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My portfolio at the end of Sep 2020

Here’s the summary of my portfolio at the end of September. As always, for my own convenience, I did it in the last weekend of the month. (Mon, Tues, and Weds get kicked into next month.) Please note that when I discuss company results, I almost always use the adjusted values that the companies give.




SORRY EVERYONE, BUT THIS WILL AGAIN BE A MUCH SHORTER REPORT

I rebroke my shoulder three weeks ago (I fell at night), so while I’m certainly getting better, I’m still having some pain and discomfort and swelling, and it’s difficult to concentrate, and can’t use my dominant hand very well yet for typing, and it would be very difficult to type and format a typical long write-up with one hand (one letter at a time instead of 10 finger typing). This will therefore again be abbreviated.


September was pretty exciting. As you remember my portfolio finished August up 133%, and then Sept 1, two trading days later it hit a high of up 179% (thanks a good deal to Zoom). A week later it hit a low for the month of up 137%, and then just chugged on up from there. The low sounds like a big drop but it was just 15% off the high. (237/279 = .85). My portfolio hit a new high of up 189% last Tues and closed the month at up 184% (or roughly 284% of where it started the year, very close to a triple). This was up 51 points, or 22% percent, from August’s close.




MY RESULTS YEAR TO DATE

My portfolio closed this month up 184.3% (at 284.3% of where it started the year)! Here’s a table of the monthly year-to-date progress of my portfolio for 2020.


End of Jan + 21.3%
End of Feb + 22.9%
End of Mar + 13.4%
End of Apr + 33.3%
End of May + 73.6%
End of Jun + 115.9%
End of Jul + 135.1%
End of Aug + 132.9%
End of Sep + 184.3%





HOW DID THE INDEXES DO?

Here are the results year to date:

The three indexes that I’ve been tracking for years closed this month as follows.

The S&P 500 (Large Cap)
Closed up 2.1% YTD. (It started the year at 3231 and is now at 3298). It was amazingly down 6.5 points this month, when my portfolio was up 51 points in the same time. I could hardly believe my eyes when I saw it!


The Russell 2000 (Small and Mid Cap)
Closed down 11.6% YTD. (It started the year at 1668 and is now at 1475, also down 6.2 points this month).

The IJS ETF (The S&P 600 of Small Cap Value stocks)
Closed down 25.6% YTD. (It started the year at 160.8 and is now at 119.6, down 7.7 points this month ). So much for value stocks outdoing overpriced stocks!!!!!


These three indexes
Averaged down 11.7% YTD. They lost about 6.8 points this month!


If you throw in the Dow, which started the year at 28538, is now at 27174, and is down 4.8%, … and the Nasdaq, which started the year at 8973, is now at 10914, and is up 21.6% YTD … you get down 3.7% for the average of the five of them YTD. The average lost 6.9 points for the month. And if you remove the two outliers (the Nasdaq and the IJS), it’s practically the same result, down 4.8% YTD.




THIS WAS REALLY ASTOUNDING TO ME!
The market averages are DOWN in a year when my portfolio has almost tripled??? It’s embarrassing, and I’m thinking of not giving my end of the month totals in subsequent months as it seems indecent.

How often have we heard that no one can beat the indexes? That stock picking is a waste of time and effort? That we will all “return to the mean”? That “books have been written that prove it!” Well, guess what, Folks, the books are wrong!

And if you look at the past years you will see that picking our “overvalued” stocks has done ENORMOUSLY better than investing in cheap, or “undervalued” stocks.

Again, my results are without using any leverage, no margin, no options, no penny stocks, no fancy stuff, just investing long in great individual companies. And I’ve told you each month what my positions are, and what proportion of the portfolio they are, so anyone who doubts it can check for themselves. And I’m no genius. Plenty of other people on the board have done about the same, and some even a lot better .

To simply state my goals, I'm merely trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes should give a pretty good approximation.




WHAT CAN WE LEARN FROM THE MARKETS’ RESULTS?

In the Covid pandemic market, large caps (S&P, Dow, Nasdaq) beat out small caps (Russell, S&P Small Cap Value). Tech stocks did best (Nasdaq). Value socks did worst. And our high margin, recurring revenue, high growth, SaaS stocks did the best by far.




AN INTERESTING MEMORY

At the October bottom, 11 months ago, all those trolls showed up on our board and were telling us that our “overpriced” stocks would “NEVER see the ridiculous highs of 2019 again,” and asking why didn’t we get smart and invest in S&P ETF’s. It was pretty scary back then, and even some of our regulars were thinking we might have to wait two years before our stocks would regain their highs. It all seems pretty funny now, doesn’t it? It’s worth keeping that in mind the next time that there is a correction and the trolls show up trying to get you to sell out.

