Passive Equity Portfolio: Annual Report

Let’s get to the ugly truth. Since inception (July 2014), my passive portfolio is up only 2.18%19 times less than the market return during the period. For 2017, the portfolio returned only 3.82%, 6 times less than the market return. Um….um….um, let me try to justify the low returns.

My peers and people jealous of me would be laughing like this:

Kuroda’s evil laugh
2014-2015

When I opened the account in the summer of 2014, TD Ameritrade gave me 2 months to trade for free. So during that time, I wanted to fill the account with stocks. The only problem was I did not know which stocks to buy. At the same time, I did not know how to research potential investments.

Mostly guided by “expert” recommendations and positive headlines, I bought some stocks which destroyed my portfolio, including Ford (F), J.C.Penny (JCP), Cisco (CSCO), General Electric (GE), and General Motors (GM). In 2015, I still did not know which stocks to buy. I wanted to do my own research. I decided to research all the stocks that were bought the previous year.

From my research, I found CSCO, GE, and JCP attractive. So I decided to keep them in the portfolio. I even wrote about CSCO and GE on the blog. I did not write on JCP as I was not profoundly convinced. Funny thing is I have never shopped at JCP, just at its competitors. Even my mother did not like J.C. Penny.

I did not like F, yet I decided to keep F in the port because it was not worth getting rid of them at $10 commissions. For GM, I was on the fence. In addition to these names, I decided to research new names and bought some of them. 70% of my portfolio was in cash in January of 2015. In December, it was 42%.

The new stocks I bought in 2015 were non-dividend yielding risky names, such as Bellatrix Exploration (BXE), Twitter (TWTR), and GoPro (GPRO). All of which did not work out well to this day. BXE, because I tried to find a good energy company at the time every energy companies were distressed. I’m very active on Twitter and use GoPro most of the time. So I wanted to invest in them. At that time, I thought Twitter would get acquired, and GoPro management would start to turn things around, and the Karma Drone would be positive for the company’s financials.

2016-2017

In 2016, I continued to research new stocks. However, I did not invest in any of them. I deposited more money into the account during that year. At the end of 2016, 82% of the portfolio was in cash.

I always found real estate interesting. Used to read about them. My interest in the real estate market skyrocketed after my first ever internship, at a small real estate firm. In January of 2017, I decided to buy WPC, a Real Estate Investment Trust (REIT). During the year, I also bought Verizon (VZ). I did not want the remaining cash in the port to sit idle. So I decided to purchase free commission based short-term bond funds, very stable dividend yielding cash parking (and one high-yield ETF). At the end of 2017, 17% of the port was in cash.

Over the past month, I have been researching consumer goods companies. I’m looking to add one to the port. When I do, I will be sure to write about it.

10 Equities

I’m currently holding 10 companies; CSCO, GE, GM, BXE, WPC, JCP, F, TWTR, GPRO, and VZ.

All shares of 10 different companies belong to 1 class: domestic equity. 62% are in large cap., and 38% are in mid-cap.

On February 16, 2015, I recommended going long Microsoft (NASDAQ: MSFT) when the share price was $43.95. Since then, it is up 101%*. I made a mistake of not buying when I wrote about it. “Put your money where your mouth is, Khojinur.”

On April 12, 2015, I recommended going long General Electric (NYSE: GE). Since then, GE is down 33%*. Dividends are automatically invested in new shares. Average price I paid for the shares is $26. I’m down 29%. Despite the 50% dividend cut recently, I’m staying with the stock for two reasons. The cost-cutting will be the best bet for us the shareholders. The $7 commission fee won’t be worth it, especially since the stock was bought in 2015 when I had less money. If I can open second Robinhood account, I’ll transfer from Ameritrade to the free-commission based brokerage.

In the summer of 2015, I wrote about CSCO (part 1part 2 AND 4Q FY’15 earnings report). Since the first article, the networking giant is up 44%*. Average price I paid for the shares is $25.11. I’m currently up 57%.

On November 21, 2015, I wrote my first article on LLY and believed it was overvalued (it still is). Since then, the pharmaceutical company is up a mere 1.25%*. The second article on LLY was posted a year after the first article. I personally am not short the stock as I cannot short.

On December 26, 2015, I recommended going long GoPro (NASDAQ: GPRO) and believed it was a buy. Since then, the action camera maker and I are down whopping 59%.

On May 2, 2016, I recommended holding FireEye (NASDAQ: FEYE).  Since then, the cybersecurity firm is down 15%.

