Q2 2024 Investment Strategies: Insights from Mar Vista, Riverwater, and TimesSquare Capital

Mar Vista Q2 2024 Focus Portfolio Commentary

We established new investments in Broadcom, Meta Platforms, and added capital to Apple. Investments in Alphabet, Adobe, Microchip Technologies, and Walt Disney were modestly reduced. The S&P 500® Index ("S&P 500®") appreciated 15.29% in the first half of 2024, one of its strongest performances since the late 1990s tech boom, though still slightly below 2023's exceptional start. This year's growth has been primarily driven by six major tech companies: Nvidia, Alphabet, Microsoft, Amazon, Meta, and Apple. These "megacap" firms, benefiting from artificial intelligence (AI) enthusiasm, have contributed approximately 60% of the market's year-to-date gains. Nvidia stands out with a 30% contribution to the first-half advance. The market impact of AI has drawn comparisons to other transformative technologies, but the rapid rise in AI stock valuations is noteworthy. Nvidia's market capitalization now exceeds the value of the German, French, and UK stock markets combined. While artificial intelligence might ultimately affect companies throughout the economy, this AI-focused rally has created a noticeable market divide. AI and AI-adjacent sectors have been driving most of the S&P 500® gains since March, while other sectors underperformed. The concentration of gains in AI-related stocks is evident in the performance gap between the S&P 500® and the S&P 500® Equal-Weight Index. The Equal-Weight Index is up 5.1% year-to-date, underperforming the S&P 500® by 10 percentage points - the largest such gap in the first half of a year on record. According to S&P measures, momentum in the market has reached levels surpassing even the dot-com era. While momentum often persists in equity markets, the current rally's concentration and longevity are remarkable. The top 10 companies in the S&P 500® currently represent 35% of the index's market capitalization but account for only 23% of its earnings. This discrepancy is at a historical peak suggesting exceptionally elevated expectations for future earnings growth. Key questions remain about the broader economic impact of AI and whether the benefits will be limited to a select few tech giants. As the rally continues, we are closely analyzing our AI investments to assess their potential to deliver on their perceived revolutionary promise. Mar Vista's Focus strategy returned +3.74% net-of-fees in the second quarter of 2024. The Russell 1000® Growth Index and the S&P 500® Index returned +8.34% and +4.28%, respectively. Stock selection within information technology, communication services and consumer discretionary negatively impacted our performance during the quarter. Apple (AAPL), Alphabet (GOOGL), and Microsoft (MSFT) were among the portfolio's top contributors for the quarter, appreciating +23.0%, +20.6%, and +6.4%, respectively. Alternatively, our investments in Nike (NKE) (-19.5%), Walt Disney (DIS) (-18.8%), and Salesforce (CRM) (-14.6%) were among the portfolio's biggest detractors. Investors were reminded of the strength of the Apple ecosystem as management demonstrated how generative AI solutions would be integrated into Apple's 1.2 billion iPhone installed base. Apple plans to integrate generative AI features into its iOS 18, which will be broadly released in the fall with the iPhone 16. We believe Apple should benefit from generative AI as it will spur a meaningful iPhone upgrade cycle and create new avenues of monetization through its app store and advertising offerings. We believe this will support intrinsic value growth that will range between high single digits and low double digits over our investment horizon. Alphabet reported robust quarterly financials, demonstrating accelerated revenue growth and improved margins from restructuring efforts. The company's core advertising business is rebounding after a challenging 2022-2023 period, when advertisers curtailed spending due to economic concerns. While this quarter's exceptional growth rate may not persist, Alphabet's performance indicates it is likely to exceed our annual projections. Following Meta's lead, Alphabet is adopting a more stringent approach to expenses. The company continues to reduce headcount and consolidate teams, aiming to counterbalance the impact of infrastructure investments on profitability. Alphabet's better-than-expected revenue and earnings underscore both the resilience of its core business and management's early success in sustainably restructuring the cost base. Notably, AI advancements are already showing promising results, enhancing consumer engagement, and improving advertiser performance. These developments position Alphabet favorably in an increasingly AI-driven digital landscape. Microsoft continues to occupy a strong position, poised to capture market share as businesses, both large and small, navigate the transition to a digital-first landscape and embrace generative AI-driven solutions. The company's commanding presence in the enterprise arena, combined with its comprehensive product portfolio encompassing Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS), establishes it as a crucial provider of IT solutions for companies of all scales. Microsoft is effectively executing its strategy in a sizable market by offering a roadmap for digital transformation and adoption of innovative, AI-driven solutions, such as ChatGPT, while enhancing productivity and reducing costs. Consequently, we anticipate that Microsoft's solutions should exhibit resilience even in a more challenging macroeconomic environment, supporting low-double-digit growth in intrinsic value within our investment horizon. Nike's stock declined following management's revised forecast for fiscal year 2025, projecting negative mid-single- digit revenue growth instead of the previously anticipated positive growth. The company has observed a marked slowdown in lifestyle product sales since April, a trend that persisted into June. Our current projections indicate that both sales and earnings will fall 15-20% below the conservative estimates set by management just a quarter ago. This substantial downward revision in sales and earnings is attributed to insufficient product innovation, wholesale channel shift, and intentional reduction of supply in lifestyle franchises. While the negative adjustments to guidance could potentially act as a clearing event for the stock, the degree of conservatism in the new projections remains uncertain. Nike maintains its position as the global leader in sportswear. However, its revenue growth has been hampered by a lack of innovation, and its recovery is further complicated by deteriorating macroeconomic conditions in the US and China. The company's renewed focus on innovation and efforts to re-engage with wholesale channels may eventually help restore growth, but we believe increased skepticism regarding management's ability to execute is justified. Disney's shares declined after its earnings release, even though the company exceeded recently upgraded financial forecasts. While Disney+ and Hulu reached a milestone by turning their first quarterly profit, the company cautioned about theme park attendance returning to pre-pandemic norms. This signals a deceleration following a period of exceptional growth, impacting the stock as theme parks and experiences account for roughly 60% of Disney's earnings. Despite broader consumer worries, Disney's stock is still trading with a significant discount to fair value. We expect the gap between Disney's market price and its intrinsic value to shrink as its streaming division evolves and increases profitability over time. Salesforce's stock came under pressure in Q2 as the company modestly missed Street expectations for software bookings and reduced its FY2025 subscription revenue guidance to "around 10%" year-to-year growth from "greater than 10%." We believe Salesforce is experiencing cyclical pressures as software demand across the industry is pressured at the margin. This has led to longer sales cycles; smaller deal sizes and budgets being allocated away from enterprise software to emerging areas like generative AI. We continue to believe that Salesforce will see a tailwind to demand from its generative AI offerings as many AI use cases are found in front office software like customer relationship management. This, coupled with Salesforce's treasure trove of customer data, positions it well to exploit the evolution of next-generation AI offerings. We initiated a position in Broadcom in Q2. As a skilled aggregator, Broadcom acquires firms, streamlines their operations, and invests R&D dollars in mission-critical products that generate industry-leading profit margins, robust cash flows and high returns on invested capital. Its primary markets include AI accelerators targeting generative AI applications, networking & wireless semiconductors, and mission-critical infrastructure software solutions. Broadcom is well-positioned to benefit from the rapidly expanding demand for custom AI accelerator chips that support the evolution of the generative AI market. The company is the second-largest producer of AI accelerator chips behind Nvidia and leads the market in custom AI ASIC chips. Its customers include leading hyper scalers like Alphabet and Meta who are turning to Broadcom for custom silicon due to its performance and cost advantages. We believe the company is a direct beneficiary of a multi-year capital cycle driven by hyper scalers building out next-generation AI factories. Broadcom recently acquired VMware, the leader in virtualization software targeting the enterprise market. The integration of VMware is tracking ahead of plan as management has simplified its product bundles, transitioned to a subscription revenue model, and reduced operating costs. We believe this simplified go-to-market structure will result in strong top-line revenue growth and expanding operating margins. We believe Broadcom will compound intrinsic value per share in the mid-20% range over the intermediate term as it benefits from the AI-infrastructure build-out, a cyclical recovery in its legacy semiconductor business, and modestly accelerating growth from its infrastructure software business as VMware is successfully integrated. We previously divested from Meta during a period of stagnant advertising growth and the company's initial, significant investment in the metaverse project. At that time, investors appeared complacent to the risks associated to an increasingly competitive landscape, and the Street's robust financial expectations as the company transitioned towards monetizing short-format video (Reels). The subsequent decline in Meta's stock price during 2022 reflected these concerns. Since then, Meta has demonstrably shifted its strategic focus. The company has prioritized operational efficiency, implemented strategies to monetize Reels effectively, and initiated a robust artificial intelligence (AI) development program. We believe the focus on AI represents a more prudent capital allocation strategy compared to the earlier metaverse initiative. Meta AI holds significant potential to unlock substantial monetization opportunities and enhance user engagement, while maintaining tight controls on operating costs. Meta's unparalleled global reach, fostered by its extensive suite of applications, translates to a dominant position within digital advertising. This competitive advantage is further bolstered by the difficulty of replicating Meta's user base. We anticipate that the company's ability to expand its global advertising market share and leverage AI for innovative business ventures should translate into 13-15% intrinsic value growth per annum. Undoubtedly, Meta faces ongoing challenges regarding user data privacy and content control. While regulatory scrutiny is likely to persist, we believe the long-term impact on intrinsic value should be minimal. Although increased legal costs are a consequence, greater data and content supervision could strengthen Meta's competitive moat. After a strong rally in the first half of the year, stocks appear to be headed into the second half with powerful tailwinds. The outlook remains positive, buoyed by healthy enterprise spending, lower inflation, and strong corporate earnings. While risks persist, the market's momentum appears poised to continue. The U.S. economy's resilience in the face of significantly higher interest rates has been a major surprise over the past two years. The stock market remains optimistic, grounded on the revolutionary impact of artificial intelligence. We are believers in the long-term transformative effect of AI, but many of the benefits are going to accrue gradually, and the market is pricing in immediacy. Our investment approach focuses on businesses with strong competitive moats that can compound intrinsic value across various economic conditions. This strategy aims to capitalize on both the business value creation of our holdings and favorable investment entry points. By patiently investing in high-conviction companies and maintaining disciplined capital allocation, we strive to deliver competitive risk-adjusted returns over the long term. Our portfolio is designed to benefit from enduring market trends while maintaining resilience against potential economic headwinds. As the market continues to evolve, particularly in response to AI developments, we remain committed to our long-term, value-accretive investment philosophy. This approach positions us to navigate current market dynamics, balancing opportunities presented by technological innovation with prudent, sustainable investment strategies.

