My portfolio at the end of October 2018

My portfolio at the end of October 2018

Well, most of us are probably in shell-shock after this month. Here’s the summary of my positions at the end of October, which was a tough month for stocks. As always, I do my monthly summary at the end of the last full week of the month, so Monday, Tuesday and Wednesday will get pushed into November’s Summary. Note that I almost always use adjusted figures when the company gives them.

This has been a tumultuous month that has caused a lot of anguish and nail-biting. I should note that no one can predict with accuracy a down market like the one we have recently been in. It is a force of nature, like a hurricane, that just arises out of the sea.

A Test of the “Cushion” Theory versus the “We’ll Be Punished for Affronting the God’s of Conservative Investing” Theory
We have all heard that we are “supposed” to get killed in a down market like the one we’ve had recently, to “punish” us for foolishly taking risks in buying these overvalued stocks, instead of staying in nice safe indexes and/or ETFs. I have often agreed that our stocks will go down a larger percentage than the indexes in a down market, but that by investing in rapidly growing companies, we will have built up an enormous cushion that will protect us, and we will end up a lot better than someone who stayed in cash, or indexes, or ETF’s or “safe” dividend stocks. This recent market should be a test of our theory. So let’s take a look:

At Friday’s close, after this sustained and very unpleasant descent, my portfolio is up 47.7%, (and down 24.7% from its all-time high). So let’s see how I compare!

The three indexes I traditionally have followed are all DOWN (not up) for the year, the S&P down 0.9%, the Russell down 3.8%, and the IJS down 3.5%, and they averaged down 2.7% for the year so far. When you throw in the Dow and the Nasdaq, the five indexes averaged down 0.9%, being held up slightly by the Nasdaq. (details further down). Thus the “Market” has given up all its gains for the year, and has fallen into the red, and anyone who invested in conservative stocks is showing a small loss, but my “cushion” has held up very well thanks, at up 48%. Clearly, picking stocks that will be winners, the way we do, has beaten investing in ETF’s and Indexes.

And if you figure from the beginning of January a year ago (2017), I am up 172% (that’s more than two and a half times of where I started, approaching a triple), while the indexes have gone nowhere (up 11%, see below). The advantage in investing in high growth stocks becomes abundantly clear.

Please keep in mind that those results were without leverage, just investing in ordinary stocks, no margin, no options, no penny stocks, nothing oddball. Yep, stock-picking doesn’t work. There are books written that prove it :grinning:.

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.” or “This technical indicator proves it.” Honest to God, I’ve heard that all of their charts and indicators proved it in 2010, 2011, 2012, 2013, 2014, 2015, 2016, and again last year in 2017. Eventually they’ll be right, and they will say “See! I was right all along!” They may be right now! I certainly don’t know.

This has clearly been a marked correction, but a bear market…? I don’t think so. But I’m no market-timing expert and the next Bear Market may have started four weeks ago for all I know! But what a price those people have paid by “keeping their powder dry” and staying out of this market for the past nine years, waiting for the big correction that never came.

By the way, it has never yet even crossed my mind to sell out during this correction. In retrospect, there are probably two reasons for this:

First, I had such a large cushion of profits that even at the lowest point (Wednesday) I was nowhere near even down to where I had started the year (up 45% from there, in fact), so I never actually felt threatened.
Second, as I have mentioned several times over the past six months or so, I segregated enough cash in my account for my family and I to live on for a reasonable amount of time. By the way, I also didn’t consider reinvesting that cash near what I thought might have been the bottom because the money was truly “set aside” in my mind. I really don’t try to guess the market.

Picking good stocks makes much more sense than trying to pick good stocks AND trying to time the market too. Just my opinion. I have stocks in a small group of remarkable companies, in which I have high confidence for the most part. I feel that they mostly dominate their markets or their niches, are category crushers or disruptors, have customers that absolutely need them, have long runways, and will have great futures. I wrote up their stories in August in my post called Category Crushers and my portfolio, post #45099,… . As that’s quite a way back now, I’ll give you an updated version in this post.

The three indexes that I’ve been tracking against closed Friday as follows. The results are given from Jan 1st to date. I’ll also tell you how they did during the month.

The S&P 500 (Large Cap)
Closed down 0.9% for the year. (It started the year at 2684 and is now at 2659). It lost 9.5% in October.

The Russell 2000 (Small and Mid Cap)
Closed down 3.8% for the year. (It started the year at 1542 and is now at 1484). It lost 13.9% in October.

The IJS Small Cap Value ETF
Closed down 3.5% for the year. (It started the year at 153.6 and is now at 148.3). It lost 12.2% in October.

These three indexes
Averaged down 2.7% for the year so far. And if you throw in the Dow, which is down 0.1% and the Nasdaq, which is up 3.8%, you get down 0.9% for the five of them. The average of the five lost 11.1% in October.

