Reflecting on 2024
Best Investments, Worst Investments and a stock I really like
I took the morning to reflect on my thinking at the start of 2024.
Here were some of the ideas I was toying with at the time:
Small Caps Could Lead Out of Correction
Mega Caps Regress to the Mean
A Meaningful Corporate Debt Wall
Surging Dollar in Asia
Watching Municipal Bond Yields
Staying Short Tesla
Dumpster Diving/Special Situations
Realistically I invested in 3 of those themes (Numbers 1,2,6,7).
Here’s how I did and how it played out:
Small Caps Could Lead Out of Correction
I don’t know that I would say this was entirely correct, however as seen here in the Morningstar Style Box 1 Year Performance, Small and Mid Caps performed slightly better than large caps across the value and growth sectors. I played it using AVALX and a few mid, smaller large cap health care and tech plays (more on these later). AVALX is one of my favorite mutual funds due to the high insider ownership, great track record and singular focus. However the performance has trailed the small cap value style box generally. In a bull market, it’s hard to beat the index. I suspect next year might show some underperformance as well, although it’s high energy focus could benefit from looser regulation.
Mega Caps Regress to the Mean
This one I was completely wrong on. It’s a lesson I continue to struggle to learn. Just because something is expensive doesn’t mean it can’t get more expensive. That being said I was quick to abandon my strategy (Arrow Reverse Cap 500) and switched to Gotham Enhanced 500 ETF, which is an ETF run by Joel Greenblatt with more of a focus on quality. It marginally underperformed the actual SP500. Again, it’s hard to beat an index in a bull market.
Staying Short Tesla
I liked this idea substantially up until Nov 5, I had successfully been in and out of this one. I’d found 220-240 to be a good range to short at, and around 180-200, I would typically close. Of course I foolishly left my short open on election night and subsequently paid the price. For now I’ve closed this short and walked away with a small loss on the net. But I don’t believe this is a good investment idea going forward.
Dumpster Diving and Special Situations
I liked the Spirit Airlines deal, which of course was foolishly killed by regulators. After that deal, I stepped away from M&A as the writing on the wall was clear. However we did take a chance on the Atmus Filtration Spinoff and that paid off quite nicely.
Finally in June of 2024, we identified 4 tech names that we thought were significantly mispriced. They had quality earnings, great cash flow and the growth in their cash flow more than offset the dilution from Stock Based Compensation.
These companies were:
Docusign - Up 58%
Zoom - Up 43%
Atlassian - Up 53%
Applovin - Up 334%
We would never have imagined that Applovin would have performed so well. We still hold it but have trimmed our position meaningfully.
Of the 4 names my favorite is Zoom. I believe it’s still only valued for it’s web conference capabilities, and most analysts don’t understand the value that Phone, Chat (Slack Like Feature), Clips (Video Messages), Docs (Notion-lite), Scheduler (think Calendly) and Whiteboard (think Figjam).
Zoom is becoming extremely well rounded, and it continues to deliver valuable add-ons to customers at fair prices. In the previous quarter RPOs accelerated for the 2nd straight quarter after 10 quarters of declining to flat growth. We suspect part of this is the right sizing post covid, another part is the land and expand model that they are successfully executing upon. In my small business, we’ve seen our Zoom spend increase significantly in the past year, while our total spend has decreased. As more APIs and integrations come onboard for it’s docs and schedulers function, we expect them to take market share from Notion and Calendly.
As the market for M&A becomes easier during the next 4 years, we think Zoom is a great acquisition candidate for a larger company like Alphabet or Amazon which on paper would create “synergies” around cloud spend while giving them a diversified revenue stream. Particularly in the case of Alphabet, Zoom could give them a legitimate product suite to contend with O365 by integration Google Drive into the Zoom Workplace offering.
Overall our 60% equity portfolio performed solidly, right in line with the market. We expect 2025 to start strong for the markets, but are nervous looking forward as the impacts of tariffs and immigration policies threaten the soft landing narrative. Currently we’ve diversified into equities outside of the US, in countries which are less exposed to the US and who performed well during the previous trade war. However we still think the 4 tech names we bought in 2024 have meaningful upside (except maybe Applovin but we aren’t prepared to cash out yet).
If you’d like to discuss any of these ideas further, contact us by going to our website. If you’re reading this for the first time, subscribe now for our free newsletter.