Mar Vista Q2 2024 Global Equity Portfolio Commentary

After a strong rally in the first half of the year, global equities appear to be headed into the second half with powerful tailwinds. The outlook remains positive, buoyed by healthy enterprise spending, lower inflation, and strong corporate earnings. The MSCI All Country World Index Net appreciated 11.30% in the first half of 2024, one of its strongest performances since the late 1990s tech boom, though still slightly below 2023's exceptional start. This year's growth has been primarily driven by six major tech companies: Nvidia, Alphabet, Microsoft, Amazon, Meta, and Apple. These "megacap" firms, benefiting from artificial intelligence (AI) enthusiasm, have contributed approximately 49% of the global market's year-to-date gains. Nvidia stands out with a 24% contribution to the first-half advance. The market impact of AI has drawn comparisons to other transformative technologies, but the rapid rise in AI stock valuations is noteworthy. Nvidia's market capitalization now exceeds the value of the German, French, and UK stock markets combined. While artificial intelligence might ultimately affect companies throughout the economy, this AI-focused rally has created a noticeable market divide. AI and AI-adjacent sectors have been driving most of the global market gains since March, while other sectors underperformed. The concentration of gains in AI-related stocks is evident in the U.S. performance gap between the S&P 500® Index and the S&P 500® Equal-Weight Index. The equal-weight index is up 5.1% year-to-date, underperforming the S&P 500® Index by 10 percentage points - the largest such gap in the first half of a year on record. Key questions remain about the broader economic impact of AI and whether the benefits will be limited to a select few tech giants. As the rally continues, we are closely analyzing our AI investments to assess their potential to deliver on their perceived revolutionary promise. Mar Vista's Global strategy returned +2.04% net-of-fees in the second quarter of 2024. The MSCI World Index Net and the MSCI All Country World Index Net returned +2.66% and +2.92%, respectively. Stock selection within information technology, healthcare and communication services negatively impacted performance during the quarter. Apple (AAPL), Alphabet (GOOGL), and Oracle (ORCL) were among the portfolio's top contributors for the quarter, appreciating +23.0%, +20.6%, and +12.8%, respectively. Alternatively, our investments in Sartorius (OTCPK:SARTF) (-40.1%), Walt Disney (DIS) (-18.8%), and Salesforce (CRM) (-14.6%) were among the portfolio's biggest detractors. Investors were reminded of the strength of the Apple ecosystem as management demonstrated how generative AI solutions would be integrated into Apple's 1.2 billion iPhone installed base. Apple plans to integrate generative AI features into its iOS 18, which will be broadly released in the fall with the iPhone 16. We believe Apple should benefit from generative AI as it will spur a meaningful iPhone upgrade cycle and create new avenues of monetization through its app store and advertising offerings. We believe this will support intrinsic value growth that will range between high single digits and low double digits over our investment horizon. Alphabet reported robust quarterly financials, demonstrating accelerated revenue growth and improved margins from restructuring efforts. The company's core advertising business is rebounding after a challenging 2022-2023 period, when advertisers curtailed spending due to economic concerns. While this quarter's exceptional growth rate may not persist, Alphabet's performance indicates it is likely to exceed our annual projections. Following Meta's lead, Alphabet is adopting a more stringent approach to expenses. The company continues to reduce headcount and consolidate teams, aiming to counterbalance the impact of infrastructure investments on profitability. Alphabet's better-than-expected revenue and earnings underscore both the resilience of its core business and management's early success in sustainably restructuring the cost base. Notably, AI advancements are already showing promising results, enhancing consumer engagement, and improving advertiser performance. These developments position Alphabet favorably in an increasingly AI-driven digital landscape. Oracle is seeing revenue acceleration as it benefits from several years of investing in cloud-based solutions that are now driving demand. Oracle's OCI offering is recognized as a viable hyper scaler offering and is winning mindshare from leading cloud customers including Open AI. This is driving accelerating demand as it offers a strong value proposition to customers due to its favorable performance and cost metrics. This coupled with Oracle's recently announced partnerships with Microsoft Azure and Google Compute Platform, which could help facilitate the migration of the Oracle Database to the cloud. We believe this should support a third leg of growth for Oracle as its large installed base of database customers shift from on-premise to cloud deployments. As database customers migrate to the cloud, Oracle could increase database software support revenues by two-to-three times. We continue to believe Oracle is well positioned to grow intrinsic value low-double-digits over our investment horizon. Sartorius' stock declined materially during the quarter as first quarter results fell short of guidance and expectations for second half growth were reduced. Management has struggled in recent years to accurately predict demand as bioprocessing spending boomed during the pandemic and busted when spending slowed and customer inventories were built to unsustainable levels. The lumpiness of near-term results has been surprising but the secular trends for bioprocessing industry and competitive positioning for Sartorius should drive steady mid-teens or better intrinsic value growth for the company as we enter 2025. Disney's shares declined after its earnings release, even though the company exceeded recently upgraded financial forecasts. While Disney+ and Hulu reached a milestone by turning their first quarterly profit, the company cautioned about theme park attendance returning to pre-pandemic norms. This signals a deceleration following a period of exceptional growth, impacting the stock as theme parks and experiences account for roughly 60% of Disney's earnings. Despite broader consumer worries, Disney's stock is still trading with a significant discount to fair value. We expect the gap between Disney's market price and its intrinsic value to shrink as its streaming division evolves and increases profitability over time. Salesforce's stock came under pressure in Q2 as the company modestly missed Street expectations for software bookings and reduced its FY2025 subscription revenue guidance to "around 10%" year-to-year growth from "greater than 10%." We believe Salesforce is experiencing cyclical pressures as software demand across the industry is pressured at the margin. This has led to longer sales cycles; smaller deal sizes and budgets being allocated away from enterprise software to emerging areas like generative AI. We continue to believe that Salesforce will see a tailwind to demand from its generative AI offerings as many AI use cases are found in front office software like customer relationship management. This, coupled with Salesforce's treasure trove of customer data, positions it well to exploit the evolution of next-generation AI offerings. During the quarter, we established new investments in Broadcom (AVGO), Linde (LIN), Meta Platforms (META), and added capital to Apple. Investments in Adobe (ADBE), Alphabet, Amazon (AMZN), and Walt Disney were modestly reduced, while Brookfield Asset Management (BAM), GXO Logistics (GXO), Novartis (NVS), and Veralto (VLTO) were liquidated. We initiated a position in Broadcom in Q2. As a skilled aggregator, Broadcom acquires firms, streamlines their operations, and invests R&D dollars in mission-critical products that generate industry-leading profit margins, robust cash flows and high returns on invested capital. Its primary markets include AI accelerators targeting generative AI applications, networking & wireless semiconductors, and mission-critical infrastructure software solutions. Broadcom is well-positioned to benefit from the rapidly expanding demand for custom AI accelerator chips that support the evolution of the generative AI market. The company is the second-largest producer of AI accelerator chips behind Nvidia and leads the market in custom AI ASIC chips. Its customers include leading hyper scalers like Alphabet and Meta who are turning to Broadcom for custom silicon due to its performance and cost advantages. We believe the company is a direct beneficiary of a multi-year capital cycle driven by hyper scalers building out next-generation AI factories. Broadcom recently acquired VMware, the leader in virtualization software targeting the enterprise market. The integration of VMware is tracking ahead of plan as management has simplified its product bundles, transitioned to a subscription revenue model, and reduced operating costs. We believe this simplified go-to-market structure will result in strong top-line revenue growth and expanding operating margins. We believe Broadcom will compound intrinsic value per share in the mid-20% range over the intermediate term as it benefits from the AI-infrastructure build-out, a cyclical recovery in its legacy semiconductor business, and modestly accelerating growth from its infrastructure software business as VMware is successfully integrated. Linde PLC is the world's largest, global industrial gas producer. The company enjoys the highest profit margins and returns on capital in the industry. Linde's primary products are atmospheric gases and process gases. Industrial gases have benefitted from secular growth trends in decarbonization and carbon sequestration. Moreover, the opportunity in blue and green ammonia and hydrogen are substantial. Projects in these areas are quickly being added to its backlog for future growth. We see these secular trends as long-term positives for Linde and the entire industrial gas industry. Linde believes it can grow its volumes with new applications; the buildout of small, on-site plants using its technologies; and focusing on growing geographies such as India, Malaysia, Vietnam, China and Brazil. Despite the long-term growth opportunities, recent demand trends have slowed due to weak global industrial production. Among the regions, the U.S. remains resilient, with volumes flat to slightly negative. Europe, Latin America, the Middle East, and China are all sending mixed economic signals. We believe these slower trends are transitory in nature, providing an opportunity to purchase shares in Linde at attractive prices. We previously divested from Meta during a period of stagnant advertising growth and the company's initial, significant investment in the metaverse project. At that time, investors appeared complacent to the risks associated to an increasingly competitive landscape, and the Street's robust financial expectations as the company transitioned towards monetizing short-format video (Reels). The subsequent decline in Meta's stock price during 2022 reflected these concerns. Since then, Meta has demonstrably shifted its strategic focus. The company has prioritized operational efficiency, implemented strategies to monetize Reels effectively, and initiated a robust artificial intelligence development program. We believe the focus on AI represents a more prudent capital allocation strategy compared to the earlier metaverse initiative. Meta AI holds significant potential to unlock substantial monetization opportunities and enhance user engagement, while maintaining tight controls on operating costs. Meta's unparalleled global reach, fostered by its extensive suite of applications, translates to a dominant position within digital advertising. This competitive advantage is further bolstered by the difficulty of replicating Meta's user base. We anticipate that the company's ability to expand its global advertising market share and leverage AI for innovative business ventures should translate into 13-15% intrinsic value growth per annum. Undoubtedly, Meta faces ongoing challenges regarding user data privacy and content control. While regulatory scrutiny is likely to persist, we believe the long-term impact on intrinsic value should be minimal. Although increased legal costs are a consequence, greater data and content supervision could strengthen Meta's competitive moat. Strong price appreciation compelled us to exit our investments in Brookfield Asset Management, Novartis, and Veralto, while lower conviction in GXO Logistics' long-term growth motivated our sale. After a strong rally in the first half of the year, stocks appear to be headed into the second half with powerful tailwinds. The outlook remains positive, buoyed by healthy enterprise spending, lower inflation, and strong corporate earnings. While risks persist, the market's momentum appears poised to continue. The global economy's resilience in the face of significantly higher interest rates has been a major surprise over the past two years. Most developed stock markets remain optimistic, grounded on the revolutionary impact of artificial intelligence. We are believers in the long-term transformative effect of AI, but many of the benefits are going to accrue gradually, and the market is pricing in immediacy. Our investment approach focuses on businesses with strong competitive moats that can compound intrinsic value across various economic conditions. This strategy aims to capitalize on both the business value creation of our holdings and favorable investment entry points. By patiently investing in high-conviction companies and maintaining disciplined capital allocation, we strive to deliver competitive risk-adjusted returns over the long term. Our portfolio is designed to benefit from enduring market trends while maintaining resilience against potential economic headwinds. As the market continues to evolve, particularly in response to AI developments, we remain committed to our long-term, value-accretive investment philosophy. This approach positions us to navigate current market dynamics, balancing opportunities presented by technological innovation with prudent, sustainable investment strategies.

