My portfolio at the end of Sept 2017
Here’s the summary of my positions at the end of September. Please note that any PE’s that I give are always based on adjusted earnings, usually as the company has given them, but very rarely with small modifications of my own. This month I hope to do a brief review of each stock too.
We are now nine months through the year. At the ends of February, March, April and May, I wrote that results had been beyond my expectations. At the ends of April and May I wrote that I thought that this incredible pace was unlikely to continue. But June, July and August continued strong for my portfolio. The portfolio closed August at up 48.7% (which astounded me), but this month (September) it jumped an incredible 16.1 points more and closed up 64.8%. Up 65% in nine months is far more than my goals, or what I thought likely, and I am more than pleased with it.
The three indexes that I’ve been tracking against had a very good month as well.
The S&P 500 is doing best year-to-date and is up 12.5% for the year. (It started the year at 2239 and is now at 2519). For those who use dividend-added results, it would be up 14.2% for the year, but I will keep using actual price results for consistency with my earlier summaries.
The Russell 2000 Small Cap Index is up 9.9% for the year. (It started the year at 1357 and is now at 1491).
The IJS Small Cap Value ETF is up 6.0% for the year. (It started the year at 140.0 and is now at 148.35).
These three indexes thus have averaged up 9.5% for the year so far (up 10.3% if you use the S&P with dividends added). Since my portfolio is up 64.8%, I have no regrets about not being in market-following ETFs.
You may ask, “Why these three indexes?” When I started this board I started comparing to the S&P 500, as that is what the Motley Fool compares against. Then I started thinking that gave me an unfair advantage, as the S&P is all large caps, and the smaller caps that I largely invest in tend to do better over the long term, so I added comparisons against the Russell 2000, a standard for small and mid-size companies. Then last year, someone kept telling us that the IJS, which tracks the S&P 600 Small Cap Value Index, has the best long term results. So I figured okay, I’ll add in value oriented small cap stocks to compare against. This gives me 500 large caps (the S&P), 2000 small and mid caps (the Russell), and a 600 small cap value index with a very good past record (the IJS), which ought to give me a very representative set of standards to compare against. I’m sure some people will say “Why not drop this index and add that one?” but these are the three indexes I compare against currently, and I will probably continue to do so. I think they give me a pretty good approximation of how the market overall is doing.
I wrote in my April summary that I am aware that there’s no way this can continue like that all the way throughout the year, and that there were bound to be reverses. But I’m no good on timing the market, and I don’t try. If I did, I might logically have exited all my positions at the end of April, when I was up 26% in four months and was “aware” that it couldn’t continue like that (but it’s now up more than 38% more). That’s the trouble with trying to time the market. I have enough trouble trying to find great companies. A correction will come. They always do. But I don’t know when, and I don’t guess.
I should state here that I continue to believe that intelligent stock picking with a modified buy-and-hold strategy can beat any index or average. How could it not? When an “average” is just that: an average of good, mediocre, and poor companies?
Here’s a little table of my results so far this year:
**End of Jan + 8.5%** **End of Feb +13.9%** **End of Mar +20.4%** **End of Apr +26.1%** **End of May +36.2%** **End of Jun +38.1%** **End of Jul +45.7%** **End of Aug +48.7%** **End of Sep +64.8%**
Here’s how it happened: There was nothing magical about it. The stocks I was in went up! I’m sure that some of you have done even better. I really am, as I made some bad choices along the way that cratered as soon as I bought them, and others that continued going up after I sold them.
The stocks I’ve been in since the beginning of the year are Arista, LGI Homes, Shopify, and Ubiquiti, and they make up 48.5% of my current portfolio. including my top two positions.
For those who want a time frame, current positions I’ve added since Jan 1st have been:
Feb – Talend
Mar – Square, Hubspot
Aug – Alarm, Nvidia
Sep – Brinks, Nutanix, Instructure
Alarm and Brinks are little positions that I’m not yet sure I’ll keep. I was briefly in and out of another little position in Teladoc in September. I liked the story but then realized that they had just taken on a lot of debt to make a very expensive large acquisition of a no-growth company, and the story reminded me too much of Synchronoss. Twilio was a tryout in August. I never built up my position and exited it in September. It was my second trial with it and I just wasn’t comfortable. I had held Kite since January but it was bought out in September for a huge gain. I exited Mulesoft and Splunk also in September. I had held Mulesoft since March and finally gave up on it. I started the year with Splunk. In fact I held it for about a year, and it went nowhere for most of that time. More recently it was reorganizing its business model, but diluting its stock a great deal, and I just had had enough. I liked the “story,” but I felt I had better places for my money.
