Roundup - 07/09/2021

Updated: Jul 10, 2021

Psalm Chapter 18 verse 30 states, "As for God, his way is perfect: The Lord's word is flawless; he shields all who take refuge in him."

It isn't that hard for me to see and understand God's perfection versus my imperfection. There isn't a day that goes by that I don't make a mistake through sin. There also isn't a day that goes by that I don't see how God's word is meant to help me nurture all my relationships and do good, despite my evil nature.

I continue to see benefits of God's wisdom and knowledge for my life with respect to investing. I'm not saying that I'm praying for my portfolio to go up. But I am saying that I am praying for God's wisdom to help me have discernment with my actions. This goes across all aspects of my life; being a Godly husband, father, and yes, portfolio manager.

Week of July 9th Volatility

On Tuesday, July 6th, the portfolio under management returned to positive territory marking the firs time since Marth 12th. After that, Wednesday and Thursday were brutal as broader market indices dealt with the irony of lower interest rates hitting growth-based equities, resurfacing Delta variant COVID concerns, the current Administration finally taking the side that the COVID virus may indeed have originated from a lab in China, to the perpetual inflation debate, among other items.

When all was said and done, the portfolio lost less than 1 percentage point, but still underperformed most broad-based indices. From a read-between-the-lines perspective, there's a lot going on justifying an uptick in volatility. First, there is pressure for the so-called "rotation" to continue to play out to benefit mostly legacy-based companies. This is more of a connection to the generational divide that is putting legacy companies in weaker positions, and not really a long-term concern. The other aspect is that while all major indices, including growth-focused ones like the NASDAQ and Russell 2000 are up near 15% or better, many select growth-based equities have been kept down, contrary to the rising tides lifting all boats typical connection.

Q2 earnings season is coming soon as the the second quarter has come to an end. There are likely still management adjustments that are also driving volatility for growth plays. Some are placing bets on how to position pre-earnings, while others are simply taking profits from the mid-May bottom.

There is also a increasing amount of information warfare that has been broadly replicated by Wallstreet. As more aggressive retail traders look to exert opposing pressure to lift stock prices, Wallstreet has responded with even more egregious manipulative tactics through media warfare. This is likely going to be the core way that retail investors will lose out in the end, especially traders. Wallstreet will continue to take advantage of their larger ability to move markets, and use any narrative possible publicly to counter with extreme pressure.

These dynamics make it very complicated for traders, but also put a lot of pressure on long-term investors during volatile gyrations. In any case, retail investors are best suited to maintain successful management strategies and to avoid the noise.

For the portfolio, it's been a little tough to watch this past week's gyrations for the simple fact that there hasn't really been any actionable moves to consider.

I've got my eye on Marqeta, and am eagerly anticipating Stripe's initial S-1 filing to go public to get a better sense of the competitive market. But like most other holdings, volatility still hasn't afforded any opportunities.

As we approach Q2 earnings, the most important item to consider will be whether we return to a more normalized trading environment where earnings performance will drive Stock Price, SP actions. This will be important, as if it occurs, there should be good opportunities to accumulate - I do expect most holdings to perform very well, with many seeing appreciation. That being said, any direct attack on select growth plays, similar to what occurred during Q1 results, could have further reaching impacts.

IPO Dog List

The above list has been created to provide investors a sense of IPOs that have come public over the past year or so, and that are not worthy of consideration for the portfolio. Over the past few years, I've scrutinized many IPOs and I tend to be very selective on the ones that merit inclusion in the portfolio.

This is a very simple list where I am continuing to build financial models for each company, and I will update this list to illustrate valuation and justification why I consider these companies IPO dogs. There are certain companies, Wish as an example, that may see very robust SP appreciation potential over the mid-term. But for me, with a strong position in Shopify, I would much rather continue to focus on a company like that, versus adding a new company like Wish, especially as they have much more to prove, especially with an asset-light model that is currently burning a lot of cash.

The key takeaway for many companies on this list is either they are growing from very small bases, that limit the likelihood that they will every grow to scale that investors expect, or that they simply are highly overvalued, or some combination of both. For any that may seem to offer strong upside potential, it may be that they are undervalued disproportionately, but once revalue occurs, their future is less bright.

