ASAN - I Didn't Think My Portfolio Could Sink Lower

2023-04-04 12:06:58 ET

Summary

• My tech-growth portfolio made new lows in December, reaching a decline of 40%.
• Nevertheless, when regarding the glass as half full, SaaS stocks have reached historically low valuations, within just two years of reaching bubble valuations.
• Inflation has come down and most of the interest rates are also in the rear-view mirror. Overall, this means it may be worth looking at SaaS stocks again.
• While some companies in the portfolio have performed worse than expected (financially), it does not seem wise to sell near the bottom, so the strategy remains to hold.
• My top pick remains SentinelOne, based on the example of CrowdStrike.

Investment Thesis

Growth and tech stocks, especially SaaS (software) stocks, have fallen out of favor for about two years now. Combined with a slowdown in growth in some notable stocks in the portfolio, the portfolio has continued its mediocre performance, and remains having a negative return.

Overall, portfolio activity has been muted as I have taken a mostly wait-and-see attitude.

Background

The portfolio was created in late 2019. The previous update can be found here: Portfolio Collapse: Wealth Destruction As the portfolio has not meaningfully changed since then, I will refer to that update for a detailed overview of the portfolio.

Q4/Q1 update and thoughts

Perhaps needless to say, but my sentiment towards investing has remained quite subpar given the evolution of the portfolio performance, which since the start of inflation etc. has taken a deep nosedive.

The return of the portfolio (as measured by the ratio of current value and nest egg) is currently a bit over -30% (0.7x), a far cry from the 3x it once was. The result is that the portfolio value has been flat (at best) for the last few years, despite the nest egg more than tripling in size.

The portfolio reached its lowest alpha in late December with an over 40% decline in value vs. nest egg. Note: since I have mainly sold profitable stocks, the return as measured by its current value compared to the amount invested is even worse. In late December, this return was -50%.

Obviously, in hindsight there are many possibilities that could have delivered far greater returns. For example, my top pick for 2021 was Asana ( ASAN ). If I had sold the whole portfolio at the peak in early 2021 and put it in ASAN, which went on to become about a 4-bagger by the end of the year, a bit similar to Upstart ( UPST ), a stock I was not yet aware of at the time, if I had then sold this hypothetical single stock portfolio again after its rally, then I would have made a >10x return in (my first) two years of investing. Not too bad. Oh well.

In terms of portfolio activity, the main activity has been due to the Unity ( U ) acquisition of ironSource, which led my broker to sell all ironSource shares. With this capital, I mainly bought Unity and SentinelOne ( S ), as well as Intel ( INTC ), Asana, SmartSheet ( SMAR ), monday.com ( MNDY ), Alteryx ( AYX ), Affirm ( AFRM ) and Upstart ( UPST ). In the last half a year, I also bought a bit more Innovative Industrial Properties ( IIPR ) and Marqeta ( MQ ).

In February, I sold a meaningful portion of my original Pinterest ( PINS ) investment for a 40% return, which was used mainly to buy more S. However, since I also bought some PINS on the way down from its peak, overall PINS has been a roughly flat investment.

Investor Takeaway

With the rate of inflation starting to drop and the top of interest rates visible, one could argue that it is currently an opportune time to invest in the kind of SaaS stocks as in my portfolio. Of course, such calls have been made before, and have turned out wrong.

Nevertheless, in the second half of 2022 (perhaps a bit coincidental with the initial slowdown in M/M inflation), the portfolio decline finally started to slow down. (The December correction was more than made up for with the rally in January.) Overall, SaaS stocks have now become historically cheap, within just about two years after they had become historically expensive, which explains why it could be worthwhile to look at this asset class again.

While some companies have seen perhaps a slowdown given the macro environment, the general thesis for growth investing remains that companies with durable growth should over time be able to outgrow their valuation, leading to outsized returns. For bullish growth investors, an improved macro environment (lower interest rates and inflation) could lead to a re-acceleration in growth and valuation multiple expansion.

Regarding my own portfolio, since I did not anticipate the extent of the decline over the last two years, for the most part I did not actively manage the portfolio. Any stocks that I did sell (such as IIPR), I replaced those other SaaS stocks anyway.

In several previous updates, readers have recommended greater diversification. While this is indeed a valid comment, given that my portfolio comprises tech stocks (admittedly of varying degree of quality, though), which as argued are currently historically cheap, it seems reasonable to just continue with the portfolio in the same spirit as the original strategy, which was the buy and hold for many years. My top pick remains SentinelOne, based on the example of CrowdStrike ( CRWD ).

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