We are currently in the lull between earnings cycles so this update will be relatively short.
PRIOR PORTFOLIO UPDATES
PORTFOLIO PERFORMANCE
| DATE | GauchoRico Portfolio (YTD) | S&P500 Total Return (YTD) |
|---|---|---|
| Jan | 3.1% | -1.0% |
| Feb | -1.2% | 1.7% |
| Mar | -13.2% | 6.2% |
| Apr | -1.5% | 11.8% |
| May | 3.4% | 12.6% |
| Jun | 28.0% | 15.3% |
| Jul | 33.7% | 18.0% |
| Aug | 73.3% | 21.7% |
| Sep | 74.7% | 15.9% |
The GR portfolio continued to rally into September, posting eight all-time highs (ATHs) during the month. These new highs came after seven ATHs in June, six in July, and 11 in August. The rally concluded (for now) on 23Sept with the portfolio hitting +92.1% YTD at the peak; this rally from the 13May trough to the peak was +151%. The portfolio’s CAGR at the 23Sep ATH since the start of 2017 was 95.3%; this CAGR was over a period of almost 4.75 years. I had been wondering if the portfolio’s CAGR could ever reach the elusive 100% CAGR; for now that 100% remains elusive.
After the ATH on 23Sep, the portfolio began to drop and closed September at +74.7% YTD. By comparison, the S&P 500 (total return) closed September at +15.9% YTD. Since I started tracking the peaks and troughs in 2018, the portfolio has seen four major drops of 35% or more. These drops happen periodically in a concentrated, growth portfolio. I wrote about these big drops in a blog post earlier in 2021. Perhaps we are now in the beginning of a big drop. Or maybe not. I’ll write more about my thoughts at the end of this portfolio update.
The GR portfolio also got a boost from options trading. Options trading includes options trades with expiration dates within three months. I consider my LEAPS as part of my long-term investing and not part of options trading as I’ve defined it above. For 2021 through the end of September, options trading comprised 15% of the portfolio’s total gains (realized and unrealized) while investing comprised 85% of the returns. Without the boost from options trading, the GR portfolio would be up 63.0% YTD rather than 74.7%. On a quarterly basis, I post detailed reports on my options trading; the Q3 2021 Options Trading Report was posted and provides more details on the options trading results for 2021 YTD.
2021 Notable Days for the Portfolio
Below are some of the notable days in 2021.
| Date | YTD Return | Notes |
|---|---|---|
| 01/27/21 | -2.2% | local bottom |
| 02/05/21 | +12.6% | new ATH |
| 02/08/21 | +14.0% | new ATH |
| 02/09/21 | +16.6% | new ATH |
| 02/10/21 | +16.8% | new ATH |
| 02/11/21 | +17.8% | new ATH |
| 02/12/21 | +18.3% | new ATH |
| 02/25/21 | -3.4% | -6.3% on the day |
| 03/03/21 | -6.3% | -7% on the day |
| 03/04/21 | -13.6% | -9.2% on the day |
| 03/05/21 | -17.1% | -4.1% on the day |
| 03/08/21 | -22.8% | -6.9% on the day |
| 03/09/21 | -11.0% | +15.3% on the day |
| 03/11/21 | -4.3% | +9.6% on the day |
| 03/18/21 | -10.2% | -6.7% on the day |