Mar Vista Q2 2024 Strategic Growth Portfolio Commentary

We established new investments in Broadcom and Meta Platforms, and added capital to Apple, Equifax, and Moody's. Investments in Alphabet, Analog Devices, Microchip Technology, Pepsi, and Walt Disney were modestly reduced, while our lower conviction in Starbucks prompted liquidation. The S&P 500® Index ("S&P 500®") appreciated 15.29% in the first half of 2024, one of its strongest performances since the late 1990s tech boom, though still slightly below 2023's exceptional start. This year's growth has been primarily driven by six major tech companies: Nvidia, Alphabet, Microsoft, Amazon, Meta, and Apple. These "megacap" firms, benefiting from artificial intelligence (AI) enthusiasm, have contributed approximately 60% of the market's year-to-date gains. Nvidia stands out with a 30% contribution to the first-half advance. The market impact of AI has drawn comparisons to other transformative technologies, but the rapid rise in AI stock valuations is noteworthy. Nvidia's market capitalization now exceeds the value of the German, French, and UK stock markets combined. While artificial intelligence might ultimately affect companies throughout the economy, this AI-focused rally has created a noticeable market divide. AI and AI-adjacent sectors have been driving most of the S&P 500® gains since March, while other sectors underperformed. The concentration of gains in AI-related stocks is evident in the performance gap between the S&P 500® and the S&P 500® Equal-Weight Index. The Equal-Weight Index is up 5.1% year-to-date, underperforming the S&P 500® by 10 percentage points - the largest such gap in the first half of a year on record. According to S&P measures, momentum in the market has reached levels surpassing even the dot-com era. While momentum often persists in equity markets, the current rally's concentration and longevity are remarkable. The top 10 companies in the S&P 500® currently represent 35% of the index's market capitalization but account for only 23% of its earnings. This discrepancy is at a historical peak suggesting exceptionally elevated expectations for future earnings growth. Key questions remain about the broader economic impact of AI and whether the benefits will be limited to a select few tech giants. As the rally continues, we are closely analyzing our AI investments to assess their potential to deliver on their perceived revolutionary promise. Mar Vista's Strategic Growth strategy returned +2.36% net-of-fees in the second quarter of 2024. The Russell 1000® Growth Index and the S&P 500® Index returned +8.34% and +4.28%, respectively. Stock selection within consumer discretionary, communication services, and information technology negatively impacted our performance during the quarter. Apple, Alphabet, and Amphenol (APH) were among the portfolio's top contributors for the quarter, appreciating +23.0%, +20.6%, and +17.0%, respectively. Alternatively, our investments in Nike (NKE)(-19.5%), Walt Disney (DIS)(-18.8%), and Salesforce (CRM)(-14.6%) were among the portfolio's biggest detractors. Investors were reminded of the strength of the Apple ecosystem as management demonstrated how generative AI solutions would be integrated into Apple's 1.2 billion iPhone installed base. Apple plans to integrate generative AI features into its iOS 18, which will be broadly released in the fall with the iPhone 16. We believe Apple should benefit from generative AI as it will spur a meaningful iPhone upgrade cycle and create new avenues of monetization through its app store and advertising offerings. We believe this will support intrinsic value growth that will range between high single digits and low double digits over our investment horizon. Alphabet reported robust quarterly financials, demonstrating accelerated revenue growth and improved margins from restructuring efforts. The company's core advertising business is rebounding after a challenging 2022-2023 period, when advertisers curtailed spending due to economic concerns. While this quarter's exceptional growth rate may not persist, Alphabet's performance indicates it is likely to exceed our annual projections. Following Meta's lead, Alphabet is adopting a more stringent approach to expenses. The company continues to reduce headcount and consolidate teams, aiming to counterbalance the impact of infrastructure investments on profitability. Alphabet's better-than-expected revenue and earnings underscore both the resilience of its core business and management's early success in sustainably restructuring the cost base. Notably, AI advancements are already showing promising results, enhancing consumer engagement, and improving advertiser performance. These developments position Alphabet favorably in an increasingly AI-driven digital landscape. As a leading supplier in the global interconnect and sensor market, Amphenol benefits from a tailwind of demand as things become smarter and more connected. Amphenol's unique entrepreneurial culture, savvy capital allocation and diverse end-market exposure have allowed it to deliver market-leading operating margins and strong returns on invested capital. We believe Amphenol should continue to deliver robust returns as it integrates and optimizes its meaningful acquisition of Carlisle Interconnect Technologies, and benefits from the build out of next-generation AI factories providing critical interconnect solutions. Nike's stock declined following management's revised forecast for fiscal year 2025, projecting negative mid single-digit revenue growth instead of the previously anticipated positive growth. The company has observed a marked slowdown in lifestyle product sales since April, a trend that persisted into June. Our current projections indicate that both sales and earnings will fall 15-20% below the conservative estimates set by management just a quarter ago. This substantial downward revision in sales and earnings is attributed to insufficient product innovation, wholesale channel shift, and intentional reduction of supply in lifestyle franchises. While the negative adjustments to guidance could potentially act as a clearing event for the stock, the degree of conservatism in the new projections remains uncertain. Nike maintains its position as the global leader in sportswear. However, its revenue growth has been hampered by a lack of innovation, and its recovery is further complicated by deteriorating macroeconomic conditions in the US and China. The company's renewed focus on innovation and efforts to re-engage with wholesale channels may eventually help restore growth, but we believe increased skepticism regarding management's ability to execute is justified. Disney's shares declined after its earnings release, even though the company exceeded recently upgraded financial forecasts. While Disney+ and Hulu reached a milestone by turning their first quarterly profit, the company cautioned about theme park attendance returning to pre-pandemic norms. This signals a deceleration following a period of exceptional growth, impacting the stock as theme parks and experiences account for roughly 60% of Disney's earnings. Despite broader consumer worries, Disney's stock is still trading with a significant discount to fair value. We expect the gap between Disney's market price and its intrinsic value to shrink as its streaming division evolves and increases profitability over time. Salesforce's stock came under pressure in Q2 as the company modestly missed Street expectations for software bookings and reduced its FY2025 subscription revenue guidance to "around 10%" year-to-year growth from "greater than 10%." We believe Salesforce is experiencing cyclical pressures as software demand across the industry is pressured at the margin. This has led to longer sales cycles; smaller deal sizes and budgets being allocated away from enterprise software to emerging areas like generative AI. We continue to believe that Salesforce will see a tailwind to demand from its generative AI offerings as many AI use cases are found in front office software like customer relationship management. This, coupled with Salesforce's treasure trove of customer data, positions it well to exploit the evolution of next-generation AI offerings. During the quarter, we established new investments in Broadcom, Meta Platforms, and added capital to Apple (AAPL), Equifax (EFX), and Moody's (MCO). Investments in Alphabet (GOOGL) (GOOG), Analog Devices (ADI), Microchip Technology (MCHP), Pepsi (PEP), and Walt Disney (DIS) were modestly reduced, while our lower conviction in Starbucks prompted liquidation. We initiated a position in Broadcom (AVGO) in Q2. As a skilled aggregator, Broadcom acquires firms, streamlines their operations, and invests R&D dollars in mission-critical products that generate industry-leading profit margins, robust cash flows and high returns on invested capital. Its primary markets include AI accelerators targeting generative AI applications, networking & wireless semiconductors, and mission-critical infrastructure software solutions. Broadcom is well-positioned to benefit from the rapidly expanding demand for custom AI accelerator chips that support the evolution of the generative AI market. The company is the second-largest producer of AI accelerator chips behind Nvidia and leads the market in custom AI ASIC chips. Its customers include leading hyper scalers like Alphabet and Meta who are turning to Broadcom for custom silicon due to its performance and cost advantages. We believe the company is a direct beneficiary of a multi-year capital cycle driven by hyper scalers building out next-generation AI factories. Broadcom recently acquired VMware, the leader in virtualization software targeting the enterprise market. The integration of VMware is tracking ahead of plan as management has simplified its product bundles, transitioned to a subscription revenue model, and reduced operating costs. We believe this simplified go-to-market structure will result in strong top-line revenue growth and expanding operating margins. We believe Broadcom will compound intrinsic value per share in the mid-20% range over the intermediate term as it benefits from the AI-infrastructure build-out, a cyclical recovery in its legacy semiconductor business, and modestly accelerating growth from its infrastructure software business as VMware is successfully integrated. We previously divested from Meta (META) during a period of stagnant advertising growth and the company's initial, significant investment in the metaverse project. At that time, investors appeared complacent to the risks associated to an increasingly competitive landscape, and the Street's robust financial expectations as the company transitioned towards monetizing short-format video (Reels). The subsequent decline in Meta's stock price during 2022 reflected these concerns. Since then, Meta has demonstrably shifted its strategic focus. The company has prioritized operational efficiency, implemented strategies to monetize Reels effectively, and initiated a robust artificial intelligence (AI) development program. We believe the focus on AI represents a more prudent capital allocation strategy compared to the earlier metaverse initiative. Meta AI holds significant potential to unlock substantial monetization opportunities and enhance user engagement, while maintaining tight controls on operating costs. Meta's unparalleled global reach, fostered by its extensive suite of applications, translates to a dominant position within digital advertising. This competitive advantage is further bolstered by the difficulty of replicating Meta's user base. We anticipate that the company's ability to expand its global advertising market share and leverage AI for innovative business ventures should translate into 13-15% intrinsic value growth per annum. Undoubtedly, Meta faces ongoing challenges regarding user data privacy and content control. While regulatory scrutiny is likely to persist, we believe the long-term impact on intrinsic value should be minimal. Although increased legal costs are a consequence, greater data and content supervision could strengthen Meta's competitive moat. Our decision to divest from Starbucks (SBUX) followed their latest earnings report, which highlighted concerning business trends. The primary issue was sluggish demand, with comparable store sales dropping in their important U.S. and Chinese markets. American consumers, grappling with inflation, are reducing non-essential expenses, including regular coffee shop visits. Meanwhile, China's economic rebound, vital for Starbucks' growth, has been underwhelming. These challenges led Starbucks to downgrade its annual financial projections, raising doubts about leadership's capacity to address immediate headwinds. Faced with lowered financial expectations, persistent demand challenges, and a deteriorating economic landscape, we opted to liquidate our investment. After a strong rally in the first half of the year, stocks appear to be headed into the second half with powerful tailwinds. The outlook remains positive, buoyed by healthy enterprise spending, lower inflation, and strong corporate earnings. While risks persist, the market's momentum appears poised to continue. The U.S. economy's resilience in the face of significantly higher interest rates has been a major surprise over the past two years. The stock market remains optimistic, grounded on the revolutionary impact of artificial intelligence. We are believers in the long-term transformative effect of AI, but many of the benefits are going to accrue gradually, and the market is pricing in immediacy. Our investment approach focuses on businesses with strong competitive moats that can compound intrinsic value across various economic conditions. This strategy aims to capitalize on both the business value creation of our holdings and favorable investment entry points. By patiently investing in high-conviction companies and maintaining disciplined capital allocation, we strive to deliver competitive risk-adjusted returns over the long term. Our portfolio is designed to benefit from enduring market trends while maintaining resilience against potential economic headwinds. As the market continues to evolve, particularly in response to AI developments, we remain committed to our long-term, value-accretive investment philosophy. This approach positions us to navigate current market dynamics, balancing opportunities presented by technological innovation with prudent, sustainable investment strategies. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Riverwater Sustainable Value Strategy Q2 2024 Commentary

