My portfolio at the end of the year 2016
When I look back to my post at the end of last year (2015), I see that I wrote:
I finished the year up 16.0%, with the S&P down 0.7% and the Russell 2000 Small Cap Index down 5.7%.
Well, this year was almost the opposite. Last year was the year for growth, this year for value, as the beaten down oil and commodity stocks have made a comeback throughout the year. I don’t invest in oil and commodity stocks and other cyclical stocks as a rule, and it wasn’t my kind of market. This year I finished up 2.5%, with the S&P up 9.5%, and the Russell 2000 Small Cap Index up 19.5%.
How does that look over the two years? I was up 16.0% and then 2.5%. To calculate my results we multiply 1.16 times 1.025, which equals 1.189. So I was up 18.9% in the two years. I wasn’t totally happy with that, but this was not a great year for growth stocks (which most of my stocks are). Strange to say, I feel content at the end of the year. I feel good about the stocks I’m invested it, and don’t feel any urge to sell out of any of them. It’s wait and see how the new year unfolds.
To calculate the S&P for the two years, we multiply 0.993 times 1.095, which equals 1.087. So the S&P was up 8.7% in the two years.
The Russell was much wilder. Down 5.7% and then up 19.5%. That gives us 0.943 times 1.195, which equals 1.127. So the Russell was up 12.7% in the two years. So I soundly beat both the averages over the two years, for what that’s worth. What’s most important, I made enough money for us to live on, which is what counts.
I had 15 positions at last year’s close and I have 15 again this year, but I find that the only two which are survived from last year are Amazon and LGIH. The ones I exited you all know about. There were SKX, SWKS, INFN, INBK, CASY, SEDG, CBM, CELG, CYBR, SNCR, AMBA, AMAVF and FB, in no particular order (although the last two don’t really count as they were tiny 0.5%, or too-small-to-be-called positions).
My stocks have really been on a see-saw the past few months In October I had lost 8.5%, and had dropped from plus 6.5% to down 2.0% in the course of the month, due partly to Amazon, Skechers and Bofi falling after earnings, but mostly due to my largest position, LGIH, which dropped 20.6% over the course of the month for no discernable reason. Shopify also dropped over 5% with no apparent reason, and some others did as well.
Then in November I regained all I had lost in October, and more, starting at down 2.0%, falling a little more before the election, but then rising like a rocket over the last two and a half weeks after the election, up 9.9% for the month, to finish the month at up 7.9% for the year. What a surprise!
So what happened in December. My portfolio settled back, dropping 5.4% to finish the year up 2.5%. What a wild ride!
Please note that any PE’s that I give are always based on adjusted earnings, usually as the company has given them, but rarely with small modifications of my own.
Now let’s get to my positions. At the end of October I was able to say that I had exactly the same 14 positions as at the end of September, with no additions or deletions. At the end of November I could say the same thing: I still had the same 14 positions with no additions or deletions. At the end of December there have been some changes. Skechers, which I had had for 30 months (2 ½ years) is gone, as is Synchronoss, which I had had for 21 months. Finally, Mitek, which I had held for 11 months, but which had been reduced to my smallest position last month, is gone as well. These were long term positions and I had to have good reasons for selling out.
Why did I exit Synchronoss? Here’s what I wrote about it a month ago:
Synchronoss started at $37, but boomed on earnings, and finished up 33% at $49.20. I added after earnings and the conference call, at about $46.60, and was very happy with my purchase. As I have mentioned, I feel they have truly turned the corner, and it should be nothing but up from here for some time. And even after the boom in price the PE is only 21.
As you can see, I was really enthusiastic. It was my fifth largest position at that point. And then they had an unexplainable attack of total insanity. Here’s what I wrote in my own notes:
After a long wait, they finally turned the corner. Their cash cow activation business had slowed down but was still raking in the dough. Their cloud business had become over 50%. Their new enterprise business with Goldman and Verizon was finally bearing fruit. Earnings had taken off again after several quarters of flatlining. All they had to do was sit back and rake it in. So what did they do?
1. They sold their cash cow, which was guided to be $74 million for just the next quarter, and 37% of their total revenue for the quarter. That’s wrong! You keep your cash cow legacy business until it becomes a small enough part of your total that you don’t miss it.
2. They are taking on new debt of $900 million which is roughly half their capitalization.
3. They are acquiring a company that they clearly didn’t need (based on the “sit back and rake in what you have earned” scenario). This is a huge acquisition. This acquired company is almost half their size, is losing money, and has grown revenue VERY slowly. Why is SNCR doing this? You mean they couldn’t find a bolt-on acquisition that would make them happy?
