Same theme of trimming.... ADBE...

Investment Analysis Clubs Saul’s Investing Discussions
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ADBE just posted record quarterly results… and I’m deciding to trim them from the herd. I can’t keep a 24% YoY company when there are so many +40% YoY companies that are far more likely to double and more.

This board has really influenced how I look at allocating my investing cash to the BEST companies in the best position to give returns… not just REALLY SOLID companies like ADBE.

There’s just not a darn thing wrong with ADBE’s quarterly… except there are better quarterly reports out there on companies more likely to give better returns…

Learning… thanks for teaching.

Mark

ADBE $258.17 2.04 (0.79%)
3:59 PM 6/14/18
Adobe Systems Incorporated | NASDAQ
Post-Market: $248.69 -9.48 (-3.67%) 4:10 PM

Earnings Press Release:

Q2 EPS of $1.66 beats by $0.12. Revenue of $2.2B (+24.3% Y/Y) beats by $40M.

Adobe Document Cloud Achieves Year-Over-Year Growth of 22 Percent

SAN JOSE, Calif.–(BUSINESS WIRE)-- Adobe (ADBE) today reported strong financial results for its second quarter fiscal year 2018 ended June 1, 2018.

Financial Highlights

Adobe achieved record quarterly revenue of $2.20 billion in its second quarter of fiscal year 2018, which represents 24 percent year-over-year revenue growth.
Diluted earnings per share was $1.33 on a GAAP-basis, and $1.66 on a non-GAAP basis.

Digital Media segment revenue was $1.55 billion, with Creative revenue growing to $1.30 billion and Document Cloud achieving record revenue of $243 million, which represents 22 percent year-over-year growth.

Digital Media Annualized Recurring Revenue (“ARR”) grew to $6.06 billion exiting the quarter, a quarter-over-quarter increase of $343 million. Creative ARR grew to $5.37 billion, and Document Cloud ARR grew to $694 million.

Digital Experience segment revenue was $586 million, which represents 18 percent year-over-year growth.

Operating income grew 39 percent and net income grew 77 percent year-over-year on a GAAP-basis; operating income grew 33 percent and net income grew 62 percent year-over-year on a non-GAAP basis.

Cash flow from operations was $976 million, and deferred revenue grew 27 percent year-over-year to approximately $2.63 billion.

cont’d

https://seekingalpha.com/pr/17192883-adobe-reports-record-re……

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I’m thinking of selling my position as well. It’s been a great investment, up 90% in a year. You can’t complain about that!!

Not sure that it can continue so…

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I’m struggling… Dreamer and Tinker made some really good posts on NPI that have me thinking more…

Consolidating down to a concentrated portfolio is SUPER hard… culling companies that have gained >10% in a few months is HARD…

Definitely cutting IBKR. That’s my only “for sure” decision. ADBE… I was sure of… but Dreamer has me doubting myself a bit… which is good… he’s causing me to think…

Problem is that I REALLY like the idea of getting down to 10-12 and REALLY studying and knowing those stocks… and keeping that number low.

Going to go pay attention to my beautiful wife… that always calms and gives me clarity.

M

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Well, you’re certainly right: there’s no comparison, a stodgy old company like Adobe and ours. Poor old Adobe has GM in the '80s and OM in the '30s and gosh, prepare yourselves, this really is a bit of an embarrassment, it, er, makes money. Quite a lot. That makes it a real loser on its own. I guess this puny grower (pah! what a wimp) has somewhere around $3,000m in FCF, not to mention FCFM north of 35 and still sports a FCFY of 2.3% which is too shabby. And then there’s ROIC which must be close to a paltry 20 and that dismal revelation that cash flow still exceeds EPS and all the rest. Add it all up and you’ve got a real shocker. The company has earned the derision of the market. In fact it’s a national joke and why it’s by far my largest holding, and why I have held this piece of manure for years and why it still is regularly spat out (as well it might be) by my screens I really do not know.

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Most people never owned a stock which went up 90% in a year.
But the future is something else and if you feel that time to sell has come, do it.
I remember selling AMZN at 350$, DPZ at 62$, PCLN at 165$, etc.
Even if they say you should never look back, I still do it sometimes.
Still, a double in a year remains a huge performance.

