Tag Archives: SFM

2015 Year in Review

My winning streaks (of both positive returns and beating the averages) came to an end in 2015. I was down 34% in 2015, compared to the S&P 500 which was down around 2%.  Yet I feel better about the risk/reward of my portfolio going forward than I ever have.

I entered 2015 with positions in AA, GTIM, SFM, HABT and YELP, with around 12.5% cash.

My first move of 2015 was to sell YELP in mid January for around a 7% loss. I had just bought YELP near the very end of 2014, but was starting to become nervous about the overall markets and wanted to raise cash, and YELP was my smallest and lowest conviction idea.

2015-yelp1

In mid February I sold my entire position in AA, largely because I thought other ideas had better risk/reward. I made around 35% on AA. I put some of the proceeds into more GTIM and raised my cash position some more as I continued to grow concerned about the overall markets.

2015-aa1

In early May I sold my entire position in SFM. SFM had been a core position for awhile, but by the time I sold I had become convinced that the story had fundamentally changed for the worse. I put some of the proceeds into RAVE, and raised my cash levels yet again.

2015-sfm1

At the end of May I sold my entire position in HABT, and I added another new position, BSQR. Despite adding a few new positions which I thought had attractive risk/reward, I was still worried about the overall markets and so wanted to maintain alot of cash. So that led to my opting to sell HABT. I made around 15% on HABT.

2015-habt1

Near the end of July I sold my entire positions in RAVE and BSQR. I continued to grow concerned about the overall markets and wanted to pare back to my highest conviction ideas. I lost around 7% on BSQR and 4% on RAVE. This also marked the high point for my cash levels on the year at around 40%.

2015-rave1

2015-bsqr1

In August I bought and sold a position in GM-B warrants. Despite my concern about the overall markets I thought the risk/reward warranted a position, but I shortly afterwards had a few ideas I liked better, so I sold. I lost around 5% on the GM-B warrants.

2015-gm1

Near the end of August I established a position in a new stock, NEWM, and in early September I bought an unnamed nano-cap stock. By mid September concern about overall markets caused me to want to pare back to my highest conviction ideas again so I sold both positions. I broke even on NEWM and lost 5% on the unnamed nano-cap.

2015-newm1

At the beginning of October I bought positions in BABA, BIDU, and HABT. Despite my concerns about overall market conditions, I felt the long term prospects of these companies were sound and their sell-offs were overdone. I sold all three positions a few weeks later for 10-20% gains.

2015-baba1

2015-bidu1

2015-habt2

The only stock I never sold was GTIM. In fact I added to it as I was selling my other positions. I added to GTIM in July, August, and November. GTIM is my only current position.

2015-gtim1

2015 was largely about managing the portfolio to weather growing concerns I had about overall market conditions while still trying to find ideas I felt had attractive risk/reward profiles. So I tried a few new positions while selling off others. Ultimately I could not gain enough conviction in those ideas and my market concerns caused me to concentrate in the only idea I did have strong conviction in – GTIM.

Overall I think I had the right idea, but my execution was slightly off. I feel if I had I executed slightly better it would have made a significant impact on my performance for the year. I feel good about closing out the positions I entered the year with when I did. YELP, AA, SFM, and HABT were all significantly lower after I sold them. Likewise I was happy closing out most of my new ideas when I did. In some cases the fundamental stories had deteriorated or were not as strong as I originally thought, and in other cases they were not the types of holdings I wanted going into what I thought would be worsening market conditions. All the positions I sold saved me from significant losses.

GTIM, the one position I held on to, was the major negative contributor to my performance for the year. I maintained my GTIM position, and even added to it, because I felt the long term risk/reward was very attractive. Even at $10, I thought GTIM could still be a 5-10 bagger in the long run, and the downside risk was limited to perhaps 50% at worst. Although I was prepared for GTIM to decline 50%, I wasn’t really expecting it to drop that far, which is partially why I did not sell any at $10. Attempting to avoid a potential 20% decline did not seem worth taking the tax hit. And when GTIM did fall 20% from its high, I only saw downside risk of about another 20%, not an additional 50%. So selling again did not seem worth it for tax reasons. Instead I decided to start adding to my position, as the long term risk/reward had only gotten better.  I saw the worsening technicals but thought fundamentals would win out. If I had it to do over, I would have paid more heed to the technicals. I probably still would have started adding too early, but I would have added more shares around the $4 level when GTIM had started to base.

Besides making my average cost on GTIM more attractive, another benefit would have been having more cash available for the few trades I did have strong conviction – my purchases of BABA, BIDU and HABT in October. Not only could I have made those positions larger, but with larger positions I might have held at least a portion of them longer into their rallies, both of which would have significantly improved my performance for the year.

As it stands, I was down 34% for 2015, compared to the S&P 500 which was down about 2%. The main lesson I take from 2015 is respecting technicals, no matter my level of fundamental conviction in an idea. Had I done that my performance for the year would have been much closer to the S&P 500, and my upside would be that much greater.