| 03/24/21 | -15.6% | -8.6% on the day |
| 03/29/21 | -19.0% | close to 3/8/21 trough |
| 03/31/21 | -13.2% | +6.6% on the day |
| 04/13/21 | +4.0% | +8.0% on the day |
| 05/04/21 | -10.9% | -6.1% on the day |
| 05/06/21 | -21.1% | -9.6% on the day |
| 05/07/21 | -17.5% | +4.6% on the day |
| 05/13/21 | -23.5% | new YTD low |
| 05/14/21 | -16.3% | +10.9% on the day |
| 05/20/21 | -5.3% | +7.1% on the day |
| 05/24/21 | -0.1% | 7th consecutive up day |
| 06/10/21 | +11.3% | +5.4% on the day |
| 06/17/21 | +19.8% | new ATH (finally!) |
| 06/18/21 | +23.2% | new ATH; +5.1% on the day |
| 06/22/21 | +27.4% | new ATH; +6.2% on the day |
| 06/23/21 | +28.0% | new ATH |
| 06/24/21 | +28.5% | new ATH |
| 06/28/21 | +30.8% | new ATH |
| 06/29/21 | +31.2% | new ATH |
| 07/06/21 | +33.4% | new ATH |
| 07/09/21 | +33.9% | new ATH |
| 07/14/21 | +25.6% | -4.0% on the day |
| 07/22/21 | +34.2% | new ATH |
| 07/23/21 | +36.9% | new ATH |
| 07/26/21 | +37.0% | new ATH |
| 07/28/21 | +37.9% | new ATH |
| 08/04/21 | +41.2% | new ATH |
| 08/05/21 | +49.1% | new ATH |
| 08/12/21 | +51.2% | new ATH |
| 08/13/21 | +55.9% | new ATH |
| 08/23/21 | +56.0% | new ATH |
| 08/24/21 | +65.1% | new ATH; +5.8% on the day |
| 08/25/21 | +66.3% | new ATH |
| 08/26/21 | +68.1% | new ATH |
| 08/27/21 | +72.4% | new ATH |
| 08/30/21 | +73.3% | new ATH |
| 08/31/21 | +73.3% | new ATH; +0.05% to ATH |
| 09/02/21 | +74.8% | new ATH |
| 09/03/21 | +79.2% | new ATH |
| 09/09/21 | +82.7% | new ATH |
| 09/16/21 | +83.9% | new ATH |
| 09/17/21 | +85.0% | new ATH |
| 09/21/21 | +85.1% | new ATH |
| 09/22/21 | +88.8% | new ATH |
| 09/23/21* | +92.1% | new ATH |
| 09/28/21 | +75.0% | -5.5% on the day |
Weekly Performance
| DATE | GauchoRico YTD | S&P500 TOTAL RETURN YTD | DELTA |
|---|---|---|---|
| 01/08/21 | 6.5% | 1.9% | 4.6% |
| 01/15/21 | 6.4% | 0.4% | 6.0% |
| 01/22/21 | 10.2% | 2.4% | 7.9% |
| 01/29/21 | 3.1% | -1.0% | 4.2% |
| 02/05/21 | 12.6% | 3.6% | 9.0% |
| 02/12/21 | 18.3% | 4.9% | 13.3% |
| 02/19/21 | 14.2% | 4.2% | 10.0% |
| 02/26/21 | -1.2% | 1.7% | -3.0% |
| 03/05/21 | -17.1% | 2.6% | -19.7% |
| 03/12/21 | -6.3% | 5.3% | -11.6% |
| 03/19/21 | -7.7% | 4.5% | -12.3% |
| 03/26/21 | -15.8% | 6.2% | -22.0% |
| 04/01/21 | -9.5% | 7.4% | -16.9% |
| 04/08/21 | -3.3% | 10.4% | -13.6% |
| 04/15/21 | 0.0% | 11.9% | -11.9% |
| 04/23/21 | 3.1% | 11.8% | -8.7% |
| 04/30/21 | -1.5% | 11.8% | -13.4% |
| 05/07/21 | -17.5% | 13.3% | -30.7% |
| 05/14/21 | -16.3% | 11.7% | -28.0% |
| 05/21/21 | -2.4% | 11.3% | -13.7% |
| 05/28/21 | 3.4% | 12.6% | -9.2% |
| 06/04/21 | 2.3% | 13.3% | -11.1% |
| 06/11/21 | 12.6% | 13.8% | -1.3% |
| 06/18/21 | 23.2% | 11.7% | 11.5% |
| 06/25/21 | 28.0% | 14.8% | 13.2% |
| 07/02/21 | 28.9% | 16.7% | 12.1% |
| 07/09/21 | 33.9% | 17.2% | 16.6% |
| 07/16/21 | 23.8% | 16.1% | 7.6% |
| 07/23/21 | 36.9% | 18.4% | 18.5% |
| 07/30/21 | 33.7% | 18.0% | 15.7% |
| 08/06/21 | 46.7% | 19.1% | 27.6% |
