GauchoChris portfolio update 3/31/2020

I already posted 2 interim portfolio updates in March. Here are the links to those:

3/6/20: https://discussion.fool.com/gauchochris-portfolio-update-362020-…

3/13/20: https://discussion.fool.com/gauchochris-portfolio-update-3132020…

What we are seeing unfolding has never happened in modern times. We are seeing a pandemic that is literally shutting world travel and much of the world economy. As a human, it’s a little scary because we are in uncertain times. As a human, I am taking very serious precautions about my health and the health of others. For the most part, I stay in my apartment in San Francisco (after 2 weeks of holing up with my girlfriend in a nearby suburb). I have a large supply of surgical masks, rubber gloves, and bleach. I order everything for delivery and clean all deliveries with bleach. I don’t go outside when there are many people around but I have been managing a walk in the early afternoons.

As far as investing goes, I am not behaving in the extremely cautious manner that I do for health. I am actively analyzing information, vetting that information, scanning for upside opportunities, looking for tax minimization moves, all while ensuring that I don’t expose myself to financial disaster by being overly aggressive. I see this time as a rare opportunity to make a lot of extra returns, but it also requires risk management. I have lived through 1999/2000 and 2008 with stock portfolios in each of those periods. But back then, while I had stock portfolios, I was a relative novice. My skills have grown tremendously in large part due to Saul’s Investing Discussion board and the collective experiences that have been shared by Saul and others. I have also learned a lot simply by playing this game for the last 5 years. I really like games, and for me investing is like a game. Starting in mid-February the game got a lot more interesting. So I have my war room in my apartment, and I spend a lot of time reading, thinking, and analyzing. For me, it is definitely not a boring thing to be “locked up” at home.

My trading activity and portfolio adjustments went into overdrive in March. I am trying to position myself well for the rebound that I know will come. When I say I know, I mean that I see this as a very high probability likelihood (not an absolute certainty). The biggest uncertainty is the timing of how long the global shutdown will last. It could be as short as 30 more days or perhaps as long as 6 months….anything outside of this range seems remote to me (IMO). I’ll comment more on this at the end.

PORTFOLIO COMPOSITION


	Ideal	**3/31/20**	3/13/20	3/6/20	1/31/20	
AYX	30%	**38.3%**	40.8%	36.7%	34.6%	temporary add
CRWD	20%	 **9.1%**	 1.0%	13.0%	15.4%	added lots of 2022 leaps
OKTA	15%	**14.4%**	12.9%	 8.6%	 8.4%	added
DDOG	12%	**11.8%**	 8.3%	 5.0%	 3.6%	added
ZM	 7%	 **7.3%**	 5.6%	 6.8%	 5.5%	sold a bunch and day traded
PAYC	 5%	 **5.3%**	 7.4%	 ---	 ---	new position
TTD	 4%	 **4.3%**	 4.6%	 4.5%	 6.1%	
SMAR	 4%	 **3.5%**	 3.6%	 3.2%	 4.2%	trimmed
ROKU	 3%	 **2.7%**	 3.6%	 3.5%	 1.2%	trimmed
GH	 1%	 **1.2%**	 1.3%	 1.1%	 3.4%	
MDB	 0%	 **---**	 4.4%	10.0%	10.5%	sold all after earnings
Cash	 5%	 **8.1%**	11.8%	 9.7%	 7.3%	increase due to share price declines

I’ve made a number of changes since the last update on 3/13/2020:

Sold all my remaining shares in MDB the day after the Q4 earnings release. My reasons for selling were pretty much identical to stocknovice’s (see his March portfolio update). I’ll add that the drop in all stocks made this decision easier from a tax perspective because I got to sell at a lower price but a similar relative price (into what I was redeploying the funds).

Sold the temporary shares of AYX that I bought in the second week of March. The allocation was over 40% and I needed to drop it down. But I added back a lot of temporary shares today which I will explain in more depth later.

