For me, every year in the market seems to pass faster than the previous, although each year is always full of surprising opportunities and memorable experiences.
The S&P 500 has declined by 20.04% this year as of December 22st (the time of writing). That marks a drastic change compared to last year’s uptick of 26.89%.
The bulls will argue that the S&P 500 is still up 19% since 2020. Could we still see a repeat of the Roaring 20s? Your guess is as good as mine.
Meanwhile, rising rates, paired with your favorite side-course, inflation, have soured consumer sentiment across the board. What’s more, housing prices are still near all-time highs, making affordability scarce for the average consumer and sparking fears of a housing crash in 2023.
On a similar note, Wall Street analysts are coming in with low expectations for the new year. However, investors should take their predictions with a grain of salt, as their average price target for 2022 was $5,225 based on single-stock/bottom-up price targets:
Veteran fund manager Stanley Druckenmiller certainly leans bearish. He expects a hard landing in 2023 and stated in September:
I will be stunned if we don’t have recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so called average garden variety.
At the same time, he also holds the Fed at fault:
When you make a mistake, you got to admit you’re wrong and move on that nine or 10 months, that they just sat there and bought $120 billion in bonds. I think the repercussions of that are going to be with us for a long, long time.
BUT…
When you cancel out all of the bearish distractions and doomsday callers, take a deep breath, and really take a look at the market…it’s apparent that many companies are trading at attractive valuations. If you’re a long-term investor, history shows that investing during a recession rewards patient investors:
Best Investment of 2022
CROX 0.00%↑: +55% return since first purchase in March
I began buying shares in March after noticing a discrepancy between Croc’s business health and its valuation. My first purchase was on March 14 at $67.05, while my last purchase was on June 17 at $47.28. Between those dates, I purchased CROX 12 times. In April, I published a piece detailing my thesis:
Here’s a quick breakdown:
Consistent record of buybacks. Shares outstanding have decreased by a CAGR of -2.54% since 2010. From 85.67M shares to 61.74M shares today.
Was trading at an EV/NTM EBITDA multiple of 5.5x in April while the industry average was 8.2x. Currently trades at an EV/NTM EBITDA multiple of 6.5x.
Industry-leading gross and FCF margins and high revenue growth. Management forecasts revenue of $6 billion by 2026.
In my opinion, the biggest risk is that Crocs is prone to becoming a fad. Still, the foam shoes have held strong since becoming viral in 2006.
CROX is currently my third largest position with a 9.4% portfolio allocation.
Worst Investment of 2022
ROKU 0.00%↑: 82% loss YTD
It’s been an absolute disaster of a year for the once high-flying Roku. The dominoes started to tumble earlier this year when investors realized that the supply chain holdup was more serious than initially expected. As a company that penetrates the streaming industry with hardware products, Roku was especially prone to this issue.
Supply chain inefficiencies, paired with a seemingly unambitious management team in terms of making lucrative deals and taking strides in innovation, have weighed heavily on the price of Roku.
Let’s not forget rising inflation and a hesitant consumer that may elect to push back big purchases, such as TVs. Putting all of these factors together rationally creates pressure and doubt for the company.
With Roku, I can admit that my original thesis of increasing monetization through the success of a global streaming platform has not materialized at all.
Personal Portfolio as of December 2022
First, let’s take a look at my portfolio from the beginning of the year:
Continued:
CRM 0.00%↑: 3.1%
TWLO 0.00%↑: 3.0%
AAPL 0.00%↑: 2.8%
PYPL 0.00%↑: 2.6%
Rest of Portfolio: 11.1% (in order) - U 0.00%↑, CPNG 0.00%↑, BABA 0.00%↑ , ESTC 0.00%↑ , $ADYEY, UBER 0.00%↑ , SNAP 0.00%↑ , ZM 0.00%↑ , AMD 0.00%↑ , & ZI 0.00%↑
25 total holdings.
Top 10 holdings accounted for 65.7% of portfolio.
Top 15 holdings accounted for 80.8% of portfolio.
8.1% cash position (labelled as SPAXX in the above chart).
SE 0.00%↑ dominated my portfolio in the early innings of 2022, although its allocation has now sank to 5.8%. Shares of the Southeast Asia company have declined by 77% YTD, and its once unstoppable three-headed dragon of Shopee (e-commerce), SeaMoney (payments), and Garena (gaming) has had its wings clipped. A lack of profitability, stiff competition in foreign countries, weak guidance, and declining gaming revenue are the main factors responsible for the decline.
What has holding SE from $350 to $50 taught me?
That buying and holding isn't necessary the best investment strategy. Buying and continually verifying your investment thesis works better. I got complacent.
