Portfolio Updates

Portfolio Update #4 – The Post-Election Rally

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The Election Rally – Portfolio Update Q4

It’s December and the post-election rally is still in full force.

It’s quite impressive really.

There’s always that group of investors that says that if X happens then the stock market will sell-off but the reality is that the stock market likes certainty and an election certainly provides certainty.

Sure, one result may mean good things for some industries while the other will benefit others and that’s already played with Biden’s victory with industries like renewables blooming. There’s a reason a lot of these EV SPAC names are suddenly exploding. However, the overall result and the knowledge that the next 4 years are locked in and a potential stimulus is ahead has been good for the market as a whole.

It’s not just the election that provided some level of certainty. You’ve also got some positive news about vaccine effectiveness and availability. Those are unfortunately still a ways away for most of us but the market is forward looking and that shift in positivity looking into 2021 is already being priced for now.

You combine that with the likelihood of more stimulus in the near term and you’ve got yourself a recipe for a huge post-election rally.

In the last month, the S&P 500 is up 5.5% and since the last portfolio update in September, it’s up an impressive 13%. We’re back to new all time highs again and moving higher almost every day. The NASDAQ has continued its crazy performance and blown through all-time highs as well and even the Russell 2k has bounced 80% off march lows to new all time highs.

It’s certainly been a crazy year and only makes the strategy that is the namesake of this blog more relevant. Time in the market matters and if you told me the market would be blowing through all time highs despite a deadly pandemic and record unemployment during the year, I’d have thought you crazy but yet here we are.

I’m sure there were people who sold off in a panic in March thinking it would keep going lower but that dip ended up being a fantastic buying opportunity. It’s weird how the stock market can work but I’ve long learned that trying to predict it is a fool’s game and you might as well just buy now because prices will likely be higher ten years from now.

Can this post-election rally continue into the last part of the year and keep going into the new year? That’s a hard question to answer.

The valuations are certainly something. Snowflake, which I pointed out last update as an example of overvaluation is up another 50% since then. Yes, they’re growing at 100% but you’re paying over $100B for a company with less than a billion in annual revenue. Sure if they can keep growing at that level for another 5+ years then maybe today’s valuation is reasonable but that seems pretty hard to do and even if so, the return from today’s prices shouldn’t be too attractive.

There’s plenty of examples like that in the market now as tech firms, EV firms and SPACs in general have certainly started to wander into what seems like a bubble phase.

Even the P/E 10 ratio of the S&P 50 is nearing 34, a number not seen since the 2000 tech boom. All that might spook investors but one also has to remember the fiscal environment we find ourselves in today.

The M1 money supply went up more in 2020 than it had in more than a decade which certainly has a bit of an inflationary impact on asset prices even if the money doesn’t translate to a huge increase in velocity. The 10 year treasury has fallen and remained below 1% sitting at 0.97% as of December 4th. Yes, we can point to the 40+ P/E 10 ratios in 2000 as overpriced but that was a year where the 10 year rate sat above 6%.

Back then stocks had an earnings yield of 2.5% while the 10 year gave me 6.6%. Today, the 34 P/E 10 of the S&P means I have an earnings yield of 2.9%(100/34) with earnings growth ahead versus a 0.97% yield on the 10 year rate without any potential for growth. If inflation is a concern then I certainly don’t want to be in those 10 year bonds right now and stocks actually look somewhat attractive.

Yes, stocks are expensive historically but is there anywhere else to put your money these days? it certainly doesn’t seem like it.

Now that doesn’t mean that stocks are guaranteed to go up simple because there’s no great alternatives to place your money and maybe there are some that I’m missing. Perhaps, real estate is the place to be or maybe even cryptocurrency. I am currently buying a home and do have some crypto holdings so who knows!

Still, even if I don’t see many other places to invest money for the long term, I do think there are pockets that are super bubbly in the stock world and might be due for a correction. It may be as simple as money cycling out of these high P/S growth names into more reasonably valued names that will benefit more from a return to norm in a post-vaccine world.

