There are only 17 ½ more trading days left in 2020. What a year. The dichotomy between the portfolio returns and the hardships experienced by tens of millions of people around the world seems almost unbelievable and it makes me feel very grateful and fortunate. I always try to look at things in a positive light, and, although I have never in one year spent more time in physical isolation, I have made several new friendships with fellow investors and learned some very valuable investing/trading skills. In 2021, I am very much looking forward to getting vaccinated and taking the many trips that I had planned and were canceled in 2020. I am also looking forward to seeing as many of my friends (including new online friends) and loved ones as possible for in person visits. Looking back on this pandemic from my own investing perspective as it was happening can be done by reading my 2020 portfolio updates in order, particularly the three updates in March and the two after that (see next section for links). For me it was interesting to read them again in order. This will be my second to last update of 2020.
PRIOR 2020 PORTFOLIO UPDATES
PORTFOLIO PERFORMANCE
| DATE | GR Portfolio (YTD) | S&P500 Total Return (YTD) |
|---|---|---|
| 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% |
| 4-Dec | +229.4% | +16.5% |
Overall, the portfolio was up 34.2% in the month of November, but no new all-time highs were attained in November. The peak was on October 13th with a YTD return of +250.3%. From this peak, the portfolio reached a max decline of -27.2% on November 10th. Looking back at previous portfolio declines, we can see that declines happen occasionally:
| PEAK — BOTTOM | % DROP |
|---|---|
| 4Sep2018 – 24Dec2018 | -37% |
| 26Jul2019 – 22Oct2019 | -37% |
| 18Feb2020 – 16Mar2020 | -45% |
| 13Oct2020 – 10Nov2020 | -27% |
The most recent decline was swift and short-lived. I am always prepared for a 50% portfolio decline, and I do expect to experience one of those at some point (although that hasn’t happened since 2015/2016).
This portfolio update includes the first 4 trading days of December, and the movement during these days was influenced by the earnings results of ZM (11/30), CRM (12/1), CRWD (12/2), and DOCU (12/3). Going into earnings of these companies, my portfolio had a combined allocation of about 62% in ZM, CRWD, and DOCU (plus some significant short-term options bets on the earnings results of these companies). It was a whipsaw week with the portfolio down 11% on Tuesday, but by the end of the week the portfolio ended just about at the same level where it ended the previous week. It just shows how a concentrated portfolio can swing around earnings results.
Below I’ve appended new portfolio highs onto the table that I posted in my last update. The entries from 02/18/20 through 10/13/20 are reposted and the entries after 10/13/20 (bolded) are new.
| DATE | YTD RETURN | NOTES |
|---|---|---|
| 2/18/20 | +40.7% | YTD high prior to lockdowns |
| 3/6/20 | +21.9% | portfolio down 10% on the day |
| 3/9/20 | +3.6% | portfolio down 15% on the day; Fear index=3 |
| 3/11/20 | +0.6% | portfolio down 8.8% on the day; Fear index=4 |
| 3/12/20 | -11.0% | portfolio down 11.4% on the day; Fear index=2 (1 intraday) |
| 3/16/20 | -22.8% | portfolio down 18.9% on the day; Fear index=3 |
| 5/22/20 | +61.0% | new all-time high (ATH) |
