stocknovice's July portfolio review

Yeah, yeah. I know this week has been a little clunky for most of us who don’t own 90% ENPH (I’m looking at you putnid!!). Instead of wallowing in the aftermath of Monday’s downdraft though, I’m going to take a different tack. When I first put my thoughts together this past weekend, I came away regarding July as a sneaky good month. I found June pretty straightforward. It was three weeks of upward surges followed by a sharp final week dive. I thought July was much subtler prior to Monday’s swoon. For the most part the first 26 days this month were a real-time lesson in the positive effects of compounding on my portfolio. A half-percent here followed by a full percent there and all of the sudden I entered last weekend up 13.8% for July. At that point a remarkable nine of my stocks had posted double-digit gains this month. If things had ended right there – as they did for Saul since it was the last Friday of the month – July would have been my second-best month of 2019 behind January’s market-wide blowout. I’m guessing most others here saw similar results. I view July 1-26 as a great example over a fairly short time frame that a bunch of small, steady gains can really add up.

Unfortunately, this week started with a very different lesson and one most of us grasp much more quickly. Monday saw a LOT of red hitting our screens, mine included. Was it limited to one company? Nope. It seemed to hit everything. Had there been drastic news affecting the business prospects of any of my holdings? Not really, unless you believe one negative Barron’s article signals the start of the SaaS apocalypse. Don’t get me wrong. I am in no way trying to discount the effects of the drop. Paper gains or not, it’s real money that disappears from our accounts when dips occur and that never feels good. However, it’s only fair to acknowledge that this week’s choppiness has been a very good example of the inevitable volatility that comes with high growth stocks.

So July’s lesson ended up being that compounding and volatility must both be considered when managing one’s portfolio. Who knew?!? I merely need to make sure I’m seeing more of the former than the latter to ensure long-term success. That should be easy enough, right?

2019 Results:

	Month	YTD	vs S&P
Jan	21.0%	21.0%	13.1%
Feb	11.5%	34.9%	23.8%
Mar	7.9%	45.5%	32.4%
Apr	5.8%	54.0%	36.5%
May	-0.4%	53.4%	43.6%
Jun	10.5%	69.4%	52.1%
Jul	6.9%	81.1%	62.2%

July Portfolio and Results:

	%Port	%Port				
	31-Jul	30-Jun	1st Buy		Return	vs S&P
TTD	14.4%	12.1%	06/08/17	80.3%	74.3%	
AYX	14.2%	13.7%	08/27/18	75.1%	69.9%	
MDB	12.7%	13.0%	08/29/18	52.7%	49.2%	
TWLO	11.7%	12.3%	08/27/18	59.5%	54.1%	
ZS	11.5%	10.7%	08/27/18	80.0%	75.6%	
OKTA	9.6%	9.5%	06/15/18	96.1%	90.1%	
SMAR	7.0%	7.3%	01/07/19	56.4%	45.5%	
ROKU	5.8%	5.0%	05/13/19	25.6%	22.2%	
PLAN	5.6%	5.3%	05/28/19	29.6%	24.8%	
CRWD	4.3%	3.6%	06/12/19	41.1%	37.8%	
ESTC	3.1%	-	07/15/19	4.4%	5.5%	
PD	-	3.0%	04/11/19	17.6%	13.0%	
SHOP	-	4.5%	08/06/18	81.0%	70.7%	
Cash	0.04%	0.03%				
					Return	vs S&P
				Month:	6.9%	5.6%
				2019:	81.1%	62.2%

Past recaps for anyone who’s interested:

December, 2018:…

Stock Comments:

I dropped from 12 stocks to 11 this month, and as you’ll see I wasn’t entirely comfortable doing it. I made the decision to consolidate only two days ago, so there’s a non-zero chance I’m back up to 12 in reasonably short order if SHOP, SQ and/or EVBG somehow force their way back into my portfolio after earnings this week. As for the July nitty gritty…

AYX – I made a ~.5% add at the very beginning of July with cash freed up as I transitioned out of SHOP. Alteryx responded at the end of the month by posting what I initially view as a very strong earnings report. Revenues reaccelerated to 59.3%, gross profits saw a nice sequential bump, gross margins remain above 90% and the company was slightly profitable on a non-GAAP basis. Alteryx continues to see success in both the land (+34% customer growth) and expand (133% expansion rate) portions of their business. Their call was very positive and their business seems to be humming right along. At first blush I don’t see any reason not to keep AYX as one of my top holdings.

