Prust04 2023 Portolio Recap

[prust04]

This is my first portfolio update but some new posters gave me the confidence to share my approach results. If they don’t follow guidelines, feel free to remove!

Before I jump in, a little about me for some context. I’m 37 and work as a strategy director in advertising. I have no technical knowledge in many of the stocks discussed on this board, except in companies like TTD & ROKU. I am however exposed to clients in quite a few industries, read a lot about consumer and industry trends, and that influences my approach to investing. As such, I’m going to attempt to orient my portfolio review around trends and decisions, vs. company reviews since many of you do a very thorough job on that front. I have my own results tracking spreadsheet but it is not as sophisticated as much of the quantitative analysis here, especially as relates to valuation. I’m continuing to learn thanks to this board. As I don’t have a ton of time to devote to pure company research (I also recently had a baby and bought a new house), I’m very grateful for the board contributors who synthesize so much.

I’ve been investing and been a Fool since 2019, and continuously add money into the market which makes it a little tough to measure my historic returns, but suffice it to say that I did well through 2020, hit a peak in Feb 2021, but had very little investment thesis beyond following consumer trends and shifts in behavior, which have been really chaotic over the last few years. I found this board towards the end of 2020, lurked & learned about how to evaluate stocks with “the Saul method” for around a year, and started adjusting my portfolio accordingly towards the beginning of 2022. It wasn’t the best time to consolidate in SaaS in the short term, but luckily I am still growing in my career and have been able to continue to invest at some of the market lows. Individual stocks account for 90% of my short-term savings and I am to continuously maintain 10% outside the market to be used on big short term expenses. I may adjust this percentage down as interest rates eventually drop.

I started the year out with ~14 stocks, and have trimmed over the year to 9, of which 7 are relatively significant. The first part of the year was a rotation out of the SaaS stocks that are covered on this board, as it dawned on me that perhaps these are not as “mission critical” as they seem, many of the growth rates began to suffer as the “year of efficiency” took hold - more on that later. This reflected my own experience dealing with decision makers. So I rotated mostly out of Cybersecurity, Data, etc. and into trends I felt were more relevant.

I decided around August it was pointless trying to play the chaotic reactions to the Fed, CPI, Fitch ratings, etc, and mostly decided to pause until things normalized a bit, plus some of my bigger positions are very interest rate sensitive and I just decided to put blinders on and make sure earnings with the companies I owned played out to expectations.

Here’s what my year looked like:
JAN: +7.01%
FEB: +6.99%
MAR: +2.26%
APR: -9.83%
MAY: +32.02%
JUN: +10.41%
JUL: +23.83%
AUG: -16.78%
SEP: -10.36%
OCT: -15.70%
NOV: +20.06%
DEC: +10.75%
YTD: +71.1

Here’s my current portfolio:

I’ll break down my rationale into some key trends I’m trying to capitalize on with a random bucket at the end:

Democratizing Finance
I worked on another FICO disruption company for a few years and I am a firm believer that lending will be disrupted, and the changing demographics of the country will speed that up. As such, I have been staying with UPST & PGY as two potential benefactors. I am watching results and news closely especially as rates top out. UPST seems to have bottomed in terms of earnings (hopefully) and PGY has been roughly flat on that front, but we have seen catalysts since the last IOT earnings report. Especially interesting is the unnamed “Top 5 bank” partner…this is the type of partnership I had been waiting for UPST to sign to go mainstream. Anyways, I have high risk tolerance and am staying with these two despite what we’ve seen go down over the past 2 years.

“Year” of Efficiency
Could become more like the decade of efficiency. I think the world saw a big lesson from big tech and there has been a sea change in terms of mindset around efficiency vs. growth at all costs. Most of my stocks are somewhere in the efficiency realm, starting with AI, which is an efficiency technology. SMCI & NVDA are here, luckily I got into both in February, added through May, which largely drove my annual returns (with UPST). SMCI seems to have some seasonality planned into their earnings, as they raised their annual guide while actually dropping in revenue last quarter, so they are gearing up for some big quarters. I understand the trepidation here but management is clearly confident. I’ll be ready to pull a trigger if they don’t meet their guides. NVDA results have been staggering, and I’m in on anything that simply has supply issues, in my mind that’s infinitely better than demand issues. I’m in for the long term. SNOW should also see a reacceleration as data needs related to AI increase. Earnings seemed to be turning around now and I’m looking to build this up when I can find some cash.

