Growth Portfolio and The September Dip

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The September dip is the perfect time for another portfolio update! After all, I want to see how my growth portfolio is holding up during this market turbulence. As a reminder, I use M1 Finance for both these portfolios as it allows me to easily purchase a bucket of stocks in a simple way without trading fees.

In the last month, the S&P 500 is down about 5.4% due to some re-emerging fears about the economy. In essence, it’s the worry that the pandemic will become a bigger issue as cold months approach. Add to that the lack of fiscal further response by the government, some other issues and you’ve got a recipe for a small downturn.

It wasn’t unexpected. After all, the stock market did run up quite a bit so maybe it was time for a temporary dip.

To me, it wasn’t a huge deal. Sure, the stock market was down about 9-10% since the peak at the start of September but it was still essentially flat for the year and up a boat load since the bottom earlier this year. That’s not too bad considering all the stuff going on in the world this year and really speaks to the value of stocks in relation to other investments in this low interest environment.

However, short term volatility is always a concern especially when you talk about growth stocks so I was particularly interested in how my growth portfolio would do during this time. Well, it turns out, it’s not too bad. While my dividend portfolio did slightly better, only being down 2.8% in the latest month, my growth portfolio didn’t fare too badly with a 3.8% reduction in the latest month.

It’s pretty interesting to see a portfolio focused on growth actually do better than the index in a volatile month but it speaks to the power of internet based stocks in this type of environment. This economic event has really impacted certain industries more than others and my growth portfolio is relatively insulated from that. It’s even more impressive to me that this portfolio only dropped a few % despite the ridiculous performance it has already seen in the last year.

However, I’m still aware that growth stocks are probably priced a bit too close to perfection right now and know that can end pretty quickly if reality doesn’t match expectation. That was made crystal clear to me by the IPO of Snowflake which has a P/S ratio of ~150 right now. Sure, it’s growing very fast but that’s a rich valuation any way you slice it and really has a lot of expectations to meet at the current price. There’s certainly a lot of hype around a lot of these companies and that has driven prices upward. That’s good for the short term results but makes it harder to gather meaningful positions at favorable valuations.

I feel like some of the stocks in my portfolio right now have certainly gotten pricey as well although none are quite as frothy as Snowflake.

However, as of right now, I have no plans to sell anything and I’m pretty happy with how it’s done so far and would actually be glad to see a few of these companies drop some more so I can buy at more favorable prices.

After all, timing the market and actually defining what’s a good value is always hard and even harder in this environment. On top of that, the lack of meaningful alternatives sends even more people into stocks that can lead to valuations that look rich on paper but might still be attractive in relation to everything else that’s out there.

We’ll see how it goes from here but I’m certainly a bit more eager to add more money into the market as it drops than I was when it was 10% higher.

Let’s take a look at how the growth portfolio has done since the last update.

The Growth Portfolio

Link to portfolio right here

Portfolio total as of 9/27/20 : $26,580.52(+16.1%)

You can clearly see the dip in September. However, the portfolio has evened out since the start of the month even rising a bit since. The overall growth is up 16.1% but that includes contributions.

I already mentioned that the portfolio is down this month but since the last update, the portfolio is actually still up 8.1% without those contributions.

That’s pretty solid considering the S&P 500 is up 2.8% since then and while out performance like that sure isn’t likely to continue based on current valuations, it’s been impressive this year.

It’s important to note the fact that while the S&P and this portfolio are down in the latest month, they’re still up since the last update. That really speaks to the power of this stock market this year that even a pretty decent drop from the peak can mean good results if you only look one month back. It also makes all the negative press about the bad September month seem so overwrought since things are actually still pretty good.

I’m not worried that much about this small correction in September since I’m a long term investor because I know that the path here has been crazy and could get even crazier. After all, just look at how this portfolio has done in the last year. The portfolio could drop another 30% from here and I’d still be looking at profits, that’s pretty nuts.

In one year, this portfolio is up 80% and that includes the dip in September. At one point, it was up over 95% so it’s clear that a small correction wasn’t unexpected. You can still see the dip in March but even then it wasn’t all that impactful for any dollars I put into the portfolio late 2019. These stocks help up relatively well and after that, this thing soared and almost never looked back.

That really speaks to the power of some of the companies in this portfolio. E-commerce has been a huge winner as that pie is up 124% in this same time period. My autonomous vehicles pie is up 239% and all of the other pies have market beating returns as well.

The S&P 500 is up about 12% in this time frame so I won’t complain about this result. It’s not a bad result for the S&P either but clearly lagging the growth part of the equation.

What does this mean? Well, I think growth stocks are bound to slow down soon. This kind of explosion has put them in rarified air in terms of performance. Prices on a lot of these securities are high and I rarely get a chance to accumulate new positions before they explode.

