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No. of Recommendations: 175
The year 2020 was unlike any other. Certainly within my lifetime, this past year was the most disruptive. The number of deaths and personal turmoil felt by millions around the world were and continue to be tragic. Fortunately, we can all look to a better and brighter future in that respect. While things are currently at their worst, the end of this pandemic is within reach. For most, life should return to a semblance of normal this year. We will be able to travel freely without fear, go to the movies, eat out, and socialize with friends, family, and even strangers. I know for me, having isolated myself since March, it will probably be the most liberating feeling I have ever felt. Last year was also disruptive to companies within industries that require human-to-human contact to function properly; these companies really got hammered.

On the other hand, companies that enable digitization and remote interaction flourished. It was clearly an uneven year for companies. In 2020, the S&P 500, which I usually consider a pretty good proxy the overall stock market, had an 18.4% return (this includes dividends as well as stock price appreciation). That sounds like a pretty good year, clearly above the average annual return for the index. Digging deeper, I went through the list of S&P 500 component companies and manually counted the number of companies that had positive and negative returns for the year. I tallied 319 companies with a positive return and 179 companies with a negative return; this adds up to only 498 companies so I must have miscounted. The best performer was TSLA (+743%), and the worst performer was CCL (-57%); it was a disastrous year for the cruise ship industry. The S&P 500 is market cap weighted so the largest companies contribute proportionally more to the index’s overall return, and, thus, it comes as no big surprise that the stock market did better than the economy; we know that, as a group, small businesses really suffered in 2020 whereas large companies weathered the storm, or in many cases gained share, because they had strong balance sheets and more resources to adapt to changes in people’s behavior. So, financially speaking, 2020 was a year of tremendously unequal financial fortunes.

Since I was invested primarily in publicly traded SaaS companies, my portfolio’s performance last year was by far the best of my lifetime. I venture to say that it would be highly unlikely that any future year could come close to matching my 2020 portfolio return. Even better, the 2020 return of 245.6% compounded on top the very excellent returns of 2017, 2018, and 2019 provided a total 4-year return of +1135% compared to the S&P 500’s 4-year return (including dividends) of +81.3%. This is a staggering difference. Considering a $10,000 investment at the start of 2017, the funds if invested in the S&P 500 would have grown to $18,125 whereas the funds invested in my portfolio would be worth $123,463 (pretax value). Of course, I had to pay more capital gains taxes because I make frequent adjustments to my portfolio’s composition, but I’ll gladly trade more taxes for much higher returns!


Year Return Cumulative Return
2017 +61.6% +61.6%
2018 +55.9% +152.0%
2019 +41.8% +257.3%
2020 +245.6% +1134.7%


PRIOR 2020 PORTFOLIO UPDATES

01/31/2020: https://gauchorico.com/2020-01-31-portfolio-update/
03/06/2020: https://gauchorico.com/2020-03-06-portfolio-update/
03/13/2020: https://gauchorico.com/2020-03-13-portfolio-update/
03/31/2020: https://gauchorico.com/2020-03-31-portfolio-update/
04/03/2020: https://gauchorico.com/2020-04-03-portfolio-consolidation/
Rationale for Consolidation: https://gauchorico.com/rationale-for-further-portfolio-conso...
04/30/2020: https://gauchorico.com/2020-04-30-portfolio-update/
06/05/2020: https://gauchorico.com/2020-06-05-portfolio-update/
06/30/2020: https://gauchorico.com/2020-06-30-portfolio-update/
08/07/2020: https://gauchorico.com/2020-08-07-portfolio-update/
09/30/2020: https://gauchorico.com/2020-09-30-portfolio-update/
10/31/2020: https://gauchorico.com/2020-10-31-portfolio-update/
12/04/2020: https://gauchorico.com/2020-12-04-portfolio-update/

PORTFOLIO PERFORMANCE


YTD Performance

GR port S&P500TR
Jan +25.7% 0.0%
Feb +27.7% -8.3%
Mar -2.9% -19.6%
Apr +16.7% -9.3%
May +64.7% -5.0%
Jun +110.3% -3.1%
Jul +144.7% +2.4%
Aug +144.3% +9.7%
Sep +187.0% +5.6%
Oct +172.6% +2.8%
Nov +231.7% +14.0%
Dec +245.6% +18.4%


Overall, the portfolio was up 4.2% in the month of December. After no new all-time highs since October 13th ATH of +250.3%, December produced 4 ATHs on consecutive trading days between 17Dec and 22Dec, inclusive. The highwater mark was achieved on 22Dec at +287.2% YTD. The year was closed out at +245.6 which is 10.8% below the ATH.