Bought more OKTA, DDOG, and CRWD (a lot of CRWD but mostly in the form of 2022 call options)

Sold more ZM after a nice runup.

Trimmed a little SMAR.

Sold 1/3 of my remaining ROKU.

Bought an 11% position in PAYC for the cashflow and discount, but reconsidered my allocation as too excessive given the high concentration of SMB customers (potential risk that PAYC’s customers go out of business).

I’ve also done a fair amount of horse trading usually using ZM, AYX, and OKTA since I noticed a pattern: wide swings in opposite directions with ZM going up big on market down days and down big on market up days, and AYX and OKTA going with the market. I don’t normally do this, but these are times when such opportunities can present themselves. Seeing 8% swings in AYX and OKTA were not too uncommon while ZM was usually swinging in the opposite direction; there was even one day where ZM swung 20% in a few hours!

If you look at the table above, you will see that my current allocations are pretty much in line with my ideal target allocations. The three exceptions are AYX, CRWD, and cash. I’ll explain why they are different below:

AYX: Today, I invested an additional 3.5% of my cash into AYX while simultaneously selling covered calls against these extra shares and writing an equal number of puts (covered short straddle). The cash I deployed in AYX is for my taxes which is now not due until July 15th. The cash now earns only 0.7% interest in my money market account. The premiums from selling these options (which expire in 17 days) will yield me 16% in 17 days assuming the price of AYX stays at or above $95, yet this trade is still profitable as long as AYX is above $80 on April 17. AYX won’t report earnings until the very end of April or the very beginning of May. The trade seems like a great risk-reward scenario to me. I also have some additional AYX shares that I will unload when I see favorable relative stock pricing to another one of my positions. I expect to have my AYX allocation down to the low to mid $30s before Q1 earnings release.

CRWD: My CRWD position is 9.1% while my ideal target allocation is 20%. This is because most of my CRWD position is in the form of 2022 $50 and $60 call options. If I consider the number of shares that I control (i.e. if I count the options as shares and use the full value as if they were shares rather than options), my position size would be about 21%. So I’m right where I want to be. However, I would be willing to add more particularly if the stock dips down again.

Cash: As mentioned above, I bought AYX with cash to earning more interest. I plan on using a similar strategy sequentially until my taxes as due in July. I understand it adds some risk, but I deem the reward worth the risk.

Now I’d like to explain more of the thinking behind my allocations. We’ve now heard from OKTA, CRWD, COUP, PAYC (stock buyback), DOCU, SMAR, and other SaaS companies in their quarterly earnings calls and press releases. After hearing from them (note they reported when it became clear the pandemic was going to be really bad and disruptive) and thinking about this and what’s happening, my view has coalesced. SaaS businesses are generally holding up well. In fact, some companies are seeing no effect from the pandemic (OKTA said so in late February) while other companies (ZM and CRWD) are actually benefiting (business fundamental-wise and adoption acceleration-wise) from this WFH environment (they said so in early March). This became especially clear to me after the CRWD call on March 5th. So which companies are benefiting? The indispensable SaaS companies, in my mind, are CRWD, OKTA, and probably DDOG. I added significantly to all three in March. I just don’t see customers cutting their services and I see adoption increasing due to the WFH. Yet they are dominating and growing great without the pandemic also. ZM is probably benefiting the most, but ZM’s stock has already doubled this year. If we see a quick resolution to the crisis then ZM will have gained a lot of new business but a lot of people will sell their ZM shares so the ZM shares will be vulnerable to a big stock pullback (IMO). But for now, ZM remains a great hedge against another big market drop….and ZM would probably go up as long as this WFH drags on. Regarding AYX, I’m not sure how the growth will be affected by the disruptions created by the pandemic. It’s not really clear to me. Growth might slow for a little while. I’m not adding to AYX other than for trading. But my position size was already about 35% so despite the great price, I don’t want to add allocation other than for short term gain. So these are my core 5 positions with CRWD, OKTA, and DDOG being what I call heads I win, tails I also win stocks where heads equals the pandemic getting resolved quickly and tails equals the pandemic dragging on for longer. Together these 5 stocks comprise more than 80% of my portfolio. I have considered putting my entire portfolio into these 5 (selling PAYC, TTD, SMAR, ROKU, and GH) but I haven’t done this. I like the upside of the other 5 stocks for when the overall market rallies so I’ve kept them for now.