IOT clearly falls into the efficiency bucket and after another beat and solid raise, seems to be more resilient than some of our other SaaS industries. I’ve been slowly adding to this where possible since August. Very exciting potential as their exposure to different industries begins to snowball.

MNDY is another efficiency benefactor, but growth HAS been slowing both on an annual and quarterly basis and I may trim this if it continues next report.

Commit To Progress
Ok, this is a loose trend, but one that TSLA & TMDX fall into. Both clearly have a vision, and the results have backed that up despite a number of concerns that have been documented on the board. I personally was a little confused at the fear of TMDX buying planes (“becoming an airline”, I think was said a time or two). To me it was a confident signal that demand is there to be captured and management is committed to keep growing. Growth rates seem to back it up. TSLA…I’m not an expert, and it feels like a pretty complex story, but it just feels like there’s too much going for them to not have a position. I did trim after the latest earnings and somewhat downbeat call.

- Wrapping Up -
I haven’t gotten into many of the new darlings of the board yet like ELF, Celsius, Axon, etc. but many are on my watch list. However I’m not sure I would add to them before SNOW, IOT or TMDX. I’d probably get into Axon first…ELF and Celsius make me nervous as “Gen Z Social Media Hype Brands”, as the wind can change pretty quickly on that front. I’m kicking myself for not getting in on Celsius early as I know that industry extremely well, but I’m concerned they might be further along in their growth curve than I feel comfortable with. I’m pretty happy with where I’m at to start the new year but I am always carefully watching earnings and try my best to react without emotional ties to any of the companies I own.

That’s it for me. I welcome any feedback on my approach or any advice. Happy New Year and good luck to all in the markets!

[mekong22]

Hi Prust

good write up. I’m curious, given your familiarity with the advertising industry if you have any specific thoughts or insights regarding The Trade Desk?

Is there anything in particular, red flags etc, that is preventing you from wanting to own shares of TTD?

[prust04]

That’s a great question, I’ll give you a TL;DR and then a more thorough response of what’s driving my decision. But I’ll also fully acknowledge that my proximity to this might be clouding my judgement.

TL;DR:
Even with the TAM and the shift from linear TV to CTV, I am not fully confident that TTD is closer to the beginning of their (current) S curve, than the end. YoY growth seems to be slowly improving from their Q1 low of 21%, so perhaps I’m wrong, but I could see them staying in the 20s vs. getting back to mid-30s. And I just see other opportunities that are experiencing catalysts or looking at future ones, whereas the shift to programmatic media has been happening for a long long time. But it has been consistent and I wouldn’t wave some sort of cautionary flag…I held them for a few months in 2023 before I consolidated.

Way Too Long Version:
I covered some of this in my TTD vs. Roku breakdown but I’ll get a little more philosophical to help explain my POV on this industry.

A lot of advertising (and media) philosophy falls into two camps, whether you are interested in short-term, efficiency, ROI. This is primarily people who grew up living and breathing digital advertising, and a lot of money is being made in this ecosystem. Then there are long-term, brand building, growth people. These are typically more old-school, they believe in big ideas, and traditional media. So philosophically, is marketing/advertising about creating efficiency, or is it about unlocking growth? I’m sure the way I write this will tell you which camp I’m in.

TTD (and Meta, Google, etc) are the primary beneficiaries of the last 15 years of shift towards efficiency in advertising (media). But you can see that for whatever reason, there is still a lot of spend stubbornly sticking around in Linear TV (despite shifting consumer behavior), and other traditional mediums…so why is that? It’s that a lot of big, experienced brands and agencies know a dirty secret, which is that much of programmatic digital media is rife with fraud and doesn’t work to drive results long-term. I won’t get to the technicalities here but the process of tracking what is driving sales/results over the long term is a lot more complicated than the digital advertising industry would want you to believe. And there has been a lot uncovered and written about the promise of advanced data targeting not being…well…true, at least not at scale. I’ve experience this first hand in a 3rd-party audit of one of my client’s campaigns (TTD was not involved).

