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Trading Diary

Trading Diary – 13 February 2020

We’ve purchased Pushpay Holdings (PPH) in the Model Portfolio. PPH takes the number of holdings in the Model Portfolio to 17 and reduces our cash balance to ~5%.

Buy

Pushpay Holdings (PPH)

Pushpay is a mobile payments company that focuses primarily on the church giving and charity sectors. It has more than 7,000 customers, mostly churches, based predominantly in the United States. The company is also the leading provider of church management software with over 4,000 customers in the US faith sector.

Technicals

The stock has been trading in a range since the end of 2017. PPH listed on the ASX at $2.09 in October 2016. It spent the next 11 months in a reasonably wide trading range. Once it broke out of this range the stock appreciated more than 110% over the next 14 weeks. The uptrend ended at the beginning of January 2018.

Since then the stock has moved sideways in a range. The trading range followed the pattern of a conventional Wyckoffian reaccumulation, with a buying climax, followed by an automatic reaction and then multiple tests of both the support and resistance lines. The stock finally “jumped across the creek”, using Wyckoff parlance at the end of last year, which was followed by a sign of strength rally on above-average volume.

We’ve initiated our position as the stock emerged from a brief pullback and looked like the beginning of a new uptrend.

Fundamentals

Pushpay has reached a significant inflection point, having become profitable during the last 12 months. Operating revenue per annum has grown from a standing start in 2014 to $165m in 2019. The company has forecast operating income of $185m in 2020. All the while, gross margins have expanded from 55% to 65%.

Faith-based giving will continue to migrate online, mainly via mobile. As a result, Pushpay’s volume-based revenue will continue to grow. The combination of continued strong growth in operating income and expanding gross and operating margins is likely to lead to an acceleration of profitability over the next few years.

Pushpay also recently announced the acquisition of Church Community Builder, a US-based provider of church management solutions to over 4,000 churches in the US faith sector. This acquisition provides Pushpay with another avenue for growth and the ability to further embed its products in its customer’s technology stacks.

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Trading Diary

Trading Diary – 24 January 2020

We’ve opened a new position in Polynova Limited (PNV). Following this purchase, we have effectively two free spaces in our model portfolio for new investment opportunities. The model portfolio is currently holding a total of 16 stocks.

Buy

Polynova Limited (PNV)

Polynova is a medical device company that develops and sells dermal regeneration solutions for the treatment of burns, surgical wounds, and negative pressure wound therapy. The company offers BTM (biodegradable temporising matrix), a wound dressing intended for the treatment of full-thickness wounds and burns.

The company also has several other products under development including for the use in hernia treatment and breast augmentation and reconstruction.

Technicals

PNV has been trading in a range for the last 20 weeks since late August 2019. The stock broke below the bottom of this range briefly in October and November before sharply reversing course in mid-December upon announcing Novasorb BTMs approval for sale throughout the UK/ Ireland and the EU.

The stock spent the next five weeks bouncing along the bottom of the range as volume all but dried up. Increased trading volume returned to the stock in the first three weeks of 2020 and promptly propelled the stock back up to the top of its range. A high volume breakout to new highs followed this action after the company announced its first sales in Europe.

The stock is now at 52-week highs. A pause at these levels is warranted given how quickly the stock has moved up. However, a decrease in volume should accompany this pullback. The stock should also hold above, or at least in the top third of the prior range. This technical price action would indicate that the stock is under accumulation and a potential new uptrend is underway.

Fundamentals

PNV is an early-stage growth company. Sales have just recently kicked off in many markets and growth is accelerating. FY18 BTM sales were $1.7m, and $3.7m for the half-year 31 December 2018, but by year-end FY19 they were $9.3M.

At the AGM the chairman announced that in the four months to October 2019 the company is more than 100% ahead of the four months to October 2018. He went on to say that they are seeing month on month growth, with October 2019 BTM sales more than 100% higher than October 2018 sales.

At this stage in its lifecycle, the company is likely to eschew short-term profitability in favour of growth. The size of the opportunity is considerable. Therefore cash flow will be ploughed aggressively into growing the global sales teams, new product development, and expanding manufacturing capacity.

Never the less, the company’s cash burn is declining as sales expand. The company has stated that they do not need new equity for short term working capital. They’re confident that newly hired sales and marketing staff can quickly pay for themselves and generate returns. However, they may still consider a capital raising for R&D and manufacturing expansion.

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Trading Diary

Trading Diary – 23 January 2020

We’ve sold our position or position in Kogan, and while the loss was not as significant as the loss taken on Redbubble, it was still more significant than our average at 18%. This stock was another landmine that our risk management processes could not avoid. All the losses occurred in one session, and we did not have enough in the way of accrued gains to cushion the fall.

The fact that this is the second time this has happened in two consecutive months is disappointing (and frustrating!). But not altogether significant. Especially not in terms of its significance to the efficacy of our strategy. We remain confident in our approach and remain committed to its long-term execution.

At this time, we have not re-invested the capital released from this transaction. However, we are currently assessing several potential prospects and will likely do so soon.

Sell

Kogan (KGN)

The company released a business update that showed slowing growth of both top-line revenue and gross profit. The business is in the process of transitioning away from Third-Party brands. The expectation was that this process would be quicker and that revenue growth would begin to reaccelerate. The business has some exciting prospects, particularly in its Exclusive Brands business and its Marketplace business.

