Home Finance Confounded's Complete Aggressive Growth Portfolio After A Brutal Beatdown – Seeking Alpha

Confounded's Complete Aggressive Growth Portfolio After A Brutal Beatdown – Seeking Alpha

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Confounded's Complete Aggressive Growth Portfolio After A Brutal Beatdown – Seeking Alpha
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syahrir maulana/iStock via Getty Images

syahrir maulana/iStock via Getty Images
Wow, what a ride over the last 3 months for high growth investors! 2022 has started off even worse than 2021 ended for momentum and high multiple names. While the rest of the market hovers near record highs, the pain train is firmly in control of a considerable swath of the growth market.
In this article, I would like to present my aggressive growth portfolio and give a brief rundown of my strategy in the midst of the current brutal sell off in growth.
First, I would like to remind readers of my overall investment philosophy, I manage two distinct and separate portfolios for myself, the first is made up predominantly of large cap, high quality, value oriented stocks. My so called “safe” portfolio.
For example, my current top 10 positions in the “safe” portfolio are:
Now, I do have some tech and growth sprinkled throughout such as Mastercard (MA), Alphabet, Amazon (AMZN), Microsoft (MSFT), NVIDIA (NVDA) and others but this is a portfolio of 45 high quality companies that I can rely on for both income and long term capital appreciation. The allocation and structure of which I believe will outperform when value stocks are in vogue.
In general, I aim to funnel 70-75% of my investable income into my “safe” portfolio to build a solid foundation from which I can experiment and take greater risk.
With the remainder of my investable income, I deposit into my aggressive growth portfolio, which we will discuss today. In this portfolio, I have no set rules other than to seek out predominantly smaller companies with high return potentials.
Historically, I have held between 20 and 40 positions in this portfolio. Up until November of 2021, my aggressive portfolio had vastly overperformed my safe portfolio and trounced the S&P 500 by a wide margin. Like others with similar portfolios however, the party came to a screeching halt late in 2021.
Since November 1st, 2021, I have calculated that my aggressive growth portfolio as of 01/14/2022 is down a whopping 28.7% in only 76 days. The shine at this point is certainly off of this portfolio and I recognized in mid December the need to jettison the investments that I was not confident in or simply purchased as part of a basket approach.
My goal in 2022 is to further concentrate this portfolio in my high conviction picks. Inherently, this is a rather risky approach, however, concentrated positions in thoroughly researched companies with high return potential is the entire point of this portfolio, a fact that I believe I lost sight of during the “throw a dart, make a 25% return” years of 2020 and most of 2021.
The portfolio that I present today is certainly not a finished product, but I believe it is off to a good start. While 2022 has continued to present smooth kicks at nearly every turn to date, they are certainly a bit easier to take in stride if you are concentrated in very highly researched and vetted companies.
Below, please see my current aggressive growth portfolio with portfolio weighting for each:
It is certainly getting heavy up at the top! My top 5 positions make up a lopsided 46% of the portfolio, with the top ten holding nearly 70% of the total value. For the remainder of 2022, I see this trend only accelerating for my portfolio.
I am extremely confident in the long term positioning of all 5 of my top holdings with II-VI moving up the list very quickly to join them. I fully intend to use the lions share of new money I deposit this year to opportunistically expand positions largely within my top 5 holdings.
In addition, I am very likely to trim this list of holdings further as the market gyrates. I can certainly see a scenario where I end 2022 with 20 or fewer stocks and with my top 5 positions holding 60% or more of the value in the portfolio. Below, I will go through brief elevator pitches for each of my top 5 holdings.
In my opinion, AbCellera presents one of the absolute best long term risk-reward profiles I can see in the market today. The company specializes in accelerating drug development by utilizing a comprehensive and complete tech stack with patented tools and software to find better therapies and antibodies, in half the time.
The company’s business model is quite differentiated in that they take the lions share of their payment for services rendered to their partners in the form of royalties on the approved and marketed drugs that result. This business model, in the current environment has led to a massive disconnect between the actual business and the stock price.
Investors, of late, have brutally punished the company for a lack of current, non COVID related revenue, all while the company itself is signing deal after deal and has expanded its programs under contract over 50% YOY through Q3 2021 alone.

