My 2020 Stock Portfolio Review

2020 is surreal and has profoundly changed our lives

2020 has been dramatic, tumultuous and surreal. It will likely go down in human history as an inflection point reshaping how we live, how we work, how we conduct business and commerce, and how we learn and entertain.

Adults and children are locked up at home for most of the year; working from home is proven not only feasible but also more productive and cost saving; Zoom becomes the modus operandi for not only work but also all kinds of social activities; people deserted cities and relocated to suburbs or across the country where they prefer to live; people in silicon valley who used to optimize for shorter commute now desire larger houses and better home furnishing as they spend all their time there; people willingly and unwillingly are getting all their life necessities taken care of online (ordering meals, shopping, schooling, entertaining, doctor appointments…)

What started this all is Coronavirus. It was first discovered in late January in US and quickly spread around the country by early March, which prompted shelter-at-home orders. By December 31, 19.8 million people in US have been confirmed victims (6% of US population) and 343K have died. Worldwide there are 83 million cases and 1.8 million deaths. It’s truly tragic. At the time of this writing, Covid is still surging in US and around the world. Even more worrisome is that there are a few mutated strains of Covid discovered in the last one week in several countries, and it’s not clear the currently approved vaccines can be effective against these and future mutations of the virus.

A tale of two streets — Main Street vs. Wall Street

Despite the prolonged health crisis, human sufferings and the economic calamity, the stock market first dropped precipitously but recovered swiftly and surged to all-time high. Main street and Wall street seem two different worlds.

2020 started with 50-year low unemployment rate and the longest bull market in history. However all of a sudden and over just a few weeks in March, unemployment rate shot up from 3.6% to ~15%, and more than 20 million people lost their jobs, according to BLS. Millions of people have slipped into poverty despite the stimulus packages. Hundreds of thousands of small businesses have either shutdown or are struggling to stay alive. Although unemployment has steadily dropped to 6.7% in late December, more than 10 million people are still out of jobs. Initial jobless claims still remain at elevated levels of ~800,000 per week, vs. the normal ~200,000 prior to the pandemic.

US GDP fell by -5% in Q1, by a dramatic -31.4% in Q2, both on annualized basis, but rebounded sharply in Q3 at +33.4%.

Unprecedented times call for unprecedented actions. FED swiftly brought federal funds rate from ~1.5% in February to 0.05% in April and only increased slightly to ~0.1% in December. FED vowed to keep rates near zero through 2023, and will bias inflation to overshoot 2%, in order to provide maximum support for economic recovery in coming years.

10 year US treasury yield was 1.8% in January, dropped to 0.5% in August, and rebounded to 0.95% in December.

FED also took the dramatic action in the spring to provide backstop funding for a variety of markets (corporate debt, commercial paper, junk bond, mortgages REITs), averting a potential financial meltdown. FED’s balance sheet ballooned to $7.4 trillion from ~$4 trillion before the pandemic.

Federal government took decisive actions as well, with Cares Act and other stimulus programs totaling $3 trillions funded by debt. Federal debt increased to $21T, ~102% of GDP, highest level in 70 years. Federal budget deficit tripled to $3.1T, ~16% of GDP, highest level since WWII.

With unprecedented scale of fiscal and monetary policies, M2 money supply rose by 25%.

With trillions of dollars of liquidity injection, people are now concerned about potential inflation in the coming years. Gold price has risen 24% this year.

Bitcoin price has risen ~280% to all time high of $26,707.

Inflation has been tame since the previous rounds of quantitative easing. To hedge against potential inflation, I still prefer equities and real-estate instead of gold and bitcoin.

Now let’s take a look at the markets. 2020 has surely been one of the wildest and most exciting rides in recent memory. Stock market first dropped precipitously in March, but recovered sharply in April, and has rallied ever since. Trillions of dollars of new liquidity, lower discount rate, digital acceleration, return of stock picking, rise of retail investors, increased speculative frenzy, and most importantly the optimism about vaccines all contributed to the V-shaped recovery and sustained rally.

