Turning over to a new calendar year is nothing more than an arbitrary new day in the scope of the universe, but it would be easy after 202.6% returns in 2020 to simply yell “sell, sell, sell!” [Cramerism] and walk away (or at least hibernate for the rest of Covid), but the reality is that we are still in the very early innings of this digital transformation wave and the stars seem meticulously aligned for continued impressive and rewarding growth and performance. And while we will almost certainly experience another 25-35% correction in 2021 (we have had five in the last 3 years), the beta (market) factors will overwhelmingly support another strong year in the stock market and our sector. Consider for a moment the following macro factors:
- Covid-19: With vaccines being distributed worldwide, I expect unemployment to decrease and the economy to begin to rebound. That won’t happen immediately, though, or maybe even completely in 2021, and we have already seen the benefits of the pandemic on our digital SaaS stocks and the transformation.
- Infrastructure Spending: The incoming Biden administration will hopefully bring some stabilization to the government. Infrastructure spending is a low hanging fruit and one of his top 3 promises, as well as one he can assuredly get both parties to sign on to and would help pull the economy out of its downward spiral, bring new jobs, increase spending and inject the economy with new life… all good for companies, which is good for individuals. A rising tide lifts all boats.
- Government Stimulus: We have already had record stimulus packages now passed in Congress twice… in the trillions of dollars. Biden has declared he will seek to pass another $2000/person package, additional PPP has been granted to businesses, and who knows what else is coming with the new administration. Net, net, more stimulus is on the way. I’ve lost track how many TRILLIONS of dollars, but M2 money supply is off the charts and it eventually has to trickle down to somewhere. Interest bearing accounts, bonds, treasuries and the like are paying fractions of 1% interest right now (and negative rates in some countries), not even close to keeping pace with inflation. Stocks may be the only game in town, unless you are buying real estate, art or vintage cars!
- Interest rates: Currently at their lowest rates in history, the Fed has already stated rates will remain unchanged for the foreseeable future. Low rates provide inexpensive money for borrowing and investing, further increasing the money supply that gets injected into assets, like houses and, of course, the stock market.
- Inflation: Eventually inflation will increase. Seemingly infinite amounts of money supply and fiscal stimulus has historically had this effect (though some argue that technology will outpace it and keep prices low). Higher inflation makes it foolish to keep your money in cash or low interest bearing accounts, because its value quickly deteriorates. Consider Argentina last year with 50%+ inflation, where $100 at the beginning of the year could only buy you about $50 of goods at the end of the year! Once again…investing in good, solid, fast growing companies is one of the ultimate hedges against the deterioration of your purchasing ability.
- Currency: Last year the US dollar lost 7% of its value (on average) compared to a basket of other currencies. This means our US dollar greenback decreased in value against the YEN, Euro and other world currency. In our borderless commercial world, we purchase many goods globally. Those goods are now more expensive for us to purchase as the dollar drops further, which I expect to continue into 2021 as we continue to print more greenbacks. Investing in great companies with global exposure that collect revenues in other currencies is far better than most other places for your dollars to be invested and hedges against the deterioration of the US dollar.
- Millennials catching the wave: An entire generation is now starting to settle down, get married, buy homes and INVEST. This year has shown a tremendous uptick with Robin Hood and other brokerages catering to this generation with partial shares, zero trading fees, education courses… the works. And with sometimes nothing else to do while sitting at home, they have embraced the stock market… perhaps because they are lucky not to have lived through 2000… and/or perhaps remember much about 2008. Regardless, they have the mass, age, motivation and finally the savings to move the markets and are intent on investing in stocks. Demand drives prices up… often even irrationally.