Just as the internet revolutionized business practices in the late '90s, we anticipate AI will have a similar transformative impact. The Sustainable Value Strategy outperformed its benchmark for the quarter and year-to-date period. (Click here for Q2 2024 Factsheet with detailed performance reports). This positive performance comes despite a challenging quarter for small cap stocks, where only the utilities sector saw gains. The Federal Reserve's reluctance to cut rates and the limited exposure of small caps to the burgeoning Artificial Intelligence ('AI') sector have presented headwinds. While the anticipated reversal of small caps' underperformance relative to large caps did not materialize this quarter, we remain confident in the long-term potential for small caps to outperform. The current outperformance of the S&P 500 (SP500, SPX), driven by AI and large-cap technology stocks, is largely due to the significant capital requirements for AI development, which has excluded smaller players. Despite this, pockets of opportunity exist for small caps supplying AI hyperscalers in chip development and data center construction. We discuss our exposure to these areas below. The Russell 2000's (RTY) stagnation since early 2021 marks the longest stretch of negative returns since the 19982003 period. Importantly, unlike the previous period, which included the tech bubble bursting, 9/11, and a recession, the current stagnation has occurred without a major economic shock. This unprecedented situation reinforces our belief that the relative underperformance of small caps is nearing its end, with potential for a multi-year bull market to follow. The chart below illustrates that the past period of subpar performance had been followed by a multi-year bull market. We believe the Sustainable Value Strategy is positioned for continued economic growth, with a significant focus on the industrial and technology sectors, which constitute nearly 40% of the strategy's weight. We are overweight these sectors relative to our benchmark, as they have been our top performers this year and we believe we are positioned to benefit significantly from the AI expansion. We believe there is tremendous opportunity across all sectors to use AI to improve productivity and growth for companies. However, the rapid development and acceptance of AI have left most management teams unprepared to implement it effectively. In a recent survey by Adecco and Oxford Economics, 61% of Csuite executives said AI would be a "game changer," but almost all of them admitted they were not in a position to take advantage of AI because their teams lacked the necessary skills and know-how. We actively engage with management teams to assess their AI strategies and preparedness, often finding responses to be vague and echoing industrywide concerns. Just as the internet revolutionized business practices in the late '90s, we anticipate AI will have a similar transformative impact. Three of our best performers over the past year have been companies that provide the "picks and shovels" to make AI happen: Amkor Technologies (AMKR), Modine Manufacturing (MOD), and Veeco Instruments (VECO). These companies support either the creation of AI semiconductors (AMKR & VECO) or the maintenance of data centers that run AI (MOD). While none of these companies are exclusively tied to AI, they have benefited from the AI tailwind. We aim to keep our sector weights aligned with our benchmarks, focusing on generating alpha by selecting the best stocks within each sector. This quarter, approximately 90% of our outperformance was driven by security selection. Given that 10 of the 11 sectors were down for the benchmark, this outcome aligns with our historical trend of outperforming in weak markets. We managed to achieve gains in 7 of 11 sectors, contributing to a positive allocation effect. Our worst performer was Atkore Inc (ATKR). We conducted a deep dive on the company in our last quarterly letter and remain confident in the company's long-term prospects. The recent weakness is attributed to temporary setbacks in the solar sector due to a delayed ramp-up of a manufacturing facility and weakness in the HDPE market due to telecom related business challenges. As detailed in our previous letter, we believe these issues are short-lived and trust management's assessment that both sectors will rebound in the new fiscal year starting this October. Atkore has generated, on average, $500m in free cash flow each of the last three years, recently initiated a dividend and has been actively repurchasing significant amounts of stock at what we consider attractive levels. With minimal debt, solid growth prospects and a current valuation of 8x this year's earnings and 7.2x management's guidance for FY 2025 earnings, we remain confident in Atkore. Veeco Instruments Inc (VECO) was the bestperforming stock in the second quarter. It's challenging to find companies in the small-cap space that are leveraged to the AI phenomenon; however, VECO has emerged as a key supplier of the AI arms race, providing essential equipment for the production of AI chips and servers. Veeco is an innovative manufacturer of semiconductor process equipment. In simple terms, VECO makes the machines that make the chips that go into everything. VECO traditionally specialized in equipment used to make memory and storage products (DRAM, hard disk drives, etc.), which tends to be a very cyclical business. Because of this, VECO historically traded at a discount to its peers. VECO's acquisition of Ultratech in 2017 brought laser annealing technology in-house, an important step in the manufacture of leading-edge semiconductors. New design wins at leading semiconductor fabs further solidified VECO's position as a vital supplier across the semiconductor manufacturing landscape. Its ability to produce leading-edge chips going into iPhones, wearables, AI servers (NVIDIA chips), etc. enabled VECO's business to grow through the memory downturn of 2021-22. Today, the insatiable need for storage/retrieval of data used by AI servers has significantly increased the need for memory and storage, which is VECO's legacy business. Combined with VECO's recent entry into annealing and other leading-edge process steps, VECO has become an extremely important supplier to companies across the semiconductor manufacturing spectrum. We first bought shares in late 2022 and added to the position in early 2023. We purchased at a low teens earnings multiple. While the multiple has expanded, it remains at a discount to the market and technology sector. We believe VECO's strong market position will drive sustained revenue, earnings, and share price growth in the long term. This quarter, we did not initiate any new positions but added to our holdings in LPX (LPX), Amkor (AMKR), Amdocs (DOX), and Charles River (CRL). We sold our positions in Evertec (EVTC), New York Community Bank (NYCB), and Hudson Technologies (HDSN), each at a capital loss. These positions were relatively small, representing around 1% each of the portfolio, as we had not fully committed to them before losing confidence in their business outlooks. While Hudson Technologies provided a weak outlook last quarter, we remain bullish on its long-term fundamentals. However, the sale was triggered by a 30% capital loss as the stock breached our downside limit. Despite this, we still see potential in the company and may consider re-entering this position in the future. Limoneira, a company with a rich history dating back to 1893, stands out not only for its longevity but also for its commitment to environmental stewardship and sustainable business practices. We believe the company's stock is significantly undervalued, with potential upside of 50-100%. While the business itself might not seem exciting at first glance, its longevity and 15% market share in the US lemon industry-up from just 4% in 2011-speaks volumes about the quality of its operations. However, the primary reason for our enthusiasm is that the market has not appropriately valued their extensive holdings of land and water rights. Limoneira has publicly stated that the value of their agricultural land and water rights is between $450$550 million. Additionally, the sale of less productive agricultural land to developers, along with their development joint venture, is expected to be worth another $100-$150 million over the next six years. The company also holds close to $100 million in equity in their real estate JV, with $15 million of that expected to be distributed. Considering these assets at fair value, Limoneira's total value could reach as much as $800 million. After subtracting debt, this translates to approximately $41 per share, significantly higher than the current market price of around $20. To address the significant discount at which the company trades relative to its fair market value, the board of directors has engaged investment banker Stephens Inc. to explore strategic alternatives. We anticipate an announcement before year-end, as the company initiated this process last December. Even without a transaction, we see upside potential as the management team focuses on improving operations, monetizing non-core real estate assets, and enhancing cash flows. As part of this effort, they have modernized their packing facility to transition from growing their own lemons to packaging and marketing lemons for third parties. While revenues remain the same, this transition aims to provide more stable and consistent cash flows. Limoneira is also pivoting towards avocado production, a more profitable segment with growing demand in the United States. Over the past ten years, US avocado consumption has grown at a 4.4% CAGR, reaching 8.7 pounds per person annually. In comparison, avocado consumption in Mexico is 23.5 pounds per person per year! While it is unlikely that the US will reach Mexico's consumption rate in the near future, we believe that US avocado consumption will continue to increase. The management team has outlined various operational initiatives that they believe could potentially improve cash flows by up to $30 million over the next seven years. If these improvements materialize, a 50% increase in cash flows within three years seems achievable, potentially translating to a 50% increase in stock value. We also commend Limoneira's commitment to sustainability, with 44% of its operations now powered by renewable energy, up from over 30% the previous year. Additionally, the company uses high-efficiency irrigation systems for 85% of its water usage, conserving water and supporting sustainable agricultural practices. Limoneira exemplifies the potential for a company to achieve both financial success and positive environmental impact. We believe the company's focus on renewable energy, efficient water use, and strong management make it a compelling long-term investment opportunity. As always thank you for your trust and confidence and please reach out with any questions. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

