earnings as of yet. It’s area is “hyper-converged infrastructure” in data storage. Like Arista, in a way, it sells hardware, but what counts is its software and operating system.
I got back into Nvidia is now in seventh place at 8.2%, at a price over $200. I got back into it in August, talked into it by all the great write-ups by members of the board. It’s been discussed at great length on the board, and I have nothing that will add to the discussion, except that I’m making an exception in buying shares in a “chip” company, but I feel that the tie-in with artificial intelligence makes it worth holding for now. Don’t let the dollar rises make you lose perspective, by the way: a $15 rise from $186 to $201 over the course of a month, for example, is exactly the same as as a $1.50 rise from $18.60 to $20.10 over the course of a month, which doesn’t sound nearly as impressive.
Talend is in eighth place at 7.4%, and a price of $40.70. It went no where at all this month, actually down 25 cents. 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. Suffice it to say that it’s another big-data analyzer that is growing very rapidly, has no earnings, but has huge amounts of deferred revenue, and is free cash flow positive. 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.
Ubiquiti is in ninth place, at 6.3% of my portfolio. I’m cautious since this is still an internet hardware company, after all, with no recurring income, and it’s moving into new fields which involves some risk given their crowd sourced sales model. But they have two businesses, a cash-cow stable WISP business, and a new enterprise model which is growing very fast and will soon be the major part of the company. They have survived a short attack which was based on what seems to be nonsense. They are buying back shares aggressively. I suggest you read Wouter’s excellent write-ups.
Instructure is in tenth place at 4.9%, and was another new position this in September. It’s another small-cap cloud-based, SaaS company, growing like mad, not making a profit yet, but rapidly taking market share from legacy services. This one does learning management systems for colleges and now for businesses. They grew revenue 50% last year and 47% last quarter. They didn’t move much this quarter.
Wix, Alarmand Splunk are three small positions at positions at 2.2%, 1.7% and 0.4%. I like all three of them but don’t feel totally certain about any of them.
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.
Saul
For Knowledgebase for this board,
please go to Posts #17774, 17775 and 17776.
We had to post it in three parts this time.
