Saturday, December 26, 2020

Portfolio Updates (December 2020)

It’s finally Christmas and it's the season I look forward to every year and the time for cold weather travel to ski on powder snow. Unfortunately, this time is different. I booked a few flights for travel this year and all got cancelled (including the travel bubble one). If there’s anything good in not being able to travel is that I managed to save more money. I continued investing in stocks and I am blessed that my portfolio has done well this year, particularly my Growth portfolio. Thanks to the circuit breaker, the times spent at home has allowed me to do more personal reflection, come out with an investment strategy and act on it.

Despite the US stock market hitting record highs, I believe next year will still be a good year for equities market. The past few months rally is fuelled by stimulus rolled out by Federal reserve and government. The next rally will be underpinned by reopening of business and economies as more people get vaccinated.

(1) Growth Portfolio

Missing from the photo: Zoom (NASDAQ: ZM)

My growth portfolio had a good run in December. Cybersecurity companies like Zscaler and Crowdstrike continued to hit new highs after the earnings report early December since their services are getting more in demand as cybersecurity concerns mount. Crowdstrike reported 81% year on year increase in annual recurring revenue. As long as public cloud revenue continues to grow, Crowdstrike is expected to see growing demand. It also owns a handful of patents: 41 patents in process, and 46 international patents.

https://ir.crowdstrike.com/static-files/547e5c92-3594-4eef-9dfc-9eca37b635f4

Crowdstrike (NASDAQ: CRWD)
Crowdstrike's latest corporate overview (see link above) shows two patents: US Patent 9,798,882 (Real-Time Model of states monitored devices) and US Patent 9,043,903 (Kernel-Level Security Agent) which forms its key part of the company’s moat. As mentioned in my previous blog, see here: http://whatsbehindthenumbers.blogspot.com/2020/07/why-i-added-crowdstrike-holdings-crwd.html , Crowdstrike uses AI to scan all the data it gathers from every of its customers to efficiently search for treats. Once it detects a threat, it uploads that file to cloud and shutdown the treat, as well as for all its clients. Hence it truly benefits from network effect like Apple and social media companies. The more clients they have, the more signals it gets and hence a better threat graph.

For my growth portfolio, I have initiated new position in Palantir, Tesla and added back Zoom (after selling it too early for $200 in May. I plan to add Salesforce as I foresee that it will continue to be a leader in CRM. If Salesforce’s history shows us anything, is the fact that they have successfully acquired companies in the past and it has proven its ability to grow and continued to be a leader for CRM Customer Engagement Centre. Sometimes you just got to place your trust in the management that they can continue to bring Slack to its ecosystem and sell the services to their current clientele base.

Why I initiated a small position Tesla (NASDAQ: TSLA)

Investing in Tesla shares is definitely not for the faint-hearted. Despite astonishing share price rally over the past few months, I believe in its growth story in terms of its superior technology (electric motor and battery,) supercharger network and vertical integration are still in the early stages.

Superior Technology
Tesla’s permanent magnet synchronous reluctance motor (induction motors in the past) makes it more superior to its competitors, in terms of price and efficiency. Its battery has allowed Tesla to maintain a grip on EV market compared to its peers. Its current model 3 has 14% better energy density. To understand battery energy density, check out this link: https://www.fluxpower.com/blog/what-is-the-energy-density-of-a-lithium-ion-battery#:~:text=What%20is%20Battery%20Energy%20Density,one%20watt%20for%20one%20hour.Currently Tesla’s North American Model S Long Range Plus promises 402 miles without stopping a charge and Tesla’s Model S can go on 370miles on a single charge.

SuperCharger Network
Secondly, Tesla, like Apple is building its own ecosystem, where several Mac devices and application are designed to work with each other in useful ways. Tesla builds its own network of proprietary supercharges that can fast charge and being proprietary means other EV cannot tap into Tesla’s network. So, once you own Tesla, everything is designed to work together. Like Mac, there are no compatibility issues and Tesla holds their owner’s hands throughout their journey.  

Vertical Integration
Tesla's vertical integration in terms of manufacturing also contributes to its superiority in technology. Most of the Tesla’s car parts are developed in house which means improving its supply chain coordination, better costs control (no middleman) and faster rate of innovation.

I read articles about Tesla and there are worries that it faces competition from other new EV players. I see this as a positive for Tesla, as these new EV rollouts by other companies will help to make electric vehicle the new mainstream. So when demand of EV starts picking up, consumers will start to compare and realize that Tesla is the best in class.

(2) Dividend Portfolio

Capitaland Integrated Commercial Trust (SGX: C38U)
I have closed all positions for Tracker Fund of HK 2800, and divested Capitaland Integrated Commercial Trust .However I am left with fewer than 100 shares as I didn’t manage to offload in the unit share market on the same day. The reason for divesting is that I already own a handful of retail Reits and any sort of diversification is not going to lower my risks. Secondly, it's because of its 6% exposure to hospitality sector, RC Hotels, which will face challenges in maintaining its occupancy rate in short and midterm. Lastly its commercial business which consists of mainly Grade A CBD office may see subdued demand due to prevalence of WFH measures, which I believe will not go away post-Covid 19. In the face of business uncertainty, tenants are also asking for shorter term renewals and considering downsizing their office space.

