What did I do in this crazy earnings season?

What did I do during this crazy earnings season, or should I say earnings week! I’ve never had all my stocks report at once like this before, that I can remember. On July 27, Amazon and Mulesoft reported and that was easy to digest, but then came last week, where in three days I had Shopify, Paycom, Square, Hubspot, Arista, Ubiquiti, Talend, BlackLine, and New Relic. I couldn’t keep up with all the earnings, conference calls and relevant posts, and often had to act on incomplete information. I just couldn’t keep them all straight in my mind it was happening so fast. And tomorrow is LHIH and Kite, leaving only Splunk for later in the month.

Okay, what did I do?

Amazon reported first and I continued to trim my position. It’s down now to a 3.8% position. Why am I trimming? After all, Amazon is a great company and I’ve ridden it from $550 or so to $1000 in less than two years. However, it’s not one that I can see tripling in price in the next few years, because of size. I’m also a little concerned about possible anti-trust action, especially when Bezos is publically feuding with a powerful politician, and when I see figures thrown around like 45% of all online commerce going through Amazon. Also AWS, their cash producer, was totally dominant at first but now it’s having more and more competition from Microsoft and others. They announced loads of marvelous products introduced, expansions of services and lots of entertainment produced in-house. However, they seem to have gone off and forgotten again about being profitable. That gave me four reasons to trim and I’m more comfortable with my position smaller.

Mulesoft is next. Yes, their sales cycle is lengthening, but heck, their revenues WERE up 57%, their deferred revenue was up 50%, their gross margins were up, their customers are spending more each quarter, etc. I added to my position on the drop. Most of what I bought is now in the green as it’s been coming back. It’s now a 6.4% position.

Then came Shopify, which is a juggernaut! After earnings I added as it fell back from its initial well-deserved rise. It was at about 15%, rose with the price rise, and then I built it back up to a 20.4% position. I know it’s against my principles, but how often in life do you get a Shopify? By the way, they promised profitability in the fourth quarter but I think they are planning a surprise with third quarter profitability.

PayCom I found very disappointing and I’ve sold most of my position. Why? They are slowing down rapidly:

Earnings growth in 2015 was 122%.
Earnings growth in 2016 was 118%
Earnings growth in 2017 Mar Q was 42%
Earnings growth in 2017 Jun Q was just 24%. PE is 64 (at $68) !!!

Revenue growth in 2015 was 50%.
Revenue growth in 2016 was 47%
Revenue growth in 2017 Mar Q was 33%
Revenue growth in 2017 Jun Q was 32%

They have had to spend a lot more on R&D (up 80% to 100% each quarter), but the big thing is they only seem to grow by opening more offices, and with that you get the restaurant syndrome (when you have 25 offices you can add 5 and gain 20%, but when you have 50 offices, adding 5 only gets you 10%. How are they going to keep growing fast? It used to be one of my largest positions but now it’s down to just 1.6%

Square and Hubspot seem to be doing just fine and I added small amounts to each of them. Square seems very focused on making money. Hubspot, especially, will be profitable for the year, is doing much better than expected, and is making major increases in guidance. They are 9.7% and 8.2% positions at present

Then came Ubiquiti. It was up to $66 in the premarket, and I sold almost all of my position at that price. My thinking, without much time to think, was that a rise from 69 cents earnings to 75 cents was hardly worth a 25% rise in price, and that 75 cents was actually down sequentially from 78 cents. But then I read the press release, the conference call, and various commentaries carefully, and decided I was missing the forest for the trees. They have two businesses, a WISP business which is pretty stagnant, and an enterprise business which is growing like mad and is now up to 50% of the whole. I added back a little today (actually at about a dollar less than I sold, and I have about a 2.1% position.

Arista blew it out of the water, and when I had a chance to consider, I decided to add, even though it had run upquite a bit. I bought near the opening this morning so I was lucky to get it at a little sell off, and it is now an 8.75% position.

Everything seems to be going according to plan with Talend. I’m very happy with them and I’ve added a small amount. It’s an 8.0% position.

I thought the sell off in BlackLine was excessive, and I bought some as it went down, but then decided I didn’t need quite that much and sold some back. It was possibly a mistake to add but we’ll see. I now have a 6.1% position.

Finally, I felt that New Relic was slowing DRASTICALLY, perhaps due to its limited TAM, and I sold out of my little half position, at prices close to what I originally paid for it.

