Leverage Point Portfolio Update
March 2022 YTD Return: -34% (-28.5% vs. the S&P)
Note from the editor: This newsletter is published twice a month, I do an end-of-month summary of my portfolio and a mid-month thought piece on investing.
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Year To Date Leverage Point Portfolio vs. Benchmarks:
Leverage Point Portfolio -34%
For the past five months keep asking am I too stupid or too smart? Too aloof or too plugged-in? Too stubborn or too flexible? Maybe I am all of these things.
The historical data seems to support stubbornness as what is required to succeed as an investor. Staying true to what you know is hard when it’s out of favor.
I have held on during this tough time, just barely. I have to admit I did crack during the sell-off when the war in Ukraine started. I panicked, like everyone. I sold all of my $SEMR because they are in Russia and I just have no idea what will happen with them. I sold off pieces of other stocks to raise more cash. I was worried that I wouldn’t have what I needed to pay my tax bill from last (I did raise the cash I needed to pay it.)
I also flirted with oil and bought the $XLE and the $XOP. Made some money with $XOP. Lost money in the $XLE. But finally came to my senses two weeks later.
Staying the course
Sure, there has been a rally this month. But everyone is asking if it’s sustainable?
Rates are going up. Inflation is not going down. The market’s reaction to rising rates and quantitative tightening (QT) I think proves just how much influence the Fed has over markets. It’s a lot. But a ceasefire could emerge any day now? Inflation may come down faster than we anticipate?
As always, there is a lot of uncertainty.
This is why I have cut all the speculative stocks that I think have no hope of getting back to their ATH. It’s easy to identify those. We all know $PTON has no hope of coming back. Just like $ZM, which I hardly ever use now that Google’s tools are nearly as good. Or $SOFI which I took a big hit on. If the Democrats keep extending the moratorium on student loan repayments, $SOFI will never meet its growth targets for the year. (Although, I just read this off the table now. Maybe I will add this to my rules. I don’t want to be in any stock that is at the mercy of politicians, so I am out of $SOFI for good now.)
Only the stubborn survive
Yes, I have a few picks that are way down from their ATH. But I believe the businesses remain on track and have a bright future ahead. They are growing fast, attacking big markets, and are innovators in their space. $AFRM even came out and said growth is better than expected. $REAL continues to do well, and if there is a recession the luxury resale market will boom. $DDOG I have held for years now and appear to be a monopoly in the observability space. $BILL is growing like a weed, but you already know that if you looked at their ER.
What I have learned through this drawdown? In order to win over the long-term one needs to be stubborn. It takes a super-human ability to maintain unyielding determination not to change one's attitude. I still have room to grow here.
I have one new edition to my portfolio, GitLab
I had looked at this when it went public and just thought it was overvalued, which seems hilarious now, right? It’s come down 50% since going public, just like a lot of growth stocks.
At the time of going public, I noted that $MSFT had purchased their direct competitor GitHub for $7.5B, which is what $GTLB is worth today. Well, now I think it’s a buy.
For those that don’t know, GitLab is a DevOps software tool that combines the ability to develop, secure, and operate software in a single application. There are other players in this space, who offer bits and pieces of the components to do DevOps in an ad-hoc fashion like Jfrog and even Jira. But they only have one true competitor GitHub. But what’s important is that in nearly every area in tech I can think of, over the long-term, the winner is always the all-inclusive platform.
Building a custom solution from different components is for early adopters. It doesn’t scale. Very few people build custom cars or custom bikes, why build a custom DevOps environment? HubSpot successfully combined most marketing tools into one platform. Apple has successfully crushed nearly every single consumer electronics device and media product into a smartphone. Yes, there will also be people that want a bespoke solution. But for most, a single platform is eventually all they need.
They are no longer entirely open-source. They essentially use a freemium model, like Dropbox or Asana. This means a team starts using a free account, and once they reach a certain scale they upgrade to paid.
Fourth Quarter Fiscal Year 2022 Business Highlights:
Customers with more than $1 million of ARR increased to 39, up 95% from Q4 of fiscal year 2021.
Dollar-Based Net Retention Rate above 152% in Q4 of fiscal year 2022.
Quarterly revenue of $77.8 million, up 69% year-over-year
Here is the quote from the CEO in the earnings press release which summarizes their market position quite well, “This growth was broad-based, driven by strong customer additions across all company sizes. We believe these results demonstrate that the market is moving from DIY DevOps composed of different tools to a DevOps Platform. This shift enables organizations to accelerate the time-to-market of their most important software and applications, providing them with a distinct competitive advantage.”
Leverage Point Portfolio YTD by Month:
Core Portfolio Holdings:
Summary of Investment Thesis by Company
Below is a concise summary of each company and why they are in my portfolio, in my own words. No corporate jibber-jabber, or regurgitating of marketing.
What they do: DevOps software tool that combines the ability to develop, secure, and operate software in a single application.
Why I own it: Their only true competitor GitHub is owned by Microsoft and this means there is a hole in the market for the des that don’t use MS products.
What’s unique about them: They offer a fully integrated solution for DevOps unlike a lot of other players that offer piecemeal solutions.
When would I sell: GitLab has 30 million free users with just 15,356 paying users, but growth will slow at some point and that’s when I would sell.
Notable News: Not too many news announcements, the Recent quarter showed acceleration which is great.
What they do: Back office accounting system for SMBs to help them pay bills, manage payments, send out customer invoices.
Why I own it: The company has made some smart acquisitions and is growing rapidly as demand for a fully cloud-based solution increases.
What’s unique about them: They simplify the process of approving invoices prior to payment and enable digital ACH bank to bank transfers.