Ascendas REIT (SGX: A17U)
Unfortunately, I didn’t learn my lesson from FCT and subscribed for 2926 excess rights for Ascendas Reit. I was expecting that Ascendas Reit to perform better exrights than FCT as its rights dilution is much lesser compared to FCT. But I still see the acquisition as a positive move, especially it's DPU accretive and attractive dividend yield of 5% in such low interest rate environment.

I have also added Mapletree Logistic Trust too. In my view, Reits and Financials stocks that pays good dividend should continue to do well against the backdrop of interest rates staying low for some time. For 2021, will be a year to buildup my warchest and any weakness in Reits is an opportunity to add.

Stock Portfolio Net Worth

Stocks Portfolio= $442,120+$7,036= $449,156

$7,036 is the value of 2,400 shares of NikkoAM STI ETF. Indicative Value as of 126th Dec (divested 2,417 in Nov 2020, and will be divesting in batches)

Cash at hand= $50,600

Total Portfolio Value= $499,756



Time weighed Returns (2020)= 22.38%
XIRR (2020) = 20.27%

June 2022's goal- 85.59% achieved


June 2030's Goal- 12.78% achieved


Portfolio 1 Net worth (i.e. Growth Portfolio+ Dividends Portfolio) = $449,156
Portfolio 2 Net worth= $170,529
Cash at Hand= $50,600
Net worth (Equity and Cash)= $670,285 


Closing Remarks

Feel free to scan on the QR code :)


We are just two more days away to Phase III and hope that Singapore's local case will continue stay at zero or low single digits. While there's still long way to go before Covid 19 gets eradicated, here's wishing everyone a safe and blessed New Year and may 2021 be a better year for all of us! Take care and stay safe!

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Tuesday, December 1, 2020

Who buys a negative yield bond?

Last Thursday, I came across an article in Business Times about UOB issued negative EUR Bonds and it was 2.6X oversubscribed, with order book of 1 billion EURO.

It doesn’t make any sense to me in first glance. I always thought that negative bond yield is only something that’s theoretical, like negative oil prices, but didn’t expect that anyone could possibly be interested in buying a bond where the investor is guaranteed to receive lesser money the original price when bought and held through maturity. It generated strong demand and analysts predicted that there will be more to come for Singapore banks. Today, the total negative-yielding debt amounts to USD 17.05 trillion. It is almost equivalent to the total market cap of Nasdaq, which stand at USD 17.2 trillion as of Nov 2020!

So I was curious on why are there so much demand in negative bond yield? Hence, I did some research and discovered some of the reasons why investors would subscribe to such bonds.

As a means of currency hedging

A 7 year- bond yielding at-0.21% may not be attractive for Singaporean investors holding Sing Dollars. However, investors who are holding onto US dollars can benefit from a higher yield as compared to US treasuries. Here's how:

As of 27th Nov 2020, a 7 year Treasury rate yields 0.61%.


Under normal circumstances, one who invests in X US Dollars in US treasury at par value will receive USD 1.0435X in 7 years time.

If one converts X USD to EUR, at a rate of 1 USD = 0.835866 EUR


and then purchase UOB covered Bonds above par of  EUR 1.01553 and hold till maturity, he will receive EUR 0.835866X/1.01553.

After converting back to USD based on EURUSD 7-year forward rate of 1.3034, the final value would be 0.835866X * 1.3034/1.01553= 1.07280x.

The effective yield would be 1.01% can be calculated by annualizing and it seems more attractive compared to buying 7 Year Treasury yield which only gives an annualized return of 0.61%.


Capital Gain

In some cases, investors do not intend to hold the bond till maturity. During the course of their holding period, they may benefit from the sale of negative bond yield if interest rates continue its decline. This is because of the inversely proportional relationship between bond price and interest rate/bond yield.



The inverse relationship makes sense if we consider the example of a zero coupon bond of a treasury bill for simplicity sake. As its name suggests, zero coupon bond does not pay interest but is issued at a discount and redeemed at par value.

Suppose a zero coupon bond is yielding 5% and interest rates were to rise the following day, the newly issued bonds will be sold at a higher yield and rendering the 5% bond to be less attractive. Hence to attract demand, the 5% bond has to be sold at a lower price to match the same return yielded by current interest rates.

If the interest rate declines during the course of holding a negative yield bond, the investor can potentially sell the bond and achieve a positive returns. Hence, negative yield are not correlated to negative returns but do note that it cut both ways. A rising interest rates could erode the investment returns.

For instance, S&P Germany Soveriegn Bond Index.

Bond fund with negative Yield to maturity

Chart showing positive returns for a German Bond Fund



In most cases, newly issued bonds tend to have yield that exceeds or at least match the current national interest rates.

In UOB’s negative bond’s case, a similar comparison would be Germany’s Bund, due to the similarity in currency, both denominated in EURO and similar credit rating of AAA by S&P. 

