Things can be simplified into frameworks. Investing is no different.
Sins of Omission
While the S&P returned in excess of 20% this year and Nasdaq above 30%, there were some standout performers that were on my radar but I did not pull the trigger - omission. These names are (w YTD% returns)
1. Palantir +380%
2. Spotify +146%
3. Bitcoin +133%
One may ask why didn’t I hop on some of these bandwagons if I were monitoring them, I have a few reasons including but not limited to the following - I) Inability to understand the business model (palantir), II) Not tracking the changing environment where the cash flows have turned positive, III) Not willing to partake in speculative assets (crypto) though that narrative has since changed as bitcoin became digital gold (and an arguably better store of wealth) in the institutional mind. And IV) Simply limited capital as my positions have largely been laid out or well deployed since 2021, taking on new positions would necessitate selling some old positions.
Sins of Commission
In contrast, as I think about my portfolio positions with losers - perhaps it comes a time to trim or say goodbye given the 3 year holding period and no growth in some of them. These losers (Alibaba, C3AI, Elastic and Unity) being 11% of my total portfolio have lagged the market proving to be a bit of heartache. Imagine that 11% in palantir and what a game changer that would be.
A quick review of the investment framework for total returns
1) Earnings growth/flat/decline
2) Multiple Expansion/flat/decline
3) Capital return (dividends or share buybacks)
Simple outlook for the 4 names over next 3 years
Alibaba - 2 and 3 as 1 is largely flat. Company cash position is 25% of market cap so plenty of capital returns could happen. If #1 happen we could see a sudden outperformance in the share price.
C3AI - Growth is returning with 29% in recent quarter (1), given palantir 69x enterprise value/sales vs C3 11x, seems like plenty of room for number 2. No capital returns expected here but if growth remains consistent, it could move the needle here.
Elastic - growth pretty decent at 17% (consistent across 5 quarters), EV/sales of 7x could see number 2 happening. No capital returns.
Unity - Weak growth, flat multiple of 5x EV/sales and no capital returns. This company is the weakest of all 4 and the share price is showing it.
Conclusion
What would I do - Potential divestments could be on the cards for Alibaba, Unity and Elastic. I think C3 has a good AI story ahead so would be hanging around for that story. But the sale of any name would only happen under two circumstances
1. Better opportunities spotted (dependent on Mr Market serving up bargains)
2. Fundamentals turn south
Otherwise, I remain ok to hold. The first mistake for most of these names was buying at too high (not the peak) but at princely prices over the last 4 years. Considering all these names are cash flow positive with reasonably health balance sheet and market leader status….I will hold for now in the midst of patiently waiting for their story to turn (or bargains to emerge)
