Project $1M: October Brings High Drama

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Includes: AMZN, BABA, BIDU, CTRP, FB, GOOGL, TCEHY, TEAM
by: Integrator

Summary

October rocked Project $1M performance, with portfolio value down almost 12% in the month.

Little in the portfolio was spared in October, however Amazon and Atlassian were dealt with particularly harshly, with both falling over 10%.

Component valuations are now at the best levels that they have been for the last 12 months and I am optimistic that strong results will be produced over 2019.

Project $1M recently marked its 3 year anniversary, generating a 13.2% annualized return.

October was a month of high drama for Project $1M, the concentrated portfolio that I am running with the aim of growing a ~$275k base into $1M over a 10 year period.

My broader investment focus with Project $1M is the purchase and long term hold of a clutch of high growth, cash generating businesses that are powered by secular tailwinds. The advantage of these secular tailwinds should be to allow the selected businesses to grow under any economic conditions that may be experienced over the life of the Project $1M portfolio (a decade or more).

Markets may move the prices of Project $1M businesses around, here and there, depending on sentiment, however I am focused on the long term returns on invested capital that my businesses can generate and the opportunity to deploy that invested capital at high rates of return over a long term horizon. For those that are new to the Project, here are Part 1, Part 2 and Part 3 of the initial investments in the portfolio.

One thing about running a real money portfolio is that the highs are sweet, and bring a material impact to ones asset value. The losses are equally impactful, and sometimes cause you to second guess everything that you are doing. October happened to be one of those "second guess yourself" months.

Project $1M ended September with a balance of close to $437,000. The end of October saw the balance fall to almost $390,000. This was a value erosion of ~$50,000 for the month. The precipitous dip in the performance chart speaks volumes, with the portfolio down almost 15% in a month, managing to rally briefly to close October down only 11.5%.

No single holding escaped October unscathed, however the "high growth, low earnings" names such as Amazon and Atlassian (TEAM) were hit particularly hard, with both down greater than 10% for October. Many of my Project $1M holdings are now either in a "bear market" (>20% fall from highs) or on the precipice of one. The list of holdings in this situation includes names such as Alibaba (BABA), Tencent (OTCPK:TCEHY), Facebook (FB), Amazon (AMZN), Baidu (BIDU), Google (GOOGL) and CTRIP (CTRP). Funnily enough, I didn't feel panic in October, but rather, a sense of relief. In fact, I feel like Project $1M now appears to offer the best value that it has in quite some time. For the first time in close to a year, I am now seeing values that are encouraging me to buy names in the portfolio in a meaningful way again.

Tencent: Unfairly beaten down

The fall in Tencent's fortunes has been frankly breathtaking. This is a business that lost almost 50% in value in the last 12 months. Put another way, this is a destruction in value of almost $300B. Tencent's business is still performing creditably. The company managed to grow revenues 30% year over year, with flattish earnings as a result of investment. While the company's mobile gaming business is getting additional regulatory scrutiny, my suspicion is that this is more a temporary transition to a lower growth era for mobile gaming, rather than the end of all mobile gaming in China. Mobile gaming as a revenue driver for Tencent is also declining, with businesses such as online advertising and video monetization experiencing faster growth. Tencent is also embarking on a transition to become more focused on the enterprise, and is bulking up resourcing in areas such as cloud computing and the internet of things. I see Tencent representing very good value at these levels.

Alphabet and Amazon: Good value but still not low enough

Alphabet and Amazon both posted robust results in recent earnings. In particular, Alphabet's business demonstrates amazing resiliency. It amazes me that a business which generates near $120B in annual revenue is still able to grow revenue north of 20% with consistency. Alphabet also posted results that easily beat earnings estimates.

Amazon's recent earnings demonstrate that it is a business in transition. The company is still able to grow revenue at close to 30%, and is now increasingly doing so in a more profitable manner. AWS, Amazon's cloud services business is a relatively high margin earner for the company. Amazon now also has the 3rd largest digital advertising business behind Google and Facebook. As brands become increasingly desperate to retain mindshare with consumers, this will become a high margin earner for Amazon going forward. Brands are facing the threat of increasing disintermediation from the purchase decision with television advertising less relevant to consumers, and securing premium in store shelf space now less impactful with decreasing store foot traffic. Amazon is in a perfect position to capitalize in enabling brand advertising on its platform. Both AWS and Amazon advertising will power Amazon earnings going forward.

I believe that both Amazon and Google represent attractive value currently. Unfortunately, I bought both of these holdings at far lower prices than what they trade for today. My Amazon holding is close to double where I bought it at, while my Google holding is still up more than 30%. I am happy with the weighting of both businesses in my overall portfolio and would only be tempted to buy if there were more pronounced falls.

Third anniversary of Project $1M recently concluded

Project $1M notched up its 3rd anniversary since inception. While at times, performance clocked as much as 6% outperformance over the S&P 500, the massive pullback in October saw annualized performance over the S&P 500 come in a little under 2% incremental at the 3 year mark. The annualized return at the 3 year mark was 13.1%. The recent share price stabilization and pick up in early November sees Project $1M performance currently stand at 14.5% annualized since inception.

Future outlook

While the asset value of Project $1M has been cut significantly, all Project $1M businesses reported strong revenue and earnings growth recently, are in robust health, and generally continue to grow at double digit growth rates. With the pricing of the Project $1M businesses now at a far more reasonable level, I'm optimistic that the portfolio overall should be able to grow at at least 10% over the course of 2019.

Disclosure: I am/we are long ALL POSITIONS MENTIONED.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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