Two larger positions I had right before my last update(SE and LVGO) are up 70% and 80% respectively since I added them a few months ago. It’s annoying in the sense that I wanted to buy larger positions in these companies from a long term perspective. However, I won’t complain about that kind of growth in the short-term. Still, I do know that they can certainly head the other way in an instant due to some bad news.

At least in the case of SE, it was a pretty strong conviction bet when I got it so I did purchase quite a bit and it’s now the 8th biggest holding in the portfolio. Have to take the wins when you get them. It’s a company that has a lot of opportunity in southeast Asia so I’m eager to see where it goes from here.

Speaking of additions, the portfolio now holds 81 positions, up from 78 at the last update.

I removed one stock, FLIR, as I wasn’t too happy about its earnings and growth prospects. I don’t think it’s a bad stock but it wasn’t a great fit for what I’m trying to do with this portfolio.

On the opposite end, I added three securities during post earnings dips with small starter positions in FSLY, AVLR and CRWD.

When I say starter positions, these are basically small conviction plays that I think are good companies that are worth owning. However, I don’t feel super strongly about buying a lot of it at today’s prices. That means I add them to the portfolio but it’s a small 1-2% holding in one of the corresponding pies(so overall it’s a ~1% holding for all three combined) because I think valuations are rich and I’m not willing to build a higher position. It shouldn’t move the needle in a significant way but I’d be willing to increase the allocation if prices drop from here.

CRWD is already up 25%(see what I mean about not being able to grow a position sometimes) while FSLY and ALVR are up a tiny bit.

These are all tech plays that have high upside but also high downside and are all priced rather aggressively.

The fourth addition was TDOC which I had to add as they purchased LVGO, one of my holdings. These two will merge with in the near future. The way M1 works is that if TDOC takes over LVGO and I don’t have TDOC in one of my pies, it will automatically sell it so that was the reason for the addition. I’d rather LVGO had stayed on its own but I’ll own TDOC once the merger happens and hope growth continues on that end as well. I do think telemedicine is the future and TDOC is certainly one of the leaders there. However, valuations for both companies are pretty rich at this point as well.

In the end, that’s the story of this growth portfolio. Crazy returns leading to some rich valuations.

I don’t know if this can continue but I’d actually rather see some dips so I can buy at more attractive prices from a long term perspective. After all, this portfolio is still very small so I’m not worried about market dips at the moment as lower prices will drive better long term returns.

The top 10 holdings this update are Amazon, Microsoft, Google, Visa, Shopify, Alibaba, Apple, Sea Ltd., Nvidia and Adobe so no major changes from the last update. All of those stocks have done well but Nvidia is the biggest winner from the top 10, up 146% against my cost basis. The biggest % returns outside of my top 10 holdings have been Tesla, JD, Trupanion, Wayfair, Etsy, Freshpet, Square and Trade Desk.

As of today, I have no plans to remove or add any stocks but may shift allocations depending on valuations. However, it’s likely new dollar flow will be directed into my other portfolio in the near term.

Besides my growth portfolio, I also have a dividend growth portfolio on M1 Finance so let’s look at how that’s done since the last update.

Dividend Growth Portfolio

Link to portfolio here

Portfolio total as of 9/27/2020 : $23,536.12(+8.3%)

While the growth portfolio requires stock picking and analysis on my part, this is a much simpler strategy.

I take all the dividend aristocrats, stocks that have paid and growth dividends for 25+ years and buy all of them in equal weighting. There’s 65 of those stocks, I buy all of them and that’s it.

If a company doesn’t raise their dividend or cuts it, breaking that streak, they automatically get removed from the portfolio. That happed with ROST earlier this year and given current market conditions, I wouldn’t be surprised if I have another scenario like that in the future.

It’s a simple strategy and has historically beat the S&P 500 as discussed in this post.

The thesis is simple. You buy stocks that have consistently paid and raised dividends and you probably do pretty well. They grow earnings, pay a decent and growing dividend and generally do better in terms of volatility and performance than the stock market. After all, people like the safety of dividends and these guys have done it better than most.

Has that proven out during this crisis? Well, in the latest month it has, doing a bit better than the S&P 500 but before that, it’s been rather lacking. The problem here is that this economic slide is driven by a unique event and that impacted certain industries differently.

As shown by the growth portfolio, tech killed it lately while industries like real estate, oil and gas, retail and banking have done poorly. What does that have to do with this portfolio? Well tech is a relatively new-ish industry so most tech companies don’t have a record of 25+ years of growth whereas some of the other industries do.

That means that this portfolio has avoided the highest performing area of the market and had exposure to the other parts and as such it didn’t do as well. In essence, since the S&P 500 has exposure to tech and this doesn’t, it’s been a laggard lately.

However, it doesn’t mean it did terribly still producing positive returns.

In the last quarter, this portfolio is up 9.2% against the S&P 500 which is up about 12% in the same time frame. That’s not horrible but it is under performance.