My portfolio lost 20.9% in October. To compare, the average of the three indexes I usually follow lost 11.8%, and the average of all five indexes lost 11.1%. That’s not bad for “risky stocks” that, at the end of September, were up eight and a half times as much as the averages.

Why do I use those three indexes? Well, they give me 500 large caps (the S&P), 2000 small and mid caps (the Russell), and 600 small cap value stocks (the IJS), which combined 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 have thought that they give me a pretty good approximation of how the market overall is doing. However, the last four months I’ve also thrown in the Dow and the Nasdaq, so as to hit all the major indexes. I may continue to do that.

(The averages would be very slightly higher if you use the S&P with dividends added, but I’m continuing to use the straight values for consistency with past results. I consider the roughly 0.1% per month that the average of the three indexes would be changed by including S&P dividends to be irrelevant considering the magnitude of the differences between our results and the results of the indexes.)

The skeptics visiting our board have said, “Anyone can be a genius in a raging Bull Market!” Raging Bull Market??? The three indexes I follow are down an average of 2.7% so far this year. Last year they were up 14.4% on average. If we combine the two years together, the indexes are up all of 11% while many of us are up well over 150%. It’s hard to explain my 172% gain in the two years as being due to a bull market, with the market being up 11%, or my current 48% gain this year as due to a bull market, with the markets down 1%.

How can we then explain the disparity between our results and the averages? I have to say again that we seem to have caught a secular wave, in which our companies are exploding in function and importance as well as in revenue, which is mostly recurring. It’s the wave of big data, the cloud, artificial intelligence, and all the rest. I had some big winners outside of that area, but it’s been that big wave that has carried us. And, in general, most of our companies provide the picks and shovels for enterprise companies switching over to the cloud, and the enterprise companies NEED what our companies have to offer.

One or two critics on the board have said I shouldn’t compare against the market, but should compare against indexes of Cloud and Internet-based stocks because they are closest to what ours are like. I think that that is fallacious and ridiculous. I compare against The Market, meaning all the companies out there that people invest in. I don’t compare against the stocks that are already in my portfolio … …or against stocks that are just like the stocks that are in my portfolio, which amounts to the same thing. What would be the sense of that? You can only compare against indexes of stocks like mine when you already know what I’ve invested in, and know how well they have done, and then look backward to figure out some index close to my stocks. What nonsense! It is just so silly as to be laughable.

To simply restate my goals, I’m trying to measure my performance against that of the “average return for an investor in the stock market,” not the return of someone who is smart enough to invest in the same “kind” of stocks I’m in. It’s as simple as that.

Let me remind you that I’m no good on timing the market, and I don’t try. If I did, I would probably have exited all my positions at the end of April 2017, when I was up 26% in four months and was “aware” that “it couldn’t continue” like that. Look, at that time, in just four months my results had already dwarfed those I had in the entire years of 2015 and 2016, so back then at the end of April 2017, up 26% seemed like a ridiculously enormous amount to be up in just four months, and my stocks seemed way “over-bought.” Of course, I finished the year up 84.2% and would have died if I had sold out at up 26%.

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 the monthly progress of my results so far this year:

**End of Jan 	+16.9%**
**End of Feb	+21.4%**
**End of Mar	+29.1%**
**End of Apr 	+25.8%**
**End of May	+38.3%**
**End of Jun	+44.3%**
**End of Jul	+55.3%**
**End of Aug	+86.0%**
**End of Sep	+86.8%**
**End of Oct	+47.7%**

The stocks I’m still in since the beginning of 2018 are Alteryx, Nutanix, and Square. They include two of my top three positions, and they make up 40% of my current portfolio.

Current positions added since the beginning of 2018 have been:

**Jan -  	Twilio, and Okta.** 
**May – 	MongoDB** 
**Jun - 	Zscalar** 
**Jul - 	New Relic**
**Aug - 	Wix and PayCom - small positions** 
**Oct - 	Amarin and The Trade Desk try-out positions**  

Here’s a last four months review:

July I took a small position in New Relic… I continued to reduce my position in Pure Storage, and coincidently it was the only one of my stocks that was down in July… I also trimmed a little bit of Pivotal… I kept building my position in New Relic, and added to Zscaler as well… I have also segregated away a certain amount of cash.

August I had reduced my Shopify position gradually over a couple of months but it was still one of my major positions. However, in early August I sold out in shock when their rate of revenue growth, which had been falling every quarter, fell precipitously in a quarter when the economy was very strong and in which Square, in a related market, had huge results, following on top of accelerating rates of growth in all the quarters where Shopify had decelerating rates of growth. My average sale price for Shopify was about $145, about 537% of my initial purchase price which was $27, two years before.

