Paper Portfolio – June 2022 Update

As always, this is not investment advice! Please do your own due diligence and take your own financial situation into account. Everyone has a different financial situation, which means different tolerances for risk and ability to take risk. What is appropriate for me may not be appropriate for you.

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After a very challenging April, May came in almost as challenging.

The Paper Portfolio declined 13.6% vs (very frustratingly) a small +0.23% return for the S&P500. This brings the Paper Portfolio’s year-to-date performance to a dismal -45.9% against the S&P500’s -12.8%. The Paper Portfolio’s cumulative return since inception is now materially behind at +25.4% vs the S&P500’s +45.2%.

Despite the last few months, a lot of stocks are starting to look quite attractive on a multi-year horizon. Many stocks have gone from very overvalued to much more reasonable valuations. And in some cases, quite cheap! Some former high flyers might not make it, but there are certainly many very well-positioned companies that have been thrown out with the garbage. And that makes me optimistic!

I don’t know how long it will take for the world to adjust to the new realities in the financial markets (higher cost of money, tighter liquidity) as well as the very real disruptions percolating through the real economy and supply chains, but with a reasonable timeframe we should be able to deliver decent returns from here.

Turning to the individual stocks…

Winners:

1/ AMD – AMD delivered strong earnings at the beginning of the month, dispelling fears of a semi industry slowdown. Despite weakness in consumer markets, the momentum in datacenter continues to power ahead. AMD also continues to win share away from Intel.

2/ MRNA – Moderna held their Science Day presentation in mid-May, updating investors on their roadmap and vision. Moderna also seems to have benefited to some extent from recent fears around Monkeypox (might be of interest if you haven’t heard of this, but whatever you do, I would not recommend Googling photos). Although Moderna does not have a product for Monkeypox, fears around disease and pandemics likely remind investors of the value of Moderna’s technology.

Losers:

Sadly there are many.

1/ NET – Despite holding a very compelling conference with significant product updates, Cloudflare sold off along with the rest of “expensive” tech. Unfortunately, Cloudflare remains one of the more expensive tech stocks despite the sell-off since many other tech stocks have sold off even more.

2/ ZI – ZoomInfo delivered good results at the beginning of the month but was targeted by a short seller mid-month questioning the company’s business practices. The Bear Cave (who seems to have a reasonable track record in uncovering issues) claims ZoomInfo’s contracts are not customer-friendly and are difficult to cancel. These allegations are disappointing. I do not know if they are true or not, but if so, this would be a great opportunity for the company to improve their business practices. ZoomInfo’s value proposition is strong enough that they shouldn’t have to engage in these type of business practices.

3/ U – Unity declined after surprising investors with an extremely weak guidance for Q2 during Q1 earnings release. Unity explained that one of their advertising AI models is having data issues. The company believes it is resolvable but will take a few quarters to work through.

4/ KIND – Nextdoor reported decent results but struck a somewhat cautious tone around macro impacts on their business. Much of the decline was probably due to cross contamination with other “expensive” tech. Nextdoor also went public via SPAC merger last year, which likely also makes it less attractive for investors at the moment.

5/ SNAP – Similar to Unity, Snap surprised investors with an extremely weak guidance for Q2 during Q1 earnings. Despite seeing solid growth through late April, the business seems to have slowed down dramatically in May. The company believes macro is a major contributor, but given the company’s rollercoaster ride over the last few quarters (and management’s poor ability to forecast their own business), few investors likely trust anything they have to say.

Other major decliners include OKTA, UBER, AYX, MELI, and SQ. Not much to call out for any of these names. The declines are mostly a function of tech sell-off, in my opinion.

For the June rebalancing, there are only minor adjustments around the edges, except for the addition of TSM (Taiwan Semiconductor Manufacturing Co). TSM is one of the world’s most important companies since it operates the world’s most advanced semiconductor foundries / factories. TSM manufactures chips for companies like Apple, Nvidia, AMD, Qualcomm, and others. The digital world we have all come to depend on simply would not exist without TSM. TSM’s growth is accelerating and will likely continue to accelerate in the next few years, but the stock has pulled back recently due to growing fears of a global recession. Historically, the semiconductor industry can be a bit cyclical. However, I think investor fears are a bit misplaced. Semis used to be driven by consumer markets like smartphones and PCs. Consumers are sensitive to macro. Increasingly, semi demand is driven by datacenter investments. These investments are made by large companies like Google, Facebook, Apple, Amazon, and others with very deep pockets. These companies also invest on multi-year horizons. Given the pullback, seems like a good bet to add TSM.

Let’s see what June brings.

Disclosures: Of the stocks mentioned, I own shares in NET, SE, PINS, U, KIND, MRNA, OKTA, SDGR, UBER, and AYX. I may transact in shares mentioned in the next 48 hours.