Project $1M: March Delivers Solid Returns

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Includes: AMZN, CTRP, FB, MELI, TCEHY
by: Integrator
Summary

My long term growth portfolio, Project $1M continued strong performance in March, once again outperforming the S&P500.

CTRIP, Mercadolibre and Tencent were all strong performers.

Project $1M has delivered jut under 19% annualized returns since the start of the Project more than 3 years ago.

Project $1M continued to deliver the same solid progress in March that it had done in February. Unexpectedly good results from CTRIP (NASDAQ:CTRP) and a continued reappraisal of Mercadolibre's (MELI) prospects upwards led to some steady share price appreciation in both stocks.

As a result, the portfolio made new all-time highs in March and was up some 5.2% over the course of the month, marginally outperforming the S&P 500 index which delivered a 3% return.

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.

The overall objective of the portfolio is to turn a capital base of $275,000 that was initially deployed in November 2015 into $1,000,000 by November 2025. This will be done primarily through buying businesses and holding high quality businesses, helping returns compound and minimizing tax and trading costs.

Project $1M ended March with a balance of close to $467,000. The portfolio continued to benefit from a continued focus toward risk on assets and the gradual appreciation that has taken place in growth and emerging market assets. While global growth concerns are starting to come more into picture, the market appears relatively content that the major risk of a near term slowdown is unfounded and that economic growth globally should still continue, albeit at a more moderate pace. Irrespective of the global economic backdrop, the Project $1M businesses continue to experience steady and consistent growth. Strong performers for Project $1M in March were Ctrip, Tencent (OTCPK:TCEHY) and Mercadolibre.

Mercadolibre: Halo effect of strong results and Paypal (NASDAQ:PYPL) investment continues

Investors continued to appraise MELI upwards when they realized that MELI's world would not come to an end as a result of Amazon's (AMZN) more focused entry into Brazil, MELI's largest market. MELI managed to put solid numbers on the board and delivered a strong earnings report in the most recent earnings quarter. Revenue was up almost 63% year on year on an FX neutral basis, with buyers up 8% and merchandise volume up 18%. Reductions in merchant subsidies and other incentives produced a sharp improvement in margin and profitability.

What was also impressive in MELI's numbers is the increasing evidence that MercadoPago is become LATAM's dominant online payments platform. Personally, I think this is likely to become the more interesting part of MELI's long term story and expect MercadoPago to be the platform for online and offline payments in Latin America.

It's clear that Paypal sees the potential in MercadoPago also, recently participating in MELI's recent fundraising several weeks ago. The presence of PayPal as a strategic investor in MELI raises some interesting possibilities. As product integration between increasingly intertwined for international transactions, MercadoPago and MELI could represent a potential take out target for Paypal as a way to play the LATAM region. I see MELI as fully valued currently, but am not yet prepared to dismount this high growth engine.

Tencent: Rebound from December lows is largely complete

Tencent was sold off to levels bordering on irrational in November last year. A spate of things went against the company, including the introduction of a new gaming regulatory regime in China and prolonged suspension of the approval of new titles. The price action in Tencent and the irrational depths to which it was driven back then made no sense to me and I said so last year. I even topped up my holding as the price crashed, a decision which I think will pay long term dividends.

In the interim, gaming approvals have now resumed in China, and Tencent has implemented time based controls for minors playing its games, an outcome which regulatory authorities are likely to look favorably on.

Tencent's crown jewel, WeChat continues to shine. WeChat's advertising revenue grew north of 38% year over year in the recent quarter and remains relatively undermonetized as far as adload, with Tencent having only recently added an extra ad unit. Meanwhile, WeChat daily active users exceed 1B and continue to grow.

I have a high conviction that Tencent will be one of Project $1M's star performers as far as total position return is concerned, at the duration of the project.

Ctrip: Every dog has its day?

Finally Ctrip, which has been a terrible underperformer in Project $1M has shown marginal signs of revival, a faint heartbeat even. After having done not very much in the last year, the stock shot up almost 27% last month. Accounting for much of this exceptional performance was a 22% year over year growth in revenue that the business reported last month. The fact that the company rallied so hard is partially explained by the extent of the short covering in the stock, as well as the notably depressed expectations for the business and Chinese travel demand in particular. To me, this understates the long term discretionary income growth that is likely to occur in China, and the fact that much of this spending is likely to make its way into the Chinese travel industry, of which CTRIP will be a major beneficiary.

Facebook Update

While not a meaningful contributor to performance in March, I thought I'd take a brief to moment to address the performance of Facebook (NASDAQ:FB) stock since I meaningfully topped up my holdings in late December. During the depths of despair, as Facebook was stumbling from one crisis to another, I went bold and topped up my holding by almost 50%. Facebook thus became my largest position in terms of my invested capital in the stock. I topped up my position around the $130 mark. Fast forward some 3 months, and the stock now trades at close to $175, representing more than a 30% return. I still think the stock has the room to power higher in the medium term, but see potential near term progress in the share price capped for now. I'm not declaring victory on this move just yet, but generally buying a high growth, high cash flow business with strong ROIC at less than market multiples during the depths of despair has a way of working out, provided that the business isn't impaired. Time will tell, but my instinct on this move remains unchanged at this point.

Portfolio Performance and expectations:

Project $1M continues to handily outperform the S&P 500, providing an incremental outperformance of north of 6.5% annualized over the S&P 500. Year to date performance is an almost 26% return. Again, I still see sub 20% returns for Project $1M for 2019 and believe we will have at least a 10% correction over the summer. That won't be enough to bring me back into the market to buy, however if we breach the early January lows once again, I'll likely look to reallocate/add more meaningfully.

Disclosure: I am/we are long ALL STOCKS IN THE TABLE. 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.