| YEAR | RETURN | CUMULATIVE RETURN |
|---|---|---|
| 2017 | +61.6% | +61.6% |
| 2018 | +55.9% | +152.0% |
| 2019 | +41.8% | +257.3% |
| 2020 | +245.6% | +1134.7% |
| 2021* | +3.1% | +1173.0% |
2020 was such a spectacular year that it will be a very hard act to follow. While the early 2021 returns for the GauchoRico portfolio and the overall stock market are nothing to write home about, the stories that have dominated the news have made it somewhat difficult to remain focused on the financial news and the individual companies in the portfolio. The attack on the United States Capitol, the transition to the new administration, the continuing coronavirus developments, and, lately, the GameStop short squeeze have sucked up a lot of my attention. Fortunately, we were in between earnings seasons so time was available to follow news not directly related to my investments. The new earnings cycle started in mid-January and the first companies tangentially related to the portfolio companies delivered results for their quarter ending on 31Dec2020 (more on that later in this post).
PRIOR 2020 PORTFOLIO UPDATES
Portfolio updates prior to 04Dec 2020 can be accessed by clicking here.
PORTFOLIO PERFORMANCE
| DATE | GauchoRico Portfolio (YTD) | S&P500 Total Return (YTD) |
|---|---|---|
| Jan | 3.1% | -1.0% |
The portfolio was up 3.1% in the month of January. The first month of 2021 delivered zero new portfolio all-time highs (ATH). The highwater mark is still on 22Dec 2020, and the portfolio currently sits 8.0% below that mark.
Although the portfolio’s value is little changed from the end of 2020, January displayed a decent amount of volatility, particularly during the last week of the month. On 4Jan, the first trading day of the new year, the portfolio dipped down to -2.2% YTD but then quickly surged to about +11% YTD. The 4Jan low was broken through during the last week of the month (on 27Jan) but only by a hair. There was no major company specific news on the portfolio companies during the final week’s selloff. Furthermore, the first SaaS, cloud titan, and big tech earnings results, which all were announced in the past week, were very positive (more on that later).
I’m primarily an investor interested in long term appreciation of my portfolio. However, I also do some trading which can also be called shorter term speculation. I prefer to call it well-informed risk taking. My portfolio results include the gains and losses on my investments as well as those from my options trading activities. In 2020, the realized gains from my options trading contributed 9.2% of my total returns for the year. Of my portfolio’s 3.1% 2021 YTD gain, the realized gains from my options trading comprised 9.8% of the 3.1% gain. In other words, without my options trading activities, my portfolio would have been up only 2.8% YTD.
Investing in a concentrated growth stock portfolio includes a lot of volatility. Some people can’t stomach volatility and opt for more consistency with lower expected long-term returns. I prefer higher long-term returns with a tolerance that my portfolio will probably have wilder swings and occasional massive drops. The table below shows some of the larger swings over the past few years plus some smaller swings that occurred in 2020. In spite of the portfolio’s choppiness in January 2021, the drops since the 22Dec peak were not significant enough for me to include them in the table.
| PEAK — BOTTOM | % DROP | Days: Old Peak to New ATH |
|---|---|---|
| 4Sep2018 – 24Dec2018 | -37% | 176 |
| 26Jul2019 – 22Oct2019 | -37% | 207/291* |
| 18Feb2020 – 16Mar2020 | -45% | 84 |
| 9Jul2020 – 16Jul2020 | -14% | 25 |
| 5Aug2020 – 11Aug2020 | -25% | 27 |
| 13Oct2020 – 10Nov2020 | -27% | 65 |
Weekly Portfolio Performance
I track my portfolio against the S&P 500 Total Return Index (^SP500TR on Yahoo! Finance). If I couldn’t consistently beat the market (S&P 500 is a proxy for the market) then I would be wasting my time trying to pick stocks. I chose the total return index as my benchmark because it includes the dividends paid on the index’s stocks; it wouldn’t be a fair comparison to exclude the dividends as they are part of my benchmark’s returns.
| DATE | GauchoRico YTD | S&P500 TOTAL RETURN YTD | DELTA |
|---|---|---|---|
| 1/8/21 | 6.5% | 1.9% | 4.6% |
| 1/15/21 | 6.4% | 0.4% | 6.0% |
| 1/22/21 | 10.2% | 2.4% | 7.9% |
| 1/29/21 | 3.1% | -1.0% | 4.2% |
ALLOCATIONS
| TICKER | 1/31/21 | 12/31/20 |
|---|---|---|
| CRWD | 31.2% | 31.5% |
| NET | 17.9% | 17.8% |
| DOCU | 16.2% | 16.4% |
| ZM | 11.5% | 11.0% |
| DDOG | 10.7% | 10.4% |
| LSPD | 4.8% | 3.3% |
| PTON | 4.0% | 4.2% |
| BAND | 1.9% | 1.5% |
| GOLD | 1.4% | 3.0% |
| BPRMF | 1.3% | 1.4% |
| NEM | 1.0% | 1.0% |
| SNOW | 0.5% | —- |
| Cash | 0.8% | 0.7% |
The above allocations include LEAPS on CRWD, DOCU, and NET (click here for an explanation on why, when and how I use LEAPS instead of shares). In January I added to my LSPD position by purchasing call options; I’ll explain the details of that in a future post.
