These are the times when it can be difficult and stressful to be an investor in hyper growth stocks. I’m certainly not immune to feeling stress when the portfolio drops this far. Let’s look at what’s happened since the prior bottom which was on 13 May 2021. Since then, the portfolio rallied for five months aided by leverage that I had added near the bottom. This rally produced a 173.5% return from the 13May bottom. This rally set up a major drop from the 18Oct YTD high of +109.2%. Whether the portfolio has bottomed at -66% on 27Jan, I don’t know. We will see if the last two day surge was enough to finally set the bottom. I’ve discussed such big drops in a previous post. Below is a list of the big drops of the GauchoRico Portfolio since 2018.
| 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 |
| 22Dec2020 – 3Jan2021 | -14% | 45 |
| 12Feb2021 – 13May2021 | -35% | 125 |
| 18Oct2021 – 27Jan2022 | -66% | ??? |
It’s clear from the above table that the 66% drop is/was far greater than the previous drops during the past five years. In fact, I’d need to go back farther than the start of 2017 to see a drop as large as the current one. In 2015/2016, my portfolio dropped about 77% from the August 2015 peak; that decline was amplified because I went overboard by using leverage via stock options. I wrote about that experience in a previous post. In 2008/2009 about a year after I first retired, my portfolio dropped in excess of 60% from the previous peak; I was not tracking my portfolio then as meticulously as I do now so I don’t exactly know the magnitude of the 2008/2009 drop. However, I can say that the 2008/2009 financial crisis affected virtually all investors whereas the current drop and the 2015/2016 drop affected the GauchoRico portfolio disproportionately due to 1) concentration in hyper growth stocks which dropped more than the overall market and 2) leverage which further amplified those drops. Portfolios that contain similar stocks but are unleveraged would have dropped about 50% rather than 66% in the current decline. Similarly, unleveraged portfolios with similar stocks may have been up only 80-90% YTD last Fall rather than the 109.2% YTD performance of the GauchoRico portfolio. Thus, part of the reason for the larger 66% was that the GauchoRico portfolio had a higher peak. Higher highs and bigger drops come with the territory when adding leverage.
Let’s look at the portfolio graphically (chart below) using the start of 2021 (13 months ago) as a reference of 1000. The portfolio hit a new ATH on 12Feb2021 which was 18.3% higher than the start of 2021. The first big drop of 2021 began in February and finally bottomed on 13May2021 at -23.5% YTD and 35% below the 12Feb2021 ATH. From 13May2021 through 18Oct2021 the portfolio increased 173.5% to reach an increase of 109.2% compared to the start of 2021. The second big drop of 2021 began in October and continued until late January 2022. On 27Jan2022, the portfolio was down 66% from the 18Oct2021 ATH but only 5.9% below the 13May2021 low of 2021 and 28% below the start of 2021. During the last two days of January 2022, the portfolio surged 21.3% (see the upward blip on the right of the graph below). Again, we’ll see in the coming weeks if the bottom of this huge drop is finally in.
Now, we can look back even further to see the current drop in the context of a multi-year timeframe. My weekly portfolio tracking only goes back to the start of 2018 so the following chart contains data spanning the start of 2018 through the end of January 2022 for both the GauchoRico portfolio and the S&P 500 (total return including dividends).
The chart shows that the S&P 500 increased 90% since the start of 2018 while the GauchoRico portfolio increased 577%. That’s still a massive outperformance. Yes, at one point (on 18Oct 2021), the GR portfolio was up 1523% since the start of 2018. The big drops are no fun, but they are to be expected when running a concentrated, hyper growth stock portfolio. I continue to believe that staying invested and riding through these big drops is one of the best ways to accumulate wealth as an investor in publicly traded equities. So if the goal is to achieve a high CAGR in the long-run, this approach to investing has worked in the past and I would expect it to continue working going forward. For people who are still trying to gain their financial freedom, I think maximizing long-term CAGR, in spite of occasional drawdowns along the way, will most likely result in attaining financial freedom earlier than if one follows a more conservative approach. Note that selecting among the best growth companies is also required because all hyper growth won’t end up being good investments. I’ve been operating under this investing paradigm and haven’t strayed from it. Recently, however, I’ve begun to question whether I should take a portion of my investible assets into less volatile investments even though that would almost certainly result in a lower long-term CAGR.