TimesSquare Capital U.S. Small Cap Growth Q2 2024 Commentary

The second quarter was good for the equity markets-provided one only owned a handful of the largest, most growthy, U.S. stocks (i.e., the Magnificent Seven). As our investment team meets with companies, reviews recent earnings reports, and surveys the global landscape, they note several investment dynamics that inform our positioning: Against this backdrop, the portfolio outperformed the Russell 2000® Growth Index in the second quarter. For the Communication Services sector, we generally prefer to invest in media and services companies that are either well placed from an advertising perspective with a target audience or provide differentiated services. MediaAlpha Inc. (MAX) operates a leading insurance customer acquisition platform. They reported revenues, transaction value, and profits materially above consensus expectations and issued favorable guidance for the second quarter. Its shares initially fell on news of a secondary offering in early May. A further decline was attributable to a short report alleging improprieties with MediaAlpha's healthcare lead generation activities. The company has been cooperating with a civil investigative demand from the FTC since February and believes its marketing complies with best practices. Despite having previously disclosed the FTC investigation, the stock price still declined -35% in reaction to the short report. Notwithstanding the scrutiny of MediaAlpha's healthcare business, we see significant opportunity within its property & casualty segment. As auto insurance pricing has sharply risen and underwriting profitability has improved, insurers are increasing customer acquisition spending. We view MediaAlpha as particularly well positioned to benefit from rising marketing budgets and an acceleration in the pursuit of new business growth by insurers. IAC Inc. (IAC) operates as a media and internet company worldwide. Its largest segments are Dotdash Meredith ('DDM') and Angi. DDM provides digital and print publishing services. Angi Homeservices offers referrals to repairing, remodeling, cleaning, and landscaping services. Both businesses reported first quarter results that surpassed expectations. Management is bullish on the outlook for DDM and announced this entity will partner with Open AI to bring DDM content and links to ChatGPT's generative search results. Forward revenue projections for Angi were less confident, causing the stock price to recede by -12%. Our preferences in the Consumer-oriented sectors lean toward value-oriented or specialty retailers, franchise models, or premium brands. Boot Barn Holdings Inc. (BOOT) operates retail stores offering western and work-related footwear, apparel, and accessories. Their fiscal fourth quarter results included a modest beat to same store sales estimates. That spurred a 36% gain in its share price, and we trimmed the position on this strength. Warby Parker Inc. (WRBY), a specialty retailer of eyewear products, rose 18%. Its first quarter results surpassed expectations with strength in single-vision glasses and a return to growth in its digital channel due to recent marketing efforts. Additionally, forward revenue and profits expectations were increased. Savers Value Village Inc. (SVV), a retailer of second-hand merchandise, tumbled -37%. First quarter profits were modestly below expectations, primarily due to macroeconomic pressures in its Canadian business. Same store comparison trends were healthier in their U.S. operations. Management announced its recently completed acquisition of Two Peaches, a small thrift chain in the southern U.S., which adds seven new stores to its mix. Looking ahead, management maintained full-year sales guidance. European Wax Center Inc. (EWCZ) is a franchisor and operator of personal waxing centers. Results from the first quarter were mixed with same store sales comparisons below estimates and profits above. Softer comps were due to adverse weather conditions as well as slower traffic from non-Wax Pass (club) customers. That caused its shares to slide by -24%. Membership warehouse club operator BJ's Wholesale Club Holdings Inc. (BJ) was up 16% for the quarter. The company reported a strong fiscal first quarter that was led by growth in membership fees. Management noted healthy unit growth in consumables offset slight weakness in general merchandise. In the Financials sector we tend to avoid banks that face credit deterioration or rising deposit costs, preferring asset managers, niche insurance companies, and niche fintech providers. Victory Capital Holdings Inc. (VCTR) operates as an asset management company. During the quarter, the company announced a memorandum of understanding to acquire the U.S. asset management operations of Amundi in exchange for a 26% economic interest in Victory and a 15-year distribution partnership agreement. Amundi brings $104 billion of assets under management and the distribution partnership will broaden Victory's international ambitions. This deal, which is expected to close at the end of 2024, was well received by the market as its stock price was lifted by 13%. Hamilton Lane Inc. (HLNE) offers private market investment solutions. The company's stock gained 10% after posting strong quarterly results, driven by performance fees, asset management fees, and fundraising efforts. MVB Financial Corp. (MVBF) provides financial services to individuals and corporate clients. Its first quarter earnings fell short of expectations and that caused its stock to pull back by -16%. Management has been focusing on de-risking the balance sheet and more profitable growth, which led to declining loan balances. Non-interest expenses were above forecasts, driven by continued investment in its back office and infrastructure. Of note, asset quality remains solid and deposit growth was strong. Our preferences among Health Care stocks are those companies providing novel therapies for unmet needs that deserve premium pricing, or specialized service providers. Treace Medical Concepts Inc. (TMCI) designs and manufactures medical devices offering an innovative approach to corrective bunion surgery. While the first quarter earnings were solid, they surprised investors by reducing forward revenue guidance due to competitive dynamics driven by knock-off medical devices. This disappointed us and other investors. We decided to exit the position which lost -60% while held during the quarter. Certara Inc. (CERT) provides products and technology-enabled services to its customers for bio simulation in drug discovery, clinical research, and regulatory submission. First quarter revenues outpaced estimates, driven by better-than-expected performance in both software and services. Bookings however fell short and that led to a -22% selloff. Biotech funding and clinical trial starts have continued to improve. Thus, we decided to add to the position on weakness. AtriCure Inc. (ATRC) develops and manufactures devices for surgical ablation of cardiac tissue. We decided to exit the position due to Medtronic's new product that is a direct competitor to AtriCure's AtriClip device. Its shares declined by -23% while held in the quarter. Addus HomeCare Corp. (ADUS) administers personal care and hospice services to elderly and disabled patients. Its share price improved 13% on solid results, which included a modest revenue beat driven by improved sequential volumes and better expense controls, leading to a profit margin that was ahead of expectations. Silk Road Medical Inc. (SILK) is a medical device company focused on developing products to treat carotid artery disease. In late June, Boston Scientific announced plans to acquire Silk Road Medical to expand their cardiology portfolio and that news boosted the stock by 46%. A new addition this quarter is Merus (MRUS), a clinical-stage immune-oncology biotechnology company. Their pipeline consists of several programs targeting solid tumors with various bispecific antibodies. Many of our Industrial positions provide necessary business-to-business operational services, highly technical components, automation & efficiency improvements, or essential infrastructure services. Regal Rexnord Corp. (RRX) manufactures industrial powertrain solutions, power transmission components, electric motors, and air moving products. We reduced the position ahead of first quarter earnings, which were largely in line with expectations. Strength in Industrial Power Solutions offset weakness in Power Efficiency Solutions that was primarily driven by destocking-related residential HVAC softness. Management's forward guidance was updated to include the sale of its Industrial Systems business and subsequent debt paydown. Nevertheless, Regal Rexnord fell by -25% over the quarter in sync with other short-cycle industrial stocks. ESAB Corp. (ESAB) isengaged in the formulation, development, manufacture, and supply of consumables and equipment for cutting, joining, and welding metals.The first quarter was solid with revenues, margins, and earnings all ahead of Street projections. ESAB also outperformed welding peers in terms of volume and pricing. Its -15% pullback was largely related to the negative second quarter preannouncement of a more North American-focused competitor with larger automotive and machinery exposure that we believe is less applicable to ESAB. WillScot Mobile Mini Holdings (WSC) provides modular workspace and portable storage solutions. Despite beating first quarter consensus estimates, its shares sold off by -19% due to the uncertainty associated with the FTC's review of WillScot's proposed acquisition of McGrath RentCorp (MGRC). We added to the position on weakness. AZEK Co. (AZEK) designs and manufactures wood alternative building products for predominantly residential applications. A beat and raise quarter was eclipsed by news of an accounting restatement stemming from erroneous inventory accounting errors by a former employee. The misstatements overstated inventory values and understated costs of goods sold. Notably, there was no impact on revenues or cash. In addition, a negative update in June from a major distributor of pool supplies and equipment pressured stocks tied to high-ticket outdoor living. Together, these headwinds sent the stock down by -16%. Driven Brands Holdings Inc. (DRVN) provides automotive services including paint, collision, glass, repair, car wash, oil change, and maintenance services. Their first quarter profits and earnings beat consensus estimates while revenues on slowing same store comparisons in the car wash and glass business. These results were overshadowed by the sudden news of their CFO leaving the company for an opportunity with a private enterprise that is based closer to his family home in Colorado. We decided to liquidate Driven Brands, which lost -29% from its share price during the quarter. Hexcel Corp. (HXL) develops and manufactures composites for use in commercial aerospace, space, defense, and industrial applications. Early in the quarter, the company announced its long-time CEO would retire and the recent CEO of Spirit AeroSystems would take his place. We are not enthusiastic about the selection and have a negative view of his tenure at Spirit. Therefore, we decided to sell out of our position which tumbled -12% while held in the quarter. Tetra Tech Inc. (TTEK) provides consulting and engineering services. Its stock price rose 11% after they reported fiscal second quarter revenues that surpassed Street estimates and increased forward guidance. A key development in the quarter was an FDA ruling imposing a very strict contamination limit on polyfluoroalkyl (PFAS) chemicals in drinking water. We believe PFAS analysis, monitoring and remediation can be an important business driver for Tetra Tech for several years. Exponent Inc. (EXPO) is an engineering and scientific consulting firm. Its stock climbed 15% on the heels of profits and earnings that surpassed Street projections. Demand for failure analysis and dispute-related engagements was robust across industries including transportation, life sciences, and energy. On the other side, weakness in consumer electronics demand continued to represent an offset to top line growth.New to the portfolio this quarter is Loar Holdings Inc. (LOAR),adesigner and manufacturer of aerospace and defense components for aircraft. We purchased this stock as part of its Initial Public Offering early in the quarter. This company encompasses 16 brands they have acquired over the past 12 years. Among the wide variety of Information Technology companies, we prefer critical system providers, specialized component designers, systems that improve productivity or efficiency for their clients, and others that closely tie to increasing shares of corporate IT budgets. Credo Technology Group Holding Ltd. (CRDO), a supplier of high-speed connectivity solutions, surged ahead by 51%. The company reported inline April quarter results and management's July quarter guidance met expectations; AI spending is a growth driver. FormFactor Inc. (FORM) offers probe cards to test semiconductors. Its shares jumped 33% on the combination of a solid quarter along with second quarter guidance well ahead of Street projections. This stems from high bandwidth memory ('HBM') and as well as foundry & logic demand for probe cards. HBM is fueled by AI spending while foundry & logic is tied to new microprocessor design ramps. Vertex Inc. (VERX) provides enterprise tax technology solutions for retail trade, wholesale trade, and manufacturing industries.Its stock gained 14% after reporting solid results, with revenues and profits ahead of estimates as their customer success and cross-selling efforts are paying dividends. Management maintained full-year guidance. Smartsheet Inc. (SMAR) offers an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations.They reported a strong quarter with upsides to revenues, subscriptions, and free cash flow. Smartsheet is simplifying its pricing model by collapsing creator and editor license types into a singular member license. Product innovation appears to be gaining traction with new user interfaces and Generative AI tools. These positive developments served to lift Smartsheet by 14%. HashiCorp Inc. (HCP) provides multi-cloud infrastructure automation solutions worldwide. During the quarter, IBM entered into an agreement to acquire HashiCorp in an all-cash deal and that boosted its shares by 24%. JFrog Ltd. (FROG) supplies end-to-end hybrid software supply chain services. We initially trimmed the position in advance of its first quarter earnings report due to elevated Street expectations. We then used its -15% share price weakness as an opportunity to add back somewhat to JFrog. Sprout Social Inc. (SPT) designs, develops, and operates a web-based social media management platform. The combination of lackluster first quarter results and lower forward guidance disappointed investors. We decided to liquidate the position which suffered a -53% decline while held during the quarter. Workiva Inc. (WK) supplies cloud-based reporting solutions. First quarter revenues outstripped sell-side projections due to higher subscription and support levels. Billings, however, fell short in a seasonally slower quarter. Their productivity focus and thoughtful hiring are driving margin improvement. Generative AI capabilities have been well received by customers. Management is optimistic about better bookings performance for the remainder of the year. Its shares dropped by -14% and we added to the position on weakness. We have one holding in the Real Estate sector. National Storage Affiliates Trust (NSA) is a real estate investment trust focused on the ownership, operation, and acquisition of self-storage properties.During the quarter, NSA announced that it will be internalizing its participating regional operating ('PRO') structure. PROs currently manage 32% of NSA's 1,050 properties. This development was well received by the market as its stock price was lifted by 7%. One of our strategy's purchase rules is based on the range of market capitalizations in the Russell 2000 Growth Index following its annual reconstitution. After the reconstitution at quarter end, the largest stock in the index had a market capitalization of $10.5 billion. The strategy's guideline limits new positions outside the benchmark at the time of initial purchase to less than 75% of the largest name in the benchmark-or $7.9 billion based on the new benchmark-so we will raise our limit to $7.5 billion from the current level of $5 billion. The lower end of the purchase range moves from a market capitalization of $44 million to $18 million, which matches the smallest stock in the benchmark (after excluding a notable outlier). At the midway point of 2024, as expected, fields of vision were occupied by central banks and election booths. Several European banks and the ECB began loosening their monetary policies. Global elections thus far saw some parties removed from power (England) or their majority standing curtailed (India). During the recent earnings reporting season, aside from pockets of technology or industrial infrastructure spending, companies were especially cautious about the near term, though many projected rebounds later in 2024. In our bottom-up evaluations, we look for those businesses where fundamentals either appear to be approaching positive inflection points, or ones with continued growth trajectories ahead. With that approach, we endeavor to protect the assets you have entrusted with us. As always, we are available for any questions you might have. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