I also decided to sell my small position in Pure at about $22.50, and I trimmed Nutanix a little (it’s still a 7.3% position), and trimmed Pivotal a little. (it had never been a very large position). … I put the money from these various sales and trims mostly in Twilio, Square, Zscaler and New Relic, and a little in Alteryx and Okta, and started small positions in Wix and PayCom, inspired by Bear’s enthusiasm for them over the months.

September. I sold out of Pivotal when it had a disappointing and confusing conference call. Many others said they did the same independently. It’s been discussed at great length so I won’t go into it, except to say that I sold out at about $22.00 and it’s now at $18.05, down 18% further. Just because it had already fallen quite a bit to $22 didn’t mean that it was a bargain.

I tried out a little (under 1%) position in Nvidia again, but didn’t hold it for more than two days, I think it was. I bought a starter position in Arena Pharma, not knowing much about it, but relying on Bulwinkle who seems to know quite a bit about it.

And, as I wrote the last two months, I have segregated away a certain amount of cash. Why? You ask. Well, I’m getting not only older, but old, and there’s a limit to the amount of years I have left to live. I want to have enough set aside for my family. I can also cover our living expenses more easily as we live a reasonably simple life. And besides, it’s too much work for an old guy.

October. Early in the month I sold my little try-out position in Arena and bought a smaller position in another little biotech, Amarin, which was also discussed on the board. Why? Arena had two or three years until marketability (if everything went right), while Amarin had its product out there already, approved and on the market, although its market might not be as large as hoped for, for reasons that I posted about. I also bought a starter position in The Trade Desk at about $121, after reading a raft of positive opinions about it on the board, even though I have been stung in the past by advertising companies.

Here’s how my current stocks have done in the first ten months of the year. I’ve arranged them in order of percentage gain. I’ve used 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.

**Twilio from 25.70 to 65.85		up  156.2%**
**Square from 34.67 to 71.12		up  105.1%** 
**Alteryx from 25.27 to 44.88		up   77.6%**
**Okta from 29.95 to 51.94		up   73.4%**
**MongoDB from 43.48 to 71.26		up   63.9%** 
**Amarin from 19.40 to 21.96		up   13.2%   	(try-out, new in October)**
**PayCom from 120.20 to 124.06	   	up    3.2% 	(new in August)**
**Nutanix from 35.28 to 35.95		up    1.9%**

**Wix from 96.3 to 94.4		    down      2.0%	(new in August)**
**Zscaler from 35.84 to 33.75,  	    down      5.8%**
**Trade Desk from 121.0 to 110.3      down      8.8%	(try-out, new in October)**
**New Relic from 102.00 to 83.82      down     17.6%	(new in July)**

Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price.

**Shopify  from 101.0 to 145.0	up 		43.6%**
**Pure  from 16.72 to 22.50	up 		34.6%**
**Nvidia from 193.5 to 248.0	up  		28.2%**
**Nektar from 59.7.0 to 76.0      up  		27.3%  1st time**
**Talend from 37.48 to 47.50      up  		26.7%** 
**Hubspot from 88.4 to 108.0      up  		22.2%** 
**Arista from 235.60 to 274.0,    up     	        16.3%**
**Pivotal from 19.18 to 22.00	up  		14.7%** 
**MongoDB from 38.00 to 43.50   	up 		14.2%  1st time**

**Wix from 102.5 to 98.1		down	         4.3%  2nd time**
**Mime from 32.34 to 30.85	down	         4.6%** 
**Arena from 41.60 to 39.40	down	         5.3%  try-out in Sept**
**LGIH from 75.0 to 71.0 		down 	         5.3%** 
**MongoDB from 41.00 to 38.65	down 	         5.7%  2nd time**
**Wix from 69.2 to 61.8    	down	        10.7%  1st time**
**Nektar from 103.0 to 54.0       down	        46.6%  2nd time**

Now let’s look at my position sizes. I’m still trying to keep my portfolio concentrated and streamlined. I’m now at 12 positions, 8 of which make up about 93% of my portfolio, and 10 of which make up about 98% of my portfolio. The smallest two are try-out positions that I’m just thinking about and may not keep. By the way, keeping my number of stocks down really makes me focus my mind and decide which are really the best and highest confidence positions. Here are the 12 positions in order of position size. Note that Alteryx and Twilio positions are larger than I usually like, but they are very high conviction Category Crushers.

**Twilio			17.6%**
**Alteryx 		17.2%**
**Square			15.2%**
**Zscaler		 	11.3%**
**MongoDB 		10.1%**
**Okta			 7.7%**
**Nutanix			 7.3%**
**New Relic		 6.4%**
**PayCom			 3.1%**
**Wix			 1.8%**
**The Trade Desk	         1.7%**
**Amarin			 0.6%**

My three top stocks are Twilio, Alteryx, and Square. As you can see, they are by far my largest positions. Alteryx and Twilio are each over 17% of my portfolio (mostly because they were already my first and second positions when they each announced great results and bounded ahead in price). They are both small companies but in my opinion they have each created their market categories and each dominate the market they are in with no credible competition (except do-it-yourself). I’d have to call both of them Category Crushers. I wouldn’t recommend to anyone to have over 34% in two stocks, but that’s the way it is.