CRWD – CrowdStrike released its first earnings report as a public company on July 18, and it didn’t disappoint. The company maintained triple-digit growth in total revenues (+103%), ARR (114%), subscription revenues (116%), gross profits (140%), subscription gross profits (153%) and total subscription customers (105%) with all of them backed by an appropriately healthy net retention rate. That rate was estimated as 137-141% in their final S1, but on the call was only referenced as beating their internal benchmark of “120% or above”. Since their NRR has fluctuated some in the past, my guess is they’ll stick with the 120%+ figure and use the broader “X consecutive quarters” statement going forward like some of our other companies. Based on their previously released numbers, that number now stands at 5 consecutive quarters.

In other areas, subscriptions came in at 90% of total revenues. GAAP gross margins improved from 59% to 70%, and non-GAAP subscription gross margins jumped from 62% to 73%. Operating, net and FCF margins not surprisingly remain negative but all three made huge improvements year-over-year. Expenses as a percentage of revenues decreased a decent amount as well. Finally, the company clearly surprised analysts on the call with their aggressive increase in FY growth guidance (plus ~10% to 75%). Putting it all together, it appears the company’s business performance has rocketed out of the IPO gate.

CrowdStrike is admittedly a very young and very hot name, but its first set of numbers did nothing to dampen the enthusiasm. They are hitting on all cylinders and have no immediate headwinds that I can see. They guide for $104M (+87%) next quarter, but two things suggest to me they are playing coy. First, given sequential increases of $8.4M (+18%), $10.7M (+19%), $14.1M (+21%) and $15.6M (+19%) the last four quarters I think it’s reasonable to expect something more in the $109-$113M range for 96-103% growth. Second, they answered a question about seasonality by stating “We do see dips in Q1 from Q4, but we generally tend to build from there. But as you think about your models, clearly look at our Q1 and run with that.” I believe those crumbs lend some credence to the thought CRWD can again challenge triple-digit growth next quarter. Saul took a look at some of those the same crumbs and came up with similar figures at $114M and 104%. I haven’t added to my initial IPO-day purchase yet, but I’ll likely look to increase this position going forward.

ESTCAlllll-righty then! After months of waffling on Elastic, I finally bit the bullet on a starter position. My erudite, fancy schmancy reasons for this decision are:

  1. the recent lock up expiration,
  2. the long-awaited and much anticipated price break out on strong volume,
  3. and most importantly the tremendous work done by others in continuing to make the case for the strength of Elastic’s business and products.

My simpler, primitive brain reason is:

  1. I greedily believe ESTC’s stock has better short-to-medium term prospects than Shopify.

I’ll give Elastic credit for its growth numbers. However, I’ll be watching what I believe to be somewhat stagnant margins and cash flow very closely to make sure they firm up moving forward. I’ve admittedly been extremely fortunate to ride SHOP’s momentum during the first half of 2019. Here’s hoping ESTC can do something similar through the second half of the year.

MDB – Mongo’s been flat for a while now, but I’m keeping the faith. Their products are wildly popular in a category they are helping create. I even added a few shares Monday based mostly on the positive comments and AMZN endorsement outlined in this article posted by VanClan (…). Hindsight being 20/20 it turns out Amazon’s January announcement encroaching on Mongo’s turf wasn’t a shot across the bow after all. Instead, it was AMZN’s very odd way of pursuing a beautiful friendship with someone they now tout as a “segment winner and safe long-term bet”.

