21st Sleep Well Pick Coming Next Week and Averaging Up
Also, quick note on the recent dip in share price and how I 'average up' in positions that have run up a lot.
Hi, I am Trung. I deep-dive into market leaders that passed my sleep-well checklist. I follow up on their performance with my Thesis Tracker updates, and when the right price comes, I buy them for the Sleep Well Portfolio, which I am building for my daughters to redeem in 2037. I disclose my reasoning for all BUY and SELL (ideally never). Access all content here.
Sometimes I don’t see anything good in the market, but sometimes I see a business and need to drop everything. That business will be the 21st Sleep Well Pick and add a different defensive dimension to the current Sleep Well Portfolio.
21st pick coming next week
It's another niche leader with a mission-critical platform that, once locked in, is tough to leave. The company has a 120% net dollar retention rate for 7 years (meaning existing customers spend 20% more each year), with 50% of SaaS revenue in the US, faces no tariff risks, no debts, and has grown free cash flow per share by over 40% since available financial data. There is only one reasonable alternative (1/3 of the size).
As the owner of similar mission-critical and cloud platform businesses, Veeva Systems, CrowdStrike, Wisetech, and Fortinet, I immediately see resemblances. I aim to finish the work next week.
Why now?
Like the 20th sleep well picks, there is also a CEO transition from the founder-CEO moving on (deservedly), on top of a significant acceleration in capital allocation. Cash (15% of market cap) is deployed for inorganic growth. The change can pay off very well, but it requires patience and thus makes it less ‘certain’ for the short-term market participants to ‘model’. I like the durability of the business, so I am doing the work today and will buy in stages as I get more well-versed with this industry's dynamics.
Q1’25 CRWD, VEEV, GTT, and FTNT reviews must wait. Others have been reviewed here: VAT, Kinsale, MIPS, Mercado Libre, Sea Limited, and Grab.
In case you missed:
20th Sleep Well Pick - Boring and Anti-fragile
Sleep Well Portfolio May Update - 64% Annualized Return
Transition of the Mercado Libre’s CEO.
Don’t miss out on my in-depth analysis and profitable investment decision.
Quick note on the recent dip and how I average up
I am building the egg nest for 2037, when my first daughter turns 18. So, until then, as long as the portfolio businesses create more value per share than the % gain in the share price, I will continue to take advantage of dips.
It’s simple but difficult to execute (if you can’t regulate your dopamine level).
The following chart shows the price changes from last month. Bright orange is the 21st pick, which has dropped the most, by -18%. The set-up is similar to Wisetech’s 25% drop in January (which it mostly recovered from) and the 20th pick’s CEO uncertainties in recent months, which partly caused the share price to drop by ~10%.
The remaining picks have only dropped a little, namely Grab, Meli, and Dino Polska. Sea Limited dropped in the last week after news of Meli’s increasing investments in logistics (more free shipping for lower ASP items) in Brazil to counter Sea Limited’s formidable growth in the region (10% of Sea’s total GMV and 40% of Meli’s Brazil GMV).
So, the dip isn’t tempting me yet. I am not after a few % gains, and I want to continue adding to companies that can create value (free cash flow per share) faster than their share price rises.
This indicates that they have created more value than the market is giving them credit for, and this should be reflected in a higher multiple. Some have duly received this, but I argue that as fcfps grows faster, the multiple can still rise. Let's look at a few charts.
Since its IPO, Fortinet’s value creation has been more than 2x the share price gain.
Veeva’s 3x
Since turning positive, Crowdstrike’s free cash flow per share has grown more than ten times the share price gain.
Grab has also performed similarly, growing free cash flow per share 10 times more than the growth of its stock.
Meli, 28 times, is the most impressive!
Sea Limited, created value 12x the stock gains, is only getting started as Shopee, the largest division, has only turned profitable in the last few quarters.
I purposely left out a few to reserve the best for paid members.
So, despite the dip not being as ‘attractive’ as it looks in the past month, zooming out to years and decades, you can see which company has consistently created value to shareholders.
I consider investing like a long hike over the mountains. I visualize the destination as a motivation while enjoying my current view (i.e., keeping things simple).
Caveats: I have a high degree of confidence that the destination is worthwhile (owning niche leaders) and that my path (selection process) to get there is directionally correct, so I worry very little over small market dips.
Averaging up
Before you leave, I’d like to share a question from a member about my framework for averaging up positions that had run up a lot (10/11 positions have done this).
Too long to read: I don’t wait until everyone thinks it’s cheap, and I try to balance making money and decision fatigue.
I hope you find the question and answer useful. I am a student of the market (not a slave to money) and welcome your feedback.
See you next week!
Sleep well,
Trung