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My 2 cents is that ADBE is a good company in the right time. With tailwinds from platforms like Shopfiy, kickstater, indigogo, instagram, digital marking etc driving entrepreneurship and small business growth I think that adobe still has a ways to go because all the digital content for new business now requires some form of graphic work where adobe has a strong moat. I cant really name one competitor to their creative suit of applications that competes on that same level. Gaming is a growing industry as well, much of the content is also created on their suite of apps. Additionally it is basically the core of education software that many schools use to teach broad fields like design. It has been on my watch list for a while, I think it still has room for growth

Ronald

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…because all the digital content for new business now requires some form of graphic work where adobe has a strong moat. I cant really name one competitor to their creative suit of applications that competes on that same level. Gaming is a growing industry as well, much of the content is also created on their suite of apps. Additionally it is basically the core of education software that many schools use to teach broad fields like design.

In my view none of these are reasons to invest in ADBE today. Creative Suite/Cloud is their big product, but the market for that just isn’t growing enough.

It’s the web marketing, analytics and advertising spaces where Adobe may see growth. That’s why they just bought Magento, for instance.

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Interestingly harsh responses on my thought of selling ADBE…

That is actually interesting to me.

ANET… a super solid company that’s had a great run up lately… but was quickly jettisoned by many when their continued growth at that rate was questioned.

ADBE… up 90% in the last year… and a great company by every metric.

ANET is in an emerging industry with a new solution that is capturing new market at an amazing rate. ANET is a $20B market cap company.
ADBE… on one hand there’s no one that does everything they do… but there’s lots of folks that do parts of what they do… and the question on ADBE is where are they going? My guess is that they are expanding more into advertising… but it’s not entirely clear to me. Further, ADBE is currently a $120B market cap company.

Who do I think is going to double first… from here… moving forward??? ANET from $20B to $40B or ADBE from $120B to $240B???

My answer is ANET.

Further, I’d compare ADBE more accurately to NVDA… NVDA is a $162B market cap company. Far better to compare 120vs162 than 20vs120. NVDA has… in my mind… undisputed technology moat on it’s competitors. NVDA’s quarterly was at least as impressive as ADBE’s. Would I chose NVDA or ADBE??? My answer is NVDA.

What this board has taught me is to not “settle” on great companies. ANET, ADBE, NVDA are ALL FANTASTIC companies. How could you argue with anyone including those companies in their portfolio??? The real question Saul’s board has taught me is to question “What company is the best chance of appreciation of my assets moving forward??” It’s taught me to look forward… not backwards. That’s a very different way of thinking for me… and I think the key factor that distinguishes the BEST thinkers on these boards. The very best are able to separate past performance and glean insights into future performance. I am VERY MUCH in the lowest tier of “thinkers” on these boards… but I’m trying to learn. I’m exposing my thoughts to get criticism (both critical and constructive)… I WANT those harsh reviews and constructive reviews to challenge my thinking… to help me become a better thinker… So THANK YOU.

Yes, I am selling ADBE. It’s a great company. It’s a growing company. But at $120B market cap and not having a clearly defined forward plan… I feel there are better places to put my money… I want clear focus… I want clear thoughts on appreciation. Their big market cap and lack of clear focus cause me doubts on their forward prospects compared to ANET and NVDA. Thus, ADBE is a SELL for me. Further, it takes time to integrate. ADBE has many solutions… and has acquired some companies lately. Integration both of a company and to get true end-to-end solutions takes time. I think ADBE needs some time to get that integration proven.

If I was targeting a 20 stock portfolio, they’d be in for sure… but I’m not. I’m targeting 10-12. I feel there are 10-12 other stocks that are more focused and have better chances of near term appreciation.

SO the critiques helped me… they caused me to defend my rationale… truly thanks.

And for those of you staying long on ADBE … I think it’s a great company and I wish you the BEST. I just believe there are 10-12 other stocks that will appreciate share value more quickly.

Mark

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Puzzled why you restrict your holdings to such a small number, even ‘targeting’ 10-12. It implies a level of certainty (and here about technology companies) I have never possessed (and in the case of technology fully confirmed by the constant trading activity seen here).

