Author: Barry Randall, Crabtree Asset Management
Covestor model: Crabtree Technology
Disclosure: Long DOX, TNE, AVAV, TTEK, HPY, AYI, DE, GSIG, DSPG, ANIK, CAMP, MGIC, NTT, Z
February brought with it the quarterly re-balancing of the Crabtree Technology model. We take this action every three months as part of the discipline in our investment process. We sell those companies no longer demonstrating our preferred characteristics of cash generation, market share gains and operational and financial execution. And we replace those companies with those that our quantitative model determines are demonstrating those preferred characteristics.
It was also during February that we had a chance to fully analyze two high-profile technology companies: LinkedIn (LNKD) and Zillow (Z). And as it turns out, we ended up investing in one of them. First let me describe each and then see if you can guess which one we bought.
LinkedIn and Zillow actually have a lot in common. Both have software-as-a-service business models. Both are enjoying triple digit revenue and subscriber growth rates and are converting these tailwinds into profits. Both went public in 2011 in high-profile, “low-float” IPOs.
Each company is exciting in its own way. LinkedIn has a wonderful, “Trojan-horse” strategy, converting what early subscribers thought was simply a professionally-oriented social network into a hugely successful human resource tool. Over half of LinkedIn’s revenue comes from selling access to its database of 155 million professionals to corporations that can easily search for potential hires.
And Zillow exploits the eternal curiosity of people wondering what their own home is worth, as well as their neighbors’. More than half of Zillow’s revenue comes from real estate agents who subscribe to Zillow’s Premier Agent program. This program gives those agents preferred advertising and marketing positioning on Zillow’s web site, as well as on mobile devices, which now account for one third of the homes viewed.
LinkedIn seems to be moving from strength to strength. In late February, Monster Worldwide’s (MWW) CEO announced that the job-search web site was considering “strategic alternatives” — that is, putting itself up for sale. Not sure what other alternatives exist for Monster, with its share price down by 60% in the last year as LinkedIn and other social network sites eat it alive.
Considering that Monster is still quite profitable, it seems somewhat harsh for its stock (with a forward price:earnings ratio of 24) to have fallen by nearly two-thirds. But that’s how powerful perception is: LinkedIn has the better business model, so they get the love. And a forward P:E of 121. Also getting the love is Facebook, that other social network, which is cultivating an ecosystem of private companies that mine Facebook’s profile database (845 million-strong) to come up with new and interesting ways of targeting people to hire.
Think that’s odd? Not really: by some accounts, more people are already finding jobs on Facebook than they are on LinkedIn, simply through the informal connections made on the giant site. What will happen when private companies like BranchOut, BeKnown, Identified and others make it as easy to use Facebook to find a job or an employee as it is on LinkedIn? Facebook isn’t there yet, but I think we’re a lot closer to the perception of Facebook-as-LinkedIn-rival than many people realize.
And that’s the difference between Zillow and LinkedIn: the downside, rather than the upside risk embedded in their share price. Make no mistake: Zillow is not “safe as houses.” It’s a high-growth, high-volatility, high-P:E stock. But LinkedIn is only a carefully-worded Facebook press release away from being… Monster Worldwide.
February was a challenging month for the Crabtree Fund, not entirely surprising as it was a challenging month for small cap stocks in general. The Crabtree Fund, with a weighted-average market capitalization of about $500 million, definitely “skews” to the small-cap side. Nonetheless, the fourth quarter earnings season, which wrapped up in February, brought with it excellent earnings performances from a number of Crabtree holdings, including MAXIMUS (MMS) , MTS Systems (MTSC), NIC Inc. (EGOV), Stamps.com (STMP), Insight Enterprises (NSIT), CONMED (CNMD), XO Group (XOXO) and SXC Health (SXCI).
Some other holdings did not execute as well, and during the late February re-balancing of the Crabtree Fund, the following holdings were sold: Consolidated Graphics (CGX), Cohu (COHU), Digi International (DGII), ESCO Technology (ESE), Electro-Scientific (ESIO), Harris (HPOL), Invacare (IVC) , Lattice Semiconductor (LSCC), Rofin-Sinar (RSTI), Sykes (SYKE), Symantec (SYMC), TechTarget (TTGT), Veeco Instruments (VECO) and Vonage (VG). We also trimmed our positions in Astronics (ATRO), Insight Enterprises (NSIT), OSI Systems (OSIS), Perficient (PRFT) and Rudolph Technologies (RTEC), reducing these winners back to 2% positions in the portfolio.
Replacing our sells were the following new 2% positions: Amdocs (DOX), Tele Norte Leste Participacoes (TNE), AeroVironment (AVAV), Tetra Tech (TTEK), Heartland Payment (HPY), Acuity Brands (AYI), Medidata Solutions (DE), GSI Group (GSIG), DSP Group (DSPG), Anika Therapeutics (ANIK), CalAmp (CAMP), Magic Software (MGIC), Nippon Telephone (NTT), and, yes, Zillow.