-0.714% vs -0.21%

Looking at Germany's 7 years bond yield just goes to show why UOB's bond is so well received by investors. 

Hedge against deflation

During times of deflation, bonds retain its value well and investors could achieve a positive return by holding on a negative bond. This happens when the bond yield is higher than the rate of inflation

The formula for real rate of return is

(1+nominal rate)/(1+inflation rate) – 1 or a more simpler way to put it

is Nominal rate - Rate of Inflation

A deflation happens when price levels in the economy goes down as compared to inflation where too much money chasing too few goods.

If I earn a 3% nominal return and inflation stands at 2%, my money is only growing at 1%.

Instead if we have a deflation of 2%, then my wealth is growing at 5%

So investors who expect price of goods to fall may consider investing in a negative yield bonds. With a deflation of -2%, the UOB negative yielding bond may still bring about positive real return.

Based on https://www.macrotrends.net/countries/SGP/singapore/inflation-rate-cpi, the inflation in Singapore has stayed low and experienced a deflation in 2015 and 2016 as compared to countries like Japan, which has struggled with deflation since 1990s and bonds has been a useful hedging tool against deflation. Also the nature of Japan’s yield curve allows investors to make capital gains through ‘roll down’ method, which essentially means buying and holding a bond and sell it to enjoy capital gain before it matures. The best time to take advantage of a roll down is during a low interest environment, yet with interest rate is expected to rise.

So here are the three reasons why it can be profitable to invest in negative yield bonds. Now if you are convinced, I am pleased to announce that I will be issuing SGD negative yield bond, called EOTS Bond. The initial subscription price is just $100,000, and at the end of the 5 years I will pay you back $90,000. Limited tranche available, and only on a first come first serve basis. Please drop me a comment below if you are interested to subscribe. 😊

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Tuesday, November 17, 2020

Portfolio Updates (November 2020)

November turns out to be a busy month with so many events happening around the world.

The biggest news was that Biden won the US Presidential election, and stock market breathed a sigh of relief as Republicans likely gain the senate majority, making the prospect of Biden’s tax hike unlikely.  

Also global markets gotten another boost when the news of the major development of Covid 19 broke during premarket hours, expect for tech stocks went on a steep selloff . While investors cheer for a vaccine breakthrough, my stock portfolio performance had been lukewarm at best, as many of my SG portfolio gains were offset by drop in tech stocks. Nevertheless, my portfolio is still in the green with 15.78% (XIRR) returns YTD.

Whereas on the east side, Jack Ma’s blunt China’s bank talk costs him the suspension of Ant Group IPO and sent shares of Alibaba down. Now it is trading below its 50 days moving average. If that all wasn’t bad enough for Alibaba and Jack Ma, China drafted new anti-trust laws guideline ahead of its Single’s Day to curb the power of tech companies.

I applied for Ant Group IPO and miraculously allotted 50 shares, and indeed felt so lucky for a moment until I got an SMS that I will be getting a refund.

Although it is only 50 shares, I can really count myself lucky when it was 872 times oversubscribed.

Despite all the volatility in  the stock market, I am so thankful that I have achieved my financial goals seven months early this time round as the worsening Covid 19 has given my tech portfolios a much needed boost and I have been actively been injecting much of my income to the stock market. 

Stocks Portfolio= $ 405,683 +$13637.70= $419,320.70

$13,637 is the value of 4817 shares of NikkoAM STI ETF. Indicative Value as of 16th Nov (will be divesting them very soon)

Cash at hand= $56,000

Total Portfolio Value= $475,320 (achieved Portfolio value >$460,391)


Updated as of 14th Nov 2020

Updated as of 14th Nov 2020

Despite a portfolio net worth above $460k, I did not achieve anywhere close to $23k annual dividends. The calculation was based on the assumption that my shares are averaging a 5% dividend yield. Currently the yield is only in the low 3% as most of my tech stocks are not paying a dividend. I will be growing my portfolio through capital growth strategy, and once I achieve my portfolio value of $3.9mil, I could convert the growth stocks to dividend playing shares which yields 5%.

Looking back at previous portfolio update blogposts, I realized it was not organized and consistent, and most readers may have difficulty figuring out my progress especially I have many portfolios all over the place. Recently I did some housekeeping by making some changes.

Moving on, I will categorize my stocks to 2 different portfolios: Dividend & Growth portfolio

(1) Dividend Portfolio

ETF not listed above: 4817 shares of NikkoAM STI ETF. Indicative Value= $13,637.40 

Updated as of 16th Nov

I will be divesting these soon: 2800.HK,  Raffles Medical, UOL, and ThaiBev because the positions are too small to be meaningful and I am not interested in following these companies anymore. Same for Nikko AM STI ETF, as my stock performance over the years has been doing better than the SG index.