They then showed up again in March during the synchronized attack on Zoom (Zoom was at about $120 to $130 then). They sounded sooo… sooo… earnest that they took some people in, telling us that they were so sorry, but the CEO just wasn’t trustworthy and we should sell out. (Ha! It closed this week a shade off $500, about a quadruple in six months since that attack).

The key for these guys is to appear very sensible, sincere, and earnest, and say they’ve been in these stocks for a long time but now it’s time to get out. One, as I remember, even said he had been investing in these stocks since long before our board even began.

What an obvious mistake! This board started Jan 1, 2014, so he was talking about 2013. Actually he was claiming “long before” 2013, so let’s be kind and say 2012. Well, NONE of our stocks was even public until five to eight years after 2012, and he couldn’t have been investing in them back then. And let me assure you that in 2012 you couldn’t make up a portfolio of companies with 70% to 90% revenue growth rates, with 70% to 90% gross margins, low capital intensive, with 95% recurring revenue coming from software subscriptions, and with dollar-based net retention rates over 120%. These companies just weren’t there in my experience!

Sometimes these guys also claim huge rates of gains for many years to establish credentials, but make their claimed “results” way unrealistically high.

So what is the message for you? Well, if someone totally new to the board shows up, and after a few earnest, sincere-sounding messages to establish trust, starts within a week or two to tell you to sell your positions, please have a little skepticism. That’s a totally different scenario than having one of our trusted long term members, whose opinions you have valued for years, telling you the same thing!




THOUGHTS ON TRADITIONAL EV/S, AND WHY IT HAS NOTHING TO DO WITH OUR COMPANIES

Some who are new to the board seem almost personally offended that I don’t calculate EV/S on any of my stocks, and that I don’t pay attention to it, or to the fact that all our stocks usually have EV/S ratios which are very high by traditional EV/S standards.

I don’t have the answer to what is “overvalued,” but I know that traditional EV/S ratios have NOTHING TO DO with our companies! Our companies are profoundly different than the companies that traditional EV/S is used for. Why? Here are some reasons:

First of all, a company with 70% to 90% gross margins is worth a much higher EV/S ratio than a company with 30% or 40% gross margins because each million dollar of sales is worth so much more to the company in take home dollars.

Just think about this for a minute. If you have 85% gross margins, a million dollars in sales is worth $850,000 to you. If you have 42% gross margins (still quite acceptable), the same million dollars in sales only brings you $420,000. Now really think about that. On that basis alone our company with an 85% gross margin is naturally worth twice the EV/S of a normal company with a 42% gross margin, other things being equal.

And a company with a 28% gross margin (believe me, there are plenty of those too, in the real world) only keeps $280,000 out of that million in revenue. How can you put the same million dollars in revenue in the denominator of EV/S? Our company with 85% gross margin is naturally worth three times the EV/S sported by the 28% gross margin company, other things being equal… But… other things aren’t equal!!!


Secondly For a company that is leasing software that becomes integrated into the core of the customer’s business, and with a subscription model that brings in recurring revenue, each million dollars of sales today is not just for this year. It’s for next year too, and the year after, and the year after that, and…. pretty much forever. No one, simply no one, is going to tear out a system that is core and essential to the smooth running of their business, and that would disrupt their entire business to pull out, to save a few dollars. It ain’t gonna happen folks.

Okay now, you have a million dollars of sales this year that will, for all practical purposes, be there next year, and the year after too and new sales next year will be an extra bonus added on. When you put that million dollars into the denominator of the EV/S equation, what do you have to multiply that million dollars by to take into account all those future years of recurring revenue? By three? By four? By five? That sure brings down the real EV/S for our SaaS companies, doesn’t it?

Compare it to a clothing manufacturer (just for instance). It sells 100,000 coats this year, but has no idea if it will sell 100,000 coats next year, or even 50,000 (maybe another brand will be in fashion). Recurring revenue on a subscription sure beats the heck out of that, doesn’t it? At first glance that clothing company example may seem irrelevant. But no, the EV/S of maybe 3 or 4 that it carries, has helped to shape the idea in your head of what a EV/S normally is. But if the clothing company's EV/S is 3, if one of our companies has the same revenue (the same S in the denominator), what should its EV/S be? Four times that? Six times that? Ten times that?

But wait! Our companies also have a dollar-based net retention rate maybe averaging 125% or so. That means that this year's sale revenue isn’t just going to recur next year, but it will be 25% bigger next year, and bigger the year after that. Well of course a company with a 125% dollar-based net retention rate of recurring and growing revenue will have a higher EV/S ratio, than a normal company with the same revenue, the same S value, down there in the denominator, which may not even be there at all next year … (duh!)