On January 20, 2017, I recommended going long W.P. Carey (NYSE: WPC). Since then, the REIT is up 11%*. Average price I paid for the shares is $61.44. I’m currently up 10%.

On May 9, 2017, I recommended going long Verizon (NYSE: VZ). Since then, the telecom is up 46%*. Average price I paid for the shares is $46.05. I’m currently up 47%.

*dividends not calculated

Estimated the portfolio dividend yield is 2.48% (that is very similar to the 10-year yield), with largest being 6% and lowest 0%. I plan to increase the portfolio dividend yield by getting rid of non-dividend yielding stocks and/or buying dividend-yielding stocks. That will happen fast, if I can make second Robinhood account and transfer the portfolio to there.

When I started doing research in-depth and writing down my findings and thoughts, everything started to improve. Writing is powerful!

Every new trade and investment will first be announced on Twitter. Almost always!

Equity/Commodity Portfolio Performance: Inception & 2016

In the previous article, I laid out my performance for Forex portfolio since inception and for the year 2016. This one will briefly lay out the equity/commodity portfolio performance. Briefly, because I don’t have much statistics on it than for FX……for now.

Before going further, I should note: “Average price” includes Dividend Reinvestment Plan (DRIP) – the dividends I received were used to buy additional shares in the company.


Since inception (summer of 2014), I’m down 31%. I’m currently holding 9 companies, including the ones I wrote article(s) about; GoPro (NASDAQ:GPRO), General Electric (NYSE:GE), and Cisco (NASDAQ:CSCO). I don’t have Eli Lilly (NYSE:LLY) since my broker doesn’t allow me to short.

All shares of 9 different companies belong to 1 class: domestic equity. 59.4% is in large cap. 18.89% in mid cap. 3.66% in small cap. And 18.05% in “other domestic equity.” Will change the allocation this year; international equity, fixed income, etc.

On February 16, 2015, I wrote about Microsoft (NASDAQ:MSFT) when the share-price was $43.95. Today, it’s trading at $62.14. I missed the opportunity to go long on it.

On April 12, 2015, I wrote about GE and believed GE was a strong by (it still is). Since then, GE is up 12.30%, from $28.06 to $31.51 (dividends not calculated). Dividends are automatically invested in new shares. Average price I paid for the shares is $25.99. I’m currently up 21.24%.

In the summer of 2015, I wrote about CSCO (part 1, part 2 AND 4Q FY’15 earnings report). Since the first article, CSCO is up 7.97%, from $27.99 to $30.22 (dividends not calculated). Average price I paid for the shares is $24.85. I’m currently up 21.61%.

On November 21, 2015, I wrote my first article on LLY and believed it was overvalued (it still is). Since then, LLY is down 13.98%, from $85.50 to $73.55. Second article on LLY was posted very recently.

On December 26, 2015, I wrote about GPRO and believed it was a buy. Since then, GPRO (and I) are down whopping 52.62%, from $18.34 to $8.69.

For the last year, my equity portfolio is down 12.61%. Because of $9.99 trade fee and low capital, I have refused to buy some stocks I wanted at times.

I recently opened Robinhood, broker with $0 commission. I’m planning to use it to actively trade equities and commodities.

As to commodities, I’m up 8.25% since inception (fall of 2016). I’m currently holding 50 shares of Direxion Daily Gold Miners Bull 3X Shares (NUGT), which is up 24.03%.

I might change my broker to Interactive Brokers (IB) from TD Ameritrade, as IB offers more tools for portfolio analysis.

If you didn’t like this performance/article, read the “Forex Portfolio Performance: Inception & 2016.” Maybe you’ll like that performance/article enough to like me again.

If you do, follow me on Twitter (@Khojinur30). I tweet out my trades live. If you don’t, peace.

FinTech To Halt Or Grow After Brexit?

Silicon Valley is the fintech capital of the world. London is the fintech capital of Europe. After the Brexit vote, the rise of fintech in UK might be under a threat.

Total venture capital investment in technology for UK increased to over $3.6 billion in 2015, 71.43% increase from 2014. Of that, London-based tech start-ups accounted for 62.55%

Total VC Tech Investment Amounts UK/London 2010-2015
Total VC Tech Investment Amounts UK/London 2010-2015

In the last 5 years, UK technology companies have collectively raised $9.7 billion, with London-based companies accounting for 54.52% of it or $5.3 billion.

Since 2010, investment in the British firms soared over 12-fold, while investment in the London-based firms soared over 53-fold.

Brexit can halt the growth of UK fintech industry.