S&P 500 reached the peak of 3,386 on Feb 19th. It dropped sharply to the trough of 2,237 on Mar. 23rd, a decline of -33.6%. After that, it started the V-shape recovery and climbed back to the Feb peak by Aug 19th. Since then, it continued the upward trajectory to close the year at 3,756, +16.2% YTD, or +67.9% from the trough.

This picture of course is not telling the full story. The biggest 5 companies (AMZN, AAPL, MSFT, GOOG, FB) accounts ~25% of S&P 500, and they all had very big gains in 2020, distorting the market index. Without them, S&P 500 would probably be barely up, significantly percentage of companies (more than 30%) are in still in bear market territory (down 20% or more).

Nasdaq reached its peak of 9,817 on Feb 19th. It dropped sharply to the trough of 6,861 on Mar 23rd, a decline of -30.1%. It recovered its Feb peak on June 5th, and continued the upward trajectory to close the year at 12,888, +43.6% YTD, or +87.8% from the trough. Notice that tech laden Nasdaq recovered its Feb peak two and half months before S&P 500 did, as tech stocks are the biggest beneficiaries.

Russell 2000 reached its peak at 1,705 on Jan 15th. It dropped to its trough of 991 on Mar 18th, a whopping -41.9%. It didn’t get back to its Jan peak until Nov. 12th, much later than Nasdaq and S&P 500, and closed the year at 1,975, +15.8% YTD, or +99.3% from the trough. The smaller companies in Russell 2000 suffered much worse economic damage and will be for a longer period of time.

VIX reached 80 in March and has subsided to a slightly elevated level above 20.

Foreign markets are a mix-bag, correlated with how well those countries fared with Covid.

My Portfolio has gained 221% in 2020

My stock portfolio returned +221% in 2020, far beating S&P 500 at 16.2% and Nasdaq at 43.6%. My CAGR in the last 3 years is 69.9%, vs. 12.0% of S&P 500 and 23.1% of Nasdaq.

TSLA +743%, CRWD +325%, SQ +248%, TWLO +244%, SNAP +207% and ROKU +205% are the biggest winners for me this year. As I opined in the 2019 year end review, SaaS sectored recovered and performed well in 2020. I am gratified to see that SNAP continued the momentum after a strong 2019, and pleased that SFIX finally started to work nicely as I have been underwater for 2 years holding this stock.

TSLA contributed 53% of the total gain this year and is now 41% of my portfolio. Last year TSLA was 16% of my portfolio, still the largest holding. I am not particularly concerned about the size of any one position in the portfolio. However it does mean that the portfolio is risky and could underperform if that one single stock does not do well in the future. I don’t worry about this, as I care more about the CAGR over the long haul and less about the return of a particular year. It also means that the weights of my positions are more skewed, and I need to increase the weighting of other positions, in order to have a more balanced growth profile for the portfolio. Otherwise the portfolio return will be overwhelmingly dependent on one single stock. The only ways to do that without selling TSLA are to commit more capital into the portfolio, or to consolidate some of the other positions.

It’s worth noting that my portfolio was down -11.8% in the last week of March, at the nadir of despair in the market. So in the whole year, my portfolio had a swing of 230%, luckily the upswing was far larger than the downswing. I didn’t panic at the nadir, the only regret is the downturn was too short lived. Before I was able to swoop in, the market already recovered.

SaaS valuations soared to the stratosphere

2020 has been a great year to be invested in SaaS sector. Valuation has soared to levels never seen before. In the good old days (2019 and earlier), fastest growing SaaS companies sported EV/Rev multiples of 15–20X, which I considered to be expensive and often shunned away from.