As I stated at the beginning of this post, I feel as good about the risk/reward of my portfolio as I ever have, and am comfortable holding just GTIM going into 2016. I will review my current thinking on GTIM and what else I have on my radar in another post.

Sold Sprouts

I sold my entire SFM position today at the open.  Although SFM was the smallest of my three remaining holdings, I did have strong conviction in it and thought it was a position I would be holding for many years.  So I would like to go a little more in depth into why I decided to sell.

To show why I sold, I first have to recap why I bought SFM and why I had strong conviction in it.  I believe that the move towards natural and organic foods is a strong trend which will continue for a long time. I felt that there was room for a grocer focused specifically on that niche, and I thought Sprouts was ideally positioned with its focus on value pricing and its smaller store format. I felt that a grocer that provided value yet still felt like a specialty retailer would be a winning concept. I thought smaller stores had several benefits. 1) Consumers seem to be turning away from superstore formats, 2) smaller stores have more flexibility in location selection, and 3) smaller stores are cheaper to build, lease, and operate.

I felt that Whole Foods (WFM) had limited appeal due to its expensive prices and its large store format was not flexible.  Other smaller publicly traded grocers focused on natural and organic like The Fresh Market (TFM) didn’t seem to be gaining traction. I wasn’t too concerned about the likes of Walmart and Target getting into selling natural and organic foods because I didn’t think they would garner much mind share in that space. I thought Kroger (KR) was doing a decent job offering more natural and organic selection, but again I thought that their bigger stores and lack of focus wasn’t as attractive. Actually my favorite in the space would be Trader Joe’s, but they are not public.

So, I thought SFM was the most attractive publicly traded option. I felt they had the best format. They had massive room to grow.  At the time I initiated my position they had around 150 stores and projected they could ultimately grow to around 1200 stores.  They also had the best comps, with same store sales comps at or above 10%, roughly double WFM and TFM.

The biggest downside I saw in SFM was the valuation.  It was on the high side based on both trailing and forward earnings.  However SFM had consistently been exceeding their guidance, which I felt was overly conservative.  In past years they were guiding to 8-9% and 7-8% same store sales comps and were delivering 10-13% instead.  They would guide to 25% EPS growth at the beginning of the year and end up delivering 50% EPS growth.  So at the price I was building my position (around $30), even though that was 40x forward earnings, I felt SFM would continue to exceed guidance and quickly grow into its valuation.

If SFM continued to deliver on its 14% annual store growth plan, and continued to deliver at least high single digit same store sales growth, then the resulting leverage in operating margins could drive sustained 30% EPS growth.  SFM would soon become a 30% grower trading at 30x earnings, which is very attractive if it can be sustained over the long term.

So what changed?  Several things.

1) SFM reported earnings yesterday and although they were only very slightly below guidance, the trends were worrying.  Same store sales growth was 4.8%. Although SFM had guided to only 5-6%, I was used to SFM exceeding same stores guidance by a couple points instead of falling short. 4.8% same store sales growth is about half what they had been delivering over the past couple years. It was also not impressive compared to the competition.  It was barely better than Whole Foods, and it was actually worse than Kroger. I didn’t find management’s explanations very satisfying either.

2) Whole Foods announced that they will be launching a new chain of smaller stores focused on value. While I think this confirms Sprouts’ model, it will also be a direct competitor to Sprouts. It will be a direct competitor for locations and a direct competitor for mind share. If Sprouts growth is already slowing, how much worse will it be with this new competition?

3) Consumer Reports annual supermarket survey for 2015 was recently released, and Sprouts slipped in the rankings. Sprouts got a score of 83 compared to 84 last year. The difference was small, but in the wrong direction. And other supermarkets increased their scores from last year, so Sprouts ended up slipping from around 4th last year to around 8th this year. Sprouts wasn’t even named as one of the stores scoring highest for fresh produce, supposedly its strength. Wegmans, The Fresh Market, and Whole Foods scored highest there.

4) Insiders, particularly the CEO, have been selling a lot of shares. I do not let insider sales deter me if I believe strongly in the fundamentals. But if I am conflicted about fundamentals, insider sales can tip me towards selling. The CEO has not only sold a lot of shares recently, the amount of sales has left him with a very small ownership position.

5) The valuation and risk/reward was looking less attractive. With declining same store sales growth and increased competition on the horizon, the probability of sustained 30% EPS growth seemed less likely. Now the probability of only 20% sustained growth seemed more likely. At 30% EPS growth I thought SFM had only a couple dollars of downside risk while having the potential to become a 2 or 3 bagger.  At 20% EPS growth I think SFM could trade down to $17 (20x 2015 EPS of $.85) while upside potential is much reduced. So the risk/reward profile is far less attractive now than I had thought before.

