My portfolio at the end of Sept 2018

My portfolio at the end of September 2018

Here’s the summary of my positions at the end of September, which was a fairly tough month for our stocks. This month ended on a Sunday, so you get a full month’s worth. Note that I almost always use adjusted figures when the company gives them.

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, and that they 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, http://discussion.fool.com/category-crushers-and-my-portfolio-33… . As that’s a way back now, I’ll give you an updated version in this post.

I’m sure that you understand that my results are ridiculous and embarrassing and it’s very hard to discuss them without seeming to be bragging, in fact without actually bragging. That makes me uncomfortable but it is what it is, so I’ll go ahead and brag.

As you know, last year (2017) was an extraordinary year in which I finished up 84.2%. At the end of the year I begged everyone not to expect that this year would be anything like that. I’ve kept saying that each month this year, but our stocks keep going up in spite of my warnings, and in fact my portfolio is way, WAY ahead of the 65% that it was up at the end of September last year. In fact, it’s actually ahead of that 84% I finished last year with, and it’s only the end of September!!!

This month, September, my portfolio closed at the remarkable result of up 86.8% for the year so far, but up just 0.8% for the month. However, if you consider my results since the beginning 2017 to today, my whole portfolio has well more than tripled so far in a year and eight months! It’s actually at 344% of where it started 2017. That’s beyond remarkable, it’s ridiculous!

In words instead of percentages, it means my portfolio has grown to almost three and a half times where it started just over a year and a half ago. (You can check the calculation with a little hand calculator: 1.842 times 1.868 equals 3.44, or 344% of where it had started).

To quickly summarize:
So far this year my portfolio is up 87%%
For the trailing 12 months it is up 109%
Since January a year ago it is up 244%

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

It wasn’t a straight line during the month. Far from it! Two and a half weeks ago I hit a top of up 96.2%, and six trading days later I had “fallen” to be up “only” 81.2%. Then, in the last week and a half, my portfolio worked its way back up to the current close of up 86.8%.

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 as my portfolio barely budged:

The S&P 500 (Large Cap)
Closed up 8.6% for the year. (It started the year at 2684 and is now at 2914). It was up 0.5% for the month.

The Russell 2000 (Small and Mid Cap)
Closed up 10.1% for the year. (It started the year at 1542 and is now at 1697). It was down 2.8% for the month.

The IJS Small Cap Value ETF
Closed up 8.7% for the year. (It started the year at 153.6 and is now at 172.8). It was down 3.8% for the month.

These three indexes
Averaged up 9.1% for the year so far. And if you throw in the Dow, which is up 7.0% and the Nasdaq, which is up 16.5%, you get up 10.2% for the five of them. That means my portfolio is not only beating the indexes but is up eight and a half times as much as the indexes.

Why do I use these 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 think they give me a pretty good approximation of how the market overall is doing. The last four months I’ve thrown in the Dow and the Nasdaq as well, 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 up an average of 9.1% 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 25% while many of us are up well over 200%. It’s hard to explain a 244% gain as being due to the market being up 25%, or my 87% gain this year as due to the markets being up 9%. Think of it this way: in the month of August alone my portfolio tacked on 31 points (from up 55% to up 86%), while the markets, as a whole, have tacked on just 10 points in nine months!

How can we 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 recurrent. 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, I just want to remind you all that in general, most of our companies are built for the cloud from the ground up, and they provide the picks and shovels for enterprise companies switching over to the cloud.

One or two chronic 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, and which is what these critics are saying I should do. What would be the sense of that? You can only know to compare against indexes of stocks like mine when you already know what I’ve already invested in, and know how well they have done, and then look backward to figure out some index close to my stocks. What nonsense.

I’ve been comparing against the S&P (“The Market”) since I started this board in Jan 2014, over four and a half years ago, years before I ever invested in a stable of SaaS related stocks. I’ve compared against The Market irrespective of what my stocks have been. They’ve included companies in fields as varied as banking (Bofi, Signature Bank, First Internet Bancorp, and others), biotech (Celgene, Kite and Nektar), real estate (LGIH), a gas station and general store chain (Casey’s General Stores), a 3-D printing company (Arcam), medical device firms (Abiomed, Intuitive Surgical), some solar companies (SolarEdge, Solar City), an electric car company (Tesla), etc, etc. My goal will always be to make money to support my family, and not to beat some index made up of a collection of stocks that’s almost the same as the ones I happen to be in at the moment. That 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 stocks I’m in, or the same “kind” of stocks I’m in. It’s as simple as that. I never guarantee to be in the best stocks in my category. I’ve always said there will always be stocks that will do better than mine (or yours). I just want to make a good rate of profit, and a better one than the market as a whole is producing. I never expected to triple my money in two years. It just happened. :grinning:

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. 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.”

