Project $1M: May And MercadoLibre Bring New Highs

Summary

• The Project $1M portfolio continued strong performance in May and once again has reached all-time highs.
• MercadoLibre, Atlassian, ServiceNow, and Veeva were all strong performers.
• The delta to the S&P 500 has widened as the flight to quality increased.
• An active approach to portfolio management doesn't have to be in direct conflict with a passive approach for self-directed investors.
• Looking for a helping hand in the market? Members of Sustainable Growth get exclusive ideas and guidance to navigate any climate. Get started today »

Project $1M continued its strong performance in May delivering a return of 9.3% compared to 4.76% from the S&P 500. The portfolio now is once again at all-time highs which were last reached during the middle of February. Performance for the month of May was most notably powered by MercadoLibre (MELI) which was up a stunning 46%. ServiceNow (NOW), Atlassian (TEAM), and Veeva (VEEV) were also other strong contributors each delivering double-digit return contributions for the portfolio for the month. May has seen a continuation of the strong performance in April, which has now powered the year to date performance of the Project $1M portfolio to 12.62% compared to the S&P 500 (SPY) (VOO) which has delivered approximately -5% year to date.

Portfolio history

My broad investment focus with the Project $1M portfolio is the purchase and long-term hold of a limited number of high growth, cash-generating businesses that are powered by secular tailwinds. The overall objective of the portfolio is to turn a capital base of $275,000 that was initially deployed in November 2015 into $1 million by November 2025 and outperform the S&P 500 in the process. The process to achieve this objective is just simply to buy a great business at good prices and let compounding and time take care of the rest. The initial $275,000 in the capital has been fully deployed and will not be added to for the rest of the project duration.

May Performance

Project $1M ended May with a balance of almost $608,000, up $60,000 for the month. This was the highest ending monthly balance for the portfolio since its inception. For the first time in the 4.5 years since the inception of the Project, the difference in annualized performance vs. the S&P 500 has blown out and is now almost 10%, which is largely a reflection of a flight to quality, away from sectors and businesses with a more uncertain outlook. I don't expect this magnitude of annualized difference to persist.

MercadoLibre was a material contributor to May

While most of the Project $1M businesses had very strong earnings results and reported well in Q1, MercadoLibre was a particular standout. MercadoLibre's business benefited from an acceleration of the strong secular tailwinds that it has experienced over the last five years. Panicked Latin American consumers went online in droves to meet their consumption needs via e-commerce and MELI was the destination that they looked to do this. MELI delivered revenue growth of 71% year-over-year on a currency-neutral basis and 38% in the US dollar terms. MELI's coronavirus quarter saw active users increase by 30%, with merchandise volumes up by a similar measure.

While MercadoLibre's payments business saw slightly reduced year-over-year growth, I have every expectation that this will be a monster in years to come and potentially better than MELI's core e-commerce business. With the last few months providing many consumers in Latin America with their first taste of e-commerce, MercadoLibre's business benefited from massive acceleration, something which the market duly appreciated and rewarded merely with a 45% appreciation in its stock price for May.

Veeva, Atlassian, and ServiceNow see strong growth in their businesses

The share price acceleration for Veeva, Atlassian, and ServiceNow in May was, ultimately, a recognition by the market that each of their businesses will, in fact, be benefited by the pandemic and the role they play in solving customer needs. In the case of ServiceNow, the businesses results and strong forward-looking guidance and commentary help the market better appreciate that ServiceNow is playing an even more critical role in having IT be able to productively manage through the unique challenges that a distributed workforce will place on the productivity of IT teams and workflow automation. ServiceNow finished up 10.3% for May.

Veeva's platform and collaboration tools are even more valuable to its life sciences and pharmaceutical customers given that most now have to do critical, time-dependent drug development governed by a strict regulatory approvals process with the majority of teams working remotely. Veeva finished up 14.7% for the month.

Finally, Atlassian's value proposition of enabling productivity and workforce collaboration across technology teams in an economical manner has probably never been any more relevant than what it is during this time of crisis. Each of these businesses was still able to grow revenues at rates in excess of 30% during their 'coronavirus quarter' and provide robust guidance through the balance of the year. Atlassian was up almost 19% for the month.

Comments on performance relative to the S&P 500 and NASDAQ 100

I made it a goal at the inception of Project $1M to outperform the S&P 500 over a 10-year period. The question often comes up from readers of these updates as to why bother trying to take on the S&P 500 when it's so much incremental work to shortlist and pursue an active stock strategy. To be clear, I don't think there's anything wrong with the S&P 500 and only index investing. In fact, I think it's a very good strategy for the majority of people.

