What a difference a new year makes!. The moroseness and subsequent giddiness of the market have been exposed in a little over 30 days. From the depths of the despair in late 2018, the S&P 500 has shot up almost 8% in January. Project $1M similarly benefitted from an enthusiastic Mr Market, who chose to “bid up” the Project $1M portfolio in January, sending it up more than 13% over the month.
The overall objective of the portfolio is to turn an initial capital base of close to $275,000 that was initially deployed in November 2015 into $1,000,000 by November 2025. This will be done primarily through buying and holding high quality businesses, helping returns compound and minimizing tax and trading costs.
Project $1M ended January with a balance of close to $420,000. This is shy of the highs of $437,000 that was reached at the end of September but represents solid recovery off the $373,000 lows at the end of 2018. Alibaba and Facebook saw strong gains in January, as did Nanosonics.
Since inception, the portfolio has returned an annualized 15.6%, compared to 10.7% on the S&P500 (with dividends reinvested).
As disclosed in my December update, I materially increased my Facebook (FB) position, selling down my previous holding in REA group. I increased the position by almost 50% at that time, at an average price of $133. Facebook reported strong earnings last week, growing revenue at almost 30% year on year, and the stock promptly marched back north of the $165 mark. While I can't confidently say that the worst of Facebook's share price volatility is behind it, I increased my position in Facebook at the time because of the valuation discount that was present to the general market. In my opinion, this is now gone. I still expect Facebook to outperform from here because of superior business structure and returns on invested capital, and thus I am content to maintain my position here.
What I was most surprised about was the markets bizarre reaction to the event. With traders having sent the stock to the mid $120 level only in the prior month, Facebook bounced almost 30% within 30 days on the back of strong results, almost suggesting that the market was pricing in some sort of catastrophic hit to profitability and a large exodus of subscribers due to the various scandals that befell it in 2018. The thing many have failed to understand about Facebook is that it is a lot harder to leave than people think. Facebook has become the digital equivalent of the "telephone" for the modern era. The platform is now an essential communication tool that enhances the productivity of maintaining social relationships. Even better than the telephone, one can be kept up to date on the happenings of a broad social circle on an asynchronous basis on a schedule of ones choosing. People will give up such a social productivity enhancer very reluctantly in my opinion, if at all. Its also of no surprise that advertisers will want to be where the eyeballs are. That the markets appear to have underestimated the likelihood of this surprised me more than a little.
Alibaba shakes off slowing domestic growth
Alibaba (BABA) also posted handsome gains for January, up almost 23% for the month. Again, this was another market reaction that greatly surprised me. Alibaba's revenue growth increased almost 43% year on year. Shares were up well on the news, and have largely increased through January. It appears that traders also recalibrated just how exposed Alibaba would be to the impact of any tariff action that may result from the prolonged trade dispute between China and the US. Given the amount of pain that has been wrought on key US political constituencies, such as farmers and industrial workers from this prolonged stand off, the likelihood of some type of settlement remains fairly promising. Further Alibaba's direct exposure to tariff impact remains a very modest portion of revenues, estimated to be below 10%. What is likely to be more damaging is the reduction in domestic consumer activity in China from a protracted trade war. In any case, Alibaba has a number of other tailwinds to ride beyond just consumer growth, including merchant services and cloud computing which is growing inexorably stronger. Further if the business was able to grow revenue at north of 40% in the face of slowing economic growth, I find it hard to imagine that anything short of a severe recession should cause a material slowdown in near term prospects.
Position weighting changes
I paired my holding in Nanosonics (OTCPK:NNCSF) back somewhat in early January, and increased my holdings in CSL (OTCPK:CSLLY) and Promedicus (OTCPK:PMCUF), essentially a redistribution of my Australian growth holding exposure. I still very much like Nanosonics and see strong long term potential for the business. However, the business remains very much an early growth venture play, requiring a strong stomach and a long term view. Share returns are likely to be volatile and patchy as the company scales its disinfection systems globally, and goes through some restructuring of its GE (GE) distribution arrangement.
The capital realized from my partial divestiture in Nanosonics went toward bulking up my position in CSL, a business that I have previously professed my strong admiration for. CSL holds a market dominant position in a blood products oligopoly. This is a complex business, with high barriers to entry, strong returns on invested capital and good long term prospects. I have always felt that my holding here was a little light, so I increased my position weighting here.
I also sought to increase my weighting to Promedicus, another interesting early stage investment of mine in the medical imaging category. Promedicus is a leading player in facilitating the digitization of medical imaging, specifically allowing radiologists to receive digital images of film and x-rays to mobile devices and tablets, improving productivity and timeliness of response. The company is also a leader in advances to bring AI capabilities to such image recognition, allowing better classification of anomalies in images.
As a result of these changes, my Nanosonics weighting drops to around 3.5%, while CSL increases to 7.2% and Promedicus to 2.7%. I feel that the portfolio balance is much better now, in consideration of the relative risk of the various positions and their revised weighting in my portfolio.
With such pronounced volatility in the markets, its hard to predict with any conviction what 2019 returns for Project $1M may look like. While some holdings such as Atlassian (TEAM) are starting to look expensive, others such as Alibaba, Facebook and Alphabet (GOOGL), all material positions in the portfolio, actually look very reasonably priced and should continue to generate good share price returns. While the portfolio is up 13% in January, I still expect full year returns to come in at the 15% range for 2019, which doesn't imply much growth for the balance of the year.
Portfolio returns of almost 15% annualized since inception mean that I still sit on target for my ambitious goal of $1M by the end of 2025, which will be the end date for this portfolio.
Disclosure: I am/we are long ALL STOCKS 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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