6) At around $28 where SFM opened this morning, it was in the region of 5-10% down from my average cost basis. I do not have any hard and fast rules about cutting my losses at a fixed percentage, but I do have some ‘mental stops’ where I will heavily scrutinize whether my reasons for owning a stock are still valid. I tend to give more leeway to the ideas I have stronger fundamental conviction on, but I do have respect for the market’s judgement. Cutting my losses quickly saved me quite a bit on past positions such as Zulily and Yelp. If I felt the fundamentals and valuation were still strong on Sprouts I would have held my position or added more. However the worsened fundamentals and valuation in this case caused me to go with the decision to cut my losses while they were still small.

So all the above reasons contributed to my deciding to sell. Obviously I would have been better off selling a couple months ago when SFM was at $38. However it wasn’t until recently, in particular SFM’s earnings report, that the preponderance of the evidence convinced me it was time to sell. Prior to that I tended to think that SFM was simply trading down along with WFM and the sector, and that was actually presenting an attractive buying opportunity in SFM. Fortunately I decided to wait until after Sprouts earnings before doing anything.

2014 Year in Review

I started 2014 with holdings in  several bank warrants (BAC-WS-B, STI-WS-B, ASBCW, VLYWW), old school tech stocks (IBM, INTC, CSCO), a Chinese online game publisher (KONG), and a couple of Vanguard ETFs (VXF and VXUS). By the end of 2014 my portfolio was completely turned over with none of those holdings remaining.

My first move of 2014 was to go long Alcoa in mid January. I added some more AA afterwards but the bulk of my holdings were bought in this first purchase. I thought AA would be a good balance to the rest of my portfolio and could become a core holding.  Thus far it is proving to be.

In February I began initiating small positions in several small to mid-cap growth stocks (SFM, YELP and BNNY). My intent was to average into the stocks I grew most confident in over time. I also bought some calls on KongZhong, expecting the stock would benefit from the release of Guild Wars 2 in China.

Near the end of February I sold my large cap tech stocks (IBM, INTC, and CSCO), to raise cash. I was pretty much break even on all three. I added Zillow (Z) to my collection of mid-cap growth stocks.

IBM

INTC

CSCO

In March I sold two of my bank warrants (BAC-WS-B and VLYWW). I just broke even on both. I wanted to raise more cash and position my portfolio more conservatively.

BAC-WS-B

VLYWW

Near the end of March I added a couple more high growth mid-cap stocks to my holdings with DATA and FEYE.

Near the end of April I bought a couple large cap growth stocks – AMZN and CMG.

By early May growth stocks had been beaten down so low that I thought it best to focus on my best ideas in that space and significantly accelerate my averaging into those names. So I sold BNNY, FEYE, AMZN, and CMG. I was down varying percentages on them when I sold, but they had not become meaningful portions of my portfolio so it was not really material to my overall return for the year. I also sold my KongZhong shares and calls. Those were more meaningful positions, and I made around 10% on both the shares and calls. I used the cash I raised to buy a lot more of the stocks I thought were my best ideas – SFM, DATA, YELP, and Z.

BNNY

FEYE

AMZN

CMG

KONG

In the second half of May I added some large cap growth stocks back to my portfolio, buying back AMZN, and adding BIDU, LNKD, and also VIPS.

In early June I decided to dedicate a portion of my portfolio to buying stocks with insider buying. I added DKS, TFM, and MTDR.

In the first half of July I made several more moves. I sold my remaining bank warrants (STI-WS-B and ASBCW). Those were big positions which I made 50% on each. I also sold my insider buying stocks (DKS, TFM, and MTDR) because I wanted to increase my focus even more. I was near break even on all three and again none of them were big enough positions to make a difference to my overall returns. In July I also added yet two more high growth stocks to my portfolio (ZU and TWTR).

STI-WS-B

ASBCW

DKS

TFM

MTDR

At the end of July I sold Z. I had intended Z to be a long term holding but it ran up so fast I decided to sell. I ended up catching the top almost exactly, locking in big gains and avoiding giving them back.

Z

To start August I added another growth stock, SGEN.

In early August I also started building a position in a micro-cap stock, GTIM, which I continue to hold.

In the second half of August I unloaded most of my growth stocks. I sold AMZN, TWTR, LNKD, BIDU, VIPS, YELP, and SGEN. Like Z I had intended them to be longer term holdings but they ran up so much in so short a period of time that I couldn’t resist locking in profits. I made between 10% and 50% on these trades, with most of them between 30% and 50%. At the same time I added to my SFM, DATA, ZU and GTIM positions, and established a new position in AWCMY.

AMZN2

TWTR

LNKD

BIDU

VIPS

YELP

SGEN

In mid September I sold DATA, same story of too fast a move up as my other growth stocks I sold.

I didn’t make many moves after that until November, when I sold AWCMY, after deciding the falling Australian dollar was too strong a headwind to battle. I was near break even on this trade. I also added a little to some of my existing positions.

AWCMY

Towards the end of November I bought some shares in The Habit, a new IPO. I had an order in on the IPO day but the stock opened above it so it was not filled. However when the stock came down several days later I began building a position.

Near the end of November I sold ZU, taking a small loss but deciding to focus on my very best ideas.

