A month ago, I launched a paper portfolio mainly as a tool to encourage more frequent writing as well as to highlight some of the businesses I think worth discussing.
Although the portfolio held 60% cash, it managed to outperform the S&P500 Index – a very welcome surprise. A quick review suggests the large cash balance helped reduce portfolio volatility during a month of elevated market volatility. However, the stock-only portion of the portfolio also managed to slightly outperform the S&P500. While a few of the stocks performed poorly despite decent earnings, this was more than offset by sustained strength elsewhere.
Note that I have modeled the cash position using BIL, an ETF that invests in short term treasury bills (1-3 months). Given the short duration of the assets, it is effectively cash but with a small positive yield.
ATVI – Although Activision did not report particularly inspiring earnings, Activision stock performed well during the month as optimism returned to the stock as the company relaunched the original version of World of Warcraft. Perhaps due to nostalgia, the relaunched version of the game saw significant gamer interest and quickly rocketed to the top of game-streaming site, Twitch. I continue to believe Activision assets are undervalued with meaningful optionality. Given the strengthening momentum and optimism around the name, seems like a good time to slightly rebalance up to 4.5%.
BABA / TCEHY – These two stocks are becoming a tale of two cities. Almost exactly two years ago, I argued that the market was giving Tencent too much credit and giving Alibaba too little credit. Though that call was a bit early, I believe the market is starting to come around to a similar conclusion. Tencent is too dependent on games. The domestic China gaming business is starting to mature, but the international business is not picking up fast enough to sustain historical growth rates. More importantly, while WeChat is an incredibly dominant platform in China, many investors (in particular, western investors) overestimate the power of WeChat and Tencent’s ability to monetize it. Tencent’s earnings are starting to reflect this. I anticipate Tencent earnings to continue to deteriorate moderately from here until they successfully reorient. Alibaba, on the other hand, continues to execute in stellar manner. Not only does the company continue to fight off new entrants, Alibaba continues to set the agenda for the industry.
MELI – Though we have not discussed MELI deeply before, it is likely the key winner in ecommerce and payments in Latin America. Similar to SE, MELI has the potential to capture two very large secular opportunities in one of the largest geographies in the world. During the month, MELI reported stellar earnings, which led to a strong move in the stock. However, the pop quickly reversed as Argentina government headed towards default. MELI is based in Argentina and derives 20-25% of revenues from Argentina, which understandably created investor fear. While there may be near-term disruption in this part of the business, ecommerce and payments benefit from strong secular forces that should dominate in the long run. I am tempted to rebalance with a higher weight, but Argentina will likely remain stressed for at least a few more quarters.
MTCH – Match performed strongly during the month after reporting strong earnings and raising guidance. Tinder is now approaching a $1 billion revenue run rate yet momentum continues to be strong. Despite already achieving a significant level of success, I can’t help but see a company still in its early days of growth. The company is approaching 100mm MAUs in a world with 600-700mm dating-age singles. Given the strong performance, the weight drifted up, but doesn’t seem to make sense yet to take any back.
SE – I continue to believe this is one of the greatest investments available out there. The company’s earnings report provided additional evidence that their platforms (gaming and ecommerce) continue to gain momentum. Gaming continues to outstrip expectations. Guidance raised with gaming revenues now expected to be up almost 200% YoY. Garena is now solidly one of the world’s largest gaming businesses. Shopee is successfully monetizing in their stronger geographies. Seems like more good things are to come.
SHOP – What a month! Not only did the company deliver a strong set of results, the company continues to execute on a vision that positions it to become the “anti-Amazon”. That’s a good place to be in the long run. Of course, betting against Amazon has not historically been a good bet, but if there is anyone that can challenge Amazon, I think Shopify is the one to do it.
Additions: Given the weakness in the market and the significant levels of cash in the portfolio, seems like a good time to add a few names. For September, the portfolio will see Adyen and Square enter at 4.00% and 3.00%, respectively. Over the past two years, I have gained a significant appreciation for the payments industry, especially with the scalability of some of the business models. Both Adyen and Square appear well positioned to be secular winners. However, Square seems to be going through a bit of a transition near-term, which limits my immediate enthusiasm for a higher weight.