Some portfolios with similar allocations have seen different performances. I began options trading in April 2020 sort of as an experiment. Of my portfolio's 245.6% increase, 22.7% was produced from options trading and 222.9% was from investing. In other words, had I not engaged in my options trading experiment, my portfolio would have gained only 222.9% in 2020. For a post on my options trading results please see the following link:

https://gauchorico.com/2020-the-year-i-became-an-options-tra...

The year was anything but a smooth ride. At the start of 2020, the portfolio was still recovering from a brutal sector rotation out of SaaS between 26Jul2019 and 22Oct2019. The portfolio rallied for 9 straight weeks from mid-December 2019 until mid-February 2020 before getting rapidly sucked down in the pandemic panic. The portfolio dropped 45% in a matter of 27 days, which I believe may have been the most rapid large fall in US stock market history. The world’s central banks’ and governments’ fast monetary and fiscal stimulus packages averted financial armageddon and sparked one of the most monstrous rallies ever. It was one of the worst times to be on the sidelines with cash. My portfolio hit a new all-time high on 12May followed by 34 more ATHs by the end of 2020.

In a concentrated growth stock portfolio a lot of volatility comes with the territory. Some people can’t stomach volatility and opt for more consistency with lower expected long-term returns although this approach may not have worked so well in 2020. I prefer higher long-term returns with a tolerance that my portfolio will probably have wilder swings and occasional massive drops. The table below shows some of the larger swings over the past few years plus some smaller swings that occurred in 2020:

PEAK—BOTTOM	          % DROP	Days: Old Peak to New ATH
Sep18 - Dec18 -37% 176
Jul19 – Oct19 -37% 207/291*
Feb20 – Mar20 -45% 84
9Jul20 – 16Jul20 -14% 25
5Aug20 – 11Aug20 -25% 27
13Oct20 – 10Nov20 -27% 5

*Intraday recovery/Closing price recovery


The portfolio has dropped 10.8% since the last ATH of +287.2% YTD on 22Dec. Especially after a new ATH, I’m always prepared for a 50% drop in my portfolio. The overall market was rising during the last few days of 2020 while my portfolio was falling off of the ATH.


Below I’ve appended new portfolio highs onto the table that I posted in my last update. The entries from 02/18/20 through 12/03/20 are reposted and the entries after 12/03/20 (bolded) are new.


02/18/20 +40.7% <<< YTD high prior to lockdowns
03/06/20 +21.9% <<< portfolio down 10% on the day
03/09/20 +3.6% <<< portfolio down 15% on the day; Fear index=3
03/11/20 +0.6% <<< portfolio down 8.8% on the day; Fear index=4
03/12/20 -11.0% <<< portfolio down 11.4% on the day; Fear index=2 (1 intraday)
03/16/20 -22.8% <<< portfolio down 18.9% on the day; Fear index=3
05/22/20 +61.0% <<< new all-time high (ATH)
05/27/20 +47.5% <<< portfolio dropped 15% (intraday 5/27) in 3 trading days
05/29/20 +64.7% <<< new ATH (end of May 2020)
06/03/20 +78.8% <<< another ATH; day after CRWD and ZM earnings
06/10/20 +79.4% <<< another ATH
06/15/20 +84.6% <<< another ATH
06/16/20 +89.4% <<< another ATH
06/17/20 +92.1% <<< another ATH
06/18/20 +101.7% <<< another ATH
06/19/20 +103.3% <<< another ATH
06/22/20 +111.4% <<< another ATH
06/25/20 +114.6% <<< another ATH
07/01/20 +119.7% <<< another ATH
07/02/20 +121.4% <<< another ATH
07/07/20 +125.7% <<< another ATH
07/08/20 +139.9% <<< another ATH
07/09/20 +147.0% <<< another ATH
07/13/20 +118.6% <<< portfolio down 10.5% on the day (biggest $ drop ever)
07/16/20 +113.1% <<< July trough
08/03/20 +156.9% <<< another ATH
08/04/20 +158.7% <<< another ATH
08/05/20 +158.8% <<< another ATH
08/07/20 +108.3% <<< OUCH! Biggest dollar drop ever (and -19.5% in 2 days!)
08/11/20 +94.6% <<< August trough
09/01/20 +177.9% <<< another ATH (day after ZM reported)
09/22/20 +187.1% <<< another ATH
09/24/20 +169.5% <<< trough
10/01/20 +196.6% <<< another ATH
10/05/20 +200.7% <<< another ATH
10/07/20 +209.3% <<< another ATH
10/09/20 +223.0% <<< another ATH
10/12/20 +234.8% <<< another ATH
10/13/20 +250.3% <<< another ATH (portfolio peak)
11/09/20 +173.8% <<< -14.75% in one day and largest $ drop ever (ouch!)
11/10/20 +155.1% <<< -6.8% on the day and -20.6% in 2 days; November trough
11/30/20 +231.7% <<< end of November
12/01/20 +195.2% <<< day after ZM reported (-11% on the day)
12/03/20 +212.3% <<< day after CRWD reported (+7.3% on the day)
12/17/20 +251.2% <<< another ATH
12/18/20 +263.3% <<< another ATH
12/21/20 +273.9% <<< another ATH
12/22/20 +287.2% <<< another ATH and 2020 peak
12/31/20 +245.6% <<< current portfolio reading