Ideally, I am working towards having 20 shares in this portfolio, comprising of REITS backed by strong sponsor and three local banks. A few examples of strong sponsors are Mapletree Investments, Capitaland, Frasers Property, Lendlease Corporation and Parkway Holdings. They have good track record in injecting valuable properties to their respective Reit portfolios and supporting them through tough times. Having strong sponsor also meant that they could raise funds with lower interest rates. E.g Parkway Life Reit’s ability to issue bonds at extremely low interest. When buying decision is concerned, I will be placing more emphasis on quality of a stock rather than how undervalued is in terms of book value or dividend yield . Owning turnaround company can pay off very well if the company eventually turn its fortune around; but over years of investing had taught me that turnaround companies seldom turn. Hence, I rather buy a wonderful company at fair price rather than buying a fair company at a wonderful price.

Frasers Centrepoint Trust (SGX:J69U)

I entered at the price of $2.63 and $2.34  prior to right issue. I thought that the acquisition news was a positive one but the sell down of shares to the rice below its right issue had me scratching my head. I subscribed for excess rights and added another 1,000 shares at $2.07 before the news of vaccine broke.

Ascendas REIT (SGX:A17U)

I learnt my lesson from FCT that the selloff may continue after XD and XR. So I initiated a small position and will increase it market presents such opportunity. There’s so much to like about the new properties, especially its San Francisco commercial buildings with quality tenants like Pinterest and Stripe and properties are on a triple net lease and built in rental esclations. Honestly speaking there’s nothing not to like about the acquisition, just that I thought there could be better ways of financing than Preferential Offering. It's trading XD and XR today and I will be apply for excess rights.

During the March selloff, I did spring cleaning and sold Raffles Medical, UOL, HRNet and Capitaland shares, as I would like to keep only HK & SG shares for dividend portfolio. At the same time, I added a new position in Mapletree Commercial Trusts, Capitaland Mall Trust, Sasseur Reit (bought and sold at a profit).

Link REIT (HKG:0823)

I blogged about Link Reit and I continue to believe in the management in delivering growth for the future as they have good track record in increasing it’s Distribution Per Unit (DPU) through Asset Enhancement Initiative (AEI). They are actively diversifying away from HK properties by seeking additional growth in cities like UK, Japan, Australia and China. It is also one of very few Reits that conduct share buybacks for cancellation of units to increase its distribution per unit (DPU)

(2) Growth portfolio


Updated as of 16th Nov.

I managed hold on to the shares during selloff in March despite most of the shares were in the red then. My only regret is not having the courage to go all-in when there was so much fear during the time. When Covid 19 became widespread in US , there were many news and analyst showing charts where US GDP is diving to a level where it mirrors the great depression in 1940s and that made me think twice.

Since my last update, I have added Pinterest, Square, Roku, and increased my position in existing tech shares during last week’s selldown. Livongo has disappeared from my portfolio as it has merged with Teladoc.

Tencent Holdings (HKG:0700)

Tencent reported a good set of results with higher net profit , widening profit and operating margins ,ahead of analyst expectations. As a long term investor, I am not too concerned about China’s newly drafted antitrust laws for two reasons: Firstly, Valued added Services segement (VAS) still made up the majority of its earnings and the law doesn’t have much impact of gaming. Secondly, anti-trust laws exists in US and many western countries, and one of the notable cases was when the US Justice Department filing a lawsuit against Microsoft in 1998. Recently, Google was also used by US Justice Department and 11 states for anti-trust lawsuit. As tech companies become more significant to the overall economy, more regulation reflects the new reality. The same goes to big companies in Silicon Valley.

Alibaba (NYSE:BABA)

Although I have a much smaller position in Alibaba compared to Tencent, I continue to like Alibaba for its cloud computing as its cloud segment is now ranked third largest Infrastructure As A Service (IAAS) provider , just right behind AWS and Microsoft Azure. It’s poised to turn to a profit next year and will likely be the growth driver moving forward. It is trading below its 50 MA and seems like much negativity about Ant IPO suspension and anti-trust news have been priced it hence I will accumulate on market weakness.

 Pinterest (NYSE:PINS)

It's a new addition to my portfolio and I believe its monetization strategy is still in its early days. There's so much room for earnings to grow, especially it's Average Revenue per User (ARPU) for International markets is only USD 0.21. I watched the interview with CEO Ben Silbermann on Youtube and his goal is to make Pinterest a place where to get inspiration from daily life. Unlike other social media where they constantly invent new ways to get users stay hooked, Pinterest wants to get their users offline. Pinterest is not meant to be a place for socializing but to find inspirational ideas and make that effort to carry it out those projects. 

Pinterest's ARPU for US and Int'l segment
Source: https://www.statista.com/statistics/995251/pinterest-quarterly-revenue-per-user-arpu-region/

These days many social mediaa and tech companies are very focused on growth in their Monthly Active Users (MAU) but Pinterest keeps score by whether the product is playing a positive role in people's overall wellbeing. In achieving this, the tradeoff could mean going slow in growing their numbers. In their early days, there were feedback from Pinterest users that they would like to keep their boards secret for good reasons. For instance, pre wedding couples wanted to keep their wedding inspiration to themselves. Hence the team allowed to the users to have an option to keep their boards secret, eventhough publishing the content in general would attract more users to the platform in the short run. I believe the sacrifice will payoff in the long run and I contiue to believe in their mission- to bring everyone the inspiration to create a life they love. I will write a separate blogpost on Pinterest when I have the time.