It may come from a slow down in earnings that has driven these growth names to new heights. There’s already stocks that get hit 25% when earnings are bad(FSLY for example) so it’s not crazy to think the overall growth batch can drop 25%+ if earnings in that group start to come down to earth and people start to get scared of what might be coming ahead.

P/S ratios of 50+ or even 100+ only ever survive if your top end growth rate is consistently great and one miss can send the price crashing down.

I also think that a wider correction is possible. After all, what’s ahead of us might be the worst of this pandemic. Sure, the government certainly is trying to do their best to prevent that via more stimulus but what if it it doesn’t work?

It’s not impossible that we see a stock market correction again in the future and the move downward can be as swift as the move up. As I mentioned before, there are stocks that are up 3x+ in a matter of months. Why can’t they move in the opposite direction that quickly?

After all, corrections in general happen from time to time and are a normal part of the economic and stock cycle. We had one in March but it was so short lived that maybe it was just a portent of something bigger to come.

We’re in one of those weird spots where if 2021 turns out to be a bloodbath, we’ll say, ah of course, the valuations were crazy and we were in the middle of a pandemic and hitting all time highs, it was clearly insane.

If it turns out to be ok, we’ll say, ah of course, the government passed more stimulus and the alternative investments aren’t there. What else am I gonna do, keep it in cash or bonds that will get eaten away by inflation?

Would I be surprised if there was a 20-30% pullback in the next year?

Given the economic conditions, no and I probably think that’s more likely than continued growth. Honestly, I wouldn’t mind it given that my investing horizon is a long term one and buying at these prices doesn’t seem like it would lead to huge long term returns because the returns have already been priced in right now. After all, how is the market supposed to return 8% from here? Will earnings start to grow at a rapid pace somehow or will ratios continue to expand?

After all, I’m in a spot where stocks I started buying in April in my growth portfolio have 4x’d since then. How am I supposed to build a sizable position when that happens!

Still, I don’t know what will happen so the best path is to dollar cost average whether we go up or down and ignore the day to day fluctuations.

After all, selling isn’t an option because the stock market can keep going up and up despite things looking expensive or bleak. Just ask anyone who sold in March how they feel about it today. Maybe they’ll get a chance to get back in at lower prices if the market has a massive pullback or maybe we’ll keep running up for years before the next correction.

Who knows, the best bet to take is that the one based on the assumption that the stock market will eventually be higher than it is today and that’s been a bet that has paid off time and time again as long as your time horizon is long enough. That last part is key. I don’t love this market if I need money within a year but if it’s ten years from now, sure why not. What else am I gonna do with that cash?

We’ll see what happens from here but first let’s look at what happened since the last update. Let’s start with the growth portfolio. As always, I use M1 Finance to manage these portfolios. You can check out my review of the platform right here.

The Growth Portfolio

Link to Portfolio right here

Portfolio total as of 12/6/2020 : $32,431.55(+22.0%)

Election Rally

The growth portfolio started at 25.3k in this graph, sat at 26.5k as of the last update and sits at 32.4k this month. That’s a 22% bump since that last update.

That total does include a few contributions but growth was the major portion of the change as it sat at 14.5% without contributions. That’s a pretty good number although not one that outpaced the S&P 500 in a big way like it has in the past. It’s still a beat against the 13.0% growth in the S&P in the same time frame.

There certainly was a bit of a dip right around the election as shown in that October 30 timeframe but it shot right back up in that post-election rally.

The S&P 500 did well in this time frame as well due to the news around the vaccine. It wasn’t just tech that was attractive but other industries as well.

At the end of the day, a return to normal will be more beneficial to non-tech names and might actually shift the valuation metric away from tech a little bit. We haven’t seen that yet as these growth names continued to perform well alongside the rest of the market but it’s certainly something I could see happening in the future.