PORTFOLIO RETURNS

Wow, what a ride. Here are the monthly portfolio returns compared to the S&P500 total return index (^SP500(TR)) which includes dividends:


        GC      S&P     Delta
Jan	25.7%	 0.0%	25.8%
Feb	27.7%	-8.3%	35.9%
Mar	-2.9%	-19.6%	16.7%

Well, considering that the market is down almost 20% and considering that I use some leverage, I am very pleased to be down less than 3% YTD. My portfolio has been swinging back and forth from positive to negative the past few days.

Below are the past portfolio peaks and troughs, the percentage drops from peak to trough and the duration it took to fall to the trough:


Peak	  Trough	% Drop	Peak to trough (days)
09/04/18  12/24/18	37.4%	111
07/26/19  10/22/19	37.4%	 88
02/18/20  03/16/20	45.2%	 27

You will notice how swift the most recent drop was. It was deeper and swifter than the 2018 and 2019 37% drops. Have we hit a bottom? If so that day was March 16th for my portfolio. I don’t know the answer, but I would guess that we have hit the bottom. We’ll see…

Below is the weekly tracking of my portfolio versus the S&P 500 total return:


07/26/19       100.0%	22.1%	78.0%
08/02/19	85.6%	18.3%	67.3%
08/09/19	87.3%	17.8%	69.5%
08/16/19	81.4%	16.7%	64.6%
08/23/19	78.5%	15.1%	63.4%
08/30/19	83.3%	18.3%	65.0%
09/06/19	73.3%	20.5%	52.8%
09/13/19	46.3%	21.7%	24.6%
09/20/19	52.8%	21.1%	31.7%
09/27/19	37.6%	19.9%	17.7%
10/04/19	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%
11/01/19	35.2%	24.4%	10.8%
11/08/19	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%
12/06/19	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%
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%

FINAL THOUGHTS

These can be scary times for investors. When there is uncertainty there is fear, and when there is fear there is opportunity, particularly when there is forced selling going on. I think we probably hit the bottom about 2 weeks ago. I would love another big drop so I can take advantage. There was more uncertainty 2 weeks ago. There was more uncertainty about the pandemic, but I think the bigger uncertainty involved whether the financial banks and governments would quickly and strongly mobilize to avert a humpty dumpty situation (i.e. businesses failing and laying off millions). Governments and central banks did respond to the call and they responded BIG. The US alone is providing $10T of stimulus with more probably coming if need be. The world’s financial system cannot survive a shutdown without help because so many businesses and so many people live paycheck to paycheck. The world’s governments really had no choice to not offer the stimulus because not doing do would have ended our financial system as we know it….at least for a long time. We now have what seems like a 3-month lifeline. The pandemic will fade in time; whether it will be weeks or months, I do not know, but it will fade and people will return to their old ways of living (mostly). If the hydroxychloroquine treatment works then we could see a faster return to normalcy because the effects of the world’s shutdown will be worse than the medical harm caused by reopening commerce. If there is no treatment then WFH could be here for a while. I believe that I’ve positioned my portfolio to thrive in either case. I also believe that I have some nice upside built in via some leverage and some options. I’d welcome another crack at those prices from 2 weeks ago for I see the chance of a prolonged economic depression as a VERY remote possibility now.

I hope that everyone is staying safe and entertained during these unusual and stressful times.

