BeSmartRich’s portfolio update May 2020 7


Hello everyone.

It has really been a while. Sorry guys for bailing for last 3 months or so.

The virus had impacted me and my wife on many levels so been busy taking care of that.

 

Market crashed then recovered!

The best thing to do for many investors with solid companies or index funds is not doing anything stupid during crash as many of the great companies you own will recover and may even thrive. Only time you need to sell is when fundamentals of the companies you hold are changed or when you see better opportunities.

 

 

Let’s go over how I did in 2020.

Portfolio 1- Margin levered portfolio

I did -10% on one of my portfolio.

This portfolio was an experimental portfolio when I set up in January 2019 and was levered before going into the crash so when things are really crashing down I had to de-lever to stop the bleed.

I completely sold out Dollarama, Ulta Beauty, Supernus Pharma, Amazon and reduced Great Canadian gaming and MTY etc over time.

I know… I just said don’t sell stocks off when times are bad. Almost all of them either recovered or thrived during this pandemic but I had to de-lever and I saw this as an opportunity to re-balance.

You can see the portfolio was down by 50% at some point but has been recovering quite well since then.

With the proceeds, I opened various positions with huge tailwinds such as Mercado Libre, Facebook, Sea limited, Alteryx and many others.

I want to talk about the stocks that I bought later in more details so I will briefly touch base why I bought them.

 

The reason for opening Mercado Libre and Sea limited was simple- Amazon was doing very well.

Amazon recovered really quickly during the pandemic as they could not keep up with the demand but their counterparts in Latin America and South East Asia did not show as much of recovery so I opened small positions then increased to full positions over time as my conviction got bigger.

They have been in my watchlist for a while so I have been waiting for the selloff to initiate my position.

After their earnings results which happened much later than Amazon’s results, the stock popped. 

They grew much higher rates than Amazon and I believe both are dominant players in their respective markets.

The company that I work for has IT development team located in Argentina. Doing conference calls, I ask questions indirectly what online platform they use for online shopping. Everyone said Mercado. I still believe Central and Latin America have a long way to go when it comes to e-commerce so I will ride this all the way up.

 

 

What about Facebook and Alteryx?

They would benefit greatly due to lockdown but their shares were hurt just as bad as or worse than other stocks. It turned out to be good calls.

 

 

 

 

 

 

Since January 1, 2019 the experimental and levered portfolio had 32% of return (Dark Blue line below) compared to S&P 500’s 22-23% returns, US index funds, VT’s 13-14% returns and developed country index’s 1-2% returns. You can see my portfolio under-performed significantly during the crash then recovered fast. That’s what leverage gets you. This experimental portfolio is quite small compared to my main portfolio but I learned several lessons about leverage.

 

Leverage?

1. Leverage really works both ways. When times are good, leverage really boosts your returns but during bear markets, the portfolio can go down at unbelievable speed.

2. If you are going to use leverage, consider hedging. Some people use 100- 150 days moving average to short sell markets to prevent draw-down while not selling any stocks during the crash. I did not use hedging this time but I learned how to and fully ready to do so if the markets start to selloff again.

3. If you are using margins, use only comfortable amounts so that you are not forced to sell. I was forced to sell quite a bit which hurt the performance of my portfolio in a long run.

4. If not comfortable with leverage, don’t. Not using leverage will give peace of mind.

 

 

 

 

Main portfolio

Let’s look at my main portfolio which is consist of 100% Canadian stocks.

YTD up 11.4% but it was down almost 22-23% during March bottom (crazy!). TSX is down by 11.4% YTD.

 

Since September 12, 2014, it is up 134.4% whereas TSX’s 14.2%. TSX really is a terrible index.

As you probably know, one of my anchor stocks is Constellation Software which has not been disappointing.

Enghouse has been performing well (Is anyone surprised? They deployed to sizable acquisitions in various software companies including Teleconference company before market sell off, ,they still have sizable cash position during the pandemic of which I am quite sure are ready to be deployed opportunistically. 

My beloved MTY sucked big time, down 70% from the top, rightfully so. 

The management seemed quite confident during the earnings call but there are many things that aren’t under their controls such as duration of lockdown, remote work impact, consumer confidences etc. Without MTY, I would have done much better but again, what could I have done? I did not expect USA and Canada would really lockdown the whole countries when the Covid case numbers were very low. Seems easy in hindsight but learned the meaning of exponential growth in a bad way.

I took some opportunistic purchases buying some Reits(which I am not typically a big fan of), beaten down venture stocks etc during market selloff.

All of them are doing pretty okay now.

 

 

Staying levelheaded

My US RRSP (my portfolio 3) did pretty well and one of the best pick during this Covid was Livongo.

I have been watching this company for many months and saw it got killed in mid March.

I knew it was severely undervalued. Unfortunately, I had to sell Amazon to buy this. Selling Amazon is a big deal for me so buying Livongo had to be absolutely worth it. That turned out well.

Lessons? Every crisis comes with fresh opportunities. All we needed to do was stop panicking and look around.

 

There were many companies sold off when the markets were hitting the bottom and they all did wonderfully…

Afterpay- Up 400%

Wayfair- Up 600%

Livongo- Up 200%

Peloton- Up  135%

Datadog- Up 150%

The list is endless…

All we had to do was really look around and think about the macro cases of the companies that got decimated altogether.