| 08/13/21 | 55.9% | 20.0% | 35.9% |
| 08/20/21 | 50.2% | 19.4% | 30.9% |
| 08/27/21 | 72.4% | 21.2% | 51.2% |
| 09/03/21 | 79.2% | 22.0% | 57.3% |
| 09/10/21 | 78.3% | 19.9% | 58.4% |
| 09/17/21 | 85.0% | 19.3% | 65.7% |
| 09/24/21 | 88.9% | 19.9% | 69.0% |
ALLOCATIONS
| TICKER | 9/30/21 | 9/3/21 | 8/31/21 | 7/31/21 | 6/30/21 | 5/31/21 | 4/30/21 | 3/31/21 | 1/31/21 | 12/31/20 |
|---|---|---|---|---|---|---|---|---|---|---|
| UPST | 31.1% | 23.3% | 22.3% | 13.0% | 7.8% | 6.3% | 4.4% | 5.7% | — | — |
| DDOG | 14.9%* | 14.0%* | 14.4%* | 16.4%* | 15.7%* | 16.7%* | 12.0%* | 12.9%* | 10.7% | 10.4% |
| CRWD | 12.1%* | 15.8%* | 18.7%* | 19.1%* | 19.9%* | 20.0%* | 30.2%* | 27.7%* | 31.2%* | 31.5%* |
| LSPD | 8.3%^ | 10.0%^ | 9.5%^ | 11.1%^ | 11.3%^ | 12.1%^ | 13.1%^ | 13.2%^ | 4.8%^ | 3.3% |
| AFRM | 6.5% | — | — | — | — | — | — | — | — | — |
| DOCU | 6.4% | 12.6% | 12.5% | 13.2% | 12.6%* | 6.6%* | 5.7%* | 5.6%* | 16.2%* | 16.4%* |
| NET | 5.9% | 7.2% | 6.9% | 13.4% | 15.9% | 15.2% | 16.6% | 15.2% | 17.9%* | 17.8%* |
| SNOW | 5.3% | 5.3% | 5.3% | 6.0% | 5.6% | 6.8% | 6.9% | 3.0% | 0.5% | — |
| DCBO | 1.8% | — | — | — | — | — | — | — | — | — |
| NEM | 1.3% | — | — | — | — | — | 1.0% | 1.1% | 1.0% | 1.0% |
| ROKU | — | 2.5% | 2.7% | — | — | — | — | — | — | — |
| GOLD | — | 1.4% | 1.5% | 2.0% | 2.0% | 2.9% | 1.6% | 1.7% | 1.4% | 3.0% |
| ZM | — | — | 2.5% | 5.5% | 5.8% | 10.8%* | 11.0%* | 12.3%* | 11.5% | 11.0% |
| PATH | — | — | — | — | — | — | 0.1% | — | — | — |
| PTON | — | — | — | — | — | — | — | 4.0% | 4.0% | 4.2% |
| BPRMF | — | — | — | — | — | — | — | 1.2% | 1.3% | 1.4% |
| Cash | 6.4% | 8.0% | 3.9% | 1.4% | 6.5% | 3.0% | -0.2% | 1.2% | 0.8% | 0.7% |
Two positions in the portfolio remain leveraged with call options. I have zero CRWD shares; the entire position is comprised of Jan 2023 call options ($170 and $175 strike prices) that were purchased between 5Mar and 3May 2021. The CRWD allocation changes are amplified when CRWD stock moves up or down. The DDOG allocation is comprised of a 14.1% allocation in shares plus a 0.8% allocation in Jan 2023 call options ($65 strike price). The portfolio contains 12.9% of its value in the form of calls options, 80.7% in stock, and 6.4% in cash. I’ve added two new positions (AFRM and DCBO) which I’ll discuss below. The cash position decreased primarily due to an estimated tax payment.
PORTFOLIO CHANGES
Changes since 3Sep2021
- Sold some DOCU shares: Sold all the DOCU shares that I had added before DOCU earnings. Sold additional shares to buy a 2% position in DCBO.
- Opened new position in AFRM: Opened 4% position in AFRM using proceeds from DOCU plus some cash.
- Opened new position in DCBO: Opened 2% position in DCBO using proceeds from DOCU.
- Sold all ROKU shares: After a ~20% loss, sold all ROKU shares not because of anything ROKU did or didn’t do but because I wanted to add to the AFRM allocation.
- Added more to AFRM: Added about 2.1% to the AFRM allocation.
