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New Purchase: Blue Harbinger Disciplined Growth - Swapping Out Less Growth for More Upside

The Trade:

We just bought shares of ServiceNow, Inc (NOW), an aggressive, open-ended, growth company that provides enterprise cloud computing solutions. We first wrote about this one at the end of January (ServiceNow: A Growing Company with Significant Upside), and we liked the company then, but were hesitant to buy considering the price had already been climbing and the valuation metrics gave us pause. However, the more we’ve been researching this company (they announced strong earnings after our previous article), the more we like its powerful growth potential. The shares are down more than 5% in the last week, and we’re using this sell-off as an opportunity to buy.

We purchased the shares in our Blue Harbinger Disciplined Growth portfolio, and we’ve funded this purchase by selling shares of Westar Energy (WR). We believe NOW is a better fit for the long-term growth objectives of this portfolio, and we still own shares of Westar, but only in our Income Equity portfolio.

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Investment Thesis:

You can read our previous full write-up on ServiceNow here: A Growing Company with Significant Upside, but our main thesis is that now is an attractive time to initiate a position in this attractive long-term investment because IT spending budgets are high (especially post corporate tax rate reductions, and considering the strong economy), competition is essentially non-existent, NOW’s subscription model creates a very high retention rate, margins are very high, the total addressable market is huge (NOW anticipates doubling revenues by 2020, we think they’ll do even better by then, and much better beyond 2020), and enterprises migrating to the cloud is not going to end any time soon (NOW compliments the big cloud players like Amazon Web Services and Microsoft Azure, it doesn’t compete with them). NOW announced encouraging earnings at the end of January (after our previous write-up). We expect some choppiness due to Accounting Standard 606 moving some Q1 revenues into the previous Q4), but overall NOW has a tremendous runway for growth, and its price-to-sales ratio is warranted.

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The Bottom Line:

ServiceNow is a better fit than Westar Energy (WR) for our Blue Harbinger Discipline Growth portfolio. NOW will add some volatility to the portfolio, but over the next five years we suspect it will add far more growth and price appreciation than the overall stock market.

Note: we’ll be updating our holdings list soon, but wanted to share this brief update right away.

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