| 5/27/20 | +47.5% | portfolio dropped 15% (intraday 5/27) in 3 trading days |
| 5/29/20 | +64.7% | new ATH (end of May 2020) |
| 6/3/20 | +78.8% | another ATH; day after CRWD and ZM earnings |
| 6/10/20 | +79.4% | another ATH |
| 6/15/20 | +84.6% | another ATH |
| 6/16/20 | +89.4% | another ATH |
| 6/17/20 | +92.1% | another ATH |
| 6/18/20 | +101.7% | another ATH |
| 6/19/20 | +103.3% | another ATH |
| 6/22/20 | +111.4% | another ATH |
| 6/25/20 | +114.6% | another ATH |
| 7/1/20 | +119.7% | another ATH |
| 7/2/20 | +121.4% | another ATH |
| 7/7/20 | +125.7% | another ATH |
| 7/8/20 | +139.9% | another ATH |
| 7/9/20 | +147.0% | another ATH |
| 7/13/20 | +118.6% | portfolio down 10.5% on the day (biggest $ drop ever) |
| 7/16/20 | +113.1% | July trough |
| 8/3/20 | +156.9% | another ATH |
| 8/4/20 | +158.7% | another ATH |
| 8/5/20 | +158.8% | another ATH |
| 8/7/20 | +108.3% | OUCH! Biggest dollar drop ever (and -19.5% in 2 days!) |
| 8/11/20 | +94.6% | August trough |
| 9/1/20 | +177.9% | another ATH (day after ZM reported) |
| 9/22/20 | +187.1% | another ATH |
| 9/24/20 | +169.5% | trough |
| 10/1/20 | +196.6% | another ATH |
| 10/5/20 | +200.7% | another ATH |
| 10/7/20 | +209.3% | another ATH |
| 10/9/20 | +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 |
| 12/1/20 | +195.2% | day after ZM reported (-11% on the day) |
| 12/3/20 | +212.3% | day after CRWD reported (+7.3% on the day) |
| 12/4/20 | +229.4% | current portfolio reading |
Weekly Portfolio Performance
| DATE | GauchoRico YTD | S&P500 TOTAL RETURN YTD | DELTA |
|---|---|---|---|
| 1/3/20 | 4.5% | 0.1% | 4.4% |
| 1/10/20 | 14.8% | 1.1% | 13.7% |
| 1/17/20 | 19.6% | 3.1% | 16.5% |
| 1/24/20 | 22.1% | 2.1% | 20.0% |
| 1/31/20 | 25.7% | 0.0% | 25.8% |
| 2/7/20 | 28.1% | 3.2% | 25.0% |
| 2/14/20 | 39.8% | 4.9% | 34.9% |
| 2/21/20 | 29.1% | 3.6% | 25.5% |
| 2/28/20 | 27.7% | -8.3% | 35.9% |
| 3/6/20 | 21.9% | -7.7% | 29.5% |
| 3/13/20 | -4.8% | -15.7% | 10.9% |
| 3/20/20 | -6.8% | -28.3% | 21.6% |
| 3/27/20 | -2.4% | -21.0% | 18.5% |
| 4/3/20 | -12.5% | -22.6% | 10.0% |
| 4/10/20 | 3.1% | -13.2% | 16.2% |
| 4/17/20 | 18.7% | -10.5% | 29.2% |
| 4/24/20 | 20.5% | -11.7% | 32.1% |
| 5/1/20 | 13.8% | -11.8% | 25.6% |
| 5/8/20 | 37.7% | -8.7% | 46.4% |
| 5/15/20 | 47.8% | -10.7% | 58.5% |
| 5/22/20 | 61.0% | 7.8% | 68.8% |
| 5/29/20 | 64.7% | -5.0% | 69.7% |
| 6/5/12 | 67.4% | -0.3% | 67.7% |
| 6/12/20 | 74.8% | -5.0% | 79.8% |
| 6/19/20 | 103.3% | -3.2% | 106.5% |
| 6/26/20 | 107.8% | -6.0% | 113.7% |
| 7/2/20 | 121.4% | 2.1% | 123.5% |
| 7/10/20 | 144.2% | -0.4% | 144.6% |
| 7/17/20 | 115.4% | 0.9% | 114.5% |
| 7/24/20 | 113.2% | 0.6% | 113.6% |
| 7/31/20 | 144.7% | 2.4% | 142.3% |
| 8/7/20 | 108.3% | 4.9% | 103.3% |
| 8/14/20 | 102.9% | 5.7% | 97.3% |
| 8/21/20 | 124.4% | 6.5% | 118.0% |
| 8/28/20 | 135.5% | 10.0% | 125.6% |
| 9/4/20 | 142.9% | 7.5% | 135.4% |
| 9/11/20 | 143.6% | 4.8% | 138.8% |
| 9/18/20 | 161.7% | 4.2% | 157.5% |
| 9/25/20 | 181.0% | 3.5% | 177.4% |
| 10/2/20 | 192.0% | 5.1% | 186.9% |
| 10/9/20 | 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% |
| 11/6/20 | 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% |
| 12/4/20 | 229.4% | 16.5% | 212.9% |
ALLOCATIONS
| TICKER | 12/04/20 | 11/30/20 | 10/31/20 |
|---|---|---|---|
| CRWD | 25.3% | 22.3% | 20.4% |
| DOCU | 19.4% | 9.5% | 9.6% |