PORTFOLIO CHANGES
Changes since 31Dec2020
I did not make major changes to my portfolio during January.
- In early January, I bought a small position in SNOW. I added to the position again in mid-January.
- I sold a small amount of ZM in mid-January. In my last portfolio update, I wrote that I was intending on cutting my ZM position moderately. I changed my mind, and now I’m intending to hold my ZM position for two reasons. First, the pandemic is dragging on so I expect ZM will benefit for a couple more quarters; this will also allow ZM to further solidify its market position. Second, the Zoom Phone results were impressive, and I now believe that Zoom Phone will provide a significant boost to its revenue in calendar 2021 and 2022.
- I sold half of my GOLD position in third week of January. I replaced the shares with an equal number of share equivalents of in-the-money (ITM) puts. The reason for this is that I was on margin and paying interest on that margin loan. Switching my shares to ITM puts allowed me to effectively own the shares without paying interest. The puts were about 7% ITM. I will be receiving a tax refund in a couple of months that can be used to replace my shares and close the short put position.
- In mid-January, I trimmed my CRWD position and bought more BPRMF. A week and a half later I changed my mind and sold the BPRMF shares and used the proceeds to buy more LSPD.
- During the last week of January, I sold some of my DOCU LEAPS, which amounted to about 1% of my portfolio.
- I used the proceeds of the DOCU LEAPS sale to purchase some call spreads on LSPD.
OPTIONS TRADING UPDATE
I started trading options more seriously in April 2020, and I previously posted a report on last year’s options trading results. Going forward, I’m planning on posting more detailed results for my options trading activities on a quarterly basis.
In January 2021, the realized gains from options trading (I’m not counting unrealized gains/losses in this calculation) contributed 9.8% of my total portfolio gains (both realized and unrealized). During the month, I closed out 61 trades while 17 still remain open. The win rate so far has been 65%, but the average loss was 41% higher than the average win.
The overwhelming majority of my trades were short straddles with a short deep in-the-money put. I described how this trade works in a recent post. In addition, I am continuously posting on a real example trade of this type. I think that following the example may be helpful for anyone interested in learning the mechanics of executing this type of trade.
This past week I couldn’t resist getting in on the GameStop action. I made a couple of options trades on GME that I described in a separate post.
EARNINGS SEASON HAS BEGUN
None of my portfolio companies have reported their results yet, but there’s work to be done leading into the earnings reports. I recently posted on how I prepare for the earnings season. I am currently applying this methodology as we are in the midst of earrings reporting for the business results ending on 31Dec and 31Jan.
Before getting into the information that I’ve gathered so far, I’d like to revisit something I wrote in my last portfolio update:
“…starting in March 2020, we have heard tech CEO after tech CEO say that they have seen several years or more of digital transformation occur in a few months; yet, in Q2 2020, we did see the purveyors of digital transformation and cloud adoption match these statements/observations with a corresponding acceleration in revenue growth. In Q3 2020, we began to see a glimmer but not enough to match the rhetoric conveyed in the Spring of 2020. I and others, like Jamin Ball from Redpoint Ventures, have hypothesized that there is a lag between stated intent of adoption and actual implementation of move-to-the-cloud and digital transformation projects. I think of implementation of these megatrends that were accelerated by the disruption force of the pandemic as coming wave. I don’t think that this wave will hit at the same time but rather that the wave has a multi-quarter thickness to it. The aspects of digital transformation with the highest urgency, such as remote communication, ecommerce, and cyber security, will show financial metric acceleration first. The backend of the wave would consist of products, services, and infrastructure improvements, that are not as urgent but still deliver positive ROI (for customers) and improved business competitiveness. If this hypothesis turns out to be correct then we could see some nice upside surprises in the coming quarters.“
GauchoRico — 4Jan 2021
I’ve bolded the last sentence of what I wrote a few weeks ago. We must ask the questions:
- What’s happening in the SaaS world right now?
- How will this impact the business results of the portfolio companies?
- How will demand for SaaS change going forward?
If we knew the answer to these questions, we could better predict what might happen to the stock prices. Clearly, accurate predictions could help in improving both investment returns and trading profits. While it may seem that I’m painting SaaS with a broad brush, the overall SaaS demand and digital transformation is only one of many indicators. I use other data in my decision making, and I pay particularly close attention to data that’s most directly relevant to my portfolio companies.
