Saul’s Portfolio at the end of May.
As I usually do, for my own convenience, I’ll end May with the last weekend of the month, and Tuesday and Wednesday will slip forward into June.
MY RESULTS MONTH BY MONTH FOR 2022
May was a good month for me. Here’s a table of the monthly year-to-date progress of my portfolio for 2023. I’ll present them as starting from 100% of my starting value and figure from there:
End of Dec 100.0% starting point
End of Jan 109.7%
End of Feb 107.0%
End of Mar 105.8%
End of Apr 91.9%
End of May 106.3%
To be clear , in April two of my largest positions at the time, Enphase and Cloudflare, each dropped 25% after earnings (Cloudflare’s drop deserved, Enphase’s much less so, in my opinion), which explains my portfolio’s 13% drop in April.
You’ll also note its nice bounce back in May with a 16% rise in one month [106.3/91.9 = 1.16]. It was largely propelled by substantial rises from Aehr, Sentinel and Monday. (For comparison, the S&P rose a little less than 1% in May).
REEVALUATION OF MY POSITIONS
As you know during the last three months I’ve done some major reevaluation and changed a number of positions.
For a long time, too long, in fact, I had been thinking in terms of growth of revenue almost entirely, with just a little attention to earnings and FCF. Now I’m giving much more consideration to Adjusted Net Profit, PE ratios, PEG, FCF, FCF Margin, EV/S, etc.
Why these changes in my thinking? Well, these latter metrics are the kind of metrics I had always used in the past to choose stocks, but then about five or so years ago we discovered SaaS companies who leased software to companies through the cloud. This meant that they could make updates daily if needed with no effort by the customer, which was a huge advantage over the old Microsoft-type annual updates which had to be manually installed in each computer.
Leasing instead of selling the software meant that these SaaS companies also had recurring revenue pretty much forever, revenue which actually even increased each year (NRR), due to the customers including more divisions or taking more bell’s and whistles, and very high gross margins as all this recurring revenue renewed with much less S&M effort on the SaaS company’s part than acquiring totally new revenue. Revenue growth was huge, 50% to 150% per year, and it became clear that they could become profitable overnight if they stopped going for growth at any cost and just cut back on S&M for new customer acquisition.
We had the good fortune to discover these companies when they were very small, just IPO-ing, and cheap, starting off at low or normal EV/S ratios because the markets hadn’t yet recognized what they were. We rode them up, and up, and up, as they became “discovered” and multiplied my entire portfolio value, by about 26 times (a 26 bagger) over a five year period (and I know that some board members did better than I did). That was not a misprint, or 26%, it was 26 TIMES ! It was pretty heady stuff, and hard to get off the speeding train, as if you did it went on without you and you felt foolish.
In the last two years of that rise, 2020 and 2021, our companies continued to grow sales at mammoth rates, and their EV/S and stock prices were growing at mammoth rates at the same time, as the whole world discovered what we had discovered. Then came November of 2021, when the “unstoppable rise” broke and the SaaS stocks started down, eventually bottoming in 2022, losing about 75% of their peak value, or so, on average. Thus our five-year 26 baggers became roughly six-year 6½ baggers at their bottoms last November (six months ago) .
Why did this happen? A number of good reasons and some not so good reasons. The little companies we had bought so cheap had become large companies and were hitting the Law of Large Numbers and just couldn’t grow as fast, and their revenue growth rates started coming down every quarter. Their valuations (EV/S) had gotten unreasonably high as everyone climbed on the bandwagon of a kind of stock that seemed to be going to the sky. I really should have listened more to Bearwho continually warned about their high valuations, but I didn’t. 
As growth rates fell, the stocks started getting re-rated, and fell until they became, in some cases, almost as undervalued as they had previously been over-rated. The companies which had been really undervalued have bounced off those bottoms now. Tor example Monday is currently up 127%, doubling and a quarter more, from its bottom six months ago. But most of the SaaS companies didn’t have the room to rapidly grow in stock price the way they used to, because their revenue growth rates kept rapidly descending partly because of their size, and partly because of the macro conditions.
Okay, those were the good reasons for the stock prices falling. How about some not so good reasons? How about the worst pandemic in 100 years or so causing chaos in the world economy? How about Russia invading a neighboring company and starting the first major European war in 80 years? Still ongoing after more than a year. How about both of the above causing confusion, anxiety, disruptions, shortages, and inflation? And how about that inflation causing the Fed to come out with the largest, steepest interest rate raises ever in the history of the Fed, causing everyone to expect a recession, and thus causing companies who are customers of our companies, to become very cautious about purchasing new software, or new products of any kind?
