2023-07-20 06:24:57 ET
Summary
- This month, my long-term investment portfolio consists of eight positions (88.96% stock exposure and 11.04% cash).
- The largest event this month is the sale of CVS, which I have decided no longer fits into the 'importance' portfolio.
- CVS does not seem to be contributing well in solving the vast complexities in the U.S. healthcare system, which is plagued by government oversight and high spending with little output.
- My focus for this portfolio is on companies with strong growth potential, high returns on capital, and a focus on product development which are factors that reflect a company's 'importance'.
Concentrating The Portfolio For Success
It has been a great month. All of my positions are up this month except for my smallest holding PDD Holdings. Furthermore, I am currently sitting with more cash given my full sale of CVS for a very small gain. In my opinion, which I discussed earlier in ' My $10,000 'Importance' Portfolio: The Start Of A New Series ', there should be no room for a company like [[CVS]] in my portfolio. Although the company has a significantly large amount of cash flow, is the company that important? I discuss more about my decision below. Other than selling CVS, I have added a small amount of shares in Sprouts Farmers Market, Block Inc, and Qifu Technologies. Going forward, my portfolio is concentrated for success and flexible with regards to new capital placements. One buyout opportunity that I have found lurking is that of Hollysys, which I may act upon during this coming month ( Seeking Alpha News ).
Furthermore, I have recently surpassed the 500-follower mark which is a huge increase from last month's 150 followers. I am so happy to continue gaining a following for these articles and if you enjoy then follow along for this 'importance portfolio' series as well as my new 'hunt for potential 10x returns' series.
My $10,000 Portfolio Setup
I have replicated my portfolio so that it has an original input value of $10,000. This makes the portfolio anonymous, general, and easy to follow and evaluate. This means that the actual number of shares and the value of the portfolio are not representative of my own, but the % of the portfolio are the same as well as the capital gain/loss % and dividend yield. Let's dive into the portfolio right away.
The Author
This month, my portfolio consists of 88.96% stock exposure and 11.04% cash. My increased cash exposure allows me to remain flexible during this time of uncertainty while collecting interest of over 4% from a money-market fund. Let's look into the capital gain % on each position separately as of July 19, 2023.
Company | Average Cost Basis / Share | Current Share Price | Percentage Gain/(Loss) |
Palantir ( PLTR ) | $9.20 | $18.35 | 99.4% |
Tesla ( TSLA ) | $179.72 | $296.73 | 65.1% |
Deere & Company ( DE ) | $176.32 | $435.40 | 146.3% |
Block, Inc. ( SQ ) | $68.79 | $79.81 | 16% |
Sprouts Farmers Market ( SFM ) | $26.26 | $38.99 | 48.5% |
Unum Group ( UNM ) | $23.78 | $48.45 | 103% |
PDD Holdings ( PDD ) | $74.83 | $76.09 | 1.7% |
Qifu Technology ( QFIN ) | $16.28 | $18.29 | 12.3% |
By continuously buying into these companies, I have been able to lower my cost basis per share and hence lower my unrealized losses. This month, my positions have increased in value along with the general market. Last month, I had a gain on the portfolio of $2,169, which has this month increased to $3,646 - a sizeable gain. Whether this will continue is yet unclear, which is why I am not going to be over-enthusiastic as a long-term investor. As I mentioned in my previous article, I have been consistently reducing my cost basis per share for PLTR, QFIN, and TSLA as well. As the market was decreasing, this worked well but is not possible with the strong gains recently. I am now letting the gains run and looking to add to the positions slightly when I see the potential to do so.
My overall forward dividends from the portfolio have naturally decreased from $204 last month to $168 this month due to my sale of dividend-yielding CVS. Below are the FWD dividend per share for my positions, the current dividend yield, the historical portfolio yield (based on my cost basis per share), and the expected dividend I will receive in a full year for each position.
The Author
My Investment Philosophy
I believe that the most important principle of investing is to buy companies that are important, will continue being important, or will begin being important. Although this sounds simple, finding companies that truly are important is ultimately subjective. The way I go about deciding whether a company is/will be important or not is by starting with a problem, then evaluating how a company is working toward solving the problem and with what set of technologies.