And then there is growth rate! Well, of course a company that is consistently growing revenue at 50% to 70% is going to have very high EV/S ratios, because in just two years a consistent 60% growth rate means they will have more than two and a half times as much revenue as they have now. That’s in just two years!

And in three years, more than four times the revenue they have now!

And in four years, more than six and a half times the revenue they have now! That will sure bring that EV/S ratio down, won’t it? I won’t go beyond four years but that’s enough. (You won’t believe it but a fifth year will bring the revenue to more than ten times what you started with. Obviously they don’t need to keep a 60% growth rate to really push up their revenue! That S in the denominator is going to grow rapidly.)

And finally, of course a company that is leasing a software solution that every enterprise on the planet needs, and that the vast majority don’t have yet, and that all those companies will keep indefinitely once they install it, will have a higher EV/S ratio than a company selling a product that anyone can put off getting a new model of, or stop buying for the duration of a recession, etc.

Here’s the key to this: You can live another year with your old cell phone, or computer, or car, or raincoat, or refrigerator, or kindle, or ski jacket, or your old factory, or whatever, without buying a new one next year, but once you lease this software, you keep leasing it indefinitely, no stopping for a year.) If you think about that and understand it, you’ve gotten the message!

And of course, of course, of course, companies that have ALL these features…

70-90% gross margins AND
a subscription model with recurring revenue AND
125% net retention rates AND
growing revenue at 50% to 70%, AND
selling products that all enterprises need …

are going to have very high EV/S rates (…duh), and I don’t know what is high, but I will NEVER sell out just because the price has gone up, and because some people think the EV/S is too high. I just don’t know where these guys will ultimately end up. Sure I didn’t buy into SNOW when it opened at three times the planned IPO price and during day one got up to $319 (four times the planned IPO price), but that was just a crazy feeding frenzy, and I wasn’t going to pull money from my high confidence positions to buy into it.

My decision about my confidence in a company is based on gross margin, recurring revenue, growth rates, dollar-based net retention rates, necessity to their customers, dominance in their field, and how all that looks to me for the future. Traditional EV/S simply doesn’t enter the equation.




LAST FOUR MONTHS REVIEW


In June I added no new positions and deleted no positions. I increased my Fastly position as much as I could, but I was limited because I didn’t have anything I was really anxious to sell. I mostly trimmed Livongo, as I felt that Fastly’s growth potential, like many of our companies, was based on the growth of data and usage and thus was basically unlimited, while Livongo’s was large but that they’d eventually come to the end of it in several years. There is a limit to how many illnesses can be usefully managed by little devices on-line, but data increases forever. It may be a mistake but that’s what I did. I also trimmed a tiny bit of my Okta and Alteryx for cash to buy more Fastly.

I decided to increase my Fastly largely because they gave guidance for revenue growth of 54% next quarter, which is up 16 percentage points sequentially(!) from the 38% growth in the quarter they just announced. They implied that this was due to increased usage because of the move to the Cloud, accelerated by the pandemic. Well, This was an extraordinary sequential gain in the growth rate, but in the world we live in, no CEO going out on a limb and forecast 54% growth unless he’s
“sure” they will have revenue growth of 60% at least
, next quarter. I’m happy with my purchases. As you remember, my initial 3.6% purchase was at $40 at the end of May. I bought more this month at $45 and $47, and added small bits at various prices from $51 to $64, and this week, a couple of tiny adds even higher, happily adding at “worse and worse value points”😀, as Fastly continued to rise. I bought at the price it was at. It closed June at $86.51, up over 100% in one month, and up 33% even from my $64 purchase a week ago. It is worth reflecting that if I HAD waited for “better vaue points”, I would have missed the entire 100% rise trying to save 2% or 3%.....

And then, with my portfolio more than doubled in size in six months, when I decided to set 4.6% aside in cash, I sold out of my Livongo to raise part of the cash.


July I sold out of my remaining Coupa to add to Fastly.

Then, after reading the initial write-up on the British tech company Blue Prism early in the month by Ethan, I got excited and took a 3% small position. But then I started thinking to myself: “I think we made a real mistake here!”

After re-reading the information in the write-up, going on to the earnings report, the comments on Blue Prism board threads by guys with much more tech knowledge than I have (and who are actually working in tech in the field), I became concerned that I was investing in:

a second tier, troubled, company
with rapidly slowing growth, rapidly shrinking market share, losing gobs of money, very negative cash flow, clunky interface, using programs based on very old technology, with poor marketing, getting left behind by the category leader, with a falling price for the last year and 9 months, and a lower price even than the price two years ago.

