Last Friday (February 22, 2019) was quite a useful day for our SHU portfolio, as a couple of our positions - The Trade Desk (TTD) and Roku (ROKU) - shot up 31% and 25%, respectively, after investor-pleasing quarterly results.
So now might be as good a moment as any to walk you through our portfolio performance, something which we meant to do at the start of the year but never got around to actually do.
Here is how the SHU portfolio is performing since its inception (September 29, 2017):
According to the Yahoo portfolio software, the return is nearly 40% but that could be higher as it seems to count our closed Finisar (FNSR) position as a 100% loss while it was less than a 1% loss (bought for $22.20, sold for $22.10).
Roku has been quite a rocky ride:
The market cannot decide what its prospects are as there seem to be two opposing forces. Yes, streaming is a really big opportunity and the shift of ad money has only just begun, but on the other hand, Roku faces some formidable competitors like Amazon (AMZN), Google (GOOG) (GOOGL) and Apple (AAPL).
It also doesn't help that the company isn't making a profit and won't do so this year. So these bouts of manic depression in the stock price are likely to continue, although we think in a somewhat more muted form.
While we are aware of a slowing Chinese economy and trade tensions with the US, all three companies are still growing briskly and were way up in the black earlier.
Two stocks have more than tripled, Inseego (INSG) and The Trade Desk and we have no reason to get out here, or even trim our position anytime soon.
Inseego has the stars aligned with its two SaaS telematics businesses and a hardware business that is set to boom on the 5G wave. The Trade Desk, well, it is just killing it with programmatic ads and CTV (connected TV, basically streaming).
Where would we add?
What you perhaps are most eager to know is where we would add. Well, there are two smaller companies which we think could show a similar trajectory as Inseego, they are more recent purchases for the SHU portfolio.
The shares of BioLife (BLFS), which we bought late October last year and only recently started to run is primed for years of growth and is already profitable and producing positive cash flow. The shares are certainly not cheap anymore though.
Our newest addition, Pareteum (TEUM) is a turn-around story like Inseego, apart from that it doesn't have any debt. It has been raking up contracts and customers, and the market is only just starting to wake up to the possibilities here as the shares were ridiculously cheap.
We bought it just 3 weeks ago and it's already up 50% since then, but we will argue in an upcoming article that it is still really quite cheap, especially considering its SaaS platform business model which usually command much higher valuation multiples.
It's selling at just 3x 2019 sales and we think that's a result of the turn-around and the fact that it's still not a widely known name.
Adding the revenues of acquired Artilium and the recently closed acquisition of iPass, sales are already likely to have been around $90M last year (pro-forma).
The company's 3-year backlog keeps exploding; it stood at $147M at the end of 2017 but the latest figure (end of January 2019) had grown to $664M. Converting just 10% of that this year would propel sales well over $100M this year.
If the company executes well (which it seems to be doing at the moment as it is raking in new contracts and customers), the shares could gradually command much higher valuation multiples.
The shares have already had quite a rally on much higher-than-average volume, albeit from ridiculously low levels:
What we're actually hoping is some pull-back so we can load up some more, but that might not happen anytime soon. So far, any attempt at a pullback has been swamped by buyers, which is quite understandable, in our view.
The big disappointment has been Nano Dimension (NNDM). The company has really cool technology (3D printing of electronics) that is starting to gain traction and it has the hallmarks of a leader in an upcoming market.
But it was always obvious it needed more finance and for the life of us, we can't understand why it didn't take care of that when the share price was above $2.
In the end, it was forced recently to do a financing at just $0.75, with so many warrants and other instruments attached that it doubled or tripled the number of outstanding shares, a blatant own goal.
This is a real shame because business-wise, it is ramping up revenues, producing stunning growth, but the dilution has taken all that away and then some.
That could be held up by Sprint's merger with T-Mobile (TMUS), but in any case it's in the hand of Sprint and the company can do little about that. It is growing the usage of SafePath pretty healthily even without this, but that sun-setting would provide an enormous boost.
We would consider adding to Smith Micro, but not to Nano Dimension as we think the way back to $2 could be a rather long one. At the moment, even $1 looks like quite a struggle.
A little blast from the past, that one of our former stocks, InterOil (IOC) was taken over by Exxon (XOM) a couple of years back and we always argued that this was done at a price that was way too low.
Guess what? It seems that a Yukon court agreed, and deemed $71.46 as a fair value acquisition price, way above what Exxon paid for the shares ($45). We remember the days when a hedge fund manager told us even after Exxon acquired the company that InterOil was a fraud. We're still laughing at that.
We do see some risk in the market though; we have had quite a rally from the December lows and the signs out of the world economy are one of a considerable deceleration of growth.
The market is also pricing in a favorable outcome of the US-Chinese trade tensions, and things could disappoint on this front, which would be especially problematic for our Chinese shares, and for US chip-related stocks - in our SHU portfolio that would be Lumentum and Data I/O.
We are quite happy with the performance of the SHU portfolio at the moment, and one cannot complain having a couple of triple-baggers after just 17 months. Inevitably, there are also disappointments with the Chinese shares and especially Nano Dimension's dramatically dilutive financing.
On a 12-18 month period, we see the best chances for some of our little stocks, the latest one, Pareteum specifically, given that we think it's still considerably undervalued and undergoing a major turn-around. We're waiting for a pull-back to add more, but we might have to wait for some time to come.
We still like BioLife and The Trade Desk as well, although these are much less undervalued at the moment.
Disclosure: I am/we are long BLFS, TEUM, NTNX, JD, SKX, INSG, DSNY, XXII, BABA, LITE, ESIO, TTD, BZUN, ROKU, NNDM, MJCO, DAIO, SMSI. 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.