The company is trying to mimic Amazon by becoming less of a retailer – constrained by capital and inventory – and more of a technology business, with infinite scalability. The idea is good. However, it might take longer to transition than initially expected. It might also be more expensive to pull off than expected.

In any event, the market has cooled on the stock for the time being. The stock has fallen back into the trading range it had been in since April or May of last year. What looked like it might be the start of a new uptrend has not materialised.

The business still has a plausible path to growth, and as such, we don’t expect a full-scale capitulation in the stock. However, the time needed to prove out its new strategy does warrant some sideways action. The market is looking for proof in the form of real top-line numbers showing reaccelerating growth.

We’re not here to argue with the market. We’re here to participate in long-term, sustainable uptrends. And uptrends are created by uncertainty, and supported and reinforced by continual positive new information. As much as company management tried spin otherwise, there was nothing new or positive in the latest update.

For the time being, we’ve taken to the sidelines (again) on this one. However, this might still be an exciting story unfolding, or it might all be just hot air and spin.

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Trading Diary

Trading Diary – 17 December 2019

This week we’ve sold our position in Redbubble. Again, we have not redeployed the capital released into the market. We now have effectively four spaces open in the portfolio for new investments. We’ll reinvest this capital into new positions as we observe leading stocks moving out of trading ranges and into new uptrends. 

Sell

Redbubble Limited (RBL)

We sold our position in Redbubble at a 47% loss. Our risk management processes were ineffective in this situation as they are most effective in conditions of gradual reversal in the trend from up to down. Trend reversals usually take place over weeks or months. In this situation, it took place in one session of trading. Therefore, we were unable to avoid the bulk of the drawdown.

The reason for this, as with most things operating in a complex system, is hard to pin down. When we opened the position in November, we were under the impression that there was a good chance that the stock was positioning itself to enter a new uptrend. The business appeared to be back on track and gaining traction with key strategic initiatives. 

However, the latest market update issued on Thursday brought into question most of these assumptions. Competition is increasing, and growth is unquestionably slowing in the core Redbubble business. As a result, the stock sold down significantly, giving up most of its gains for the year. 

Future growth trajectory

It’s unclear at this point whether the company’s growth profile is permanently slowing or even reversing or whether the growth profile is just volatile. The industry in which the company operates is very competitive. More competitive than the market realised. Competitors in the area will continually try to gain short term ascendancy by one-upping each other through deals and marketing. The hyper-competitiveness will result in lower margins and a volatile business, which is what we’ve seen in this latest update. 

Moving on

In this situation, we take our cuts and move to the sidelines. This trade is the most significant loss we’ve experienced this year and is substantially higher than the average loss for our strategy. 

One key takeaway from this experience is that in future, we’ll be less inclined to enter a position that has gapped up in price substantially in recent history. A stock that can gap up on positive new information is one that can equally gap down on negative news. We prefer smooth trends, where information slowly disseminates through the market, driving the price momentum. 

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Trading Diary

Trade Diary – 5 December 2019

We’ve exited two stocks this week including Western Areas and Dicker Data. We’ll hold the cash released from these transactions in cash for the time being. We have a full watchlist of stocks on our radar, however, have resolved to wait for more opportune entry points at this time.  

We’re now holding a total of 15 stocks in the model portfolio with a 16.7% allocation to cash.

Sells

Western Areas Limited (WSA)

We exited our position in Western Areas with a loss of 16%. We based our thesis for this holding on continued strength in the Nickel price. This continued strength has not come to fruition, and as a result, the trade has come unstuck. 

We entered the stock following a big gap-up in the stock price, which was on substantially above-average volume. The move is most visible on the weekly chart (not included here). 

Following this initial aggressive move to the upside, we expected a minor reaction to create a new basing point from which the major trend could continue. 

The stock established a basing point shortly after our entry on the 3rd of October at $3.01 and quickly tested it ten days later. What appeared to be a new breakout to the upside followed this test. However, the breakout did not have sufficient volume and quickly petered out, falling back into the base before rapidly failing to the downside. 

This base failure was our cue to exit. The Nickel price has fallen significantly from its highs. And what appeared might be the beginning of a major bull move has fizzled out at this point. As a result, we have stepped aside. 

Dicker Data (DDR)

We missed the initial breakout of DDR from the long shallow base that began in November 2017. Following this price breakout, the stock moved up quickly, gaining more than 80% in just four months. Along the way, there was only one brief basing point – a shallow reaction of only 8.5% over four days. 

In May the stock settled into a more traditional Wyckoffian base, which lasted until the beginning of July. We entered our position as the stock broke out from this base on above-average volume. The stock continued to move higher, lulling us into a false sense of security that the significant uptrend was continuing.

Again, this was not to be. At the end of July, the stock suddenly broke down, collapsing 29% over three days with significant volume and no news. This breakdown was not a good sign. However, since the stock managed to hold above the previous basing point and recovered quickly, we were inclined to keep our position at this point. 

The stock subsequently recovered to make new highs. However, it quickly fell back from these new highs and has been making lower highs and lower lows since then. This price action makes us believe that the major uptrend might be over or at least pausing at this time. 

Nothing has changed with the fundamentals of the company. The market might now have fully discounted the opportunity (perhaps even over-reacting to the upside as the market is want to do) and now needs to pause until there is new information that could cause some further valuation uncertainty. We believe that this uncertainty is what causes stock prices to trend, and therefore we tend to seek it out. 

In any event, we’ve now exited DDR at a very slight profit and will move it back to the watchlist.