In December I bought a little Lending Club (LC) and an unnamed micro-cap stock, both of which I sold a week later. Neither was meaningful to my returns. And near the very end of the year I went long YELP again.

I also sold VXF and VXUS in stages throughout the year. I had intended for them to be a core and growing part of my portfolio over time, but as I found more opportunities I liked in specific stocks I sold off these two ETFs. I made a small percentage on both of them but they weren’t significant to my overall returns.

2014 was a year with a lot of turnover in my portfolio. I could have timed some of my entries and exits slightly better, but overall I am happy with all the moves I made. I think it was the right decision to exit all the positions I started the year with in favor of the new opportunities throughout the year. Overall I think I did a good job of buying when I thought the risk/reward was favorable and selling when it had become much less so.  And I think I am positioned well at year end with all the positions I am holding going into 2015 having favorable risk/reward profiles. AA and GTIM are both around 25% of my portfolio, SFM and HABT are both around 15%, YELP is around 7.5%, and I have around 12.5% in cash.

AA

SFM

GTIM

HABT

YELP2

In my past year in review posts I ended with some statistics about my trades. This year I went ahead and calculated my returns for this and prior years.  I have a few accounts in which I do my investing, some retirement and some taxable, and I had to account for contributions and withdrawals, so it took awhile to accurately figure out.

I calculated that my return in 2014 was roughly 44%. Here are my returns since I started this blog, and a comparison to the S&P 500 with dividends reinvested.

Year / TSAnalysis / S&P 500 / delta

2011 / +171% / +2% / +169 points

2012 / +22% / +16% / +6 points

2013 / +63% / +32% / +31 points

2014 / +44% / +14% / +30 points

In 2011 I had the majority of my portfolio in a stock which I got a triple on in a couple of months (COOL), which was the main driver behind my phenomenal return that year.

In 2012 I again had a trade which I got a triple on (warrants on UBSFY), however it was not as large a portion of my portfolio this time. I had a major position (KONG) I held for 7 months which I ended up just breaking even on. Still, I ended up beating the S&P 500 return by 6 points so I can’t complain.

In 2013 I had quite a bit of turnover, much of which didn’t contribute to my returns. However I had another significant position which I ended up getting a triple on (ROICW), which was the main driver of my strong return in 2013.

I am perhaps most proud of my performance in 2014. Unlike 2011 through 2013, most of my potential home-run plays in 2014 (such as my bank warrants, KONG options, and AWCMY) didn’t work out as well as planned yet I still managed to handily beat the S&P 500. My 2014 return was driven by strong gains in GTIM and AA, and well timed trades in several growth stocks.

My goal for the years ahead will remain to maximize after tax returns while minimizing risk. However I do not expect to continue to beat the S&P 500 by as much as I have the past four years, especially as I continue to increase my emphasis on after tax returns and minimizing risk.

Added some more HABT, sold ZU

I decided to accelerate the building of my HABT position slightly because it seemed to me that $30 was pretty strong support. So I bought a little more HABT today, bringing me to about half of my full target position.

At the same time I wanted to maintain a fairly healthy amount of cash so I decided to sell ZU. It was really the only thing I could sell. I consider AA a core holding for the next 10 years, and a necessary balance to all my consumer stocks. I also think SFM and HABT could be core long term holdings as they expand across the country. GTIM might not end up being a core holding, but I think it is in the very early phase of rapid growth so I want to hold on to it here.

I think ZU will do well over the next year or two, but after that I was less certain about its longer term growth than my other holdings.

Portfolio Update

I haven’t posted in awhile because I hadn’t made any changes to my portfolio. I have been pretty happy with my current holdings but I did make a few moves recently.

I bought a little more ZU after the stock went down after they reported earnings. I bought a little more SFM after it dropped again on the latest share sale by Apollo. I  bought a little more GTIM. I also wanted to raise cash because I was hoping to buy some shares in The Habit (HABT) which had its IPO yesterday (more on that in a bit).

So, I decided to sell AWCMY. I ended up right around break even on the trade. The shares of Alumina which trade on the Australian exchange (AWC) actually went up a fair amount since I bought. However the Australian dollar dropped quite a bit against the US dollar, so the Nasdaq listed shares which I bought (AWCMY) were negatively affected and I ended up around break even. I really have no idea where the Australian dollar is going versus the US dollar going forward, but the trend has been down. I felt the currency exchange factor was adding a layer of complexity which I preferred not to have to deal with.

As I mentioned I had hoped to buy some shares of The Habit. I think The Habit will do well over the long run, and has much better prospects than other restaurant IPOs of the past few years (such as LOCO, ZOES, NDLS, PBPB). I had limit orders in as high as $27, but the stock opened at $30 and has not looked back. At current prices I think the stock has gotten ahead of itself, so I did not end up buying any shares.

So, that actually left me back up at around 20% cash. I am in no hurry to deploy it as I think the markets are kind of high now and I like having some cash ready to deploy if opportunities present themselves.