I also took a little 1.2% position in Twilio because of all the enthusiasm for it by people I respect on the board saying so many good things about it. I also figured they probably guided to a worst possible scenario with Uber, and would probably beat consensus when they reported tonight.

I also took a little put it on the radar 0.4% position in TelaDoc that Bear and Ryan have talked about. I have no idea whether I will keep it at this point.

Finally I added to my LHI Homes position after they announced July closings. It’s also been rising in price so it’s now a 11.0% position.

Putting it all together, my ups were greater than my downs and I’m now at up 47.3% for the year, up another 1.6% from up 45.7% at the end of July. The average of the three Indexes I follow is down about 1% from the end of July.

I’d welcome comments or questions.

Saul

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Looks like Twilio is up about 11% in early after-hours trading, so you might have been right about them sand-bagging a little.

As you could probably tell if you paid attention to my number of posts on the Rule Breakers board for Ubiquiti, I think they still have a good amount of potential going forward. UBNT has grown to a 6.5% position for me (and that is not counting my gains from a call option position I closed out early on the morning after the earnings announcement).

After Square’s drop, I bought some September call options that I anticipate converting into a starter position. I currently have a 7.3% Shopify position, and although both Square and Shopify are offering similar features with the small loans to their merchants and by having an available payment device, I see room for both companies to be quite successful. Square seems to be a bit more of the present leader for physical locations’ payment options, but for the overall online store infrastructure there is a huge addressable market for Shopify.

If I didn’t know that you are averse to Chinese companies, I would suggest taking a close look at Baozun (BZUN), as it is a sort of Chinese Shopify. Looking at their client list might help quell some of the fears regarding a Chinese company (http://www.baozun.com/clients/). I recently started an options position to potentially convert over to a starter position, pending what I can get done in the next 2 weeks of study and observation of the stock. One possible yellow flag for me so far is that I have yet to find a firm date of when their earnings will be announced. Google Finance still says August 4th (estimated), which didn’t happen. Apparently Jim Cramer took note of Baozun last week (“It is a very good company”), for what little that is worth. https://www.benzinga.com/media/cnbc/17/08/9878611/jim-cramer…

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Wow, at least 31 people read this post because there are 31 recs right now, but no one wants to disagree with me or discuss why I’m reducing Amazon, why I became perhaps overly optimistic about Shopify, why I sold out of New Relic, and almost out of PayCom, why I added to Arista even after the rise, why I added to Mule, and all the rest.

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Hey,

I’d love to disagree but i’m too new and still learning, only been doing this for a year …

But if anything i would be worried about shopify … any slow down in their growth will impact the stock price a lot in my opinion, due to the simple reason their momentum is extremely good at the current time and any slowdown will look like a failure.

I am looking at amazon right now to add to my portfolio but i agree with you that it is not easy for amazon to grow fast anymore, and since i am in my early 30s i think at the current moment i can risk a bit more. Amazon seems to be a “solid” stock that will just keep growing … even if they get hit by antitrust like google just did.

Thank you for all the information, as i do not have the knowledge to find and deduce the things that you do, this forum has helped a lot !

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Looks like Twilio is up about 11% in early after-hours trading, so you might have been right about them sand-bagging a little.

Thanks volfan, I see you did discuss. I’m glad about Twilio and glad I went back into Ubiquiti a little. No chance though of me buying a Chinese stock.
Best,
Saul

Saul, thank you for this very useful summary. I always learn a lot when you give these bits of insight into your thinking!

Some quick questions:

BlackLine (BL): Any thoughts on the reason for the selloff? I’m struggling to understand the market reaction on this one, even as an overreaction.

LGI Homes (LGIH): I am a bit concerned that the skepticism over management’s claims has been replaced too quickly by euphoria at recent results. I suspect it would not take much for skepticism to take hold again and drag the price down by 20% or more. This of course is a short term concern only. Any thoughts?

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BlackLine (BL): Any thoughts on the reason for the selloff? I’m struggling to understand the market reaction on this one, even as an overreaction.

LGI Homes (LGIH): I am a bit concerned that the skepticism over management’s claims has been replaced too quickly by euphoria at recent results. I suspect it would not take much for skepticism to take hold again and drag the price down by 20% or more. This of course is a short term concern only. Any thoughts?