Today the hottest SaaS companies have outrageous EV/Rev multiples. Even based on 2021 revenues, SNOW is at 81X, COUP at 43X, SHOP at 40X, NET at 40X, CRWD at 39X, and U at 39X. Stocks at below 30X are relatively more “reasonable” — TWLO at 28X, TEAM at 30X, VEEV at 26X, MDB at 28X, and FSLY at 27X. Stocks at below 20X are considered “cheap” — WDAY at 11X, NOW at 18X, SPLK at 12X. Stocks at below 10X are probably rendered “troubled”. The following table includes names I follow. Their valuations are higher than the average (~16X) or median (~13X) of SaaS companies, as they are better companies with faster growth.

These SaaS companies had fantastic returns in 2020, with 200%+ to 400%+ in one year!

Acceleration of digital transformation of businesses and cloud software adoption due to remote work and shelter at home, predictable recurring revenue streams in recessionary environment, are lower discount rate due to lower interest rate are the main drivers for this out performance.

Is this a new normal for SaaS valuations? I would like that to be the case, but I don’t think so. That’s why I have not picked up any new SaaS names in 2020, although I really would like to have SNOW, FSLY, MDB and U in my portfolio. Given their current valuations, they have to drop at least 30% before I would ever consider. It’s true that FSLY, MDB and U have presented brief windows of opportunity at 20X during the past year, and I was on the verge of bagging them, but I left my conservatism took over. I lost good gains from them this year, and even worse I might miss even bigger upside in future years. The only remedy for me is to hope for a market correction to get into them. SNOW is simply way too far from my reach.

I did increase my positions in CRM and WDAY in Q4, because they haven’t appreciated much during the run-up by the rest of the SaaS pack, and at ~10X 2021 EV/Rev, they are very reasonably priced. With the economy gradually returning to normal in the next couple of years, I think these two names can benefit with sustained 20% growth rate in the large and bread and butter CRM and HR/Finance segments.

MAGA and stay-at-home online beneficiaries

The four trillion dollar club members, MAGA (Microsoft, Apple, Google and Amazon) continue to deliver impressive results following a strong 2019. AAPL’s market cap is at $2.7 trillion. It added one trillion this year. MSFT, AMZN and GOOG are above $1T. Among the other large tech names, FB and TSLA have a good shot to reach that league hopefully soon. NVDA having already surpassed Intel as the largest chip maker, made a bold acquisition offer of ARM for $40B this year. ADBE to my surprise is larger than CRM in market cap. To my bigger surprise, CRM is now bigger than ORCL! When I saw this, I paused and reflected on this for a moment.

Various sectors got a big boost from the new stay-at-home life — ecommerce, digital payments, real estate, streaming, gaming, telemedicine, online education, etc.

A blockbuster year for IPOs

2020 sets the record for the highest number of IPOs over the last 20 years, with over $160B raised, although half of that amount was from SPACs. I am not a fan of SPACs, maybe I am good old fashioned in this regard.

Contrary to the poor performance of IPOs last year, this year’s IPOs fared fantastically well. Three largest IPOs are ABNB, DASH and SNOW, each raising more than $3B; ABNB and SNOW sported market cap of ~$95B and DASH ~$50B. Valuation is through the roof. Several IPOs had first day jumps of well over 100% — 112% by SNOW, 113% by ABNB, 139% by LMND, 195% by NCNO and 120% by AI. The best performing IPOs based on YTD returns vs. IPO price as of Dec. 23 are LMND at 331%, AI at 283%, U at 217%, PLTR at 178%, SNOW at 168%, and NCNO at 154%.

Out of this cohort, I have picked up LMND and GDRX. I am very interested in acquiring SNOW, ABNB and U, but valuations are way too rich for my liking at this point. I will patiently wait, knowing that there is a chance that I won’t be able to pick them up anytime soon or at all. I am biased in not losing money over missing an upside.

Looking into 2021 IPO pipelines, Roblox, Affirm, Coinbase have already filed S-1. The other likely candidates that I will pay attention to are SpaceX, Robinhood, UIPath, Databricks, Instacart, AppLovin, ThoughtSpot and Oscar Health.