Here’s how my stocks have done in the nine months since December 31. I’ve arranged them in order of percentage gain. In previous months I separated the stocks I’ve been in since the beginning of the year from those I’ve added since, but I don’t think anyone is interested in the historical details of when I added stocks. I’ve put them all together, using the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. At any rate,
**CURRENT POSITIONS**. **Shopify** from 42.90 to 116.40, **up 171.3%** **Arista** from 96.80 to 189.60, **up 95.9%** **LGI Homes** from 28.73 to 48.60, **up 69.2%** **Square** from 17.50 to 28.81, **up 64.6%** **Talend** from 26.80 to 40.95, **up 52.8%** **Hubspot** from 62.40 to 84.10, **up 34.8%** **Ubiquiti** from 57.80 to 56.00, **down 3.1%** **NEWER POSITIONS taken in AUGUST and SEPT** **Nvidia** from 161.2 to 178.80 **up 10.9%** (3rd time) **Brinks** from 79.70 to 84.25, **up 5.7%** **Instructure** from 31.75 to 33.15, **up 4.4%** **Nutanix** from 21.70 to 22.39, **up 3.2%** **Alarm** from 43.85 to 45.20, **up 3.1%** **EXITED POSITIONS THIS YEAR** (showing prices when I entered and when I exited) **Kite** from 47.50 to 179.00, **up 276.8%** PayCom from 45.50 to $69.00, up 51.6% Splunk from 51.15 to 67.75, up 32.5% Amazon from 750 to 985, up 31.3% Horton from $8.31 to $10.44, up 25.6% (1st time) Horton from $10.90 to $12.75, up 17.0% (2nd time) Nvidia from $146.3 to $166.1 up 13.5% (2nd time) Signature Bank from $150 to $160 up 6.7% A O Smith from $51.10 to $53.80 up 5.5% Twilio from $28.85 to $30.00 up 4.0% (1st time) Nvidia from $149.5 to $154.4 up 3.3% (1st time) Wix from $73.25 to $74.00 up 1.0% Trade Desk from $51.90 to $50.65 down 2.4% New Relic from 47.2 to 44.75, down 5.2% Mulesoft from 22.25 to 20.80, down 6.5% Twilio from $30.90 to $28.75 down 7.5% (2nd time) BlackLine from 37.40 to 29.95, down 19.9%
I also exited four biopharmas in July (Cellectis, ZioPharma, bluebird, and Matinas) at prices ranging from a gain of 20% (Cellectis) to a loss of 42% (Matinas). All of the positions were tiny and none of the results were material as far as my portfolio results.
I’d like to note that since 2010 (with fears of a double dip recession), well-intentioned people have been warning us constantly that another bear market and/or recession is coming. “The bull market is too old.” or “The market is too high.” All of their charts and indicators proved it in 2010, 2011, 2012, 2013, 2014, 2015, 2016, and they still say they prove it now.
At one point this month I read a thread on another MF board in which some guys were commiserating over the future fate of the “naïve” investors on Saul’s board who are investing in all these aggressive companies, and who will be panicked when the correction, or bear market (that these posters have been expecting for years), arrives. I thought to myself that these poor guys are SO jealous! They’ve believed all this scary stuff for years, and have seen us make large gains by ignoring it, and they just have to comfort themselves by believing we’ll be spanked for being bad boys, and not listening to the conventional wisdom like they did.
Of course a marked correction will come eventually. Look, it could come next week for all I know! But we never really know when. And what a price those people have paid in staying out of this market for the past seven years. Picking good stocks makes much more sense than trying to pick good stocks AND trying to time the market too. And being up 64% year-to-date when the market averages are up just a few percent, sure gives a big cushion.
Now let’s look at my position sizes. I’m still trying to keep my portfolio concentrated and streamlined and I’m currently back down to 12 positions, of which two are small try-out positions.
Here are the positions in order of position size. You’ll see by observation that after the huge drop from Shopify to LGI Homes, the rest decrease more gradually from one to the next.
