What the heck is happening to tech?
Plus resetting my portfolio and a tidbit about the amazing Roth IRA
Rotation to Rickety Balance Sheet Companies? No Thanks!
If you invest in an index fund or the S&P 500, then you might not have noticed, but recently tech stocks have taken a tumble. Many high growth tech stocks have pulled back 20%-30% or more, all while the S&P 500 hit an all time above 4000 😳
So what happened? Offsetting the pullback in tech are the rickety balance sheet companies like GameStop (pumped by wallstreetbets) and Carnival Cruise Lines, as noted by Bloomberg. They are beating sturdier, cash flow generating companies by greater than 20% during the most recent quarter.
For example, Carnival Cruise Lines’ (Ticker: CCL) stock price has increased over 70% in the last 6 months. This is a company whose revenue dropped 75% or $15 billion (you got that right, b for billion) year-over-year, and probably won’t be able to fully set sail until November 2021. But the stock price has rocketed.
Due to the debt and capital they accumulated during the pandemic, the company is actually valued at a higher overall amount today earning $5B in revenue for the year than it was pre-pandemic earning $20B in revenue for the year. CCL’s enterprise value has increased from $35B on 2/29/20 to ~$50B today.
What is Enterprise Value?
This is the approximate face value of the company today if you wanted to purchase the entire business. To do this, you would buy every share of stock outstanding at the current price (aka the market capitalization), add the debt of the business that you would have to pay off, and then subtract out the cash on the company’s balance sheet that you could use to pay off that debt or pocket after purchasing the company (thus lowering the overall face value).
So today it would cost $10 to buy every $1 of revenue earned by CCL, whereas on 2/29/20 before the pandemic it would cost $1.75 to buy every $1 of revenue. This has been a result of:
The increasing price of the stock
The increased number of shares the company sold to the market to raise cash (almost 300 million shares)
And the increasing debt on the balance sheet (approximately $14 billion added) that the company took on to help them operate during the pandemic.
Now, back to the larger picture. Why is this rotation from high growth to reopening stocks occurring? Well, the market tends to be forward looking, and everyone is very bullish/excited/(insert positive adjective here) on the reopening this summer. But do you really want to be buying these companies riddled with debt, or the so-called rickety balance sheets? I definitely won’t be.
If you get a chance to watch “The Last Blockbuster” on Netflix (slightly ironic) then you will find out the true reason why Blockbuster went bankrupt. It is largely a result of debt. They couldn’t service it (keep up with the payments and interest) and thus it bankrupted them right as they were responding to the Netflix threat.
This growth tech pullback definitely hit my portfolio, but I refuse to reallocate to rickety balance sheet companies that will take many successful years to correct. So I will stick with my plan. I will continue to buy disruptive, high growth companies with generational leaders that are guiding their ships toward a huge addressable market.
My Current Portfolio
In a future newsletter, I will break down my new concentrated portfolio more thoroughly. But for now, here are the stocks:
CRWD - Crowdstrike (leader in cyber security)
DKNG - DraftKings (leader in online sports betting)
DOCU - DocuSign (leader in electronic signatures)
GDRX - GoodRx (leader in discount prescriptions)
MELI - MercadoLibre (e-commerce leader in Latam)
NET - Cloudflare (leader in network services and security)
NVDA - Nvidia (leader in graphic processors)
PINS - Pinterest (social e-commerce up and comer)
PTON - Peloton (leader in connected fitness)
RDFN - Redfin (online real estate brokerage, iBuying, and mortgage lender)
ROKU - Roku (connected TV leader)
SE - Sea Limited (e-commerce leader in SE Asia)
SQ - Square (Cashapp and small business seller ecosystems)
TDOC - Teladoc Health (virtual care leader)
U - Unity Software (VR/AR 3D software leader)
ZM - Zoom Video (leader in video conferencing)
My main portfolio is comprised of the above list. I also like to make moonshot bets where I hold smaller positions (trying to mitigate the crazy price swings in the stocks with smaller positions sizes). Here are my moonshots:
CLPT - ClearPoint Neuro (minimally invasive, robotic brain surgery)
CRLBF - Cresco Labs (multi-state operator selling and manufacturing cannabis products)
DMTK - DermTech (non-surgical testing of skin cancer)
GTBIF - Green Thumb Industries (multi-state operator selling and manufacturing cannabis products)
NNOX - Nano-X Imaging (disruptive medical imaging company)
And I also currently hold two SPACs that are pre-merger and have management that I trust to find a strong company:
HAAC - Health Assurance Acquisition Company (searching for a company that leverages technology to create consumer-centric, data-driven solutions to healthcare)
LUXA - Lux Health Tech Acquisition Company (searching for a business at the crossroads of healthcare and technology)
I spent some time contemplating my portfolio recently, and realized…
So now my portfolio contains 23 positions, along with a large chunk of cash that I will deploy to those positions over the coming months. I will not be buying or selling nearly as heavily as I was these last few months, and will also make sure to share all buying and selling through the newsletters, along with the reasoning behind each move.
Finance Q&A
Q: Why is a Roth IRA amazing?
A: The government has created the Ferrari of investment vehicles in the Roth IRA. The challenge many investors come across is having to account for taxes on any profits made from investments. A Roth IRA is sheltered from those yearly tax payments, so investments can be bought and sold within the Roth IRA account and grow tax free.
In order to qualify for a Roth IRA, your individual income must be less than $125k, or joint income less than $198k (which is ~98% of the US population). And the current 2021 max contribution is $6k if you are under the age of 50, and $7k if you are over.
Amazing aspects of a Roth IRA:
Tax free growth
Since contributions were done using after-tax income, profits can be pulled out after the age 59.5 tax free
Contributions to the Roth IRA that have been in the account longer than 5 years can be pulled out without penalty before the age 59.5 (only profits would be hit with a 10% penalty)
No required minimum distributions after the age of 70
If you placed $6k per year for the next 30 years and invested it (this would be $6k * 30 years or $180k total), then that money could grow to be $1 million with a tax free gain of $820k, thanks to the historical stock market returns and the tax-free growth allowed by the Roth IRA.
And you would have access to those funds tax free as well!
Thank You!
If you’ve made it this far, then you are an amazing human. Let me know what you think by leaving a comment. Or drop me a question. Share it with others who you think might appreciate the information. Looking forward to sending out the next issue!
**I am not a financial advisor, so please don't buy/sell anything based solely on what you read here and do your own due diligence.