The next question I ask myself is, will the company continue being important and why? Answering this question involves evaluating management, company incentives/structure (inside ownership or not?), competitive positioning, and the forward-looking demand for the set of products that the company is offering. Forward-looking demand is a measure of how much customers of a product will continue needing/using that product. Furthermore, the best signal that a company is important is that its customers will need the company's products even more going forward. This creates a natural tailwind for the company and can generally be described by industry growth metrics.
Another important principle that I abide by is owning companies over the long term. This means that I like to own companies that have a large market potential going forward. Many investors have said something along the lines of, it's much more fun to own a company that has a small market share that is steadily increasing with time rather than a company with a dominant market share that is declining over time. Companies with the former dynamic have 'long runways' for growth that will only benefit the long-term investor since revenues and profits will increase over time.
To conclude, the level of a given company's importance will, to a large extent, be reflected in the company's financial statements. Companies that already are, and will continue to be, important will have high returns on capital and strong margins since the customer is so in need of the product that they will pay a substantial premium for it compared to its produced cost. Other signs of companies that fall into this category are a management team that prioritizes internal growth opportunities over shareholder distributions (share buybacks & dividends) and companies that have dominant products that continue to be ahead of the competition. The category of companies that will become important (or will become even more important) is the most fascinating to me. These companies are usually investing heavily in internal growth opportunities. They focus on product, product, product over everything else. For companies that fall into this category, profits should not be equated to company performance. Rather revenue, market share, product offering, and customer growth are much more important measures. The reason that these companies are interesting from an investment standpoint is that through continuous investment they can drive huge operating leverage over time, meaning that profits can quickly flip from deeply negative to extremely positive. I believe that my portfolio consists of a mixture of important companies and those that will become even more important, all in varying degrees.
In the continuation of this series, I will provide important updates to how my portfolio companies are evolving from a business perspective with news and thoughts regarding these company's ongoing performance.
Block Inc. (26.1% position; +16% unrealized gain)
The thing I like most about owning Block is that the company is an organic innovator that is at the forefront of providing economic empowerment through developing the Bitcoin ecosystem as well as establishing a decentralized identity on the web. What I'm referring to more specifically in this update is the progress of two projects within the company: Bitkey and Web5.
The Bitkey team recently announced that they are partnering with Cash App and Coinbase to offer a seamless option to move Bitcoin from these custodial wallets/exchanges to the Bitkey non-custodial wallet. These partnerships are really big news because of their scale. Cash App had 10+ million cumulative actives buying Bitcoin in Q1 2022 ( 2022 Investor Day ) and Coinbase is the largest US crypto exchange with 8.4 million monthly active users, whereof 6.1 million are monthly active Bitcoin users, and the platform holds a total of 500 thousand Bitcoin ( River.com ). The Beta version for the Bitkey product is now available to sign up for on the website link above (I have applied. The last day is June 30th and the decision will be made at the end of July). The company plans on gradually rolling out new features such as buying and transferring Bitcoin with global fiat currencies as well as making Bitkey available around the globe:
"During the global public launch of Bitkey later this year, customers will then also be able to buy and immediately initiate a transfer of their bitcoin to Bitkey from Coinbase across 6 continents, including markets such as the US, Canada, the UK, Brazil and Australia, among other global markets; and Cash App in the US."
Currently, the business model consists of Bitkey taking a transaction fee for moving Bitcoin from the exchange/wallet into the Bitkey device. I expect Bitkey to get new features and partner integrations going forward, which the company can further monetize - something that Block does with all of its businesses. In all, this product truly is seamless and already has an incredible scale from these two partner integrations which makes it a real contender to "empower the next 100 million people to truly own and manage their money with bitcoin".
Web5 is 73% finished! The TBD team driving this initiative has released a Web5 SDK integration which enables developers to build apps using decentralized identity technology ( Web5 SDK ). Essentially, developers can now build apps where the app does not store the user's data but rather allows the user to store his/her data with him-/herself. As this new developer platform is beginning to roll out, the TBD team has been participating in several marketing events to increase awareness of the relatively nascent technology.
Qifu Technology (15.87% position; +12.3% unrealized gain)
Qifu Technology stock has been struggling to retain balance lately. After shooting up to around $25/share in February, the stock has retreated to ~$16/share. During the first quarter, as I mentioned in my second article the company raised its dividend payout ratio to 20-30% of net income in order to return more shareholder value. The company has now taken the next step, which I've been eagerly awaiting, to begin a stock repurchase program. For the company, repurchasing shares around these depressed prices is a no-brainer that can contribute to the long-term growth of the company.