My Project $1M approach was inspired by Jack Bogle, arguably the father of index investing and his comments back in 2015 that he didn't believe that the S&P 500 would return any more than several percentage points of annualized return over the next decade. I decided at that point that I wanted better performance. While I'm still a little under half way into the duration of the project, I'd explain the variance of the returns from the S&P 500 thus far as due to not being invested in the wrong things, trying to seek out the right things and entering the right things at the right price.

I deliberately and purposefully avoided a lot of the slower growth, high debt, secularly disadvantaged businesses in the S&P 500. Businesses like Ford (F), Best Buy (BBY), Xerox (XRX), and others that I believed were rowing against the tide. Instead, I sought out businesses like MasterCard (MA), Visa (V), Adobe (ADBE), and Alibaba (BABA) which are either underweighted in the index given relative to their high-quality or simply not represented in the S&P 500 at all. I, then, weighted patiently for these businesses to be offered up at prices that I thought made sense. Alibaba was served up in Q1 of 2016, Facebook was meaningfully strengthened in December 2018, and Adobe was more recently added in March 2020.

Nothing in the current results of Project $1M is necessarily attributable to skillful trading or great market insight on the current conditions. Rather, Project $1M is the deliberate study of an approach to long-term investing and the power of having a long-term mindset. The project is reaping the benefits of decisions that were made months and, in some cases, years ago. It's the reason why position sizes in MercadoLibre and Atlassian are multi-baggers of original investments.

The Nasdaq 100 (QQQ) is another point of comparison that tends to come up fairly frequently. While there are obviously a number of components of Project $1M that are in common with QQQ, I didn't initially want to design something that just replicated the Nasdaq 100. I also didn't want to be as tied into Apple (AAPL) and Microsoft (MSFT), which are more than 20% of QQQ, over a 10-year period (in hindsight, this was probably a mistake, especially regarding Microsoft which will have above-average growth from cloud services for an extended time).

Source: Morningstar.com, Project $1M

I was, and continue to be, very bullish on digital payments, as proxied by Visa and Mastercard, elements that were underrepresented in QQQ. QQQ has performed very well over the same time period, as can be seen in the results. Project $1M has outperformed it since 2017, but the magnitude of the gap is not as meaningful as compared with the S&P 500. At the end of the day, I just wanted the ability to select a set of businesses that were high quality which I liked and understood and could be comfortable holding for an extended period.

There are definite disadvantages to the more concentrated approach that I am pursuing. Given so many of the Project $1M holdings are high-quality businesses which are quasi-monopoly or duopoly positions, there is the constant threat of regulation. Regulators may turn around and lower the interchange that MasterCard or Visa could receive. Facebook's (FB) social media influence makes it a constant target for regulators seeking to limit their influence. Alphabet (GOOG) (GOOGL) is regularly the target of anti-trust concerns. MercadoLibre has very specific and very unique exposure to a precarious economic situation in Latin America and elevated currency risk. Ultimately, I am cognizant and comfortable with these exposures.

However, what makes it easier to pursue a more active investment strategy is the fact that I actually having meaningful underlying exposure to the market via a broad-based index like the S&P 500. I've never shied away from index funds, in fact, they were the core of my investment approach, even though my more active holdings now dominate my portfolio. The knowledge that a self-directed investor has in knowing that at least a portion of their portfolio will actually "meet the market" allows a more targeted and measured approach toward higher risk-adjusted returns in other areas of the portfolio and that's an approach that's worked well for me.

The beauty for self-directed investors is you don't have to choose. Portfolio approaches allow you to blend both. The fact that I have exposure to the S&P 500 allows me to go after a more aggressive component. I know if I fail, I'll at least get the market return on some component of my holdings, that to me is the beauty of this approach. I certainly didn't expect to see annualized returns exceeding the S&P 500 by 10% for Project $1M within 5 years of the journey, and no doubt, it's possible this advantage may get whittled over the next 5 years.

Future outlook

I expect it will be a volatile second half of the year to bring up the halfway point for the Project. In fact, I expect the summer to bring a relatively strong retracement in performance, something which has been lacking and long overdue in the high-quality growth area of the market. With the portfolio already up almost 13% for the year, I expect relatively slow growth between now and year end.

Nonetheless, in spite of a more muted share price outlook, I remain optimistic about the business outlook for each of the components within the Project $1M portfolio. The last few months have shown that if anything, secular trends will continue to accelerate for many of the businesses within the portfolio a number of whom have been able to meaningfully accelerate their penetration due to the pandemic.

Analyst’s Disclosure: I am/we are long GOOG, FB, MELI, MA, V, SPY, NOW, TEAM. 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.