**Shopify 21.9%** **LGI Homes 10.7%** **Hubspot 10.3%** **Square 10.0%** **Arista 9.9%** **Talend 8.0%** **Nvidia 7.8%** **Nutanix 7.7%** **Ubiquiti 6.1%** **Instructure 4.7%** **Alarm 1.8%** **Brinks 1.2%**
Eye-balling that list you can see that there is one double-sized position (Shopify), then four positions clustered around 10%, three more positions at 8%. Then a significant drop to Ubiquiti at 6% and Instructure at 5% and two little positions at about 1.5%.
Let’s start with Shopify, my very oversized position.
Shopify helps small merchants, and increasingly larger ones, open and operate online stores. It’s growing VERY fast, and has grown to be my largest position at 21.9%. I know that it’s also a VERY large position, and above what I recommend, but you don’t see too many Shopifys in a lifetime of investing, so for now it is what it is.
Shopify started the year at $42.90. It closed Friday at $116.40, which is up about 171% year-to-date. Shopify’s growth is slowing slightly with size but it remains an incredible success story.
This is a SaaS company with no GAAP earnings. It only lost a penny a share last quarter non-GAAP, and said it would have positive adjusted earnings in the December quarter. I think they will surprise and have positive adjusted earnings a quarter early (Sept quarter). Revenue is almost all recurring in one sense or another.
By the way, I have to thank the MF for this one. When they recommended it two months in a row in the middle of last year they got my attention, as I’d never seen them recommend a stock twice in a row before. My only concern about it is that the Fool has been pushing it in ads I see on investing sites.
LGI Homes is still in second place at 10.7%. It’s a small home builder that specializes to selling first homes to apartment dwellers. Its 2016 annual earnings were up 36% from 2015. It started this year at $28.75 and is now at $48.60. You know the story about their weak closings in Jan and Feb. They had huge closings numbers in May, June, July, and August. They seem to have “weathered” the Sept hurricanes without excessive damage, and they are opening new communities like mad.
I realize that this is a cyclical industry, and that it eventually will get overbuilt, but there is a nationwide shortage of homes now, and they are selling them as fast as they can build them. Their current PE is only 12.9 although revenue and EPS were both up 45% in the June quarter. This shows there’s still a lot of skepticism and lumping them with some mythical average for the housing industry.
Hubspot has moved up to third place at 10.3%. It’s another SaaS company with very rapid growth, lots of recurring revenue, and just breaking into positive adjusted earnings.
What does it do? Hubspot pioneered inbound marketing. What’s that ??? Inbound Marketing refers to bringing customers to you, rather than going out and chasing them. As your customers get more technically savvy, reaching out to them isn’t as effective as it used to be (they do their own research online, they don’t answer their phones if they don’t recognize your number, unsolicited marketing emails go to their spam folders, ad-blockers block your online ads, etc). Inbound marketing is about building up an online presence that will bring in leads over time through social media, search engine optimization, blogging, etc, etc, and everything is stored in a single database with full integration amongst all the tools.
Traditionally, businesses used separate tools for each of these functions, which made it very difficult to pull together a total view of marketing performance, and followup sales performance, for various marketing channels. Hubs pulls everything together into a unified, easy-to-use, platform. They say clients increased the number of leads generated by 5.7 times after one year of using the platform, on average.
Their earnings report was great, breaking into positive territory much sooner than guided, and raising guidance by large jumps. I added to HubSpot after earnings were announced last month, and added again this month after their big conference where they announced a lot of new products and raised guidance…again. I haven’t sold any at all since I took this position in March.
Square is in fourth place, at 10.0% and at a price of $28.80, up $3.80 from last month. I started my position in March at an average price of about $17.50, and have added several times along the way. This company is also growing revenue like mad (41% last quarter), and also has a lot of recurring revenue. It is already profitable.
Square’s original purpose was to allow any merchant with a mobile device to be able to accept card payments anywhere, anytime. Since then, it has evolved into a much more robust payments solutions business. It still offers basic payments solutions, but it also provides more sophisticated services such as:
Instant Deposit, which allows retailers to receive money instantly in their bank accounts upon swiping a customer’s credit or debit card, instead of waiting up to four days. For each instant deposit, Square charges 1%. This is incredibly lucrative for Square, as it’s a three-to-four day loan at 1% (which is a huge compound rate, at little risk).
Square Capital is a service that facilitates loans to Square’s merchants, who can pay the loan back gradually, as a percent of transactions. These loans especially appeal to small businesses that don’t normally have access to capital. And, because Square is so familiar with its customers’ businesses, it can decide whom to offer loans to with a high degree of safety.