So you have a lot of big brands and agencies who are not taking the bait, and you have industry thought leaders spreading this message (Marc Pritchard, the CMO of P&G, probably the foremost thought leader in marketing, is one). There could be a sea change if this starts to really take hold, but the allure of saving money is sometimes overpowering to the C-suite decision makers.

CTV however (more broadly, advertising-based video on-demand), is where these two worlds meet and this is where things get a little tricky so I’ll use an example. Let’s say I’m Taco Bell, and I’m concerned about building a long-term brand and sales with young people globally. So I want to align myself with the NBA (official sponsorship or otherwise). I can’t just buy that through TTD, even within people streaming the TNT app. I have to buy that through TNT, or ESPN, and then I get inventory both within streaming or linear. If I try to do it through TTD, I might be able to get a sliver of inventory because TNT isn’t going to sell a lot of their premium NBA inventory to any programmatic platform.

Now, a lot of new companies, companies with low budgets, or companies that strongly believe in the promise of programmatic targeting, etc., they will be over the moon about TTD’s CTV offering. Because you can get TV inventory for a much lower price than buying directly from broadcast & cable networks. But by and large, you are buying an audience using data, which isn’t as perfect as the industry promises, and it’s hard to know where, when, or even IF it is running (see: fraud).

So what does this all mean? I believe that TTD is going to reach saturation within the companies that are easily sold on Programmatic Digital Media. They likely won’t see a ton of churn, but may struggle to convert a large share of the holdouts who want to buy more specific contexts to align their brand with. These holdouts will likely shift their buying to buy direct with the streaming apps themselves, giving them more control over programming, timing, etc.

The catalyst I’d be looking for to get back in, is if there is a big partnership announced with a major sport or network where you’re able to get a ton of guaranteed inventory through TTD, not just 1% of your buy. OR a technological innovation that allows more precise context-based buying. I’d imagine either of these would come through a Roku before a TTD, as Roku probably has more intimate relationships with the apps themselves.

I hope that’s helpful and not TOO overdone. I track their earnings and am open to getting back in if they continue to improve on YoY rev growth. It’s also an election year, and hopefully a better year for the ad/media industry as we achieve a soft landing

[Fool4ZTribe]

@prust04

It’s also an election year,

This…is…key!

[wsm007]

@prust04

I’m kicking myself for not getting in on Celsius early as I know that industry extremely well, but I’m concerned they might be further along in their growth curve than I feel comfortable with.

Prust,

Thanks for a nice write-up and kudo’s for buying UPST when it was low and reaping the rewards.

I have a big position in CELH (and ELF). Given your knowledge of the industry I would really love to understand your thinking / bear case in a bit more depth. I have documented why I think they have a long runway ahead; interested in what makes you think it may peter out soon?

Thanks!
-wsm

[prust04]

Hi wsm, I’ll give you my take on it although I don’t track their earnings so this is more just my background having a client in this industry from 2019-2021.

First, they are not the only “better for you” energy drink that they present in their materials. Before them, Bang held the top spot, but they struggled with distribution. They built their brand using social media and physical events and were serious disruptors to Monster & Red Bull. They eventually signed a deal with PepsiCo, but their CEO messed it up because he’s a nut job, they got into legal battles with Monster and lost, etc. They tanked from there.

Monster has a competing product called Reign. When they launched they had nearly instant distribution and caught up to Bang quickly. Both of these brands were marketed to a pretty niche market (heavy fitness enthusiasts), which limited their appeal and in retrospect might have been a bad move. Because along came Celsius and they went more “mass” from a marketing perspective. Focused on youth but across many lifestyle types.

My two big issues are their upcoming YoY laps and competition:

The laps YoY will get harder and harder as they come up against their distribution-related increases a year ago. I have seen this first hand when I worked on the competition. They will need to expand their marketing budgets by a lot in order to match the velocity that the initial distribution gains brought. I’d keep an eye on this in the next earnings call. Many brands in this space think they don’t need to invest in marketing to grow and then they stall and someone eats their lunch…it’s happened multiple times in this category. The relationship with PepsiCo might change this for Celsius. Watch this space in the earnings call and in real life. If you start to see them on your TV, that is a good thing, it means they are serious about taking on the two goliaths.