The CEO Mr. Haisheng Wu stated, "The Company’s new share repurchase program demonstrates our confidence in our business outlook and reflects our commitment to maximizing long-term shareholder value.” This quote provides a hint that the loan environment in China is easing and that Qifu has been able to capitalize/will capitalize on the opportunity going forward. The company may purchase shares for a value of $150 million over the next 12 months, starting June 20, 2023. This one-year share repurchase authorization is quite large as it represents 6% of the company's market capitalization ( Seeking Alpha News ).
On July 12th further positive news came from China's Premier Li Qiang ( Seeking Alpha News ). The Premier met with executives of Chinese technology companies and he urged local governments to encourage economic prosperity through aid packages and abandoning the technology crackdowns. The news article writes:
"The Chinese Premier called for local governments to create a fair environment, improve investment access for companies, and also reduce the cost of compliance in operation and promote the development of the industry."
Continued support from the top down is very encouraging to see, which makes me believe that China is on a better track to meeting its 5%+ GDP growth for the year. All things said, Bank of America ( BAC ), has for the first time that I'm aware of, initiated coverage on Qifu Technology. The analyst at BofA announced a price target of $24.5, which implies an upside of 29,4%. To me, it's exciting to see an analyst begin to cover this company, which has been undiscovered as of yet. This may lead to a larger institutional shareholder base as well as a greater popularity for the stock among retail investors.
Fidelity News
Palantir (14.14% position; +99.4% unrealized gain)
Palantir has received unprecedented demand for its new AIP product, which the company will likely be demoing with real customers live soon. Furthermore, Palantir's Apollo product, which allows companies to "deploy, monitor, remediate, and secure" software is now being distributed across the public sector through Carahsoft ( Palantir ). As I mention in my article, Palantir will likely drive operating leverage over time by offering ready-to-use products that the company can take a share of. One of these products is Apollo's FedStart which allows companies to gain IL5 and IL6 certification much quicker than the traditional path. To drive deeper adoption of the Apollo platform, "Carahsoft will serve as a Public Sector Distributor for Palantir, making the company's Apollo Platform available to the Public Sector through Carahsoft's reseller partners, GSA Schedule, NASA Solutions for Enterprise-Wide Procurement (SEWP) V, Information Technology Enterprise Solutions – Software 2 (ITES-SW2), and additional State and Local contracts ." ( Palantir Press Release ). With this partnership, Palantir will likely be ceding some gross margin for its products while lowering its own sales and administrative costs.
Further, Palantir has partnered with AirMatrix through the Foundry for Builders Program - the latter company is pioneering drone airspace infrastructure. This is a similar company to what Palantir has invested in earlier - namely Lilium ( LILM ) - one of Palantir's SPAC portfolio companies that utilize Palantir's software to provide flying taxis. I find it very interesting and strategically keen of Palantir to partner with up-and-coming companies that are building products for tomorrow's world.
Tesla (10.56% position; +65.1% unrealized gain)
During the month of June, EV companies have been continuously publishing news that they will be adopting Tesla's North American Charging Standard (NACS). Here are the companies that have committed to adopting NACS in the coming years (2024 & 2025):
- Ford
- GM
- Polestar
- Volvo
- Rivian
- Mercedes
- Nissan
Furthermore, 11 charging networks and 19 charging hardware companies will be adopting the standard, while three states will be contributing funds to building out the "NACS" (Texas, Kentucky, & Washington).
Tesla
In other news, XPeng rolled out assisted driving in Beijing, which expands its coverage to Shanghai (2 months ago), Shenzhen, and Guangzhou ( Seeking Alpha News ). As I mentioned in my article dedicated to Tesla, one of my biggest questions for the company is whether or not it will be able to capture the Chinese EV market. Currently, Tesla dominates the U.S. EV market with a ~62% market share, however, this number is only ~10% in the Chinese EV market. The biggest differentiator for Tesla going forward is full self-driving technology; while large automakers in the U.S. seem to be behind on this, the Chinese automakers are not, which could make the future competition even more fierce.
Even if Tesla doesn't dominate the Chinese auto market (which the new cheaper model could help with), the company's market share in the U.S. and abroad is impressive. Recently, Tesla announced quarterly deliveries of 466,140 units which blew estimates by a longshot ( Q2 Deliveries ).