Below is the weekly portfolio YTD performance.


GR S&P Delta
01/03/20 4.5% 0.1% 4.4%
01/10/20 14.8% 1.1% 13.7%
01/17/20 19.6% 3.1% 16.5%
01/24/20 22.1% 2.1% 20.0%
01/31/20 25.7% 0.0% 25.8%
02/07/20 28.1% 3.2% 25.0%
02/14/20 39.8% 4.9% 34.9%
02/21/20 29.1% 3.6% 25.5%
02/28/20 27.7% -8.3% 35.9%
03/06/20 21.9% -7.7% 29.5%
03/13/20 -4.8% -15.7% 10.9%
03/20/20 -6.8% -28.3% 21.6%
03/27/20 -2.4% -21.0% 18.5%
04/03/20 -12.5% -22.6% 10.0%
04/10/20 3.1% -13.2% 16.2%
04/17/20 18.7% -10.5% 29.2%
04/24/20 20.5% -11.7% 32.1%
05/01/20 13.8% -11.8% 25.6%
05/08/20 37.7% -8.7% 46.4%
05/15/20 47.8% -10.7% 58.5%
05/22/20 61.0% -7.8% 68.8%
05/29/20 64.7% -5.0% 69.7%
06/05/20 67.4% -0.3% 67.7%
06/12/20 74.8% -5.0% 79.8%
06/19/20 103.3% -3.2% 106.5%
06/26/20 107.8% -6.0% 113.7%
07/02/20 121.4% -2.1% 123.5%
07/10/20 144.2% -0.4% 144.6%
07/17/20 115.4% 0.9% 114.5%
07/24/20 113.2% 0.6% 113.5%
07/31/20 144.7% 2.4% 142.3%
08/07/20 108.3% 4.9% 103.3%
08/14/20 102.9% 5.7% 97.3%
08/21/20 124.4% 6.5% 118.0%
08/28/20 135.5% 10.0% 125.6%
09/04/20 142.9% 7.5% 135.4%
09/11/20 143.6% 4.8% 138.8%
09/18/20 161.7% 4.2% 157.5%
09/25/20 181.0% 3.5% 177.4%
10/02/20 192.0% 5.1% 186.9%
10/09/20 223.0% 9.2% 213.8%
10/16/20 230.7% 9.4% 221.3%
10/23/20 204.8% 8.9% 195.9%
10/30/20 172.6% 2.8% 169.8%
11/06/20 221.2% 10.3% 210.8%
11/13/20 173.1% 12.8% 188.0%
11/20/20 199.9% 12.0% 169.8%
11/27/20 224.9% 14.5% 210.4%
12/04/20 229.4% 16.5% 212.9%
12/11/20 230.9% 15.4% 215.5%
12/18/20 263.3% 16.9% 246.4%
12/24/20 276.3% 16.7% 259.6%
12/31/20 245.6% 18.4% 227.2%