Portfolio Net Worth

To date, my Growth +Dividend Portfolio Value= $ 419320

Portfolio 2(which I will not be updating anymore as of 2018) =$151,700

Cash savings= $56,000

Net worth (Equity and Cash)= $627,020

Almost two and a half years back, I wrote about achieving $1mil before age of 31. http://whatsbehindthenumbers.blogspot.com/2018/

I turned 31 today and unfortunately didn’t achieve my goals but I enjoyed my investing journey and learnt many valuable investing lessons. I made mistakes along the way and my returns would have been much better should I have started investing in US stocks earlier. Sadly, I invested in turnaround stocks in the early 2012- 2014 and never made money. As of now, my investment goal is to focus on growing my portfolio towards $3.9mil and to update it by blogging on a monthly basis.

Last year, I bought a car and cleared off the loan recently hence it also took away a significant chunk of my cash savings meant for investment as well.

How’s your stock portfolio been performing this month? Did you shares get a boost from the news of Covid 19 vaccine ?

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Sunday, October 18, 2020

Positive Changes during Covid 19 situation

Before I go ahead with my next stock analysis and portfolio update, I would like to share some of the lifestyle changes and habits I have built up over time as I grow my wealth.

Batching


I learnt about this concept in Tim Ferriss’s book ‘The Four Hour Workweek’. It means delaying in doing a specific task and letting them pile up until a specific point. Actually, we do apply it in some parts of our lives, like doing laundry: we wait for the dirty clothes to pile up and then wash them. When we do a task, there’s always a set up costs involved. To send an email, I need to turn on my laptop, load the outlook application before I start typing and click on the send button. When I check and send emails in different times of the day it means multiply these preparation time by that frequency. Contrarily, if I only do it once a day or less, I keep the set-up costs at a minimum.

Recently, I have applied the concept of batching not only in checking emails, but also checking my physical mailbox (weekly instead of daily) , update my expenses tracker (once a day instead of multiple times daily) and updating my investment portfolio in StocksCafe (weekly instead of three times a week). I was also addicted to checking Whatsapp message whenever there’s a notification, even while I was waiting for the traffic light to turn green, but now I learnt to hold on to the urge to do so by checking only at specific times of the day. Sometimes I do fall back to the old habits but it gets better with time and discipline.

After trying it out for some time, I felt that my concentration has improved due to minimal switching costs. Multiple studies have also shown that, if we switch from one task to another, it takes about a few minutes to fully concentrate on that new task, as our brain at time still think about the old tasks.

When I am driving these days, I will put my phone in the wireless charging compartment, lock it up and enjoy piano music.

Set Goals (daily goals, monthly goals, and 10-year goals)

 I have read articles on new year resolutions which talks about the sad fact that gyms are always packed at the start of the year with new faces but starts thinning out after February. New Year resolutions are indeed hard to keep as they failed to follow through their goals that they set since day one. I tried setting new year resolutions to blog every week, eat healthily, but as work started piling up, I tend to do the urgent tasks instead of focusing on my resolutions and blamed it on my busy schedule.

Since the start of circuit breaker, all my overseas trips were all cancelled and physical meetings become Zoom meetings. All the driving around and rushing for every meeting had come to a stop and I felt very unnatural and awkward at the start. However, having all the time at home has forced me to slow down my fast-paced life and rethink my long-term goals. I like the way Tim Ferriss put it: ‘Being busy is form of laziness- lazy thinking and indiscriminate action’ I was guilty of that as I kept myself busy at work and at home without evaluating and reflecting if I am being efficient at work or just busy and unproductive. 

With the time I have, I started reading books which had been sitting on my bookshelves and collect dusts for very long (books that I wanted to read but never had time to). I began to think about what I truly want to achieve in life and made it a priority to sit down for a few hours to set long term goals. I used Goals Journal and 10-Year Plan by Kikki-K. These books taught me to start by defining my core values, and to visualize my dream life and a monthly planner by setting 4 goals each month and a reward if I achieve that goal. It worked very well for me, and I think  the concept by Charles Dhugg on the power of Habit: Cue -> Routine -> Reward was applied. As I began to set goals, I made some positive changes in life to fit my goals: more sleep, exercise, meditation, intentional reading, visualization of goals every day, gratitude journal.




Setting goals also helped me came out with the chart below on how much portfolio value I need to attain to achieve 195k of passive income in 10 years’ time.



After setting 10 year goal, I proceed to think of ways to reach my yearly goal. Breaking down into daily and monthly goals of spending few hours each weekend to read investment articles, annual reports and investment books to brush up my investment skills and blog on a monthly basis.

To help visualize my success, I invested in a vision board, and it helps to get me fired up emotionally to work hard and complete my daily goals that every step in the right direction counts towards my long-term success.

 


Diversify my meaning markers

Recently I have been doing quite abit of reading and through the book titled :Before Happiness by Shawn Achor, I learnt that to define my core values and my goals should not be just financial success, but to diversify my meaning portfolio. Strange but true, the more diverse your portfolio, the more routes you have to steer to your goals. In the past, my life shrinks down to only one thing which is meaningful- building wealth. But as I read further into the book, I found out that if my happiness depended on one corner of my life, I am living a pretty fragile place. Because if things don’t turn out well, I don’t have anything meaningful to fall back on.