Let me take Alteryx first. What they do is to enable non-techies to quickly and easily analyze data. Their clients therefore love them. Their revenue percentage growth looks like this:

**2016:          57  67**
**2017:  61  50  55  55**
**2018:  50  54** 

That looks solid as a rock to me. Their adjusted gross margin last quarter was 90%, up from 84% a year ago. 90% gross margins!

Their deferred revenue at the end of the year the last four years, in millions of dollars, has gone: 29, 44, 71, 114…. Take a good look at that!

Their dollar based net retention rate has been over 130% for the last seven quarters. Before that it was in the 120’s, so it’s improved with age and size.

Their number of customers, 3940 at their last report, is more than quadruple the number of customers that they had three years ago.

The number of shares grew only 4% from a year ago, which is remarkable for one of these super fast growing companies.

They feel they have no competition. Here’s from the conference call: We’re really the only general-purpose data science networks platform on the market today.

I have no new news on Alteryx this month. I didn’t sell any during the month. I added a trivial amount on Friday at $44.40. I still feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six. Their high close was at about $62 and they are now at about $45, which is down about 27.4% from the high.

Next Twilio. They provide communication services and they seem to have no viable competition in what they do besides “do-it-yourself”. One company, Uber, who had been a big customer, decided to do-it-themselves, which caused weak year-over-year revenue growth comparisons over the past year. That is, if you can call 40% revenue growth weak…that was the lowest yoy comparison, in the December quarter… Revenue growth is now back up to 54% and climbing. It always stayed above 60% year-over-year growth if you excluded Uber. They hit adjusted profit this last quarter unexpectedly, and will probably be profitable for the year. Their dollar-based net expansion rate was 137% including Uber, and 145% excluding the effect of Uber’s withdrawal.

They had a euphoric conference call:

… If you actually look at Base Revenue growth excluding Uber, that was in the mid 60% range, and that number has been in the low and mid 60% range over the last eight quarters, so as we scale this business we maintain consistently high revenue growth…

… I think that that means there’s a runway for us for many, many years to be replacing old legacy technology… I think there is going to be no shortage of opportunity for us to do that for years to come.

They are also euphoric about their new Flex call center product, for which the beta was oversubscribed.

…we’re targeting some of the most demanding contact centers that are out there, some of the largest with the most customer-issue requirements of the contact center market… and so as we work with customers we’re not trying to be the lowest cost transaction out there, we’re trying to provide very sophisticated solutions for some of the most demanding customers that are out there.

In October they made an acquisition to fill in a gap in their offering, but it was an excuse for the stock price to go down. It was well discussed on the board. They also announced a bunch of new products, which also was well discussed and which made me feel that no one can really compete with them.

Their high close was at $88 and they are now at about $66, which is down about 25% from the high. I added trivial amounts a couple of times during the month.

Clearly another Category Crusher and very high confidence. I’ll give it six stars as well. Actually I think of each of these two companies as juggernauts. They are each a one-of-a-kind company. Each controls its space and is growing like mad.

Square is next and makes up 15.2% of my portfolio. It has so many moving parts, in so many markets, that various pieces of it could be Category Crusher or Category Leader or Disruptor, or Rapidly Growing Company in… Well, you get the idea. It’s like the blind men with the elephant. Their stock price was traumatised this month by their CFO, the charismatic Sarah Friar, leaving to be CEO of a little start-up, which I personally thought was a terrible decision on her part.

Square’s total revenue has grown year-over-year by 39%, 41%, 45%, 47%, 51%, and 60% in its last six quarters. Yes, you read that correctly! Instead of revenue growth returning to the mean (whatever that means) the rate of revenue growth has increased each quarter. Extraordinary.

How is that happening? It’s because its Subscription and Service Revenue which is its high margin revenue, the good stuff, is growing at about 100% (last six quarters it’s grown year-over-year by 104%, 97%, 86%, 98%, 98%, and finally 131% (!) last quarter.

They’ve been adjusted profitable in 2016 and 2017, and 2018 so far… and profits are growing. In September they had a number of analyst upgrades, which are pretty meaningless, but one of them actually suggested that Square should be added to the FANG group. We also learned that Square’s Cash App passed PayPal’s Venmo in total downloads (which was a big surprise for most of us. I almost thought it was a misprint at first, but for verification, PayPal fired their Venmo chief, for what I think is the second time in less than a year). Square also released Square Payroll App in September, and Square Payroll and Square Terminal this month, so Square is still rolling along

Their high close was about $99.00 and I sold some during the month at about $98.50 for cash, but bought back more at $78.00 later in the month. They are now at $71.12, which is down 28.2% from the high.