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%**

The stocks I’m still in since the beginning of 2018 are Alteryx, Nutanix, and Square. They include two of my top three positions, they make up 42% of my current portfolio, and they are up an average of 111% year to date, despite Nutanix’s fall off.

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 

Sep - Arena Pharm

Here’s a last four months review:

June I sold out of the remainder of my Arista early in the month… I was reducing Nektar all month, but planning to keep a token position, but sold out of the last of it at the end of June to buy Zscalar… I took a small position in Wix early in June, but sold it back in the same month, to buy Zscalar… I reduced Pure Storage to buy Zscaler.

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 of it in shock when their rate of revenue growth, which had been falling every quarter, precipitously fell in a quarter when the economy was very strong and in which Square, in a market quite similar, 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. If I look back to my End-of-July post, Shopify was at $160.15 and Square was at $69.85. Shopify is now at $164.80, up 3% for the nine weeks, and Square is at $99.01, up 42% for the nine weeks.

I also decided to sell my small position in Pure at about $22.50, and I trimmed Nutanix a little (it’s still a 8.7% 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. This month 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 $19.58, down 11% 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.

Here’s how my current stocks have done in the first eight 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 86.28		up  235.7%**
**Square from 34.67 to 99.01		up  185.6%** 
**Okta from 29.95 to 70.36		up  134.9%**
**Alteryx from 25.27 to 57.21		up  126.4%**
**MongoDB from 43.48 to 81.55		up   87.6%** 
**PayCom from 120.20 to 155.41	   	up   29.3% 	(new in August)**
**Wix from 96.3 to 119.7			up   24.3%	(new in August)**
**Nutanix from 35.28 to 40.78		up   21.1%**
**Zscaler from 35.84 to 40.78,  	        up   15.6%** 
**Arena from 41.60 to 46.02		up   10.6%	(new in September)**
**New Relic from 102.00 to 102.76        down   7.6%**

It’s hard to believe what some of these stocks are doing.My recent big stars have been:
Square, up 156% this year so far, and more than quintupling in price since I bought it at $17.50 just a year and six months ago, in March of last year.
Twilio and Okta, up 236% and 135% from when I bought them in January, just over eight months ago.
Alteryx, up 126% this year so far.

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%** 
**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**

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 the market is in a bubble.” All of their charts and indicators proved it in 2010, 2011, 2012, 2013, 2014, 2015, 2016, and again last year in 2017. I’m hearing convincing stories about bond yields now foretelling a crash, and interest rates rising. The only trouble is that I’ve heard similar convincing stories about other technical indicators every year. 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.

Of course a marked correction or bear market will come eventually.They always do. And rising interest rates, tariffs, and trade wars do eventually stop market rises. Look, the next Bear Market may have started two weeks ago for all I know! But we never really know when. And 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.

Picking good stocks makes much more sense than trying to pick good stocks AND trying to time the market too. Just my opinion.

Now let’s look at my position sizes. I’m still trying to keep my portfolio concentrated and streamlined. I’m now at 11 positions, 9 of which make up 95% of my portfolio, and the other two are small positions that I’m just getting comfortable with. 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 11 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			17.9%**
**Alteryx 		17.2%**
**Square			16.8%**
**Zscaler		 	10.3%**
**MongoDB 		 9.0%**
**Okta		         8.3%**
**Nutanix			 7.6%**
**New Relic		 6.1%**
**PayCom			 3.1%**
**Wix			 2.7%**
**Arena			 1.0%**

My three top stocks are Alteryx, Twilio and Square. 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 35% in two stocks, but that’s the way it is.

Square was a little further behind them last month, but even though Alteryx and Twilio increased their percentage of my portfolio this month, Square gained ground on them and now makes up 17% of the portfolio.

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 still feel very justified in calling it a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six.

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.

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 16.8% of my portfolio, up from 15.0% a month ago. 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.

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. This month they’ve had a number of analyst upgrades, which are pretty meaningless, but one of them apparently said 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, this month PayPal fired their Venmo chief, for what I think is the second time in less than a year. Square also released Square Payroll App this last week.

