Stocknovice's December 2023 Portfolio Review

stocknovice · December 30, 2023, 5:53pm

Dec 2023

Aaaand another year is in the books.

The end of the year is always a good time for portfolio review and lessons learned (if interested, I have done the same in all the December recaps linked below). As I reflect on 2023, three lessons come to mind:

1) The difference between thinking in dollar amounts versus percentages.

One of my biggest lessons as a younger investor was learning to ignore dollar amounts and think in percentages. It was mostly a mechanism to better reframe losses. Mathematically, a $100 decline in a $1,000 portfolio is the exact same 10% as a $1,000 drop from $10,000 portfolio or even $10,000 from $100,000. Psychologically though, the difference between a $100 “loss” and a $10,000 “loss” can feel enormous. To weather the inevitable storms and see real long-term portfolio growth, I think every successful investor eventually finds a way to navigate this dollar/percentage dilemma.

Now being further along (2024 will be 30 years [!!!] in the market), I am coming to appreciate the occasional benefit of shifting my thinking from percentages back to dollar amounts. When managing a smaller portfolio, we would sometimes see short-term swings equating weeks or even months’ worth of living expenses. Having been fortunate enough to see our portfolio grow significantly over time, those swings can now cover years. At what point does the quest for capital growth shift at least partially or even wholly to capital preservation? I first started considering that question after this excellent post by GauchoRico in July of 2022 (https://gauchorico.com/when-should-the-game-change/) and have continued to mull it over as we’ve ground our way through 2023. One of the first adjustments I’ve made has been…

2) …the way I have come to think about cash.

For years I was determined to stay fully invested especially when working full-time. Holding cash in even the smallest amounts drove me nuts. However, that mindset has changed during this latest cycle. As outlined here (Thoughts on Portfolio Management - TheStockNovice), I tend to group our holdings by conviction level and then allocate accordingly. At the same time, I’ve decided the maximum number of holdings I can comfortably manage at my preferred level of detail is ten. After learning a painful (i.e. very costly) lesson in 2022 owning more BILL and MNDY than I wanted for no other reason than staying fully invested, I’ve settled on a compromise. I now pay stricter attention to my conviction tiers and ten-company limit, owning only those firms I want up to my max conviction level. If that uses 100% of our investable dollars, great. If not, I’m content to keep the remainder in cash. That process leaves 15.6% of our portfolio in cash to end 2023. We’ll see whether rising conviction and/or an alternative company puts a dent in that number during 2024.

3) The effects of macro downturns on hypergrowth investing.

While this might sound contradictory to the statement above, I still pay MUCH less attention than most to the specifics of interest rates, inflation, employment numbers, and the endless parsing of Fed comments. Where I believe this downturn has most affected our portfolio, however, is the amount of smaller, faster-growing alternatives to our current holdings. As I think about our most successful stretches in recent years, much of it was driven by an amazing influx of smaller companies in a great position on their hypergrowth S-curve. As an admitted S-curve investor (Buying Low, Selling High and Understanding the S-Curve), that was a much easier time for finding alternatives when a current holding’s growth began to slow. From 2018-2021, we had a steady influx of new IPO’s to replace companies entering a slower part of their curve. This dynamic led to a relatively smooth and wildly profitable transition from companies like AYX to CRWD to DDOG to LVGO to ZM to UPST. As the market hit its post-COVID peak, the next-great alternative became less obvious starting with our Fall 2021 exits from DOCU and UPST. And as overall market conditions worsened in 2022, the IPO market ground to a halt. That in turn led to holding companies into slower and more mature part of their S-curve, something I wrote about here (Hypergrowth to...HyperGARP? - TheStockNovice). I don’t know when this dynamic ends, but it is something I will continue to watch.

As we enter 2024, I like where our portfolio sits (don’t we all? ). First and foremost, I know what we own and why we own it. In my opinion, that’s the biggest investing lesson you can learn. And with all my newfound macro sensitivity, I also know conditions will eventually loosen enough that a new round of attractive, high-growth companies will hit the market. Until that happens, I will continue to do my best setting expectations for our current firms and then holding myself accountable for adjusting to the results. Because owning excellent companies is always the best strategy, and that’s one lesson that never really changes.

