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.
For February, the Paper Portfolio returned -1.81% vs -2.51% for the SPY. This brings YTD performance to +15.11% vs +3.62% for the SPY. However, the performance gap since inception remains wide at +19.58% vs +39.62% for the SPY. Despite this gap, there should be ample opportunities to recapture lost ground when the conditions are right, eventually.
February opened with a bang as the market strength observed in January continued to carry through. However, an unexpectedly strong jobs report and inflation print sent markets off course. The markets are now rethinking the fragile narrative that had been slowly building over the last few months: Inflation has been coming down, but is disinflation now over? Could inflation be going back up? With such a strong jobs market, will demand continue to outstrip supply?
These questions will take time to settle.
It takes two points to make a line, and three points to make a trend. Now that we have a narrative-violating print, we may need another print or two for a new narrative to form…
As we discussed in the last update, the road to anywhere worth going is never a straight line. Our decision last month to remain nimble and conservative has proven helpful as markets see-sawed in February. Even though I continue to believe in the disinflation narrative (assuming no major geopolitical disruptions in the near-term), the path to lower inflation will likely continue to see bumps along the way.
Still, I’m not sure these bumps are as problematic as it may seem in the moment. Every bump in the near-term will likely cause the Fed to consider extending the rate hiking cycle, but it seems unlikely to compel the Fed to go back to mega-hikes. What this means is that we get potential for more 25bps hikes beyond what the market is currently expecting but no 50bps or 75bps hikes. The market was previously assuming the Fed stops hiking by May. Maybe we now get a (25bps) June one. And perhaps another 25bps after that if inflation remains sticky. This is not too bad because it leaves time and room for change. A lot can happen between now and June. This gives time for bumps to be digested, while still leaving optionality for the Fed to act if disinflation is indeed not happening a few months from now.
We’ll have to see.
During February, the top of the portfolio performed quite well, while the belly was quite weak.
Some moves of note:
Cloudflare returned 13.4%. The company reported strong quarterly results and continues to execute successfully and aggressively against their long-term growth plans. Cloudflare is building something truly special. Not only are they becoming critically important for the operation of the internet, they are making the internet uniquely better through better performance, better security, and better capabilities.
Nvidia returned 18.8%. Nvidia has been on fire YTD as it benefits from a confluence of several tailwinds. Interest in AI has exploded recently, especially as ChatGPT both shocks and stuns. All of this AI requires a lot of GPUs for training and processing. There is an arms race in tech…and Nvidia just happens to be effectively the only arms dealer available. Investors appeared to be a bit concerned about datacenter weakness heading into results, but those fears were promptly dispelled.
Nextdoor declined 16.3%. As a fairly small company, Nextdoor is a fairly neglected stock at the moment. The advertising industry is under pressure due to macro, and Nextdoor appears to be facing more pressure than normal due to the small scale of their ad operations. However, Nextdoor remains strategically attractive due to its unique positioning as a hyperlocal social network. There are many interesting things they can do with that positioning in the long run. While they lack scale in advertising, advertising works best when you have data. Nextdoor is one of the few companies that know the direct identity of their users as well as highly personal information like your address. This has been a tough stock to own, but with an incredibly strong balance sheet, they have plenty of time to execute.
Moderna declined 21.2%. Although there have been a number of positive announcements around the pipeline over the last few months, including positive readouts on RSV, flu, and personalized cancer vaccines, the stock continues to face headwinds from uncertain Covid demand. Covid revenues are falling, but the pipeline will still take time to fill the gap. This dynamic makes for a difficult stock to hold…but if we take a longer view, Moderna seems almost destined to be worth far, far more than they are worth today.
Unity declined 14.3%. Unity continues to face challenges in its advertising business. It recently completed its acquisition of IronSource, which helps resolve some of the issues on the advertising side, but it will likely still be a few quarters before it can regain operating momentum.
There’s a couple more stocks that had outsized moves, but given their smaller size, their contribution to returns were not that meaningful.
For March, the Paper Portfolio will add a position in Marvell Technology, a semiconductor company. Despite the overwhelming macro and geopolitical narratives that are driving stocks across the board, semiconductors increasingly looks attractive to me. Semiconductors are systemically important, and investments into semiconductors is rising, especially as AI capex accelerates. In addition, the semiconductor industry has been under pressure over the past year due to weak consumer device demand…this should also be stabilizing / inflecting soon. Marvell is exposed to a number of areas including telecoms, autos, and datacenter / cloud. The most exciting part is probably their datacenter / cloud networking products, which are increasingly powering the most advanced datacenters. Marvell benefits from a lot of the same tailwinds driving Nvidia, but Marvell is getting far less attention than it deserves.
Alright let’s see what March brings. Onwards.
Disclosures: Of the stocks mentioned, I own shares in NET, PINS, SE, KIND, MRNA, UBER, OKTA, U, SDGR, SNAP, AYX. I have no intention to transact in any shares mentioned in the next 48 hours.
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