| NET | 19.1% | 18.3% | 14.6% |
| ZM | 14.8% | 28.2% | 23.0% |
| DDOG | 11.2% | 10.8% | 12.6% |
| PTON | 3.3% | 3.3% | 11.6% |
| GOLD | 3.2% | 3.1% | 4.4% |
| BPRMF | 1.3% | 1.2% | 1.5% |
| NEM | 1.1% | 1.1% | 2.7% |
| Cash | 3.3% | 4.6% | 6.1% |
The above allocations include leaps on CRWD, DOCU, and NET. I won’t get into the details of the breakdown of options versus shares, but these options amplify the upside and the downside of the positions. Also, 2.8% of the 4.6% cash on November 30 are reserved to make tax payments on Jan. 15, 2020.
PORTFOLIO CHANGES
Changes during the month of November 2020
- In November I had built up my PTON position to more than 12%. After the earnings report/call, I sold about ¾ of my position. The reason was not because I do not believe in PTON’s future prospects but rather because the upside is being partially capped due to supply constraints. With a strong belief in ZM’s and DOCU’s future prospects combined with ZM’s and DOCU’s share price dropping, I decided to add to DOCU and temporarily and opportunistically add to ZM.
- I sold all of my high cost basis shares of DDOG just ahead of the DDOG earnings date. This only dropped my allocation a little as I had previously sold all of my DDOG in my tax deferred account and most of my remaining shares were low cost basis shares in my taxable accounts.
- I sold half my NEM shares to add to my fast growers which had declined.
- The funds from selling PTON, DDOG, and NEM shares were redeployed into ZM and DOCU.
- In addition to adding to ZM and DOCU, I converted some of my shares in these 2 companies to 2023 call options (leaps) to add leverage to these positions. For more information about this click here.
- On November 27th and 30th, I sold some of the temporary ZM shares (added in mid-November) before the earnings. Some of these funds were held in cash while 0.5% was added to DOCU shares.
Changes during the first 4 days of December 2020
- On December 1st, I sold all the ZM leaps and a few more shares to bring the allocation down to about 16% (was 30% the week prior). I will explain the reasoning behind this allocation change. The ZM proceeds were left in cash while I decide where to reallocate. I intend to sell 20% of my remaining ZM shares (hopefully for a better price) to bring the allocation down to about 12-13% of the portfolio.
- On December 4th, I further added funds to DOCU based on a stellar report and increased confidence in their future.
EARNINGS RESULTS SINCE LAST UPDATE
PTON (11/5): Top of guidance was 220.2% revenue growth
DDOG (11/10): Top of guidance was 51.3% revenue growth
ZM (11/30): Top of guidance was 314.2% revenue growth
CRWD (12/2): Top of guidance was 71.8% revenue growth
DOCU (12/3): Top of guidance was 45.1% revenue growth
The earnings reports of our portfolio companies always give us new information that must be absorbed, processed, considered, and then, if appropriate, acted upon. This was very true for me this past quarter. Other posters on Saul’s board have given good summaries of the companies and the results. Instead, in this section of my portfolio write-up, I will focus on (for each company listed above) the following:
a) my preconceptions going into earnings,
b) the most relevant information (IMO) from the earnings results and management’s commentary,
c) my conclusions and subsequent actions.
