A monthly update of the Compound 8 to 80 Portfolio…
Performance Review and Market Environment
The 8 to 80 Portfolio declined 0.52% (net of fees) in July.
We saw a resurgence of covid-19 during the month, with the Delta variant pushing up cases in the U.S. to levels we haven’t seen since April.
While the vaccinations still appear to be highly effective against preventing severe illness, the increase in Delta globally has renewed fears of an eventual impact on travel and the economy, with Airline stocks giving back most of their gains on the year.
On the other side of the ledger has been the sharp rebound in Tech stocks which have been beneficiaries of covid-induced restrictions.
In what has become a recurrent theme this year, investors continue to ignore rising inflation, shrugging off a 5.4% CPI reading (highest since 2008) and core inflation of 4.5%, its highest level since 1991.
This is due in large part to the Fed’s insistence that all inflation is “transitory,” reassuring market participants that easy money policy (0% interest rates & $120 billion/month in bond buying) are here to stay for a while longer.
The biggest story during the month was the collapse in Chinese equities on fears of increasing government regulation and control. This hit technology shares particularly hard, which are now in a 50+% drawdown from their February highs ($KWEB China internet ETF).
The divergence between U.S. and Chinese equities couldn’t be more stark, with U.S. shares hitting all-time highs during the month while Chinese stocks hit 52-week lows.
This weakness has pushed the ratio of Chinese to U.S. equities down to its lowest level since 2005.
Onto the portfolio…
It was a busy month for earnings, with a number of portfolio companies reporting.
-Google ($GOOGL) crushed expectations on all fronts with revenue of $61.88 billion (vs. $56.16 billion estimate) and earnings of $27.26 per share (vs. $19.34 estimates). The 62% increase in overall revenues (year-over-year) was the largest since 2007. YouTube revenues grew to $7 billion, an 83% increase over the prior year.
The stock continue to hit new all-time highs during the month and has now gained more than 50% on the year.
-Apple ($AAPL) obliterated expectations with revenue of $81.41 billion (vs. $73.3 billion estimate) and EPS of $1.30 (vs. $1.01 estimated).
iPhone revenue was the largest contributor, up 50% over the last year. Services also continues to grow in importance, up 33% in the last year to $17.5 billion.
The stock hit a new high during the month for the first time since January.
-Amazon ($AMZN) reported a rare revenue miss ($113.08 billion vs. $115.2 billion estimate) and lowered its guidance for Q3 ($106-$112 billion vs. $119 billion forecast). They expect to see slower growth rates in the coming quarters as the YoY comps become more difficult (Amazon had an enormous bump-up in demand last year after the pandemic hit).
Shares traded lower on the news after hitting new all-time highs earlier in the month.
-Shopify ($SHOP) reported a 57% increase in revenues in the last year, crossing above $1 billion for the first time. Since the company went public in 2015, its revenues have increased 2,392 (71% annualized), one of the most incredible growth stories of all time. Shares hit new highs again in July.
-Spotify ($SPOT) reported a 22% increase in monthly-active users to 365 million.
Shares traded lower as this was the slowest growth rate since 2018, with the expectation of more difficult comps in the coming quarters.
-Twitter ($TWTR) reported a 74% increase in Q2 revenues, with ad spending rebounding nicely after the covid-induced downturn last year. Monetizable daily active users grew 11% to 206 million.
-Netflix ($NFLX) reported EPS that missed estimates ($2.97 vs. $3.16 estimate) and a 19% increase in sales, its first sub-20% growth rate since 2013. Subscriber growth slowed to 1.54 million new additions in Q2 and Netflix lowered guidance for Q3 adds (3.5 million vs. 5.5 million forecast). The company also confirmed its push into the gaming space which will be included in Netflix subscriptions at no additional cost.
Shares traded lower after the report.
-Mastercard (MA) reported a record $4.53 billion in revenue in Q2, a 43% increase over the prior year. The company noted the increase in consumer spending due to stimulus payments, confidence in the economy and high levels of savings.
Howard’s Latest Thoughts
“I am mad at myself for having Alibaba and Tencent in the 8 to 80 portfolio. They fit the category of having products that people in China and around the world rely on from their 8 to 80’s and I broke my rule of not having Chinese stocks in my portfolio because I felt they were too ‘profitable to cheat.’
What I forgot to factor in was the government risk. We got that the last few months and rather than wait around any longer I decided to rid myself of them from the portfolio. It is hard enough to invest in the markets picking companies that qualify for my 8 to 80 list and emerging candidates to the list, but the Chinese crackdown makes it silly to allocate when there are so many great American companies to choose from.
On the bright side, we recently added Bitcoin and Ethereum after the May crash in prices. They have pretty quickly recovered 20-40 percent. I believe we are quickly entering the next phase of crypto adoption as cool use cases and platforms to spend crypto proliferate and gain traction. People are spending and investing a lot of crypto – collecting, investing, purchasing and trading digital goods.” – Howard Lindzon
The top performers during July were Bitcoin (+16.5%), Adyen (+10.4%), and Google (10.4%)
The bottom performers during July were Tencent (-18.7%), Spotify (-17.0%), and Alibaba (-13.9%).
Trimmed Google ($GOOGL) and Facebook ($FB) on strength.
Added to US Cannabis ETF ($MSOS).
Exited Alibaba ($BABA) and Tencent ($TCEHY).
End of Month Exposures
Cash and Cash Equivalents: 25%
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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security.
Past performance is no guarantee of future results. Performance results are shown net of fees and include dividends and other adjustments. All performance data is strictly illustrative and may differ from actual results.
Discussion of portfolio holdings are for illustrative purposes only and are not investment recommendations. The portfolio holdings are subject to change at any point in time.
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