ClearBridge Small Cap Strategy Q2 2024 Commentary

Our investment process takes a holistic approach to evaluating what makes a "good" investment, including considering the risks to shareholders from rising CEO compensation. By Albert Grosman & Brian Lund Small Caps Face Pressure in Uneven Market - Market Overview The second quarter proved exceptionally challenging to navigate for small cap stocks, as investors continued to narrow their focus on a small handful of AI beneficiaries and bitcoin plays, while economic deceleration and a higher-for-longer interest rate outlook weighed on the rest of the market. The result was a broad retreat for small caps, with nine of the 11 Russell 2000 Index sectors posting negative returns and a -3.28% decline for the overall index. Only the most defensive sectors of the benchmark, consumer staples and utilities, managed to generate positive returns - and the latter just barely. Style made only a little difference amid such headwinds, as the Russell 2000 Growth Index returned -2.92% and the Russell 2000 Value Index returned -3.65%. Portfolio Performance The ClearBridge Small Cap Strategy underperformed its benchmark in the second quarter, as detractors in the industrials and materials sectors overcame positive contributors from our health care and IT holdings. Stock selection in the industrials sector was the greatest detractor from performance, as many of our holdings felt the impact of economic deceleration. For example, Forward Air, an asset-light freight and logistics company, faced pressure from weak end markets, resulting in excess carrier capacity and pricing pressures. Additionally, the company has struggled to unlock synergies from its acquisition of Omni Logistics in the first quarter, further fueling concerns about increased leverage. Given the lack of insight into the company's general strategic direction under its new CEO, we ultimately decided to sell the position. Stock selection in the materials sector also weighed on relative performance. Eagle Materials, last quarter's top-performing holding, pulled back as macro uncertainty and higher-for-longer interest rates resulted in weaker industrial and construction outlooks. However, we continue to have high conviction that the company's strong pricing power in its cement business and cost advantages versus its peers in its wallboard business should allow Eagle to continue to maintain attractive returns on capital. Health care results lifted relative performance during the period and included our top two individual performers in Lantheus (LNTH) and newer portfolio addition Corcept Therapeutics (CORT). Lantheus, which makes diagnostic and therapeutic products that help clinicians diagnose and treat heart, cancer and other diseases, saw its share price rise on strong first-quarter results. Corcept, which was added last quarter, announced that it had successfully reached its main goal in its Phase 3 trial for its treatment for patients with Cushing's syndrome. We believe the new drug's efficacy and safety significantly increases its likelihood of approval and offers an attractive growth runway via possible extension into other indications. Portfolio Positioning We initiated a new position in Criteo (CRTO), in the communication services sector, which provides digital advertising technologies that help drive clients' e-commerce businesses. While the company was previously reliant on third-party cookies to help optimize its products, management has spent the past five years pivoting away from this technology and focusing on building a leading presence in the burgeoning retail media space. We believe this transformation has reached a tipping point, and that the inherent growth opportunities in this new end market represent a higher growth rate than is currently reflected in the company's valuation. We also added a new position in Q2, an IT company that provides cloud-based solutions to regional and community financial institutions. The company has been steadily gaining market share versus industry incumbents thanks to its diversified offerings that provide small banks with technology to rival that of the biggest money-center banks. We initiated the position with the proceeds from our sale of NCR Voyix (VYX), which provides similar services but has been gradually losing market share and undermining our conviction in its long-term prospects. We exited our position in Oddity Tech (ODD), in the IT sector, which builds and scales digital-first brands to disrupt beauty and wellness industries. During the period, the stock came under pressure after a short report made allegations that the company had misled investors by engaging in suspect marketing tactics and misrepresented the company's claim to be fully digital through physical retail locations. While we are uncertain as to the true extent of these allegations, the report raised questions that the company's management was not able to explain satisfactorily. Given the stock's appreciation and more questions about the business, we elected to exit the position in favor of those where we have higher confidence. The Rising Risk from CEO Compensation Given the tumultuous and sentiment-driven market conditions, it can be easy to overlook the advantages that a rigorous, fundamental investment philosophy offers investors. There are many criteria that we look at in assessing whether a company is a "good" investment - some of which are more apparent than others. While things like cash flow generation, the strength of a company's balance sheet and its long-term strategy are obvious considerations, one of the most important - but less talked about - considerations is how these companies treat their shareholders. While the rise of environment, social and governance (ESG) criteria has helped cast a light on how companies are tackling the "E" through things like reduced emissions, and the "S" through things like providing workers living wages, less attention has been applied to the "G." Meanwhile, there has been a rapid and escalating rise in CEO compensation. A recent report from Equilar estimates that the spread in compensation between the CEO and the median worker at the largest 100 companies in America reached 312:1 in 2023, with the top 100 CEOs realizing a 20% increase in median total compensation actually paid.1 Much of that comes from stock awards, which many companies ignore when reporting adjusted earnings and many investors ignore when calculating valuations. However, those awards are not free. Stock-based compensation decreases the per-share value of future cash flows and represents a transfer of future value creation from the existing shareholders to top management. Ultimately, the better the company does, the more value management gets over other shareholders. And it is management: while employees often get grants, the vast majority go to the bosses. How much value are we talking about? Public companies gave $700 billion in stock-based compensation from 2005 to 2014. From 2014 to 2023, that figure rose to $1.6 trillion and shows no sign of slowing (Exhibit 1). Exhibit 1: Stock-Based Compensation Accelerates The strength in the stock market adds significantly to that enormous transfer of wealth, which one could argue is good for shareholders. But is it causal? That is, did the stock market do well because CEOs got large stock grants? Are the CEOs just the lucky recipients of a windfall when the market goes up and their employees perform well? Or do they require huge grants to do their jobs that no one else could possibly do as effectively? Tesla (TSLA), and most of its shareholders, certainly think the latter is true. In 2018, Tesla's board of directors crafted a pay package for CEO Elon Musk that would award him 12 tranches of 10-year, fixed-price options on 1% of company stock for every $50 billion in market cap the stock added. In total, the options would be for 304 million shares of the company at $23.34 a share. He would receive no other compensation, until or unless the board decided otherwise. Shareholders approved that pay package, and the stock added all that market cap and more, giving Musk the right to buy 10% of the company for $50 billion less than it was worth, adding to his existing 13% stake. Minority shareholders sued, and a court sided with them and expunged the package in January 2024. "The process leading to the approval of Musk's compensation plan was deeply flawed," ruled Judge Kathaleen McCormik of the Delaware Court of Chancery as part of a 200-page decision. It seemed like a long-awaited check on excessive compensation to one individual for the achievements of an entire company. But no. Tesla responded by proposing that they reincorporate the company in Texas to avoid Delaware courts and reinstate the pay package as previously outlined. Proxy advisory firms recommended shareholders reject the deal, noting that owning 13% of the company should incentivize Musk sufficiently. However, approximately 70% of shareholders, including some large index fund managers, voted to reinstate the package, this coming merely one week after reports surfaced that Musk had diverted precious Nvidia (NVDA) chips away from Tesla toward other companies he controls. It also came after significant production issues at Tesla, such as multiple recalls on the new Cybertruck and fatalities from Autopilot. The most egregious issue here is the lack of concern for shareholders and proper governance that large index fund managers exhibited. They allowed a CEO to overstep shareholders in their funds, despite concerns from proxy advisors and overt acts to disadvantage Tesla in favor of other companies he controls. Is Musk - or any CEO - really worth this level of deference and compensation? Is Tesla's success really so reliant on one person? More than one hero CEO has subsequently been shown to be just in the right place at the right time. With the economy seemingly slowing and extreme concentration in the market, we believe that the risks posed by this growing, but largely unaddressed, threat requires even greater attention and understanding than are outside the purview of passive investors or large index managers. In managing our strategies, we always take stock-based compensation into account when evaluating the governance of a company, as well as the amount going to top executives and the independence of the board. Outlook The small cap Russell 2000 Index has underperformed the large cap Russell 1000 Index by more than 10 percentage points annually since the end of 2020. Within small cap, growth has outperformed value by almost 8 percentage points annually over that period. Those trends have been in place since the end of 2016. With large cap valuation spreads reaching record levels, we think the odds of small cap outperformance over the next few years are high. To that end, we continue to apply a disciplined process to stock selection and refine our positioning in our goal to deliver attractive, long-term returns over a full market cycle. Portfolio Highlights The ClearBridge Small Cap Strategy underperformed its Russell 2000 Index benchmark during the second quarter. On an absolute basis, the Strategy had losses across nine of the 11 sectors in which it was invested during the quarter. The leading contributor was the IT sector, while the industrials sector was the largest detractor. On a relative basis, overall stock selection detracted from performance. Specifically, stock selection in the industrials, materials, energy, financials and consumer staples sectors weighed on performance. Conversely, stock selection in the health care and IT sectors proved beneficial. On an individual stock basis, the biggest contributors to absolute returns in the quarter were Lantheus, Corcept Therapeutics, SkyWest (SKYW), Murphy USA (MUSA) and Commvault Systems (CVLT). The largest detractors were Forward Air (FWRD), Bloomin' Brands (BLMN), Rush Enterprises (RUSHA)(RUSHB), Olin (OLN) and Century Communities (CCS). In addition to the transactions listed above, we initiated new positions in Allegiant Travel (ALGT) and Centuri (CTRI) in the industrials sector, Scholar Rock (SRRK) in the health care sector and Abacus Life (ABL) in the financials sector. We exited positions in Replimune (REPL) in the health care sector, WalkMe (WKME) in the IT sector, QuidelOrtho (QDEL) in the health care sector and Integral Ad Science (IAS) in the communications sector. Albert Grosman, Managing Director, Portfolio Manager Brian Lund, CFA Managing Director, Portfolio Manager Footnote: 1 We always take stock-based compensation into account when evaluating a company. Past performance is no guarantee of future results. Copyright © 2024 ClearBridge Investments. All opinions and data included in this commentary are as of the publication date and are subject to change. The opinions and views expressed herein are of the author and may differ from other portfolio managers or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments, LLC nor its information providers are responsible for any damages or losses arising from any use of this information. Performance source: Internal. Benchmark source: Russell Investments. Frank Russell Company ("Russell") is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell's express written consent. Russell does not promote, sponsor or endorse the content of this communication. Performance source: Internal. Benchmark source: Standard & Poor's. Click to enlarge Original Post ClearBridge is a leading global asset manager committed to active management. Research-based stock selection guides our investment approach, with our strategies reflecting the highest-conviction ideas of our portfolio managers. We convey these ideas to investors on a frequent basis through investment commentaries and thought leadership and look forward to sharing the latest insights from our white papers, blog posts as well as videos and podcasts.