2023 Results:

2023 Monthly Allocations:

Key:
• darker green: started during month
• lighter green: added during month
• yellow: trimmed during month
• blue: bought and sold during month
• red: position exits
• positions >10% in bold

Past recaps:

Stock Comments:

A quiet month with a lot of green. What more could you ask for to end the year?

AEHR – Aehr’s first update was its participation in the annual NYC Summit investor conference December 12. The next and much more important update was the announcement of an initial customer order for its gallium nitride test and burn-in system (Aehr Receives First Order for FOX™ Wafer Level Test and Burn-in System to be used for Gallium Nitride Semiconductor Engineering and Qualification - Aehr Test Systems). This marks “Aehr’s first gallium nitride customer to order a system.” That’s not only good news for the present but early validation Aehr has correctly identified gallium nitride as an area it can expand its business in the future. That could be a real needle mover for a company this small. I’d expect more info during AEHR’s Q2 earnings call, which I anticipate at some point in January even though we haven’t seen an announced date yet.

AXON – Though Axon’s announced nothing of note since its strong November report, I’d say that performance was plenty good enough to justify the stock’s steady rise since. I like the business momentum Axon has created for itself into 2024.

CELH – Other than presenting at a couple December investor conferences, I’ve seen no news from Celsius. 2024 should be an interesting year as CELH partners with Pepsi to enter several international markets. With international sales accounting for just 4.5% of current revenue, Celsius has plenty of runway in this area.

CRWD – CrowdStrike issued a few December updates. First, it earned a Leader designation from Forrester Research for its managed detection and response services in Europe (CrowdStrike Named a Leader in MDR by Forrester in Europe, Q4 2023).

Next, CRWD ranked #3 on Fortune Magazine’s most recent Future 50 list (CrowdStrike Ranked #3 in 2023 Fortune Future 50 List). Based on the “assessment of a company’s growth potential and its ability to deliver against that potential,” this placement seems like a nice little feather in CrowdStrike’s cap. As a bonus, it was the only cybersecurity firm to make the top 20.

Then CrowdStrike announced general availability of its Falcon Data Protection product (https://ir.crowdstrike.com/news-releases/news-release-details/crowdstrike-announces-general-availability-falcon-data). This module easily integrates with existing services to expand visibility while also improving incident detection and response times.

Lastly, the company announced it has passed the $1B sales mark with channel partner Optiv (https://ir.crowdstrike.com/news-releases/news-release-details/crowdstrike-and-optiv-surpass-1-billion-sales). Optiv’s Senior Vice President of Partners, Alliances and Solutions stated, “CrowdStrike’s comprehensive visibility and protection across the most critical areas of risk empowers us to meet clients where they are on their security journey. We congratulate CrowdStrike on this milestone and look forward to our continued partnership in driving successful customer outcomes.”

This milestone follows CRWD’s recognition as the first cloud-native software vendor to pass $1B in sales on Amazon’s AWS Marketplace. From that perspective, it appears CRWD’s channel partners are reaching impressive scale. Despite a few trims in recent months, CrowdStrike enters 2024 as our biggest holding after soaring 142.5% on the year. Well done.

DDOG – Datadog issued no company news but did appear at the recent AWS re:Invent customer conference. Generative AI was a big topic, and DDOG was there to show all the ways it can support this movement (Highlights From AWS Re:Invent 2023 | Datadog). Management finally hinted in last quarter’s comments that customer optimizations might be starting to ease. The question is when it starts to show up in DDOG’s numbers. I’ll be keeping this one small until it does.

ELF – e.l.f. Beauty has also been quiet since its strong November earnings. Here’s hoping Santa relied on this ELF for a lot of stocking stuffers this month (yeah, I know but it’s all I got).

