Retirementdough July 2022 Portfolio Update

Portfolio Update 7/28/22 at 9AM

It’s been a little under a month since I posted my last portfolio update found here;…

I have found doing these updates is helping me keep better records of my investing thought processes over time. Much like keeping a journal in life when you re-read in the future it helps you remember what your thoughts were at the time of writing. Hopefully others find this helpful as well.

Current Portfolio as of 7/28/22.  
Change since 7/1/22		   	  -21.1%		YTD	-77.7%

VTI Monthly 				   +6.7%   		YTD	-16.3%

I have decided to just benchmark versus the VTI which is Vanguard Total Stock Market Index Fund, which is probably what I would put my money into if I did not want to spend time researching stocks. VTI includes all 3600 stocks traded in market.

Stock		% Portfolio 	  % Portfolio	       % Change 	Market         Monthly Stock 
		  Current	    Previous	         Portfolio  	Cap (B)        Price change %
UPST		       37.4		93.1		-55.7		  2.1B		-24.3
UPST options	        0.6   	 	 6.9		 -6.3 misleading as puts/calls are offsetting
SNOW		       30.9	 	   0		+30.9
CASH		       31.1                0     	+31.1 using it for securing put position               	          

New positions since last portfolio update: SNOW

Exited positions since last update: NONE

Trades between 7/1/22-7/28/22

Bought: 	SNOW					7/11		$156.00
		SNOW					7/19		$143.98
		UPST Jan20 2023 $30 calls		7/11 & 7/25
		UPST Jan20 2023 $40 calls		7/11
		UPST Jan20 2023 $50 calls		7/11
		UPST Jan20 2023 $12.5 puts	        7/25
Sold: 		UPST					7/11		  $28.47

Thoughts on trades and companies for the month.

There was big announcement early in the month. Upstart pre-announced earnings and forecasted a big drop in revenue…. They sighted macro conditions and not using balance sheet to secure loans. “First, our marketplace is funding constrained, largely driven by concerns about the macroeconomy among lenders and capital market participants. Second, in Q2, we took action to convert loans on our balance sheet into cash, which, given the quickly increasing rate environment, negatively impacted our revenue.”

Well….this is why it’s hard to own one stock and many investors would advise against it. My fault for believing management forecast earlier this year. They really did there investors dirty so far this year. Now I will say I do not think it was intentional but dang it feels a bit like ineptitude. Not good for faith in management or what they forecast going forward.

After that time the CFO SanJay Datta did an interview with Bank of America… It was really great information, a must listen to if you are invested in Upstart or considering an investment in Upstart. I have to say I do think the company is special and one day will be much larger and much more profitable. However I believe even harder days may be ahead in the short term.

JonWayne over at Saul’s board has always used trust pilot’s data to make assumptions about loan volumes. He really brings great information to the boards.… If you scroll down to where it shows the number of reviews per month you will see quite a drop off from April. Well May 9th is when Upstart reported first quarter 2022 earnings. Remember wall street did not like using balance sheet to fund loans, so Upstart management said they were going to stop. Looking at Trustpilot looks like the loans are really dropping off since that time (if you believe there is correlation between reviews and loans).

That recent pre-announcement of earnings which was forecasted so sharply downward is based on Q2 numbers (months of April thru June). If you look at July it will end up lower than Q2 months and the trend since May is downward. I expect when they announce official earnings in a week and half guidance for Q3 is going to be worse! Now I am basing this on trust pilot data which is only one source and who knows how much you can put on that. I just could not shake the feeling that it was showing the reality of Upstarts current situation.

For me it was enough to start hedging my investments. Right after they announced I sold a bunch of my position. I put some of it into SNOW. Why Snowflake? Mostly because it is well covered on Saul’s board and I think it has a great future. Some of the money I have kept in cash, which I used to sell UPST Jan20 2023 $12.5 puts (that price puts market cap value of UPST at ~1B). If the stock goes down that far or below I would own the same amount of shares that I had last month come 1/20/23, while also having the SNOW position which I previously did not have.

Additionally I took the money generated for selling the puts and used it to buy some more long calls. Remember I have been steady selling “out of the money” covered calls on UPST every week and using that money to buy long calls. So I own some 11/18/22, 1/20/23 and 1/19/24 long calls ranging from $30, $40, $45, $55, $65. Now these may all expire worthless but remember I used money generated from covered calls to buy these. If UPST does go up in the future I have secured long call shares equivalent of the amount of shares I had held last month. Not to get too deep in the weeds but if the stock craters in future I will own the same amount of shares I previously held (for much less avg cost) and if the stock ascends in future I will capture the gains as if I had similarly held the stock. All the while I now have add one more company stock to my portfolio and get to hold cash.

So pretty complicated strategy. Here is why I did it. I think the earning calls on Aug. 8th is going to be a mixed bag, it is my belief that the stock may get punished further as I believe forecast is going to be reduced for for Q3 and annual revenue. However, I do think this company has an advantage with their technology which will continue to be proven. Additionally now that they purged the loans (not R&D loans) from the balance sheet, they will begin to show positive earnings again. Additionally I believe the banking system will regain its footing after this recent quick movement in interest rates. In November when they report Q3 I could see a stock bounce upward.

