Frank Sands’ Firm Cuts the Lights on Illumina

Sands Capital Management recently disclosed its 13F portfolio updates for the third quarter of 2021, which ended on Sept. 30.

Founded in 1992 by Frank M. Sands Sr., Sands Capital Management is an independent investment management firm that invests in high-quality growth businesses.

Frank Sands (Trades, Portfolio) Jr. joined the firm in 2000 and currently serves as CEO and chief investment officer. The Arlington, Virginia-based firm has two main concentrated growth strategies: Select Growth, which chooses innovative businesses, and Global Growth, which diversifies holdings in countries outside of the U.S. Sands Capital focuses on six investment criteria: sustainable above-average earnings growth, leadership position in a promising business space, a clear mission with a focus on value, good financial strength, rational valuation and significant competitive advantages.

Based on the firm’s latest 13F filing, its top buys for the quarter were Cloudflare Inc. (

NET, Financial) and Square Inc. (SQ, Financial), while its most notable sells were Illumina Inc. (ILMN, Financial) and Sea Ltd. (SE, Financial).

Cloudflare

The firm added 7,289,490 shares to its Cloudflare (

NET, Financial) investment, increasing the stake by 705.06% for a total of 8,323,377 shares. Shares traded for an average price of $119.44 during the quarter, and the buy had a 1.37% impact on the equity portfolio.

Cloudflare is a web infrastructure and cybersecurity company based in San Francisco. By sitting between a website’s visitor and the customer’s hosting provider, the company is able to act as a reverse proxy for websites.

Shares of Cloudflare traded around $200.42 apiece on Nov. 4 for a market cap of $64.12 billion. Since the company went public in September of 2019, shares have gained 1,013%.

The company has a financial strength rating of 5 out of 10. The Piotroski F-Score of 4 out of 9 and cash-debt ratio of 2.31 show a stable financial situation. The profitability rating is 1 out of 10 on the back of consistently negative operating and net margins that underperform 76% of software industry peers, but the losses do seem to be narrowing.

Square

The firm also added 3,307,189 shares, or 45.44%, to its Square (

SQ, Financial) holding for a total of 10,585,033 shares. During the quarter, shares traded for an average price of $256.82, and the buy impacted the equity portfolio by 1.32%.

Square is a financial services company headquartered in San Francisco. It primarily operates as a merchant services aggregator, a mobile funds transfer platform (via the Square Cash App) and a provider of business website design and order delivery services.

Shares of Square traded around $246.17 apiece on Nov. 4 for a market cap of $113.50 billion. According to the GuruFocus Value chart, the stock is modestly undervalued.

The company has a financial strength rating of 5 out of 10 with a decent cash-debt ratio of 1.38 and an interest coverage ratio of 8.88. The profitability rating stands at 3 out of 10 due to low margins, but the company has been growing its top line, even if its bottom line remains around the same range.

Illumina

The firm sold nearly all of its stake in Illumina (

ILMN, Financial), reducing the position by 1,673,585 shares, or 99.86%, for a remaining holding of 2,298 shares. The stock was trading for an average of $472.70 per share during the quarter, and the trade had a -1.34% impact on the equity portfolio.

Based in San Diego, Illumina is a biotechnology company that develops, manufactures and markets integrated systems for the sequencing and analysis of genetic variation and biological function. Its products enable researchers to explore DNA at an unprecedented scale.

Shares of Illumina traded around $421 apiece on Nov. 4 for a market cap of $65.79 billion. According to the GF Value chart, the stock is fairly valued.

The company has a financial strength rating of 6 out of 10 and a profitability rating of 9 out of 10. The Piotroski F-Score of 7 out of 9 and Altman Z-Score of 13.52 show the company has a fortress-like balance sheet. The return on invested capital is typically higher than the weighted average cost of capital, meaning the company is creating value as it grows.

Sea

The firm trimmed its top holding, Sea (

SE, Financial), by 2,623,034 shares, or 11.36%, leaving a remaining investment worth 20,469,459 shares. During the quarter, the stock traded for an average price of $307.05 per share, and the sale had a -1.22% impact on the equity portfolio.

Singapore-based Sea is a global consumer internet company that operates through three main segments: digital entertainment (Garena), e-commerce (Shopee) and digital payments and financial services (SeaMoney).

Shares of Sea traded around $356.73 apiece on Nov. 4 for a market cap of $197.17 billion. According to the GF Value chart, the stock is significantly overvalued.

The company has a financial strength rating of 5 out of 10 and a profitability rating of 3 out of 10. The Pioroski F-Score of 6 out of 9 and cash-to-debt ratio of 3.31 show the company should have no trouble keeping its debts paid. Revenue has been growing at a decent clip, but net income has been moving in the opposite direction.

Portfolio overview

At the end of the quarter, the firm owned shares in 71 stocks valued at a total of $59.97 billion. The turnover for the period was 6%.

The top holdings were Sea with 10.88% of the equity portfolio, Netflix Inc. (

NFLX, Financial) with 5.29% and Visa Inc. (V, Financial) with 5.14%.

In terms of sector weighting, the firm was most invested in communication services, technology and consumer cyclical.