I’ll call them a Rapidly Growing Company in a Rapidly Expanding Market, and I’ll rate them five confidence stars out of six. And by the way, I added small amounts to each of Alteryx, Twilio, and Square this month when I sold out of Pivotal. Good choice, overall.

Zscaler is next at 10.3% of my portfolio. It’s a lot 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 45% 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!

In my opinion they are a Disruptor and 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 9% 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 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… if I owned it, I would just leave it alone… Investors in high-growth IT names are ultimately going to have to own MDB, unless it gets bought by a legacy rival. It is just a question of when and how much.

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

Okta is next and is an 8.3% position. I had rated it at the three star level in my Category Crusher post because I felt at the time that 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 https://discussion.fool.com/more-importantly-i-just-can39t-wrap-… and https://discussion.fool.com/bear-you39ve-asked-a-simple-question… 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.

This is a Disruptor and Category Leader, and a Cloud-based New Market Stock. I’d give it four confidence stars (and rising). I added a trivial amount during the month.

What does Nutanix do? Damned if I know. 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 enough for me, but it sounds impressive though, I have to admit. There has been a lot of discussion on the board of what they do, 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 understand:

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.

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. I also believe that Dell is a partner with Nutanix, as is Google and Microsoft. I could safely put Nutanix down as a Rapidly Growing, Big Data, New Market Stock. They are at 7.6% of my portfolio. Oh, and in June they won a $30 million contract with the US Air Force, the largest contract in their history.

My thoughts about Nutanix’s 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 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.

I’ll give Nutanix three confidence stars, only because of its complicated situation. I added a fair amount to my position during the month but a week ago I decided that I have enough and will wait and see what happens. I would have bought more but I had no available cash and I didn’t have any larger positions I wanted to trim, and I didn’t want to trim my smaller positions as I wanted to let them grow.

New Relic is a relatively new position, and only 6.1%. It has four stars of confidence because I don’t have much experience with it, and because it’s growing a little slower 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 lower 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.

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.

Paycom and Wix which I started just last month are still small at 3.1% and 2.7% positions, and I’d consider them three confidence star positions, but they are growing. They were two stars last month.

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 a tiny 1.0% position in Arena Pharma, as I mentioned above.

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.

Saul

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.

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Saul and Bear… thank you for your continued monthlies…

Just brilliant,like this board and the posters therein, not much more that I can add. Fully deserved.

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My thoughts about Nutanix’s results are the same as those of Bert and others: the results were misunderstood by robo-analyzers

We have discussed what has caused the share price to drop and fall to very low forward valuations. Many possibilities, one for sure was a short attack w false Google article followed by analyst serious downgrade calling Nutanix a “second source” to VMWare, which is absurd, but whatever.

Rob-analyzers? I am sure they are out there I have just never considered them before analyzing fundamentals. Bert I would think would be quite up to speed on these things however. If this is a material issue, then this time next year, assuming Nutanix business continues to grow as it has and we think it will, it will be nearly an apples to apples comparison and that robs-analyzer will be calculating revenue acceleration from 12-15% to 50%! Now what it does with it I don’t know but if I were a computing machine my algorithm might get pretty excited about that.

TBD. The current Nutanix situation is very similar to what caused Nutanix to crash back in 2016, so not unexpected, and it is almost as if there was a gap to fill from when Nutanix went nearly straight up after announcing its software only strategy. Who knows, but the more I try to hypothesize the bearish issues the more bullish one seems to get.

We can’t all be wrong, can we? Don’t answer that;) I do not want to know the answer.

Tinker

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Saul,
Once again, thanks for a great write-up! It’s obvious that you don’t do these monthly reviews simply for the benefit of those of us who read your posts and try to emulate your style of investing. I’m confident that they assist you in sharpening your own thoughts about your investments. I’d be curious to know if you did something similar prior to starting this board. I don’t recall that you specifically recommended monthly reviews in the Knowledgebase (it’s been a while since I reread it), but if not, you might consider adding this practice. It’s something I have not really engaged in, but I think I will start, if only for my own benefit.

Separately, I’ll add just a few words about some the companies we hold in common where I think I can add some understanding about what they do and what gives them a moat:

Twilio. They provide communication services and they seem to have no viable competition in what they do besides do-it-yourself.