It took a Covid 19 lockdown for me to identify more meaning markers to see how they are all connected to my life and my happiness should not be entirely dependent on my wealth. So when my stock portfolio is not performing to my expectation at times, I still be buoyed by other parts of my life to still feel meaningful to keep moving forward. After reflecting and diversifying my meaning markers, my life don’t revolve around work, I catchup with friends more often, spend more time pursing my guitar hobby, playing badminton and spend more time with my family over a phone call (as they are living abroad)

 

Value sleep and keep a low information diet

The future is indeed uncertain and sometimes the problems in life keep us up at night. There are times I can’t fall asleep despite going to bed early and feeling tired the next day. On certain days, I slept early but woke up in the middle of the night, thinking about work or simply too excited about tomorrow.

 Planning my day ahead made me realize the need to be well rested to complete the daily tasks smoothly and forced me to make some sacrifice in order to sleep well. I began setting some ground rules close to bedtime and stick to it. These days I put myself to bed at 11pm and cut off screen time an hour before sleeping and spend that hour reading books with a cup of hot rooibos tea.

Overthinking at night could be attributed to my brain processing on what is going on in my day that affected my sleep. Hence these days, I maintain a low information diet, which means watching less news, turn of all unimportant notifications and deleting apps which are time consuming and irrelevant to my long-term goals.  That comes with a cost: missing out on shopping deals or single’s day promotion. However, I began to get used to it as the price I paid is nothing as priceless as a good night rest.

I used to own a bunch of credit cards to maximize the signup bonus and compare which is the best cashback card or highest miles per dollar. However, as my wealth grows, I learnt to simplify my life by holding on four credit cards. While I may not be optimising my credit card strategy that way, I get to free up that extra research time to spend quality time with my loved ones, and be more productive at work.



Here are four positive changes that I have made, and it makes me happier and improve my overall concentration. Circuit breaker is indeed a trying period for many (including me) and felt that time has slowed down; but I have learnt an important lesson that in order to go fast, I need to slow down.

What positive changes have you made during Covid 19? I would like to hear from you!

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Saturday, October 3, 2020

Why I think that JD.com share is still undervalued despite a 113% YTD return

September has been a month of correction for US market, with tech companies taking the hardest hit. Market darlings like Apple, Zoom & Tesla retreated from their all time high and I took the opportunity to take a bite at Apple stock. With the upcoming US presidential Election and the growing Covid 19 numbers, stock market might stay volatile till end of the year.

While many beneficiaries of Covid 19 companies are still trading at very high valuation, I have to be more selective of companies to invest in. One of the shares which I believe is reasonably trading below its intrinsic value is JD.com.

I bought 50 shares of JD in 2018 at the price of $37 and $41.40 when it was not profitable back them. When Liu Qiangdong was investigated on the suspicion of rape, I then added another 20 shares at $27.50. The stock price hit rock bottom at $19.27 before it recovers. I am glad that I hold on to the shares as I believe the JD has a good business model will get through this. Moreover, he was not convicted of the crime, but only accused. 

In August, I added 10 more shares at $75 and $78.8 after it reported a solid set of results. It then rallied to $80 and closed at $76.10 last Friday. Despite YTD return of 113.45%, I believe there’s more room to grow.

Diversifying their earnings with warehousing and fulfilment centres

JD , also known as JingDong, is a B2C ecommerce company founded by Liu Qiangdong and named after him and his ex girlfriend Gong Xiaojing. It is also known as the Amazon of China, as it builds and invests in its own logistics and delivery network through it’s own business group known as JD logistics. While investing in its own logistics network comes at the cost of its operating margin, it is an important part of its long-term strategy to digitalize the logistic system to manage their supply chain more efficiently. Since logistics is a business built on scale, so as they continue to grow in scale and orders, their margin should trend better. This can be evidently seen during the Covid 19 times, where delivery costs go to all time low due to increased order volume caused by the pandemic and costs controls. Check it out here

Also, having in house fulfilment means that they could have better control over the costs in the long run through and won’t be at the mercy of third-party logistics to set delivery price or impose price hike. Other than benefitting from economies of scale, they are also leveraging on 5G as well as its big data resources to build an efficient logistic system which could further lower operating costs for the long term. Just last year, it recently launched 5G-powered smart logistic park in Beijing which aims to tap into the bandwidth offered by 5G to increase its operating efficiency of JD’s Industrial Internet of Things (IIOT) fulfilment operations as well as better interaction between employees and smart machines.

JD, being a much smaller company relative to Amazon, has higher fulfilment capacity-730 warehouses (183mil square feet) compared to Amazon’s 175 ($150 million square feet). They have even formed a logistic network with the ability to fulfil 90% of direct sales in 24 hours. Hence, JD has much capacity to support its growth in sales with its current warehouse footprint. With that excess capacity, JD could offer its service to 3rd party companies to drive revenue growth. For instance, Just ten days ago, Aiqin, China’s leading maternal & infant chain store announced a partnership to outsource it’s fulfilment to JD Logistics. According to Aiqin, the number of defective goods delivered to store has reduced to lower than 7% after switching to JD logistics. 

