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No. of Recommendations: 131
GauchoChris PORTFOLIO UPDATE 3/6/2020

My portfolio had its largest single day drop (about 10%) on Friday, March 6. It also had its largest absolute dollar drop. Things are getting kind of crazy. There’s lots of volatility, lots of fear, and lots of uncertainty. The CCN Fear & Greed Index now stands at 6 so almost as low as it can go. The index hit a low of 2 on December 24, 2018. Back then the “market” had already had a 20% drop from the previous peak, it had taken a few months to drop to that level, and the Fed’s 3 25 basis point cuts had a lot to do with that drop, IMO. Back then the Fed cutting rates could easily fuel a comeback. Today, the S&P 500 is about 12% below its peak so it hasn’t fallen as far as it did in late 2018. It has fallen very quickly as the peak was on February 18th, just 12 trading days ago. While the decline has been rapid, it has not yet been as deep as other declines. Now, the S&P 500 contains 500 companies across many industries; some of those industries (e.g. airlines, hotels, casinos, travel, restaurants, and those with complex supply chains) will suffer serious damage to their short-term and mid-term business operations, revenue, etc. It is possible that some small companies could go out of business. Others are less susceptible. And still others will benefit from what is occurring. The response of governments, companies, consumers, and citizens will have a far bigger impact on the workings of commerce than the virus itself will have. Are these responses prudent or an overreaction? I don’t know, but, as an investor, I can see that the responses are happening and are VERY likely to continue happening. The amount of disruption and change in behaviors that are happening right now are unprecedented in scale….at least going back to World War II. Globalization that has occurred over the past several decades has so dramatically changed the world and its interdependence when compared to the 1930s and 1940s.

My portfolio is made up of just 10 companies. Here are my current allocations:


3/6/20 1/31/20
AYX 36.7% 34.6% added
CRWD 13.0% 15.4%
MDB 10.0% 10.5%
OKTA 8.6% 8.4%
ZM 6.8% 5.5% trimmed
DDOG 5.0% 3.6% added
TTD 4.5% 6.1% sold leaps
ROKU 3.5% 1.2% added
SMAR 3.2% 4.2% trimmed
GH 1.1% 3.4% sold about half
Cash 9.7% 7.3%


When I look at these 10 companies, I see that none of them are in the direct crosshairs of the coronavirus. Most are IT software companies that will more or less continue business as usual. Well, maybe they will make some changes to how they will operate (less face to face sales calls, cancelled analyst days and user conferences and such), but I would expect no major disruption to their businesses. If there is a massive downturn in the global economy and unemployment rises, they might lose some of their users (i.e. if their customers have layoffs the number of users will drop as a result) and their revenue growth rates may slow temporarily. But their services do make their customers more competitive via the digitization transformation, AI, and cloud transition megatrends which will all continue regardless of the fallout from the coronavirus. Companies know that investing in these initiatives are a prerequisite to effectively competing and effectively competing is essential for their survival. So long term and for the most-part, I expect there to be no material effect on my companies, their businesses, and ultimately their stock prices.

Since my last portfolio update, I have not completely sold out of or added any new positions. I have the same 10 positions that I had on 1/31/2020. However, I have made a number of adjustments:

• Added to my already oversized position in AYX. After earnings, I added a large medium sized options position after their blowout earnings result. The bet is that their business acceleration will continue and they will have very strong Q1 result reported in early May.

• Trimmed ZM a couple times as it has risen so much since my purchases in December and January. I also day traded it a few times. ZM is so volatile so I may take advantage of the wild swings as they occur.

• Added to DDOG. I was hoping for a big pullback due to the lockup expiration on 3/17/2020. I really wanted a larger position after the great earnings result. I may add a little more if there is a drop due to the lockup.

• About tripled my ROKU position.

• Trimmed my SMAR position to put more into stocks that I have more conviction in. I like SMAR’s financial metrics and consistently high growth but I don’t see SMAR as a clear dominant winner in a huge market.

• Sold my TTD leaps. The leaps were Jan 2021 $130 call options that I bought in December 2018. I sold them when TTD was at about $308.


• Cut my GH position by more than half after learning that the expected FDA approval date of theirliquid biopsy test would likely be delayed from H1 2020 to H2 2020.

• Had increased my cash position from 7.3% on 1/31/2020 to about 13.5% but put much of that to work yesterday (on 3/6). About 40% of my cash is reserved for my taxes in April.

