The Freedom Portfolio – April 2019

April 4, 2019 paul.essen Comments 5 comments

Now that’s more like it.

You may (or may not) remember that the first ever performance check-in for the Freedom Portfolio was all about explaining why the Freedom Portfolio was under-performing the market and why I wasn’t worried. Here is what I said 3 months ago:

When the market is down, the Freedom Portfolio will do even worse, but my hope and expectation is that when the market is up, the Freedom Portfolio will do better, and over the long run those up periods will more than make up for the down ones.
The Freedom Portfolio January 2019 by Paul Essen, January 1st, 2019

Well, the S&P 500 was up 14% this past quarter. The Freedom Portfolio? It was up 25%. Since inception (October 1st, 2018), the Freedom Portfolio is down 2% compared to the S&P 500 being down 3%.

In other words, the Freedom Portfolio has won the Q1 2019 battle and is currently winning the war.

Here is a breakdown of performance by position:

Ticker	January 2019	April 2019	Percent Change
STNE	18.29	41.11	124.77%
NVTA	10.76	23.42	117.66%
MELI	285.61	507.73	77.77%
IQ	14.56	23.92	64.29%
SHOP	134	206.62	54.19%
JD	20.31	30.15	48.45%
NVCR	32.5	48.17	48.22%
BZUN	28.23	41.54	47.15%
TWOU	48.45	70.85	46.23%
RDFN	14.01	20.27	44.68%
SQ	54.1	74.92	38.48%
NFLX	259.28	356.56	37.52%
AABA	56.78	74.12	30.54%
CRSP	27.84	35.72	28.30%
SPOT	111.66	138.8	24.31%
AMZN	1465.2	1780.75	21.54%
ISRG	469.5	570.58	21.53%
NPSNY	38.335	46.43	21.12%
TWTR	28.26	32.88	16.35%
TDOC	48.19	55.6	15.38%
EDIT	22.03	24.45	10.99%
KSHB	5.47	5.94	8.59%
ILMN	294.71	310.69	5.42%
DIS	108.1	111.03	2.71%
ATVI	45.25	45.53	0.62%
MKL	1021.88	996.24	-2.51%
TSLA	306.1	279.86	-8.57%
UXIN	4.79	3.79	-20.88%

Needless to say, I’m thrilled. I was confident that the Freedom Portfolio would make a comeback, but I certainly didn’t expect it to happen over just one quarter. A 25% gain in a single quarter is pretty ridiculous, even coming off a big drop. However, it’s worth noting that despite the big quarter, the portfolio is still down from where it started. Also, everything I said previously about short time periods is still absolutely true. A half a year is an incredibly short amount of time when it comes to investing, and with signs that the US economy might be slowing down, I wouldn’t at all be surprised to see another bear market where the Freedom Portfolio under-performs soon. I’m definitely not planning any parades yet.

Notable performers

Worst Performers

Note: A position doesn’t have to lose value in order to be a “worst performer”. All it takes to qualify is to under-perform the market. With the S&P 500 up over 14% this past quarter, that’s a high bar that a lot of positions are going to fall short of.

Disney (DIS): Disney is a perfect example of this. Normally a return of 2.7% in a quarter would be pretty respectable, but it falls well short of the performance of the S&P. We’re coming up on 4 years of basically flat performance for the Walt Disney company, which is definitely frustrating, but I’m still holding onto my shares. With the Fox acquisition finally closing, all of the pieces should finally be in place for over-performance over the next few years. This year alone should see an incredible box office performance (Avengers: Endgame, Star Wars: Episode IX), the opening of the new Star Wars theme park, and the launch of Disney+. Should be a fun ride.

Activision Blizzard (ATVI): Basically flat over the quarter, but that’s a pretty major disappointment after the pummeling it took in Q4 of 2018. Many other positions in the Freedom Portfolio rebounded but Activision has not. The company remains on my watch list for potentially selling, as there has been a lot of negative news around the company recently that has wiped out some of the investing thesis behind it.

Tesla (TSLA): After being the best performer in the 4th quarter of 2018, Tesla was down 8.5% for this quarter. I’m honestly a little surprised it has been as relatively stable as it has been considering the controversy swirling around CEO Elon Musk. The stock is down around 5% since the inception of the Freedom Portfolio. While I am still a believer in the company long term, I did sell about 30% of my position early in the quarter for reasons I will lay out further below.

Uxin (UXIN): Uxin was the biggest under-performer on a percentage basis, but the impact on the Freedom Portfolio was relatively minor because it is such a small position. It was a very volatile stock when I purchased it and I anticipated that it would continue to be volatile in the near future. Not at all worried right now and not at all thinking of selling. Uxin has a pretty long leash and I want to see how the company performs when there there isn’t the threat of a slowdown in China going on.