I’ll call them a Rapidly Growing Company in a Rapidly Expanding Market, and I’ll rate them five confidence stars out of six.

Zscaler is next at 11.3% of my portfolio. It’s quite a bit smaller than the first three, but I’ve been building my position gradually. This company has an interesting, innovative and revolutionary idea in Internet security (and insecurity). They feel that putting a hardware firewall around a company doesn’t work anymore, now that the enterprise company is partly in the cloud and people can sign in from anywhere, and sign on to other outside programs from within the enterprise. Zscaler provides native cloud-based security, and as far as I can tell they are far and way the leader in this, if not the only player. They have 100-plus data centers all around the world, which would be almost impossible for a competitor to replicate. Zscaler has been building them out and operating them for ten years. It is growing revenue at 50% and growing billings at higher than that. Their adjusted net loss is 5% of revenue. (Compare that with Mongo’s loss of 37% of revenue, a little further down the page!) Zscaler sounded pretty euphoric too, in their conference call:

Zscaler delivers advanced security and policy enforcements, no matter where the users are, connecting users to the nearest Zscaler data center, hence taking the shortest path to the application…

…We believe we are the solution to secure the cloud-first, mobile-first, world. We have 10 years of operational experience running our security cloud at scale. We process in excess of 45 billion internet requests per day during our peak periods. Each day, we detect and block over 100 million threats and perform more than 120,000 unique security updates. This cloud effect delivers far superior security than traditional appliances for all of our customers… We feel the world is coming towards us!

There was no new news that caught my attention during the month. Their high close was at $47.30 and they are now at $33.75, which is down 28.6% from the high. I added some this week at $33.82.

In my opinion Zscaler is a Disruptor, a Category Crusher, and a juggernaut like Twilio and Alteryx. The traditional security providers can’t compete with Zscaler because their businesses are built around high-priced hardware and firewalls, and they don’t have the data centers all over the world that Zscaler has. I’ve been building my position gradually. I also added a small amount to Zscaler this month, and I give it a five out of six confidence rating.

MongoDB has pretty much invented its solution and category, although it does have competition. It’s the leader in NoSQL data storage and it this last quarter its revenue growth accelerated to 61% from 51% the year before. It has chosen to put almost all its money into growing, and thus its adjusted loss was about 37% of revenue, which is why I only gave it a 4 out of 6 confidence rating, although that loss is down from a loss of 65% of revenue the year before. Mongo is about a 10.1% position.

I know that Bert likes it, and the MF likes it, and that Mongo has come out with Atlas which gives it a fully managed cloud solution, and that Steppenwulf said that MongoDB is the story of 30 year old technology (SQL) being replaced by more modern technology. This story is only tangentially about the cloud - with or without the cloud, the amount of data is exploding and old technology can’t handle it….

Bert wrote: MongoDB reported a simply monster quarter… Investors in high-growth IT names are ultimately going to have to own MDB, unless it gets bought by a legacy rival.

The only news this month that attracted my attention was a small acquisition.

Their high close was at $84.80 and they are now at $71.26, which is down about 16% from the high (quite a bit less than the others). During the month I added a trivial amount at $64.30.

I’ll call Mongo a Disrupter, a Category Leader, and a Big Data New Market Stock.

Okta is next and is a 7.7% position. I had previously rated it at just the three star level in my Category Crusher post because at the time I didn’t know enough about the tech to tell whether they could be replaced by someone like Zscaler. I’ve since learned, through Puddinhead’s and Brittlerock’s great posts… and… and others, that they are complementary and not really competing companies. I would suggest that if you are invested in Okta or Zscaler you read those enlightening posts. What Okta does is control individual sign-on to all the apps you use using a native cloud SaaS platform. It’s called identity and access management. It is loved by the people who use it, because they no longer need a million passwords for each program they sign on to. It only has one real competitor, Sailpoint, who it turns out can only really compete for on-premises projects.

Okta is growing revenue at 60% and its net loss is down to 11% of revenue. It seems to be in command of its own future.

There’s been no new news of note, but lots of discussion on our board. I didn’t buy or sell any during the month. Their high close was at about $74.20 and they are now at $51.94, which is down 30% from the high.

This is a Disruptor and Category Leader, and a Cloud-based New Market Stock. I’d now rate it four confidence stars (and rising).

