Trimming and Positioning

Updated: Jun 8, 2021

I get a lot of questions on "how do you know when to trim?". It is not necessarily knowing when to trim, it is about understanding when valuations are so stretched in the short-term and breaking from your bias of the business and potential long-term results. Just because I shave now, does not mean I wont buy back later. That is the essence of it actually, I plan on buying those shares back at a lower price sometime in the future to continue my CAGR. I believe the probabilities of the price heading lower, is higher than the odds of the price moving higher.

Of which, I believe my largest position Cloudflare has entered that realm. I have been long since 19x NTM Ev/Sales (value people going to murder me). Much more to the business than just that. The market is valuing SaaS on that metric, so as an investor, you must also value based on that metric unless you think you are smarter than the market. Understanding how the market values your business is crucial to performance.

Cloudflare as of this writing (4/27/2020) is trading at 20x my FY23 Ev/Sales which isn't super bad relatively speaking. Given the frothy market in terms of valuation, massive amounts of money being made, I believe a proper target to sell some of my Cloudflare would be roughly $100 per share if applicable before earnings. I may sell earlier as well if applicable or feel like they are running out of juice.

I would shave roughly 35% of my position which would be 455 shares. That would raise around $45,500 in cash (assuming we even get this price). The business is on a tear, along with share price return. What worries me about this market is dissecting business fundamentals from massive flows of liquidity being the driver of share price returns. I love the business, but I also love keeping my CAGR where it is. I believe I can find a better R/R (Risk vs Reward) elsewhere.

I only trim when I really feel I can find a better R/R, and I believe I would double my position in SharpSpring in the long-term growth portfolio with some of proceeds, then I may actually sit on some cash for a while.

Right now I think cash can be your friend. I do think summer will be relatively boring, probably increased volatility. I still think the broader indexes finish the year higher than where we are today. I know I will be traveling in June and July, and my trading will most likely be cut back due to not monitoring the market each day minute by minute like I currently do.

One thing I was taught as an analyst was to trim a comfortable amount, where if the share price continues to run another 20%, 30% whatever it may be, you can be content with your current holding and if it drops 20% or 30% you are satisfied with the profit you trimmed off the table. Few understand this, few apply this.

I wanted to write this as a heads up on my thoughts moving forward and my thoughts on Cloudflare and the amazing run the business has seen. They are just getting started, but valuation is always a concern for me. I think we have a little more room to run in the share price, I am not timing anything and am content right now. There is no guarantee Cloudflare gets to $100, it is just a number I have in my head. I will have a portfolio update in the first week of May coupled with my updated returns in my LT account and my active trading account.

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