PORTFOLIO PERFORMANCE


GC S&P500(TR) Difference
Jan31 +25.7% 0.0% +25.7%
Feb29 +27.7% -8.3% +35.9%
Mar6 +21.9% -7.7% +29.5%


While things may seem bad with all the news, the S&P500 is down only 7.7% YTD. My portfolio is still doing quite well, and I am very happy with how well it’s been holding up. I’ve been tracking my portfolio weekly versus the S&P500 for over a year now; I do this for 2 reasons. First, it helps me keep short term movements in the perspective of the long-term. Second, I do use some leverage in my portfolio and having the historical, weekly movements of my portfolio and the S&P 500 over a long period helps me decide when to add leverage and when to pull back.

Below, I’ll post the weekly results back to the high of 2019 (7/26/2020):


Date GC S&P Delta

2019

7/26/19 100.0% 22.1% 78.0%
8/2/19 85.6% 18.3% 67.3%
8/9/19 87.3% 17.8% 69.5%
8/16/19 81.4% 16.7% 64.6%
8/23/19 78.5% 15.1% 63.4%
8/30/19 83.3% 18.3% 65.0%
9/6/19 73.3% 20.5% 52.8%
9/13/19 46.3% 21.7% 24.6%
9/20/19 52.8% 21.1% 31.7%
9/27/19 37.6% 19.9% 17.7%
10/4/19 47.5% 19.6% 27.9%
10/11/19 49.0% 20.4% 28.6%
10/18/19 30.2% 21.0% 9.1%
10/25/19 34.2% 22.5% 11.7%
11/1/19 35.2% 24.4% 10.8%
11/8/19 30.0% 25.5% 4.5%
11/15/19 40.4% 28.7% 11.7%
11/22/19 49.0% 26.3% 22.7%
11/29/19 58.7% 27.6% 31.1%
12/6/19 45.9% 27.9% 18.0%
12/13/19 37.2% 28.9% 8.4%
12/20/19 42.1% 31.0% 11.1%
12/27/19 44.0% 31.8% 12.2%
2020
1/3/20 4.5% 0.1% 4.4%
1/10/20 14.8% 1.1% 13.7%
1/17/20 19.6% 3.1% 16.5%
1/24/20 22.1% 2.1% 20.0%
1/31/20 25.7% 0.0% 25.8%
2/7/20 28.1% 3.2% 25.0%
2/14/20 39.8% 4.9% 34.9%
2/21/20 29.1% 3.6% 25.5%
2/28/20 27.7% -8.3% 35.9%
3/6/20 21.9% -7.7% 29.5%


These are the results of my specific portfolio, but they would be mostly similar to other portfolios that are comprised of the highest growth (mostly SaaS) stocks. So perhaps looking at my weekly tracking can put things in perspective if you have a high growth portfolio with similar names. The sector rotation that started in late July 2019 was brutal for the portfolio. The peak to trough drop was about 37% from July 26 through October 22. Interestingly, the drop that occurred in 2018 (Sept 4 through Dec 24) was also 37%. The recovery time of the 2018 drop was much shorter than the recovery time of the 2019 sector rotation drop. In 2018, it took 176 days for the portfolio to go from peak to peak (9/4/18 to 2/27/19) and only 65 days to go from trough to previous peak’s highwater mark (12/24/18 to 2/27/19). My portfolio still has not yet closed above the 7/26/2019 peak, but it came within a whisker on 2/18/20. The portfolio closed up +40.7% YTD on 2/18/20 and it did crossed the previous 7/26/19 highwater mark during the intraday that day. It was so close but it didn’t happen. My portfolio is not exactly the same as others who invest in similar stocks so I’m sure that there are some with high growth portfolios who re-attained a closing peak above their 2019 peak. I will discuss my thoughts on where we are some more at the end of this update.

COMPANIES IN THE PORTFOLIO

AYX (36.7%): AYX is my largest position. It is the one company about which I can see absolutely nothing wrong. I have written about it extensively. The last earnings results on 2/13 were spectacular, and when combined with the with previous two earnings results, it looks even better. My position is 36.7% position is comprised of three separate bets. The shares that I own in AYX comprise 27.2% of my portfolio and are a long-term bet on the company. The leaps that I own comprise about 5.6% of my total portfolio; I purchased these in Oct/Nov 2019 and they are a medium-term bet on AYX performing very well for the next 2 years; I expect to close this options position within the next 18 months. The balance of my AYX allocation is a bet on the stock doing well shortly after the Q1 earnings results are reported in early May; I will be out of this part of the position in about 2 months.

