Monday, August 31, 2020

US Portfolio



(For Stocks Cafe users, remember to adjust your Apple shares for stock split) 
What I did was to add a sell transaction at last Friday'sclosing price and buy back 4x more at its adjusted stock split closing price.

It's been a really hectic month for me since the start of August hence I didn't have the time to analyze shares and haven't been making much changes to portfolio. So to keep my blog alive, I will be sharing my US portfolio which I have started since 2018 but only began adding more stocks since middle of 2019.

I was fortunate to have started this portfolio and it has been perfoming well the past 2 years, outperforming the Singapore stocks which I have invested. During the start of Covid 19, the stocks tanked quite abit yet I am glad that I made the right decision not to panic sell , as many are beneficiries of Covid 19, especially with the speeding up of digital transformation.

Most US stocks which I invest in are tech companies traded in Nasdaq with high valuations. However, in analyzing growth stocks, it's important to look beyond earnings. Many companies in my US portfolio are still in the red yet prices continued to soar as it is valued for it's strong topline growth. In the past, companies like Amazon also did not register any profit till recent years, and today it continued to be valued at 130x price to earnings ratio.

For growth companies in its initial phase, the focus is on acquiring more clients and hence it's expected to have high Operating Expenses i.e. sales and marking. As today's competitive advantage may end up becoming tomorrow's obselences, Tech and healthcare have to constantly invent or redesign their products and services to keep up to date in this everchanging digital world as there is always a threat that newer technology will replace it, which means heavy spending on Research & Development.

Once it has captured a significant market share, expenses will plateau relative to revenue it will become profitable (in many cases). 

Here are the few 'must have' metrics which I look out for to satisfy my investment criteria.

1. 'Growing' Free Cash Flow

Free Cash Flow= Operating Cashflow - Capital Expenditures

During uncertain times, cash is king and this applies to for growth companies. It's the amount of cash generated by its operating after funding for it's operations and deducting capital expenditures. It also shows how efficient the company is in generating cash. One of the pitfalls to look out for is an increase in profit but deteriotating free cashflow which could be due to it's changes in working capital, with build up receivables and decreasing payables i.e. means that it is slow in collecting cash from its customer and not stretching its accounts payable. If the company is unable to generate free cash flow, it will have to boost its debt to have the liquidity to finance its operations. 

For growing companies, I am ok with losses, but the trend of growing free cashflow is important. If you think about it, a firm that generates excessive high free cash flow can do all sorts of things with money such as saving it for investment opportunities to acquire it's competitors, buy back shares without relying on capital markets or shareholders to fund its expansion.

2. High Deferred Revenue

It's commonly seen in balance sheet for SAAS companies. It's the amount which subscribers pay to the company and the service is not delivered yet. Once it is delivered it will be recognized under Revenue. Hence a growing deferred revenue tells you in advance to expect a growing topline in the next quarter and still in its stages of growth.

Growth companies like Crowdstrike tend to have high deferred revenue, a sign that its expected to report higher revenue in the following quarter.

3. Strong growth in Revenue & High Gross Profit Margin

Gross Profit Margin= (Revenue-COGS)/Revenue X 100%

You will commonly see performance of growth companies measured by it's price/sales ratio rather than the popular pe ratio. For growth companies, they tend to concentrate on growing its topline at the expense of their profitability hence they will spend aggressively on the marketing expenses on client acquisition, hence may expect an operating loss. However I will watch out for its gross margin and compare with companies of its similar industry to ensure that it's continue to outperform its peers. 

I also browse through the past quarters' earnings to ensure the profit margin is consistent. Companies with high profit margin could signify that the sector is lucractive and could attract competition, therefore the stability of the margin means that the company is able to withstand compeutition and keep competitors at bay.

There are other factors to look out for such as Total Addressable Market (TAM), understanding GAAP and non- GAAP, and economic moat which I will cover more when I have the time.

How's your portfolio performing during the Covid 19 season. Have you made any changes to your investing strategy?



4 comments:

  1. Hi, thanks for sharing. I am new to US market. How do you time your entry for a counter that is constantly at 52-week high and inching higher? (e.g. I tried to obtain Apple last night but the price just kept inching further and further from my limit order, needless to say the order was not filled in the end.)

    ReplyDelete
    Replies
    1. Hi, thanks for dropping by.

      I don't time my entry as I use fundamental analysis to determine my buy/sell decisions.

      If you wish to buy Apple shares and not too bothered by the day fluctuation in prices, you may consider Market Order instead, which means that your order will be filled based on that current sell price.

      Delete
  2. You could have easily just added a buy trade with the extra shares and put 0 for the price in Stocks.cafe for 31st Aug. That really was what happened with the split anyway

    ReplyDelete