Portfolio Update

I made a lot of moves this week. I bought some more SFM, DATA, and ZU. I also bought more of the micro-cap stock I mentioned in the previous post and I started a new position in Alumina Limited. I sold AMZN, TWTR, LNKD, BIDU, VIPS, YELP, and SGEN. I know that is a lot of changes and must seem like a drastic departure from the long term strategy I have outlined many times in the past year. So let me explain my reasoning.

I bought more SFM when it dropped below $30 on the share offering by Apollo and some other shareholders. Like I mentioned before, anytime SFM drops below $30 it is almost like an automatic buy for me.

I also bought some more DATA and ZU. Like SFM, both DATA and ZU are about a year past their IPOs and are trading near 52 week, post-IPO lows. That made them attractive to me here given their strong growth. Incidentally, research I have read has said that around a year after an IPO is often the best time to buy into new issues.

I accumulated more shares of the micro-cap stock but I still have more to go so I won’t be writing about it just yet.

Lastly I started a position in Alumina Limited (ticker AWC on the Australian stock exchange, AWCMY for the ADRs on the Nasdaq OTC, which is what I bought). Alumina is basically a pure play on Alcoa’s upstream businesses (bauxite mining and alumina refining). Alumina’s sole interest is a 40% stake in AWAC (Alcoa World Alumina and Chemicals). Alcoa owns the other 60%.

While I like Alcoa for its transformation into more of a light metals value added component supplier to the aerospace and automotive industries, I also think that the mining and refining businesses are due for a rebound and AWCMY provides a more leveraged play on that.

I not only depleted my cash on all those buys I also went a little bit on margin. So I had to do some selling. The first stock I sold was AMZN. AMZN was my largest market cap holding and the one I probably expected the lowest return from, so I always knew it would be the first to go if I found better opportunities.

But what about the other stocks I sold? In the case of TWTR, LNKD, BIDU, VIPS, YELP and SGEN I felt that perhaps they had simply moved up too far too fast, particularly the larger cap names. I accumulated the bulk of my positions in those stocks near their May lows. Since then they have gone up between 20% and 50% in two or three months. That is 100% to 200% annualized returns.

I asked myself, what if I didn’t sell any of them and just held them for around 10 years? What sort of gain would I expect? Google has been in the news recently because of the 10 year anniversary of its IPO, and over 10x increase since then. Could my stocks become 10 baggers in 10 years like Google, I wondered? That seemed unlikely because of the already larger market caps of most of them. BIDU would be a $700 billion market cap company. TWTR and LNKD would have $270 billion market caps. YELP and SGEN would have market caps of over $50 billion. As much as I like TWTR and LNKD, I don’t think they are the next Google, and as much as I like YELP I don’t think it is the next Priceline. A 5 bagger in 10 years seemed like a more reasonable expectation.

So then I worked backwards, calculating what annual return was required for a 5 bagger in 10 years. It is 17.5%, compounded. A 10 bagger would require a 26% annual return compounded over 10 years. The 100-200% annualized return I had gotten in the stocks I sold was just so far beyond that that it tipped me over to deciding to sell, even taking taxes into consideration. Also, some of my holdings are in retirement accounts so holding period was not a consideration there.

Another way I looked at it was, how many 50% gains would be needed to result in a 5 bagger? The answer is four. A 50% gain, compounded four times, would result in a 5 bagger. 6 times would result in a 10 bagger. Say I could make two 50% trades a year (it wouldn’t necessarily have to be in the same stock). In two years I would have a 5 bagger. That seemed far better than what I could expect from a strict buy and hold strategy.

Now if I didn’t see any opportunities for more 50% trades then perhaps I might have decided that sticking to a buy and hold strategy was preferable. However there were several opportunities in names I was already familiar with, like SFM, DATA, ZU, AWCMY, and the microcap as I already mentioned. So I would say that it was the combination of those opportunities I wanted to take advantage of along with the rapid gains in some of my existing holdings which made me decide on the course of action I did.

I ended up making about 10% on AMZN, 20% on SGEN, 30% on TWTR and VIPS, 40% on BIDU, and 50% on LNKD and YELP.  After all of my activity I am about 90% invested and 10% cash. However I like the risk/reward of my overall portfolio more now with the changes I made.

A little more on portfolio management

I remarked in my last post how I was down to around 5% cash. I wanted to explain a little further why I was comfortable with that, despite the fact that I seem to be seeing more warnings recently of a possible correction.

Usually I keep a cash buffer of around 10%-20%. It had even reached closer to 30% after I sold Zillow. I like to have that cash buffer so that I am never in a position where I am forced to sell and I can take advantage when opportunities arise. So 5% is pretty low for me. However a couple things made me comfortable with it. 

Foremost, I feel that there is not too much risk in most of my positions. In what would be considered the riskiest portion of my portfolio, my smaller growth stocks, most of those are already down, or were as recently as a few months ago, 30%, 40%, 50% or more. Even most of my larger growth stocks are or were down 20-30%. All of those companies are leaders in their field or niche. All are still growing strongly, increasing sales and cash flow, if not yet GAAP earnings. So while there is always some downside risk, it seems unlikely to me that these stocks would break below their lows of a couple months ago. Likewise I feel that there is limited downside risk in my largest position, Alcoa.