It seemed very much as if we were hoping for a turnaround or an acquisition instead of investing in a category leader. I asked myself “What am I doing investing in a company like this?” I sold it all at a small loss (5%) less than a week after I bought it. I’m perfectly aware that my decision may turn out to be a mistake, but that’s what I did and I have no regrets. Oh, I put most of the money into a new little position in Cloudflare, and a some into Zoom and Fastly. I also kept trimming Alteryx and a little of Okta and added to Crowdstrike and more to Fastly.


August. I sold out of Alteryx for what I think are obvious reasons, keeping just a half percent position to keep it on my radar. I reduced Fastly and increased Cloudflare to equalize the positions. I added small amounts of Alteryx money to Datadog, Crowdstrike, and Zoom, as well as to Cloudflare.Okta issued quarterly results, which seemed strong and steady to me. Notably, operating income, net income, EPS, and free cash flow, were all positive numbers, up from losses the year before. Adj gross margin and adj subsciption gross margin at 78.9% and 82.8%, were the highest they have ever been, RPO was up 56% yoy, net expansion rate was 121%, up from 118% a year ago, etc.


September I made very few buys or sells as I was out of action with a fractured shoulder, and busy with doctors’ appointments and physical therapy. I did sell out of my remaining ½% position in Alteryx, and trimmed Zoom twice when it got over 30% of my portfolio (it’s grown to be back over 30% again), and added some to Fastly and a little to Cloudflare. On Wednesday morning I also pulled some cash out of the market permanently and put it into my emergency family fund.




HOW THE INDIVIDUAL STOCKS HAVE DONE YTD

Here’s how my current positions have done this year. I’ve arranged them in order of percentage gain. As always I’ve used the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. Please remember that these starting prices are from the beginning of 2020, and not from when I originally bought them if I bought them in earlier years.

For example, I bought Alteryx and Okta originally at $27.72 and $29.95 over two and a half years ago, but I listed them at entry prices of $100.07 and $115.37 because those are the prices at which they started 2020.

Zoom from 68.04 to 496.5 up 629.7%
Crowd from 49.87 to 136.39 up 173.5%
DataDog from 37.78 to 90.65 up 139.9%
Fastly from 39.98 to 91.46 up 128.8% (Bought in May)
Okta from 115.37 to 216.20 up 87.4%
Cloudflare from 34.97 to 40.04 up 14.5% (Bought in July)


Granted, a lot of my gain was from Zoom, but you will note that my next three positions are ALL up over a hundred percent, YTD, even though one of them was just purchased in May.

I also should remind you that the weekend after Zoom’s June report of its April quarter results, when there were eight articles on Zoom by different writers on Seekin Alpha, and all eight warned that Zoom was overpriced and that you would do best to sell out, or at least not add, I pointed out on the board that that was a clear sign that Zoom wasn’t in a bubble (where most would have been telling you to buy), and that there were plenty of people out there still doubting. Zoom was at roughly $200 at the time, and is now roughly $500.




POSITION SIZES

As often happens at times of great stress and uncertainty, I sold off lower conviction positions and have concentrated my funds in my highest conviction companies. I now have six positions.

My portfolio now has three positions between 21% and 31%, followed by three other positions culstered roughly around 8%. Keeping the number of my stocks down really makes me focus my mind and decide which are really the best and highest confidence positions. As I wrote above, I’ve trimmed Zoom back to 30% twice and plan to continue.

Here are my positions in order of position size, and bunched by size groups..
.

Zoom 31.0%
Crowdstrike 23.7%
Datadog 20.6%

Fastly 9.0%
Okta 7.5%
Cloudflare 7.5%





STOCK REVIEWS

I can’t update this section this month, for the reasons mentioned at the beginning of this post. I hope to be more back to normal next month.




FINISHING UP
Let me remind you first, that I have NO IDEA what our stocks will do next month. I’m terrible on predictions. But I know that the businesses of our companies will do just fine for the most part.

I feel that my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.

When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances
seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.

I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.

You should never try to just follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.




THE KNOWLEDGEBASE
Since I began in 1989, my entire portfolio has grown enormously.
If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read the Knowledgebase, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven't yet.
A link to the Knowledgebase is at the top of the Announcements panel that is on the right side of every page on this board.

For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially:

How I Pick a Company to Invest In,
Why My Investing Criteria Have Changed,
Why It Really is Different.
Illogical Investing Fallacies

I hope this has been helpful.

Saul
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