- Sold all GOLD: Sold GOLD to harvest tax loss; exchanged for NEM, another gold mining company.
- Bought NEM: Bought NEM using proceeds from GOLD.
NEW POSITIONS
AFRM: AFRM is a new position that I first heard about last year when I was invested in PTON. I was not interested in AFRM at the time because a large portion of AFRM’s business was linked to PTON. My friend Ethan (ethan1234 on The Motley Fool) brought up the Buy Now, Pay Later (BNPL) space and AFRM several weeks ago. I must say that Ethan has been somewhat of a golden goose in 2021 as he also brought LSPD and UPST to my attention. Thanks, Ethan!
AFRM’s recent investor presentation contains a great high level summary for the case for owning the shares. BNPL is disruptive of the credit card industry, particularly among the younger generations (Y and Z) who have different purchasing preferences with regard to payment. Many people carry credit card balances on which they pay exorbitant interest rates. For consumers who carry a balance on their credit cards but are trying to eliminate their credit card debt, charging additional charges on the card each month can thwart their efforts. On the other hand, having access to an alternative way to buy now/pay later can aid in the journey to get out of debt. AFRM’s very high net promotor score of 78 provides further evidence that it is delighting its customers. On the other side of the transaction, merchants who offer consumers payment options for how they prefer to pay will see demand for their products and services rise. BNPL through a third party like AFRM offers merchants to include this form of payment options without taking on the credit risk. In addition, when consumers use BNPL, merchants gain new insights into the consumers; these insights are not available when consumers use a credit card for the purchase. Thus, the most important metrics that I follow for AFRM are the size and growth of the consumers and merchants in the AFRM ecosystem. During FY2021 which ended on 30Jun, AFRM added 3.5M (+97%) consumers and 23.3M (+409%) merchants. In addition to Peloton which was once AFRM’s most prominent merchant, AFRM now has Shopify, Walmart, and Amazon (almost as testing continues before this relationship goes live). In addition, I’ve repeatedly heard from friends and family that when they placed orders with various retailers such as Pottery Barn, Affirm was offered as one of the payment choices. The strength and growth of AFRM’s ecosystem bears close monitoring going forward, but, so far, I’m very pleased with the way things are going.
Lately, I’ve heard two arguments against holding shares in AFRM. First, in exchange for a discount on the sales price of the item being purchased, AFRM takes on the credit risk of the purchase. So, yes, AFRM carries loans on its balance sheet. On 30Jun that balance stood at just over $2B, up from just over $1B on 30Jun 2020. On slide 24 of the investor presentation, we can see that AFRM has historically had very low default rates and charge-offs. So far so good, but to be invested in AFRM, investors must believe that AFRM is very good at underwriting risk. AFRM is also vulnerable to economic shocks and the economic cycle that could affect households’ ability to service debt leading to potential increases in delinquencies; AFRM is taking on this risk, and, as investors, we need to be aware of it. However, I’m willing to accept that risk in part because a) AFRM’s track record has been good so far, b) I believe that collective consumer demand will remain high as we exit the pandemic, c) I expect the global economy to surge driven by demand and an increase in employment, and d) I believe consumers will use their savings and available credit to buy now what they want (most people buy what they want rather than thinking about their long-term financial freedom). Thus, for me, the rewards of owning AFRM stock outweigh the risks.
The second argument against holding AFRM is that AFRM has five sources of revenue making the company too hard to figure out and analyze. Deciphering the details of the various revenue line items can be confusing particularly when these figures fluctuate quarter to quarter. Some have questioned whether this is some sort of shell game. I don’t claim to have put in the effort to follow every revenue source and audit the results with a fine-tooth comb. And as such, I’ve kept my allocation smaller than a large one and focus on the ecosystem growth and overall revenue growth. AFRM recently reported their Q4 FY2021 and guided for 36.7% for FY 2022; this may seem like a guide for low growth (relative to my other portfolio companies), but we must remember that AFRM will have an opportunity to raise the full-year guidance for three more quarters; in addition, this guidance includes absolutely zero contribution from their Amazon partnership. I’m expecting great things from AFRM in the coming quarters.
