Updated: Apr 2
I want to start off this Q1 analysis and review with a few thoughts and summarized comments:
The market does not care about our emotions; you must invest and trade accordingly to your research and conviction, coupled with your true understanding of the business
I am very tech-focused in how I invest my capital - it is not for everyone
You will not find me timing and rotating to cyclicals, value, etc
Only trades, mostly, if the opportunity arises (like we have seen in Q1)
I focus on few names, but try to know them to the best of my ability
The first quarter of 2021 is over, and it was a bumpy ride depending on how your portfolio is positioned. I see a lot of remarks on Twitter and the investment world on "how" you should be positioned; at the end of the day, I study technology businesses the most and that is where my core focus is, so my positioning is pretty obvious. I developed my portfolio around businesses that I think will do well over the course of three to five year periods that have strong themes and tailwinds, unless they hit my targets before then that I deem fair or too expensive (an example is if Cloudflare hypothetically hit $100-110 this year, I would probably shave a large chunk and reallocate towards something of better value in my eyes, maybe bump SharpSpring up).
Example: An example is Lemonade in 2020. We had a return of almost 200% in 4-5 months where as I figured they would return that over a three to five year period. I closed and reallocated the position because my goal is to provide consistent CAGR over longer periods of time and do not want to overpay for a business.
To me it is all about the Risk vs Reward in my given timeframe on an investment, as you have read on why I exited Zebra and added SharpSpring to my long-term Fiducia Fund (Roth IRA). The re-open thesis had played out with Zebra holding up relatively well and outperforming my three other businesses. I then used that capital to throw into a beaten down name off highs (SharpSpring). Given Zebra's broad end market exposure to economically sensitive areas, this felt like a great play to invest in for a re-open rotation. Maybe I should have allocated more capital towards Zebra, but I am content with how everything played out.
(Source: KoyFin, screenshot on the 26th of March)
The goal of Fiducia is to provide research on more of the unknown businesses out there and provide consistent research and updates on them.
We had a self induced economic recession in 2020 by closing the economy down because of COVID-19, and we fueled the market with liquidity to replace what should have been flowing through the economy in the first place. Forced to stay at home by the government, businesses went under, people lost millions of jobs, and it put a mental toll on a lot of people. The stock market, though, was on absolute fire in 2020, and you could throw a dart at a wall of stocks and make money. With the Work From Home theme, there was a wave of new traders and investors and couple that with the liquidity, we saw unprecedented moves in technology names and people claiming they are professional investors now. The market made everyone look like a genius, and this year, in the first quarter, some people are looking pretty dumb and scrambling for answers. Now we have a lot of people caught with their pants down, and the tide is out.
Investing and making money is not easy despite what your neighbor says. We saw an influx of new traders and investors in the market in 2020, and I think this is a net positive. But, I do think the inexperienced people will get "hurt" in a way moving forward because in reality, not everything always goes up, and if you really do not know what you own, you will be left scratching your head on why your stock is down 55%. This is why knowing what you own is so important to long-term investing and it is why I study so few names. I do not even feel I know enough on the four names I own, and that is why I continue to build and write up research. The hunger for knowledge in this industry is your best friend.
A quote from the current book I am reading by Joel Greenblatt:
"Mr. Market is subject to wild mood swings. Each day he offers to buy your share of the business or sell you his share of the business at a particular price. Mr. Market always leaves the decision completely to you, and everyday you have three choices. You can sell your shares to Mr. Market at his stated price, you can buy Mr. Market's shares at that same price, or you can do nothing" (Greenblatt, Joel. The Little Book that Beats the Market, John Wiley & Sons, Inc, 2006)
I like to reflect on Buffett here, who has stated he is a net buyer of stocks every year since he was 11.
You won't find me talking about the 10YR too much (even though I explained it in a few posts), I do not structure my portfolio around it. The 10YR probably settles between 1.75-2% in 2021 as rates level off near 2020 levels (pre-pandemic). I think tech will continue to outperform over the next few years as investors digest valuation and pick individual equities out of the declines. The best businesses will outperform and our goal is to find those. Not every business will be a winner. Personally, I think we may start to see a divergence in growth/cloud names and the best of breed will show strength this year. If you do not feel comfortable investing in individual equities, index funds may be your friend.
The Federal Reserve is not taking their foot off the pedal on bond buying- not that this is a reason to solely buy risk assets, but it certainly helps! There will be a time when the economic recovery comes back to normalized levels and we see them taper off- potentially giving us another buying opportunity in stocks as risk assets may pullback off the initial pullback of the Fed buying. Who cares? We will continue to see the narratives shift on why the market does this, why the market does that, and to be frank, absolutely no one knows, because if we did, we would all be wealthy and I would not be sitting here writing this report.