Secondly, nearly 40% of my portfolio is in stocks that I am about as confident as can be will be much higher 10 years from now, AA and SFM. So I wouldn’t mind holding them through corrections.

So while I monitor macro economic conditions, all my stock decisions are based on company/stock specific fundamentals. When I felt the risk/reward on stocks in my portfolio got out of balance I reduced or sold them, as I did with Zillow. I feel good about the risk/reward profile of every stock in my portfolio currently, so thus I am comfortable with my overall portfolio positioning.

I remain convinced that holding smaller cap companies with strong growth for many years is the best strategy for maximizing long term after tax returns, so that will always be a significant portion of my portfolio. I feel confident that the stocks I hold for this purpose are continuing to report results which confirm my thesis on them. I also feel that they are attractively valued at current levels.

Now as much as I like growth stocks it wouldn’t be prudent to be 100% in just growth. I needed something to counter balance the secular growth portion of my portfolio. That something would be sensitive to macro economic conditions. Perhaps it would be materials or industrials related. However I still wanted this counter balance to have as much potential for price appreciation as possible.

I feel I found an ideal stock for this purpose in Alcoa. Alcoa combined what I felt was a compelling commodity rebound with a turn-around/transformation play, both of which I felt had the potential to play out for multiple years. Both of those situations can produce significant price appreciation so I felt I found a counter balance with nearly as much growth potential as my secular growth stocks. I felt AA’s situation was so compelling that I decided it was the only stock I needed for this purpose. Every time I considered another commodity play or industrial stock or macro sensitive stock, I decided that it wasn’t more attractive to me than Alcoa.

So that is about it. I have arranged my portfolio so it has a balance of secular growth and a counter balance to that. I monitor my positions to make sure my thesis on them continues as expected. I make adjustments to individual positions when I feel their story is no longer as I expect or their risk/reward profiles have become unattractive. As long as I continue to find individual situations I find attractive I do not mind going to low levels of cash. Likewise if I could not find any situations I found attractive I would not mind holding a very high level of cash.

Bought SGEN and a couple other moves

I have wanted to add a small/mid cap biotech to my portfolio for awhile and in particular I have had Seattle Genetics (SGEN) on my radar. I am far from knowledgeable in the biotech space, and I consider having just one small/mid cap biotech rather risky. So I liked SGEN because besides appearing to me to be a leader with their next generation ADC cancer therapy technology, they have growing commercial sales already, a strong balance sheet, a robust pipeline, and agreements with major drug companies. And although I place more importance on insider buying by executives, it is nice to see that well known biotech hedge fund, Baker Bros, has been accumulating more SGEN recently and it is their top holding.

SGEN is about 33% off of its high and reported good results and outlook yesterday yet the stock didn’t move much this morning. So I thought this was an attractive entry point for me finally into SGEN.

I also bought a little more ZU today, to bring it up to the same proportion of my portfolio as my other small cap growth stocks.

In addition I bought more SFM today. The SFM shares I bought today were mostly for a trade. In addition to the overall down market I think SFM was down today because of Whole Foods disappointing results yesterday. However I think SFM is taking share from WFM and so shouldn’t have traded down on WFM’s results. I thought this provided a good trade opportunity ahead of SFM’s earnings next week.

In addition to Alcoa, Sprouts is one of the stocks in my portfolio I have the most conviction will be a strong grower for the next 10 years. SFM is just a little expensive however so I felt it may take a year or so for it to grow into its valuation before it starts to take off, which is why I haven’t made it a bigger part of my portfolio yet. I didn’t think I’d get another opportunity to buy SFM under $30 however, so I decided to pull the trigger on some more shares today. If SFM doesn’t gain on earnings like I expect, I wouldn’t mind holding onto the shares I bought today for the long term.

With my most recent moves I am down to about 5% cash. Although I had been raising cash to adopt a slightly more conservative positioning, I didn’t see a lot of risk in the moves I made today. Anytime I can buy SFM under $30 is just too attractive an opportunity for the long run for me to pass up. I don’t think there is more than a couple dollars of downside to SFM from these levels. Similarly SGEN and ZU appeared to have minimal downside risk at these levels.

So I am comfortable with having a smaller cash buffer than normal despite the broader averages looking perhaps a bit toppy still even after the pullback of the past week.

Mid Year Review Part II

In this second part of my mid year review I am going to review the stocks I am holding going into the second half – both the new positions I opened in 2014 as well as the positions I carried into 2014 which I have held on to.

I feel good about my portfolio makeup at this point and think that I will be holding on to most of these positions for the long term. My overriding goal remains maximizing gains after taxes. That means an increased focus on positions which I think will be good multi-year holdings. If I come across any shorter term trades which appear too good to pass up, I will make those in tax deferred/tax free accounts.