A rotation out of tech/growth names into something like dividend payers could mean this growth portfolio slows down next year as some of the valuations fall back to earth. Sure the earnings growth has been great here but a lot of these returns were driven by multiple expansion as well.

If that does happen, I wouldn’t be too upset about it as I barely had time to accumulate some of these companies before they exploded.

Sea(SE) is a good example of that. I started getting into that company around $50 earlier this year and it’s now sitting at $200 just a few months later. Tesla is a similar story where my cost basis on that stock is $59.79 and the stock sits at $599 today. Trade Desk has a cost basis of $263 and it sits at $903 today.

There’s a bevy of names like that where I barely got a chance to accumulate before it exploded. I still think these are great long term companies but I’d certainly prefer to buy them at my initial prices. It’s hard to build a sizable position in them at these prices and I wouldn’t mind significant pullbacks so I could accumulate more and have better long term returns in the next 10+ years.

After all, this portfolio is still tiny and new contributions are a big part of it right now so lower prices are better here from a long term perspective.

As evidenced by the few examples above, the portfolio has done amazingly well this year and you can see that in the graph below. In the last year, this portfolio is up 90.76%.

Election Rally

That performance has slowed a bit in the last quarter but it’s still up 10.6% in that period with most of that, 8.6% being in the last month.

There have been a few pullbacks recently in certain industries. E-commerce for example took a bit of a step back after the vaccine news although it’s still up over 130% for the year. However, in general, most of the companies in my portfolio continued doing well and driving solid performance.

I do think growth stocks are really priced to perfection right now and while I’ll still keep putting money into them, I think more of my future funds will flow into my dividend portfolio as they did last month.

I wouldn’t be too surprised if there was some volatility in some of these companies but I’m still in them for the long term.

Speaking of companies, there have been a few changes in the portfolio since the last update.

First, LVGO is no longer in the portfolio as it merged with Teladoc(TDOC) which is still in my portfolio.

Second, I added three starter positions in Crispr Therapeutics(CRSP), Invitae(NVTA) and Roku(Roku) to the portfolio. All are strong companies with good growth prospects but their price points aren’t overly enticing right now which is why they’re small started positions. NVTA is already up 15% since I added it and Roku is up 25%. CRSP is up a crazy 50% or so in the last few month. I guess they weren’t all that overpriced?

That brings the total to 83 holdings at the moment. I have no plans for more changes as of today but continue to think about removing my aerospace holdings and have already reduced those a bit from the last update.

The top 10 holdings this update are Amazon, Microsoft, Google, Visa, Sea, Shopify, Apple, Alibaba, Mercadolibre and Trade Desk.

All of those are strong performers. The top 5 overall performers are Tesla, Trade Desk, Trupanion, JD and Etsy.

As always, full disclosure, I own all 83 stocks reflected in the linked portfolio. I may make changes to this portfolio without posting any updates but have no plans to do that as of today.

Beyond this growth portfolio, I also track a dividend growth focused portfolio that’s less active than this one. Let’s check how that one has done since the last update.

Dividend Growth Portfolio

Link to portfolio here

Portfolio total as of 12/6/2020 : $28,613.19(+21.57%)

Election Rally

The dividend growth portfolio is up 21.57% since the last update. Without contributions, it’s up 12.7%.

I started at 23.2k on September 8th, was at 23.5k as of the latest update and sit at 28.6k today.

The growth here is a bit behind the S&P 500 but this is the first update where this one hasn’t lagged in a significant way which really speaks to the overall market rally we saw in the past few months. That rally hit most companies and really allowed this dividend growth portfolio to catch up a bit to the tech focused growth portfolio.

While that other strategy is more active in design, this is one is a lot more simple. I just follow the dividend aristocrats portfolio which has historically beaten the S&P 500. However, in recent months, the ridiculous performance of tech stocks(which this portfolio is lacking) has left this portfolio in the dust.

Unfortunately, I don’t have a performance view for the full year like I do for the above portfolio since there was a split of a stock in 4/1 that skews data. However, the graph since then is below.