I never have a clue how many investments I have got and it is not a question which remotely interests me. I really don’t think I have ever counted them. If a company comes through the relevant screen and then survives some fairly demanding DD, it is bought. Both ADBE and ANET qualify (though I have not yet read the latest in the trade wars). Why would I want to sell one to reduce my holdings, having full-scale cynicism about tech. obsolescence and invisible competition?

Here’s something I do know: I have a spread of 11 players in our sub-sub-sector of SaaS smallcaps. A few more would be welcome, if they qualified, and preferably no less. Unlike big players ADBE and MSFT, I think they’re rubbish investments - but good, even essential, for a trade in these weird times! Food has to be put on the table somehow but Buffett’s Rules #1 and #2 should not be forgotten.

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Puzzled why you restrict your holdings to such a small number, even ‘targeting’ 10-12. It implies a level of certainty (and here about technology companies) I have never possessed (and in the case of technology fully confirmed by the constant trading activity seen here).

I never have a clue how many investments I have got and it is not a question which remotely interests me. I really don’t think I have ever counted them. If a company comes through the relevant screen and then survives some fairly demanding DD, it is bought. Both ADBE and ANET qualify (though I have not yet read the latest in the trade wars). Why would I want to sell one to reduce my holdings, having full-scale cynicism about tech. obsolescence and invisible competition?

Here’s something I do know: I have a spread of 11 players in our sub-sub-sector of SaaS smallcaps. A few more would be welcome, if they qualified, and preferably no less. Unlike big players ADBE and MSFT, I think they’re rubbish investments - but good, even essential, for a trade in these weird times! Food has to be put on the table somehow but Buffett’s Rules #1 and #2 should not be forgotten.

Several points…

  1. Why 10-12?
    a)First I did a bunch of research on diversification versus dilution of returns. I was reading published research papers… not opinion articles. In the published research, it was found that more than 10-12 stocks clearly diluted returns without providing better diversification risk reduction. The papers that “leaned that way” had the caveat that the 10-12 stock were in different sectors of the market. I found some papers that went as low as 4… but all of them pointed to ‘large numbers of stocks dilute returns without providing truly reduced risk via diversification.’. Now, I’ll note that I also found papers to the contrary but based on the predominance of tested research out there I decided to target a smaller number of stocks.
    b) My moniker “prodigal” is an earned title. This is the third time I’ve ventured in to investing in individual stocks. Life has hit me with some challenges that distracted my attention from individual stock investing. Each time I’ve gotten involved in individual stock investing I’ve done well… and I’ve learned each time… but I’ve also been “unsatisfied” in the past. In each of my past iterations I’ve accumulated large numbers of stocks similar to the approach you describe. I’d have screens… I’d follow TMF recommendations. My returns beat the market. I felt I was doing great. But I also always had this nagging sensation that I “faking it”. If I was asked, “Tell me about stock XYZ in your portfolio…why is it there?” I really didn’t have a satisfactory answer. I could say that “I follow TMF, it met my screens, I read up on it.” But I didn’t REALLY understand the company. I didn’t REALLY get it. And I certainly couldn’t make a good argument on why to sell or hold or buy. Thus, I accumulated. I wasn’t constantly reevaluating my holdings… I never sold… until life turned me upside down a couple times. Last time I sold out of the individual stock world was when Hurricane Ike leveled me… a Cat 5 Hurricane passing directly over everything you own… destroying everything… well… that isn’t a good sell strategy.

So… based on the research and nagging feeling that I didn’t like from accumulating… I decided this time that I’d limit myself to 20 stocks. BUT… I couldn’t keep up. It was too much reading… too much research. I just couldn’t truly get to the depth I wanted on that many stocks… so I decided to reduce down to 10-12 per the research.