- Explosive SaaS Earnings: Finally, every company, everywhere on the planet who hopes to survive and thrive going forward is being pushed, whether gently, or kicking and screaming, into a digital transformation. They will each require the “picks and shovels” to transition. Cloud databases, cloud and IoT security, cloud analysis, access, communication… cloud everything. The companies I try to invest in have just started to see the fruits of this transition, but make no mistake, it has heretofore just been the very tip of the metaphorical iceberg. While many of you live here in Silicon Valley and/or I have beaten you over the head with these theories to the point you may think its normal or mainstream, most around the US and the world are only now waking up blurry eyed to the concept the first wave of the digital transformation, Zoom communication as a new normal, digital signatures (DOCU) and keeping and accessing from anywhere your digital life in the “cloud” (NET). Indeed, the US government and many companies are also just realizing how critical having impervious cloud security at the edge (CRWD) is to avoiding massive hacks of the pentagon by other country sponsored hackers.
Hence, my largest positions going into 2021 are CRWD, NET and DOCU, the fastest growing, well established moats, disruptive technologies with impressive fundamentals, great management and impressive headstarts in their respective expertise. I have been divesting of a large portion of my ZM position based on difficult comparisons to both prior year quarters and sequentially and other reasons already discussed; And I am using those funds primarily to build positions in SNOW and ROKU, companies who are accelerating their growth, have relative moats in their respective industries, great management, impressive net dollar based retention rates, and staggering ARR and billings, just to name a few attractions. Following are all the positions by percentage in the portfolio to start off 2021:
| CRWD | 20.15% |
| NET | 15.64% |
| DOCU | 13.80% |
| DDOG | 9.07% |
| OKTA | 6.48% |
| SNOW | 4.76% |
| ZM | 4.63% |
| ROKU | 4.04% |
| BPRMF | 0.99% |
| LSPD | 0.90% |
| EDIT | 0.49% |
These do not include my options positions (~8% of the entire portfolio) or my cash position (9%), which will partially be needed to pay Uncle Sam for 2020’s capital gains. I also like to keep some tinder available when my investments have surged (as they have lately), so that I can add to my current positions when there is a sector rotation or a correction that unduly impacts my entire portfolio and gives me an opportunity to get additional shares at a relative bargain. I don’t usually keep more than 5-10% cash position, though I want to be clear, none of the funds I invest in these companies are needed in the next 3-5 years to live comfortably. This will differ depending on your own person situation, of course. As Warren Buffett famously once said:
“Be fearful when others are greedy, and greedy when others are fearful.”
To be clear, sector rotations and market corrections come and go, but are short-term in nature; however, if you are disciplined enough to invest long-term in solid, financially stable and fundamentally sound companies with incredible growth, strong balance sheets, great and trusted management teams, an ARR model, and many of the other factors I try to capture in my analysis, you won’t need to bail out of a great company when the stock price drops short-term; what is more, you will have the conviction to buy at exactly those times with the research, knowledge, and conviction that the stock is undervalued relative to the fundamentals of the company underlying it and that the stock will rebound long-term.
Rather than review each individual holding in the portfolio, something I have already done via text message quarterly and in depth when the earnings calls are released, I will end here and save that for other posts. That said, it is very nice just 12 short days into 2021 to be up about 9% in the portfolio as a whole already this year-to-date. DOCU in particular is up 9% by itself, just today!
Sub-Note: My hope and intention is to use this blog over the next 6-months or so to lay out each of the 15 fundamental criteria and metrics (e.g. Revenue growth, ARR, TAM, mgmt, etc) that I use to analyze a particular company, as well the 20 investing guidelines (Beta, portfolio size, trading vs investing, options, psychology, strategies, cash, etc) that I try to follow when investing. There are many “right ways” and many “wrong ways”. By no means should my methods be considered the only way and I will most assuredly make MANY more mistakes as we lumber along. Nonetheless, I hope you will find this blog useful and above all educational and thought provoking as I strive to introduce as many as I can to a means of financial freedom through financial education and stock investing that I have discovered the past 25 years. I sincerely welcome your respectful responses with any questions or thoughts, or just pointing out any errors or omissions. Like you, I’m always learning, exploring and fine tuning. “None of us is as smart as all of us!”
And if you use Twitter, please feel free to follow my twitter feed @VNunnemaker.
Cheers and Happy New Year 2021!!