Unum Group (9.60% position; +103% unrealized gain)
Unum is the position in my portfolio with the highest historical yield at 6.14%. On May 25th the company announced a 10.6% dividend increase for its shareholders which results in $1.46/dividend per share for the four quarters going forward. This implies a 3.2% forward dividend yield for investors who buy the stock for around $45-46/share.
For the past ten years, Unum has repurchased around $2.4 billion worth of stock and paid shareholders roughly $2 billion in dividends. This is especially impressive considering that the company has a market capitalization of around $9 billion. Unum's history proves that the company is shareholder friendly which makes it likely that the company will continue raising its dividend going forward as well as repurchasing shares.
2013-TTM (Seeking Alpha UNUM Financials )
Other than this, Unum has expanded its coverage for cancer cases, pregnancy complications, and other life-threatening diseases ( July 17th Unum News ). It is encouraging to see the company expand its offerings and, while doing so, enabling customers to treat their diseases properly. This is what the extended coverage implies "After receiving a lump sum payout for cancer treatment, policyholders can receive an additional percentage of their policy's total benefit amount for each month of treatment, up to another 100%. The coverage includes hospital stays, chemotherapy, radiation, surgery and hospice."
Apart from this, the stock is trending upward stealthily. The company is set to post earnings on the July 31 post-market, where we will be able to better gauge if Unum has kept its strong momentum going.
CVS (0% position; +0.6% realized gain)
- CVS: A High Cash Flow Yield, But A Low Return On Capital
- Walgreens Is Fundamentally Weak, While CVS Remains Strong
This month, I sold all my shares of CVS for $69.575 representing a realized gain of +0.6%. I wrote in the previous month that I was considering selling the company when it went into the plus. Although CVS generates a large amount of cash flow in comparison to its valuation ($13.5 billion guided this year at a current valuation of $88 billion), the company does not fit into my new importance framework as well as my other holdings do. The healthcare industry in the United States seems to be plagued by strict government oversight in certain parts of CVS's business, which pressures margins immensely. The fact that the government is looking so deeply into, among other things, pharmacy benefits managers (PBMs) such as Caremark (owned by CVS) is an alarming clue that the company isn't really helping to solve the U.S. healthcare system. Furthermore, the value-added that CVS is able to deliver is slightly unclear. Its pharmacy store-front has hardly grown over the past few years, the company abandoned its clinical trial business after two years of initiating it, and Aetna lost its 5-star rating for 66% of its Medicare advantage plans.
Due to several performance mishaps, I have lost the confidence that I used to have in CVS and I have realized my own mistake of thinking that the post-covid year growth was going to continue. But, in hindsight, pharmacy profits retained an obviously large contribution from covid vaccines and increased store footprint that hasn't held on as strongly as I expected. Although I still believe CVS is strong - it has an impressive digital footprint and a diversified position in the healthcare supply chain. For that reason, CVS is in a good position compared to industry peers such as Walgreens ( WBA ) which recently announced that it did not meet guidance and that it needed to lower its full-year outlook ( Seeking Alpha News ). The reasons for this were a much lower Covid vaccine contribution and the uncertain macro environment that has pressured consumer confidence. This piece of news came a few days after I sold CVS, which makes me even more relieved that I could get away while avoiding a loss!
John Deere (7.1% position; 146.3% unrealized gain)
Deere has been rallying toward all-time highs recently, which I did not expect in my article above. It seems as if the cyclical downturn has not yet taken place for Deer's business, especially considering the fact that the company increased its net income guidance range to $9,25-9,50 billion from $8,75-9,25 billion for FY 2023 ( Deere Press Release Q2 ). Deere's CEO attributes the success to the new smart industrial strategy:
"Based on Deere’s results to date, it’s clear we are well on our way to another year of exceptional achievement,” May said. “This is due in no small part to the success of our smart industrial operating model and our ability to provide value to our customers by helping them be more profitable, productive, and sustainable."
Although the smart industrial strategy is being executed successfully, I still believe that Deere can experience a cyclical downturn in the coming years. Here are the prices of four of the most popular crops grown in the U.S. by volume ( Alberta.ca ). Since prices are still so elevated, farmers in the U.S. will have high earnings this year as well. But my question is, how long will this last? Crop prices have been on the rise for about two years now of which soybeans, corn, and wheat seem to have peaked but are still stubbornly high.