I’ll just shed a little more light on that subject. Much was said about Uber deciding to to roll their own. But not much was said about what might have motivated them. Communications and telephony reside at the very heart of the Uber business model. In fact, IMO ride hailing is actually an outgrowth of what they do, obviously, an important one and I’m hard pressed to come up with a better one, but it is the communications functions that enable the service. In that Twilio has a transaction based fee structure and Uber is a communications transactional enterprise it undoubtedly made economic sense for them to self provide in order to escape the fees.

But this is far from the norm for most companies. Most companies, are engaged in some other business and rely on Twilio enabled functionality primarily to provide customer support or sales functions. For those companies digging deep into the weeds of communications protocols (and these are very deep weeds) would require a hiring a handful of specialists who would inevitably become an IT bottleneck as their workload would be sporadic. The tendency would be to under-staff these high paid positions.

Enter Twilio with a library of APIs that most programmers can master after an initial training period. And there’s no annual subscription fee for the libraries, you only pay for what you use when you use it. What’s not to like? Virtually every company big enough to have an IT department will need some communications functionality at times. Twilio makes it easy and standard. No risk of two specialists coming up with different solutions for the same problem.

How about competition? I already discussed the special case of Uber. And yes, a competitor could develop similar functionality, it’s not that esoteric. But if you’re hiring IT staff why would you go with brand X? Twilio has the network effect of being first, best and getting better with an ever growing body of programmers already familiar with their APIs and how to use them. And their pricing model might be matched, but can’t really be beat, a new entrant would have to have a lot of funding to undercut their prices and survive for the long haul while playing catch up. If you’re a venture capitalist would you bet on brand X?

And just a brief word about Nutanix. Not all that many years ago many companies went through a major IT overhaul by replacing big blue mainframes with smaller primarily UNIX boxes. This IT transformation was called “distributed computing.” I was one of several managers on such a project where I worked. Not well recognized at the time was that one set of problems related to centralized mainframe computing was being exchanged for another set of problems related to multiple application and data servers. In a nutshell, as the number of applications and the volume of data escalated, the number of servers required multiplied as well. What used to be the I/O bottleneck (and vendor lockin) of mainframes was traded for a nightmare of networking, capacity allocation and load balancing among myriad boxes. Enter Nutanix. In a nutshell, they vastly simplify the management of all those boxes, interconnections and capacity requirements. The management job is not eliminated, but with Nutanix it is no longer necessary to pay attention to every server and storage unit as an individual device. All the devices and traffic between them is hidden from view and the management is raised up to a macro level. And it’s not just the management, but forecasting and capacity planning are made much simpler as well. These important functions become more accurate and gain expanded time frame windows.

New Relic - APM/NPM are not new. I managed the TPNS group where I worked in the 80s (TPNS stands for Teleprocessing Network Simulator, an IBM product for the IMS DB/TP environment). Oracle has offered database performance monitoring tools for a number of years. But, the problem should be fairly obvious from what I’ve just related. The monitoring tools that have been available are all domain specific. What sets New Relic apart is that it monitors at higher level of abstraction. And as Saul noted they are in the process of adding NPM tools. I don’t have much to add other than watch this space. I don’t know much about it other than what’s been discussed here, but to some extent Elastic plays in the same field. That may pose a serious competitive challenge - or it may not. I don’t know enough about it yet to make a determination. Maybe there’s some folks here who can shed more light on it than I.

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“What does Nutanix do? Damned if I know.” Saul

As a fellow old fart, I appreciate your honest admission, Saul. The complex high tech nature of our exploding stocks preclude many of us who are in the golden years of our life.

However, there is hope for us old guys! There is a sprinkling of young extremely bright minds beginning to visit and post on Saul’s Investing Discussions. My son (Mr. TBS) is one of them. May their tribe increase!

The wisdom of decades of sober experience mixed with youthful fresh insights into our rapidly evolving high tech complex world will profitably benefit us all.

Jim

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Of course a marked correction or bear market will come eventually.They always do. And rising interest rates, tariffs, and trade wars do eventually stop market rises. Look, the next Bear Market may have started two weeks ago for all I know! But we never really know when. And 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.

I excerpted this from Saul’s post because think it bears repeating (emphasis different from original). Even if investors just keep a portion of their “powder dry” it is opportunity lost. Imagine how a 15% cash position would have grown in the last 9 years.

