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August 2014 How to Invest HQ Portfolio Update

August 2014 How to Invest HQ Portfolio Update

The How to Invest HQ Portfolio is a free public stock portfolio that can be viewed in full here. Each month, I add approximately $1,000 to real positions in the stock market and publish the results in this column.

July was an odd month for the How to Invest HQ Portfolio based on the way earnings season fell. Most companies reported earnings towards the end of July, whereas other companies reported on August 1st (like LinkedIn). As a result, the portfolio’s return looks much different today (just 2 weeks later) than it did on July 31st. Whereas this month looked like a big loss, by close on August 1st, the portfolio was outpacing the S&P 500 for the year.

Side note: Sorry for the slow update. This project is still alive, and no moves have been made outside what has been posted already. I was unable to post for the past few weeks due to an emergency, but posts should be coming in a more timely fashion going forward.

July 2014 Portfolio Performance

Stock6/30/14 Close Price7/31/14 Close PriceShares HeldGainPercent Change
NYSE: LNKD$171.47$180.6416$146.725.35%
NASDAQ: PBPB$15.96$11.5944-$192.28-27.38%
NASDAQ: AMZN$324.78$312.198-$100.72-3.88%
NASDAQ: GOOGL$584.67$579.552-$10.24-0.88%
Total Value 6/30/14Total Value 7/31/14Total Gain (July)Total Percent Change

As mentioned in the intro to this article, July looked a lot worse than it really was for the portfolio. First, LinkedIn reported on August 1st (with the stock soaring as a result), so the portfolio’s results look weaker than they are today. Additionally, the drop in Amazon’s share price was a massive overreaction by the market to their earnings report (discussed below). This drop in Amazon’s share price has since recovered.

Potbelly Was A Mistake

There is no way around this one. I made a big mistake investing in Potbelly (NASDAQ: PBPB), but fortunately, the solid performance of other stocks held by the portfolio has erased that debt. While Potbelly may recover over time, I believe there are better companies out there that will be able to deliver a larger return. As a result, I plan on moving out of PBPB and into another position. Since the value of the PBPB investment is not worth a solo buy, I will time the sale with a monthly purchase, giving myself about $1,500-$1,600 of purchasing power on a single purchase.

Amazon’s Sell Off is Ridiculous

Amazon reported late in July, “disappointing” on earnings per share. I do not understand this sentiment at all. When a company begins turning a profit and stockpiling cash, paying a dividend, or buying back stock, the company is essentially saying, “we have run out of investment opportunities”.

When a company makes very high margins on its products (like Google and Apple), one would expect them to turn a profit fairly early in the company’s life-cycle. Amazon is a growth company in the retail game, a completely different animal. In retail, there is always something new in which to invest. Whether it be because they are investing in more warehouses, better distribution channels, or more efficient infrastructure, Amazon should not turn a profit any time within the next few years. As an investor, I want the company to plow back every dollar it earns into enhancing its infrastructure so it can further its cost advantage over traditional brick and mortar stores. Jeff Bezos has proven himself very capable of this task.

2014 Year to Date Performance

Last Updated Stocks Held (in shares)Price Paid Per ShareTotal Price PaidCurrent Price Per ShareTotal Value
August 31st 2014LinkedIn Corp (LNKD): 16$183.56$2,936.96$225.75$3,612.00
August 31st 2014Potbelly Corp (PBPB): 44$22.50$990.00$12.10$532.40
August 31st 2014Amazon (AMZN): 8$316.12$2,528.96$339.02$2,712.16
August 31st 2014Google (GOOGLE): 4$573.61$2,294.44$582.36$2,329.44
August 31st 2014Yelp (YELP): 14$69.10$967.40$82.42$1,153.88
Total Invested:$9,062.08Total Current Valuation:$10,259.39Total Gain:$1,197.31 (13.21%)
Weighted Total Investment:$4,459.09Total Gain:$1,197.31Total Gain vs Weighted Investment:26.85%
S&P 500 YTD Return:8.39%

With this month’s weak performance, the portfolio slid from outpacing the S&P 500 a weighted return over just over 1%. While still in positive territory, it was a disappointing month. The weighted return value represents the average amount in the portfolio since the start of the year; given that I add approximately $1,000 per month, the average amount held by the portfolio per month year to date (YTD) is only a total of $3,967.01.

August 2014’s Purchase

August Purchase:SharesPrice Paid7/31/14 Closing Price Per ShareGain/LossPercent Change
NYSE: YELP14$69.10 (Purchased 7/29/14)$67.16-$9.70-2.81%

For August’s purchase, I decided to add 14 shares of Yelp (NYSE: YELP) at $69.10 a share. There are three reasons for this:

  • Great Company: I think YELP is a great company. I wrote extensively about YELP in my post, Battle of the Review Sites.
  • Fairly Priced: Given that YELP is trading at 13x this year’s projected revenues, you would be hard pressed to find many investors describe this stock as fair priced. However, with year over year revenue growth beyond 50% and the company trading at a 30% discount from recent highs, the numbers look reasonable. While it could let out a little steam if interest rates were to rise, it would be able to more than make up for any contraction within a few more years of revenue growth.
  • Benefited From Recent Google Update: While Yelp has always been a great company, one of the things that made me want to get in on Yelp was this little-known Google update. Dubbed “Google Pigeon” by search engine industry pundits, this update significantly boosted Yelp’s visibility in Google’s search engine results. Before this update (and as outlined in the linked post), Google was actively manipulating its own results to show Google Reviews above Yelp results. After much complaining from both Yelp and those in the search engine industry, it looks like Google has finally addressed this issue. This change from Google should cause an unexpected uptick in Yelp’s traffic, resulting in an earnings beat next quarter. I figured it would be good to establish a position now (and potentially add to it before next earnings report) in order to take advantage of this update.

Plans for August and September 2014

Right now, I do not have any plans to sell any of the positions in the How to Invest HQ Portfolio aside from Potbelly. For next month’s purchase, I will likely either add to my position in Yelp (NYSE: YELP), Google (NASDAQ: GOOGL), or retake a position in Zillow (NASDAQ: Z). The action I take will depend highly on the prices of these three stocks at the end of August, so stay tuned for the next update.

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