Before I get into the details, I wanted to take a moment to thank everyone for reading my articles, sharing your experience under comments, and following me. I can’t explain how much it means to me, and even though I have written only 3 articles so far – both the readership and the followership have defied my own expectations. It feels so amazing that I have been able to add value to the community, and I hope to continue doing that. It is also a learning opportunity for me, so always share your thoughts and experience in the comments section.

3 Objectives of Providing Monthly Portfolio Update

This is my first portfolio update, and I am hoping to achieve the following three things through these write-ups –

  1. Introduce / discuss a concept or answer a recurring question from my readers or debunk an investing myth
  2. Share how I am tracking against my long-term goal, and in-process inspire you to start reviewing your portfolio regularly and take appropriate measures to ensure you achieve those goals
  3. Discuss some of the transactions I made during the month and my thought process when I buy or sell a security. I am hoping this will help my readers in making adjustments to their stock portfolio

Okay, so enough of the introduction, let’s get going.

Buying Growth Stocks

Isn’t the growth already factored into the stock price?

It’s a very valid question, and when I started investing, I bought stocks that dropped significantly or were trading at 52-week lows. It didn’t serve me well, and I discussed this experience in a bit more detail in my first article. I adjusted my approach, and I am a big proponent of buying stocks that can consistently grow their earnings profitably, even if the price you pay is higher than what you would like.

I was recently listening to Master in Business podcast by Barry Ritholtz, in which he interviewed Simon Hallett, and Simon explained this concept in a very articulate manner –

If you can get the valuation wrong, and therefore the price you pay for the company is too high, the growth will bail you out and give you returns over a long holding period

If you haven’t yet, please go ahead and listen to this podcast as it’s a must for every investor.

This core belief has shaped my portfolio and helped me in avoiding value traps while investing in companies that generate value over the long term. Now the most commonly sighted example about investing in growth stocks and its propensity to end badly is characterized by the famous Nifty Fifty example. But what most investors don’t realize is that even if someone has bought Nifty Fifty stocks at its peak valuations ~42X earnings in December 1972, over the long term, it has produced returns comparable to the S&P 500 without any adjustments. Here is an excellent post by Ben Carlson on the topic. It’s important to note that the term was coined a few years before that, this valuation itself was insane, and it would be unimaginable that investors won’t rebalance their portfolios for 26 years.

Now let me hone-in on this further by bringing the example of Amazon and answer the perennial question –

Should I buy Amazon (AMZN) stock?

A lot of investors don’t want to buy it because they believe its P/E ratio is very high (I used to be in the same boat). But we fail to look at its cash flow. Here is a snapshot –

Source

Its current Market Cap is ~1.6T. So it may look that AMZN is trading at 100+ P/E based on TTM, it is only trading at 31 times its cash flow from operations. It has chosen to reinvest most of its cash flow in the business, which for me is a better use of capital than returning it to the shareholders, as I am confident that they will be able to generate better returns than what I would be able to do on my own.

READ ALSO  Hebei legislature beefs up FTZ support

Now people may argue that AMZN would still have to make some Capital Investments in sustaining the existing business. So I tried to pull comparables from Walmart (WMT), not a perfect comparison, but there CapEx is ~2% of their revenues, and that translates into ~$6.5B in CapEx for AMZN and not ~$24B, the AMZN has been investing as per TTM. Further, they have grown their Operating Cash Flow @~31% every year (it’s ~40% for the last 3 years, so growth is not slowing), ~15X in 10 years. Isn’t that incredible?

So I am more than happy to pay 30-60 times earnings for a business that can grow their cash flow at the clip of 30%. And if the stock price gets stuck at the current level for a couple of years, we would be looking at a business growing @30% and trading @~18 times cash flow, and that would make it even more attractive.

All this to say, if you can buy a great growth stock at low valuations, it’s amazing. Even if you end up paying a bit more, it should work out fine over the next few years. And no, all the growth is not priced-in even if you think that a particular stock is expensive to buy today. Do your diligence, though because conviction is crucial.

So now, I hope I have delivered against my first objective, so let’s move on to the next one.

Tracking Net Worth against my long-term goals

I track my net worth monthly – I know it’s a bit too much, but it does help me in understanding where I am and make appropriate decisions. For a quick background, I am young (mid-30s), and I aim to accumulate enough wealth by 50 that at a withdrawal rate of 3.5% it can cover close to 60% of my current income.

So how am I tracking against that goal?

Here is a snapshot of my net worth against my target, and my current net worth is ~22% of what I require to be able to draw a sustainable income.

Source: Created by Author

Let’s take a closer look at the chart –

Source: Created by Author

You may notice it has not been easy to deliver against the ambitious targets, and the recent performance of the stock market helped me in being able to cover the gap. In fact, the month of July and 2020 as a whole has been very positive, and I am tracking at 108% of my year-end target. But considering my significant allocation to equities (~85%) means any significant drawdown in the market may have a heavy impact on the overall net worth.