Paradise lost — exodus from Silicon Valley

California lost 70,000 residents in 2020, the first annual population loss since statehood in 1850. In the last 5 years, California’s population growth has plummeted from 300,000+ per year to zero in 2019 and negative in 2020.

Oracle and HP Enterprise have decided to move their corporate headquarters from Silicon Valley to Austin, Texas. Oracle’s move is particularly shocking to me, as I started my career there right after college, and so many of us software professionals in silicon valley regard Oracle as our alma mater. Newly IPO minted Palantir moved its HQ to Denver, Colorado. Charles Schwab, another admired corporate staple of San Francisco albeit for the investment management industry led by the eponymous and legendary entrepreneur, is moving to Texas as well.

Besides companies, notable individuals also have moved their residences to outer states. Larry Ellison, founder and captain of Oracle for over 4 decades, is living on his island Lanai. Elon Musk has moved to Austin, Texas, to be close to the new Gigafactory and the SpaceX launch site. Splunk CEO, Dropbox CEO, Opendoor co-founder, as well as a few notable VCs have moved to Austin as well.

In addition to California exodus to Texas on the west, there is New York exodus to Florida. If you wonder why, I fathom politics, regulation and taxes are probably the top reasons for the silicon valley and wall street elites. The regular joes are probably driven away by the increasingly unaffordable housing price and low quality of life. Much thanks to Covid-19 which made all these bold moves possible with working from home becoming a new norm.

What to look forward in 2021

The prevailing wisdom is that economy will rebound sharply next year and stock market will continue to rock with strong corporate earnings growth. For example, Morgan Stanley forecasts ~6% GDP growth in US in 2021 after -3.5% GDP contraction in 2020. Inflation remains tame at below 2%. S&P 500 EPS growth is expected more than 25%.

I usually take these forecasts with a grain of salt. Remember the forecasts for 2020 at the end of last year? My anticipation is that 2021 will continue to be highly uncertain and challenging, especially in the first half. The biggest risk is Covid, which is currently surging with unprecedented speed and quickly mutating into various new strains. If Covid lingers well into next year and herd immunity is the only defense against it, the economic fallout will become more severe and longer lasting. After the 2008 financial crisis, it took 8 years before unemployment rate dropped to pre-crisis level. The second bucket of uncertainties could be the potential political instability in the US, in China, and around the world. This means I will still tread very carefully in 2021, be patient, pick great companies and stocks at reasonable price, and take advantage of any market corrections if they do occur.

What to bet on in the next decade

Just as the Spanish flu (from February 1918 to April 1920), ushered in the roaring 1920’s, will the rebound from the Covid-19 pandemic kicks off the roaring 20’s this time around? Televisions, telephones and automobiles drove the last roaring 20’s. What should we bet on in the coming decade? I will be placing my chips in the following areas.

1) Continued acceleration of digital transformation for all businesses, empowered by AI, cloud computing, and blockchain. I have particular interest in financial services which will be reinvented in two ways — re-intermediation by a new crop of companies that are re-doing the core tasks of capital allocation and risk management with machine learning and data science, and complete dis-intermediation by blockchain based systems.

2) Sustainable energy, including sustainable transport (EV’s and autonomy), energy generation and storage. ARK Invest forecasts that EV sales will scale 20-fold globally during the next five years, from an estimated 2 million and ~2.5% of the market this year to 40 million and ~45% in 2025. As autonomous vehicle networks scale during the next five years, transportation costs will drop more than 50%, from the $0.70 per mile in personal cars to $0.25.

3) Genomics, personalized medicine, and new drug discovery accelerated by machine learning.

I will also be watching quantum computing and space exploration. Both areas are very early stage in development and currently not accessible from the public market, but I think they will become investable in the coming decade. Quantum computing and quantum information will revolutionize today’s computers and internet. For space exploration, think about SpaceX and Starlink.

Auld Lang Syne.

Happy New Year and Many Happy Returns!

December 31, 2020

P.S. my 2019 review