Caviar – this might seem an odd service for a payments company. After all, restaurant delivery and pick up services are fiercely competitive. However, Caviar has quickly grown since coming aboard. The most important thing is that restaurants that use it often sign up for all the rest of Square’s services.
Arista is in fifth place at 9.9%. Smorgasbord has clearly explained what they do:
They make ethernet switches, which has been Cisco’s bread and butter for decades. However, instead of each switch being its own separate entity, Arista’s switches use SDN (Software Defined Networking), which enables the entire network (no matter how complex) to be modeled and controlled via software. In a typical non-SDN setup, routing is based on packet destinations, but in an SDN world, you can control routing based on both source and destination, and thus be more flexible, or treat certain sources with higher priority, etc. Security is also improved since you have more control.
What I always understood though is that Arista was founded by a small group of very smart people who used to work at Cisco. They developed a better way of doing something (using SDN), but Cisco didn’t want to deploy it (the legacy dinosaur’s dilemma) because it would undermine their legacy products. So the Arista guys (and gal) left, started their own company, and got sued by Cisco because they are taking market share left and right.
They have been moving up steadily and were up another $16 this month to $189, as the threat from Cisco’s law suits diminishes.
Their last quarter was incredible with revenue up 51%, and up 21% sequentially, with net income up 96.5%, and EPS up 81% year over year. I bought some after earnings, even though it had already shot up.
Talend is in sixth place at 8.0%, and a price of $40.95. It’s been rising steadily and I’ve been adding to my position as well.
It’s too hard for me to explain what it does, but I wrote it up early in May, which you can probably look up. Suffice it to say that it’s another big-data analyzer that is growing very rapidly, has no earnings, but has huge amounts of deferred revenue, and is free cash flow positive. I consider it a category crusher as well as a disrupter, as it seems to have no effective competition at present. In the May conference call the CEO said:
…our win rates remain ridiculously high, which is evident from the growth rate… The market dynamic is that the large (legacy) players continue to be challenged, and long term I think most of the competitive battle is going to be fought with very small players that are trying to get up to scale right now. So we’re in this kind of special period in the middle right now (with no functioning competitors) and we’ll see how long that lasts.
I’d never heard a CEO say “our win rates remain ridiculously high” before. I can’t say I mind it.
I got back into Nvidia again last month, and its now in seventh place at 7.8%, up $13 in price this month. I was talked into it this time by all the great write-ups by members of the board. It’s been discussed at great length on the board, and I have nothing that will add to the discussion, except that I’m making a real exception in buying shares in a “chip” company.
Nutanix is in eighth place at 7.7%. It’s a new stock this month, and it’s been discussed in great length on the board during the month. It’s another company that is growing revenue at a great rate, has loads of deferred revenue ($369 million last quarter, up 69% from the year before), but no earnings as of yet. It’s area is “hyper-converged infrastructure” in data storage. Like Arista, in a way, it sells hardware, but what counts is its software and operating system. I’m not sure if it will take off, but it seems unlikely to drop much from present levels.
Ubiquiti is up to ninth place, at 6.1% of my portfolio. I’m cautious since this is still an internet hardware company, after all, with no recurring income, and it’s moving into new fields which involves some risk given their crowd sourced sales model. But they have two businesses, a cash-cow stable WISP business, and a new enterprise model which is growing very fast and will soon be the major part of the company. They have just survived a short attack which was based on what seems to be nonsense. They are buying back shares aggressively.
Instructure is in tenth place at 4.7%, and is another new position this month. It’s another small-cap cloud-based, SaaS company, growing like mad, not making a profit yet, but rapidly taking market share from legacy services. This one does learning management systems for colleges and now for businesses. They grew revenue 50% last year and 47% last quarter.
Alarm and Brinks are two tiny positions at 1.8% and 1.2%. I like both of them but don’t feel sure about either.
Finishing up. When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit after months, or sometimes years, but I’m talking about what my intention is when I buy.
I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.
You should never just try to follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.
Since I began in 1989, my entire portfolio has grown enormously. If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read posts #4 through #8 at the beginning of the board, and especially the Knowledgebase that Neil keeps for us, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven’t yet.
I hope this has been helpful.
For Knowledgebase for this board,
please go to Posts #17774, 17775 and 17776.
We had to post it in three parts this time.