Hi Othalan, LGIH just reported and revenues were up 45.6% and earnings were up 44.8%. That gives them a PE of 12.7 at yesterday’s close. That doesn’t sound like too much euphoria to me. It sounds like it’s still underpriced, at least until a major recession comes along.

I don’t have a clue about what all the skepticism is about with BL. Must be because they haven’t sold any hubs yet. Just a guess.

Saul

SaulR80683: LGIH just reported and revenues were up 45.6% and earnings were up 44.8%. That gives them a PE of 12.7 at yesterday’s close. That doesn’t sound like too much euphoria to me. It sounds like it’s still underpriced, at least until a major recession comes along.

I have to admit those unusually good numbers puts it all in better perspective. Perhaps I’m just overly sensitive to the long time they spent at a P/E below 11. Not that I am all that concerned as LGIH is by far my largest holding!

Wow, at least 31 people read this post because there are 31 recs right now, but no one wants to disagree with me or discuss why I’m reducing Amazon, why I became perhaps overly optimistic about Shopify, why I sold out of New Relic, and almost out of PayCom, why I added to Arista even after the rise, why I added to Mule, and all the rest.

Ok I’ll take the bait.

Made very similar moves to you. Added to SHOP, sold NEWR. I also have been considering selling AMZN for the exact reasons that you stated, but I just haven’t decided where to put those funds.

I also added a whole bunch to my SQ position.

I would say that adding to MULE is questionable until they can prove that they can scale. I sold all to buy more SHOP, SQ, and TWLO.

For the same reason, I’m puzzled by your investment in BL and even more by your addition to it.

I’ve discussed MULE and BL before so I won’t repeat here.

Chris

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OK, I will join it too. I continue to hold AMZN because I won’t sell until AMZN shows me that the investing thesis (decent growth) is broken. While I don’t expect to hold AMZN over the next 20 years, I am happy to hold it another year or two or five so long as it is doing what I think it should be. Is it possible that AMZN is a 3 trillion dollar company in 5 years? I think it could be. Do I have rose colored glasses? Probably guilty as charged, but those glasses lead to excellent sleep.

Best,

bulwnkl

PS Of course, I am still hoping to make 3-5 X on KITE, which was thought to be optimistic when I suggested it to the board. Because I opened that investment with Calls, I am at 283% :o)

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Wow, at least 31 people read this post because there are 31 recs right now, but no one wants to disagree with me or discuss why I’m reducing Amazon, why I became perhaps overly optimistic about Shopify, why I sold out of New Relic, and almost out of PayCom, why I added to Arista even after the rise, why I added to Mule, and all the rest.

You made a good case for MULE when it fell. No reason to argue here.

PayCom did what you said it did.

I am holding Amazon. Not selling it now.

Cheers
Qazulight

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I’m puzzled by your investment in BL and even more by your addition to it.

As I said, I reconsidered and have been selling back what I added. I was thinking that their alliance with Deloitte might give them a real boost, but we’ll have to see.

I don’t see Mule having the same problems as BlackLine. BL has lots of competition apparently. Mule so far doesn’t seem to have any competition except legacy, or internally built, programs. Their problem is their long sales cycle.

Saul

Because I opened that investment with Calls, I am at 283%…

But because you opened it with calls instead of stock, aren’t you figuring that 283% on a very small base invested, so it has much less actual impact. I started with real stock at $47.50 (at your suggestion, thanks) and so I’m now up about 147% (247% of where I started), but with real money.

I think actual stock was the better investment, but I don’t know anything really about options.

Saul

…but no one wants to disagree with me or discuss why …

You and I already discussed your lightening of Amazon; Arista seems pretty obvious.

I did take a small bite of Blackline and quickly am down almost 25%. This was pure gambling on my part, so I got what I deserved, but it’s small enough. Does anyone have a good investing thesis for Blackline today?

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I tend to quickly develop a keen interest and investing curiosity when Saul and Co bring a new stock to this board. However I just cannot conjure up any excitement for BL. I just don’t get what they do which is so revolutionary and the system migration is a challenging sell to most established companies

Hi Saul,
I actually converted my profits to stock a while back. While there is no arguing with your success, using calls for a binary event with a volatile company makes sense. I won’t drone on about the details, but the number of calls were kept appropriately small, the profits are real, and I now own the stock outright. I had lower risk of loss than owning the stock outright, and I converted into the number of shares I targeted as if I were buying the stock outright.