The market, notably tech-market, will notice that these fast growing high multiple names WILL continue to rapidly grow after COVID ends because they are critical to the digital transformation of enterprises we are seeing and efficiency they create for these enterprises. I would personally much rather be positioned in them over the next five years. Not only do I like Cloud, but I like the semiconductor industry and have since 2017. Notable ideas for investments from my point of view are LRCX, NVDA, and AMD. I do not think you can go wrong owning these the next five years, even ten years, to be frank. I do cover Lam Research as a Fiducia holding through quarterly reporting. I am no semiconductor expert (far from it), nor do I think you have to be to own them, but the technology is so amazing and I love having exposure here and enjoy reading about the businesses.
Current Long-Term Portfolio:
My current long-term portfolio consists of four names I deem strong, have secular tailwinds, great management with vision, and will be winners in their end markets.
Cloudflare - Behind the strong leadership of Matthew Prince and Michelle Zatlyn, we have seen consistent delivery quarter to quarter, rapid product innovation, as well as a team that is building their own total addressable market with each new product launch. Now, we have to monitor execution during 2021 and 2022. I will continue to write quarterly reports on Cloudflare for paying members. My first price target in 2021 (if applicable) to shave is around $110 per share. To me, that would feel over-extended and a good place to take short-term profits and raise some cash. (62.42% holding in my long-term account)
Anaplan - Frank Calderoni, another great CEO I have watched interviews on, is the leader behind the great execution at Anaplan. Carving the path for "connected planning" for enterprises, I think this business gets heavily ignored. Fiducia has Anaplan as the second largest position behind Cloudflare. Anaplan right now (3-28-2021) is trading below its lowest price target ($55) on Wall Street, and the highest PT is $100 per share. I think the risk vs reward here is unrivaled. (17.56% holding in my long-term account)
BlackLine - Marc Huffman, who replaced founder and CEO Therese Tucker in January of 2021 (this was all planned succession wise), is another strong leader with a strong skillset to build the business while Tucker can focus on product development. I do think Huffman is the right CEO for the job, given his experience at BlackLine already. I expect better execution in 2021 and 2022 from a revenue growth perspective and integration of Rimilia. I think that financial automation is a very interesting, small corner of the market that no one is paying attention to. Automating these pesky, repetitive tasks is at the core of what BlackLine is doing. (12.96% holding in my long-term account)
SharpSpring - The newest addition to the long-term portfolio family. This one is certainly more "speculative" you could say, given its market capitalization of roughly $200m in the Marketing Automation area. Founder-led by Rick Carlson, SharpSpring also has two very strong board members, Savneet Singh and Greenhaven's Scott Miller, to back up the legitimacy and strength of the business; I have built my confidence in their execution. I will continue to monitor execution as we head out of the Q4 report, and as we recover from COVID-19 damage to smaller businesses, which is the target market for SharpSpring. I think marketing automation will actually be a very secular theme to play the next three to five years as we come out of COVID-19 and the economy reopens, generating leads for businesses to have revenue may be a top priority. (7.03% holding in my long-term account, I would if anything buy more SharpSpring with Cloudflare profits if applicable).
The part everyone wants to read! The first quarter of 2021 was not the best, not that exciting either. As you can tell by the returns below, we underperformed the broader diversified indexes, but as you can see over the long-term since April 2014, we have done very well:
I also run a taxable trading account, below are the returns for this account as well. This is where I am slightly more active, and trade opportunities the market presents to me.
Below are the list of transactions I did, for transparency in my long-term account, over the course of Q1:
Q2 Outlook & Fiducia Thoughts:
As I have stated in the bullet point at the top, I continue to be bullish on technology and the broader markets. I do think as 2021 plays out, we will see more volatility and I will potentially hedge myself more often in my taxable account with either puts on QQQ or IGV, probably IGV given they are a strong benchmark for me.
Software continues to eat the world of efficiency and digitization: what price are you willing to pay? I think this is subjective for many reasons. Believe it or not, I used to be a very deep value-oriented type of investor trying to pay $.50 for something I thought was worth $1, but then I started looking at examples like Salesforce where the business never actually traded below 45x Next Twelve Months P/E (until March 2020 briefly dipped below that). I actually do not think that Software will really ever trade at a value-bargain discount. I believe we are better off just buying high margin businesses with strong management and holding for long periods of time monitoring the execution of these businesses. Salesforce has dominated the market since IPO. Look for yourself!
Obviously, I cherry picked this, but I think it is a great example of a business that continues to reinvest in itself through acquisitions and has never traded at an "attractive valuation" as most would say. Again, my investing is not for everyone.
"The Little Book that Beats the Market" by Joel Greenblatt is highly recommended in my opinion, if you have not read it. A lot of his mentality is really hitting home with me; I think it is an important book to read and study, especially for newcomers into the market.
I am a firm believer that it is always a great time to start investing. I also usually suggest starting a portfolio of index fund tailored to your personal risk tolerances and goals. I enjoy analyzing individual businesses and will continue to do so while providing potential trade ideas on the side. Not only is this a great way for me to grow as an analyst, but grow the Fiducia community as we tackle and overcome the capital markets.
We are just getting started. Thank you for reading.