MDB’s chart has always been a little choppy (I find TTD’s similar), but it consistently seems to find a way to lurch up and to the right if you simply give it enough time. I guess it’s possible something is different with this recent pullback. On the other hand, maybe we should just resign ourselves to the fact the NoSQL revolution is likely to happen in the same fits and starts. I’m siding with the latter thought for now.

OKTA – I gave Okta a small ~.3% bump to start the month with some cash added to my taxable account. In my opinion there’s absolutely nothing wrong with being boring good.

PD – PagerDuty consumed a disproportionate amount of my thoughts as July progressed, especially considering it was my smallest holding. My original thesis still holds, and I believe the company posted a solid first earnings report on June 6. They showed good business momentum, and revenues accelerated for the quarter. However, that acceleration was accompanied by expenses and margins that moved slightly the wrong way which put me in hold mode with my shares. After a nice post-earnings jump the stock very erratically gave most if not all of it back, and it continued to whipsaw as the rest of my holdings made steady gains. I know PD’s roller coaster pattern is not at all unusual for early-stage IPO’s, and I do believe I have the stomach for the volatility if there’s enough conviction behind it. Yet this might be a case where valuation actually does matter, at least for something that came out of the gate as fast as PD. On one hand, posting a 17.6% gain since my 4/11 IPO purchase is nothing to sneeze at. On the other, I couldn’t help but notice only a few here seem to have jumped on this particular bandwagon. As you can see, I developed quite a pro-con, good-bad, yes-but thing with PD as the month went on.

From a big picture standpoint PagerDuty isn’t supported by either the size or initial growth numbers of say CRWD or ZM. In fact, PD’s 49.6% growth last quarter is one of the lower rates in my portfolio despite having the smallest revenue base upon which to build. My gut says that rather than continuing to climb, PD is more likely to settle in and drift for a spell like the early days of ZS, SMAR or ESTC. That made me wonder if my funds weren’t at least temporarily better allocated elsewhere until PD proves it can establish a little firmer footing.

When considering my options, nothing on my watch list jumped out. Instead, I found myself continually returning to my higher conviction companies. The dilemma was whether I was mentally ready to consolidate to fewer than 12 holdings. I wrestled with the idea for quite a while. Then an epiphany occurred. I glanced down at my inspirational investing bracelet emblazoned with HWbR – “How Would bulwnkl Roll?” (…) – and a booming voice from the market heavens answered “Concentrated portfolios are the only way to go!” and “Invest in the best!” So I shook my fist, shouted “Let’s Roll!” at the top of my lungs and sold out of PD at the beginning of Monday’s drop to buy additional shares of TTD and MDB.

PLAN – Not much to report here. My late May, post-earnings buy back into Anaplan has worked out very well so far. There’s probably not much to do or say here until their next earnings report, which is likely to occur sometime in late August or early September.

ROKU – I used some SHOP cash to nudge my Roku allocation ~.5% after a 15% decline due mainly to AMZN announcing a sale on its own featured smart-TV. Since Amazon wasn’t touting a new product but instead discounting a pre-existing one that hadn’t affected ROKU much previously, I viewed this as mostly FUD and added a smidge at $91.90 on 7/2. I originally decided against this purchase since I was already in my 5-7% allocation zone, but changed my mind after I viewed the discount as too attractive to pass up and Roku touched the bottom of that range.

We’ve now experienced a couple instances where an Amazon announcement causes one of our holdings to temporarily dip before bouncing back to challenge new highs. January’s MDB wobble is probably the most notable example. AMZN’s Open Distro gambit against ESTC appears to be ending that way as well. I’m fully aware that a handful of cases does not indicate a trend, but ROKU’s price has thus far followed a similar path by rebounding 14.1% since July 1 while touching new highs along the way. While I’m glad the opportunity to buy the dip has worked out thus far, I view Roku’s August 7 earnings as a MUCH more important indication of its future. Stay tuned…

SHOP – For better or for worse, I’ve followed through on last month’s musings about finally rotating out of SHOP. As alluded to elsewhere in this recap, I exited ~1/3 of my position to start July for roughly equal nibbles at AYX, ROKU and ZS. I swapped the remainder mid-month for a starting position in ESTC. It’s important to note here I have zero complaints with either Shopify the company or the business it continues to build. I’m simply making a judgement call that I can find better returns elsewhere as Shopify enters its next phase. I’ll keep tracking it though, starting with August 1 earnings.