Why? Well, it has to do with my personal circumstances of having enough and not wanting to leave more than a fixed dollar amount to my beneficiaries. With the excess going to charity when I pass (or before), any further wealth accumulation would be going to charity. Also, the latest drawdown has been enormous (I mean in actual dollars, not percentage) compared to previous drops. Even though, I know that I’d probably be better off (in terms of having more wealth in the long-run) by continuing to manage my assets primarily in hyper growth stocks, I don’t think that I’ll want experience such a large dollar drawdown again. I say this knowing it would likely mean accepting a lower CAGR. But now that the huge drop has already occurred, I have no intention of adjusting my approach, even partially. The time to have done that (at least for me) has passed so I’m more than content to continue as before and ride the next wave up. I’m planning on writing a post in which I’ll elaborate on switching goals and strategy once one has achieved all his/her financial goals so stay tuned for that.
PRIOR PORTFOLIO UPDATES
PORTFOLIO PERFORMANCE
| DATE | GauchoRico Portfolio (YTD) | S&P500 Total Return (YTD) |
|---|---|---|
| 2017 | 61.6% | 22.8% |
| 2018 | 55.9% | -5.2% |
| 2019 | 41.8% | 31.5% |
| 2020 | 245.6% | 18.4% |
| 2021 | 27.7% | 28.7% |
| Jan22 | -31.7% | -5.2% |
I’ve already written a lot about the recent portfolio performance (above) so I’ll just focus on the highlights in this section. The GR Portfolio ended January 2022 down 31.7% from then end of 2022 and down 59.3% from the 18Oct2021 ATH. By comparison, the S&P 500 is down 5.2% since the end on 2021 and down 5.8% from the 3Jan2022 ATH. The fact that the S&P 500’s maximum decline (so far) from the peak was 9.7% shows how much more hyper growth stocks have fallen. The Nasdaq Composite, which is heavy in technology, has fallen 16.8% (on 27Jan) from its 19Nov21 ATH. Thus, an unleveraged portfolio of hyper growth stocks has declined about 3x as much as the Nasdaq. Such a 3x amplification (up or down) is not so uncommon when one compares moves on individual days. I’d expect that the highest quality hyper growth stocks will likely show a nice amplification over the Nasdaq when the tide turns. This can be seen by example when observing the final two trading days of January; the GR portfolio increased by 21.3% while the Nasdaq increased by 6.6% (a 3.23x amplification but note, however, that the GR portfolio is leveraged).
2022 Notable Days for the Portfolio
Below are some of the notable days in 2022.