I can’t control the markets, but one thing I have better control over is savings. So let’s look at how my savings are tracking against my goals.

Source: Created by Author

Overall, my total savings so far are ~10% more than the target. Being locked in the home in the last 6 months did help me save significantly more. But my wife and I love traveling, and as soon as things ease, we are definitely going to take a 2-week vacation, and that may bring down the savings rate.

My Net Worth and Savings are tracking well in the short term, and I will continue to closely monitor the performance. Btw, I have also finally named my Financial Independence project – Project Aegis – as I read that naming a project improves engagement and likelihood of its success.

So by now, I have shared my perspective on one of the recurring questions as well, how my portfolio has performed in July. Now the last part of the article – sharing my holdings and transactions in the month.

My Stock Portfolio, Holdings and Return

Ticker

Stock Name

% Weight

Initial Purchase Date

Holding Period (Months)

Cost Basis

Total Return

Consistent Compounders

GOOGL

Alphabet Inc. A

3.7%

28-Jul-2017

36

909.4

64%

FB

Facebook Inc. A

3.3%

17-Jan-2018

31

155.1

64%

MSFT

Microsoft Corp.

3.1%

21-Nov-2017

32

72.2

184%

TD

The Toronto-Dominion Bank

2.8%

22-Aug-2017

35

48.2

-5%

UNH

UnitedHealth Group Inc.

2.5%

17-Apr-2017

40

166.7

82%

GLIN

VanEck Vectors India Growth Ldrs ETF

2.3%

5-Jun-2018

26

38.4

-32%

MA

Mastercard Inc. A

2.1%

16-Nov-2018

21

200.0

54%

SYK

Stryker Corp.

1.8%

21-Dec-2018

19

152.4

27%

CVS

CVS Health Corp.

1.7%

19-Oct-2017

34

62.0

2%

WFC

Wells Fargo & Co.

1.6%

25-Jun-2018

25

36.5

-33%

FDX

FedEx Corp.

1.5%

20-Dec-2018

19

161.3

4%

BKNG

Booking Holdings Inc.

1.4%

8-Jan-2018

31

1880.0

-12%

NBC860

NBI Quebec Growth A

0.7%

24-Mar-2017

40

34.8

61%

[[S&P500]]

TD US Index e

0.3%

10-Jul-2020

1

57.8

4%

Total

14 holdings

28.8%

28

21.8%

High Flyers

SHOP

Shopify Inc. A

10.8%

11-Mar-2017

41

96.6

991%

NOW

ServiceNow Inc.

3.9%

16-Aug-2019

12

232.2

89%

PTON

Peloton Interactive Inc.

3.7%

10-Feb-2020

6

25.9

163%

SQ

Square Inc. A

3.6%

12-Jul-2017

37

39.1

232%

CMG

Chipotle Mexican Grill Inc. Class A

3.5%

8-Mar-2016

53

135.4

394%

AMZN

Amazon.com Inc.

3.5%

24-Dec-2018

19

1366.3

132%

LVGO

Livongo Health Inc.

3.0%

22-May-2020

2

60.3

111%

BABA

Alibaba Group Holding Ltd. ADR

3.0%

9-Apr-2018

28

170.4

47%

JD

JD.com Inc. ADR

2.8%

20-Jul-2018

24

31.4

103%

WDAY

Workday Inc. Class A

2.2%

16-Aug-2019

12

174.4

4%

OTCPK:ADYEY

Adyen NV ADR

1.6%

24-Jun-2020

1

28.7

18%

LMND

Lemonade Inc. Ordinary Shares

1.5%

7-Jul-2020

1

78.0

-25%

NFLX

Netflix Inc.

1.4%

17-Jul-2020

1

489.0

0%

RDFN

Redfin Corp.

1.3%

24-Jun-2020

1

40.0

4%

TAL

TAL Education Group ADR

1.1%

20-Jun-2018

25

41.2

90%

WORK

Slack Technologies Inc. Class A

1.0%

5-Jun-2020

2

31.5

-6%

NCNO

nCino Inc. Ordinary Shares

0.7%

15-Jul-2020

1

75.1

5%

XP

XP Inc. Class A

0.6%

24-Jun-2020

1

49.0

-11%

TCOM

Trip.com Group Ltd. ADR

0.5%

18-Jan-2018

31

44.6

-39%

PD

PagerDuty Inc.

0.4%

5-Jun-2020

2

25.1

21%

SOGO

Sogou Inc. ADR

0.4%

6-Jun-2018

26

11.4

-24%

Total

21 holdings

50.7%

15

100.9%

Special Situations

SLB

Schlumberger Ltd.

2.8%

5-Nov-2015

57

44.7

-59%

XEG

iShares S&P/TSX Capped Energy ETF

2.7%

1-Dec-2016

44

6.9

-46%

GM

General Motors Co.