ALLOCATIONS


12/31/20 12/04/20 11/30/20
CRWD 31.5% 25.3% 22.3%
NET 17.8% 19.1% 18.3%
DOCU 16.4% 19.4% 9.5%
ZM 11.0% 14.8% 28.2%
DDOG 10.4% 11.2% 10.8%
PTON 4.2% 3.3% 3.3%
LSPD 3.3% --- ---
GOLD 3.0% 3.2% 3.1%
BAND 1.5% --- ---
BPRMF 1.4% 1.3% 1.2%
NEM 1.0% 1.1% 1.1%
Cash 0.7% 3.3% 4.6%


The above allocations include leaps on CRWD, DOCU, and NET. I won’t get into the details on the breakdown of options versus shares, but these options amplify the upside and the downside of the positions. Also, 2.8% of my portfolio’s total value will used as an estimated tax payment on Jan. 15, 2020, meaning that I will need to either sell something or go on margin.

PORTFOLIO CHANGES

Changes since 04Dec2020

>> I had previously sold a lot of my ZM position during the first week of December after the Q3 earnings results. I sold a little more on 14Dec. I had intended to sell more ZM to bring the allocation down to around 9-10%, but I played with selling some covered calls against these shares. Now ZM shares have dipped below $350, and I am reluctant to sell at these prices so I’m still holding out for a rebound. Also, my allocation is dropping without needing to sell more shares.

>> I bought LSPD, a new position, several times between 7Dec and 14Dec.

>> I trimmed a small amount of the CRWD position in my tax deferred account on 22Dec. I had been resisting trimming CRWD despite my oversized position.

>> I bought BAND, another new position, on 22Dec.

>> My cash position dropped down to 0.7% from 3.3% on 4Dec. The cash allocation dropped from new purchases (see above) and because the positions in the portfolio grew creating a larger denominator.

PORTFOLIO COMPANIES

CRWD (31.5%)

CRWD sits 7% below its ATH. The company continued to execute incredibly again and has a multitude of growth drivers pushing business forward: international expansion, new modules/cross selling, an expanding market/TAM, and now a heightened urgency for effective cyber security protection in the wake of the highly visible SolarWinds attack. It sure seems as if CRWD is the best positioned company to capitalize on increased cyber security spend that surely has already started. CRWD’s revenue growth has been steady in the mid-80%s for many quarters. All the other important financial metrics that I track for CRWD are phenomenal. I previously have pondered whether the company would have experienced revenue growth deceleration if not for the pandemic. I now wonder if CRWD can actually accelerate revenue growth. All the stars appear aligned for CRWD to continue its hypergrowth and domination of the Cloud-based cybersecurity market, and, despite having a 31.5% allocation, I feel a reluctance to reduce my oversized position.

NET (17.8%)

NET is 14% below its recent ATH. The company revenue growth is quite a bit lower than CRWD’s, but it has been accelerating. In addition, NET has some products and services that it has been giving away for free on a trial basis; customers are now paying for these offerings so revenue should see an additional boost. NET’s recent, rapid-fire launch of new products, services, and enhancements gives me extra confidence that NET is winning in its market. Despite it recent share price rise and its high valuation multiple, I’m not planning on selling any shares as I await to see how well NET will execute in 2021.


DOCU (16.4%)

DOCU shares are 23% below the ATH that was reached just before their Q2 FY2021 earnings. It’s business metrics, except for a deceleration in customers added in the most recent quarter, are continuing to improve. Other investors seem to fear that DOCU’s business growth may slow down in 2021. Management told analysts to expect that. I think they may be overly conservative. I also see international expansion and the eventual addition of the new product revenue streams coming on line. By comparison, DOCU shares seem less expensive than most of my other holdings. I’m planning on maintaining my allocation.

ZM (11.0%)

ZM shares have been falling ever since their Q3 earnings release and now sit 43% below their 19Oct ATH. Expectations for ZM were lofty, as were mine, going into the Q3 earnings announcement. I shared the reasons for my disappointment and for slashing my allocation in my 12-04-2020 portfolio update [ADD LINK]. I was waiting until 2021, a new tax year, to sell all the shares that I planned on selling. I also expected somewhat of a rebound in the shares after they dropped to the low $400s; so far I have been wrong about that, but we’ll need to wait and see what happens in early 2021 now that all the yearend profit taking, tax loss selling, and hedge and mutual funds’ portfolio rebalancing is complete. The Q1 FY2022 earnings release is due out on or around March 1, 2021.