| Date | YTD Return | Notes |
|---|---|---|
| 01/03/22 | -5.5% | -5.5% on the day |
| 01/04/22 | -11.7% | -6.6% on the day |
| 01/05/22 | -22.4% | -12.1% on the day |
| 01/13/22 | -30.7% | -8.9% on the day |
| 01/18/22 | -33.6% | -4.5% on the day |
| 01/21/22 | -39.5% | -8.7% on the day |
| 01/24/22 | -35.9% | +6.0% on the day |
| 01/25/22 | -40.4% | -7.1% on the day |
| 01/27/22 | -43.6% | -3.4% on the day; local bottom |
| 01/28/22 | -39.3% | +7.6% on the day |
| 01/31/22 | -31.7% | +12.6% on the day |
Weekly Performance
| DATE | GauchoRico YTD | S&P500 TOTAL RETURN YTD | DELTA |
|---|---|---|---|
| 01/07/22 | -24.1% | -1.8% | -22.2% |
| 01/14/22 | -30.5% | -2.1% | -28.4% |
| 01/21/22 | -39.5% | -7.7% | -31.8% |
| 01/28/22 | -39.3% | -6.9% | -32.3% |
ALLOCATIONS
| TICKER | 1/31/22 | 12/31/21 |
|---|---|---|
| DDOG | 36.8% | 31.7%* |
| MNDY | 26.0%^ | 27.5%^ |
| SNOW | 18.4%** | 15.5%** |
| ZS | 12.6%* | 4.3%* |
| CRWD | 6.4%* | 5.9%* |
| ARFM | 3.8% | 7.4% |
| UPST | 3.5%* | 14.7%* |
| NET | 3.2% | — |
| Cash | -5.6% | -4.0% |
Five of the eight positions in the portfolio are leveraged with long-term call options. CRWD: of the 6.4% allocation, 1.7% are shares and 4.7% are Jan2023 $190 calls. ZS: of the 12.6% allocation, 10.9% are shares and 1.7% are Jan2023 $280 calls. SNOW: of the 18.4% allocation, 16.6% are shares and 1.9% are Jan2024 $300 calls. MNDY: of the 26.0% allocation, 24.0% are shares, 1.0% are Dec2022 $250 calls, and 1.0% are 18Feb21 $175 calls. UPST: of the 3.5% allocation, 3.0% are shares and 0.5% are Jan2023 $330 calls. The DDOG, AFRM, and NET positions are all shares. The portfolio is comprised of 10.3% in long call options, 100.4% in shares, -5.6% on margin, and -4.9% in short put options.
PORTFOLIO CHANGES
Changes since 31Dec 2021
I’ll explain my rationale for my allocations when I discuss each company below.
- Sold about half of my AFRM shares: Sold 47% of my AFRM position.
- Sold about 3/4 of my UPST shares: Sold about 75% of my UPST position.
- Sold DDOG Jan23 $65 calls: This action trimmed the DDOG position which remains too large.
- Increased ZS significantly: Used proceeds from AFRM and UPST share sales to add to ZS.
- Bought NET: Reopened a 3% position after selling out completely in November 2021.
PORTFOLIO POSITIONS
There have been no earnings results since the last two portfolio updates, but I’d like to share my current thinking about the positions in the portfolio. There hasn’t been a lot of new company news so the reallocation among the portfolio stocks had more to do with consolidation into the highest conviction companies. When there is indiscriminate selling among hyper growth stocks, I like to concentrate my bets into the companies that I believe will 1) be long-term winners (the category leaders) and 2) have sustained hyper growth into the future. To put things into context, let’s first look at the percentage decline of each of the portfolio stocks.
| 52-wk high | Max Drop from High | Current Drop from High | Last Rev Growth | Rev Growth Trend | Earnings since 52-wk High | |
|---|---|---|---|---|---|---|
| DDOG | $199.68 | 40% | 27% | 74.9% | Accel | 4Nov |
| MNDY | $450.00 | 60% | 53% | 94.9% | Stable/Acc | 10Nov |
| SNOW | $405.00 | 43% | 32% | 110.0% | Stable | 1Dec |
| ZS | $376.11 | 41% | 32% | 61.7% | Accel | 30Nov |
| CRWD | $298.48 | 50% | 39% | 63.5% | Decel | 2Dec |
| AFRM | $176.65 | 73% | 64% | 54.8% | Unclear | 10Nov |
| UPST | $401.49 | 81% | 73% | 249.5% | Unclear | 9Nov |
| NET | $221.64 | 65% | 56% | 51.0% | Stable | 4Nov |
I don’t think it’s prudent to simply look at the percentage drops and then reallocate funds from companies that have fallen the least to companies that have fallen the most. The reasons for adding or reducing are highly nuanced, and each company needs to be examined. Some stocks may have undeservedly shot up giving them an inflated 52-week high. Recent news or new information on specific companies may require an upward or downward valuation adjustment. Some stock prices have fallen more or less than they deserved. Interestingly, the two stocks which fell the most from their 52-week highs (UPST and AFRM) had their allocations decreased in my portfolio; this may or may not have been the most favorable decision…we will see. Let’s look at each portfolio company; I’ll try to explain my rationale for each allocation level and change.
