During November, the paper portfolio outperformed the S&P500 by 0.92%. This number, however, masks the underlying strength of the portfolio since ~40% of the value is still allocated to cash. The stock-only portion of the portfolio outperformed the S&P500 by 3.89% with significant strength across almost all holdings except for Uber, Match, and Activision Blizzard.
Despite significant strength across most of the stocks in the portfolio, all of them continue to look undervalued over a longer time horizon. All of these companies are creating significant value (above the S&P500) and almost all of them can do it in a way that is not particularly sensitive to the underlying macroeconomy. These are companies that are driven by secular forces and are masters of their own destinies. They create value rather than passively capture value, which I would argue is more dependent on macroeconomic forces.
While I would like to say that good stock-picking led to good results, I will have to admit that outside of SE, BABA, and perhaps SQ, most of the stocks performed well likely because the market is becoming increasingly comfortable with the idea that we will reach some sort of ceasefire with China near-term but not much more. This reduces near-term uncertainty but leaves the long-term questions (trade, technology, geopolitics) unsolved.
Ironically, these are the circumstances that favor secular, strong businesses like the one in the paper portfolio. In an uncertain world, investors should favor strong businesses that are masters of their own destinies, especially the ones that are driven by secular forces unrelated to trade. Regardless of what happens to trade, consumers like you and I will likely continue to shift to ecommerce, continue to increase our usage of digital payments, continue to adopt software in our workplaces and at home, continue to buy less but better.
I don’t anticipate any quick change to the external environment, and so this portfolio should hopefully continue to do well. I will also point out that despite the good performance in November, we are still a little behind the S&P500 since inception (-1.5% for the underlying stocks, -2.6% for the total portfolio due to cash drag in a, generally, up market).
For this update, I’m adding another 3 names to the portfolio in order to continue to work down cash: Visa (V), Starbucks (SBUX), and Cloudflare (NET).
V and SBUX likely need no introductions. V continues to build out our exposure on the digital payments / fintech theme. SBUX recently ran into some troubles with a hyper-aggressive new entrant in China (Luckin), but I think SBUX is starting to find its footing. But more importantly, SBUX will learn new innovative ways of serving customers as they compete with Luckin. These learnings should be applicable to their markets outside of China as well.
Cloudflare is a recent IPO. While the company is likely not a household name, the company plays an incredibly important role in protecting the global internet from DDoS and other security-type attacks. Not only does it offer an incredibly important service (that will become even more important in the future), it is leveraging this starting point to build out a developer / client ecosystem that will likely become incredibly valuable in the future. More on this in a future post.
Here’s what the latest portfolio looks like following this update:
A couple of things to call out…
SE: SE performed incredibly well (+24.5%). SE has recovered from the weakness seen in Sept / Oct largely as a result of reporting earnings that calmed concerns around an imminent slowdown in the gaming business. While their self-developed game, Free Fire, is certainly to mature within the coming quarters, Free Fire is unlikely to see dramatic declines. Modern games are designed to minimize “cliffs”. And at the end of the day, the jewel is really Shopee, the ecommerce business. I think we will be very happy with the results even if the gaming business declines gradually over time while Shopee ramps up in the coming years. What is more likely, though, is that we will still get some gradual growth in Garena as other games outside of Free Fire reach the market. For example, I’ve highlighted the strength of Activision’s Call of Duty Mobile in recent posts. SE is a distributor of Call of Duty Mobile in Southeast Asia and hence will grow as that grows.
BABA: BABA concluded an IPO in Hong Kong, raising >$10 billion. In some ways, this is defensive as it gives the company a second listing outside of the US, which reduces future risk from US-China trade war. On the offensive side, it does give BABA >$10 billion of extra cash. Will be interesting to see what they can do with that, especially since BABA now has the largest war chest out of all Chinese peers.
SQ: As mentioned in my October Update, recent weakness in SQ stock will likely prove to be a great buying opportunity because the Cash app fundamentally transforms SQ from a one-sided merchant acquiring business to a two-sided network that brings together merchants and consumers. SQ is going about this in quite a unique way, but they have all the ingredients to create something great. SQ reported results that opened investor eyes to the potential of the Cash app. This helped drive the stock up +12.5% in November. I think this is still very early days for the Cash app.
Uber: On the losing side, Uber is the lone stand-out…declining 6.03% in November. When I added it to the portfolio last month, I knew it would be a controversial stock. This revealed itself in a number of ways during the month – Travis Kalanick’s (Uber co-founder) sale of >$1 billion of stock + London’s rejection of Uber’s application to renew their operating license among others. Although Uber is one of the few companies in the portfolio that has less control over its own destiny (largely due to regulations and a somewhat tarnished reputation), I think investors continue to underestimate the value of the network they have created and the optionality of touching so many users (100mm+) on such high frequency.
Disclosures: I own shares in SE, BABA, ATVI, TCEHY, SHOP, SQ, and UBER. I have no intention to trade any of the names in the next 48 hours.