Partnerships Q3

AbCellera

AbCellera
The actual business inside AbCellera appears to be humming along greater than ever before, while the stock appears to be performing a reenactment of the Detroit Lions 2021 football season.

Chart
Data by YCharts

The disconnect between the business and the stock has been striking to say the least and while in early 2021 shares were clearly ahead of themselves, at $10, I am buying up as much as I can stomach. I have intently listened to each earnings call and conference in which they have presented, I have read each SEC filing front to back and I cannot find a single good reason not to load up every share I can buy at current levels.
If the current sentiment holds in biotech, I expect the shares to remain depressed until a clear catalyst emerges to drive them higher. The bottom line here is that the company has roughly $800 million in cash with no debt, 131 royalty eligible programs, growing at 50%, trading for an enterprise value of $2 billion.
I expect this position to grow substantially in weighting within my portfolio during 2022.
In contrast to AbCellera, Kaleyra is dirt cheap right now based on current financial results. The company operates in the fast growing CPaaS market and with the recent mGage acquisition has become a top 5 provider worldwide.
The company trades for a ridiculous 1.27 enterprise value to sales multiple on 2022 estimates. The main knock on the company has been its historically low margin profile of around 20%.
That profile appears to be rapidly changing for the better as mGage produced margins in the 30’s and simply on a proforma basis, Kaleyra should be in the high 20’s during 2022.

Combined Company financials

Kaleyra

Kaleyra
In addition to the boost from the merger, the company is rapidly deploying higher margin products to its customers around the globe thus growing margins organically.
Kaleyra is making all the right moves to profitably grow the business and shares in my opinion are dramatically undervalued. As such, I plan to expand my holdings in Kaleyra during 2022.
Data observability during the run up in 2020 and 2021 was certainly a hot trend, however there is actual traction behind this. Dynatrace and others in the field serve a vital role in today’s enterprise IT world by organizing and monitoring the performance of the entire tech stack of a customer. This need is not a fad or a buzzword, it is the way things will operate going forward in an increasingly cloud and application focused world.
This ability to visualize, monitor and track all of the complex systems and software of an organization is literally in its infancy, and Dynatrace, in my opinion, has a clear edge in the enterprise market.
The company faces a significant amount of competition for this prize from the likes of Cisco (CSCO), Splunk (SPLK), Datadog (DDOG), New Relic (NEWR) and Elastic (ESTC) however the latest metrics show that Dynatrace is retaining or even widening its lead.

Dynatrace named a Leader in 2021 Gartner Magic Quadrant for APM | Dynatrace news

Gartner

Gartner
The conviction for me here comes from the company’s positioning in the enterprise market. The company has nearly a singular focus on the enterprise market and once they have been selected, the product is incredibly sticky.
In addition, the company recently announced that they have hired Rick McConnell as the new CEO. Rick was the prior head of Akamai Tech’s (AKAM) security division, telegraphing a large foray into the adjacent security market.
Dynatrace is highly profitable, including GAAP profitability, which cannot be said for much of its competition and the long growth runway at the company cements my confidence in keeping this as an oversized position going forward.
The company, is certainly not considered to be cheap, however I do plan to opportunistically add to my holdings on continued volatility.
The solar market in general has had a quarter that only a mother could love. The Build Back Better plan appears to be completely dead in its current form and the oil and gas renaissance looks set to continue during the year. So why would I have a solar tracker manufacturer as a top 5 holding?
It is just so dang cheap is my short answer. The long answer is that the company has been sold down to levels that are not reasonable due to what appear to be temporary headwinds. The company was cut in half during the summer of 2021 by rising steel and logistics prices, which the company promptly fixed by way of renegotiating contracts, long term supply agreements and rewriting future deals to include commodity cost provisions.
The company is currently in the process of burning off low margin contracts with the expectation that these deals will be burned off no later than Q2 of 2022 at which time, the company expects to retain its historical margins or exceed them.
In addition, the company has announced an opportunistic acquisition of STI Norland, a Spanish based solar tracking manufacturer with a large presence in the highly sought after Brazilian market. This acquisition is reportedly highly accretive given STI’s margin profile and manufacturing synergies, yet the company’s shares remain at or below the lows reached in the summer.

