Best Year Ever +49%
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
- Benjamin Graham
As I'm writing,
The portfolio is UP +48.93% YTD
Our benchmark, the S&P 500 is up about +14.28% YTD
Best Year Ever This year is shaping up to be the best year for the fund since I began posting portfolios in 2016. I'm hesitant to call a win before the year is officially over, but I thought we could use some good news. I suspect the return will bounce around a bit, but it looks like we'll finish the year strong. While the Stay Invested portfolio has beaten the S&P 500 every year, the portfolio is now several points ahead of our previous best return in 2017 of +45.56%.
As we approach the end of the year I'm looking at what I want to sell and preparing for the launch of the 2021 portfolio. Some names will remain, some will get sold to make room for new names.
Today's big gains are being driven by Apple, Enphase, Heron Therapeutics, Uber, and Veeva Systems. Rumors are abounding about Apple creating an electric car that might ship by 2024. Why the stock catapulted on that rumor isn't really clear, and I don't find much substance in it. Apple is not a manufacturing company, they're a design company that mostly outsources manufacturing. I would be more inclined to believe that if Apple is reigniting its autonomous car initiative, they are most likely looking to do it through an outsourcing arrangement. If I was to pick a partner for Apple it would be Magna International. Magna trades at only 10.25X forward earnings and not even 2X its price to book. Magna's profit margins are very thin, but they have plenty of free cash flow and lots of capacity to build cars for a new customer.
Enphase makes a semiconductor-based microinverter, which converts energy at the individual solar module level, and combines with its proprietary networking and software technologies to provide energy monitoring and control services. It also offers AC battery storage systems; Envoy communications gateway; and Enlighten cloud-based monitoring service, as well as other accessories. The solar industry is in its infancy and is one of the biggest beneficiaries of ESG investing. I'm a bit concerned about the valuation of this company right now which is trading at 93.5X forward earnings, and nearly 50X its book value. While revenue growth has been flat, earnings growth is over 26%. Enphase's biggest opportunities are in international markets, and the company keeps making good progress expanding across the globe.
Heron Therapeutics seems to be up due to technical trading metrics, no real news today to be driving the stock up 8.5%. The stock is trading just pennies above the lowest estimate from analysts. The street consensus is $31.60, or 50% above the current stock price.
Uber is up over 4% today, partly in sympathy with the overall EV trade but also on some very bullish options activity that has Call prices up triple digits for many contracts. I think Uber stands to be a big winner long term as many of their business opportunities begin to get traction. Uber Eats has been a standout during the pandemic and wasn't a party to the attempted dismantling of their business model by California politicians who pushed a bill written by the taxi drivers union. In their thinking, it is somehow unconscionable to allow drivers who deliver people from point A to Point B to operate without "Company-sponsored benefits", but it's okay if that same driver is delivering food. The competition will sort this out in time, for now, the Uber business model of providing a platform where people can choose to drive when they want remains intact. Uber freight is my favorite franchise, I hope we see faster progress in that business. Uber's acquisition of Postmates is a clear indication that Uber is aggressively moving into the deliver anything business, which should make them a beneficiary of the "Last Mile" delivery solutions industry. The availability of fully autonomous vehicles will transform Uber in unimaginable ways.
Veeva Systems is up over 5% today and over 105% YTD. Veeva is one of my favorite companies, with a business model that just keeps firing on all cylinders. Is the stock expensive, yes, it trades at 85.5X forward earnings but in return, we get a company that's delivering nearly 25% profit margins, over 34% revenue growth YoY, nearly 18% earnings growth YoY, has nearly $1.6 billion in cash and only $59 million in debt. For a software company, those numbers don't seem huge, but Veeva keeps delivering numbers like this year after year. With their cash hoard and the low debt, I suspect Veeva will eventually make a significant acquisition or invest heavily in R&D to enable them to launch into new markets.
"Given a 10% chance of a 100 times payoff, you should take that bet every time" - Jeff Bezos
For the new year, I'll be adopting a new layout for the portfolio page. The new layout will illustrate more clearly how I think about how different holdings support the portfolio, which ones are where I expect to see gains and which ones are there for protection. Allocation, or how much money is invested in a specific holding is very important. The new portfolio will show this visually. I'll provide some explanation next year, and please feel free to post questions on the site.
I have also decided to correct something I did a couple of years ago. After the first two years of beating the market, I had a number of emails wanting to see me get to $1 million and more. At that moment the portfolio felt like a video game, which is the complete antithesis of what we're doing here. I got angry and closed the portfolio and started with a new lower-cost basis. Nobody manages a portfolio like that at home, and I frequently espouse to eliminate emotion from investing, so I think I did a disservice to my readers. For 2021 I will be collecting the starting and ending values for each portfolio and displaying them permanently on the portfolio page which will show the running balance since 2016. My intent is to clearly show what an investor who followed the portfolio diligently could have earned over the past five years and what the YTD gains and gains since inception are without the disruption I introduced by restarting the portfolio.
"Markets don't go to zero, Portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
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Keep Me Honest 2020
Today is a good time to carefully leg into stocks again (3-20-2020).
Worst Case: S&P 500 decline further to around 2,100 - 2,150 (3-28-2020).
Middle Case: S&P 500 level out around 2,650 - 2,700 (3-28-2020).
Best Case: YE S&P 500 eventually rise to around 3,000 - 3,200 (3-28-2020).
Market bottomed March 23, 2020 at S&P 500 2,237.40 (4-17-2020).