Valuation matters. You could own shares of the best company in the world, but if you buy at a high valuation, all you’ll experience is losses.
Let’s take a look at my portfolio today:
Continued:
ZS 0.00%↑: 2.4%
SQ 0.00%↑: 2.2%
BABA 0.00%↑: 1.9%
Rest of Portfolio: 5% (in order) - CPNG 0.00%↑, CRM 0.00%↑, PYPL 0.00%↑, ROKU 0.00%↑, NET 0.00%↑, $ADYEY, TWLO 0.00%↑, ESTC 0.00%↑, GOOGL 0.00%↑, ZM 0.00%↑, SHOP 0.00%↑, SNAP 0.00%↑
27 total holdings.
Top 10 holdings accounts for 75.7% of portfolio.
Top 15 holdings accounts for 89.3% of portfolio.
<1% cash position.
Of the positions mentioned in my beginning of the year portfolio, I have completely sold out of Unity, ZoomInfo, and Uber.
Uber: Agree or not, I believe Uber is a luxury product and not a necessity for the average consumer.
With lower consumer sentiment, inflation, the risk of employees being legally labelled full-time employees by the Biden administration, and higher gas prices (earlier in the year when I made my decision to sell), it wasn’t a hard choice for me to click the sell button.
Unity: I am still hesitant about the metaverse, although Unity is still a top pick-and-shovel play for the industry. Generally, I’m not a fan of investing in pure gaming companies but I broke my rule because I wanted some exposure to the metaverse, along with my META 0.00%↑ position. That didn't turn out so well.
ZoomInfo: Recession = Less jobs = Less business for ZoomInfo. I sold out just prior to third quarter earnings, which revealed a billings miss and lowered FCF guidance.
Furthermore, my holdings in SNAP, ZM, ESTC, SHOP, and TWLO are all extremely small in that a collapse to $0 for all of them would have a minimal effect on my portfolio.
Performance as of December 2022
My portfolio has returned -29.89% as of Dec. 22, compared with the S&P 500’s return of -20.04% and the Nasdaq 100’s return of -33.61%. My portfolio takes on more of a tech emphasis than the S&P 500, which offers an explanation as to why my returns are more similar to the Nasdaq 100.
My portfolio ultimately has a theme based on 4 industries:
SaaS-based Cloud: The global SaaS market was valued at $165.9 billion in 2021 and is expected to grow at a CAGR of 11% from 2022 to 2028
E-commerce: The global e-commerce market was valued at $9.0 trillion in 2019 and is expected to grow at a CAGR of 14.7% from 2020 to 2027.
Semiconductors: The global semiconductor market was valued at $527.8 billion in 2021 and is expected to grow at a CAGR of 12.2% through 2029.
Cybersecurity: The global cybersecurity market was valued at $184.9 billion in 2021 and is expected to grow at a CAGR of 12% from 2022 to 2030.
*Market size and CAGR growth estimates courtesy of Grand View Research and Fortune Business Insights.
The health and growth potential of all 4 of these industries remains well-intact for the long term. I am extremely confident of my current holdings and portfolio allocation, despite the losses I’ve sustained this year. My most significant purchases this year that fall in these 4 industries include AMD, AMZN, CRWD, and DDOG.
I do continue to hold on to a few unprofitable companies, such as Sea Limited. Today, unprofitable companies are more scrutinized than ever in the face of high rates.
Based on the DCF model, future FCFs are discounted back to the present at a higher rate due to higher interest rates. That equates to a lower present value for companies across the board.
However, unprofitable companies are especially prone to higher rates and a more restrictive macroeconomic policy. That’s because the basis of their valuation lies in future FCFs, and it certainly doesn’t help to not have any. Higher rates also mean that borrowing capital becomes more expensive, further hindering profitability. This has caused investors to jump ship for companies with a track record of profits.
2023 - Full Steam Ahead
The easy fruit of the past two years has been harvested, and we are in a completely new economic regime. Gone are the zero-rate days where companies were valued based on revenue multiples and were free to borrow capital with little interest expense. Today, revenue growth has been replaced with a focus on profitability and FCF, and the generous hand of the Fed has been withdrawn.
That might not seem fair, and also abrupt, but that’s just how the market cycle works. Low rates signify easy money, while high rates present a much more difficult landscape.
It’s quite apparent that we are now in the difficult money stage. With patience and a steady hand, investors can emerge prepared to take on the inevitable and subsequent bull market.
Happy holidays, everyone :)
Newsletters coming soon: The Top Performing Hedge Funds of 2022 and Third Point - Dan Loeb.
Hedge Vision - Institutional Insights
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