SMAR – Smartsheet’s stock spent most of the three months between its March and June reports drifting sideways and consolidating. It’s been on a steady climb since. SMAR remains a potential mid-50’s grower with an expanding customer base and secondary numbers that are trending the right way. I don’t consider its products quite as essential to business survival as some of my other companies, but there’s no denying the impact Smartsheet has had on the thousands of clients that use it. And since 90% of their subscription customers are on annual contracts, those clients aren’t likely to go anywhere soon. I remain happy with SMAR’s spot in my portfolio.

TTD –Well, whaddya know? An AMZN announcement that affected one of my stocks in a positive way for a change. Rather than give you a recap, I’ll simply stand aside and let CEO Jeff Green explain the move himself:…. I’d say it sounds like the potential for pretty big stuff. I added a small amount during Monday’s dip and believe The Trade Desk’s August 8 earnings call should be wildly entertaining. Hopefully the upcoming numbers will support the inevitable enthusiasm.

TWLO – After Twilio announced its July 31 earnings date I decided to post my ramblings a couple weeks early (…). The company has admittedly become more complicated for me since the SendGrid acquisition and I wanted to bounce those observations off the rest of the board. Thanks to those who shared their replies. It helped.

In the end I decided to stand pat into earnings and see how things played out. The surface numbers were about what I expected. They beat on both revenues (+86.1%) and base revenues (+90.2%). Customers and gross margins continue to grow since the acquisition, and despite higher expenses Twilio was able to sneak some very small profits to the bottom line. As the linked thread above implies, I’m still trying to figure out exactly what Twilio is moving forward. It is definitely an evolving company, but it’s also one that has just two more quarters to find its new identity before facing MUCH tougher comps. My guess is I’ll spend quite a bit of time over the next few days seeing how the market reacts to earnings and determining just how much Twilio I’m comfortable holding.

ZS – As mentioned above, ZS is one of the stocks I bumped up as I rotated out of SHOP. The longer I hold ZScaler, the more I am coming to appreciate the unique competitive position they are creating. Barring some unforeseen circumstance, I picture myself owning it a long time and likely continuing to add bits and pieces as opportunities present themselves.

My current watch list in rough order is ZM, PD, EVBG, COUP, TEAM, SQ, SHOP and PAYC. ZEN and PS have been placed on double-secret probation after earnings reports that showed slowing momentum. I’m curious to see what EVBG, SQ and SHOP have to say when they report over the next few days.

And there you have it. The overall market continued to creep upward this month and lucky for me my portfolio advanced right along with it. In fact, I hit a YTD high of 92.7% on July 26. I have to give props to a strong push from the rear this month courtesy mostly of CRWD (+30.4%), ROKU (+14.1%) and PLAN (+12.8%). All three are executing very well and slowly becoming a bigger portion of my portfolio as a result.

I’d be remiss in wrapping up July if I didn’t highlight a tremendous thread started by Bear on “what we’re good at”: (…). It really simplified some of my current thoughts on high growth investing. The whole thread is worthwhile, but the highlights for me were 1) an awesome reply from brittlerock (…) and 2) this post by GuyLucky reviewing an outstanding article about growth companies (…). The article contains historical commentary on higher growth rates along with some interesting points to ponder when evaluating firms with revenues between $100M and $1B. It also outlines some growth challenges above $1B that I must admit not only influenced my recent decision to swap SHOP for ESTC but will almost certainly affect how I evaluate TWLO going forward. And my education continues…

Thanks for reading and I hope everyone has a great August.