DDOG is my highest conviction position because it’s 1) the clear category leader in its space, 2) increasing its leadership position and barriers to entry by adding partnerships, integrations, and new products/features, 3) expanding into adjacent markets, and 4) accelerating the performance metrics. I see little risk of DDOG being disrupted or outcompeted. Technical reviews by Peter Offringa and muji’s Hhhypergrowth website can provide excellent information in the context of the company in its current and future target markets; they both cover many of the other SaaS companies in my portfolio. My DDOG allocation has increased from 31.7% to 36.8% in spite of selling my Jan2023 $65 call options (about 2% allocation) in January. The reason for the allocation increase is that DDOG stock has fallen less than any other portfolio company. My current allocation remains higher than I’d like it, but I’m reluctant to add to any other positions; I expect my portfolio allocations will be adjusted when the recovery is well underway.
MNDY is the position I think could grow the most from here in the short- to mid-term. I wrote that in my Dec 2021 portfolio update and that statement is more true now that MNDY shares have fallen much further (down 32% since the start of 2022). In my opinion, the valuation is compressed way too much. MNDY is listed on the Nasdaq, but it’s an Israeli company that must only report audited financials once a year. MNDY is not as heavily traded as my other portfolio companies so I’d expect that the price action of the stock can swing both higher and lower. MNDY operates in a competitive market that I don’t completely trust. Clearly, MNDY isn’t as dominant as DDOG or SNOW for example. However, compared to ASAN, MNDY seems to be winning. For how long can its growth be sustained, I don’t know, but for now MNDY is getting a very large allocation in my portfolio. I will likely adjust the allocation significantly lower once MNDY shares surge (hopefully) to a more reasonable valuation.
SNOW is also a very high conviction position. I continue to believe that SNOW’s long-term domination (the rate and duration of it) is underestimated by other investors despite its high valuation. In particular, as I’ve written in several previous portfolio updates, I believe that the customer lock-in, growth potential, and virtuous cycle of SNOW’s cloud data sharing ecosystems is under-appreciated by the market. Furthermore, I believe that SNOW is just now laying the groundwork by getting thousands of organizations to digitize more and more of their data. I expect that SNOW will likely become as dominant as companies like Google and Amazon. SNOW’s stock price has fallen among the least of my portfolio companies even though it had a very high valuation at its ATH price. Therefore, SNOW’s stock price could be vulnerable should the Company not deliver quarterly results as expected.
ZS received a significant allocation increase in my portfolio (12.6% versus 4.3% at the end of 2021). ZS’s revenue has been accelerating, and, with its high FedRAMP certification, the Company is poised to benefit from the upcoming increase in cyber security spending by the government. Unlike CRWD, S, and PANW, which seems to be fighting it out for dollars in next generation cyber security spending, ZS has relatively limited competition in its market segment. Therefore, I expect ZS to continue to post accelerating growth.
CRWD’s allocation in the portfolio didn’t get adjusted in January. Other investors who I respect have greatly reduced or completely sold out of CRWD primarily due to steady revenue growth deceleration over the past four quarters from 85.5% to 63.5%. Some of these investors switched from CRWD to S because S’s revenue growth is much higher. While I also reduced my CRWD allocation significantly in December 2021, I’ve decided to hold on to my remaining 6.4% allocation. CRWD is the category leader in end point protection, and the Company has successfully increased its offerings to adjacent markets. CRWD clearly had a COVID bump when millions of office workers needed end point protection while working from home/anywhere. This bump combined with 1) more significant cyber security spend being absorbed by SentinelOne and Palo Alto Networks and 2) the law of CRWD’s large numbers likely led to the more recent revenue deceleration. However, CRWD, in my opinion, continues to exert its dominance by leading the way in next generation revenue, establishing significant partnerships, and possessing the most developed distribution channel. We will see how CRWD (will revenue reaccelerate?) and S (will they be able to sustain its high growth and march toward profitability) performed in their 31Jan quarters. My bet remains on CRWD for now, at least until I see the 31Jan quarter’s results.