2.2%

6-Oct-2017

34

31.7

-22%

GE

General Electric Co.

1.8%

19-Oct-2017

34

10.2

-40%

TEVA

Teva Pharmaceutical Industries Ltd. ADR

1.6%

11-Sep-2017

35

12.3

-6%

DAL

Delta Air Lines Inc.

1.5%

6-Apr-2020

4

22.7

10%

RCL

Royal Caribbean Cruises Ltd.

1.4%

5-Mar-2020

5

48.1

1%

SPG

Simon Property Group Inc.

1.3%

17-Mar-2020

5

53.4

17%

WBA

Walgreens Boots Alliance Inc.

1.2%

19-Oct-2017

34

56.8

-28%

LB

L Brands Inc.

1.1%

12-Sep-2017

35

38.2

-36%

XOM

Exxon Mobil Corp.

1.0%

6-Mar-2020

5

43.6

-3%

ALK

Alaska Air Group Inc.

0.7%

31-Jan-2018

30

42.9

-20%

CAKE

Cheesecake Factory Inc.

0.7%

2-Apr-2020

4

15.1

59%

BA

Boeing Co.

0.5%

17-Mar-2020

5

104.6

51%

Total

14 holdings

20.5%

23

-30.1%

READ ALSO  13 Nobel Laureates in Economics Endorse Joe Biden

Considering this is my first portfolio update, I want to draw your attention to a few things –

  1. Notice the performance disparity among the three stock buckets. You can read more about these buckets in one of my earlier posts. Even though the average holding period of the Special Situations bucket is relatively higher compared to the High Flyers, they have significantly underperformed.
  2. You may further notice that I bought some of the Special Situations stocks recently (in Feb-Mar), but most of them have holding periods of 3 years. So what it means is that I have been trying to focus my energy on Consistent Compounders and High Flyers in the mid to long term rather than the deep value buys.
  3. Among the high flyers, even if I strip out the performance of SHOP – an outright winner – the returns are 65% on the weighted basis, much higher than the other buckets.
  4. Even though my portfolio has been outperforming the S&P 500 in the recent period, I don’t take it as a given. Actually, my portfolio significantly underperformed the S&P 500 in 2017 and 2018 – my heavier allocation to Oil & Gas and some other deep value names played a big role in that underperformance. But the point is that we have to continue to learn what works for us and what doesn’t and adapt our portfolios to reflect that.

This post is already quite long, and I don’t want to bore you further, so let me quickly share the transactions I made during the month –

1 Stock Sell

Berkshire Hathaway (BRK.B) – I finally sold out of my Berkshire holdings @~$184.5, and it’s not because it’s overvalued, but I don’t think it’s any more aligned to what I look for in my holdings. I may be wrong and getting ahead of myself but I will take my chances.

READ ALSO  'Dual-circulation does not mean seclusion'

3 Stock Buys

  1. Lemonade (LMND) – I finally dipped my toes into this P&C insurer. They are promising to disrupt a very mature industry, and if they are successful, I want to be a part of it. Check out this great post from The Value Investor, including the comments to learn more about the positioning of the company.
  2. nCino (NCNO) – You can either consider it to be a software company or a fintech one. It provides a SaaS platform to simplify and automate conventional workflows in banking. The smaller to mid-size banks are under immense pressure to optimize their cost structure, and moving to something like this can add a lot of value. I particularly like this post from Bert Hochfeld on the stock. Even though it’s trading at a much higher valuation than what everyone expected, I did end up buying 50% of my typical position and looking for opportunities to add more.
  3. Netflix (NFLX) – Not buying Netflix earlier was one of my biggest mistakes. I recently went deep into its numbers, and potential subscriber growth here, and strongly believe that it will stay at the top of the entertainment value chain. Don’t miss reading the comments section, as it has some interesting perspective from readers across the globe – both on subscriber growth and ARPU.

Conclusion

Even though chasing momentum could be dangerous, don’t underestimate the power of compounding that growth stocks bring to the table. It’s always amazing to buying something at a deep discount, but even if you end up paying a higher price for something that is consistently growing earnings, it may all end up fine.

My portfolio has been able to perform well in July and YTD, but I’m vigilant of the valuations and prepared to take a hit if we see some corrections in the market. I don’t have a crystal ball, so I’m not selling anything even if I believe the prices have run ahead of itself.

I ended up making 3 purchases in July – all under the High Flyers bucket. I do realize that I am overweight here and hoping to add more Consistent Compounders in the future. I particularly like the Healthcare sector and wrote my perspective and top picks here. The article was very well received, and it’s a must-read if you are also intrigued by the sector.

If you like what you’ve read here and want to see more, click “Follow” to receive instant notification when I publish my next article. Also, please leave a comment below with your thoughts on the analysis.

Disclosure: I am/we are long AMZN, NCNO, LMND, NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: These are just sample ones I mentioned in the article. I hold all stocks listed under my portfolio.



Via SeekingAlpha.com