When would I sell: If customer acquisition slows for any reason it would be problematic for the stock. I want to see it stay at 60% to 70% or more YoY.
Notable News: The Divvy acquisition has been significant for them putting Bill.com in a leading position increasing their offering.
What they do: Cloud-based enterprise cyber security that offers a more secure version of what is known as a virtual private network (VPN).
Why I own it: Cyber security is top of mind as the volume and ferocity of cyber security breaches continue to accelerate.
What’s unique about them: ZPA is an easier to deploy, more cost-effective, and more secure alternative to VPNs.
When would I sell: If revenue growth was to slow down to under 50% annual I would definitely sell. A QoQ growth slowdown would be something to watch for.
Notable News: Not too many new announcements, Zscaler is Positioned as a Leader in the 2022 Gartner® Magic Quadrant™.
What they do: Cross-cloud data warehouse services that make it easy for companies to manage large-scale datasets with less overhead.
Why I own it: They are on track to meet their goal to grow to $10 billion in annual product revenue by fiscal 2029.
What’s unique about them: Snowflake’s success as a cross-cloud tool has a network effect that drives more developers and partners to the platform.
When would I sell: The company remains richly valued and while the growth is tremendous, the stock may languish.
Notable News: Not a lot of news except the release of CEO Frank Slootman’s book which I have downloaded, but haven’t started yet.
What they do: Affirm is the market leader in BNPL (Buy Now Pay Later), an alternative to credit cards with better rates and instant approval at checkout.
Why I own it: Massive growth from recently closed partnerships with all major U.S. e-commerce players including Shopify, Amazon, Walmart, and Target.
What’s unique about them: Technology is superior to competitors and the pipeline of product updates is strong most notably Affirm Card offers.
When would I sell: I am closely following active customers and the average number of purchases. I want to see those two grow substantially.
Notable News: Lots of product development announcements, and this one that flew under the radar. They now offer cashback rewards.
What they do: Observability platform for engineers to monitor systems, databases, and other technologies to get data to improve performance.
Why I own it: Core infrastructure data products like this have high switching costs and once implemented rarely are removed.
What’s unique about them: With more than 350+ integration options competitors don’t seem to be able to offer the same level of extensibility.
When would I sell: The company is now approaching a $50B market cap and that could just make hyper-growth harder to sustain.
Notable News: There is a great post here on Software Stack Investing detailing all the new updates and features.
What they do: Largest market for reseller market for authenticated luxury goods that operates both online and physical locations.
Why I own it: Revenue growth has been at 50% and average order value continues to increase, in December it hit $518 per order.
What’s unique about them: While there are many reseller markets, The RealReal is the largest that is exclusive to authenticated luxury goods.
When would I sell: If growth were to drop below 30% or AOV declines significantly I would be concerned.
Notable News: They just hit 25M members and are by far the largest in the reselling space. No competitors come close.
I have worked in internet media and technology on the business side my entire career. I live in the SF Bay Area and focus on investing in what I know, high-tech growth companies. I try my best to stay in my circle of competence.
I like to buy small positions, this gets me focused to learn about a company. Then I sell, or I add to it over time in small increments depending on a variety of factors. Some positions I hold for years, others for only a few months. My goal is CAGR. Not 10-baggers and I try hard not to fall in love with a stock. My aim is to maximize my returns and I have no allegiance to any particular method or style of approach.
My portfolio is concentrated and I aim to hold a maximum of 10 stocks at the same time. The fewer the better. I consolidate around my highest conviction picks while looking for new opportunities to cycle into.
I sell on a dime. Which is a massive advantage of retail investing. If there is something I don’t like, I don’t take any chances and I just sell. This is why I take a small position at first and test drive my ideas. If for whatever reason I change my mind, I just take the loss (or gain) and move on. Sometimes, I just decide I want more cash for peace of mind and sell. I can always get back in at a later date if I want.
I have an obvious bias toward SF Bay Area high-tech companies and for good reason, it’s an ecosystem that I know well and like. I think it gives me a slight edge, beyond the numbers when investing.
Things I look for in a business to invest in are:
Sustainable competitive advantage: This can be superior technology, but it can also be brand, business strategy, or even company culture.
Massive growth runway: The companies I like to invest in have a large total addressable market (TAM) and no obvious ceiling or limit.
Great management with a clear vision: While not exclusively founders, I like management with a track record who can clearly articulate their vision.
Are in hyper-growth mode: Revenue should be growing at least 50% YoY and can be sustained. If it can accelerate, that’s even better.
I have unique insights into it: I look for businesses that I have a personal connection with. Maybe a product I use? Or management I have met and liked.
A business vertical I know well: I focus on businesses and eco-systems I understand intimately and it’s why I have avoided areas like biotech.
And what I avoid:
No open-source companies: I think the open-source model is flawed when it comes to building a strong scalable business.
No Chinese companies: The SEC’s own guidelines say they are limited in their ability to enforce regulations in China.
No penny stocks: I avoid companies that are under $1B in market cap. Those stocks are too easy to manipulate given the low volume and float.
No stocks on non-U.S. exchanges: Maybe I just haven’t found the right pick, but in general, I avoid foreign listings as they are harder to manage.
No crypto or NFTs: Coins are not fractional shares in a business and have no underlying value other than what someone will pay you for them.
Overall Returns Since February 2020
Portfolio returns since I started closely tracking it in February 2020 is 126%.
This post is simply an end-of-month summary. Positions can change immediately. With or without notice. Do not make decisions based solely on my writings. Do your own due diligence and make your own investment decisions. Rember that predictions are hard to make, particularly when they are about the future.