2020 Q4 and Year-End Review
Review of the quarter including results, market commentary, portfolio commentary, and insights.
Results
The fourth quarter of 2020 ended on December 31st, 2020.
For the fourth quarter, the consolidated return for Torre Financial accounts was 21.86%. For the same period, the S&P 500 (SPY) returned 12.12% and the Dow Jones Industrial Average (DIA) returned 10.70%.
For the full year 2020, the consolidated return for Torre Financial accounts was 21.04%. For the same period, the S&P 500 (SPY) returned 18.37%. The Dow Jones Industrial Average (DIA) returned 9.61%.
Returns for individual accounts may vary as each account is managed separately. While indices serve as a useful benchmark, each portfolio is tailored towards each investor’s unique investment objectives and risk profiles. Performance data represents past performance. Past performance does not guarantee future results.
Market
The market continued climbing a wall of worry throughout the fourth quarter of 2020, looking past the concerns of the day and towards a brighter future.
Fear of a second wave of COVID-19 threatened to close the economy. Emergency unemployment and other relief benefits came to an end. A contentious presidential election was infused with additional uncertainty by new voting protocols and candidate commentary.
Digesting the concerns, the selling pressure caused a brief dip in October. Notwithstanding, the market climbed on to new all-time highs. The S&P 500 recorded its best performance for November ever, up 11.27%.
In an incredible feat, biopharmaceutical companies began distributing vaccines in December. Developed in 11 months, the vaccine for COVID-19 was the fastest ever. The shortest timeline previously was for the Mumps vaccine, which took four years. Other notable vaccines took much longer: Polio, seven years, 1948–1955; Measles, nine years, 1954–1963; Chickenpox, 34 years, 1954–1988; and HPV, 15 years, 1991–2006.
In December, the Fed reaffirmed their commitment to keep buying bonds, thereby maintaining low rates, until they see “substantial progress”. In a vote of confidence on the liquidity in the financial system, the fed lifted temporary restrictions on national banks, allowing them to resume share buybacks. In the final week of the year, Trump signed a pandemic-aid bill, providing additional fiscal stimulus.
Forward-looking as always, the market reacts promptly to changes. Sentiment turned positive. Technology companies rushed to the market, creating various blockbuster IPOs including Palantir, Snowflake, Airbnb, DoorDash, and more. Margin debt balances, a strong indicator of stock-market euphoria, reached an all-time high in December.
2020 has truly been an unprecedented year. Investors that have stayed the course have been rewarded.
Portfolio
The pandemic has clearly delineated winners and losers. COVID has accelerated digital transformation, driving many companies on to the cloud. Many of our portfolio companies have benefitted, notably:
Cloudflare (NET). Providing infrastructure for the cloud, Cloudflare has been able to successfully leverage their core competencies to expand their offerings beyond speed and reliability into security. In this past quarter, the market reevaluated Cloudflare as a cyber-security player. NET is up 345% this year.
CrowdStrike (CRWD). An emerging, cloud-native leader in the cyber-security space, CrowdStrike has grown revenue at roughly 90% year-over-year. CrowdStrike is well-positioned to serve customers in any industry as they move their infrastructure onto the cloud. CRWD is up 325% this year.
Okta (OKTA). Okta provides cloud-based identity access management, enabling employers to manage access to applications and software. Recently, Okta has expanded beyond the workforce and into consumer identity access management, which is growing at a rapid pace. OKTA is up 120% this year.
Not all companies have fared as well.
Raytheon Technologies (RTX). Recently merged with United Technologies, Raytheon is an aerospace conglomerate serving both the defense and commercial industries. Needless to say, demand for aircrafts is not particularly strong. RTX is down 26% this year.
Lockheed Martin (LMT). An exceptional company, Lockheed Martin constantly maintains a high return on invested capital and a healthy backlog. However, concerns about spending with the new administration have suppressed the stock price. LMT is down 10% this year.
CVS Health (CVS). CVS is transforming from solely a pharmacy benefit manager to a vertically integrated healthcare provider. Their results seem to indicate success in integrating with Aetna. Large sums of debt and threats of Amazon entering the space have kept CVS down. CVS is down 9% this year.
JP Morgan (JPM) and Bank of America (BAC). National banks suffered steep losses in the March bout. Large write offs, foreboding potential defaults and other shockwaves, alongside low interest rates have kept banks down. BAC is down 15% this year. JPM is down 10% this year.
There have been a few other noteworthy developments in some of our portfolio companies.
Salesforce (CRM) and Slack (WORK). Salesforce signed a definitive agreement to acquire Slack for roughly $27.7 billion. Salesforce plans to leverage Slack as the user interface to their services. With this acquisition, Salesforce is confronting Microsoft directly in competition for the enterprise space. CRM is up 39% this year. WORK is up 92% this year.
Facebook (FB). The Federal Trade Commission launched an anti-trust law suit against Facebook, claiming illegal monopolization. The case asks Facebook to unwind its acquisitions of Instagram and Whatsapp, two acquisitions that were approved at the time and have grown to be widely successful. FB is up 31% this year.
Bristol Meyers Squibb (BMY) and Abbvie (ABBV). Berkshire Hathaway initiated positions in both of our biopharma companies. As a well-known, long-term investor, Berkshire is a good partner to have and can serve as a catalyst. BMY is down 4% this year. ABBV is up 17% this year.
Disney (DIS). With theme parks, cruises, hotels, retail stores, and distribution through movie theaters, Disney seemed to be the perfect victim to the pandemic. We sold our position in Disney earlier this year. Disney took this as an opportunity to transform their business, leveraging the recent success of Disney+ to restructure the company and launch an ambitious lineup of content. DIS hit an all time high. DIS is up 21% this year.
Upstart Network (UPST). A new addition, Upstart is a young company seeking to make lending better. Through artificial intelligence and machine learning, Upstart collects and processes signals to predict the outcome of a particular loan. As an API-first company, Upstart partners with banks, in contrast to many fin tech companies focused on starting an online bank. Leveraging Upstart, banks are able to offer borrowers lower rates, leading to more loans with fewer defaults. Upstart began in personal unsecured loans, a small and growing market. They recently announced entry into auto loans, and have a long runway left with large markets including credit cards and mortgages. Upstart IPO’d on December 16 and is up more than 100% since.
Insights
Technology companies have had an incredible year. As the pandemic drove everyone to remote work, the services provided by many of these companies have become indispensable.
As a fundamental-first investor, I had a hard time wrapping my head around the sky-high valuations these companies demand. At 20x, 30x, and even 40x next-twelve-month’s revenue, these companies, such as CrowdStrike, Cloudflare, and Okta, seem to be priced beyond perfection. As valuation multiples expanded, these companies have more than doubled and tripled this year.
Various factors contribute to their growth, including strong demand for their offerings and low interest rates. These are top-tier companies taking on large markets with the opportunity to grow exponentially. Exponential growth is hard to grasp, causing us to undershoot the future.
That being said, I do not think these revenue multiples are sustainable. Multiples are bound to compress. I do not know if there will be a hard step down or it will happen gradually over time.
Revenue multiples, however, are not the same thing as the share price. Even with multiple compression, these high-growth companies can continue to reward shareholders, due to their rapid revenue growth rates.
I’m excited about the future for these companies and am looking forward to what they could become. Winners keep on winning.