BSVN - DocShah's 2022 Portfolio Performance

Summary

• In the past five years since inception, my portfolio has generated a CAGR of over 26%.
• In 2022, my return was 19%, which beat the Nasdaq by 50%. I officially became ranked in the top 1% of analysts on TipRanks.
• I primarily held three stocks all year: Devon Energy, Hims & Hers Health, and Bank7.
• I outline five things to look for in evaluating a stock.
• Discipline, patience, and optimism are three essential traits to being a good stock market investor.

Background

Each year I write an article on my previous year’s portfolio performance. For last year’s piece, please click here . For those who are new, I play for Major League Baseball in the World Baseball Classic and my regular season team is the MD Blue Crabs. I manage my parents’ stock portfolios and have plans to open my own asset management company, DocShah Capital to the public in the next one to two years. I have written on Seeking Alpha since 2018, when I started managing my parents’ portfolios.

In the past five years:

• I have generated a CAGR of over 26%
• I became ranked in the top 1% of analysts on TipRanks
• My average return per rating is over 40%
• My portfolios have grown from $200k to $637k, which represents a 218% or 3.2x gain.

In 2022, my return was 19%. This beat the Nasdaq, which was down (30%) on the year, by almost 50%. In a year where all indices were in bear markets, I was able to produce a return consistent with years past. In this article, I will discuss the specific stocks I owned, how I evaluate a stock, and what readers can do to make great investments themselves.

My 2022 Returns

An equal weighting in each stock for the entire year would have resulted in a 16% return. My portfolio returned 19% as I did not have equal weighting in each stock and I bought and sold at various times throughout the year.

My 2022 Holdings

I primarily held three stocks in all of 2022: Devon Energy ( DVN ), Hims & Hers Health ( HIMS ), and Bank7 ( BSVN ). Here is how I evaluated each stock:

Devon Energy

Devon’s stock price depended heavily on the price of oil and natural gas. I first bought shares at the end of 2020. My primary reason for buying Devon was I expected the price of oil to rise dramatically, which would massively increase the company’s FCF and push the stock price higher.

Following COVID-19, demand for oil plummeted as the public was ordered to stay home and excess supply formed, which cratered the price of oil. Ultimately, supply began reducing to match demand. However, demand is like a spigot as it can be turned off and on… but, supply is not – it takes time, capital investments, and resources to produce oil. This timing difference is what I expected would push the price of oil higher as there simply would not be enough supply to keep up with the restored demand.

And this is exactly what happened over the next twelve months as the price of WTI Crude oil went from the upper $30s to well over $100 per barrel. As a result, Devon produced massive free cash flows which pushed their stock price from $8 to $80 within two years. Here are some of the specific things I liked about the company:

• Long history of profitability
• 9% variable dividend yield
• No major debt repayments until 2030
• $1.3 billion in cash
• Shareholder friendly management

Hims & Hers Health

Hims’ wound up being my biggest position towards the end of the year. I have written many articles throughout 2022, but the bull thesis is simple: Hims is a telehealth company which makes it easier for patients to access healthcare using their electronic devices. The company is on the brink of profitability. Here are some of the specific things I liked about the company:

• Revenue growing at a CAGR of 95%
• Subscriptions are 6x higher than at inception
• Insiders own 16% of shares
• $200 million in cash and no debt
• Best branding and huge TAM

Hims hit a low of $2.72 earlier this year despite its consistently great earnings reports. Yesterday, Hims made a new 52-week high of $7.56, representing an almost 200% gain. The stock almost tripled within a year.

Bank7

Bank7 is a small regional bank centrally located in Oklahoma. I bought this stock in 2020 after truly finding a diamond in the rough. A lot of banks stocks had a risky loan book and were significantly overpriced. Bank7 was the opposite – its loan book was safe and the stock was undervalued. Here are some of the specific things I liked about the company:

• Consistent track record of earnings
• 70% inside ownership
• Introduced a dividend during the heart of the pandemic (which is unheard of, but that’s how strong the company’s financial standing was at the time).
• The dividend yield was significantly higher than competitors
• Excellent capital and liquidity ratios
• Significantly better NIM, Efficiency Ratio, ROACE, ROATCE, and ROAA than competitors.

Bank7 was an anchor in my portfolio; its stock price barely fluctuated throughout 2022 and it threw off great dividend income. The stability and consistency in the underlying business became expressly embedded in its stock price.

Characteristics of a Great Investor

There are many traits that great investors possess, but for the scope of this article, I will discuss a few:

Discipline

Contrary to what most people think, passing up stocks is what makes you rich. Great investors do not chase and are able to continually pass over stocks in which they do not understand the business, regardless of how popular those stocks are in the market. Being able to stick to what you know and only buy stocks in which you have a thorough knowledge of the business and conviction in its future is what leads to above average returns.

Patience

Those who seek to get rich overnight get neither rich nor their sleep. These individuals are speculators, not investors and will not get above average returns by chasing momentum stocks or speculative assets. In the end, they will lose a lot of money and sleep due to the stress of not knowing what they own . When you have no clue what the asset you own does, you are going to be stressed watching its price fluctuate. Sleeping well at night is a luxury only afforded to investors, not speculators. Investors have patience – they evaluate assets which will generate returns long into the future.

Optimism

Dumb optimists make more money than smart pessimists. Never forget this. Pessimists will not make good investment decisions because their decision making is clouded by negativity. Investing for the long-term requires faith that the future will be better than today. Invest using 90% logic and 10% emotion.

How to Evaluate a Stock

I want to keep this as simple as possible to make it easy for investors to apply what they have learned from my writing. There are certain things investors must examine before purchasing a stock. Everyone develops their own strategy and interpretation of what is important versus what is not; however, there are some non-negotiables which must be reviewed carefully. They are as follows:

1. Is revenue increasing YOY?
2. Is EPS increasing YOY?
3. How much cash and debt does the company have?
4. What is the company’s dividend history?
5. How does the company compare to competitors (some ratios I like are: the cash ratio, asset turnover ratio, gross margins, and solvency ratio).

By specifically answering the above, investors will gain a solid understanding of a business. From there, they are can get more granular and ultimately, project the future price of a stock. I use a discounted cash flow model, but that may not be easy to create for someone without experience. To keep it simple, I recommend using analysts forecast of EPS and attaching P/E of 12-15 to project future cash flows.

For example, if Stock A’s EPS is expected to be $5/share in 2025, then we can expect Stock A’s price to be somewhere in the range of $60-75 in two years. We can compare this forecast to the current stock price to determine what return, if any, we can expect.

Takeaway

My five year cumulative return since portfolio inception is 220% or 3.2x higher, which works out to be a CAGR of over 26%. I generated a 19% return during the bear market of 2022 and expect these results to remain consistent for the foreseeable future. I take great pride in being ranked in the top 1% of analysts, but the ultimate goal is to be #1 not 1%.

An investor with discipline, patience, and optimism has the characteristics to be a great investor. Following the five evaluation criteria in the article will provide a solid base of understanding for most companies. Then, the investor can put a price on the business based on its future earnings and compare it to the price the market has assigned on its expectation of future earnings.

See you in 2024 with my 2023 results. Thanks for reading, following, and commenting.

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