Best Performers

StoneCo (STNE): This is for clarification more than anything else. While StoneCo is up huge the past quarter, I didn’t actually start a position until very recently and after the big gains. In fact, my position is slightly down from where I bought in right now.

MercadoLibre (MELI): The MercadoLibre gain, on the other hand, is very much legitimate. While it started off the quarter as one of the larger Serentiy level holdings, I obviously wish it had been a lot bigger. I thought that even after the huge pop after earnings, which is why I bought after those big gains. I don’t regret it at all, either, as even those later purchases are up a fair amount. In fact, while the earnings jump and adding to my position helped move MercadoLibre from a Serenity level position to an Enterprise level one, the performance since then is threatening to move it into a Babylon 5 level position. Mercado Libre’s gains over the quarter accounts for 15% of the Freedom Portfolio’s gains. That’s how on fire the company has been.

JD.com (JD), iQiyi (IQ), Baozun (BZUN): The JIB had an awesome quarter, up 48.5%, 64.3%, and 47.2% respectively. If the JIB was counted as a single company, it would be a Babylon 5 level holding in the Freedom Portfolio and their gains would’ve accounted for 16% of the gains in the Freedom Portfolio. Positive movement in the trade war between the US and China seems to have outweighed concerns over China’s economy potentially slowing. Regardless, I’m still a big fan of every one of these.

Netflix (NFLX): Another large position and another big gain for the quarter. The 37.5% increase for this Enterprise level position was enough to account for 12% of the Freedom Portfolio’s gains. There wasn’t a lot of news with Netflix over the quarter, although I have seen a lot of people concerned that Netflix could struggle with the entry of some well-funded competition in Apple (AAPL) and Disney (DIS). I believe Disney will have a very strong product, but I’m not worried about either offering hurting Netflix much. I believe there is room for multiple winners in the streaming video space and I am confident that Netflix will be one of those winners.

Shopify (SHOP): Much like Netflix before it, Shopify was an Enterprise level holding which also crushed it this quarter. Its gains accounted for 14% of the Freedom Portfolio’s gains. Not much else to add except that they continue to execute excellently and riding the eCommerce wave.

Changes in the Portfolio

This past quarter saw a lot more turnover in the Freedom Portfolio than usual and I wouldn’t expect to see nearly as many transactions for the rest of the year.

A few weeks ago, during my post on anchoring, I laid out some of the recent buys and sells that I undertook this past quarter. Here’s a quick recap of them:

Sells: Axos Financial (AX), nVidia (NVDA), Bladex (BLX), Baidu (BIDU), Tencent Holdings (TCEHY)
Buys: Baozun (BZUN), CRISPR Therapeutics (CRSP), Editas Medicine (EDIT), MercadoLibre (MELI), Teladoc (TDOC), Naspers (NPSNY), Spotify (SPOT)

Sells

Tesla (TSLA): As mentioned above, I sold around 30% of my position in Tesla earlier in the year. Part of it was locking in some gains that I wanted to deploy elsewhere, but part of it was out of some concern over the short term prospects for the company. Specifically, I was concerned that the late year push for Model 3 sales and the reduction of the federal tax credit for buyers meant that Tesla might’ve pulled forward a lot of demand. In other words, people who might normally have bought a Model 3 in Q1 of 2019 instead rushed to get the purchase in before the end of 2018. If that was the case, it would’ve meant disappointing Q1 numbers. We’ll find out in about a month when Tesla reports earnings.

Buys

StoneCo (STNE): I had my eye on this company before they had an amazing earnings report in mid-March which caused the stock to soar. At the time, I knew it was a digital payments company in Brazil that counted Berkshire Hathaway as an investor, and anybody who has read what I had to say about MercadoLibre knows I am intrigued by the payments space in South America. Unfortunately, I hesitated pulling the trigger. I finally decided to dip my toe in with a small position after the big jump on earnings. I’m looking forward to digging into the company more over the coming quarters and possibly adding to my position if I like what I see.

Kushco (KSHB): Speaking of adding to positions if I like what I see… Kushco Holdings was one of my smallest holdings on account that it was a pretty small company in a very speculative industry (cannabis). For that reason, I decided to start with a very small position. Having liked what I’ve seen of the company since then, I wanted to add a little to my position.

Spin-Offs

Multichoice Group Limited (MCHOY): I’m guessing you haven’t heard of this company. Neither had I until it magically showed up in my portfolio. It turns out that Naspers (NPSNY), my preferred way to indirectly invest in Tencent (TCEHY), had spun off one of its many other holdings as a way to try to unlock value for shareholders. I’ve decided to hold onto it for now until I can do more research into the company, but I’ll likely end up selling this tiny position in the next month or so.