A monthly update of the Compound 8 to 80 Portfolio…
Performance Review and Market Environment
The 8 to 80 Portfolio declined 5.06% (net of fees) in September.
In last month’s update, I wrote the following:
“The equity markets in the U.S. have been unusually calm thus far in 2021, with the S&P 500 already posting 54 all-time highs and doing so without a pullback greater than 5% (on a closing basis). Investors should not view this as a sign that risk has been eradicated. There’s always risk lurking beneath the surface; you just don’t always see it. Corrections are the norm, not the exception, and another one is surely coming – we just don’t know when.”
Right on cue, we saw markets reverse course in September, with the S&P 500 (-4.7%) and Nasdaq 100 (-5.7%) suffering their largest monthly declines since March 2020. While the broad indices were still hitting new highs in early September, many high growth names have not seen highs since February, and suffered larger declines during the month (ex: Ark Innovation ETF $ARKK -9.4%).
With skyrocketing housing prices (Case Shiller +20% YoY, largest increase ever) and broad measures of inflation persisting (4.3% PCE, highest since 1990), the Federal Reserve is finding it increasingly difficult to justify its ultra-easy stance (0% rates and $120 billion in bond buying per month). At their September meeting, they hinted at a potential slowdown (“taper”) in asset purchases to commence by year-end. And the market is now pricing in Fed hikes before the end of 2022 (previously expectations were for 2023).
This anticipated change in monetary policy coupled with fears over the Chinese property market (Evergrande default) were enough to deliver the second 5% correction of the year for the S&P 500.
Since the March 2009 low, this is now the 25th such correction, all with differing reasons attributed to them…
Will this be like the previous 24, simply another opportunity to buy the dip with new highs coming shortly thereafter? Or is this going to last a while longer, as we saw in the declines following the March 2000 and October 2007 peaks?
No one knows the answer to that question, but after the strong run of the last 12 years, many investors have lost their respect for risk and are not entertaining the possibility of a long-lasting drawdown. Which is why, in the years to come, a little bit of prudence may go a long way.
Onto the portfolio…
-Nike ($NKE) reported revenues which fell short of expectations ($12.25 billion vs. $12.46 billion), but the big story was the supply chain disruptions that are likely to impact future growth.
The company lowered their forecasts for the next year from low double-digit revenue growth to mid-single-digits. Inventory shortages are the primary factor, with factory shutdowns in Vietnam due to Covid-19 leading to a loss of 10 weeks of production. Even after the products are produced, increasing transit times are adding to delays, as it now takes an average of 80 days to move goods from Asia to the US.
Two positives in the report were a) continued strength in digital (+29% YoY with the expectation of it growing to 40% of the company’s revenues by 2025), and b) pricing power amid low supply and continued strong demand, which has reduced the need for Nike to discount its products.
The stock ($NKE) was falling before the earnings report, and continued to decline thereafter, closing out the month with a 11.8% loss and giving back most of its gains on the year.
-Netflix ($NFLX) was one of the few bright spots in September, hitting new all-time highs for the first time since January. Its new hit show “Squid Game” has gone viral, already the most popular foreign language Netflix original and is in the running for the most popular series to date (Bridgerton currently holds that title). This is just one of many new content offerings that are expected to drive increasing subscriber growth through the end of the year. Netflix also announced the acquisition of Night School Studio, an independent game developer, with the plan of offering games to subscribers at no additional charge.
-Facebook ($FB) fell over 10% on the month after a series of negative headlines stemming from the Wall Street Journal’s investigative reporting (see here). Some of their findings: Facebook knew Instagram was toxic for teen girls, they exempted “secret elite” from its rules, and did little to counteract drug cartels and human traffickers using their platforms.
“Peloton is struggling. There could be many reasons for the weak stock price…supply chain, the end of COVID (the return to the outdoors and fitness clubs), the pull forward of customers during COVID). I consider it an 8-80 stock because they are after the fitness stack. They have an incredible hardware product, incredible video/software delivery of fitness sessions and a recurring revenue model wrapped around the system.
Only Apple (personal computing) and Tesla (automobiles) have done that and so Peloton is aiming high.
Time will tell if Peloton can continue to expand the fitness category and hold their subscription customers and continue to create a great product experience, but I think the stock is worth the risk/reward at these prices.” – Howard Lindzon
The top performers during September were JAMF (+9.6%), Netflix (+7.2%), and McDonald’s (+1.5%).
The bottom performers during September were Ethereum Trust (-13.6%), Adyen (-13.3%), and Peloton (-13.1%).
End of Month Exposures
Cash and Cash Equivalents: 24%
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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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