Let’s go in order of when the companies reported starting with Peloton on 11/5:
PTON (11/5)
I first bought PTON in October, and, as the earnings date approached, I substantially increased my position to about 12% of my portfolio. I wrote about PTON in my last portfolio update (10/31/2020 see link above). To briefly summarize what I liked about the company: spectacular growth, tremendous user and engagement and ecosystem (Apple-like), and an aspect of recurring revenue. I also liked that I believe many other people view PTON as a WFH pandemic play that would reverse after COVID. PTON was gaining traction before the pandemic, and my view is that Peloton will continue rapid growth after the pandemic. My one concern going into earnings was PTON’s ability to meet demand with enough supply. There were stories of delays at the Los Angeles port where the Bike shipments must go through to the get to the large US market from PTON’s factories in Taiwan. The long supply chain was a concern here going into the very crucial holiday selling season. I also ordered a Bike in late August and then ordered a Bike+ in late September. I also knew of several friends who were also buying the bikes so I knew first hand how long their fulfillment delays were.
PTON’s results were great. They exceeded revenue guidance and raised full year guidance (note the FY ends in September so they just reported Q1 FY21). Everything was good except for the delays which also led to subpar customer service. They said on the call that demand was very strong but supply would be an issue for the foreseeable future. While my view of their story, the demand for the product, and what will happen to demand after the pandemic were all unchanged, I decided that the supply issues were going to be a problem for 1-2 more quarters. I also weighed that PTON has about 8% churn so their “DBNER” (if you can call it that for PTON….I say that more because my alternative investments are mostly SaaS companies which have DBNERs) is around 92% compared to 120+% for my other investments. Thus, I decided to cut my PTON allocation from about 12% to about 3.5% after getting this new information. I decided to buy DOCU and temporarily park some of the PTON proceeds in ZM because ZM shares were down about 35% from the high (and I thought this drop was undeserved and likely to reverse).
DDOG (11/10)
DDOG had run up to $120 and was looking expensive when compared to the other positions in the portfolio. I was concerned about the revenue deceleration and possible further revenue deceleration going into Q3 earnings. I decided to lighten my position by selling all my shares in my tax deferred accounts and all my high cost basis shares. The allocation cut was only about 2% in terms of allocation. At first glance, the DDOG report looked not all that good to me, and this result was a bit more complex to decipher. But some good discussion by members of Saul’s board ensued. Also, the numbers, IMO, were good enough considering all the partnerships and FedRamp approval that could boost growth going forward. Thus, I decided to make no further adjustments after the earnings results were released.
ZM (11/30)
I knew the ZM results would be the hardest of all the companies to predict. The range of possible outcomes was VERY wide. I thought on the low side they might come in at $750M revenue and on the high side over $900M revenue. I was very optimistic with a 30% allocation (temporarily and opportunistically boosted from 23%) on the Friday prior to earnings. I also had placed some options bets totalling about 1% of my portfolio to capture tremendous upside should ZM report an absolute blowout; the risk reward on this bet was too good to pass up. But, at the same time, I did lighten my allocation from about 30% to about 28% by selling some shares on the day of earnings but before the result became public. The results were within the range of my very wide prediction but on the lower side. The guidance was very strong. I lost my options bets, but the size of the loss was tolerable. My disappointment in the report related to three main things. First, I was expecting massive adoption by enterprise customers. In the prepared remarks, CEOs of SaaS companies typically highlight notable customer wins. Eric Yuan highlighted three, only 2 of which were enterprises. I was very disappointed that ZM could not highlight any impressive customer wins. This disappointed me because it left me wondering if they had any great enterprises adopt ZM in Q3. It’s now a concern for me: is ZM getting enough new Fortune 500 logos to adopt Zoom for video conferencing? Now I don’t know. The second disappointment was an almost lack of information on Zoom Phone. Prior to the Q3 report, I was expecting ZM to show some real sales traction on Zoom Phone. We hardly got any evidence of that and I think it’s important because Zoom Phone should be a very important driver to sustain future growth. Now I’m left wondering about the growth in calendar 2021. The third disappointment was the information on OnZoom: they said on the call that they expect no meaningful revenue contribution from OnZoom until 2022. Ouch. I was expecting to see meaningful revenue from this in 2021. Another growth driver for 2021 gone. Add to this the uncertainty of churn when the pandemic ends (note that 38% of revenue comes from customers with less than 10 employees and these customers are not included in their 130+% DBNER calculation). All this new information together changed my view of how much growth may slow post-COVID: I was hoping for 50-60% growth after COVID and now I’m thinking 35-40% seems more realistic. Long-term I think Zoom is still a Google-like company, but now it doesn’t deserve a 20+% position in my portfolio. On the day after earnings, I cut my ZM position to 16% (I sold my leaps first followed by a few shares). I plan on cutting another 20% of my remaining ZM shares over the next few weeks which will leave me with a 13-14% allocation. But cutting down the ZM allocation left me with a larger cash position than I normally like.