Robinhood IPO

I recently deconstructed Robinhood's financials and the company may be a lucrative investment IPO option as we get more details on the amount of money to be raised, Shares Outstanding, and pricing expectations. That being said, some good insight was provided on Cathie's Ark Trading Floor on Robinhood's Transaction-Based Revenues, TBRs primarily being generated from firms like Citadel Securities to the tune of over 80% of all TBR in Q1 2021. Robinhood has been in public cross-hairs, but the unscrupulous deeds of getting in with major market movers, with retail investors trading activity begs the question of are transaction fees truly free - especially in the event that a retail investor may not be getting the most optimal transaction price, while firms undercut.

These type of shenanigans are a form of legalized manipulation, and Robinhood has been fined in the past. But as it goes on Wallstreet, if the fine is profitable, who cares. While there are definitely questionable practices within Robinhood's Revenue generation, I will continue to assess the IPO prospects and valuation - I may initiate on the first trading day.

Stripe IPO Forthcoming

As I mentioned above, the Stripe IPO is in the beginning development stages. The most recent valuation pegs the company at $95 billion or so. This is going to be an important IPO as Fintech is getting more and more convoluted. A company like Stripe will provide further transparency with respect to the transaction payment stack. Marqeta recently went public and is a market leader in part of that stack. But is a competitor to Stripe. Stripe being much larger than Marqeta likely has a larger connection to the payment stack and it will be important to see who Stripe's key customers are, and how they are growing respectively for various Revenue segments.

Newer companies are focusing on Fintech with recent public peers including companies like Paysafe and SoFi Technologies. I view these companies as weaker competitors against Marqeta, especially as their transparency is not as clean on operations. Stripe will generate much needed transparency to help investors better understand how the payment stack, well, is stacking up.

Hippo Enterprises & Insuretech

I've been keeping a close watch on Hippo Enterprises as the merger deal will likely be coming soon with Reinvent Technology Partners Z. So why focus on Insuretech? That's a good question, and the clear answer is the growth opportunity. My opinion is that Insuretech companies will succeed as they connect more strongly with younger generations beginning with Millennials.

So the opportunity is there, but the valuation levels for many of these companies is at a premium, Hippo included. Hippo currently trades at the highest valuation near a $5 billion Enterprise Value, EV, while Lemonade is trading just below $5 billion. Root Insurance trades at the lowest valuation at below $2 billion. I see Hippo and Lemonade as the strongest potential winners, this being based on scale, growth potential, and diversification of products. I see a company like Root, playing catch-up, while competing against formidable peers.

When it comes to valuation, investors need to realize that Revenue for Insuretech peers is driven mostly by Net Earned Premiums and Ceding Commission Income, which have an inverse relationship. Essentially the math includes Gross Premiums by Customers and Premiums per Customer, but Insuretech companies have ceding agreements to offset claim risk - known as asset light models. So Gross Premiums are adjusted based on timing of Customer premium payments to Gross Earned Premiums, and then from that, Net Earned Premiums are the result after Ceded Earned Premiums are offset.

To this point, a company like Lemonade is trading over 50 times Revenue based on EV at $4.8 billion. Hippo is trading around 65 times. Most Insuretech companies have a variety of metrics to measure profit performance. For me, it's quite simple and all about Cash Flow. This is the kicker as many of these companies do anticipate any positive Cash Flow until 2025. This presents a key focus on Cash Burn and financial strength.

Both Hippo and Lemonade have approximately $1.2 billion in Cash. Over the next five years, Lemonade is going to burn at least $300-400 million, while Hippo will likely burn an amount towards the upper limit or higher. Both companies have plenty of Cash to absorb this burn, but this does not account for any acquisitions either.

To me Insuretech is fascinating and really an area where I'm going to continue keep my eye fixated on. I did own Lemonade a couple times and have not had the best success holding it, but my positions have remained very small so it was offset for other investments.

I view both Hippo and Lemonade as leaders versus other companies like Root. Based on the premium dynamics and patience needed for Cash Flow, I think both companies should be considered at lower SPs. Hippo will have over 620 million Shares Outstanding once the merger is completed, while Lemonade only has over 60 million. For Hippo, I'd wait until post-merger to get in at a lower price in the high single-digits. For Lemonade, the recent drop towards $60 was a great opportunity, and drop below $80 would be a good entry level.

27 views0 comments