Below is JD's Gross Profit and & Operating Margin



It’s evident its gross & operating margin has improved over the years and the trend suggest that it will continue to improve as logistics business get more profitable. JD logistics was spun off in 2017 to a separate business unit, and with many institutional investors such Tencent and Sequoia Capital as its shareholder , I believe it’s a matter of time JD Logistics will be listed in the stock exchange. https://www.bloomberg.com/news/articles/2019-12-23/jd-logistics-eyes-ipo-to-raise-up-to-10-billion-reuters-says

What this means is that will translate to higher operating margin and hence higher profitability, as logistics will not weigh into the cost of revenue and operating costs once listed. Moreover, shareholders of JD could potentially enjoy a special dividend or given shares of JD Logistics.

JD Cloud

Another way of improving its operating margin is through its cloud services. In 2019, JD announced a partnership with Cloudflare to strengthen its cloud and AI business. Currently it’s revenue stream is too small to move the needle in its total sales growth, but in the long term it is expected to form a new recurring income steam for its cloud and AI business with cloudfare paying JD to use its data centres. It’s margins may not be as impressive as AWS but sure it will go beyond its current operating margins of 2.17%.

In China, Alibaba is the leading cloud player, followed by Tencent & Baidu. Since the start, Alibaba’s cloud segment has been in a loss-making stage as they focused on growing their market shares. While  doing so, it managed to narrow its loss with time. Just a few days ago, CFO of Alibaba came out with the news that its cloud computing segment is expected profitable in 2021, sending shares up 6.16% on Nasdaq (30th Sept). This suggest that it could take a few years for JD Cloud to be profitable and with evolving technologies like AI and Internet of Things (IOT), cloud service will continue to be in demand and highly profitable.

In the case of Amazon, just look at the chart below on how much AWS makes a difference in its operating profit.


Amazons’ revenue stream comes from 3 segments: North America, International and AWS.

AWS made up only 12% of revenue but contributed 58% of total operating income.

The latest report shown an operating income margin of 5.98%, however without AWS its profit margin only come in at 2.37%.






Valuation

Presently, at the price of $76.10, and with current FCF (TTM) of USD 3.217 Bil and 1.56 Bil shares outstanding, it is trading at Free Cashflow Multiple multiple of 36.9. In my opinion, it is cheaply valued, considering that not many companies with potential growth of 39% y-o-y (see below) is trading at 36.9x FCF.  Its closest peer I can think of is Amazon and it is trading at P/FCF of 58.

Below is the JD's FCF since 2013. Its cashflow has generally been on an uptrend with the exception of 2018. The 2Q 2020 report highlighted that it was a one off due to decrease in advance payments from customers for their marketplace. 



Year on Year Growth (2013-2019) is 39.7%


Historically its FCF was growing 39% (2013-2019) and with possible listing of JD logistics, its capital expenditure could be significantly reduced and hence a higher FCF. Also, JD cloud is still in its early days and could generate stable cashflow for JD once it turns profitable like Alibaba Cloud.

To calculate present value, I would assign a discount factor of 8%, with a growth rate of 30% (Year 1 to Year 5), 15% (Year 6 to year 10) and 5% (Year 10 to 15). 

Sum of PV of Cashflows= 1014.96 Bil RMB.

Total shares outstanding= 1.56 Bil

Present Value (RMB) = 650.6154

1USD: 6.79 RMB

Present Value (USD)  =USD 95.82

Potential Upside = 25.9%

What are your thoughts on JD? Do you see its potential in the long term? If yes, will you consider adding at current levels?


Thanks for checking out my posts. If you are keen to follow my posts or get updates, do like/follow my FB page here where I will update it when there's a new post.



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?



Saturday, July 25, 2020

Why I added Crowdstrike Holdings CRWD (NASDAQ)

With Nasdaq trading at its all time high, there's not much low hanging fruits left and I have to look elsewhere for more unfamiliar tech companies and came to know Crowdstrike Holdings. It is not exactly trading at a cheap valuation, with 33.5 times price to sales. On 6 Jul 2020, I bought 10 shares at $109.12 because of I am convinced there are still plenty of growth ahead and it demonstrated a strong ability to secure clients and high retention rate. As a result, the company had a good run, and recently showing some weakness at $100 range, declining from its overbought level. Moving forward, I will be keeing much cash to potentially buy more on dips.

Crowdstrike Business

Crowdstrike is recognized by Gartner as one of a few leaders in endpoint security . Unlike antivirus (AV) protection where it protects an indivdual personal computer or a device, endpoint security detects malicious activities and protects the whole network including servers and devices from a malware attack. It is more frequently used in enterprises and organizations rather than individual or home use. New corporate cultures such as working from home and bring your own device policies in light of the current situation has made endpoint security more relevant than ever. In fact, Crowdstrike has gotten a boost from Covid 19.

