Philiproth June Portfolio summary

Investment Analysis Clubs Saul’s Investing Discussions
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I started following this board in March 2020 and I believe it has improved my investing dramatically. I welcome questions and comments. Apologies–I am keeping this short because I don’t have a lot of time to work on it this weekend.

One thing I don’t love about my portfolio is I feel it isn’t likely to perform well if inflation hangs around, and I think the likelihood is that it will. But I’m not really sure what to do about this. One stock I bought a few months ago that I thought would perform very well in an inflationary environment was Dollar General, which turned out to be a very bad investment.

My investments are in two accounts of roughly equal size, and they are broadly similar, but I have decided to focus on my IRA because it is easier to track. It has very limited options exposure and no money moving in or out of it. I may note a few differences between this account and the taxable one to give a better sense of my overall strategy/exposure.

Many of my stocks are not Saul stocks, though my understanding of what constitutes a Saul stock is less clear lately, and I suspect I am not alone in my confusion. I also own way too many small positions. Try as I might, I can’t seem to cure myself of the temptation to take a tiny position in something which I think is interesting but where I have very little conviction. I won’t list all the stocks, and I will write little or nothing about stocks which I feel certain are not Saul stocks.

Performance YTD +28.69%
1 year return +8.63%
3 year return (cumulative) +13.13%
5 year return (cumulative) +17.92%
Performance since all time portfolio high at end of September 2021 -61.9%

Portfolio
Pagaya PGY 16.4%

I have posted about this a couple of times recently. This link and the ensuing discussion is probably most helpful.

Call Pagaya a penny stock if you want, but not too many penny stocks have former Fortune 500 CEOs like Harvey Golub on their Boards of Directors. I hadn’t even noticed this until addedupon pointed it out it a recent post, so thanks for that.

SOFI 14%
I added a bunch at or near the recent highs and then kept adding as the shares fell below $8. Between my two portfolios, this is actually my largest position.

For a discussion of SOFI, including many of the reasons I like it, click here

SMCI 6.31%
I still think this is a great pick-and-shovel play on AI.

PLTR 6.08%
Another AI play. Scores pretty well on a quant service I subscribe to, and many of our stocks don’t.

IOT 6.04%
I am doing a really bad job with this one, getting in and out at exactly the wrong time. I’m just following the crowd here.

MSFT 5.32%
Clearly not a Saul stock.

ENPH 5.24%
This may be a fine stock, but the competitive dynamics in this market are a bit complex for me. I might get out of this.

ZS 5.07%
Following the crowd.

AEHR 4.61%
Following the crowd.

CRWD 4.16%
Following the crowd (no pun intended.)

UPST 3.37%

IQV 3.1%
Not a Saul stock, but I like the AI/biotech combination.

TYGO 2.78%
See here for a brief discussion.
LW 2.52%
FSLY 2.11%
MNDY 2.1%
INBP 2.09%
RACE 1.57%
NET 1.53%
Cash and several tiny positions 8.7%
Two other stocks I own in the other portfolio but not this one are TTD 6.5% and APPN 3%.

prior updates
May 2023

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I could cut and paste your entire write up (and substitute my stocks) and it would be 95% accurate for my situation. Appreciate you sharing your thoughts with the time you do have available.

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Unless you know exactly why “Dollar General turned out to be a very bad investment” you cannot prove that it was inflation related. The problem with linear thinking is that the world of stocks is not linear, it a “Complex System.”

What are complex systems? | Waterloo Institute for Complexity & Innovation.

Many of my stocks are not Saul stocks, though my understanding of what constitutes a Saul stock is less clear lately, and I suspect I am not alone in my confusion.

Complex Systems have been described as evolving fitness landscapes. A Saul stock is one that on average outperforms non-Saul stocks. When you study the development of Saul’s board you realize that it is constantly evolving. You can define a Saul stock for an instant of time but not for long periods.

Denny Schlesinger

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I have recently been troubled by valuations and have been searching for answers. Valuation is important in the short term, but it may not be as crucial in the long term. Of course, we can argue that if something can be cheap, why buy it at a higher price?
However, from a long-term perspective, if a company continues to perform well, its future value is likely to be higher than its current value. In that case, why should we consider valuation? So, what should we base our buying decisions on?
When we decided to buy should we ignore valuation?

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I would argue that this is simplifying the picture a bit too much. Snowflake’s company performance from late 2020 to late 2022 was stellar. The stock however fell from the mid 300’s to the mid 100’s. That’s 2 years of blistering growth, and for their trouble, investors lost more than half of their money.

That was an abnormal valuation. Some of our other companies got up to abnormal valuations in 2021. The valuations were so abnormal (there are levels to consider), that all the blistering growth in the world couldn’t save the stocks. It will probably be another year or two or more before many of them even re-gain highs, but that’s not the goal. That is simply break-even. The opportunity cost is still huge. You could have been making money elsewhere, or at least losing less.

Similarly, if stocks are now priced for less blistering growth, say 35% or 30%, but the company does very well yet only achieves 25%…what do you think will happen?

So that’s what we have to figure out: what’s expected, and what will actually happen.

