Four trading days into the year and the indexes are clustered around break-even (roughly between plus one percent and minus one percent), and the five of them average out to down four hundredths of a percent, while my entire portfolio has risen almost nine percent in the four days, more than I was able to add on in the whole last three months of 2019!
I’ve been tracking this too. I’ve also tracking where I am relative to the portfolio peak which was +100.0% YTD during 2019 hit on July 26, 2019. The portfolio ended +41.8 for 2019 so it needs +41% in 2020 to reattain the previous peak (1.418 * 1.41 = 2.00). After today’s close the portfolio is +9.45% YTD for 2020 so now it needs to rise another 28.8% (1.0945 * 1.288 = 1.41) to reattain the 2019 peak. I think many who follow this board have similar holdings so they may well be at a similar point on the path to reattaining the July 2019 high.
There was a sector rotation in August - October 2019, but I think it was also a revaluation of the high flying software-as-a-service stocks (among others) that maybe had risen too far, too fast. Here’s what I wrote on September 15 when I argued that the sell off was different recent sell offs that we had experienced in our stocks:
https://discussion.fool.com/you-wrote-that-by-july-of-2015-you-w…
Here’s part of that post:
So here we are in the middle of our violet storm. So what should we do? Everyone will make their own choices. Personally, I closed out most of my options positions so that I will not be in a situation where I am forced to sell (if the stocks continue their decent). I did the opposite in 2015, adding to my options positions when the stocks begin to drop. At the time, I continued to believe that the analysis was solid, that the companies were great, and that the growth would continue. Well, it turned out that I was wrong and that the companies were not on sale after all. There were margin calls and that episode could have wiped me out financially. But it didn’t and I learned some valuable lessons.
Another question is when will our companies recover now that have now dropped between 20% and almost 50% (ESTC being an exception: only down 10%) from their July all-time highs. I don’t know. I tend to think that it could be a while (and they may not have bottomed yet). This is just my opinion, but I would be surprised if these stocks go back to their all-time highs before the end of 2019. It will really depend on 2 things: how the businesses perform (and we’re only getting 1 more cycle of earnings results before the end of 2019) in the coming quarters and when will the companies come back into favor. If the businesses perform then they should also come back into favor but at what multiples. No one can know, but my personal guess is that the highs on most of the companies might be matched in 18 months with a range of 6-24 months. If it’s 6 months then the multiples will need to go back up. If it’s 24 months then the growth of most of the businesses should be able to support the previously high stock prices with a lower multiple; and this is what’s keeping me in the stocks. Again, this is just my personal opinion and I could be wrong.
It’s now been almost 6 months since the peak and 4 months since I wrote the above. My portfolio hit the low on October 22, just about 2 months after the peak. Since then, the portfolio has recovered about 24% (about 13.5% between October 22 through the end of 2019 and 9.45% in the first few days of 2020). We’ve also had 2 quarters of earnings for all (I think all) of the companies. If the companies are averaging 60% growth and assuming that they are basically valued on a multiple of revenue and the growth of that revenue, then 60% annual revenue growth is 26.5% (1.265 * 1.265 = 1.60) growth every six months. This is a very rough calculation but I’d say that one would expect to see mid-20%s stock price appreciation after 6 months assuming no multiple expansion or contraction. This means that the stock price appreciation that we’ve seen (at least in my 9 stocks) since October 22 has been essentially all fundamentals driven (i.e. not multiple expansion) assuming of course that the October 22 prices are the “correct” price. These calculations make me feel particularly optimistic. First, we are heading into another earnings reporting cycle with all of the companies reporting in February and March. Assuming that the 60% average revenue growth continues, I’d expect another 12.5% of expected stock price appreciation (from today’s levels) and that’s without any multiple expansion. If we see multiple expansion then we would expect to see more than 12.5% in the next 2 months. And, of course, if there is multiple compression, then we’d see less than a 12.5% gain.
Chris