Second - What if Monster or Red Bull wakes up? It’s almost incredible that Monster hasn’t started throwing serious weight behind Reign, but I have to imagine someone over there is going to figure it out? And if Red Bull were to launch a serious copycat, that would be an instant issue. Now, I understand Celsius has a strong brand with youth, and they will probably continue to grow, but this could put a serious dent in the rate of growth. There are also new entrants, like PRIME, that are going after youth. If Red Bull launched something I’d be pretty spooked as an investor. If you start seeing Monster get serious, more of a watch-and-see.

International is certainly exciting, and yet I am curious at how quickly they will be able to adapt the product to local market regulations and break into the markets. From what I remember there are significant hurdles here…again the relationship with Pepsi might overcome this but just something to watch.

I owe this a deeper dive into earnings but I leave for Thailand on Wednesday and wanted to get you my thoughts before I leave, hope it helps a bit.

[intjudo]

IMO $CELH has painted themselves into a marketing corner.
My take on marketing/branding is the objective is to get consumers to identify with your product: you want your audience to associate their actual core perception of themselves with your product.

So let’s take a look at some marketing slogans, and see which have broader appeal:

1. Coke: “Have a coke and a smile”, " The Coke side of life", “Open Happiness”, “Taste the Feeling”, “Together Tastes Better”
2. Red Bull: “Red Bull Gives You Wings”
3. Celsius: “LIve Fit”

Then look at the pictures used in the marketing:

1. Coke: people in marketing pictures mostly run the gamut of everyone/anyone
2. Red Bull: I’m not very familiar with Red Bull imagery but seems to involve lots of red bull cans in invigorating surroundings
3. Celsius: Gym Rats With Impossible Bodies

So on the one end of the spectrum, Coke is reaching out with its marketing asking you, AS YOU ARE, to identify with Coke.

And on the other end of the spectrum, Celsius is presenting a picture of how you WISH you were. (…I mean for the 99% of us who are not Gym Rats With Impossible Bodies)

Niche marketing can quickly ramp you into the favor of those who already fit your niche, but IMO it remains to be seen whether Celsius can gap up to making its marketing appeal to EVERYONE, like Coke does.

…However Don’t forget: Pepsi already wants/ has the “everyone” marketing covered; some of Pepsi’s slogans:
"“The Choice of the New Generation”
“That’s What I Like”

Not sure Pepsi would be entirely happy with $CELH attempting to widen their audience to “everyone” since that’s Pepsi’s stomping grounds?

[prust04]

I am not sure they have painted themselves into a corner quite yet, but I want to see them putting their foot on the gas from a media buying perspective, and to your point, make sure the messaging feels inspiring/aspirational (a la Nike) and not unachievable/offputting.

This is way in the weeds of marketing strategy but I do think it’s important in order to continue to grow share and disrupt coffee & other forms of energy.

[coldmountain]

Regarding Celsius and their industry, the fact that they’ve partnered up with Pepsi is a big deal. It is true that they are dwarfed by monster/coke, but each major soft drinks&snacks conglomerate has a solid distribution pipeline and retail network that it needs to keep supplied with what consumers want. There is plenty of space for competition in the segment, and every non-coke distributor is screaming for a product that can go head to head with monster.

Bang, as noted up thread, looked to be a decent bet for the non-coke network, but its founder was beyond crazy, and managed to completely burn his bridges with his main partners (the distributor network) not once but TWICE. At the time I was working in food & beverage and tracked the progress of the various (that is not a typo) lawsuits against him, all of which he lost in spectacular fashion.

The comments about Celsius’ marketing and what it needs to keep going are all on point. They still have challenges ahead, no doubt.

[Graydrake]

With some exposure to beverage sales years ago when working my way through college, I was a soft drink salesman calling on retail outlets. Shelf space is a significant driver of sales - a popular product is hurt by lack of quality shelf space, and a quality shelf space dramatically increases the likelihood a customer will trial a personally untested product.

There is power in the Pepsi connection, as the volume of their influence will improve the amount of shelf space, the quality of the display location, the probability of accepting a major promotion and probability retailers will give the newer guy a more aggressive shot both improving sales and capturing/retaining new customers.

Graydrake