If people absorb this one lesson from the board their time will have been well spent. Don’t underestimate this very powerful concept.

Jeb
Explorer Supernaut
You can see all my holdings here: http://my.fool.com/profile/TMFJebbo/info.aspx

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Saul, thanks for continuing to provide monthly, sharing your wisdom and very watchful moderation of the board. Its been enormously helpful, to the tune of changing life for me (and i think many others on this board).

Just one point on your ZS description:
"They have 100-plus data centers all around the world, which would be almost impossible for a competitor to replicate. "
This was discussed on the board at some point.
It is my guess (based on the how ZS describes… and how i would think it ought to be based on their services) that ZS has not build dedicated data-centers around the world - they have simply leased capacity on public cloud (from providers like Amazon AWS and Microsoft Azure etc). They have leased such that they end up replicating their infrastructure on 100 (or more now) physically segregated data centers around the world. Purpose of doing this obviously is to avoid single point of failure… but more importantly to provide very low latency connection from anywhere in the world and also simultaneously satisfying customer (or local laws) that require physical location of their data / access within specific country.
This is by no means “easy” to do… however, they way they have done it is “much easier than building and operating their own datacenters around the world”. So it is also not “that difficult” for a capable competitor to replicate.

Ofcourse, this is not the major point in investment thesis… however, its useful to to understand one aspect of competitive moat.

Hope its useful.

nilvest

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Microsoft Azure, as I understand it, has more data centers around the world than Google and AWS do combined (someone may need to correct me on this, but that was given at a presentation). Microsoft has 52 or thereabouts. Thus Zscaler operates with more than double the data centers that even Azure offers worldwide.

It certainly is not impossible for a competitor to scale out to many data centers, MongoDB does it with their database automatically with their new provisioning functionality.

However, Zs has been doing this for 10 years, and in 10 years there has been no one else to do it, and to do so from scratch to catch up with Zs in a competitive fashion is near impossible at this point in time. You have to come at it from a different direction if you want to be competitive.

In the entire world there is one company that is somewhat similar, although they do use appliances as well (although the appliances are free and part of your subscription). That is iBoss. iBoss is in the visionary square, well behind everyone else other than in vision, and even at that they are behind Zscaler.

According to Gartner there are two other not well distributed possible all internet technologies that may or may not get some play, but I am not all clear if either of these really compete against Zscaler anyways.

So I agree 100 data centers in and of itself is not insurmountable, it is the entire product itself that appears to be insurmountable unless someone tries to come at it from a different angle. To date there is no competitor that qualifies. iBoss certainly likes to market itself as a better option than Zscaler (and they have some sales and VC money, but are way behind and growing well, but still slower than Zscaler). The other two technologies, one involves basically something similar to what Nutanix offers with its DaaS product actually, and that is basically streaming the desktop to the computer. Everything runs on the server and therefore the device on the edge never directly links to the internal network. However, it is not the same as DaaS.

But such technologies are nowhere affecting Zscaler’s business, so I have not dug deeper than a cursory examination (since Gartner mentioned them).

Tinker

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I excerpted this from Saul’s post because think it bears repeating (emphasis different from original). Even if investors just keep a portion of their “powder dry” it is opportunity lost. Imagine how a 15% cash position would have grown in the last 9 years.

A bit of a straw man argument. 9 Years ago was a great time to buy (buy-low); the idea is to sell high. The real question is how much opportunity will be lost keeping a cash position from now; given the market is reaching new highs (sell-high).

Everyone knows that a sell-low; buy-high strategy never works. Right?

tecmo

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The real question is how much opportunity will be lost keeping a cash position from now; given the market is reaching new highs (sell-high).

That’s interesting. So the argument is to sell when the market hits a new all-time high. Let’s see. Forty years ago, 1978, the S&P started the year at 90.25. Right now it’s at 2914.22. Just think how many thousands, yes probably thousands, of days the S&P has hit new all-time highs (even if only by a fraction of a point) on its voyage from 90.25 to 2914.22. And each time the commentators said “The S&P hit a new all-time high today…” but you would have been out of the market forty years ago when it hit its first new high. Sorry, but selling out because the market is at new all-time highs is not how one makes money in the market.

Saul

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can you tell us more about your confidence on NTNX? you said ‘only 3 stars’. Are you setting it up to reduce and to sell out like you did for SHOP?

what do you mean you ‘wanted to buy more in September’?

from the % it seems that you reduced NTNX a chunk.