Chris

98 Likes

So these are my core 5 positions with CRWD, OKTA, and DDOG being what I call heads I win, tails I also win stocks where heads equals the pandemic getting resolved quickly and tails equals the pandemic dragging on for longer. Together these 5 stocks comprise more than 80% of my portfolio. I have considered putting my entire portfolio into these 5 (selling PAYC, TTD, SMAR, ROKU, and GH) but I haven’t done this. I like the upside of the other 5 stocks for when the overall market rallies so I’ve kept them for now.

Three days ago, I wrote the above. After thinking things over, I made these changes. I sold all of my PAYC and TTD. I sold almost all of my ROKU except for a small token amount. I trimmed SMAR to a 3% allocation. I kept GH. I added a lot to ZM, some to CRWD, and a bunch to DDOG. My portfolio now looks like this:


AYX   37.9% includes options and temporary shares
CRWD  13.5% much of the position is options so allocation is a lot higher than it appears
OKTA  15.4%
ZM    13.5%
DDOG  13.4%
SMAR   2.9%
GH     1.2%
ROKU   0.2%

So why did I do this? When thinking about how things will play out over the next 2 years, I considered the best case and almost worst (worst that I considered would be a multiyear depression where many businesses go belly up) case scenarios; I wanted my portfolio to do ok in the worst case scenario and do really well if we get a recovery.

I think that the top 5 companies will survive and probably come out of this stronger. All have amazing growth, good and improving FCF, and strong balance sheets. All have their employees able to work from home without much negative impact. CRWD and ZM should thrive under an extended freezing of human movement. OKTA and DDOG should also do as well or almost as well under the worst case scenario. AYX might not do as well as the other 4, but under a worst case scenario, the other 4 should buttress the portfolio. If things get resolved in the next several months, all the companies should do well, but ZM may see a pullback in the stock price; that’s fine because the others will then carry the portfolio (ZM is a nice hedge). On the other hand, TTD is going to get hurt by several factors: no Olympics, pandemic taking attention from the 2020 election, probable advertising budget cuts. ROKU may also get hurt. PAYC would get harmed if lots of their SMBs go belly up. I considered also selling SMAR but haven’t yet.

AYX: 75% growth and accelerating. May see a hit to growth but AYX can easily weather the storm and will come out in a better competitive position. Any of their small competitors will have a very tough time getting new business in this environment. FCF positive and improving quickly. Very strong balance sheet with $975M cash with $698M of very low cost convertible debt (net cash $276M).

CRWD: 89% growth and not decelerating (probably will accelerate). FCF positive and growing VERY fast. Very strong balance sheet with $913M cash, no debt. Going well but need to keep an eye on the competition to make sure they they don’t get disrupted.

OKTA: 45% growth and growth has been stable. FCF positive with very strong balance sheet with $1403M cash and $938M very low cost convertible debt (net cash $$465M). Clear dominant leader in their space (looks like they have won their market) which is why I’m willing to accept the lower growth.

ZM: 78% growth but has been decelerating. Expect a BIG re-acceleration. FCF positive and growing fast but expect a lot of investment in 2020 to support the massive growth; FCF growth may take a big hit but I expect ZM to not go FCF negative. Very strong balance sheet with $844M cash, no debt.

DDOG: 85% growth (stable for last 5 quarters). Strong balance sheet ($777M in cash, no debt). Don’t think that their service is as essential as CRWD’s and OKTA’s. Going well but need to keep an eye on the competition to make sure they they don’t get disrupted. Very asset light business model.

So I see AYX and OKTA not getting disrupted. CRWD and DDOG are taking share and are growing like weeds so all good for now; I think they are in markets where disruption is more likely. ZM seems to be taking over and this will attract competition; ZM needs to execute (rapid expansion can be very challenging) and avoid any PR disasters as the world’s eyes are on them.

Chris

78 Likes

On the other hand, TTD is going to get hurt by several factors: no Olympics, pandemic taking attention from the 2020 election, probable advertising budget cuts. ROKU may also get hurt.