What does Nutanix do? Damned if I know. And based on the probably 80 to 100 recent posts on our board (or maybe twice that many, I didn’t count them), trying to figure it out exactly what Nutanix does, I doubt that anyone else does either. To quote from the MF: “Nutanix’s Enterprise Operating System enables a data center filled with hardware, storage, and networking, to behave as if it were a public cloud like AWS.” Doesn’t really clarify it much for me, but it sounds impressive, I have to admit. There has been a lot of really good discussion on our board, and I have nuggets copied to my notes, which make it clear when I read them, but I forget five minutes afterwards. It’s the numbers that I follow:

Nutanix is phasing out the zero-margin pass-through hardware that they had been counting in revenue in the past. This makes revenue comparisons a bit complicated and obscure. At any rate their deferred revenue in millions of dollars, at the end of the June quarter these last three years was: $172, $332, $540 million. You read that right! Subscription revenue this last quarter was up 55%, and Subscription billing was up 67%. Those are some pretty impressive percentages, although there has been some recent discussion about a part of that being service revenue. At any rate, it isn’t hardware.

Oh, and in June they won a $30 million contract with the US Air Force, the largest contract in their history.

I know that they are part of a duopoly in the space they are in, with VMWare (a piece of Dell, like Pivotal) being the other player. As I understand it, VM mostly converts prior Dell customers and Nutanix goes out and finds new ones. Dell is a partner with Nutanix, as are Google and Microsoft. I could safely put Nutanix down as a Rapidly Growing, Big Data, New Market Stock.

My thoughts about Nutanix’s latest results are the same as those of Bert and others: the results were misunderstood by robo-analyzers. They were great results! Let’s look at some more figures:

Gross revenue was just up 20% from last year, but that’s only because they weren’t counting $95 million of hardware that would have been counted in the same quarter last year. Put that back in for an apples-to-apples comparison, and revenue was up 58%!

Subscription revenue was up 49% as reported, which is the future of the company.

Deferred revenue is huge (more than twice as large as the quarter’s entire revenue) and was up 71% yoy!!! Yes, up 71%. And up 17% sequentially.

Subscription billings were reported up 66%.

Free cash flow was positive $6.5 million, up from negative $6.5 million a year ago.

For the fiscal year ending this quarter, Free Cash Flow was positive $30 million up from negative $36 million a year ago!!!

Operating cash flow was $23 million up from $6 million yoy.

For the fiscal year ending this quarter, Operating Cash Flow was $93 million up from $14 million a year ago!!!

Is there anyone left who doesn’t think that this was a blow-out quarter?

Adjusted Net Loss was 6% of revenue, improved from 10% of revenue a year ago.

Customers were 10,600, adding 1000 new customers in the quarter. Note that’s not in the year, that’s in the quarter.

There has been no new news of note, but lots of discussion on our board. Their high close was at $63.70 a few months ago and they are now at $35.95, which is down an incredible 43.6% from the high.

I give Nutanix just three confidence stars, but only because of its very complicated and difficult-to-get-your-mind-around situation. I just can’t get my confidence level higher. When I have looked to trim lower confidence stocks I’ve found myself taking small amounts for cash to buy higher confidence stocks, but as you see, it’s still a 7.3% position.

New Relic is a relatively new position, and only 6.4% of my portfolio. It only has four stars of confidence because I don’t have much experience with it, and because it’s growing a little more slowly than the others, but confidence and position size are growing.

What does it do? To quote Bear, New Relic monitors web and mobile applications in real time, detecting issues before they become problems, and helping companies figure out where the pain points may be before it costs them sales, or even customers.

This is called the APM space (or the Application Performance Monitoring space). They are adding NPM (or Network Performance Monitoring), and they have developed a realtime Dashboard. APM didn’t use to be very sexy, but with the rise of the cloud, people in your enterprise may be using all kinds of applications, including ones that are on the web and in the cloud. APM is becoming much more important for enterprise companies. To quote the MF:

New Relic makes software that ensures that everything behaves the way it should whether applications are in the cloud, on premises, or part of a hybrid system. As a pioneer of what it calls Application Performance Management (APM), it allows companies to see what’s working, what isn’t, and why. That’s important for making sure your back-office systems function the way they should, and it’s critical for understanding your customers’ experience… New Relic is a “land and expand” business. While older APM software tends to be expensive and difficult to use, New Relic’s platform works entirely in the cloud, making it easy to add new applications. It’s also cheap.

How are they doing? They grew revenue at 35% last fiscal year (ending in March). That was amazing by old standards, but it’s slower than most of my other companies. However, earnings per share are something else again:

At the end of June 2016 their TTM earnings were minus 84 cents.
At the end of June 2017 their TTM earnings were minus 38 cents.
At the end of June 2018 their TTM earnings were plus 23 cents.

Read that again! APM may not be sexy, but that sequence is!

Their adjusted gross margin is 85% which isn’t bad either.

Their TTM adjusted Free Cash Flow margin has gone from minus 56% to plus 11% in five quarters.