In the wake of increasing commodity prices, the U.S. government has decreased its subsidy amount to the agriculture sector which is expected to amount to levels lower than those in 2014. This will serve to offset farm cash incomes slightly which are expected to be $150 billion, down from nearly $200 billion in 2022 as I mentioned in my article dedicated to Deere. I believe that falling commodity prices could come within the coming years, which would adversely affect farmer income and also John Deere's equipment sales.
Taxpayer.net
The below graph provides some indication as to how long elevated prices may last. This is a depiction of corn prices over the past 59 years. What I notice is that corn prices do not stay elevated for more than ~3 year (1973-1976, 2010-2013) periods. However, in the long run, corn prices have trended upward growing from around $1 to the current $6.54 per bushel. For this reason, the agriculture industry has positive long-term prospects but yearly prices can swing dramatically.
59 Years of Corn Prices (Macrotrends.net)
Sprouts Farmers Market (4.38% position; +48.5% unrealized gain)
Here are the new stores that Sprouts has opened since June 5th ( Sprouts Press Releases ):
Date | Location(s) |
June 5th | Orlando, Colorado Springs, & Boca Raton |
June 13th | West Melbourne, Florida |
June 19th | Kenneth City, Florida |
June 21st | Tampa, Florida |
June 27th | New Rialto, California |
July 21st (expected) | Fort Myers, Florida |
Total New Locations | 8 |
Other than these new store openings, Sprouts has laid low. The company's stock has steadily been ticking upward which is encouraging. In the next quarter, it will be interesting to see how the company's gross margins will be affected by a lowering level of inflation. If the company can retain its gross margins, then it's a sign that it has strong pricing power.
PDD Holdings (1.1% position; +1.7% unrealized gain)
On June 14th, Reuters published an article about a proposed law that removes Chinese e-commerce shipments from the exemption of tariffs ( Reuters ). The exemption, called the de minimis rule, allows imports under $800 that go directly to customers to avoid the 25% import tariff that the U.S. has on China ( Tax Foundation) . If this proposed bill were to go through, it would cause incredible damage to PDD's Temu, which is pushing to expand in the American market. (thank you to @winning life for tipping me on this article!)
In the wake of this news, PDD has announced that it is looking for several compliance roles to be filled in the Boston area. Among these roles is a "Senior Legal Counsel in Boston. The work requires maintaining a sanction screening protocol and policy for the platform, develop a product compliance system to screen merchandize, and make trust and safety policies, among other things." ( Seeking Alpha News ). In all, the news are alarming in the sense that the U.S. has not dropped its pessimistic stance on potential Chinese e-commerce practices (senators claim that goods may be coming from the Xinjiang region with forced Uyghur labor), but it is also positive to see that PDD is being proactive about working to prevent these tariffs. A 25% tariff could be a make or break for Temu's expansion in the U.S., after all.
Cash (11.04% position)
After selling CVS, I have an ample amount of cash on hand that is currently in a money market fund earning 4%+ interest. To me, this is a perfect place to have the cash for the time being. Moving forward, I will likely be beefing up my positions in my current holdings given they retrace downward. Furthermore, I have been eyeing a company called Hollysys Automation ( HOLI ) for a long time now and I am looking to take a position. The company has several times been involved in rumors of being bought out of the market. The current premium suggested is 60%, which would be a great gain. The downside risk is also low since the company is performing well and has a very strong balance sheet where 60% of the company's market value is made up of cash, with ~3% debt.
Conclusion
Thank you for reading the start of my new series which is aimed toward following my $10,000 portfolio. My goal is to provide monthly updates on how the portfolio has developed and how the portfolio companies are performing. As a summary of this month, I have sold off my whole $1,080 position in CVS which as a result increased my cash position by ~6%. Other than that, I have bought into Block Inc and Qifu Technologies with very small amounts. Overall, the companies in the portfolio are continuing to perform very well with roll-outs of new product offerings (Palantir, Block Inc, Tesla) as well as continued strong strategic performance (Sprouts Farmers Market, John Deere).
Reach out to me if you have any questions, comments, recommendations, thoughts, or interesting discussion points!
For further details see:
My $10,000 'Importance' Portfolio: Concentrating The Portfolio For Success