CRWD (12/2)
CRWD has been one of my top 2 positions for a long time now. When you consider that most of my CRWD position is in the form of LEAPs ($50 and $60 strike prices), it is clearly my largest position. It has been growing consistently in the mid-80%s for a long time and it has clear tailwinds from COVID. It is not a work from home stock, but that’s what most people think it is. It is actually a work from anywhere which is an important distinction because work for anywhere is the new normal. Security is one of the first if not the very first step in a digital transformation. CRWD is cloud based security and they are the leader. They have the advantage of getting more effective the more devices are connected to their network. They punch way above their weight class in terms of valuation, probably because security companies have a history of getting disrupted. I think that anyone who thinks that CRWD is likely to get disrupted is going to turn out to be wrong (good for me because it made buying the shares for less possible). CRWD has many drivers to sustain its growth: international, more and more modules that can be cross-sold, a growing market (i.e. increasing TAM) with a large portion yet to be captured, a long way to go in the world’s collective journeys to the cloud and digital transformation. CRWD also seems to have excellent marketing and a world class executive team. I can’t really find much wrong with CRWD, and, unlike Zoom, CRWD, IMO, has clear sailing after the pandemic is over. So going into earnings, CRWD was my highest conviction position. I placed some options bets on CRWD but not as many as I had placed on ZM. Going into earnings, I predicted CRWD had a 5% chance to show a small revenue growth deceleration, an 85% chance to maintain its mid-80%s growth rate, and a 10% chance to show a nice acceleration in revenue growth. They maintained the mid-80%s growth rate, provided solid guidance, and provided a quite rosy and upbeat commentary on the earnings call. Absolutely nothing wrong that I could find. After results, I collected my winnings from my options bets (which offset a large portion of my ZM options losses from the day before) and maintained CRWD number one and highest allocation position.
DOCU (12/3)
I want to provide a shoutout to stocknovice for getting me interested in DOCU. DOCU is my newest position (first bought on 10/12/20) and if not for stocknovice’s excellent write-up and analysis I would have not looked at it more closely. After I sold ¾ of PTON, DOCU was a clear choice for me to increase. IMO there’s a lot to like about DOCU: accelerating growth in revenue and in customer adoption, a relatively (compared to other SaaS companies) reasonable valuation, a rock solid market dominating position, a very large TAM with many years of growth available, and some new initiatives/products (AI-based solution and notary), if successful, can really add another leg to its growth (and double its TAM). I had high hopes going into earnings and I increased my position from 9.5% to 15% in the days before the Q3 earnings announcement. I also placed some options bets on the earnings results. DOCU reported the Q3 result yesterday. Growth continued to accelerate and everything is playing out as well as I could have (and did) hoped. My own thoughts about DOCU post-COVID were shared and explicitly stated by the CEO on the earnings call: that is that the customers who have shifted to DocuSign are not going back to paper. I increased my position on DOCU further today. For me it feels really great when I gain clarity on how I should allocate the positions in my portfolio. Much of my ZM proceeds have found a home in DOCU.