Chart
Data by YCharts

To me, this makes no sense. The company has addressed the issues that led to the initial decline in shares from the $30 levels and has forecasted margins to meet or exceed historical levels in mid 2022, adding in the accretive acquisition and a forecasted 56% rise in 2022 revenues, it certainly appears that we have a quite undervalued company.
The company operates in the utility level solar field and per the Q3 earnings call, the company has not experienced any cancellations for projects scheduled and the end markets remain incredibly strong. The company is gaining share in the tracker market that is set to grow at a conservative 15% CAGR long term.
At the current price, Array sells for a forward 2022 PE of only 19 and a 2023 PE of 11. The company looks set to grow EPS at a 20%+ rate for some time and benefits from the relatively stable and secure North American utility market while reaping the potential of rapid growth in emerging markets from the opportunistic STI Norland acquisition.
If the shares remain at current levels, I expect this to take the number 3 spot in my portfolio shortly.
To further the theme of my above stocks, Splunk likewise is crazy cheap in my opinion. The company has been beaten down for years now from a poorly communicated and investor received cloud transition.

Chart
Data by YCharts

The good news here is that the company has now largely completed the arduous task of shifting from an on-premises vendor to a cloud first vendor. Splunk, compared to others in the field is already a huge and trusted partner to the majority of enterprises in the United States.
The company offers the very sticky Data-To-Everything platform. Essentially, Splunk is a software platform to search, analyze and visualize data produced by the entire IT infrastructure of a given organization. The product they provide at this point in IT’s evolution is considered nearly essential to running a large enterprise today and Splunk sits at the core of it all.
My thesis for owning the company at a high weighting in the portfolio boils down to the future growth prospects of the markets that they operate in as well as the absurd valuation the market is currently placing on the shares. The company is expected to grow revenues at a 20%+ rate in the coming years and next fiscal year revenues are expected to be $3.02 billion. The market currently awards the company only a 7 EV/S ratio which is nearly half the multiple awarded to others in the field.
The transition to a cloud based offering has been messy and confusing to many investors, however escape velocity is building and the company expects long term cloud margins to be in the 70%+ range when it all settles out. I expect Splunk to be a free cash flow machine in the next few years and when the picture clears up from this transition, I expect the price to dramatically rise from the current $120 range.
I am not looking to add to this position, nor to reduce it during 2022.
In late 2021 and so far into 2022 to date, I have been thoroughly pwned by the market in my aggressive portfolio. While this has not been a pleasant experience, I can say that I am quite confident in the long term thesis of my major holdings and I plan to further concentrate my positions with the bulk of any new money funneled into AbCellera, Kaleyra, Array Technologies and II-VI, Inc. in that order.
With growth dramatically out of fashion for at least the near future, I am grateful to have the bulk of my assets residing in my “safe” portfolio, which thankfully has overperformed during this time period. However I do believe that the time is now, during a massive sell off, to increase my positions and concentrate around my highest conviction picks in the portfolio.
This does put me at a higher overall risk level, however I believe it also positions me for the greatest potential reward should I be successful. Wish me luck!
Thank you for reading and I look forward to your comments below, good luck to all!
This article was written by
Disclosure: I/we have a beneficial long position in the shares of ALL LISTED either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: “I am not a licensed financial advisor. This is not a solicitation to buy or sell a specific security nor is it to be construed as investment advice, please contact your licensed financial and tax advisor for advice to your specific situation.
This article is an opinion piece only and should not be construed as fact or be represented as such, please perform your own due diligence prior to investing in this or any equity.”

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