The Paper Portfolio performed well during June. The Paper Portfolio returned 14.87% vs the S&P500’s 2.25%. While the performance for the month was strong, the Paper Portfolio still needs to make up some lost ground in order to match the S&P500’s strong performance year-to-date. The Paper Portfolio has returned 11.90% YTD vs the S&P500’s 15.25%.
This has not been an easy year for quality / growth / secular winners since many investors seem inclined to rotate into beaten down value stocks or companies that were negatively impacted during the pandemic (and hence likely to benefit from a reopening).
However, June saw a meaningful reversal back towards quality / growth / secular winners. The continued rise of COVID-19 variants as well as shortage of vaccines globally is giving investors some pause when it comes to the growth-to-value rotation trade. In addition, the recent rise in bond yields that negatively affected high multiple stocks like the ones in the Paper Portfolio has also reversed. Investors seem to be heeding the Federal Reserve’s message that elevated inflation is likely temporary as well as the Fed’s discussions of the beginning of QE tapering in the coming months. Both of these things suggest inflation is not on a run-away train, and hence bond yields are unlikely to be on a run-away train either.
A number of stocks performed very well during the month including NET, PINS, MRNA, U, NVDA, ZI, TWLO, SHOP, AFTPY, and FSLY. All of these stocks increased by more than 15%.
Most of these moves are just in response to the overall change in market tone around high multiple growth stocks. The only stocks within that list that benefitted meaningfully from company specific news are:
1/ MRNA – The company released data that showed high vaccine efficacy even against the new variants. MRNA also likely benefited from CureVac’s low mRNA vaccine efficacy (~50%). For many non-medical experts, it may be hard to understand MRNA’s competitive advantage given many companies claim to have mRNA capabilities as well. However, not all mRNA vaccines are the same. CureVac’s less effective vaccine likely proved the point to investors.
2/ NVDA – Recently, a couple of big names in the semiconductor space including Broadcom, Marvell, and MediaTek came out in support of Nvidia’s acquisition of ARM. In addition, the company’s management team spoke at several recent industry events. The company continues to appear optimistic about an approval. Given that most investors seem to have already written off the possibility of the deal going through, these positive comments from both the company and ARM customers have likely led to improved sentiment in the stock.
On the loser side, UBER and ETHE both declined.
UBER’s decline was quite shallow. ETHE experienced a deeper decline (and significant volatility). In case you were not aware (is it possible to not be aware of crypto these days?), crypto has been going through a rollercoaster over the last few weeks. For us, ETHE is a small position so the impact is limited. It’s in the Paper Portfolio in case Ethereum does go to $100k like some people suggest. Will it go up? I don’t know 🤷♂️. I don’t know how to determine what it is worth, but there are some interesting projects built on top of it. If it doesn’t go anywhere, it’s <1% of capital.
In terms of rebalancing, the Paper Portfolio will continue to lean into the highest conviction stocks at the top, while marginally pairing back others like SQ, Adyen, and AAPL.
The Paper Portfolio will also add a 2% position in TAL, the leading China after school tutoring company. The Paper Portfolio used to have a position in TAL until we sold it off as part of the February 2021 Update. Since we sold it, the stock has declined a shocking >60% within a few short months.
Over the last few weeks, there have been a lot of concern that the government is potentially going to hammer the industry with new restrictions in order to reduce the cost of raising children in China as well as reduce mental burden on children. While the government is very likely to announce additional measures to address both of these issues, it is very likely not in the interest of the government to completely ban after school tutoring. The risk / reward looks favorable.
That’s all folks.
Let’s see what July brings. Happy 4th of July. And happy hot vax summer.
Disclosures: I own shares in NET, PINS, SE, MRNA, SDGR, SQ, U, UBER, PLAN, AYX. I have no intention to transact in any shares mentioned in the next 48 hours.