CRWD (13.0%): CRWD will report Q4 earnings on 3/19. I have not changed my position size since my last portfolio update, but I have milked some profits by selling puts. I reduced the put selling once the stock got above $60. The business has shown great operating leverage improvement, business momentum, and continued amazing growth. My expectation is that this continued in their Q4, and I expect that the Q4 report on 3/19 will reflect that. CRWD also seems to be adding new customers almost effortlessly (compared to ZS for example). I suspect that CRWD is benefiting from a virtuous cycle where having more customers improves their threat detection and remediation capabilities which in turn attracts more customers and so on.

MDB (10.0%): I haven’t changed my allocation since 1/31/20. I see MDB as a clear long-term winner in a fast growing market that will be enormous. In the short term, perhaps MDB may be in store for some short-term growth deceleration. Without the penalty of taxes, I might be inclined to sell some. The earnings will be reported on 3/17 so I’ll reassess then.

OKTA (8.6%): I haven’t changed my allocation since 1/31/20. OKTA reported Q4 on 3/5 and the results were great. No meaningful change in growth. Continued and strong new customer additions, especially those in large enterprises. Large enterprises have an average of 4 year duration contracts with OKTA!!! That’s a huge vote of confidence in their future. Their operating leverage and cash flow continue to improve. OKTA is on track compared to what I was expecting. They are seeing (so far) ZERO effect on their business from the coronavirus outbreak. OKTA announced that their Oktane20 conference will be virtual. OKTA is the clear dominant company in its market. I see no reason at all to change my allocation after the latest result.

ZM (6.8%): Zoom, zoom, zoom. You can do it from your room! Zoom, zoom ,zoom. You can do it from your screen, free from COVID nineteen!
https://www.youtube.com/watch?v=llyiQ4I-mcQ
I feel very fortunate (and lucky) that I started to add ZM to my portfolio in Dec 2019. Fortunately, I added a mid-sized position. COVID-19 is turning out to really move the stock. It’s been very volatile, and I have managed to day trade it a few times for some nice profits. I also trimmed some shares before earnings and some more in the after hours after earnings. Despite these sells, my ZM position is still larger than it was on 1/31. ZM had a good earnings result but the revenue growth has continued to decelerate: 126%, 120%, 108%, 103%, 96%, 85%, and now down to 78% in the most recent quarter that was reported. The valuation is very high and without the probable tailwinds provided by the COVID-19 responses to restrict travel and face to face meetings, I think ZM’s deceleration would have probably continued. ZM has been public a long time only long enough for them to give guidance for the next quarter 4 times with 12.2%, 6.8%, and 7.0% beats in each of the last 3 reported quarters, respectively. If they continue this trend and beat by 7% in Q1 2021 then we can expect about $215M in revenue next quarter and only a slight deceleration in revenue growth (78% down to 76%). Perhaps the COVID-19 reactions will arrest ZM’s revenue deceleration. I think that ZM is very likely to be very volatile in the near term because it serves as sort of a COVID-19 safe haven when the market is falling and a place to take money from when the market is rebounding. I am very tempted to trade in and out of ZM (only the shares in my tax deferred accounts) when the stock price is fluctuating so much and to such a large degree (sometimes we’ve seen 20% swings in a single trading session!!).

DDOG (5.0%): I’ve added to my DDOG position on several occasions since 1/31/20. Their last earnings report was quite extraordinary: operating leverage keeps improving, company is expanding customer count and spend per customer tremendously and seemingly with minimal effort. The IPO lockup expiration is on 3/17, and I was hoping to pick up shares on the cheap when employees and insiders unload some of their shares. So far we have not really seen that opportunity materialize. We’ll see if the relative price of DDOG (relative to other SaaS companies) declines in the next few weeks. In any case, I doubt that I would want to increase my allocation above 7% because 1) DDOG is highly valued, and 2) because their market has demonstrated that it can be quickly disrupted with some new competitors rapidly take share from previous leaders.