DCBO: DCBO is currently a small trial position. I was enticed into starting a position by the numbers. The company’s 76% y/y revenue growth is solid enough particularly since the growth has been accelerating for several quarters. Annual Recurring Revenue growth and customer growth trends both look very positive as well. As long as the growth continues to be this strong, I’ll be inclined to stay invested. Many hyper growth companies, when they’re at DCBO’s stage, post large non-GAAP losses to support their rapid growth. DCBO, on the other hand, has managed to keep its cash flow only slightly negative; this is a big plus as it demonstrates that if DCBO can maintain high growth then it will easily be able to swing to positive cash flow.
EARNINGS DATES PREDICTIONS
Each quarter I predict when my portfolio companies will report earnings. I use the method that I described in a previous post. Below are my predictions for the next earnings cycle which starts in late October.
| Earnings Date (est) | Rev Growth Guide (top) | |
|---|---|---|
| LSPD | 4Nov (BMO) | |
| NET | 4Nov | 45.4% |
| DDOG | 9Nov (BMO) | 60.3% |
| UPST | 9Nov | 229.0% |
| AFRM | 11Nov | 43.7% |
| DCBO | 11Nov | |
| SNOW | 24Nov (or 1 Dec)* | 80.3% |
| CRWD | 1Dec | 57.1% |
| DOCU | 2Dec | 38.9% |
The dates are important because they provide information on when a stock catalyst can occur. This information is beneficial for making options trading decisions. If stocks in the portfolio continue to sink then my willingness to make options trading bets on earnings will increase.
FINAL THOUGHTS
During the past several months, I’ve deleveraged my portfolio about as much as I’m willing to do. Some other investors have also raised varying amounts of cash because valuations of the stocks in their portfolios have gotten “frothy”. Yes, in recent years, SaaS stocks have often sold off sharply after prolonged run-ups. Examples of this pattern include peaks in Sep 2018, Jul 2019, and Feb 2021. From May-early Sep 2021, we’ve had a tremendous rally. The GR portfolio has seen 32 new ATHs during the past four months. We all know that such rallies must eventually end. The big question is when. Personally, I was not very certain about the pattern repeating, particularly since 2020 has been unprecedented in terms of fiscal and monetary stimulus provided to economies. In addition, some of the cloud companies, during their 2020 earnings calls, cited acceleration in digital transformation projects and five years of growth in a few months; thus, huge growth during the pandemic and beyond seems justified. I accept that I just don’t know where my portfolio stocks are headed; therefore, I’m reluctant to try to time the peak and miss more upside. I’m more willing to accept that I may need to ride stocks down before the rally resumes. The downward ride many have now begun. Let’s look at how far the high growth portfolio stocks have fallen since their recent highs.
| Recent High | Date | 30-Sep Price | % Drop | |
|---|---|---|---|---|
| UPST | $336.34 | 23Sep | $316.44 | -5.9% |
| DDOG | $148.69 | 22Sep | $141.35 | -4.9% |
| CRWD | $286.37 | 30Aug | $245.78 | -14.2% |
| LSPD | $124.41 | 22Sep | $96.43 | -22.5% |
| AFRM | $128.37 | 27Sep | $119.13 | -7.2% |
| DOCU | $310.05 | 3Sep | $257.43 | -17.0% |
| NET | $136.97 | 22Sep | $112.65 | -17.8% |
| SNOW | $324.08 | 15Sep | $302.43 | -6.7% |
| DCBO | $92.32 | 15Sep | $72.79 | -21.2% |
The table shows that (as of 30Sep) the portfolio stocks have dropped to varying degrees. LSPD which was hit by a short attack this past week was off the most. UPST, DDOG, AFRM, and SNOW have shown to be the most resilient. Whether this drop will continue or not, I can’t know. Investors are not only watching the stocks’ fundamentals, business metrics, and stock prices but also monitoring interest rates, inflation, and fiscal and monetary policy developments all of which have garnered much attention recently. This attention is driven by a convergence of uncertainties which the market hates. I’m also watching this incoming flow of information, but I’m really more focused on what I see ahead for my portfolio companies. They recently reported results, and, looking ahead two years, I think that even if multiples compress from here the stock prices will still be buoyed by the strong growth of the companies’ revenues. If this decline which began on 24Sep turns into a big one then I’ll assess whether or not it makes sense to add back leverage to the portfolio.
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.