Why is that? UK could lose its “passport.”

Many companies in EU, including fintech, use mechanism known as “passporting” to access Europe (European Economic Area) by getting licensed in a EU nation and be able to sell their products/services across the bloc. If the passporting privilege is lost, companies will have to submit application in every single country it wishes to operate in, which is time consuming and cost prohibitive.

Not only fintech companies, but also international banks would have to find a new legal home base. Large U.S. banks, such as Goldman Sachs (GS), Citi (C), and JP Morgan (JPM), employing thousands of people, would have to move its operations to other cities, such as Paris or Frankfurt.

Fintech companies could take the same direction as the banks. It is possible they will move to Ireland (Dublin). Ireland is European home (EU base) to Apple (AAPL), Google (GOOGL, GOOG), Microsoft (MSFT), Dell, Twitter (TWTR), Airbnb, and more. The corporate tax rate, which is one of the most important part of Irish investment attraction, is 12.5%, one of the lowest in Europe. That’s very low compared to United Kingdom’s 20% rate and Europe average of 20.24%.

One other important part of Irish investment attraction is its KDB (Knowledge Development Box). Certain intellectual propriety income, such as patent/copyright, are subject to just 6.25% tax, half of its famous 12.5% corporate tax rate. Not only that, but there is also 25% tax credit for research and development spending.

The KDB is clearly aimed at incentivizing innovate R&D. It provides 50% deduction in tax rate from qualifying profits. In other words, 50% allowance. No wonder so many U.S. tech companies are using Ireland as their European base.

In Europe, overall fintech investment increased 120% between 2014 and 2015. The number of deals increased by 51%. Both should continue to increase as states like Ireland continue to attract start-ups and talent. However, if UK files for Article 50 and other EU members plans to follow the same path, it is very possible the increased uncertainty over the EU cartel will scare away start-ups and international investors.

There’s also the issue of free movement of labor. One in three UK start-up workers are outsiders. Of the 34% workers from outside the UK, 20.7% are from the EU. 66% hold UK passport. The most common non-UK nationalities were Irish, American, and Spanish.

Brexit is likely to make it costlier and complicated for start-ups to attract and retain talent. Will the UK allow the free movement of labor? I don’t think so. One-third of leave voters stated the main reason for wanting to leave the EU “offered the best chance for the UK to regain control over immigration and its own borders.” Plus, other EU members, such as Ireland, probably want start-ups and talents to come to their cities, not stay in the UK.

In 2014, financial and related services employed nearly 2.2 million people, 7% of the UK workforce. The industry contributed 11.8% of UK economic output in 2014. London, the financial center of the UK and the world, accounted for 714,000 of the employment.

The British fintech firms employ about 61,000 people (2015 data), 2.8% of the financial and related services employment and 5.7% of financial services employment (both of which 2014 data).

The stakes are definitely high here.

Peer-to-peer (P2P), money-transfer and payments start-ups would be hardest hit by Brexit and by the end of EU passporting.

In April 2015, London-based P2P lending company, Funding Circle secured the largest single deal of the year with a $150 million funding, valuing the startup at over $1 billion, going straight into the “unicorn” club, private companies valued at $1 billion or more. The company is online marketplace that allows investors to lend money to small and medium-sized businesses.

European Investment Bank (EIB) recently announced it would the platform to make 100 million pounds ($133.3 million) loans to UK firms. 20% of UK’s fintech firms focus on credit and lending, which P2P falls under. UK has 74.3% share of the whole EU alternative finance market, which particularly includes online alternative finance, from equity-based crowdfunding to P2P business lending and more.

In 2014, UK P2P business lending market size was 998 million euros ($1.1 trillion), 42.70% of total UK alternative finance market size. As I said above, “The stakes are definitely high here.”

Brexit could reduce lending, especially to 5.4 million small businesses in the UK accounting for 99.3% of all private sector business. Collectively small businesses account for 50% of GDP (Gross Domestic Product) and 60% of employment.

Many of these businesses will encounter financial problems, leading to layoffs of employees and so on (domino effect).

In addition to above, money-transfer and payments start-ups could also be hit hard as they will lose their “passporting” privilege. 54% of UK fintech firms focus on banking and payments. To sum up what I said about “passporting” above, if you’re regulated in UK, you’re regulated across the EU.

Other EU members, such as Ireland, will try to use Brexit to their advantage. They will try to make its laws more attractive to entice fintech firms away from London.

There is also chance the UK will get to keep its fintech firms, only if it differentiates itself with streamlined regulation, tax breaks, and increased support for innovation.