4. The CEO that has made them so successful is choosing this crucial moment, with everything in flux, to remove himself from the day to day running of the company.
5. And who is replacing him? The CEO of the slow growing, money-losing huge acquisition. What a great choice.
This is no longer the company I was invested in. It’s barely recognizable. It’s an unknown quantity, with a huge debt load, less revenue, and a CEO who is also an unknown quantity. It may do fine, but it will do it without me.
As you can tell, I was furious. I sold out as soon as I figured out what was happening, and got out of almost all of my position between $42.50 and $40.00 with a few shares at about $39.80. The price had been at $49.50 and is now at $38.30 so a lot of people agreed with me.
Why did I exit Skechers? Here’s an excerpt from what TMF Pencils wrote. It sums up my feelings quite well:
…it’s disappointing seeing SKX not meet expectations this year. Growth in the U.S. has ground to a halt (even dropping), and it looks like management expects the same thing to happen internationally as a whole. The stock has been a very disappointing performer, and based on management’s guidance we shouldn’t expect growth to turn around in the near future. But that doesn’t mean our investment in SKX won’t pay off or that the stock doesn’t represent an attractive value for patient investors. Looking at the balance sheet, it’s clear the underlying business is still strong…. it’s really just a matter of how long this slump lasts and/or if SKX can find other lines to generate growth. Their balance sheet is strong and inventory and accounts receivable are being managed well…
In other words, it has changed from a growth stock to a hoped-for value or turn-around stock. Personally, I was amazed to see rapid growth just disappear like that. They had year-over-year AND sequential declines in earnings for two quarters straight. Even though I love the shoes, I decided to put my money elsewhere.
Why did I exit Mitek? Here’s what I wrote a month ago:
…my smallest position has continued to sink, and has fallen in two months from $8.30 to 5.95, a drop of 28%. There is no reason for the drop that I’m aware of except revenue growing without earnings growing. They had announced beforehand that 2016 would be an investment year, investing in grabbing market share …so, to tell you the truth, I’m not sure what’s going on. And as I don’t understand what was going on, rather than adding to this small position, I reduced some of my position.
This is really a tiny company. Their total trailing 12 month revenue is just $35 million dollars! I didn’t understand what was going on, but when they increased revenue last quarter by 23%, but decreased earnings per share by 22% it was enough for me and I sold the rest of my position. It may do fine. All three of these companies may do fine. But I’m trying to find better places for my money.
I now have 12 real positions, plus one position that is half-way between a real position and a evaluation look-see position, and two tiny look-see positions. So say 12 and a half positions and a couple of tiny ones that may or may not be there next month.
Let’s look at position sizes. Remember that a percentage of the portfolio can rise, not because I added, but because it rose more than the rest of the portfolio. Similarly, a percentage can fall not because I sold some, but because the price fell, or rose less than the 9.9% that the rest of the portfolio rose.
First, let’s look at the 14 companies I had at the end of November and where they are now.
**November December**
LGI Homes 14.2% 13.2%
Signature Bank 12.7% 12.1%
Shopify 11.0% 12.5%
Amazon 10.2% 12.2%
Synchronoss 7.4% ------
Ubiquiti 5.7% 8.0%
Arista 5.7% 7.9%
Skechers 5.7% -------
PayCom 5.5% 6.3%
Silver Spring 5.4% 4.5%
Bank of Internet 5.2% 5.2%
Splunk 4.6% 5.7%
Hubspot 3.4% 4.9%
Mitek 1.9% -------
So what’s changed and what’s the same?
Well the top four are still the top four, they’ve just moved around a bit. I added some Amazon, sold a little SBNY after a huge run-up, and LGIH fell some in price.The top four as a group remained pretty stable, advancing just from 48.1% to 50.0%. This probably reflects that I have fewer full positions.
Ubiquiti and Arista have moved up to fifth and sixth place, with medium-large positions, at 8.0% and 7.9%, but well behind the top four.
PayCom, Splunk, Bofi, Hubspot and Silver Spring follow at medium position sizes ranging from 6.3% down to 4.5% of my portfolio. They are in 7th through 11th places.
Then I have a new smaller position: Twilio (TWLO) at 3.9% and in 12th place. It first came to my attention when someone brought it to the board. I liked it. I discovered that Bert had recommended shorting it when its price was at $56, but I got into it at $35. Bert felt their moat wouldn’t hold and that people would migrate to cheaper competitors. I found Tinker’s thesis more compelling: Twilio has 80% of the market and essentially all of the developers use Twilio. Moving away from the dominant player makes little sense to save a couple of pennies.