Valuation is always a judgement call, more art than science. The trick is to find companies that are going to do better than expected. When expectations for a company just continue to improve and improve, its stock will do phenomenally. When expectations come down, the stock will suffer phenomenally.

This is all part of Saul’s method:

Bear

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Thank you, Bear.

The issue that’s been bothering me is this: When we find a company that is performing better than expected, can we ignore its valuation and still buy in?

I understand that valuation is more of an art than a science, as it constantly changes. When new evidence emerges, the valuation may shift.

I have gone through your response multiple times and have been pondering this question. My conclusion is that if it’s speculation, valuation is quite important. However, if it’s not speculation, the current valuation is not overly crucial. Buying a company is based on the belief that its future will be better than its present. After buying, it’s important to monitor and if there are changes that are not as expected, it might be time to exit.

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“When we find a company that is performing better than expected, can we ignore its valuation and still buy in?”

My answer is yes, to the above question, because the companies value has changed, based on fact. Speculation is formation of a hypothesis not based on fact.

I therefore agree to your following assertion.

“…if it’s speculation, valuation is quite important. However, if it’s not speculation, the current valuation is not overly crucial. Buying a company is based on the belief that its future will be better than its present. After buying, it’s important to monitor and if there are changes that are not as expected, it might be time to exit.”

Best,

Jason

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That doesn’t seem to square with the Snowflake example I gave:

The key is the word expectations. You said:

So I ask, in my example above, did Snowflake do “better than expected?”

No, because the stock went down. You see, we can’t really know for sure what the market expects. This is why I say interpreting a valuation is more of an art than a science.

Bear

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Hi Bear,

Are you conflating Chang’s reference to ‘Company Performance’ with ‘Stock Price Performance’?

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No, I’m trying to say that if the company performs what we would call “great” and the stock goes down for 2 years, the market must have been expecting better than “great.”

Does that make sense? I’m not trying to be tricky…I guess it’s just hard to state clearly. The main point I’m making is that we can’t know with certainty what the market’s expectations are for any company. That’s why this is more art than science.

But still, figuring out what the market expects for companies (and which companies will beat those expectations) is what we have to try to do, if we’re going to be stock pickers.

Bear

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I have been considering how to answer this question.

Using SNOW as an example, was its valuation reasonable in 2021? There is no definite answer to this because at that time, the valuation might have been high, but as long as the company continues to grow, it could be considered a low point from a future perspective. Has the current state of SNOW changed, leading to a change in its future value? If not, then why is there a concern about opportunity cost? Those who still hold SNOW must believe that its future value will be higher than the present value to continue holding it.

Taking MDB as another example, its current valuation is also quite high, but does that mean it’s not worth buying? After new information comes in, its future value may be even higher. Should we give up on a company just because of valuation concerns?

Market expectations often appear in the wrong places because the market is often driven by greed and fear, and sometimes stock prices may not accurately reflect performance.

I’ve tried to simplify the approach:

  1. Try not to buy when the market is exuberant.
  2. Look at individual companies from an investment portfolio perspective (evaluate whether the current price is worth owning whenever new information comes in, rather than focusing on losses).
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I mean since it’s down 50%+ now 2 years hence…it seems like we can confidently conclude that it was overvalued back then. Or we can predict further out: for simplicity let’s just take its $100b+ valuation in 2021, and see how that would grow if they are able to hit their $10b revenue in calendar 2028 (fiscal 2029). Even with a high 30% FCF margin and a high price at 50x FCF, this would put the market cap at $150b. Is gaining 50% (ignoring dilution) in 7 years good? No! The S&P500 index usually does close to twice that.

If 2 years isn’t enough, maybe 7 years still isn’t enough. I admit, you can never prove the valuation wrong because there will always be “the future” in which it could catch up and stop losing to the market and even beat the market. But I suggest that we shouldn’t convince ourselves that valuation is tolerable because of the rosiest possible future. We should look to buy companies whose futures could easily be better than what the price seems to imply.

I would say what was expected (or priced in) back in 2021 was that Snowflake would easily grow at 50%+ for several years (I know that’s what I expected). So is this year just a blip? Will growth re-accelerate to 50%+? If so, perhaps Snowflake will catch up to the market, and you can get back what you’ve lost in opportunity cost the last 2 years. But I think we’d be foolish to expect that. Why? Mainly: Law of large numbers (especially difficult with a consumption model). I can of course be wrong, but for that to happen Snowflake will have to put up some unthinkable numbers, and nothing I see is trending toward that.

Bear

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Teradata, the legacy data warehouse provider founded in 1979 which is being replaced by Snowflake in many organizations, has reported declining sales the past few years. However, as an investment, it has outperformed Snowflake as follows:

  • +58% vs. +21% YTD
  • +38% vs. +13% on the last year
  • +7% vs. -35% on the last two years
  • +135% vs. -28% since Snowflake’s IPO

We don’t need to get into a hypothetical argument about which investment will outperform in the next year, two years, or decade. The point is that you’re not just buying a piece of a company (where fundamentals matter) - you’re also buying a financial instrument (where valuation matters).

-RMTZP
Let’s keep further discussions on this off-board as we’re straying from Saul’s rules

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