The portfolio is up 38.4% since 4/1 but the S&P is up 49% in that same time period. The lag is due to the lack of tech names within this portfolio as those have done killer this year.

This portfolio is based on companies that have increased their dividend for 25+ years so naturally a lot of these new tech names won’t be in there since they either don’t pay a dividend or haven’t been around for 25 years if they do.

Still, even if the performance has been lacking, I do think this is a good long term play and will certainly do better if valuations start to normalize and a flight to safety is required. These stocks won’t avoid a major market crash but they will certainly do less bad in such a time and the dividends they pay out will make it easier for investors to stomach it without selling.

It’s possible more dividends cuts do happen in this group of stocks.

This group of 66 stocks is already down to 65 stocks after ROST paused their dividend earlier in the year. Exxon(XOM) also failed to raise their dividend this year but I’m not sure whether the S&P will remove them from the dividend aristocrats index so I’ll wait to see what happens in January before I remove them. The S&P index language is a bit confusing so I’m not quite sure if they’re no longer a dividend aristocrat.

In the last month, the portfolio is up 5.4% and I do think the valuations here are still pretty fair in relation to the market. If you’re looking for income, you could do a lot worse than this group of companies especially as the world trends back towards the pre pandemic normal and we see some potential for money shifting into more traditional names and out of growth.

It’ll also be interesting to see if XOM falls out of the grouping since they didn’t raise their dividend and if any other companies are on the cusp of the 25 year streak. I do believe that IBM(old tech) might be on the cusp.

That’s one of the problems with this portfolio. It’s based on a lot of long term data and includes names that might not be sexy anymore which can lead to multiple contraction. However, as long as they can keep producing high cash flow, reinvesting in their business and paying and raising their dividends, it’s possible they might still be winners in the long run. However, since the dividend aristocrats group is missing a lot of the companies that are changing the world right now, it’s possible there’s some lag in performance which is why I’m also investing in those via the other portfolio.

I’m also thinking of starting a 3rd dividend based portfolio that will be more focused on growth names and more concentrated as well but that’s a future endeavor.

I figure by investing in both strategies, I can get upside on the growth front and more security on this front and the two together should work well.

The Overall Portfolio

Overall, the portfolio is up 21.8% to a total of $61,044.74! Without contributions, that’s a growth rate of 13.6% against 13% for the S&P 500 in the same time frame.

Both portfolios contributed to the returns this update unlike the last few quarters where the growth portfolio was the primary driver.

The plan is to still contribute to both portfolios but I think I’ll lean a bit more towards the aristocrats right now. From an income perspective, the portfolios have also been growing as well.

In 2019, dividend income from these two was $169.42 and I’m already sitting at $529.81 with December, one of the bigger months still to come.

The portfolio has almost tripled since the start of the year through a combination of growth and contributions. I started at $22,169.45 in January and am now sitting north of $60,000. As a comparison of the growth between the S&P 500 and my portfolios, I’d be at $50,116.64 if I had just invested in the S&P 500.

It’s a small time scale but it’s nice to see out-performance over the S&P 500. A lot of that is driven by the growth portfolio and would be even bigger if I didn’t have the dividend aristocrats portfolio. However, I also want to have some volatility protection if the market isn’t as rewarding as it has been since the drop in March.

I do think there’s some volatility ahead and will be glad to have those dividend aristocrats and their dividends when and if that happens. If not, then I’ll keep doing what I’m doing and investing in both until I’m ready to retire in a decade or two.

Right now, I’m happy to hit another $10,000 marker and do it pretty quickly after the last. Hopefully this election rally can stretch into 2020. I wanted to get in one last update before the year rolls over and will be back with the next portfolio update in another 2-3 months.

Unfortunately, there’s still a big gap between wall street and main street and these winter months will certainly be hard for a lot of us. Best of luck and best health to everyone reading.

Thanks for reading.

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.

Election Rally

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