Revenue is up about 70% for the first 9 months of the year. This isn’t something new as revenue was up 84% last year off a much smaller base. Active customers are up 45%, so each customer is spending more (more increase in revenue than in customers). Their “Dollar-based Net Expansion Growth Rate” is 155%. Their losses per share, based on a constant 83.9 million shares, has been down each quarter, and for the first 9 months is down from 25 cents to 15 cents per share, and should be just 2 or 3 cents next quarter. Losses are just about 5% of revenue and shrinking fast. This is obviously a rapidly growing company, and in spite of what Bert said, they are very close to breaking even (lost 4 cents last quarter, and will probably lose 2 or 3 next quarter.) They also have a close relationship with Amazon (and could be acquired).
Then I have a new half-sized position: Hortonworks (HDP) at 2.3% and in 13th place. What in the world is a company called Hortonworks. Well it is an important seller of Hadoop (whatever that is). Actually, what Hadoop is is a database or a framework for distributed storage and distributed processing of very large data sets on computer clusters built from commodity hardware. Because of its architecture, which has built in redundancy, Hadoop is highly reliable. (Doesn’t help much, does it?) Well Bert says Adopting Hadoop is probably “mandatory” for any organization that wishes to do advanced analytics and get actionable insights on their data. Probably 60% to 70% of data that enterprises have access to goes unused for business intelligence and analytics… Application developer professionals are adopting Hadoop “en masse,” and analysts predict that 100% of large enterprises will adopt Hadoop. The Hadoop market is supposed to have a CAGR of 50% to 60%. That’s not bad.
In the past year and a half the stock price has dropped from about $28 or $29 to a low of $6.40 a couple of months ago, and a current price of $8.30. That means it lost over two-thirds of its stock price. So what’s the fly in the ointment? Well it’s losing a bunch of money and the thought is they will have to do another secondary to raise more money. So why did I buy it? Because I read the Prepared Remarks and the Presentation associated with the last earnings report. Their Adjusted EBITDA fell from a loss of $29 million to a loss of $15 million sequentially, and they say, unambiguously, that they will be at breakeven for Adj EBITDA this quarter, and that they will reach Cash Flow breakeven next year. They, of course, have mostly recurrent revenue, and have a lot of deferred revenue that they can’t count yet towards earnings. What counts is what they call their “Operating Billings” rather than revenue, which includes growth in Deferred Revenue. It was up 65.5% last quarter, and up 16.6% sequentially. That’s moving. I took my positions at about $8.10 to $8.70.
I also have taken two tiny positions that I don’t want to talk about yet, because I’m not sure I’ll stay in them and I don’t want anyone to buy them because I’m looking at them. They add up to just 1.3% of my portfolio, taken together. I also have a Net 0.1% of my portfolio in Cash.
Well what happened with my big four during December? Going through them alphabetically:
Amazon was down about 4% for the month, starting at $780 and finishing at $750. This is apparently because of worries that they might have troubles with the new administration, and partly it’s perceived that limitations on free trade would hurt them. There was no actual negative news that I saw. I bought a bunch at about $758 this month.
LGI Homes had a disastrous October, falling 20% to $29.20, then bounced back to 33.23 at the end of November, but crashed again in December to $28.73, below where it fell to the first time. As I’ve said, its PE is now 9.1, while it continues to grow like mad.
Signature Bank, my second largest position at the end of October, and again at the end of November, had an exuberant month (because it is a bank, and banks had an exuberant month based on the election results). It started at $118.30 and finished up an enormous 27% at $150.20. I thought that this magnitude of rise was perhaps “irrational exuberance” and I sold a small part of my position on the way up.
Shopify started at $43.30, got as low as $39.50 during the month, but finished at $42.90. I added to my position several times.
What I do is “modified buy-and-hold”. I had had SKX for 30 months, and I’ve had LGIH for 14 months. I had had SNCR for 21 months. I had INFN for a year and INBK for a year and a half each before I sold them. I had SWKS for 26 months before I sold out. I had BOFI for about three years the first time before I sold it. I held CELG and WAB for over two and a half years each. I even held little MITK for 11 months.
What I mean by modified buy and hold is that, when I take a position in a stock, it’s with the idea of holding it indefinitely, as long as circumstances seem appropriate, and NEVER with a price goal, or with the idea of holding it a few days or a few weeks, or with the idea of trying to make a few points and selling. I do sometimes take tiny positions 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.
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 now, but I may change my mind about a position during the month. In fact, I not infrequently do, and 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 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 do it yourself, I’d suggest you read posts #4 through #8 at the beginning of the board, and especially the Knowledgebase that Neil keeps for us, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven’t yet.
I hope this has been helpful.
Saul
For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.
A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board
