Project $1M: April Closes In On 'Halfway Mark'

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Includes: BKNG, FB, GOOGL, MELI, NNCSF, PMCUF, TEAM
by: Integrator
Summary

Project $1M, my high growth, high quality, low turnover portfolio got tantalizingly close to half of my 10 year objective, clocking in at $494k.

Facebook (FB), Mercadolibre (MELI) were two of the particularly strong performers.

I expect overall returns for the portfolio to come in at 20% for 2019, which still implies a fairly material correction at some point this year.

Project $1M delivered an unexpectedly robust month as far as gains were concerned, with the portfolio just finishing below the half way mark of the targeted 10 year goal of $1,000,000. 2019 is starting to have a very similar look to it as 2017. The portfolio had four contributors that contributed double digit returns in the month of April. These companies were Pro Medicus (OTCPK:PMCUF), Facebook (FB), Mercadolibre (MELI) and Nanosonics (OTCPK:NNCSF).

As a result, the portfolio again made a new all time high in April and was up just shy of 6% over the course of the month, significantly outperforming the S&P 500 index which delivered a 2.4% 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 an initial 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 April with a balance of close to $494,000. Reporting season through the month of April was generally very kind to the businesses in the portfolio. Particularly strong results were posted by Facebook and Mercadolibre. Google (GOOGL) was probably the only real let down of the reporting season thus far. The portfolio has cumulatively put on gains of $54,000 across the last 2 months. While I don't dwell much on the near term gyrations of the market (apart from when it provides meaningful opportunities to buy), its difficult to see the volume of gains continuing without some type of near term pull back. What will make the pullback easier to deal with is the significant capital appreciation that I am sitting on across most of my positions. The strong results that continue to be posted by the businesses that I own make it relatively easy to just sit, wait and be a passive owner that takes no action.

Mercadolibre: Strong financial and operational results in latest update

Mercadolibre's strong price appreciation has continued since the announcement of the PayPal investment. The contributing factor to the most recent appreciation has been the strong operational results posted by the business. What's becoming clear is that MercadoPago is starting to really carry its weight and is becoming a meaningful part of the MELI business.

MELI processed total payment volumes of $5.6B in the most recent quarter, of which off net payments (outside of the MELI platform) accounted for $2.5B. This is significant, because this sets the stage for MELI to proxy broader LATAM growth, beyond whatever happens to occur on its own e-commerce platform. Not only does this provide a hedge in the event that other destinations for commerce emerge, beyond MELI's own e-commerce portal, but it also allows MELI to participate in broader commerce growth that just isn't transacted on its own platform. That MELI's e-commerce platform will stall is less of a near term concern, because what is clear from the latest numbers is that MELI's e-commerce platform is in great shape. MELI's overall revenue was up 94% (on a currency neutral basis), with GMW (Gross Merchandise Volume) up close to 27% (on a currency neutral basis). These numbers suggest that MELI continues to enjoy natural e-commerce tailwinds, and that consumers specifically continue to look at MELI as an online commerce destination.

Facebook: No surprise that strong revenue numbers were posted

The irrational sell off in Facebook shares in late 2018, early 2019 is looking more and more like a gift in hindsight. Of course, there are still a raft of regulatory and political challenges that remain to be navigated by Facebook, but what is increasingly clear from recent results is that the core user, platform and advertiser growth remains in exceptionally good shape. Facebook revenues were up almost 26% year on year. That's astounding for a business that has a market cap over $500B. Facebook may well continue to push ahead at these levels. While spending on security enhancements will keep profitability levels low for the next 18 months, if robust revenue growth continues, there will be a spring board effect in profit numbers in the next couple of years.

In fact, given the general state of the market, I would argue that Facebook represents one of the few technology positions that still offers reasonable value. Facebook is one of my best returning positions in 2019. I remain convinced that my purchase during times of extreme share price distress in December/January will prove to be an astute purchase at the conclusion of this project.

ProMedicus: Setting the standard for radiology digitization

While initially quite a small position, ProMedicus has risen rapidly and now accounts for a more meaningful position in the portfolio, almost on par with Booking Holdings (BKNG) in terms of weighting, and rapidly closing in on Atlassian (TEAM). The company, which facilitates the digitization and delivery of radiology images is increasingly setting the standard for this service in the industry, and continues to pull in marquee healthcare institutions which are large consumers of radiology services. ProMedicus continues to ride several significant tailwinds. These include the move to digitization of health records, which creates the need to create electronic records of film, a generally ageing population, which creates greater demands for imaging services, and the continuing push to increase productivity and collaboration in health care which creates the need for imaging to be accessed at anytime from anywhere. I only see these trends continuing to accelerate, with ProMedicus likely to be a long term beneficiary of this.

Portfolio Performance and expectations:

Project $1M is starting to create quite a significant gap over the S&P500, delivering a YTD return in 2019 of just over 33%, compared to the S&P500's return of 18.2%, or an incremental outperformance of close to 15%. On an annualized basis, this translates to returns of 20.5% for Project $1M compared to 12.75% annualized for the S&P 500 since inception. I don't expect this kind of margin to last, and when the correction does come, it will be particularly severe on the Project $1M names. That said, I have slightly revised upward my return expectations for Project $1M for 2019, and now expect a full year return performance of 20% return. Nonetheless, that still implies a correction in portfolio value of north of 10% at some point this year. It goes without saying that I am not a buyer of any of the positions in the portfolio at current prices.

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.