Their adjusted Op Margin percent has gone from minus 44% to plus 8% in the same five quarters.

In October they acquired the technology and hired key members of the team behind CoScale, a Belgian company with deep experience monitoring container and microservices environments, with a special focus on Kubernetes.

Also in early October Bert took a position.

New Relic’s high close was at $113.40 a few months ago and they are now at $83.82, which is down 26.1% from the high.

I’d call them a Category Leader and a company that took an old space that was going nowhere and turned it into a cloud based New Market space. As I said aboveI’d give them four stars of confidence, and more as I get to see more quarters of results.

Paycom and Wix which I started in August are still small at 3.1% and 1.8% positions, and I’d consider them three confidence star positions.

Here’s an interesting news item from Paycom: Named the 5th fastest-growing company on Fortune’s 100 Fastest Growing Companies List. Now in its second year on the list, Paycom landed above notable technology companies such as Facebook, Amazon and Netflix. It placed 2nd a year ago.
Each company’s overall rank was determined based on three areas of performance over a three-year period, ending June, 2018:
Average annual revenue growth; Average increase in earnings per share; Total stock return.
Their revenue was up 31% last quarter, and Adjusted EBITDA was up 46% and made up 41.5% of total revenue. As opposed to some of our other stocks, they’ve already reported $1.54 in adj earnings for the first six months of the year.

Wix is growing revenue in the mid-40% range. Their Free Cash Flow is 16% of revenue. In the trailing four quarters their adjusted earnings were positive 51 cents, up from a loss of 15 cents the year before. Bear has them as his largest position, as I remember it, and feels they are turning into a cash machine.

I have started a tiny 0.6% position in Amarin, as I mentioned above, and a 1.7% position in The Trade Desk.

I feel that most of my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.

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. Sometimes it’s after months, and sometimes after 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. And besides, I sometimes make mistakes, even big ones! 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 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 Posts #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 that is on the right side of every page on this board.


Hi Saul,

I must admit, I’ve been looking forward to this review more than any other and you sure did not disappoint. I actually feel a lot better about things after reading this. (hopefully others feel the same). Best portfolio review post of the year if you ask me.

Thanks for taking the extra amount of time for this one. I’d give it 6 out 6 stars. :slight_smile:



At Friday’s close, after this sustained and very unpleasant descent, my portfolio is up 47.7%, (and down 24.7% from its all-time high).

People like gains, but they hate losses even more (what academics call “loss aversion”).

And so this is why most people are happy investing in the S&P 500 index and only being down 1% for the year versus up 50%. Because losing 10% this month is much less painful than losing 25%.

Of course, this isn’t logical, but it’s human nature.

Thanks for the update.



I have often agreed that our stocks will go down a larger percentage than the indexes in a down market, but that by investing in rapidly growing companies, we will have built up an enormous cushion that will protect us, and we will end up a lot better than someone who stayed in cash, or indexes, or ETF’s or “safe” dividend stocks.

But the missionaries from The Church of Conservative Investing has one point, though. You need to have the time to build up the cushion of gains. I started following this board in late July — and even though I had a good ride up through August until my peak on September 11th, I have only one stock in green, and the rest is red and down 10-15% in losses.

Well, during October I have sold some of those short-term losers (tax loss harvesting for the future) and consolidated my portfolio into only three very high conviction companies: Square, MongoDB and Twilio. I think those companies will reclaim the lost gains pretty fast when this correction is over.

I know a hyper-concentrated portfolio with only three stocks does not comply with The School of Diversification but please note that this is not my retirement portfolio or my entire life savings. It’s just a relatively small-ish portfolio (˜50% of my yearly salary) which I keep in a taxable account (non-US tax rules apply).


Thanks Saul for all you do. I don’t post much at all because I’m not a technical analyst type. That’s why I do read the boards though. I’m the other half of the equation, so all the info on here really rounds me into making better decisions.

Right now I look at this market as walking into a favorite store and finding a really nice sale going on. Today 20% off, but the salesperson tells me they may lower prices further next week, so you may want to check back. So I decide to buy a few things, and will check back next week to possibly buy a couple of other items I have my eye on. I love sales.

This market needed this correction. Clear the field so to speak. You want a healthy landscape, sometimes you need to burn away the overgrowth so the field can come back healthier.

That’s the way I see this. It’s a gift and longer term much healthier for markets longer term well being.

Thanks again to the good people on these boards.



By the way, it has never yet even crossed my mind to sell out during this correction. In retrospect, there are probably two reasons for this:

Thanks Saul for your update. I am curious to hear your decision and rationale in the following situation:

If you happened to be just in stock index funds or in slower growing stocks at the moment would you sell all/some/none of those and buy these fast growing stocks? BTW, I have chosen the middle option (some) since July. I have some losses but have’nt sold any of the fast growers.