DDOG (10.4%)

The last trade has DDOG shares 17% below their ATH. I had cut my allocation a little in November, and I’m currently holding off on making further changes until I see how their December quarter went. I expect their Q4 results out on or around 11Feb2021.

PTON (4.2%)

PTON is only 9% below their ATH. I previously shared my thoughts about PTON after their 5Nov earnings release in my last portfolio update. The big news since that report is the Precor acquisition. In my opinion, this acquisition is a great long-term fit because 1) it should help alleviate PTON’s supply constraints by adding a very large manufacturing space in the United States, and 2) it should enable easier penetration of the hotel and gym markets to PTON; the Peloton community is very engaged and I believe that not only tracking of workouts and goals but also competition among friends are important aspects that are only possible if everyone is using a standardized Bike from Peloton. People have their Bikes at home, but, when herd immunity allows for travel and gym visits, Peloton members will be very pleased to see the same standardized Bike in the hotels and gyms that they use. I think that the availability of Peloton equipment will be an important selection criterion for booking certain hotels and joining specific gyms; therefore, since hotels and gyms compete for customers, having important amenities, such as Peloton Bikes (and Treadmills) will be an important differentiator. Precor’s relationships with the hotels and gyms should boost penetration of those market segments. Finally, Precor’s business was really struggling, so PTON got an excellent purchase price only having to pay about 1% of its market capitalization! What a bargain! I am now more enthusiastic about keeping my PTON shares as they have partially addressed my top concern: the short-term supply constraint.

LSPD (3.3%)

LSPD is just 1% below its ATH. It’s a new position for me. ethan1234 (username on TMF) introduced me to the company after he took a position. LSPD is SaaS company that helps SMBs manage their operations. They focus on SMBs, retailers, restaurants, and golf course operators. The customers/companies in their markets were crushed by the pandemic, and some of them may well go out of business. LSPD is one of many competitors in a fragmented market, and they have a strategy to consolidate that market somewhat; they’ve already completed 4 acquisitions in 2020 for great prices because times are so tough. LSPD may be able to cross sell services to their newly acquired customers which could provide significant synergies as the integrations proceed. Q2 2020 was a horrible quarter for restaurants and retailers, but LSPD’s results were not so horrible as they managed to help many their customers with solutions that enabled them to sell online. Their September quarter was better than the June quarter, but, with the resurgence of COVID-19 in the Fall, the December quarter could be very ugly. The results of the December quarter are expected to be announced in early February 2021, and I will reassess my allocation after I see those results. Last, another reason for investing is the expectation of a strong rebound in business after the post-pandemic reopening.


BAND (1.5%)

BAND is trading 23% below its 52-week high. It’s another new trial position. My reason for trying it out include a low valuation, management’s focus on profitability, and the recent acquisition of some very high-profile customers. BAND also recently acquired Voxbone for a great price; the acquisition will be immediately accretive to gross margins and non-GAAP net income. The top competitor in their market is TWLO, and I don’t usually invest in lower tier competitors so I may decide to sell this one.


BPRMF (1.4%)

BPRMF’s stock is only 3% below its 52-week high. My position is up about 57% since my purchase in July. I own it because I like the space, and the top competitor, UiPath, is not yet available for me to buy because it’s not public. Blue Prism seemed to be undervalued, and I thought that the stock could see some nice gains with the upcoming hype of UiPath’s IPO. In fact, UiPath just filed their draft registration for an IPO a couple of weeks ago.

ADDITIONAL THOUGHTS

What might 2021 have in store? At or near the end of each year I like to ponder what might lie ahead. Let’s go back and revisit what I wrote in each of the past several years before we think about what 2021 may bring.

Here’s what I wrote on 03Jan2018 after my portfolio returned 61.6% in 2017:
2017 was a phenomenal year. Some people say this can’t be repeated in 2018. I wouldn’t go so far to make that statement. Will 2018 be a repeat performance for the stocks that we have picked? I really have no idea. But I think it’s feasible and I think it’s certainly possible. It might even be somewhat likely. I know that I tend to be optimistic, but here are some things to consider:

1) If you look at my stock picks, you will see that 9 of 11 are in tech (or at least related to tech). The other 2 are biotechs that have some pretty interesting pivot events likely in 2018. Techs were sold off in December 2017. I think that a bunch of institutional investors rotated out of tech. I think it’s highly likely that there will be (maybe it’s already started in the first 2 trading days of 2018) a rotation back into tech. Investors will look for growth and growth is in these companies.