Another difference between a traditional AV and Crowdstrike's endpoint security is that the former blocks the intrusion of virus or malware by relying on its signature. Hence if the malware was not captured in it's antivirus database or a software experiences a zero day attack, it could end up firing blanks or left undetected. The latter is cloud based and uses machine learning, realtime monitoring of events to diagnose if a particular file or application is malicious. If it detects a suspicious application, it uploads the particular file to cloud, sandbox it and monitor it realtime for any malicious activities. Hence Crowdstrike is benefitting from sort of a 'network effect': the more clients they acquire, the more signals it gets which results in a better threat graph.




Financials



At first glance, it appears that Crowdstrike has relatively high debt. Yet a huge poportion of debt is made up of deferred revenue, which is a plus point to me. Deferred revenue is an unearned revenue  Crowdstrike received in advance which its service has yet to be delivered. It is very common in SaaS companies, when a year of subsciption fees are billed upfront. Once delivered, it will be poportionally recognized and show up in income statement under Revenue.

Strong Growth in Deferred Revenue

A strong growth Deferred Revenue shows that they have managed to secure new contracts which will be delivered during contractual period. Hence, we should keep an eye on its deferred revenue as any signs of slowing deferred revenue will point to a weak sales growth in the next few quarters.

Valuation

Since Crowdstrike is not profitable yet, there are not much valuation metrics which I can apply to this stock. I will be analysing its free cashflow from Q4 2019 to Q1 2021.

As the revenue grows, so does the Net Cash Provided by Operating Activities, with exception of Q1 2020 and Q2 2020. I digged deeper into the financial report to analyze what could have caused a  negative operational cashflow in Q2 2020. That quarter showed an exceptionally high General & Administrative Expenses yet there is no explanation on the sudden spike in G&A; but management expects G&A to decrease as a percentage of revenue over time. It could be that G&A expenses incurred in Q1 2020 were only registered in Q2 2020 as Q1 shown relatively low G&A.

Percentage of G&A by Total Revenue

I plotted the percentage of G&A by GAAP total Revenue and the results seemed to align with management's anticipation. Hence, it would be fair to assume that the spike in G&A is just a one time off.






The past few years has seen strong revenue growth but management's revenue guidance for FY 2021 of USD 723-733mil  i.e. 53% increase, meant growth will be slower than the prior years.

To value the stock, I will be using a discounted cashflow by extrapolating its growth and then poject its relation to free cashflow through the Free Cashflow Margin. 
Using CAPM to calculate Discount Rate:

E(R)= Rf + β (Rm - Rf )
= 0.69+ 0.91 (5.5)
=5.695

According to MarketWatch.com, CrowdStrike has a beta of 0.91, and that gives a discount factor of only 5.695%. I am a little hesitant to adopt a low discount factor for this growth stock and revise it to 8%.


Revenue Growth and Terminal Growth Rate
As Revenue are still growing at high figures, I think that average growth of 30% for the next ten years is conservative for Crowdstrike's growth.

DCF has two major components: forecast period and Terminal Value. As forecasting gets more challenging when time horizon grows longer, a perpetuity growth rate of 2% is assigned with the assumption that revenue will continue to grow, albeit at a slower pace. 

Net Cash Provided by Operating Activities as a % of Revenue
Cash Generated by Operating Activities making up 50% of revenue may seem to be on a high side when Form 10K showed Crowdstrike generating positive cash flow from Operations in Year 2020 with only 21% of Revenue. If we analyze its quarterly reports, cash generated from Operating Activities only started turning positive in 3Q 2020, making up of 31% of Revenue in 3Q 2020 and 43% at 4Q 2020.  Hence its net cash generated as a percentage of Revenue in 2020 was actually marred by first two quarters of negative cashflow. It continued to grow with 1Q 2021, making up 55% of Revenue. Currently, Crowdstrike is in its growth stage and its emphasis is on acquiring clients instead rather than profitability and ability to generate cash. Over time, costs as a percentage of revenue could decrease once they have captured a larger share of the market and lesser costs is required to retain existing clients. (see below)

Operating Expenses as a Percentage of Revenue (quarterly) decreases with time

Operating Expenses as a Percentage of Revenue (Yearly) decreases with time


Purchase of PPE
Past three quarters' average was 13% and I would assume a 15% for 2021 onwards.

Capitalized Internal-Use Software 
The yearly trend showed a modest increase in Capitalized Internal-Use Software and only comprised of 1% of the Total Revenue for the last two quarters. 



Summing up present values= USD 143.28

Potential upside of 43%. (current share price of $100.03).

Whats your take on Crowdstrike Holdings. Would you purchase at current levels? 

p/s Indeed its hard to swallow at today's price to sales of 33.5 times, but such levels simply indicates that market expects strong growth in upcoming earnings. If the upcoming financial results can exceed these demanding valuations, it can still be undervalued.

Anyways, I hope you find this analysis useful or as a starting point to do research on this stock. If there is any particular stock that you would like me to analyse, feel free to drop a comment down below! :)

Thanks again for reading. Happy investing and if you are keen to follow my posts or get updates, do like/follow my FB page here where I will update once there's a new post.

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