Reassessment after these earnings results
The clarity I feel can be summed up like this: My highest 3 conviction stocks are CRWD followed by DOCU and NET. I have confidence that their growth trajectories have all be enhanced by COVID in three ways: a) growth accelerated but not pulled forward at the expense of future revenue (it’s pull forward in adoption which does not take away from future revenue but adds to it), b) new products that fit the new post-COVID world and provide new growth opportunities, and c) increased market dominance provided by the appropriate product-market fit at the right time and the scale required to reinforce that dominance. It is clear to me that all three companies possess these attributes and they deserve to be top tier companies in the portfolio. ZM was there until recently but the concerns that I mentioned above and the risk of their second acts not being blockbusters has knocked ZM down a notch in my portfolio. DDOG is still expensive and their future dominance is not as clear to me; the winner in their market is not yet set in stone as it appears to be with CRWD and DOCU (and probably ZM and NET); but DDOG is making great progress and the partnerships with all the Cloud titans is a great step to establishing dominance. While PTON has great potential, its success in post-pandemic times is not assured to the same degree as it is for the others. In addition, PTON’s reliance on non-digital goods (i.e. exercise equipment) makes scaling the business slower and more challenging as we are witnessing with their protection ramp and supply chain issues. Thus, despite PTON’s high growth rate, it can’t have as high an allocation.
ADDITIONAL THOUGHTS
If you watch the financial news you will hear a lot about WFH stocks, reopening stocks, cloud software stocks (which have gotten a lot of attention due to the run up in stock price in 2020). IMO many of these talking heads don’t have the time and have not put in the effort to research and really study in a deep dive kind of way many, if any, individual companies (stocks). You will hear some talk about 1999 and the internet bubble and warn that the software stocks are great now but they will get crushed. Many talk about a barbell approach which is having some growth stocks and some that will (as if they know) do well when COVID is over. The problem with what they are saying is that they are generalizations. We look at each company on its own. We don’t lump everything together as in the market or a sector. Sure, sectors will rise and fall (in terms of stock price) together often, but it is each individual company, its financials, its dominance in its space, etc that will determine in the long run how well its stock will perform. We are trying to pick the fastest growing companies that are and will continue to dominate; these things are required for longer periods of sustained revenue growth (and EBITDA growth) that will be necessary to earn market-crushing returns. We want to select the companies that will be the winners and our analysis of the companies, their markets, their competitors, and many other factors are needed to have a chance of success at picking winners. It is this long, sustained high growth over many years that protects the stocks should we see valuations compress. If needed, the companies can grow into their valuations if valuations compress (assuming the high growth continues on).
When I compared my portfolio today to my portfolio from a year ago, I noticed that the market cap of the companies in the portfolio is much higher today than a year ago. Most of my companies a year ago were less than $10B in market cap. Today, they are mostly much higher; here are the approximate market caps of the growth companies in my portfolio:
| Ticker | Market Cap (12/4/20) |
|---|---|
| ZM | $117B |
| DOCU | $45B |
| CRWD | $37B |
| PTON | $33B |
| DDOG | $31B |
| NET | $24B |
Yes, their stock prices have risen (which contributes to market cap increase). But each company’s market dominance is much greater now than it was a year ago. That’s what we want. We want dominance so their futures will be more certain. We want dominance together with hypergrowth. When I look at the top 6 positions in my portfolio which make up 90% of the portfolio, I see a group of companies that are dominating and hyper growing. And that gives me comfort when others say my companies are overvalued and due for a crash. When I see dominance fading or growth slowing too much I usually move on to a different horse.
The opinions, thoughts, analyses, stock selections, portfolio allocations, and other content is freely shared by GauchoRico. This information should not be taken as recommendations or advice. GauchoRico does not make recommendations and does not offer financial advice. Each person/investor is responsible for making and owning their own decisions, financial and otherwise.