I’ll start with the positions I carried into 2014 which I am still holding. First off are the two ETFs I am long, VXF and VXUS. Together these currently account for around 5% of my portfolio. My long term goal is to have these two ETFs account for around 50% of my portfolio, but for now I am finding too many attractive opportunities in individual stocks to add to these. However over time I do expect to grow these two ETFs as a percentage of my overall portfolio.

Next are STI-WS-B and ASBCW, the two bank warrants which are the only other positions I started 2014 with which I am still holding. Together they account for roughly 12% of my portfolio. I once held warrants on more bank stocks, but over time I sold them off until only these two remained.  I think these warrants have the best chances of making big moves. I feel my original thesis on the bank warrants may finally be close to playing out with the macro picture continuing to improve and the end of the taper and the beginning of rate increases now within sight. If the underlying stocks make moves of around 25% higher that would be enough for the warrants to double just from their intrinsic value since they are only slightly out of the money. However I am watching these positions closely because if the underlying stocks were to trade sideways (or up or down slightly) for a long period of time that could result in the warrants steadily losing value (both from the loss of time value as well as the decreased volatility). I would like to be completely out of these positions well before two years prior to when they expire. Time value could really start to decline rapidly at that point, and one never knows what a given stock may do over a one or two year period, so I feel holding these warrants with less than two years to expiration is very risky. Right now I am up slightly on both STI-WS-B and ASBCW, and they have just about reached the one year holding period, qualifying for long term capital gains. My plan is to average out over the course of the next twelve months or so.

Now on to the new positions I added in 2014, the largest of which is AA. Alcoa is also my single largest position at around 24% of my portfolio. I have a high level of conviction that AA will be a great multi-year holding. I think that the adoption of full Aluminum body vehicles is a huge trend which will play out for a decade and which Alcoa will be a prime beneficiary of. Alcoa is moving more towards its value added businesses and away from its commodity businesses. But even there I think things are improving with Alcoa moving down the cost curve in its smelting operations and global supply/demand finally coming into balance. So I think Alcoa is both a cyclical play as well as a turnaround/transformation play. I feel AA also balances the rest of my portfolio which is heavy on tech and consumer names. For all those reasons I am comfortable making AA my single largest position, a core holding.

Next are four stocks I group together as my small/mid cap high growth stocks – DATA, SFM, YELP and Z. Each is about 7% of my portfolio. Each of these stocks has around a $4-$5 billion market cap, and I think all of them are leaders in their niche and have many years of strong growth ahead. My cost basis on these four names is close to their May lows and I think they will make great long term holdings. For each I just wanted to mention a few points which I felt demonstrates their leadership positions.

DATA – Of all the smallish market cap big data stocks I looked at, Tableau seemed the best, in terms of growth, profitability and balance sheet. Tableau was named a leader in Gartner’s most recent Magic Quadrant for Business Intelligence and Analytics Platforms report. I think Tableau’s product has a large, diverse addressable market which can fuel growth for years to come.

SFM – I think Sprouts Farmers Market is the best play in the healthy/organic food space. Sprouts recently ranked among the top supermarkets in Consumer Reports Ratings. Sprouts’ publicly traded peers such as Whole Foods and The Fresh Market did not fare as well. Sprouts’ same store sales have been coming in much stronger than its peers as well, nearly 13% in the most recent quarter compared to 5% for Whole Foods and 2.5% for The Fresh Market. Compared to Whole Foods, Sprouts has cheaper prices and I feel a better, less intimidating layout both of which give it wider appeal. Sprouts only has around 170 stores still, with potential for around 1,200 according to their projections. And in contrast to The Fresh Market, Sprouts has been successful in expanding into new markets whereas The Fresh Market is retreating from some of the new markets it expanded into.

YELP – To me Yelp is the modern day equivalent of the yellow pages and the clear leader in local search. Additionally I love the moat provided by their user generated content and scale. I think a key trend is specialized apps gaining market share in mobile search. eMarketer recently singled out Yelp as one of the players emerging from the pack in mobile search. I also think Yelp has many avenues for potential expansion. For example I think Yelp could more easily move into OpenTable or GrubHub’s businesses than they could move into Yelp’s.

Z – Zillow is the clear leader among real estate sites. I like Zillow’s business model with the agent subscriptions and that they are not dependent on just advertising. Z appears to be pulling away from the competition with more than double the traffic of the number two player Trulia, according to recent comScore data.

Next are four stocks I group together as my large cap growth stocks – AMZN, LNKD, BIDU and VIPS. Each of these is about 4% of my portfolio. And while they are larger cap I think they have many years of strong growth ahead.

AMZN – Amazon has the largest market cap of all my holdings. Despite being a $150 billion market cap company I think it is still early days for Amazon’s growth story. E-Commerce still has plenty of room to grow. And I think Amazon Web Services, Prime streaming video, Amazon Fresh, Amazon Pantry, Amazon Supply are all exciting opportunities. I also think Amazon has an interesting search angle with all of its data on customers shopping history. Top it all off with the leadership of Bezos, Amazon’s customer satisfaction ratings, and Amazon’s wide moat, and I think AMZN makes a great long term holding. The stock’s pullback to $300 gave me the opportunity I wanted to go long.