Chris,

First my appreciation for your taking the trouble to update the group. I think your observations are spot on which is to be expected from someone who seems to be whip smart. ,I however do not have the intestinal fortitude to risk your heavy concentration in just 5 stocks. But then I’m 80 yrs old.

My question relates to TTD and ROKU. Though they may have difficulties in the immediate future, their marketplace lead and the value of their product supports the view that they will recover readily and resume rapid growth.

There is a bottom coming which is not yet un view. Would those points not support holding and adding to both ROKU and TTD?

Thanx for any comments

draj

I’ve done some modeling based on the a starting allocation and a best and worst case scenarios.

To try to quantify my opinions, I used the following assumptions:

Best case scenario (return to near normalcy by the Summer):
AYX could double or more by the end of the year and quadruple in 3 years
CRWD could go up 50-70% by then end of the year and double or triple in 3 years
OKTA could go up 20-50% by the end of the year and double in 3 years
DDOG could go up 30-40% by the end of the year and triple in 3 years
ZM could drop by 20-30% by then end of the year and go up 50-75% in 3 years

Worst case scenario (3 year depression):
AYX could drop another 50% by year end and also drop 50% after 3 years
CRWD could drop 20% by year’s end but double after 3 years
OKTA may just stay the same by year’s end and increase 20% after 3 years
DDOG may drop 50% by year’s end and get disrupted and drop by 90% in 3 years
ZM may increase 30% by the end of 2020 and go up 5-10x after 3 years

A portfolio with 35% AYX, 20% CRWD, 15% OKTA, 15% DDOG, 15% ZM would look like this under best and worst case scenario:

Assumptions on stock price value as a percentage of start (today):


	Best2020   Best2023	Worst2020  Worst2023
AYX	200%	    400%	 50%	    50%
CRWD	160%	    300%	 80%	   200%
OKTA	135%	    200%	100%	   120%
DDOG	135%	    300%	 50%	    10%
ZM	 75%	    163%	130%	   750%

Note that in the above table, for example, 100% means no change in stock price, 10% means 90% drop in stock price, and 750% means 650% increase in stock price.


	Start	Best2020   Best2023   Worst2020	  Worst2023
AYX	 35	 70	   140	       18	   18
CRWD	 20	 32	    60	       16	   40
OKTA	 15	 20	    30	       15	   18
DDOG	 15	 20	    45	        8	    2
ZM	 15	 11	    24	       20	  113
**Total	100	154	   299	       76	  190**

The table is based on my own assumptions of the best and worst case scenarios which probably are not likely. We will likely see something between these 2 extremes. I used this type of thinking to construct my portfolio. You can see that based my assumptions, the portfolio will do very well in either scenarios (of course assuming that my assumptions on how stocks would perform under each scenario).

Chris

32 Likes

If your worst case scenario is a 3 year depression, and at the end of 2020 this portfolio would be down 24% from here, but then in 3 years it would be up 90% (24% CAGR), then that is a very optimistic worst case scenario. I hope you are right.

Greg

1 Like

My question relates to TTD and ROKU. Though they may have difficulties in the immediate future, their marketplace lead and the value of their product supports the view that they will recover readily and resume rapid growth.

There is a bottom coming which is not yet un view. Would those points not support holding and adding to both ROKU and TTD?

The following is just my opinion. I think advertising is going to be cut globally (in aggregate). The reason is that people (in aggregate dollar terms) will be spending less money. They will spend more on some things and less on others but net net they will spend less because they will be staying home, cooking, working, playing video games, reading books, watching TV. I think less spending means less advertising which means less revenue for TTD and Roku. How long this will go on is still uncertain. This is why I did what I did. I wanted to be about of companies that will be suffering and in companies that will not suffer or not suffer much. Yes, eventually things will return to normal and when that happens advertising will return. In the meantime, TTD and Roku will suffer. I would think that TTd will suffer more because people will be watching more TV so Roku can still benefit from more streaming hours but at the same time be hurt by less advertising. Will advertising slots all be filled for Roku? I don’t know. Will the cut for advertising be changed for Roku? I don’t know. Eventually, both companies should recover. But I’d rather be in companies that can do well no matter what happens.