TTD (4.5%): I cut my TTD position recently when the shares were trading at around $308 (discussed above). The company reported their Q4 on 2/27. The rhetoric by CEO Green continued along the same lines as it had on the previous several calls. The growth doesn’t quite match the rhetoric yet but it’s “supposed to” in 2020. This year is supposed to be a big year in ad spending especially since we have a presidential election in the United States. On the call, Green mentioned the strong spending from one or more presidential candidates. We all know that he was referring to Bloomberg who is reported to have already spent $500 million on this 2020 presidential campaign. But now that Bloomberg has dropped out of the race, the combined spending by the remaining candidates will be MUCH lower than if Bloomberg had remained in the race. Perhaps this means that Q1 will show the biggest boost to TTD from the 2020 race. Anyway, I’ve sold enough of my position for now and am willing to let the rest ride through 2020. Hopefully, TTD will deliver on its promises.

ROKU (3.5%): ROKU is my other stock that benefits from the shift from linear TV to streaming and from the increased cord cutting. ROKU reported Q4 earnings on 2/13, and I think the results were really good (actually better than I was expecting). Platform revenue growth (the growth that I think is most important) did not decelerate very much (71% compared to 79% in the previous sequential quarter) and the top of the 2021 guidance range calls for 64% platform revenue growth….and ROKU has 3 full quarters to raise this 2021 guidance. I expect that they will grow platform revenue growth about 75%+ in 2021. The company’s platform revenue gross margins are around 62% (so not as good as most of our SaaS companies) but still good. This was enough to keep me in when the stock was around $130. Since it’s dropped, I about tripled my position. ROKU’s future is also highly dependent on them having success in penetrating new international markets. They have already had success in Canada, the UK and Brazil. I’ll be watching closely to see how they fare in entering other countries in 2020.

SMAR (3.2%): Since 1/31 I trimmed my SMAR position a few times, not because I don’t like SMAR but because I liked some others better. SMAR has not yet reported their Q4 (scheduled for 3/17/20). SMAR has been growing consistently in the high 50%s and they have also been very successful in growing the number of customers who spend >$50K and >$100K. In addition, their dollar based net expansion rate has been consistently high at 134% for the past 4 quarters. The financial metrics look outstanding. So why don’t I have more invested in SMAR? I like companies with solid and improving financial metrics but I also love companies that are THE dominant company is a large and growing market. I’ll explain more on that in a bit.

GH (1.1%): GH is my smallest position at 1.1% of my portfolio. I cut GH back after they reported their Q4 on 2/24. GH is working on getting FDA approval for their liquid biopsy test. On the earnings call, it became clear that GH now expects approval in H2 2020 rather than in H1 2020. This is why I cut my position from 3.4% to 1.1%. That and the fact that the stock that I moved the funds into (ROKU) had great results and big decline in its stock price. I figure that ROKU is a better bet to increase in the remainder of H1 than GH.

SOME THOUGHTS ON SELCTIONS AND ALLOCATIONS

In selecting my positions and the allocation size in each position I consider the financial metrics and the degree/speed to which/with which those metrics are moving. I also consider my view of how I see those metrics moving in the future. These factors are very important. The financial metrics don’t just mean revenue but other metrics as well. For me to take a large position or a decent mid-sized position (>5%), the company must also display dominance in its market. All of my top positions are displaying that very strong, if not complete, dominance. Look at AYX, CRWD, MDB, OKTA, ZM, and DDOG.

ADDITIONAL THOUGHTS

We are currently in uncertain times. In the short term, there are a lot of unknowns. The market hates uncertainty. How bad is this virus? Will it overwhelm healthcare systems in the US and around the world? It’s certainly possible and some say it’s probable. If this does occur then we should be extra cautious with our general health and well being….on one wants to have an accident that requires emergency care when the hospitals are all full. With the Fear & Greed Index at 6, how much worse can things get? Hypothetically, I think things could get could get a lot worse for many people, and it could get a lot worse for the “market” (stocks in general). Recall that we are only down 12% from the all-time highs. The way the world conducts business is changing for now. Things could freeze up. Central banks and governments are trying to prevent that from happening (rate cuts, other accommodative actions, and target fiscal spending may come). Some of these changes may stay with us, but after this virus threat gets cleared, things will return to normal and in retrospect it will look like a blip on a long-term chart. In the long run, we may not even notice that there was any disruption. Unfortunately, many people will likely die so for them and their loved ones the effects will be tragic.

As it stands now, my portfolio is about 15% below the 7/26/19 peak. Perhaps valuations were getting frothy then but we have also had 3 earnings reports on companies that are on average growing revenue more than 60% per year. These nine months have to be good for a 40% increase in stock price. As the growth in the fundamentals of our companies keep improving every quarter, the stocks become better and better deals if the stock prices stagnate (or even better as they decline).

Chris
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