Unfortunately, due to a split of UTX in April, I only have data back to April 1st but the lag is still there with the S&P 500 being up 35% since that day while this portfolio is up 30%. However, the NOBL ETF which tracks this portfolio pretty well(not exactly as I re-allocated more often and remove dividend cuts immediately) has shown it lagging the S&P 500 in the latest year as well.

Since the last update, the portfolio without contributions is up 1.5% which trails the S&P return of 2.8%.

All of that is simply due to lacking technology exposure which has been bad in this market. In fact, if you look at a lot of dividend ETFs these days, you’ll see a similar story. Dividends are good but they tend to lack tech and that really kills performance when tech drives so much of the index performance.

On top of that, within this portfolio, there’s been a decent amount of exposure to stocks that have been more heavily impacted in this market. XOM, CVX. PBCT, WBA and FRT are all down 19%+ since I bought them. ESS, BEN, AFL, T, GD. ATO, CB and a few others are down as well.

Tech has been in favor and a variety of industries have struggled. None of these companies have cut their dividends outside of ROST so they remain in the portfolio but I do think some are at risk of having to do so in the next year or so if things don’t turn around quickly.

However, it hasn’t all been bad news. After all, the portfolio is still up quite a bit recently. Companies like Carrier, Lowe’s, Cintas, Target, Sherwin-Williams and Clorox have done well during this environment and have more than offset the losses of those other companies.

Overall, while this portfolio is lagging, I do feel OK about it from a long term perspective. Some of these companies, if they can survive their current struggles, are no doubt a great value when compared against some of the growth stocks that have risen 80%. However, I don’t think those results will be without turbulence either.

There’s some value here but a lot of these companies still get a valuation boost due to their history of paying and raising dividends. That’s one of the reasons this portfolio has done so well in the long term and that valuation boost disappears immediately if they cut their dividend.

I do sell them at that point but locking in losses(outside of the tax benefit) isn’t great. That means, I’m not hoping for anyone to cut or fail to raise their dividend but am aware that they might. I actually think it likely that before we’re out on the other side, this portfolio will be smaller than 65 holdings.

From a long term perspective, I’m still a big fan of this portfolio but I think there’ll be some changes to it before this crisis is over. After all, this portfolio always changes during events like this. New companies come in as their record reaches 25+ years of dividend growth and some get removed as economic struggles cause them to cut their dividend.

However, in the long run, this portfolio has done well and I do expect that to continue.

The Overall Portfolio

Both portfolios are up but it’s clear that growth is carrying the day right now.

Overall, the portfolio has crossed the 50k mark and is up 12.3% since the last update. That’s driven by contributions but also by 4.9% growth against an S&P 500 return of 2.8%.

That’s mainly driven by my growth portfolio as it has been all year. In the last year, I’d certainly have been better off just having that one winner but I like having the two portfolios to even out returns across the long term. Growth may be hot right now but it likely won’t be forever.

I’ve done pretty well even accounting for the various contributions I made. I went back and tracked the data to when to the beginning of the year and plotted it against the S&P 500 as if I had bought both during the first day of the period and made the same exact contributions I made to these two portfolios and the results are pretty good. I will say it’s impossible for me to track this 100% accurately but this is a good enough estimate given the data set I have.

I started the year at $22,169.45 and am currently sitting at just north of $50,000, a good deal above where I’d be if I just invested in the S&P 500.

Now, that doesn’t mean the S&P 500 is bad. After all, I invest a lot in it. If you look at my 401k or Roth IRA, t’s all index funds including the S&P 500. The index funds are great and what most people should be investing in. However, I do enjoy investing and doing some analysis so that’s why these portfolios exist. Naturally the goal here is to beat the index if I can and I’ve done a pretty good job at doing that so far.

The S&P 500 might not be 100% comparable since I likely have some small and mid cap companies within my holdings but I think those have done ever worse in the last year.

In the end, I’m doing this for fun and enjoyment since I like picking stocks with a small portion of my funds. Plus, making cool graphs and tracking performance is neat! I’m glad to see such results this early but I’m also aware that long term out-performance is hard to achieve.

The majority of this performance is driven by my growth portfolio and I’d be much further ahead if the dividend growth portfolio wasn’t half of this. However, this is a long term game and this is a short term graph. I’m sure there’ll be a point in the future where this all flips and the growth names will be struggling.

Right now, I’m pretty happy with where I sit and now that I’ve broken the $50k mark, it’s time to set my sights on the 100k mark.

Disclosure : I am long all companies discussed within this article and contained in the linked M1 Finance portfolios. These portfolios may change at any time and I will not update this article with those changes(you’ll have to wait until the next update to see changes). Investing in stocks via these portfolios comes with risks of loss and you should discuss any investment plans with a qualified investment advisor.