IOT – Samsara has released a few updates since its stellar November 30 report. First, it won a contract with the City of New Orleans monitoring 41 municipal departments including “Police, Fire, Public Works, Code Enforcement, Parks and Parkways, Sanitation, and more” (https://investors.samsara.com/news/news-details/2023/City-of-New-Orleans-Chooses-Samsaras-Connected-Operations-Cloud-Across-41-Departments/default.aspx).

Next, IOT was named Frost & Sullivan’s 2023 Company of the Year for Commercial Telematics solutions (https://investors.samsara.com/news/news-details/2023/Samsara-Earns-Frost--Sullivans-2023-Company-of-the-Year-Award/default.aspx). According to the release, “Frost & Sullivan believes that Samsara is successfully solving the industry’s key problems through its comprehensive suite of products and that Samsara remains at the forefront of the digital revolution in the connected operations space.”

Then the company released a case study showing international customer Roelofs Transport saw a 60% reduction in non-fault claims using Samsara’s monitoring solutions (https://investors.samsara.com/news/news-details/2023/Roelofs-Transport-Sees-a-60-Reduction-in-Non-Fault-Claims-With-Samsaras-Real-Time-AI-Powered-Solutions/default.aspx). Roelofs uses Samsara to track its European operations across multiple countries between Italy and the Netherlands.

Lastly, Samsara joined a pilot program with the California Bureau of Automotive Repair for automatic monitoring and reporting of smog tests for public sector fleets (https://investors.samsara.com/news/news-details/2023/Samsara-Joins-California-Bureau-of-Automotive-Repairs-Continuous-Testing-Program-Pilot-to-Streamline-Smog-Checks-for-Public-Sector-Fleets/default.aspx). IOT is partnering with customer the City of Ventura to monitor its vehicles and equipment through this program.

TMDX – TransMedics has been on a tear since its November earnings report. Management followed those awesome numbers by bumping the targeted number of airplanes for its internal transportation network from 10-15 to 20 at a late-November investment conference. To that end, management spent $13.2M to purchase another plane December 18 (https://investors.transmedics.com/node/9356/html). Raising this target hopefully bodes well for the volume of transplants TMDX will be able to facilitate in 2024. We should hear more when management participates in the J.P. Morgan Healthcare Conference January 8.

TTD – I’d say The Trade Desk had another slow, steady, efficient year. Even with its core advertising business very closely tied to macro sentiment, TTD continues to innovate and grab market share as the world moves from linear programming to connected TV. While overall advertising barely grew and even declined in some areas during 2023, The Trade Desk continued to post 20%+ growth. Recent Fed news suggesting a loosening economy could lead to a nice bump in upcoming ad spending against some relatively weak comps. With the likelihood of another record level of US political spend next fall, TTD’s 2024 math could easily lead to growth re-acceleration. Fingers crossed…

ZS – Much like CrowdStrike, Zscaler has benefitted greatly from recent tailwinds buffeting the cybersecurity sector. This month it released several AI-powered enhancements to its Business Analytics portfolio and monitoring package (https://ir.zscaler.com/news-releases/news-release-details/zscaler-unveils-ai-powered-analytics-across-cyber-risk-digital). ZS should also benefit as the long-awaited US federal spend for mandated security upgrades appears to finally be hitting the books. I’ve trimmed this allocation some but honestly still feel a bit overweight after a 2023 gain of 98%. A good problem to think about heading into 2024.

My current watch list in rough order includes monday.com (MNDY), MongoDB (MDB), Super Micro Computer (SMCI), and Snowflake (SNOW).

And there you have it. Nice finish! After an agonizing 20-month stretch, you’ll hear no complaints from me about this year-end rally. More importantly, the brutal inflation and interest rate environment which caused most of this cycle’s economic angst seems to be settling. In fact, we are even starting to see signs better days lie ahead (which somehow always seems to happen during US election years). How will the market respond in 2024? As usual, we have no idea. However, I’ll gladly take this year’s outlook over the doom-and-gloom we saw heading into 2023.

Thanks once again for following along, and good luck to everyone in 2024.

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Stocknovice's December 2023 Portfolio Review

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