The company continues to sign up new customers… and is making quick in roads to the auto industry…

The one thing Mr. Datta spoke about on BOA fireside chat was that they know that unemployment is highly correlated to default rates with the AI models. Currently unemployment is low This is something that investors in upstart should keep an eye on. If that number starts to climb rapidly, it would not be positive for Upstart. However with current employment rates it gives me some confidence that the company may turn the corner quickly and have a sharpe regain in share price.

I will say that this has turned into a “story stock” that Saul warns about on his investment board. Revenues are falling, it is not currently a hyper growth stock. If one strictly just follows the numbers, bailing out is the right idea. I continuously am self reflecting to make sure I just have not fallen in love with this stock.

I can only go on my own experiences. It reminds me of when I owned NFLX and blockbuster was giving away movie rentals for free and netflix stock feel hard because it hit their revenues at the time. I held in with the company because I felt that they had something that their competitors did not, it was just a matter of weathering the storm, so to speak. I have that feeling again. It is not competitors hurting Upstart, it is macro economic conditions. All the while I see them building AI products that are outperforming the old way of doing things (disruption).

They continue to gain customers (banks and credit unions) and are making inroads into new business (auto loans). What is really hurting them is the ABS market, which they will not need in the future with the way the business is heading. Their business model is not as stable as SAS companies but they are extremely profitable (minus unloading recent loans off the balance sheet) while growing and gaining new markets. I see a company with real but temporary head winds.

Upstart UPST
MC 2.1B
TAM 1.4T…

Monthly performance of stock for July was -24.3%, June was -36.5%, May was -35.6% YTD -77.3%…

  1. There are 144 MDIs and over 950 CDFIs in the U.S., operating in every state serving both rural and urban communities.

  2. The founding members of the Coalition are Upstart, Ariel Investments, Bank of America, BNY Mellon, Capital One, Citi, Discover, Ford Foundation, Goldman Sachs, Google, Key Bank, Kresge Foundation, Mastercard, McDonald’s, McKinsey & Company, Micron, Momentus Capital, Moody’s, Netflix, PayPal, PNC, Rockefeller Foundation, and TIAA.

  3. The Upstart model approves 43.4% more Black borrowers and 46% more Hispanic borrowers than a traditional credit scoring model, with approximately 25% lower APRs.…

“Our market data shows Upstart Auto Retail had the highest net growth in dealer count in the second quarter of this year, including preferred and exclusive OEM digital retail providers,” said Pete Batten of Automotive Market Data, a leading supplier of automotive market insights.…

“By partnering with Upstart, we’re able to help more people borrow smarter! Upstart will help us bring on new members through an online, AI-powered lending experience,” said Nader Moghaddam, President and CEO of Financial Partners Credit Union.…

  1. Revenue is expected to be approximately $228 million, previously guided at $295 to $305 million

  2. Contribution margin is expected to be approximately 47%, previously guided at approximately 45%

  3. Net Income (loss) is expected to be in the range of ($31)-($27) million, previously guided at ($4) to $0 million

I am not going to do a write up on SNOW this month. I am currently at airport with my son heading to South America to go skiing.

YTD return of portfolio for each month 

January  	-30.4%
February	  -9.4%
March		-19.5%
April		-41.3%
May		-58.4%  
June (July1st)	-71.8%  
July		-77.7%

I think sharing ones portfolio can be a helpful endeavor but obviously I have a huge tolerance for risk. I base my investment decision on my analysis and thoughts alone. I listen and weigh others thoughts and information but never hold them accountable for any investment decisions that I make. Portfolio allocation is another unique decision for all investors. I obviously am extremely highly concentrated. This investment style is not for the faint of heart. It requires quick decision making and action if one feels there is a change in investment thesis. I state all of this to clarify that one should study and hold yourself responsible for investment decisions. New investors should take the time to learn first before investing their hard earned money.

One of my favorite articles ever written on the TMF was Morgan Housel’s “The Agony of High Returns”…

It’s hard to grasp how the best-performing stock of the last 20 years could spend the majority of that time with returns that would make you want to vomit. It’s easy to think that the single-best investment to own is one that would make us smile every morning we woke up owning it.
But it wasn’t. It never is. And it never will be.

That’s the nature of the stock market. On the way to making serious money, you spend a lot of time losing serious money. It’s a reality anyone investing in stocks, no matter what you own, has to face.

I looked at the 10 best stocks to own over the past 20 years. These are all cherry-picked for their stellar returns, and the stocks you would probably choose to own if you had a time machine. On average they increased more than 28,000%.

But they all spent a majority of the time well below their previous high mark. They all had multiple declines of 50% or more. A few had multiple 70% drops.

I may have vomited a bit earlier this month with pre-announced earnings. I obviously took some quick action to diversify somewhat. I have the opportunity to gain on continued price movements up or down in future.