By Riddhi Ruparelia
After achieving a nearly 20% gain in first half of 2012, I believe that our portfolio remains well-positioned for the second half. Over the last six months, we sharply increased our focus on winners and reduced the number of holdings in our portfolio from 27 positions at the end of 2011 to 14 positions at the end of June 2012. We did all this without significantly increasing volatility compared to what we experienced in 2011.
Most importantly, we are now set up much better to benefit from strong companies in our portfolio. Here is the investment thesis for our top three holdings in our portfolio.
SodaStream International Ltd. (NASDAQ:SODA) sells soda maker kits and consumables so one can make the beverage at home. There are numerous advantages of making soda at home compared to buying cans or bottles from grocery stores, including convenience, control of taste/content and being green. It is not clear if there is any cost benefit, but at least it doesn’t seem to be expensive compared to buying buying cans and bottles.
Our investment thesis rests on two points: first, the company is consistently showing significant year-over-year growth in revenue (and pretty much all other metrics) for a number of quarters in a row. Secondly, the market continues to stay skeptical about SodaStream’s ability to sustain growth over longer period of time. This combination generally sets up for a pleasant surprise in stock price.
Even after sharp rise in SODA’s stock price in last two months, this stock was recently trading at a price to sales ratio of <2.5 and a forward PE of 15. (The PE ratio has improved to about 24 as of July 6.) We believe these are pessimistic multiples for a company analysts on average are expecting to grow by 35% on an earnings per share basis. Sales are forecast to advance by 32%.
So we believe there is plenty of upside left in this stock. And we have put our money where our mouth is: SODA consists of almost 20% of our portfolio (as of end of June 2012).
iRobot Corporation (NASDAQ:IRBT) makes a robotic vacuum called the Roomba for home cleaning. Apart from robots for consumer use, iRobot creates robots for the military. With US government cutting back on their military budget, iRobot has been shunned by investors since its fourth quarter earnings report.
We like the company for the following reasons. iRobot has demonstrated significant growth in the consumer robot business and that sector has become a larger segment of the company’s overall revenue and a bigger contributor to margins per first quarter 2012 earnings.
With 22% year-on-year growth and increasing average selling price (ASP) and profit margins, iRobot has already become a consumer robot company rather than a defense business. More importantly, iRobot consumer robots are sold in many countries providing a lot more reliability to the revenue stream in the future.
Current valuations are just too good to pass up. With $166 million in cash, iRobot has 27% of its market cap secured by cash. With a price to sales ratio of 1.3 and forward PE of 18 as of July 6, iRobot is priced for flat performance this year. After accounting for cash on hand, and the fact that company has an operating profit (no risk to the cash on the balance sheet), market expectations from iRobot are very low.
We believe iRobot’s consumer products business will continue to grow, which will offer positive surprises to the market over next four quarters. Any improvement in the defense business will be icing on the cake.
We have been building our position in iRobot since July 2010. We were certainly happy to snap more shares in June 2012 as a significant bargain appeared in the market. So now, IRBT is our second largest position with slightly above 10% as of 7/1/2012. We strongly believe IRBT is one of the best bargains in the market currently and market will start valuing it as a growing consumer products company in the not too distant future.
AthenaHealth, Inc. (NASDAQ:ATHN) provides cloud-based services to independent medical practitioners. The company’s main service helps doctors get paid by insurance companies. Athena has been aggressive in deploying additional useful services and demand is increasing for its package of various services. This has driven revenue from $189 million in 2009 to $324 million in 2011.
The company’s current valuation, at a price to sales ratio of slightly below 8 and forward PE at 60, reflects strength and success of this company. However we see this growth story just starting out. AthenaHealth is one of the few companies that has demonstrated the ability to develop more and more relevant products for a core customer base — while still expanding their customer base.
The company is currently building services like a EHR (Electronic Health Record) exchange on one hand while expanding into the hospital space on the other hand. This is the type of company we would like to stay invested in for a long time.
We first bought ATHN in May 2011 at $44.70 and since then added shares three more times at $58.93, $60.35 and $71.34 in April of 2012. This method of accumulating over a longer period of time enables us to truly understand the company.
With ATHN closed at $79.17 on June 29, 2012, we are already sitting on an average gain of 35% in a 13 months. We believe this is multi-year story and lot more to come.
Here is to enjoyable summer and happy investing to all!
Disclosure: Long IRBT, SODA, ATHN
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