Did you sell so much in August?

tj

Packed with great info as usual, but I found your thoughts on Pivotal very very informative:

“September. This month 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 $19.58, down 11% further. Just because it had already fallen quite a bit to $22 didn’t mean that it was a bargain. “

I’m trying to improve how I think about and handle these types of situations and the idea that it’s not a bargain just because it has fallen is critical. Probably one of the keys to your success Saul.

Great post this month and thanks for sharing.

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Forty years ago, 1978, the S&P started the year at 90.25. Right now it’s at 2914.22.

Another straw man argument. The point is to sell-high; buy-low. A seller in 1978 had lots of time to buy back into the market.

Sorry, but selling out because the market is at new all-time highs is not how one makes money in the market.

Actually a more optimal approach is to sell if the market has not reached a new high “recently”; a good measure of recently is 100 trading days or so.

Just to be clear.
Staying 100% invested all the time is better than staying 100% in cash all the time. However moving in and out of cash at “optimal” times is even better.

tecmo

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what do you mean you ‘wanted to buy more in September’?..from the % it seems that you reduced NTNX a chunk…Are you setting it up to reduce and to sell out like you did for SHOP?

Hi tj,
Well duh, did you forget that the price fell about 25% while the rest of my portfolio rose. Don’t you think that that reduced NTNX’s percent of the portfolio by “a chunk”?

What I wrote was:

I added a fair amount to my position during the month but a week ago I decided that I have enough and will wait and see what happens. I would have bought more but I had no available cash and I didn’t have any larger positions I wanted to trim, and I didn’t want to trim my smaller positions as I wanted to let them grow.

That was pretty clear that I added to my position in September, not reduced it. I sold out of Shopify because of surprise (to me) bad news (what I considered bad news, anyway). As I made clear in my description of Nutanix’s results, I thought they had great results. I think you’ve got my thoughts all wrong.

That never means I won’t change my mind about any stock in my portfolio during the next month, but I have no current intention of selling out of Nutanix. I added to it, but decided I had added enough because of (1) not having more cash to buy with, (2) having a large enough position in a beaten down stock (7.6%) so that a return to previous levels will give me enough of a boost to make me very happy and (3) I will add only so much to a position that is going down, especially if I don’t fully understand why. I’m not a guy who looks for cheaper entry points, I prefer to add on the way up.

Best,

Saul

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However moving in and out of cash at “optimal” times is even better.

In theory … the problem comes in practice, i.e., determining what is “optimal”. I have looked at a bunch of proposed signals and they work in some circumstances and not others. If they are too hair trigger, one is getting in and out all the time and missing big up days … there are some amazing figures about how missing big up days really blows one’s results. If they are slower, then they have the potential of not getting one out until much of the drop has already occurred and not getting back in until there is a lot of gain, resulting in a net loss over just holding.

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It would not be logical for the Miami Blue-Rinse Widows Investing Club to compare the stock part of their prudent portfolios to my ‘Less Work, Do Nothing’ comparator. For ridiculous and nonsensical types like me who like to see how it is getting on, the average of the ADBE, CRM and MSFT constituents is up 70% TTM. Now that’s what I call a bull market!

Many here are doing even better, wisely a fact the Miami Blue-Rinse Widows shrewdly judge to be of little interest to their necessarily more cautious style group. The S&P is their benchmark, and a good one it is too.

Tecmo, I don’t know how anyone could time the market well enough to move in and out of cash at “optimal” times.

Can you start a new OT thread and share your results over the past 5 or 10 years and share how you’ve figured out how to optimally time your buys and sells?

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Tecmo,
Wow! Genius insight. I’ve got a question though. Exactly what criteria do you use for determining optimal times? Seems like that’s kind of important part of your strategy.

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Tecmo, I don’t know how anyone could time the market well enough to move in and out of cash at “optimal” times.

I put the words “optimal” in quotes; clearly getting to 100% optimal is not a realistic goal; but even making slight improvements can have a big impact.

I am quite surprised about that the comments were so pessimistic. Many on this board have taken to the belief that you can beat the market by picking individual stocks; why not extend that to market timing? I would think that on the difficulty scale it is probably a lower bar than picking stocks.

tecmo

Tecno, there are boards for discussing market timing. This is not one of them. This is completely off topic and please take the discussion elsewhere. Thanks for your cooperation.
Saul

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