Comments

[afgolfman666]

Love your portfolio and investing style Integrator . A stock that recently got into my radar that I’m surprised you don’t own based on some of your holdings (Tencent, BABA, MELI, AMZN) is Sea Ltd (SE).
They’re a global player in esports / gaming while being the leader in digital entertainment (Garena), e-commerce (Shopee), and digital payments (Seamoney) in Southeast Asia. 33% owned by Tencent and their vision is to become the epicenter of internet transactions in SE Asia .  

Revenue growth has consistently been pretty explosive.... reminds me a lot of MELI of SE Asia + gaming. Thoughts on this company?

[Integrator]

Hi, I really do like that business, SE and actually own some. The Project $1M portfolio is structured as fixed capital project, through to end of term, so I have to sell to add new names, which I've generally refrained from doing. I structure my marketplace service as one where I have been deploying fresh capital, so that tends to have a few more names that I own which aren't necessarily in this portfolio, but SE is a good business.

[Hidden Rock Capital]

Great performance. Some of these stocks may be overvalued (e.g. Morningstar gives one or two stars for Mercado and Adobe) so do you
intend to keep holding?

[Integrator]

Yes, I will be. I only sell if the investment thesis is broken, and don't believe thats the case with either of these businesses. Their intrinisic value will continue to increase.

[Atlas Capital Investing]

Just started reading recently, I find your articles as really useful and interesting. Planning to go through them from 2015, related to project 1m. One observation though. When looking at performance of PRNHX it shows that performance is very similar to yours. I attribute this to low interest rate environment. Here comes question: is it worth doing all this research as one can just follow this index? If interest rates go up, your growth portfolio will suffer most probably, as it did in 2016. Thus users must be vigilant do not overexpose themselves to growth stocks (my opinion). Thanks anyway, good reading.

[Integrator]

Hi, I just took a look at PRNHX. I'd watch the expense ratio on that one, its almost 0.9%. That could have been what helped Project $1M deliver a better performance.

[KamilAgrawala]

Great stuff. Can you do a comparison against VGT ? I added aggressively to VGT during the march lows. VGTs top 5 holdings are AAPL, MSFT, V, INTC, MA. VGT has outperformed QQQ recently (last 3-5 years)

[Integrator]

Hi, looks like Apple and MSFT alone are more than 40% of this portfolio!. I think Project $1M has a slight advantage so far this year, but VGT has done a little better in last couple of years.

[dschuangzi]

FWIW, I am was very much influenced by Marc Andreesen's "Software eats the world". Perhaps you find the following link interesting:

www.battery.com/...

Here on SA, I highly recommend App Economy Insights cf., for example the following article which might serve as an introduction:

seekingalpha.com/...

Over the years, I have basically accumulated all "digital" tickers which made any sense to create my own "future fund". The winds have been very favorable (except for a few Chinese tickers) and I think they will continue to be favorable. As long as the Central Banks don't close the faucets ...

[dschuangzi]

Just to clarify, this by no means meant as criticism. I am wondering myself about the performance of my own portfolio (it is not easy to measure because I have been buying regularly over the last years, done some selling as well, collected some dividends (very few) and put a lot of fresh money in every year).

I was very certain that my stocks in payment, software and emerging markets would have widely outperformed the S&P 500. But now I am wondering to which extent the Central Banks have just lifted all boats.

[dschuangzi]

Dear Integrator, first of all thank you very much for the great work over the last years!!! Apart from general thoughts which reinforced my beliefs in the area where we have overlaps, I owe you Pro Medicus and the courage to invest again into TEAM, inter alia ...

What I do not understand is why the above portfolio has not outperformed the S&P 500 by a much wider margin. In the above portfolio you have almost no losers and some exceptional winners. Are the numbers correct? Otherwise, do you have an explanation?

[Integrator]

Thanks for your comments, my responses below.

1. As much as the broad thematics in software play a role, I am less trend driven and more focussed on enterprises creating really solid businesses. It just so happens that the portfolio is peppered with a bunch of technology names, but I also tend to find these types of names in healthcare, financial services and have also held consumer discretionary names in the past. I also want really good businesses, solid moats, attractive economics, rather than just leveraging a trend for the sake of leveraging a trend.

2. I tend to eschew too many Chinese companies, beyond the stocks already held. I find there's too much risk there and its not aligned with my strategy of long term capital preservation

3. Why no greater outperformance? Ha!. If you consider my holdings, the portfolio skews very much large cap. Its hard to outperform by >10% annualized over such a long period with these types of holdings. The exceptional high performers, MELI, TEAM suffered from smaller position sizes, a deliberate strategy on my part to derisk earlier stage businesses when the portfolio was first created. I am very happy with the performance thus far, it probably represents at least $150k delta over the 4.5 yrs versus had I put the money in the S&P500.