The UK will have to renegotiate the financial regulation with the EU. But I don’t believe they will get what they want. EU is already playing hard-ball. UK has more to lose than the EU.

Article 50 won’t likely be triggered until late this year or early next year. If by then, anti-Brexit campaign gains momentum and the presence of pro-remain politicians increase in the UK government, it is likely UK will not leave EU.

Feel free to read my previous article, Pros and Cons of Brexit.

If you have any views, I would love to know in the comments below. If you have any questions about any issues related to Brexit, I would be happy to answer them ASAP. Don’t be surprised if the answer is 5 paragraphs long. Thank you.

FireEye’s Future Prospects Bright, But Investors Should Avoid The Stock (Second Seeking Alpha Article)

About two weeks ago, my second article was approved on Seeking Alpha. The article is about FireEye (NASDAQ: FEYE). The first article was about Eli Lilly and Company (NYSE: LLY)

The article can also be found at http://seekingalpha.com/article/3966410-fireeyes-future-prospects-bright-investors-avoid-stock.

If you have any questions/suggestions, feel free to contact me anytime. Thank you.


Summary

  • FireEye acquired four companies in the last three years.
  • Issued nearly $900 million in debt and continues to lose money.
  • Possible secondary offering, diluting shareholders’ equity further.

Founded in 2004, FireEye (NASDAQ:FEYE) has grown exponentially. The importance of security is extremely vital, and the demand for security continues to increase as cyber attacks increase and the world becomes more connected.

In 1988, after four years from the Macintosh introduction, the Internet’s first ever worm virus hit the computers. The Morris worm – one of the finest recognized worms to affect the world’s nascent cyber infrastructure – changed everything. Bugs in the code caused hundreds of systems to slow down and crash. Computer security was then no longer a science fiction.

Today, it is not just a computer security, but also smartphone security, cloud security, and so on. In short, the Internet is everywhere. As FireEye says:

“Attackers are clever, technology is complex, and experts are in short supply.”

FireEye stands out in the global Specialized Threat Analysis and Protection (STAP) market. According to research firm IDC, FireEye had 37.9% of the nearly $1 billion STAP market in 2014, seven times greater than its closest competitor. The $930 million STAP market grew 126.3% from 2013. By the end of 2019, it’s expected to reach $3.14 billion, compounded annual growth rate (CAGR) of 27.6% from 2014 to 2019.

From the STAP market alone, FireEye generated $353 million in revenue, a 119.2% growth year over year (Y/Y). The STAP market revenue accounted for a whopping 82.86% of FireEye’s total $426 million revenue in 2014. If the company can maintain its 38% of share by 2019, it could be generating about $1.2 billion in revenue from that market alone.

STAP Market Revenue and FireEye's Revenue at 37.9% share
STAP Revenue – 2011-2019 ($M)

While these are great news, there’s a disappointment. FireEye’s 37.9% share of the market in 2014 declined from 43.1% in 2013 due to a growing competition, notably from Palo Alto Networks (NYSE:PANW).

In April 2014, Palo Alto Networks acquired Israeli cyber security start-up Cyvera for nearly $180 million. In September 2014, it introduced Traps, an endpoint STAP product that was built on the technology from Cyvera.

FireEye itself admits the intense competition it operates in. In its 2015 annual filing, it recognized that “several vendors have either introduced new products or incorporated new features into existing products that compete with our solutions…independent security vendors such as Palo Alto Networks…offer products that claim to perform similar functions to our platform.”

In December 2013, FireEye acquired Mandiant, a leading provider of advanced endpoint security products and security incident response management solutions, for approximately $1.02 billion in cash and stock. Mandiant is well known for a report it published in February 2013, detailing a secretive Chinese military unit believed to be behind a long list of cyber attacks on U.S. companies.

The combination of former FireEye, attack detector, and Mandiant, attack responder, came after the Snowden leaks in June 2013. The marriage between them created a major force in the cyber security industry.

During the fourth-quarter conference call, chairman and chief executive officer of FireEye, David DeWalt, stated:

“We’ve gone from selling discrete web and email security appliances to enterprise customers to delivering a global threat management platform integrated across the network, endpoint and cloud to customers large and small.”

According to a report by Cybersecurity Ventures, the global cyber security market is expected to grow from $106.32 billion in 2015 to $170.21 billion by 2020 at a compound annual growth rate of 9.8%. In its cyber security 500 list of the world’s hottest and most innovative cyber security companies, FireEye came in first.