Early Indications
On January 25, Gartner released a report forecasting global IT spending. This is a must read for anyone invested in IT software stocks. The forecast was developed using interviews with and survey results from many CIOs and CTOs (i.e. the people responsible for IT spending decisions). For me, this report carries significant weight in my view of what’s to come for many of my portfolio companies. If anything, it’s supporting my hypothesis that demand for the products and services sold by my companies will continue to be very strong for at least 2-3 more years. Here’s a notable quote from the report:
Through 2024, businesses will be forced to accelerate digital business transformation plans by at least five years to survive in a post-COVID-19 world that involves permanently higher adoption of remote work and digital touchpoints. Gartner forecasts global IT spending related to remote work will total $332.9 billion in 2021, an increase of 4.9% from 2020.
25Jan 2021 Gartner report/forecast on IT spending
Another nugget from the report is that the highest spending increase within overall IT is forecast to come from Enterprise Software: -2.4% growth in 2020, +8.8% growth forecasted for 2021, and +10.2% growth forecasted for 2022. Furthermore, the categories that were highlighted as showing the most demand included cloud computing, core business applications, security, and customer experience. In summary, this report strongly supports that digital transformation and cloud adoption is stronger than ever and growth should not be in jeopardy of slowing anytime soon.
MSFT, AMZN, GOOGL Cloud Business Revenue
The cloud titans (AMZN, MSFT, and GOOGL) provide enterprises a place to host their digital workflows. Together, these three mega tech companies, through their AWS, Azure, and GCP offerings, constitute the vast majority of the outsourced cloud. I track the performance of their business results. MSFT reported their earnings results on 26Jan, and Azure didn’t disappoint! In constant currency, Azure revenue grew 48% in the Dec2020 quarter accelerating from 47% growth in the Sep2020 quarter. It’s very impressive to see a business at such a large scale show momentum and acceleration. Satya Nadella’s comments about the state of cloud adoption and digital transformation were even more encouraging:
“What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry. Digital capability is key to both resilience and growth. It’s no longer enough to just adopt technology. Businesses need to build their own technology to compete and grow. Microsoft is powering the shift with the world’s largest and most comprehensive cloud platform.”
Satya Nadella, MSFT CEO — 26Jan 2021 during the Q2 FY2021 earnings call
It really is another confirmation that businesses must digitally transform or else they will be unable to compete. MicroSoft went on to announce that they are expanding Azure’s capabilities by building more data centers.
AMZN and GOOGL will report their Dec2020 quarterly results next week on 2Feb. I will be watching closely for confirmation that these other two cloud titans will report similar results and commentary to what MSFT delivered this past week. This would be another strong indication that SaaS companies will also deliver great quarterly performances.
Earnings from the First SaaS Companies
It’s still early in the earnings season, and most of the SaaS companies have yet to report results. During the past week, we heard from NOW and TEAM. Both delivered very strong results. CEO McDermott of NOW had this to say in his prepared remarks:
“The workflow revolution is happening and the pandemic is accelerating digital transformation…The secular tailwinds of digital transformation, cloud computing and business model innovations have all intersected at the perfect moment in time, a paradigm here is happening worldwide. In 2020, for the first time in history, we saw a digital transformation spending accelerate despite GDP declining globally. Digital investments are at an all-time high and are expected to continue growing. According to IDC, worldwide digital transformation investments will total more than $7.4 trillion by 2024. The digital economy is firing on all cylinders.”
Bill McDermott, CEO of NOW — 28Jan 2021 during the Q4 FY2020 earnings call
Wow. I’m not sure that the business environment could sound any better than what McDermott described. We’ll have to wait and see what results the other SaaS companies deliver in the coming weeks, but, so far, I’m quite pleased with what I’m hearing. Furthermore, what we’re seeing growth is a must-have trend in a crappy business environment. Imagine what could happen to growth once the economy rebounds!
ADDITIONAL THOUGHTS
I keep hearing that valuations are frothy. I’m not sure if that’s true or not. I do know that my portfolio currently sits 8% below its all-time high. Sure, I realize that SaaS stocks can sell off at any time, and it’s not unusual for selloffs to exceed 35% from the peak. I’m almost sure that such a selloff will occur at some point in the future. Whether that’s tomorrow, next month, or next year I can’t predict. It’s a fact that my stocks have not sold off significantly since last October/November. On the other hand, it could also be that my companies are about to report an amazing quarter; indications are pointing toward a series of great earnings reports in the coming two months. As always, there’s significant uncertainty in the short run and a bit more clarity in the long run. With this backdrop and as usual, I’m inclined to remain fully invested. On the trading side, I’m not being particularly aggressive, but I’m continuing to employ a mid-level amount of my maximum leverage to trade. Should I see a surge in my stocks’ prices, I’ll probably throttle back my trading and leverage. Conversely, if I see a pullback in stock prices, then I’ll probably become more aggressive with my options trading and leverage.
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.