2) Tax reform has passed and the analysts (and the companies) have not yet have time to revise their earnings forecasts. This will happen soon. Cramer also said this today, and I agree with him. I think it’s highly likely that we will see a rally into earnings and during the earnings reports (late January through February).

3) The Fed raised rates in December. Will they raise 3-4 times in 2018? The real question is whether there will be evidence of inflation. Maybe we will see some movement there or maybe it will be less than the Fed and economists think (due to the deflationary pressure of technology). I’ve posted about my view of inflation and how people over estimate inflation and underestimate the speed with which technology advances. Technology advancement is happening faster and faster every day and it continues to accelerate. This is difficult to observe. Yes, the Fed has increased rates a few times….the pressure on the gas pedal has been lighted but with current rates the gas is still being pressed and the brakes have not been applied. Monetary policy is still VERY favorable to stocks and to growth stocks specifically. Now, with tax reform, fiscal policy will give stocks a very big boost in 2018.

4) Will there be additional fiscal policy that will favor large corporations? That might be infrastructure spending. I think it will be more difficult to get through than the tax reform. However, an infrastructure bill would further fuel growth.


The end of 2018 was unusual because we had just had a large 2-month market drop that culminated on 24Dec2018. My portfolio had fallen by 37% from the 4Sep2018 peak and the S&P 500 closed out 2018 with a 5.2% decline. Yet, my portfolio managed a 55.9% gain in 2018. Thus, it was sort of obvious that 2019 would probably be pretty and I didn’t have any “wise” words. I didn’t post a portfolio update until 19Jan2019 and here’s what I wrote:

What’s happening in the market? The market low was December 24 and the Fear Greed Index was at 2 out of 100 on that day. The Fear Greed Index is now at 51 which means that the market is neither Greedy nor Fearful. What a turn around and what a buying opportunity December 24 was! 2019 is certainly turning out to be another very interesting year.

Here’s what I wrote on 23Dec2019, a little more than a year ago:
All in all it was a great year even if it seems a little disappointing after the July highs. Looking back, after 2017 most did not expect another spectacular year. And again after 2018, many people did not expect another spectacular year. What do people think is in store for 2020? I think the tendency is to expect a return to the 2019 high, so perhaps, unlike our thinking at the end of 2017 and 2019, we may be expecting a big 2020. Interesting how that works, huh? I'm kind of expecting another great growth year for 2020 and a return to the 2019 high would be a 40% increase in 2020. Anchoring? Maybe. Will the 2020 presidential election cause turbulence? Maybe. Will 2020 finally be the year that FOMO returns? It's been so long since we had the FOMO that we saw in the late 1990s so it almost seems like we may never see such FOMO again. Maybe the millennials (as a general group) are permanently scarred by 2000/2008. Who knows. Currently, I do not fear a big drop in our stocks (even with the stock market at all-time highs) because multiples in our companies have compressed and because the financial results are improving every quarter which will lead to further compression due to business fundamentals growth.

Here we are after an unbelievable 2020 for the portfolio. I think FOMO has been coming back, finally, after 20 years. There is a whole new generation of fearless “investors” trading stocks and even options. Perhaps, it required the new Generation Z that was never scarred by the dotcom crash and the great recession of 2008/2009 to spark a renewed interest in stock investing. Perhaps those in the older generations (Boomers, GenX, and the Millennials) who had the double dose of PTSD are getting dragged back into stocks because of FOMO created by some of the specular returns since the March 2020 bottom. Or perhaps they have little choice to park their capital in stocks because bond yields are so very low. FOMO may have only just started, and as we saw in the mid-1990s, FOMO can last several years before the next crash. I will be paying attention to how many people start talking about stocks. It’s been so long since this was a main topic of conversation in taxis (it’s been so long that there were no Ubers then), at cocktail parties, and at the barbershop. Money is cheap with historically low interest rates. The government money printing presses are going nonstop. Fiscal and monetary stimulus injections in 2020 have been massive on the order of about $20 trillion on a global GDP of about 87 trillion. Fiscal stimulus was needed to prevent the complete collapse of the global economic system. And there’s still a ton of cash that’s on the sidelines available to be invested in the markets. With a backdrop like this, how could the overall stock markets not rise? I’m expecting a big stock market rally in 2021.