LNKD – LinkedIn has an enviable moat as the leading social network for professionals. And again I like that it has diversified revenue streams and is not dependent solely on advertising. LNKD’s company and CEO ratings on Glassdoor are superb. I bought most of my position around the May lows of around $150.

BIDU – I wanted some exposure to the China internet space and Baidu was a natural choice. BIDU has shown in its recent results that it is handling the transition to mobile successfully. With a dominant position, strong multi-year growth potential and a reasonable valuation, I thought BIDU was a great choice for a long term Chinese holding.

VIPS – I wanted a little exposure to another mega Chinese growth trend – e-commerce. VIPS has unbelievable growth and is profitable. I thought that VIPS had an interesting model combining flash sales and discount outlets.

Lastly are my most recent additions, my insider buying stocks – DKS, TFM and MTDR. Each of these is around 1.5% of my portfolio.  I also have around 10% cash currently.

One thing I had worried about was with my move away from having only a few concentrated positions, was I ‘diworsifying’ my portfolio down to where I would end up with index like performance? I do not think that is the case. My portfolio is still pretty focused with only around a dozen core positions, each of them a ‘best idea’ for me. I didn’t add any of them simply for the sake of diversification (not counting my two ETFs). Furthermore I feel all of them have significant upside potential. AA is a cyclical/turnaround play which can typically make explosive moves on the upswing. STI-WS-B and ASBCW have multi-bagger potential. DATA, SFM, YELP and Z are young growth companies. AMZN, LNKD, BIDU and VIPS are larger companies but still with plenty of growth ahead. My insider buying stocks and cash are aimed at targets of opportunity.

Overall I am up only slightly so far in 2014, but I feel all the changes I have made position my portfolio well for the long run.

Portfolio Changes

I made some changes to my portfolio this week.  The drop in small cap/momentum stocks has significantly improved their risk/reward profiles in my opinion.  With most of them already having reported Q1 earnings, I sorted through which ones I thought were really the best long term plays.

I settled on four which I felt most confident about – Sprouts Farmers Market (SFM), Tableau Software (DATA), Yelp (YELP), and Zillow (Z).  All four reported great earnings which validated my original investment thesis on them.  I think Sprouts will be a long term winner in organic foods – I think Whole Foods is still too expensive and the older traditional supermarkets and Walmart will have trouble gaining significant mindshare in organics.  I think Tableau has a nice niche and clear lead in data visualization which I think is a large market but not as crowded as some other software/cloud spaces.  And I think both Yelp and Zillow are increasing their leads in their respective spaces and both have long runways still and many avenues for expansion. I wanted to increase my exposure to those stocks while still maintaining the same or greater cash position I had.

So I sold Annie’s Homegrown (BNNY), Fireeye (FEYE), Amazon (AMZN), and Chipotle (CMG).  I also sold KongZhong (KONG) – both the shares and Sep $10 calls I had bought.  Annie’s hadn’t reported earnings yet, but I wasn’t as confident in their ability to successfully expand their product line and I thought Sprouts was a safer play on organic foods. Fireeye was a tough decision to sell.  It was down so much I felt there was little downside left, and I really felt the Mandiant acquisition was great.  In the end however I decided their product being so expensive might lead to a longer sales cycle giving competitors time to catch up. There was nothing really wrong in my mind with either AMZN or CMG, just being more mature and not having dropped as much recently, I felt they wouldn’t bounce back as much on the upside either.

As for KONG, my plan had always been to hold the shares until around GW2’s release and then sell for hopefully around $15, for around a 50% gain.  With the drop in the small cap/momentum stocks I mentioned I felt those now had more upside potential (around 50% in the short to medium term and even more in the longer term) and thus had more attractive risk/reward profiles. Now it may well turn out that when KONG reports earnings in a couple weeks the stock takes off, but I will be OK if that happens.

On the KONG calls, I could have had more than a double on them had I sold them when KONG reached $12 recently.  However at that time I felt that KONG would continue to steadily increase to $15 leading up to Guild War 2’s official launch.  That turned out not to be and I don’t like holding options with only a few months remaining until expiration so I decided to just sell them for a small profit.

I ended up losing about 40% on FEYE, losing 10% an BNNY, breaking even on AMZN and CMG, and gaining around 10% on both my KONG shares and options.

So I used some of the proceeds from those sales to increase my pace of averaging into DATA, SFM, YELP, and Z. I suppose that kind of defeats the purpose of dollar cost averaging, but I really felt that current levels for those stocks were quite attractive here.  I also bought a little more Alcoa (AA).  I also saved a lot of cash, bringing my cash position up to around 35%.  I will continue to average into my small cap holdings over several months, perhaps until the end of this year, and will also continue to maintain some cash for any other opportunities which may arise.