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.
With another challenging month coming to an end, this brings the current selloff into its 7th month. Most of the factors that drove the market in June remained very much the same as the ones that have driven the market thus far…and we continue to lack clarity on when things will reverse.
Inflation remains a challenge. Rising interest rates remain a challenge. Geopolitics remain a challenge. Global supply chains remain a challenge.
And now, increasingly, growth is probably a challenge with rising interest rates threatening to push many economies around the world potentially into recession.
What is interesting, though, is that certain sectors like commodities have also started to reverse. The selloff is no longer an exclusive issue for long-duration growth stocks or bonds (which are negatively impacted by rising interest rates). Even commodities, which previously benefited from Ukraine-induced supply shocks, have now been pulled in.
Although it remains hard to predict the path from here, there does seem to be a path emerging ahead.
Growth is slowing down. Inflation is slowing down. And supply chains appear to be improving at the margin.
If these trends continue, we may (hopefully) return to a more predictable environment in the coming months before the next crisis rears its head.
June was another very challenging month for the Paper Portfolio. The Paper Portfolio returned -11.35%, worse than the S&P500 at -8.25%. This brings year-to-date performance to a dismal -52.1% vs the S&P500’s -20.0%. This now also brings the Paper Portfolio’s returns since inception to 11.2%, materially behind the S&P500’s 33.2%.
Most names across the portfolio performed very poorly, mostly just due to market weakness.
A couple of names did experience company-specific / sector-specific issues.
Semiconductor stocks like Nvidia, AMD, and TSM have weakened recently due to slowing end market demand in areas like PC and smartphones. This is raising concerns that datacenter (a key area of growth for the industry) may be next. With recession potentially waiting in the wing, many investors fear semiconductors may be heading for a downturn despite being somewhat more resilient than many tech stocks year-to-date.
On the positive side, Okta benefitted from stronger-than-expected earnings results at the beginning of the month. Given Okta’s security issue back in March, investors were braced for disruption. However, it turns out that, if anything, it reminded companies how important Okta is. Although many companies may have grumbled about the situation, Okta remains an important partner that is getting more important every day.
Nextdoor performed well after announcing a sizable $100 million stock repurchase plan at the beginning of June. Despite the strong performance, this only partially reverses the significant underperformance experienced over the last few months. At the moment, Nextdoor remains a fairly small platform in comparison to larger peers with a much less mature revenue model. This likely makes the stock less interesting to investors at the moment. However, Nextdoor’s market cap has shrunk quite significantly to just $1.3 billion. The balance sheet is very strong with >$700 million of cash. Although the company is not yet profitable, its cash burn is quite manageable relative to the cash on hand. The $100 million stock repurchase plan could go a long way in terms of reducing share count.
In terms of rebalancing, there will be no major changes except for some adjustments at the margin. Given how undervalued Nextdoor continues to appear to me, we will let its weight drift up as part of the rebalancing.
Let’s see what July brings.
Disclosures: Of the stocks mentioned, I own shares in NET, SE, PINS, MRNA, OKTA, SDGR, KIND, U, UBER, and AYX. I have no intention to transact in any shares mentioned in the next 48 hours.