Vulcan Value Partners Q2 2024 Letter

We experienced stock price volatility with several companies in the portfolios. Portfolio Review Our quarterly results were mixed. These results are detailed in the table below. As we have often said, we place no weight on short-term results, good or bad. When we think we can improve our prospective long-term returns and lower risk, we will make those decisions without regard to their effect on short-term performance. We experienced stock price volatility with several companies in the portfolios. We followed our discipline and took advantage of this volatility by allocating capital to companies where our price to value ratios improved. INVESTMENT STRATEGY QTD YTD Annualized Since Inception* Large Cap Composite (Gross) -2.8% 9.0% 10.3% Large Cap Composite (net) -2.9% 8.7% 9.5% Russell 1000 Value Index -2.2% 6.6% 7.0% S&P 500 Index 4.3% 15.3% 10.3% Small Cap Composite (Gross) 0.3% 0.6% 8.4% Small Cap Composite (net) 0.1% 0.3% 7.4% Russell 2000 Value Index -3.6% -0.8% 6.0% Russell 2000 Index -3.3% 1.7% 7.0% Focus Composite (Gross) -0.3% 12.5% 14.4% Focus Composite (net) -0.4% 12.2% 13.4% Russell 1000 Value Index -2.2% 6.6% 7.3% S&P 500 Index 4.3% 15.3% 10.4% Focus Plus Composite (Gross) -0.4% 12.6% 13.8% Focus Plus Composite (net) -0.8% 12.0% 12.7% Russell 1000 Value Index -2.2% 6.6% 7.0% S&P 500 Index 4.3% 15.3% 10.3% All Cap Composite (Gross) 1.3% 8.2% 11.1% All Cap Composite (net) 1.1% 7.8% 10.1% Russell 3000 Value Index -2.3% 6.2% 9.7% Russell 3000 Index 3.2% 13.6% 12.8% Click to enlarge *Inception date is 3/31/2007 for Large Cap, Small Cap, and Focus Plus Composites. Inception date is 11/30/2007 for Focus Composite. Inception date is 4/1/2011 for All Cap Composite. Past performance is no guarantee of future results. Please see important disclosures at the end of this document. Please reference additional performance information for each of the composites in the strategy reviews that follow and important disclosures at the end of this document. In the discussion that follows, we generally define material contributors and detractors as companies having a greater than 1% impact on the portfolio and should be viewed in context with the performance information provided. Click to enlarge Large Cap Review As of 06/30/2024 INVESTMENT STRATEGY QTD YTD 1 YEAR 3 YEAR 5 YEAR 10 YEAR Since Inception Large Cap Composite (Gross) -2.8% 9.0% 23.9% -0.3% 10.2% 9.3% 10.3% Large Cap Composite (net) -2.9% 8.7% 23.2% -0.8% 9.5% 8.7% 9.5% Russell 1000 Value Index -2.2% 6.6% 13.1% 5.5% 9.0% 8.2% 7.0% S&P 500 Index 4.3% 15.3% 24.6% 10.0% 15.0% 12.8% 10.3% Inception 03/31/2007 Click to enlarge We did not purchase any new positions during the quarter. We sold one position during the quarter: BALL Corp. There were no material contributors to performance. There was one material detractor: NICE Ltd. We sold Ball Corp. to reallocate capital into more discounted companies. NICE is a global enterprise software company that provides mission-critical contact center software. NICE was a material contributor last quarter. As we said last quarter, the company continues to perform well, and fundamentals are strong. Cloud revenue has grown in line with our expectations. We believe that generative AI will continue to drive cloud adoption and that AI is an opportunity rather than a threat to NICE's business. As the leading platform in the space, the company has many competitive advantages that position them well to win. Cloud penetration is in the low 20% range today and AI will likely accelerate cloud adoption, which should benefit NICE. We believe that this growth will more than offset any seat count attrition due to automation. Furthermore, data and customer examples show AI is driving higher levels of revenue per customer and that AI specific product adoption is increasing rapidly. We followed our discipline and added to our position during the quarter. Small Cap Review As of 06/30/2024 INVESTMENT STRATEGY QTD YTD 1 YEAR 3 YEAR 5 YEAR 10 YEAR Since Inception VVP Small Cap (Gross) 0.3% 0.6% 7.6% -8.5% 2.5% 5.2% 8.4% VVP Small Cap (net) 0.1% 0.3% 6.8% -9.2% 1.6% 4.3% 7.4% Russell 2000 Value Index -3.6% -0.8% 10.9% -0.5% 7.1% 6.2% 6.0% Russell 2000 Index -3.3% 1.7% 10.1% -2.6% 6.9% 7.0% 7.0% Inception 03/31/2007 Click to enlarge We purchased three new positions during the quarter: Planet Fitness Inc. (PLNT), Qorvo Inc. (QRVO), and CarMax Inc. (KMX) We did not sell any positions during the quarter. There was one material contributor to performance: Sdiptech AB (OTC:SDTHF). There were no material detractors. Planet Fitness pioneered the "high value, low price" ('HVLP') gym model and operates over 2,500 gyms globally with 18.7 million members. Their straightforward, no-frills approach offers excellent value, appealing to a diverse and casual fitness demographic. Members enjoy a clean environment, regularly updated equipment, and accessible pricing starting at $10 per month, with their premium "Black Card" membership providing extensive benefits and access to all locations. Planet Fitness captured roughly 90% of U.S. gym membership growth from 2011-2019. The company's dominant scale coupled with high advertising spend drives powerful growth, and the company plans to double its number of U.S. locations. Planet Fitness demonstrates robust same-store sales growth, high EBIT margins, strong returns on capital, and excellent free cash flow conversion. Qorvo is a leader in radio frequency ('RF') systems and power management solutions for mobile devices, wireless infrastructure, aerospace and defense, the Internet of Things, and various other applications. Qorvo's chipsets are a small cost but are critical components in modern mobile devices. As data needs increase and telecommunications technology continues to evolve and become more complex, more RF content is needed in each device. The complexity and barriers to entry intensify as content requirements increase and space constraints become more pronounced. Qorvo operates in an oligopoly with only a small number of companies capable of producing these increasingly complex chipsets at scale. Qorvo should also benefit as growth accelerates in adjacent markets and these markets eventually become a larger piece of the business through the adoption of the Internet of Things, satellite, Wi-Fi, and other markets. The company has faced headwinds over the past few years including lower demand in China, excess inventory in the channel, and factory underutilization; but secular tailwinds should drive growth and, in turn, margin expansion. CarMax is the largest used car retailer in the United States. The company has the third largest wholesale business in the U.S. and a large captive finance business. We believe that CarMax's omnichannel approach is a competitive advantage that will enable the company to continue taking market share in a highly fragmented market. This strategy enables the company to generate higher and more stable levels of profit per used vehicle sold and generate solid returns on capital. A significant portion of the used car market is made up of small independent dealerships without resources to invest in digital infrastructure. Another significant portion of the market is made up of digital only retailers, who are now focused on profitability at the expense of volume. CarMax continues to invest in its digital infrastructure which has improved its customer experience. These investments have made it easier to buy, sell and finance vehicles. Over the last two years, management has focused on de-leveraging the company's balance sheet and right sizing the firm, which has significantly de-risked the business and positioned CarMax well for when volumes normalize. We believe that the combination of a leaner cost structure and an improved competitive position will strengthen the company's prospects. Sdiptech acquires and develops niche infrastructure companies that contribute to more sustainable, efficient, and safe societies. Today, Sdiptech is a collection of approximately 40 operating businesses. We believe these businesses are positioned well to compete and possess a natural ability to grow their competitive moats. Sdiptech's management team has appropriately navigated the varied markets over the past few years and has consistently operated with the long-term in mind. Over the last two years, the stock price has traded at a substantial discount to our estimate of fair value. We followed our discipline and added to the position accordingly. The recent share price increase could be attributed to the company's consistently strong operating performance. Focus Review As of 06/30/2024 INVESTMENT STRATEGY QTD YTD 1 YEAR 3 YEAR 5 YEAR 10 YEAR Since Inception VVP Focus (Gross) -0.3% 12.5% 32.7% 10.4% 20.8% 15.6% 14.4% VVP Focus (net) -0.4% 12.2% 32.2% 9.9% 20.2% 14.8% 13.4% Russell 1000 Value Index -2.2% 6.6% 13.1% 5.5% 9.0% 8.2% 7.3% S&P 500 Index 4.3% 15.3% 24.6% 10.0% 15.0% 12.8% 10.4% Inception 11/30/2007 Click to enlarge We did not purchase any new positions during the quarter. We did not sell any positions during the quarter. There was one material contributor to performance: Alphabet Inc (GOOG,GOOGL). There was one material detractor: CoStar Group Inc. (CSGP) During the first quarter, Alphabet's revenue growth accelerated and margins expanded. The company continues to introduce new search pathways with advanced models and algorithms that are 100 times more efficient than they were 18 months ago. Disruption risks to core search from generative AI have not completely abated, but Alphabet's technical prowess and historical investments in leading technologies are becoming more apparent. CoStar Group is a premier information services provider to the commercial and residential real estate industries. It is founder led, sells access to mission critical data and information assets, and is supported by a largely recurring, subscription-based revenue model. While it is difficult to pinpoint the exact reason for the stock's underperformance over the last quarter, its operating results continue to impress us. Therefore, with a stable value, we followed our discipline and added to our position. Focus Plus Review As of 06/30/2024 INVESTMENT STRATEGY QTD YTD 1 YEAR 3 YEAR 5 YEAR 10 YEAR Since Inception VVP Focus Plus (Gross) -0.4% 12.6% 33.0% 10.5% 20.9% 15.7% 13.8% VVP Focus Plus (net) -0.8% 12.0% 31.6% 9.7% 19.9% 14.7% 12.7% Russell 1000 Value Index -2.2% 6.6% 13.1% 5.5% 9.0% 8.2% 7.0% S&P 500 Index 4.3% 15.3% 24.6% 10.0% 15.0% 12.8% 10.3% Inception 03/31/2007 Click to enlarge We did not write any options contracts during the quarter. We use options to lower risk. Equity-like returns are possible when option prices reflect higher levels of implied volatility. If exercised, these options give us the right to purchase stakes in companies we want to own at a lower price than the market price at the time the option was written. We would like for these options to be exercised and have set aside cash for that purpose. We employ no leverage. In effect, we are being paid while we wait for lower prices and a corresponding larger margin of safety. We also use options to exit positions. Generally, we write covered calls with the strike price being our estimate of fair value. As with our puts, we are being paid to do something we would do anyway at a given price. We did not purchase any new positions during the quarter. We did not sell any positions during the quarter. There was one material contributor to performance: Alphabet Inc (GOOG,GOOGL). There was one material detractor: CoStar Group Inc (CSGP). During the first quarter, Alphabet's revenue growth accelerated and margins expanded. The company continues to introduce new search pathways with advanced models and algorithms that are 100 times more efficient than they were 18 months ago. Disruption risks to core search from generative AI have not completely abated, but Alphabet's technical prowess and historical investments in leading technologies are becoming more apparent. CoStar Group is a premier information services provider to the commercial and residential real estate industries. It is founder led, sells access to mission critical data and information assets, and is supported by a largely recurring, subscription-based revenue model. While it is difficult to pinpoint the exact reason for the stock's underperformance over the last quarter, its operating results continue to impress us. Therefore, with a stable value, we followed our discipline and added to our position. All Cap Review As of 6/30/2024 INVESTMENT STRATEGY QTD YTD 1 YEAR 3 YEAR 5 YEAR 10 YEAR Since Inception VVP All Cap (Gross) 1.3% 8.2% 22.3% -2.1% 7.7% 8.5% 11.1% VVP All Cap (net) 1.1% 7.8% 21.4% -2.9% 6.9% 7.6% 10.1% Russell 3000 Value Index -2.3% 6.2% 12.9% 5.1% 8.9% 8.1% 9.7% Russell 3000 Index 3.2% 13.6% 23.1% 8.0% 14.1% 12.1% 12.8% Inception 04/01/2011 Click to enlarge We purchased one position during the quarter: ISS A/S (OTCPK:ISSDY). We sold one position during the quarter: Park Hotels & Resorts Inc. (PK) There was one material contributor to performance: Sdiptech AB. There was one material detractor: NICE Ltd. We sold Park Hotels to reallocate capital into more discounted companies. ISS A/S is a facility management company, specializing in services that are non-core to their customers. Its services include routine and specialized cleaning, food management and catering, building management, security, and other services. We like the company's scale, focus, geographic footprint, wide array of services, employee base, and sticky customer relationships. Its focus on services that are non-core to its customers allows for the company to benefit from the trend of outsourcing these types of services. The company executed well throughout the pandemic showing consistent progress towards its goals including growth, margins, free cash flow, and financial leverage. The company has improved margins and is entering a relatively more normalized operating environment, and it continues to trade at an attractive discount to our estimate of fair value. Sdiptech acquires and develops niche infrastructure companies that contribute to more sustainable, efficient, and safe societies. Today, Sdiptech is a collection of approximately 40 operating businesses. We believe these businesses are positioned well to compete and possess a natural ability to grow their competitive moats. Sdiptech's management team has appropriately navigated the varied markets over the past few years and has consistently operated with the long-term in mind. Over the last two years, the stock price has traded at a substantial discount to our estimate of fair value. We followed our discipline and added to the position accordingly. The recent share price increase could be attributed to the company's consistently strong operating performance. NICE is a global enterprise software company that provides mission-critical contact center software. NICE was a material contributor last quarter. As we said last quarter, the company continues to perform well, and fundamentals are strong. Cloud revenue has grown in line with our expectations. We believe that generative AI will continue to drive cloud adoption and that AI is an opportunity rather than a threat to NICE's business. As the leading platform in the space, the company has many competitive advantages that position them well to win. Cloud penetration is in the low 20% range today and AI will likely accelerate cloud adoption, which should benefit NICE. We believe that this growth will more than offset any seat count attrition due to automation. Furthermore, data and customer examples show AI is driving higher levels of revenue per customer and that AI specific product adoption is increasing rapidly. We followed our discipline and added to our position during the quarter. Closing We appreciate the confidence you have placed in us. Your stable capital, invested alongside our own, provides a foundation that allows us to make sound, long-term investment decisions that lower risk and provide the opportunity to achieve superior long-term results. You, our client-partners, are one of our most important competitive advantages. The Vulcan Value Partners Investment Team, C.T. Fitzpatrick, CFA | McGavock Dunbar, CFA | Stephen W. Simmons, CFA | Colin Casey | Taylor Cline, CFA Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Vulcan Value Partners are value investors - business analysts with a long-term time horizon focused on purchasing publicly traded companies that are competitively entrenched at significant discounts to intrinsic worth.