So why don’t we find new IPO’s of cheap SaaS companies just starting out, and ride them again? Well, if they came out cheap everyone in the world would now be trying to buy shares, as everyone now knows about SaaS. And the companies we had been invested in were category definers. Those categories are now dominated so new SaaS companies tend to be more niche companies, like Samsara, for instance. There’s nothing wrong with them, but they don’t have endless horizons ahead of them.
We also had invested in some “SaaS” companies that turned out to not be SaaS companies at all. I’m thinking of companies like Snowflake and Datadog. Their revenue was based on consumption by the customer instead of on a fixed subscription, which made their revenue very tied to the economic cycle and has caused their revenue growth rate to fall much more rapidly than expected. There isn’t any visibility into the future (as we have with a true SaaS company) with a comsumption based company. I have exited both of them.
I still recognize the advantages of SaaS companies and am still invested in several, but I have also invested in a number of other interesting and rapidly growing companies. You will see as we progress:
Here’s what my positions looked like TWO MONTHS AGO , at the end of March**:**
Monday 16.7%
Cloudflare 16.6%
Enphase 16.4%
Snowflake 16.0%
Sentinel 10.8%
Global-e 8.6%
Samsara 7.8%
TransMedics 3.2%
Procore 3.1%
Datadog 0.9%
And what they look like NOW:
Monday 14.9%
Sentinel 12.5%
Global-e 11.8%
Trade Desk 11.2%
Samsara 11.0%
Bill 11.0%
Aehr Testing 10.6%
Enphase 9.7%
Zscaler 7.4%
Out of the ten positions that I had at the end of March I have closed five of them. That is very, very, very, rare for me, a suggests a real reevaluation. Closed were Snowflake and Datadog for reasons discussed above, Cloudflare for reasons that I will discuss below, and also the little try-out positions I had in Procore and Transmedics.
I added four new positions to bring me up to nine current positions. The added positions are TradeDesk and Aehr, and I added back positions in Zscaler and Bill because of excellent and reassuring results. I kept my positions in Monday, Global-e, Samsara (IOT), Enphase, and Sentinel, but note than Global-e, Enphase, and Samsara were already new positions that resulted from my re-positioning. Monday, Sentinel, Bill, and Zscaler are what is actually left from my old portfolio, and Aehr and TradeDesk are new.
Here are some thoughts about some positions and ex-positions. Please remember that I can be very wrong about any of these. Believe me, it has happened before. Make your own decisions!
Snowflake’s position size was trimmed in March from 24% to 16%, still a respectable position, and in April I trimmed it further down to 8%. Still quite a reasonable position, but not one of the largest. In May, this month, I trimmed it down to 0.8%, a trivial position, and then, after earnings I sold out of that last bit. Possibly a great long term outlook, but right now it being consumption-based means an amount of uncertainty that’s hard to quantify, even for the CFO. Two quarters in a row they had to cut back guidance although they were a third into the quarter in question already when they gave the guidance. That’s uncertainty! I’m more comfortable being out.
Cloudflare. I thought they had a more predictable present than Snowflake (after all, they had had revenue growth around 50% for 8 or 10 quarters in a row), but they proved me wrong. They were right behind Monday in 2nd place at the end of March, and I had already trimmed a quarter of the position by the end of April and completely exited in May. This company is more controversial. Some, like me have exited, and some still have oversized positions.
The dropping of the growth rate into the 30s, and restating of guidance, the sales and marketing problems, the fewest new enterprise customers added in 8 or so quarters, and the question of whether all those nifty new products will ever actually move the needle on revenue, all made me feel I had better places for my money. And this was after me having held Cloudflare for years.
Monday.com When it got way out ahead I trimmed some for cash, but it is still in first place, out there by itself. They had an outstanding earnings report. They are up about 127% in six months from their November bottom. I’ve heard many people say that “companies in this field never succeed,” as their reason for not considering it, so I can’t resist supplying a little color:
Four year ago in the same quarter Monday had $13 million in revenue. This year they just announced $162 million. That’s more than twelve times as much revenue in four years!