  1. Sector Risk… my 10-12 stocks are NOT sector diversified. I don’t think these boards “do justice” in explaining to folks why people choose the portfolios they do and the context in which those decisions are made. My diversification strategy for retirement is as follows: 1) U.S. Government Pension from NASA. Thankfully, that’ll give 35+% of my salary with cost of living adjustments for life. Independent of the stock market. 2) I book Social security as covering 15% of my current salary. Independent of the stock market. So… 50% of my current salary is accounted for independent of any investments. 3) I also own a commercial property. That provides me another 10% of my salary. 4) In addition, when I retire… I won’t be contributing to retirement like I do now. I’ll be totally debt free. and MOST importantly, I am currently paying for FOUR KIDS in college. YES… FOUR in college at the same time. With all of that, my retirement expenses to maintain the same standard of living that I am at today will be 60% of what I earn today. Note… I have 60% of my income covered for retirement BEFORE I ever even discuss stock market investments. I’m not being arrogant or bragging. I think this type of discussion is necessary to truly explain risk posture and why people make the decisions they make. So… if I’m “set for retirement” without investing… now we can talk investment risk posture. 95% of my stock market exposure is invested in the S&P500 index. The government Thrift Savings Plan uses IVV as their index fund. So that’s about as conservative as one can get while being invested in stocks. I contribute $18,500 to that in the governments 401k TSP Roth every year. In addition, I contribute another $6000 per year as ‘over 50 catch up’. My wife, under 50, also contributes $18500/year. All of that new contribution is added to the S&P500 index TSP Roth investments. We’ve been doing that for 30 years.

Sooooo…… what’s left is 5% of our investments that I manage… we contribute roughly $35000/year additional of new money to the 5%. When your “minimal retirement” at your current standard of living is covered without stock market investments… and when 95% of your investments are in the S&P500 index… with the remaining 5% and new contributions… can I accommodate some sector risk?? Yes, I think so.

Would I suggest anyone model my portfolio?? NO. Absolutely not. Not unless their total situation is the same as mine and they have the same goals and the same risk tolerance. I would suggest that EVERYONE’s situation is unique to them. I would suggest that there are many other factors that weigh in to allocations and risk tolerance and goals. Saul and other frequently state “don’t follow me”… this is WHY… if you aren’t in their shoes… it probably isn’t right for you.

Conclusion for me… yes, I’m new for third time to picking individual stocks. I’m here to learn… but I’m learning on a small fraction… I consider how I’ve planned and set my family up fairly Foolish. Honest, I think many folks would be well served learning how to get to the point of true retirement safety… beyond just picking individual stocks. Back in the 90’s TMF focused MUCH more on that. I don’t see nearly as much of that today and I think newer subscribers are missing out.

Hope that helps. And TRULY… I love the criticism. I love learning. I love being challenged. Thank you and respectfully,
Mark

PS… Want to hear what I NEVER planned for… I do all this work to be able to retire early… I survive unplanned horrible accidents… and unplanned Hurricanes… and unplanned divorces. My financial plan has been turned upside down many times by the unforeseen… but I get here in pretty darn good shape…… and my wife just got an AMAZING new job. A historic job. First ever female in her new position. BIG deal… and now she probably doesn’t want to retire early!!! and I can’t blame her!!! I do ALL THIS… I work… and now we may not retire early anyways!!! but that’s a blessing. Just kind of funny. I’m BEYOND amazingly proud of her. But fairly hilarious. Never planned for that either.

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Mark,

What an excellent post! Explains your situation and why 10-12 is right for you.

In my opinion, the key is to have less companies than what you like. For example, if you like 20 companies, 10-12 is great because it forces you to cut the ones you like but aren’t quit as good.

In my situation, I had about 35 companies, and I liked them all. I am forcing myself to get down to 20. At 24 right now.

I am long ADBE and plan to keep it as part of the 20.

I like that their revenue growth accelerated this last quarter, margin improvement, FCF as a % of revenue is expanding each year, etc.

They are getting very large, and at some point they will start to come against their “invisible asymptote” and won’t have much TAM left. Management is doing a great job of expanding their TAM and moving the asymptote with tack on acquisitions. I think we will know that when revenue growth starts to slow.

For me I like having a few of the large tech companies that are really growing. It’s my way of diversification. I have FB, GOOGL, ADBE, MC, V, and AMZN. And I guess you can say NVDA is a large tech also. (Yes I think MC and V are really tech companies)

To me diversifying across different sectors doesn’t mean as much. The best companies are all really technology companies, no matter what they are selling.

Jimbo

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Jimbo… agree with you completely… and if I were targeting 20… ADBE and the ones you mentioned would certainly be in there. For me NVDA is the “big boy” that I can’t let go of and made my cut to keep in the 12.

Besides, I’m a HUGE Texas A&M fan… the original 12th Man and all that. 12 stocks just has to be the right answer for me… :slight_smile:

Thanks
Mark