4.As far as central bank influence vs underlying position performance. Reasonable observation, though I'd say good businesses still shine because they are good businesses. Central bank influence has failed to help prop up and stabilize commercial REITS, discretionary retail, industrial and a bunch of poorly performing sectors. Central banks may amplify the effect on good businesses, but they can't make something thats junk shine. At some level revenue growth and earnings growth is required, and central banks can't manufacture that, no matter how poor the business.

[dschuangzi]

Thank you for your detailed answer. I agree with most of what you are writing. I thought that the large cap focus might be an explanation for the not so large outperformance (only in view that you almost only selected huge winners for this portfolio (I have many more losers in my own portfolio).

I do not think that software is a recent trend only - and explicitly for that reason I cited the 2011 Andreessen article.

Having worked for conglomerates in Europe I have closely watched quite a few different industries. I see the revenue and earnings growth potential mostly in the field of technology/ software (and in payment, Asia generally, biotech and, I thought ..., travel airports). All the classical markets (food & drinks, FMCG generally, retail, cars, raw materials, chemical industry, industrial conglomerates etc, etc.) seem to be saturated. And the growth in software is asset light and the SW companies carry no liabilities from the past (debt, pension obligations, huge workforce etc.) like many traditional favourites.

I understand the concern with China, in particular the political and legal risk, each of them both in China and the US. But I firmly believe that the economic future is in Asia and I want some exposure to it (in my case ca. 30%).

Thank you very much again for your great work.

[serpo]

I envy your results. I am still down 2.5% for the year.

[serpo]

No NVDA or APH in your portfolio?

[Integrator]

I do like NVDA, its just too expensive for me at these levels.

[brainleft]

Integrator, who is mlvsa? I tried to reply in kind with Slp a favorite of mine but it looks like mlvsa is not an individual? thank you

[mlvSA]

Thanks @brainleft for the recommendation of $SLP ,i will take a look.

[brainleft]

not many of us will ever forget this year and it's only June. I'm now up single digits for the year thanks in part to authors such as yourself here on sa and also because I was buying with abandon at the end of March.
Integrator is the reason I've made bundles in names like tdoc, docu,ayx,avlr,roku, etc.
my favorites from this portfolio are V, adbe and team. I'm patiently waiting to add to them in my portfolio.
thank you!

[mlvSA]

@brainleft - take look at $fsly,$enph,$se,$lvgo - I'm no momemtun chaser either,but these have some solid fundamentals and tam in their respective areas.

[charles1222]

I hold ENPH since the beginning of the year. I am interested in FSLY and SE but I couldn’t find the company with the symbol Ivgo. Can you confirm the symbol?

[mlvSA]

Livongo health

[Christopher.1]

How would you make allocation decisions today?

It's clear that you consider all of these positions to represent longterm values for the portfolio at current levels, but how do you rank current valuations? You mentioned adding Adobe in March—would that mean you consider Adobe to be the most undervalued part of the portfolio?

Put another way, I am wondering how you evaluate the portfolio. Although I understand that your intention is to not actively trade these positions, I'm am curious as to what your process of allocation would be with these positions.

Thank you for the update and article.

[Integrator]

Fair question. The thing that needs to be remembered with many of these names is that their intrinsic value will continue to increase with time, so whats best value isn't necessarily static, and any overvaluation, unless its really excessive, isn't terribly cause for concern in my opinion. Looked at today, the Chinese equities BABA, Tencent, Baidu are the best value in my view. Of the others. I also think CRM is pretty reasonable as well. MA, V have run hard from low's but would always make up any core portfolio I built, even at these levels.

[investor30s]

Are you not worried about Chinese stocks getting delisted?

[Integrator]

Not in respect of the positions I hold, BABA, TCEHY and Baidu. In the worst case, the shares will just be converted to ordinary shares on their home exchanges (HK for all of these at the relevant time). You are probably also talking at least 3 years from time of the reg passing (in whatever its final form is). At this stage, I don't want to box at shadows. The delisting also just means the shares don't trade, not that the entitlements don't exist. I don't have any intention of trading these.

[investor30s]

Wow!! Very impressive returns. I have been following VEEV and MELI. Always look expensive. Missed the opportunity when it dropped in March.

[Integrator]

March provided a very brief opportunity, which unfortunately looks like its been very firmly shut on these now, at least for the time being

[Librarian Capital]

Well done, impressive figures.

[Integrator]

Thanks Librarian Capital, I appreciate it. Really good businesses rather than anything else. Makes it easy to hold.