2021 Q1 Update

At long last, there finally appears to be a light at the end of the COVID tunnel. As the world works its way through the vaccination cycle, life is slowly returning back to normal. Businesses are reopening and at least here in Baltimore, the sun is starting to shine. I am excited to resume normal life, being able to travel and go as I please without fear of harming myself or others. I will look back on this period as an incredibly strange time in my life, but ultimately one with no real lasting impact. I have been lucky enough to get through this without personally knowing anyone who fell truly ill to the virus. Knock on wood this stays true through the end. Unfortunately for others, they have not been so lucky. Over 550,000 people have lost their lives to the virus in the US alone. That number will continue to creep up until we reach full herd immunity.

I do not take it lightly how lucky I am to be in that position. Along with most others, my investments have continued to do well over this period, but that is truly of secondary importance to being safe and healthy. If this has all taught me one lesson, it is to not take life for granted. Nothing in life is guaranteed, so make the most of it.

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Q1 Performance

As of 4/1/2021, my 10K portfolio climbed to 15,700.05. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 4/1/2021 the SPY had a price of $396.33. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.

10K Return(1)SPY Return(2)Difference(1-2)
2018(8/19-12/31)(13.95)(13.71)(.24)
201937.3332.64.73
202021.2217.593.63
2021(1/1-3/31)9.607.841.76
Since Inception(8/19/18)5745.9611.04



My portfolio has started 2021 strong out of the gate. I outperformed the S&P and my returns continue to grow. With congress pumping an additional $1.9 trillion into the economy, I expect spending to remain high. I won’t opine on the impacts of inflation today, but it is certainly a topic to think long and hard about. Inflation will have a profound impact on the economy and therefore our investments in the years to come.

Since inception, I am beating the S&P by over 11%. As I noted last quarter, this is nice, but slightly misleading. The SPY is only one metric to follow, comparing with the Nasdaq leaves my performance looking much worse. Fortunately, I gained ground in Q1. At the new year, I was losing to the QQQ by 34.88%. That delta fell to 24.42% by the end of Q1. I’m still getting trounced, but I’m trending in the right direction!

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Here we can see my allocations and that I hold $699.21 in cash, meaning cash is a 4.45% position. I like to have a little firepower left in the tank for opportunities, but I remain almost fully invested.

Transactions

HD– I made the error of never buying shares of Home Depot previously, so this quarter I decided to remedy that mistake. They are a company we all know and I would hazard a guess and say shopped at. Whether you were dragged there as a kid by your parents or are someone who enjoys home improvement projects, Home Depot has a way of drawing people in and getting them to spend their money. As someone who has worked in real estate for the better part of the last decade, I can personally attest that we have spent a lot of money at their stores.

I can’t count the number of times I’ve walked through their aisles, impressed with the level of inventory they keep on hand at all times. Often in construction projects, you need an unexpected part that very day. If you had to wait even two days for the item to be shipped, you could lose out on thousands of dollars of productivity. Therefore it is worth paying a few extra dollars to get what you need immediately. Orders are often quite bulky as well. The price to ship such orders often outweigh the convenience of not leaving the house. Home Depot also provides high quality customer service, employing a knowledgeable staff who can help you answer questions and locate items within the store.

Every quarter I marveled at the results the company reported, but could never justify the price based on valuation. This was a mistake, as Home Depot proceeded to knock it out of the park quarter after quarter and the stock followed suit. I finally saw the stock take a dip after their most recent quarterly earnings release and I pounced at the opportunity. I couldn’t let this slip through my fingers once again.

As for some numbers, let’s take a quick dive in. Home depot is a behemoth, with a market cap now well over $300B. In 2020 they did over $132B in revenue and $12.8B in bottom line profit. They produce gross margins north of 33% and report massive FCF, roughly $13B after subtracting $2.5B in CapEx. They use that FCF to pay out a strong dividend, around 2.5% when I bought in, buy back shares, share count has fallen 11% in the past five years, and every now and then make an acquisition like they did this past year of HD Supply. They have a strong balance sheet with only $67B in total liabilities. They are simply a company you can hold long term without much worry. In bad economic times they will weather the storm and in good times they will thrive.

This past quarter, revenue was up 25% and EPS up over 16%. The record level of home buying has really helped the business, but I don’t expect a let up anytime soon. This investment does not rely on any brilliant insight on my part. Home Depot is a world class operator with economic tailwinds giving a boost. The market presented a rare opportunity to buy at a reasonable price and I took it. I purchased at around 22x FCF which I think is more than fair. The stock has already increased by 25% since my purchase.

TOITF– Next up we have an interesting situation with Topicus. Constellation Software performed a spinoff this past quarter, yielding me with three shares of Topicus. I trust Mark Leonard of Constellation and his decision making, so if he thought it was in the best interest of Constellation shareholders to make this happen that’s good enough for me.

Much like Constellation, the company focuses on VMS business rollups. As the company takes very little capital to operate, they are left with lots of capital with which to deploy into acquisitions. Topicus will focus on the much more fragmented European markets.

I’ll readily admit I am not exactly sure about all of the structural nuances of this spinoff. As this is now a tiny portion of the portfolio, I’ll keep tabs on the company and learn more as times go on. If I like what I see, perhaps I’ll buy more shares. At this present moment I don’t have anything particularly insightful to say, but let’s give this a bit of time.

EA- My ownership of shares in Electronic Arts was short lived. I didn’t particularly like what I saw out of their last quarter and management didn’t give me great hopes for the future. One red flag to me was that another company announced they were producing games in the Star Wars universe. EA lost their exclusive rights, which makes me worry about their competitive position. Will they lose other exclusive rights to long term money making franchises?

They also announced the acquisition of GLU Mobile for $2.4B. This is a lot of money to pay for a company that is hardly earning any money. This could very well pay off, given EA’s game expertise and ability to squeeze profits out of IP, I’m just not sure. Mobile is obviously a big part of the gaming universe and EA desperately wanted to get in on that slice of that pie. I’m skeptical that this acquisition was the right move given none of GLU’s games are truly must have IP. Ultimately, I felt more comfortable holding shares of HD over EA, so I traded out of EA and into HD. So far this has been a very profitable trade, but time will tell if it was the right decision.

As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Follow me on Twitter @TheGarpInvestor.