The Freedom Portfolio – July 2022

August 25, 2022 paul.essen Comments 0 Comment

In my last quarterly recap, I wrote: “the first quarter of 2022 is likely the worse investing quarter than I have had (and hopefully ever will have)”.

Well, the second quarter would like to have a word.

As bad as the first quarter of 2022 was for performance of the Freedom Portfolio, the second quarter has been worse. It was so bad, it took me nearly two full months to write this quarterly recap!

Thanks to supply chain disruptions, the war in Ukraine, soaring inflation, abrupt federal reserve moves to raise interest rates, or whatever other thing people want to blame, the first half of 2022 was the worst for the market in 50 years. As bad as the market has been, the Freedom Portfolio has been even uglier:

Yes, after crushing the market for two years, my returns have fallen back below the returns of the S&P.

Woof.

Here’s the details:

Ticker	Quarterly Change
SWAV	-8%
TSLA	-38%
CELH	11%
AXON	-33%
TTD	-42%
MELI	-48%
SNOW	-41%
NU	-54%
ZM	-9%
NVCR	-21%
ETSY	-42%
SQ	-54%
SE	-45%
SHOP	-55%
TDOC	-55%
ROKU	-35%
FVRR	-55%
RDFN	-53%
FUBO	-62%

I would be lying if I said this wasn’t frustrating and disappointing. I knew valuations had gotten a bit out of control in 2021 and we were due for some flat years or even some pullbacks, but I didn’t quite expect this degree of resetting.

I know I sound like a broken record, but despite the really horrid results lately, I haven’t been shaken out of my belief that I can beat the market long term. In fact, I’m excited about getting a second chance to buy shares in some of my favorite companies at prices I never dreamed would return. Much like 2020 and 2021 saw share prices get irrationally high, I believe we’re seeing share prices in many companies that are irrationally low right now.

Why do I say that? Because even though the share price of many of the Freedom Portfolio holdings is lower than it was pre-pandemic, the companies are almost universally much better off. Short term, share prices can go all over the place, but over the long term they will track business performance.

Let’s briefly look at two notable Freedom Portfolio holdings and how they look now versus pre-pandemic (I chose February 2020 to represent “pre-pandemic”).

Business performance vs share price:

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Shopify (SHOP): In February of 2020, Shopify shares were around $46 (split-adjusted). They currently trade for around $33 a share. While a roughly 30% drop is pretty notable, that undersells the dramatic fall Shopify stock has had of late. Under a year ago Shopify shares were as high as $150, which would make the current drop almost 80% from those highs. Yet the business has been growing stronger in all sorts of ways. During that time they announced new products like Shopify Audiences and Shopify Collabs and have formed partnerships with companies like JD.com, Spotify, and Youtube. Their quarterly revenue more than doubled, from $470 million to $1.2 billion. Their Gross Merchandise Volume has similarly more than doubled, going from $17.4 billion to $43.2 billion. Shopify the stock might look pretty sick right now, but the company has never been healthier.

Redfin (RDFN): It’s a remarkably similar story with Redfin. The stock was sitting around $27 a share pre-pandemic and is now at close to $10 a share despite having seen an incredibly red hot housing market in between. Also like Shopify, that decline looks even worse when you realize Redfin stock was at $75 about a year and a half ago. And yet, just like Shopify, Redfin’s business is much more fleshed out and robust now than it was pre-pandemic. They acquired RentPath to get a foothold into the rental market and Bay Equity to strengthen their mortgage segment. They saw significant missteps from competitors like Zillow while they avoided blowing up their balance sheet by being prudent and conservative with their iBuying initiative despite a roller coaster of a housing market. They continue to slowly but sure take market share, going from 0.93% of houses sold to 1.18%. Their revenue more than tripled over the past two years. In almost every way Redfin is a stronger, healthier, more robust company than it was 2 years ago, regardless of what the share price might imply.

I could write a recap like this for almost every position in the Freedom Portfolio and they would all hit similar notes. This gets at the heart of why I’m not overly concerned with what I see as a temporary pullback in my portfolio. Eventually sentiment will change and innovative, growing companies will once again be in favor. When that happens I expect the share prices for these companies to more closely match the reality of how the business has performed over the past few years.

Until then, it may sound boring, but I intend to hold tight to my strongest conviction positions.

Changes in the Portfolio

That doesn’t mean holding onto everything, though. When the thesis gets busted or is no longer relevant, then it’s time to cut ties and move on. Here are some moves I made in the previous quarter:

Cutting some losers to add to other losers