October 2023 Portfolio Review
Total Return: +5.4% YTD (-3.8% vs S&P)
2023 Results:
2023 Monthly Allocations:
Key:
darker green: started during month
lighter green: added during month
yellow: trimmed during month
blue: bought and sold during month
red: position exits
positions >10% in bold
Past recaps:
December 2018 (the one that got things started)
December 2019 (contains links to all 2019 monthly reports)
December 2020 (contains links to all 2020 monthly reports)
December 2021 (contains links to all 2021 monthly reports)
December 2022 (contains links to all 2022 monthly reports)
Stock Comments:
This certainly isn’t the market environment I would have chosen leading into what will be some rapid-fire earnings reports for our portfolio over the next few weeks. Oh well. Buckle up.
AEHR 0.00%↑ – Aehr Test System released our portfolio’s first earnings update with its October 5 report. I thought it was a solid quarter in a vacuum, but the market didn’t seem to like the lack of full-year raise or management’s comments around the timing of customer testing turning into actual revenue. That sentiment only turned worse as the month progressed. Despite generally positive comments from chipmakers around demand for the SIC driving Aehr’s recent performance, the decision of some automakers to delay EV design and production has caused a broad sell off. This was only exacerbated by top customer OnSemi forecasting a softer outlook next quarter (though again, not necessarily in SIC).
Long-term I can’t see anything which seems off track, especially given microchips have always been cyclical. Shorter term, however, the flat guide and uncertainty on timing only increases pressure on the next three quarters to meet expectations. I made a small trim on a profitable block of older shares post-earnings but plan to leave the rest as is.
AXON 0.00%↑ – Axon’s big October news was the dismissal of an FTC antitrust complaint filed after its acquisition of body camera company Vievu in 2018. The market understandably liked the reduced antitrust risk, but I also view this as delayed validation of management’s original decision.
The company followed with an announcement it would be presenting new products at the International Association of Chiefs of Police conference in San Diego October 14-17. In conjunction with that event, Axon launched a national database tracking gun-related deaths between the police and public. While that topic might be an uncomfortable one, it does align with the company mission of “transforming public safety with technology.”
We’ll get our next major update when Axon reports November 7.
BILL 0.00%↑ – Usually quiet Bill provided a couple recent updates. First was being named a Power Partner in the financial products and serviced category of Inc. Magazine’s 2023 Power Partner Awards. The Power Partner program recognizes the best B2B providers for small and medium-sized businesses. Next, Bill announced new capabilities making it easier for customers to manage purchase orders.
While both announcements are nice, neither is likely to have a huge effect on Bill’s November 1 earnings. I trimmed this position quite a bit this month to help fund a new position in e.l.f. Beauty (detailed below). The fate of the rest of our shares likely relies on this quarter’s report.
CELH 0.00%↑ – Other than getting caught up in the same market moodiness as everything else, I saw no October updates on Celsius. One piece of positive indirect news was distribution partner PepsiCo’s strong report. PepsiCo management mentioned Celsius a couple times as both a driver of present growth and potential international expansion. Said PepsiCo’s CEO, “Celsius continues to grow. We've doubled the distribution and the presence in store of the brand in the last year or so, especially in the convenience channel, which is a key channel for energy consumption. That participation of CELSIUS in our drive makes our full system more efficient. It makes our salesmen more relevant in the store. It makes our cooler more a go-to cooler in the store, and those are all positive that eventually have a halo effect as well in the rest of our portfolio.” That’s sounds like a satisfied partner to me and seems like a feather in Celsius’s cap heading into its own upcoming report.
CRWD 0.00%↑ – CrowdStrike provided a few updates this month. First, it became the first independent cloud-native cybersecurity vendor to surpass $1B in software sales on Amazon’s AWS Marketplace. Next, it was named a Leader in The 2023 Forrester Wave Endpoint Security Report for Q4. CRWD attained the highest score in 15 of the 25 criteria and achieved the highest ranking of all vendors in the Current Offering category. Lastly, it was named a Cloud Security Leader in Frost & Sullivan’s report on cloud-native protection platforms.
If nothing else, these were nice marketing wins at the same time the cybersecurity sector saw added attention when MGM Resorts admitted to a huge breach which froze most of the company’s systems for roughly 10 days. I’m sure we’ll hear more during CRWD’s next report, which I’d anticipate in late November/early December.
DDOG 0.00%↑ – Other than presenting at a couple investor conferences in early September, Datadog hasn’t had much to say in either news or blog posts since its August customer event. Don’t worry though. We’ll likely get all we need to know about the current state of affairs when DDOG reports November 7. Hang on tight.