Best,

bulwnkl

PS No one bit on the Amazon hyperbole?

bulwinkl, I have started diving in to options a pretty decent amount myself lately. My guess is that they simply aren’t worth bothering with once growing a portfolio to a decent size (which some quick math would imply that Saul’s portfolio is at based on 26% average gains over the period since 1989). There is a bit of additional math/complications involved in dealing with options, but after studying them closely for about a year now, I am starting to feel like their pricing in relation to the underlying share price and the time to expiration is almost intuitive.

Having gained some options experience already at the age of 33 with a relatively meager self-managed portfolio, I am guessing my future use of options will probably continue. Although at a certain portfolio size level I will probably limit options use solely to positions that require little management/attention from me. My investing philosophy is morphing into an amalgamation of the philosophies of Warren Buffett, Saul Rosenthal, David Gardner, with some options added on top (which I can’t attribute solely to Jim Gillies or Jeff Fischer, but is more my own self-developing strategy).

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no one wants to disagree with me or discuss why I’m reducing Amazon, why I became perhaps overly optimistic about Shopify, why I sold out of New Relic, and almost out of PayCom, why I added to Arista even after the rise, why I added to Mule, and all the rest.

Putting it all together, my ups were greater than my downs and I’m now at up 47.3% for the year

Saul, has it occurred to you … it’s kinda hard to disagree with 47% returns in early August. Well done!

Dan

… and the board has heard all my reasons for believing in SHOP so I won’t even mention your dangerous over-enthusiasm there. :slight_smile:

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Wow, at least 31 people read this post because there are 31 recs right now, but no one wants to disagree with me or discuss why

Saul - I was intrigued by your very swift pivot on PayCom which you had always enthused about. I know Bert was calling time on the Workday and PayCom crossing the Rubicon but I was surprised by your about turn. Was it more a valuation thing or more a operating model/lack of leverage thing. If it was on a P/E of 30 would you have arrived at a different conclusion or was it a basic lack of operating model leverage with R&D investment and new office openings? On both accounts, I thought it was a valid point they were making that these YoY growth numbers were lapping the toughest compares they have had of 65% and 50% prior year growth levels for Q1/Q2.

I agree with your other conclusions especially about Amazon although slightly surprised you sold out so immediately on the price rise of UBNT to then re-enter. I would say Mule holds the most risk from your latest movements (or least conviction for me). Splunk seems to be an enigma - they got slaughtered last time after very positive results. I just can’t see what they can do to make positive headway - it seems it has a greater risk of a drop than a gain.

Ant

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I agree with your other conclusions… although slightly surprised you sold out so immediately on the price rise of UBNT to then re-enter.

Hi Ant,

I was in Ubiquiti because they had been saying that they would re-accelerate with the enterprise business (and I liked their model). I had had an 8% position, which I had built up to when it was down at $47. I’ve been in it for over a year. It worked up to about $53 before earnings. Then it announced earnings which looked like no progress to me (earnings up negligibly to 75 cents from 69 cents, and down sequentially from 78 cents). Then I look in the pre-market and see it UP(!) 25% (Twenty-five percent! Overnight!) to $66!

I thought “that has to be a misprint” but I was able to sell most of my position at $66 in the pre-market. Then I read the conference call, and realized that margins were down because these were new products which they were just learning to manufacture, but gross margins would rise, and enterprise business was growing at 50% per year and would soon be dominant, so I got over my immediate shock, and bought some back (it’s a 2.4% position now).

I was intrigued by your very swift pivot on PayCom which you had always enthused about… Was it more a valuation thing or more a operating model/lack of leverage thing. If it was on a P/E of 30 would you have arrived at a different conclusion or was it a basic lack of operating model leverage with R&D investment and new office openings? On both accounts, I thought it was a valid point they were making that these YoY growth numbers were lapping the toughest compares they have had of 65% and 50% prior year growth levels for Q1/Q2.

I felt it was a genuine slowing, due to the new offices model and the R&D spend. When you are growing EPS at 117% as they did in 2016, a PE of 70 seems not so out of line. When earnings growth then drops to 42% and 24% as they did in the last two quarters, and the PE is still 60 to 70, that is a real change in circumstances. At least it seemed so to me, but I’ve been wrong before.

Saul

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