 

Things that I say to myself all the time 

  • You have to trust your process.
  • It is easy to look smart in a bull market but it is much harder to stay levelheaded during market selloff. Emotion is a really powerful weapon which often works against you.
  • Do your due diligence.
  • Go with your best ideas (e.g. Moat, high gross margin, high FCF and ROIC, founder driven and experienced management, leader dominating niche, high visibility revenue (recurring), large and growing tangible addressable markets etc.)
  • Buy absolutely high quality stocks and let them run.
  • Be patient but don’t hesitate to change your mind if you feel something is off. Don’t stay wrong for a long time.
  • Lastly, keep your macro view intact especially times like this- For example, what companies will benefit due to Covid?  If you think of the companies that would benefit, then start small and increase your position as your conviction gets bigger. When you think that you are really late to the party, maybe you are early. Not the earliest but still early and benefit greatly down the road. Who knows? What counts is your thoughts and ideas based on research and act on your convictions.

 

That’s it for today. Keep well and be safe everyone. See you all soon!

 

 

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7 thoughts on “BeSmartRich’s portfolio update May 2020

  • Albert

    Congratulations on your outstanding performance!

    I went 50% cash early April and I have not bought anything. I am -23% YTD.

    I missed Livongo. Am I too late if I buy now?

    I think the markets are overbought.
    The cases are still growing, many countries are doing terribly, unemployment rate through the roof.
    I don’t understand why markets are up.
    I think the markets will crash back again.
    I am waiting for correction and will deploy my cash.

    • Be Smart Rich Post author

      Livongo was $48 or so just 2 days ago now it recovered back to $60. It almost trades like a penny stock. Extremely high beta but that’s normal for this kinda ultra growth stock.
      I believe everyone should be exposed to ultra growth stocks at some extent in their portfolio which should compliment well with other stocks.
      If you wait for correction too long, you may never get back in the game.
      Note that many economic data is a lagging indicator meaning what you see from the news now is absorbed by the markets 1-2 months ago.
      Markets are forward looking so if you like some stocks to buy, don’t get too cute. Just buy some and build into a position overtime otherwise you may miss the opportunity and kick yourself down the road.

      I can be wrong but I believe March low was the low.

  • Mike

    Dear BSR,

    How do you estimate a fair intrinsic value of growth stocks? Several of your holdings have explosive growth but generate very little profit or even persistent annual losses. Could you perhaps post a case study on how to value one of your high growth companies in terms of your screening process, due diligence, growth assumptions, fair purchase price model, and upper and lower selling bounds? How do you account for extremely generous share-based compensation schemes and aggressive dilution (and potentially ticking time bombs of convertible securities) in the fast growth companies?

    Companies like Enghouse and Constellation are aiming to allocate capital with a 5-6 year cash-on-cash return on investment. This process, however, does not work for most newer type of software companies which rely heavily on adjusted metrics and consistently generate net losses. Even after these aggressive adjustments, current valuation are simply orders of magnitude too high to fit such criteria.

    I have recently listened to a podcast by MAWER (https://www.mawer.com/the-art-of-boring/podcast/what-the-f/) which was discussing their equity analyst’s perspective on how Shopify could be considered a GAARP purchase at a reasonable discount to intrinsic value even at its super expensive traditional valuation metrics (forward PE of 5k+; P/CF of 1k+, negative EV/EBITDA, negative ROE). In summary, they state that some companies like Shopify or Amazon choose to expense 100% of their software development costs as an immediate expense rather than a gradually amortized investment like companies used to do in the past in physical infrastructure (roads, factory equipment, office building, etc.).

    At the same time, however, Mark Leaonard suggested in the past CSI AGM something along the lines that there seems to be a seemingly endless amount of irrational private equity capital pouring into software companies which are often being run by aggressive managers who try to slash costs and raise prices at the expense of customer relationships and product development. These software companies than seem to hop in a circle between private equity funds in recurring daisy-chain transactions with ever higher valuation based on adjusted metrics and ever higher leverage to justify the higher multiples. This leaves essentially very little profit to be made in holding them long term and also pushes up valuation of publicly traded companies to irrational levels. I have read several other investors state similar concerns about technology unicorns where by the time they usually IPO, there are very little returns to be made and it is an escape plan for the early investors/founders who want to run away from a hot momentum/flavour investment which will never make profit and pass the hot potato to the dumb retail investors before the market sobers up to their financial reality.

    I have lost more than half of my RRSP portfolio thanks to believing in siren’s song of adjusted metrics of Canadian health care companies like Concordia and Valeant etc. As a result, I am perhaps too pessimistic when trying to understand the intrinsic value of the “new” paradigm software stocks since other than high leverage there seem to be many parallels.

    Looking for example at a company like SEA [ticker SE] which was a new company I read about in your post… using 5-year morningstar data from Dec 2014 to Dec 2019, we get a CAGR of revenue per share of growth of 51%. However, the per-share operating loss (and NOT profit) grew at 43% and net loss grew at 58%. In other words, the company’s numbers were diverging. SEA was losing more money more quickly than it was growing its revenue. In the past five years, the company has loss of 3.4 billion USD on a revenue of 4.2 billion USD (in other words, they have been giving away 81 cents for every dollar of sales). If we look at the expenses, the sales/general/administrative was about 69% last year and research and development only 7%. Amortizing rather than expensing the R&D over time would thus have a very small impact on the overall financial numbers. Do you assume in the future the company will keep growing its revenues but will slash its advertising and R&D expenses to zero or substantially smaller number? I am not sure what is their churn, competitive pressure, and attrition, but many SAAS companies will likely have to keep very large advertising budgets to maintain their aggressive growth into the future.

    I am very confused about the market and do not understand valuation of many companies. Could you, please, enlighten us with your perspective and accounting expertise?

    Sincerely,
    -Mike

    • Be Smart Rich Post author

      Hi Mike- I will do a post on importance of having a macro view to address what I have realized last few years. That should give us an opportunity to think about and direct us more towards to great investments against the terrible ones like Concordia and Valeant.