ARFM’s allocation in the portfolio was cut by 47% to 3.8% in January. Yes, AFRM shares has fallen by as much as 73% from its ATH. That’s second in decline only to UPST which fell as much as 81%. Like UPST shares, AFRM shares likely rose quite a bit too far so the percentage drop says as much about how high AFRM (and UPST) rose than how much it (they) fell. I think AFRM probably didn’t deserve to get to $176/share. But AFRM certainly has the potential to report a great 31Dec quarter. AFRM also has potential for great growth in 2022 and beyond, but I think that the certainty for that growth is far less certain than the growth and dominance of companies like SNOW, DDOG, and ZS. This lack of certainty lead me to cut AFRM in favor of other companies in which I have higher conviction. While I’m willing to bet 3-4% on a company which has very high potential with lower conviction, I’ll reserve my highest allocations for companies that are the dominant category leaders with excellent hyper growth metrics. Thus, when everything fell, AFRM had to be cut in allocation.
UPST was reduced from 14.7% to 3.5% for a similar reason (as I just described above for AFRM). I continue to like UPST’s execution, vision, and potential. But my conviction was shaken when I heard about the lack of superior delinquency performance (now December 2021 and January 2022 –two months in a row– showed weakness) compared to other underwriting methods. I fully understand that there may be a good explanation for the delinquencies metric weakening, and such an explanation may come as soon as 15Feb when UPST reports the 31Dec quarter. However, UPST must rely on the perception by potential lending partners (banks and credit unions) that delinquencies will be lower for apples to apples borrowers. If these lenders, which, by the way, are very conservative by nature, have reasonable doubt that UPST’s underwriting is not significantly superior, then the lenders will not adopt UPST. And UPST hasn’t exactly been announcing large numbers of new bank partners. UPST’s AI hasn’t been battle tested through an entire economic cycle which in itself will create doubt among prospective customers. So even if UPST’s AI works great, there’s no way UPST can prove it until the AI has been through an entire economic cycle. Therefore, UPST entire value proposition for lenders could be damaged (until sufficient data is available), and my allocation needed to be cut accordingly.
NET was once again added to the portfolio in January. It’s a 3.2% allocation, and it will likely remain small as the Company is still valued high despite its 65% share price drop. The bet on NET is that its TAM (total addressable market) is huge and growing as the Company continues to launch new products. I recently checked NET’s job openings and saw that the Company had more than 900 open positions! New product and service introductions will probably keep on coming given all the new employees. I and other investors are also betting on NET’s growth to remain high for many quarters into the future. I’d like to see revenue growth accelerate out of the low/mid-50% range.
FINAL THOUGHTS
If the portfolio hasn’t already bottomed on 27Jan, I think it’s close. With MSFT, TEAM, and NOW all reporting great results last week, cloud software seems to be continuing its growth unabated. This week we’ll hear from the other two cloud titans: AMZN and GOOGL. I expect those results will show continued strength in cloud adoption. Next, we’ll begin to hear from the portfolio companies starting with DDOG, NET, and AFRM on 10Feb and followed by the rest by mid-March. I expect all of my eight portfolio companies to deliver great results for their most recent quarters. When revenue is annually growing 50-110%, time is our friend for with each passing quarter the valuation compresses significantly if the stock price doesn’t rise. For example, with SNOW growing at 110% annually, it’s growing more than 20% every three months. And once a company’s valuation multiple has bottomed, the shares will grow at a rate of its revenue growth (less share dilution). And if the multiples have fallen too far (which they probably have), then these multiples can re-expand to some degree for additional stock price growth.
People have talked much about inflation and the coming rate hikes by the Fed. My opinion is that inflation may begin to recede on its own and rates may not need to be increased as much as some analysts predict (one analyst predicted seven 0.25% rate hikes in 2022!). In time, we’ll get the answer to that. Regardless of whether interest rates rise a little or a bit more, I don’t think that the businesses of the portfolio companies will be negatively affected. Yes, I’m optimistic about the portfolio’s prospects going forward.
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.