ELF – e.l.f. Beauty gets a new spot in our portfolio. First off, I readily admit this is just as much about ELF’s numbers as anything to do with its cosmetic products. Simply put, business has exploded in both growth and market share the past few quarters. Revenue the last six quarters (oldest to most recent) has grown 13%, 26%, 33%, 49%, 78%, and finally 76% YoY. That 76% is no small potatoes either given $216M in Q1 revenue.
Moving down the financials, that excellent top line growth is paired with impressive leverage and efficiency:
GAAP Operating Expenses as a % of Revenue: 42.5%
Adjusted Op Expenses as a % of Revenue: 39.0%
GAAP Gross Margin: 70.5%
Adjusted EBITDA: $74.3M (34% margin)
Operating Cash Flow: $23M (10.8% margin)
GAAP Net Income: $53.0M (24.5% margin)
Adjusted Net Income: $62.9M (29.1% margin)
Management put a cherry on top by raising its FY revenue guide from $720M all the way to $802M, suggesting confidence in what’s to come.
Digging a bit deeper, the catalyst for this recent performance seems to be a decision to turn the company’s main sales focus away from its own brick-and-mortar outlets to distribution deals and digital sales. Positioning itself as a higher-quality product at lower prices, e.l.f. now has a major online presence along with prominent shelf space at outlets like Ulta, Walmart, and Target. My anecdotal due diligence found a teenager, 20-something, 30-something, 50-something, and 60-something who all recognized the brand with positive things to say. Despite my obvious omission of 40-somethings in this painstaking analysis, I decided to call it a win.
At the end of the day, ELF is a repeat-business widget company expanding its market while earning 70% gross margins at a competitive price point. In my opinion, that’s a remarkable testament to the efficiency and leverage of its business model. While I’m guessing there’s a fad quality to cosmetics, I’m happy to take a chance on a company clearly firing on all cylinders. With a recent haircut taking the stock from $130+ to its current $92, this seems as good a time as any to grab a starter position. I figure if the world is suddenly going to stop wearing makeup, we’re gonna have bigger fish to fry anyway. Earnings November 1.
IOT 0.00%↑ – Samsara released a couple updates this month. First it was recognized as an "approved supplier" for public sector organizations in the UK. This obviously expands its list of potential customers in that space.
Next was an announcement the city of Houston, the fourth most populous city in the US, chose Samsara to digitize operations for its Public Works department. One of IOT’s competitive advantages is its ability to project an immediate ROI as part of its sales discussions. It is easy to see how this would have appeal to public sector customers, and it’s nice to see Samsara land what looks like a big win.
TMDX 0.00%↑ – I have seen nothing of note on TransMedics other than the continuation of what seems to be a sour market mood toward its recent airplane purchases. I’m expecting a pretty binary response when TMDX reports November 6. Either the numbers and comments will be strong enough to claw back part of this decline or the market will have been right all along. I’m content to wait for that piece of info before making any further decisions even as the psychological cushion of a large chunk of shares purchased in the $40’s has now completely evaporated. I understand the what’s and why’s of the move to logistics. From this point forward, it’s going to be all about execution.
TTD 0.00%↑ – Not much to report on our portfolio’s Old Faithful. I’d expect another business-as-usual report November 9.
ZS 0.00%↑ – Like CrowdStrike, Zscaler seemed to benefit from October’s MGM-induced bump to cybersecurity. While ZS didn’t address the MGM incident directly, it did issue a blog post after the attack with some specifics on the sensitive nature of customer data the gaming industry collects. It followed with an internal report noting a 400% increase in IoT and operational technology malware attacks over the last year.
Much like CRWD, there’s probably nothing wrong with a little extra customer attention on the ongoing need for the latest in cybersecurity. I’d expect Zscaler’s next report sometime around the start of December.
My current watch list…
…in rough order includes monday.com (MNDY), MongoDB (MDB), Super Micro Computer (SMCI), and Snowflake (SNOW).
And there you have it.
What’s to say? Not a very enjoyable month. It’s never much fun when your only real choices seem to be swapping blood red for a lighter shade during an overall market flush. I’ve never really found much success with that strategy so decided to stay the course.
The good news is over half our portfolio will report over the next few weeks. I’d anticipate those updates dictating what if any changes need to be made. Stay tuned.
Thanks for reading, have a great November, and don’t eat too much of that leftover candy.