But what about my stocks? I’m in the stocks involved in the digital transformation and shift to the Cloud. These are the stocks that have done so well in 2020, and in 2019, and in 2018, and in 2017. It’s a fair question to ask whether they are overvalued as enterprise value to sales multiples of these stocks have expanded considerably. The stock prices have risen, and part of that rise is very much justified due to the huge increase in business/revenue that these companies have posted. Another part is justified because the revenue growth rates are still so high. And yet another part is justified because my companies have improved their dominance in their markets such that their chances for disruption have been vastly diminished. But, again, the multiple have grown. During 2019 and 2020, we’ve also seen sector rotations from these SaaS companies to so-called “value stocks”. One sector rotation lasted about 3 months from 26Jul2019 until 22Oct2019, but most of such rotations were mini-rotations that often lasted just a few days; we had lots of them in 2020. Each time I wondered whether we were just starting another multi-month, prolonged sector rotation. But they were all head fakes in 2020. On a daily basis, many commentators on the financial networks talked, and continue to do so, about the overvalued software sector and the expected rotation into the value stocks and the reopening stocks. Yet, I have remained invested in these high growth stocks for 4 years now.

Yes, while I’m very confident that stocks in aggregate will be up significantly in 2021, I’m not sure if my portfolio will double in 2021 or whether it will drop 20 percent. I think either scenario is within the realm of possible outcomes. Will there be enough money pouring into the stock markets to rise all boats? I think the answer will be yes. Will SaaS companies get rotated into other investments? Maybe. But for how long I do not know. I would guess though that the 2-year return (from here on) for my portfolio will outperform the market again. How can I predict this? Well, of course, I can’t be sure, but here’s my thinking:

First, I would say that the digital transformation and cloud adoption is probably 25-30% complete with 70-75% to go. This means that there is still a lot of hypergrowth ahead. Once I see that these megatrends are about 75% complete, I will consider a shift to the next thing.

Second, starting in March 2020, we have heard tech CEO after tech CEO say that they have seen several years or more of digital transformation occur in a few months; yet, in Q2 2020, we did see the purveyors of digital transformation and cloud adoption match these statements/observations with a corresponding acceleration in revenue growth. In Q3 2020, we began to see a glimmer but not enough to match the rhetoric conveyed in the Spring of 2020. I and others, like Jamin Ball from Redpoint Ventures, have hypothesized that there is a lag between stated intent of adoption and actual implementation of move-to-the-cloud and digital transformation projects. I think of implementation of these megatrends that were accelerated by the disruption force of the pandemic as coming wave. I don’t think that this wave will hit at the same time but rather that the wave has a multi-quarter thickness to it. The aspects of digital transformation with the highest urgency, such as remote communication, ecommerce, and cyber security, will show financial metric acceleration first. The backend of the wave would consist of products, services, and infrastructure improvements, that are not as urgent but still deliver positive ROI (for customers) and improved business competitiveness. If this hypothesis turns out to be correct then we could see some nice upside surprises in the coming quarters.

Third and related to the second point, the coming replacement of 4G with 5G with its leap in data transmission speed will enable new applications that have not yet been imagined. Past technology leaps, such as the Internet in the 1990s, provided the infrastructure for new industries and the spawning of new companies that have evolved into some of the mega cap titans of today. Thus, there will always be new hypergrowth companies into which we can reallocate. The idea is to stay invested in the dominant hypergrowth companies until they begin to show signs of slowing. Some or all of the portfolio companies that I hold today will probably not be in my portfolio in 2-3 years. Always analyzing and reassessing the companies in the portfolio, as well as alternatives, is one of the hallmarks of successful concentrated growth portfolio investing.

Last, I will say that continued hypergrowth offers a high degree of protection against multiple compression because every high growth quarter that elapses automatically lowers the multiple. The companies in the portfolio are still growing very rapidly, and based on my analysis, I believe that the signs for continued hypergrowth are intact. Therefore, even if there is a sector rotation that compresses the multiples of my SaaS companies, I am currently confident that it is only a matter of time until the companies grow into their valuations.
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