Chris

2 Likes

If your worst case scenario is a 3 year depression, and at the end of 2020 this portfolio would be down 24% from here, but then in 3 years it would be up 90% (24% CAGR), then that is a very optimistic worst case scenario. I hope you are right.

Yes, of course, the big assumption there is that Zoom will benefit so much during the darkness to make up for the others. As an analogy: if a volcano erupts and blocks the sun for 3 years then the light hitting the earth will be a drastically reduced but it can become concentrated into a beam that goes to Zoom. An extended pandemic and lockdown would lead to a global depression but Zoom could make a ton of money in this scenario. Again, I think it’s an unlikely scenario but that’s why I increased my Zoom…it’s a hedge in case we see the worst case scenario. I hope I’m wrong and we don’t see the worst case scenario.

Chris

1 Like

AYX: 75% growth and accelerating. May see a hit to growth but AYX can easily weather the storm and will come out in a better competitive position.

Why do you guys assume that AYX can easily weather the storm and come out in a better competitive position?

It doesn’t matter whether their employees can work from home. It matters whether their customers and prospective customers have enough profitability over the next year to afford their “fancy analytics toys”.

So, I’ve missed some posts. If there’s posts that outline their moat, the defensibility of their growth projection, please point me to them. Although it looks like I’m being a d*ck, I’m actually not. I’m really just looking for information to defend my decision to hold on.

FC
long AYX

6 Likes

Why do you guys assume that AYX can easily weather the storm and come out in a better competitive position?

It doesn’t matter whether their employees can work from home. It matters whether their customers and prospective customers have enough profitability over the next year to afford their “fancy analytics toys”.

So, I’ve missed some posts. If there’s posts that outline their moat, the defensibility of their growth projection, please point me to them. Although it looks like I’m being a d*ck, I’m actually not. I’m really just looking for information to defend my decision to hold on.

FC
long AYX

I work as a sales engineer for a large cloud vendor and my job is to educate customers on our products as well as find and build the business case for solving customers’ problems with our technology. Building the business case means quantifying the value of doing a project in terms of revenue increase, cost reduction or risk reduction and compare that to the cost of doing the project itself.

When we say something is ‘expensive’ it’s all relative to the value the customer will get from the project. The cost of a technology project is the cost of the technology needed + the time it takes people to actually do it.

First let’s make it clear that data science projects, the likes of which AYX, DataRobot, Databricks, Google, Amazon, Microsoft, IBM and others enable customers to do solve problems in all three areas: cost, revenue and risk and they can do this at huge scale with massive impact. Many organisations offering this technology require you to move all your data into their cloud or at least their software system if it’s on-prem. These kinds of data warehouse or data lake transformations can take years and be massively expensive before you can even get started solving any problems and delivering value to the business.

The beauty of AYX is that you can start small without moving any data at all! Their software plugs into data where it is today and can start delivering value straight away.

Furthermore, they don’t have to go in at the c-level and sell a huge, expensive transformation programme. They can sell to one individual, demonstrate value and then it spreads through the organisation to others as they see the success their peers are getting from it.

Now, to put this into the context of today’s macro economic environment, many of my customers have paused their large scale transformation projects, choosing to focus only on projects that are business critical or will deliver value this year. Big DW or DL transformations are going to slow down or get canned, but individuals who find use cases where they can get something done quick using something like AYX will still be able to do what they want to do. The fact that they can do a small, high value project in isolation is actually a big advantage in this current climate. And the high license cost of AYX’s software is often greatly outweighed by the fast time to value and low effort to get results.

Everything I’ve said here is just my humble opinion of course, but it’s why I’ve added a ton of AYX this week in the mid-80s. I think they’ll come back strong and quicker than is currently priced in.

Bobby

74 Likes