While FireEye may be the hottest, its stock is the ugliest. The share price of FireEye was down 35% last year while the NASDAQ 100 Technology sector has declined 2.8%. Since hitting an all-time high at $97.35 on March 2014, the stock is down 82%. The stock hit all-time lows on February 12th – the day after the fourth-quarter earnings report – at $11.35. Since then, the share price is up 55% at a current price of $17.60.

FEYE Chart
FEYE data by YCharts

In May 2014, FireEye acquired nPulse Technologies, a privately-held network forensics firm, for $56.6 million. nPulse specialized in the analytics of a cyber attack and how the attacks may have affected the networks. nPulse was a partner of FireEye prior to the acquisition. It seems FireEye benefited from the partnership with nPulse. The combination of Mandiant and nPulse gives FireEye an all-encompassing security framework.

In January 2016, FireEye acquired iSIGHT Security, a cyber threat intelligence solutions provider, for $200 million. iSIGHT is memorable for its discovery of a zero-day vulnerability – a hole in a software that is unknown to the vendor – affecting Microsoft (NASDAQ:MSFT) devices. It was used by Russian hackers to hijack and snoop on computers and servers used by NATO, the European Union, telecommunications and energy sectors.

In February 2016, FireEye acquired Invotas, a small company based in Virginia focusing on security automation and orchestration. The terms of the deal were not disclosed. FEYE said it plans to integrate the security orchestration capabilities from Invotas into the FireEye global threat management platform, “giving enterprises the ability to respond more quickly to attacks through automation,” and help customers deal with the “severe shortage of resources by automating the security process and building intelligence into their operations.”

FireEye expects iSIGHT and Invotas to add approximately $60 million to $65 million to 2016 billings and approximately $55 million to $60 million to 2016 revenue. That alone would bring 7.52% to 8.15% growth to the billings Y/Y. Revenue would grow 8.83% to 8.63% Y/Y.

For the year ending December 31, FireEye expects revenue from $815 million to $845 million and billings from $975 million to $1.1 billion. If the revenue grows as expected, it represents a growth of 31% to 36% Y/Y, and the billings would grow 22% to 32% Y/Y. After subtracting the revenue growth from iSIGHT and Invotas, organic growth would range from 22.85% to 28.48%. Of course, that does not include other acquisitions. The question is what is FireEye’s real organic growth?

FireEye's Key Financials and Growth Rate
FireEye’s Key Financials and Growth Rate

DeWalt believes bringing FireEye, “Mandiant, iSIGHT and Invotas together, we’ve created a cyber security like no other, one with a suite of leading technologies, world-class cyber security expertise, and nation-grade threat intelligence, all brought together to form a comprehensive threat management platform.”

At the end of 2015, the company had $402.1 million in cash and cash equivalents, up from $146.4 million in the end of 2014. With short-term investment – which can be liquidated in less than a year – of $767.8 million, total cash and ST investment adds up to $1.17 billion, an increase of 190.86% from $402.2 million in 2014. Most of the increase in total cash can be attributed to the issuance of debt last year. In 2015, FireEye issued a total debt of $896.5 million. It currently has $706.2 million in debt, which I expect to increase as the company continues to lose money.

FireEye believes the existing “cash and cash equivalents and short-term investments and any cash inflow from operations will be sufficient to meet our anticipated cash needs, including cash we will consume for operations, for at least the next 12 months.” But, I do not take its word for it, considering the company loses about $135 million every quarter, or $500 million in a year. In addition to the issuance of debt, total stockholders’ equity decreased to $1.04 billion in 2015 from $1.25 billion in 2014, as the amount of common shares increased 8.8 million to 162 million. As FireEye continues to lose money, it is possible it might do a secondary offering, which will dilute shareholders’ equity further.

One sign that FireEye is investing into the future is its workforce. At the end of 2015, FireEye had approximately 3,100 employees, up from 2,500 in 2014 and 1,678 in 2013. Growing workforce shows the company is optimistic in the future. Make no mistake, FEYE is clearly positioning itself to take a bigger share of a growing industry.

I believe FireEye is a great company that has the potential to succeed in the growing security market. But, it is too early for me to be optimistic in its future stock performance, as it continues to lose money and possible secondary offering this year.

FireEye is due to report its first-quarter earnings on Thursday, May 5th.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All information I used here such as revenue, etc are found from FireEye’s official investor relations site, SEC filings, and Bloomberg terminal. The pictures you see here including “FireEye’s Key Financials and Growth Rate” and “STAP Revenue – 2011-2019 ($M)” are my own.