Just three years ago Monday had 105 of the $50k enterprise customers. Now they have 1683 of them. That’s sixteen times as many in just THREE years! They added a record number this quarter while most of our other companies were adding reduced numbers. As we mentioned above, Cloudflare, for instance, added the smallest number of enterprise customers added in eight quarters
Just think about that. Monday has sixteen times as many $50k customers as three years ago. If they had grown the number of customers by 100% each year, doubling them each year, they’d only have eight times as many as they started with. They have sixteen times. We have companies who brag if enterprise customers are up 20% yoy.
Last year, they a Free Cash Flow Margin in the quarter of minus 15%. This year they had a Free Cash Flow Margin of +24% !!! Other companies promise 20% FCF margins sometime in the vague future. Monday just did it! Monday is simply not in the same category as those other companies that haven’t succeeded in this field.
Enphase sells microinverters, and now batteries, for solar energy systems. They announced first quarter results on Tuesday. They have the tailwind of the whole shift to renewable energy and climate change, but they sold off mightily after decent results because of the usual bugaboo, guidance. As far as this quarter’s actual results, let’s see:
Revenue was up 64.5%, and slightly above expectations,
Adj gross margin of 45.7% which was a record, and up hugely from 41.0% a year ago and from 43.8% sequentially.
And this isn’t some money-losing company trying to reach profitability. It had:
Adj EPS of $1.37 in this QUARTER alone, beating expectations by 15 cents and up 73% from 79 cents a year ago, and let’s not forget:
Adj net income of $192 million!
Free cash flow of $224 million! This company is making money.
Now, does that sound like it was worth a $57 and 26% sell-off to you. Well that’s what happened because they predicted roughly flat sequential results next quarter. With that drop in price, and me trimming slightly, they are now my next to smallest position, at a still decent 9.7% position.
Sentinel . Yes, I know, I’m one of the very small group who has confidence in them, but I do. In looking back at my notes to myself, I see that I concluded in March, after going through their Jan quarter results, that Sentinel was tied with Monday as one of my two highest confidence positions. And some other people must like them too as their 28.5% stock price rise in May has moved them into 2ndplace behind Monday. Earnings will be out June 1st.
Global-e handles all the complications of cross-border sales for mostly large well-known retail companies. It’s still a small company with $409 million revenue for 2022, and it is growing quite fast.It helps merchants sell merchandise to customers in other countries, and also makes it easier for the customers to shop from the merchants. It’s mostly luxury goods that are worth buying from another country, and global-e handles everything from customs regulations to returns in over 100 different languages. They’ve also now integrated with Shopify which hopefully should give them a good boost in revenue soon.
Samsara , with the interesting ticker IOT. They help companies manage objects like 18-wheelers, farm machines, manufacturing machines, etc. They can offer companies an immediate, large, and “hard” ROI which is very attractive in the current environment.
What’s a “hard” ROI? Well they can explain to a fleet owner that each truck he includes in the plan will cost him $400/yr, but he will save about $2,500/yr, per truck, just in reduced idling time. (How can you say no to that?).
Trade Desk is back again as part of this redoing of my portfolio. As macro has really hurt advertising they only grew about 21% this quarter, but as their competitors were only growing 0% to 5%, or even decreasing revenue, Trade Desk is apparently taking market share like mad, and growth should bounce when the macro does. And they are profitable, and they are repurchasing stock ($300 million last quarter).
I’ve already talked a great deal about Aehr on the board, and don’t want to repeat myself. Yes, it is quite different than my usual companies. However it’s up 32% in May and up 28% since I took most of my position early in the month.
I have kept a permanent safety fund out of the market that I could live off for several years if necessary, and I feel everyone who does not have a secure regular source of income should do the same.
I have learned long ago that sticking with great companies wins out in the end, and beats market timing, but living through this decline has been difficult.
FINISHING UP
Let me remind you first, that I have NO IDEA what our stocks will do next month. I’m terrible on predictions. But I know that the businesses of our companies will do just fine for the most part.
When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.
I do sometimes take a tiny position 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 later do 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. If I decide to keep it, I add to my position and build it into a regular position.
You should never try to just follow what I’m doing without making up your own mind about a stock . First of all, you may have a completely different financial picture than I have. Different age, different income, different assets, different debts, different expenses, different financial and family responsibilities, etc.
Besides, in these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I 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 even then. And besides, I sometimes make mistakes, even big ones! 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.
THE KNOWLEDGEBASE
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 try to do it yourself, I’d suggest you read the Knowledgebase , which is a compilation of my “words of wisdom”, and definitely worth reading (a couple of times) if you haven’t yet. It’s on the panel to your right.
I hope this has been helpful.
Saul