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Just one question; who is Bert?

Thanks Saul for your update. I am curious to hear your decision and rationale in the following situation: If you happened to be just in stock index funds or in slower growing stocks at the moment would you sell all/some/none of those and buy these fast growing stocks? BTW, I have chosen the middle option (some) since July. I have some losses but have’nt sold any of the fast growers.

Hi Texmex, Two answers to that question:

First, I told you what I did, but that would not be best for everyone. I depends on your circumstances, your income, finances, responsibility, etc. You need to decode what’s best for you, and I can’t decide that for you. I’m not a financial advisor, don’t want to be one, and wouldn’t be good at it.

Second, I can’t imagine myself in a totally different situation and give you a opinion about what I’d do. My emotions would be entirely different, and my feelings about my stock holdings would be entirely different. And even if I could imagine it, my decisions wouldn’t be the same you’d come to, or the one you should come to. That depends on your circumstances.





Not asking for FA. As stated I already chose the middle option and plan to continue investing in hi conviction hi growers. Money is in retirement and not needed for 10+ years. Was just curious what would you have done I suppose. But I see that can be a very tough hypothetical for anyone to imagine.


If Saul thought that his allocations were not to his liking then he would change them. So you can assume (only tax considerations might change that) that if Saul had all cash then he would allocate his portfolio exactly how he reported it yesterday. In fact, this is a good way to think about investing: don’t hold on just because you made a decision perviously and invest in those companies that you think will do the best from today on.




about your “A Test of the “Cushion” Theory versus the “We’ll Be Punished for Affronting the God’s of Conservative Investing” Theory”…

Here is how I see it works. Having a small number of high growth stocks will enable one to be far ahead of the market if you get in the right ones early enough and you buy that well in advance of a correction. But if you don’t get in at the right time (time being +/- 1 to 2 years) and/or if you don’t get in the right stocks, you can see declines bigger than the market during a correction. For example, ALGN. I know you don’t have ALGN but I read that some of your followers do. So if you have had conviction on ALGN and you pitched in with a small portfolio, you would have been ecstatic about ALGN contribution to your portfolio performance in 2018… until a few weeks ago when it started to give up all its 75% gain and became a loss for the year a few days ago. Certainly some have risen just as much or more but have not fallen down…yet? How would you know? It works until it doesn’t and it is at that time you wished you did not pitched in so heavily.
Of course, if you have the knack of picking a few of the stocks that don’t give back their hot gains, or you know how to bail out in time then you are in business. Of course luck is always playing a role. That is a given.

Several hot stocks did give up their 2018 gains just in these past several weeks. Well that’s how musical chair is played. You may have gone further out from shore into the deeper end so we still cannot see if you are swimming naked or not. Be careful don’t get swept out to sea just because you don’t want us to know that (joke?).
No, Saul. You are good and you do seem to know how to walk the thread. Good for you.
The rest of us just want to know how you do it but I don’t know if we can really learn to do it or maybe it is because some just don’t have the same frame of mind as you do.


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Trying to post for the third time - I’ve been having a lot of connection problems this year in China . . .

Anyway, two observations:

First, thanks once again Saul for an informative and inspiring post. Your monthly summaries are of greater value than you probably know. They are very instructive. Yes. there’s a certain amount of redundancy from month to month, that’s necessary as there’s always the readers who have never seen a previous post, but there’s also always new insights that provide new understanding. I’m deeply grateful.

Second, a word about the recent portfolio damage many of us have suffered. My wife is Chinese and has no understanding of investing. Her interest is only in one number which is the summary total of our three portfolios. As of late, she’s been pretty unhappy. I told her, yeah, I’m not so happy either, but also not discouraged. I pointed out that we were about at the same point we were sometime back in March, up about 30% for the year. In March we were both pretty exhilarated about it, now, seven months later it’s somewhat depressing. And my annual goal is 20%. Yeah, could go down from here, but I’m pretty confident as the quarterly earnings come in, these numbers are going to go back up.

Perspective can be difficult to maintain when performance has been far beyond expectations.


For those who think Saul’s results are best compared to the regular indexes only over decades rather than months and are interested in my regular comparisons to a ‘Less Work; Do Nothing Index’ composed of the average of three titans of the current theme, ADBE, MSFT and CRM, Saul continues his wide outperformance, being up about 48% YTD (to 10/26) while the LWDNI is up 31%.

Saul also refers to the period Jan. '17 - Oct. 26 '18 where he is up 172% whereas the LWDNI is up 100%.

Being lazy, and disliking too much risk and excitement, I prefer the LWDNI route but Saul’s results speak for themselves as usual, vindicating his hard work.


Hi Strelna, Can I ask what is LWDNI?Thanks. Cheers Will

Less Work Do Nothing Index

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