Parnassus Value Equity Fund Q2 2024 Investment Commentary

If investor uncertainty around interest rates and the political landscape heightens, we anticipate finding more bargain opportunities. The strategy pursues strong risk-adjusted returns by owning a concentrated portfolio of U.S. large cap stocks that are poised to rise but are temporarily out of favor relative to their history or peers. After strong gains in the first quarter of 2024, U.S. large-cap value stocks pulled back as investors remained focused on AI-related storylines and expected Federal Reserve (Fed) interest rate cuts later in the year. The U.S. economy remained resilient, buoyed by a continuation of consumer spending growth, relatively steady employment data and moderating inflation. Amidst this backdrop, most sectors within the Russell 1000 Value Index posted negative returns, with only the Utilities and Consumer Staples sectors ending the quarter in positive territory. The Consumer Discretionary sector was the worst performer, followed by Health Care and Materials. The Fund returned -3.81% (net of fees), trailing the Russell 1000 Value's -2.17%. From a sector perspective, stock selection in the Communication Services sector contributed the most to relative performance, followed by selection in the Information Technology and Utilities sectors. The Fund's overweight in Financials also aided results. Stock selection in Health Care, Consumer Staples and Industrials, on the other hand, hindered relative return. The Fund's top contributors were Alphabet (GOOG,GOOGL), Micron Technology (MU) and Taiwan Semiconductor Manufacturing Company (TSM), while the bottom contributors were Global Payments (GPN), Intel (INTC) and NICE. Alphabet's stock rose on the strength of robust first-quarter revenue growth underpinned by noteworthy gains in search advertising, YouTube advertising and the cloud business. Signs that the company is accelerating its development of AI solutions sparked investor optimism. Micron Technology posted fiscal-third-quarter results that met expectations. Micron's DRAM (dynamic random access memory) and NAND (non-volatile storage technology) segments grew revenue strongly, continuing the company's recovery from a cyclical downturn last year. We believe Micron is well positioned to capitalize on AI-driven demand for greater memory. Taiwan Semiconductor Manufacturing Company's leading position in AI chip production continued to boost investor sentiment on the stock. During the quarter, announcements by several large technology companies to expand their AI investments signaled insatiable demand for TSMC's chips and contributed to the stock's rise. Oracle (ORCL) stock surged in June after management forecasted double-digit revenue growth for fiscal year 2025, powered in part by growth in its cloud infrastructure business. Investor sentiment was further bolstered by the company's announcement of a new partnership with ChatGPT-maker OpenAI and Microsoft and another with Google Cloud. Brookfield Renewable (BEPC) shares climbed sharply after the firm announced a $10 billion agreement with Microsoft to expand its renewable power capacity. The agreement is the largest corporate clean energy deal to date. Focusing largely on wind and solar, the buildout will seek to address rising electricity demand from data centers. Global Payments stock fell on investor fears that a slowing economy could weigh on payment processing companies. The company will host an investor day focused on improving efficiencies and strategic redeployment of assets in the fall, which we believe will unlock hidden value in the undervalued shares. Intel disappointed investors with a less-than-stellar second- quarter forecast, driving shares lower, despite first-quarter results that largely met expectations. Additionally, the company revealed greater losses than anticipated in its foundry operations during the quarter. NICE reported first-quarter earnings that exceeded consensus estimates. However, the stock fell on news the company's CEO plans to leave at the end of the year and on concerns that its contact center software would be replaced by generative AI. We believe the concerns are overblown and anticipate instead that the firm will integrate AI features successfully. Align Technology (ALGN), the manufacturer of leading dental aligner Invisalign, logged solid first-quarter earnings and improved guidance. Shares fell over concerns of weakening consumer sentiment since orthodontic costs are often not covered by insurance. We maintain our view that Align will take market share from metal braces. Baxter International (BAX) saw its shares decline after reporting disappointing results for its Hill-Rom subsidiary amid weakness in the primary care market. If Baxter's management follows through on its stated intention to sell or spin off its kidney care segment this year, the transformation should rekindle investor optimism. The Fund's largest overweights relative to the benchmark as of June 30, 2024, were in the Information Technology, Communication Services and Financials sectors, while the Fund's three largest underweights were in the Energy, Consumer Staples and Industrials sectors. During the second quarter, the Fund's overweight position in the Information Technology sector decreased slightly as we sold our position in Cisco Systems (CSCO) and used most of the proceeds to buy Broadcom (AVGO), a leading semiconductor company and provider of custom silicon products. Both stocks provide similar exposure to networking technology, but we believe Broadcom offers more upside from AI infrastructure spend and defensiveness due to its software assets. The Fund's exposure to the Communication Services sector increased slightly as we used proceeds from the Cisco exit to increase our existing exposure to Comcast (CMCSA) and Charter Communications (CHTR). We consider both Comcast and Charter to be trading at attractive valuations following a period of soft performance. These moves increased the Fund's overweight position in the Communication Services sector. In the Financials sector, we tapered our positions across multiple holdings, including Bank of America (BAC), Bank of New York Mellon (BK), Fidelity National Information Services (FIS), Charles Schwab (SCHW), Progressive (PGR) and American Express (AXP). After more than a year of uncertainty, investors now accept the idea that the U.S. economy could experience a soft landing, which has driven these stocks higher. While there is room to run if capital markets continue to recover, we reduced the Fund's overweight in Financials slightly to add to our existing positions in cable and other stocks with more upside potential. With stocks pushing multiple record highs, there are fewer bargains in the market. We therefore made fewer new purchases this quarter, consistent with our disciplined investment process. Our bottom-up approach allows us to uncover quality businesses and invest only when they are trading at attractive valuations. We continue to maintain the Fund's balanced positioning between offensive and defensive sectors, given that available economic data suggests a balanced mix of risks and opportunities. After peaking at over 9% in 2022, headline inflation is trending lower in response to restrictive monetary policy by the Fed. However, the unpredictable timing of Fed rate cuts, concerns that economic growth could stall and tensions over the upcoming presidential election are all expected to increase investor uncertainty. Our strategy is to capitalize on such volatility by investing in quality businesses when they reach attractive valuations. We remain confident in our portfolio's positioning and strategy for potential future returns. The possibility of Fed rate cuts creates a favorable environment for equities, benefiting our holdings in the Financials sector. Our strategy focuses on undervalued stocks of quality companies, which are likely to rise quickly if the market rally broadens. Additionally, advancements in AI should boost our strategic investments in the Information Technology sector, where we carefully balance the upside potential against high market expectations. Our positioning today is an outcome of our bottom-up investment process. While it is tempting to bet on specific macroeconomic outcomes, in our experience, fundamental factors can far outweigh near-term macroeconomic factors for generating attractive returns. This thesis informs our approach for building concentrated portfolios with high conviction and high active share. Macroeconomic drivers, however, can result in temporary dislocations in the market, which create opportunities for active managers. During the rest of the year, if uncertainty around interest rates, geopolitical events and the domestic political environment increases, we anticipate discovering more bargain opportunities to invest in for the long term. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Weekly Market Pulse: The Soft Landing Zone

Technology, Communications Services, and Utilities (all AI-related) earnings were, by far, the biggest gainers in the first quarter of the year. At first glance, the inflation reports last week seemed pretty boring. The Consumer Price Index actually fell in June by 0.1%, but the year-over-year change was still 3%, a full percent higher than the Fed's target. Core CPI was up 0.1% for the month. Both were positive surprises, with the consensus expecting a rise of 0.1% for the headline and 0.2% for the core reading, but it wasn't that far from what was expected. The Producer Price Index, on the other hand, was a negative surprise with a headline reading of +0.2% and a core reading of +0.4%, higher than the expected +0.1% and +0.2% respectively. Furthermore, the year-over-year readings came in at 2.6% and 3%, up from 1% and 1.75% at the beginning of the year. PPI readings tend to be more volatile than the CPI, but those are pretty obviously moving in the wrong direction. But, like the CPI wasn't that positive, neither was the PPI that negative. With that as background, I think the reaction of the bond market was appropriate, with the 10-year yield falling roughly 8 basis points on the week. The reports were a mild positive, and the bond market reaction was also mildly positive. Money markets took this as a bit more positive, with expectations for a Fed rate cut in September rising to about 90% from 74% earlier in the week and the odds of a cut in November rising above 50%. The response in other markets though was much more extreme. On Thursday, after the CPI report, the S&P 500 (SPX) fell 0.9% on the day as the large tech stocks that have been leading the market were taken to the woodshed. Nvidia (NVDA, NVDA:CA), the AI darling, fell 5.6% on the day and most of the tech names in the top 10 holdings of the index were down over 2%: Those top 10 names have been leading the index higher all year, while the rest of the stocks in the index have lagged badly. In the just-completed second quarter, the average stock in the index was down over 2% while the index itself rose almost 4.5%. You had to own those big tech stocks in size to make money last quarter. The YTD numbers are also skewed by the returns of those AI-oriented stocks, with the index up more than double the average stock. On Friday, after the PPI report, the big tech names recovered some, but less than 1%, while the index itself recovered all of its Thursday losses. Obviously, that wasn't because of the mild recovery in the AI names. The difference in the performance of the index versus those big tech stocks on both days is found in all those other stocks that have lagged the index so badly this year. In the second quarter. Only 42% of the stocks in the index posted positive returns, but 390 of the 503 stocks in the index finished Thursday higher and Friday 90% were positive. An even bigger divergence this year has been between large-cap stocks and their small and midcap cousins. Small caps were down 3.4% in the second quarter, while midcaps fell 2.8%. At the end of the quarter, their YTD returns were 2.9% and 6.2% versus the 15.3% of the large caps (S&P 500). Thursday, small caps were up 4.1% and midcaps were up 3% with small caps posting their biggest one-day outperformance of large caps since October of 2008, which tells you that follow-through will be critical to see if this is sustainable. We got that on Friday (and we'll need to see more next week) and by the close, small caps were up 6.2% and midcaps 4.4% for the week. YTD, small caps are now up 6.2% and midcaps 9.0%. The S&P 500 is still winning, but the gap is closing. REITs also responded very favorably to the increased odds of a rate cut. At the end of the second quarter, REITs were down 4% for the year. They rose 2.8% on Thursday, posted a gain of 4.8% for the full week, and are now positive on the year. I expect to see this broadening out of the rally to continue. The first half outperformance of technology makes some sense when you look at earnings growth. Technology, Communications Services, and Utilities (all AI-related) earnings were, by far, the biggest gainers in the first quarter of the year. 7 of the 11 sectors saw earnings contract in Q1 24 vs Q1 23. The rest of the year, though, looks a lot different (assuming estimates are close to accurate). Q2 earnings, which we are starting to be reported now, will show some improvement with energy and healthcare also posting earnings gains. I would also note that we haven't seen the normal confession period we see near the end of a quarter. Usually, the last couple of weeks of the quarter see companies warn about missing current estimates and analysts adjust their numbers down before the reporting starts. That sets up the usual "better-than-expected" reporting we see just about every quarter. But that hasn't happened this time, as estimates are down less than 1% during the quarter. That bodes well for this earnings season. The second half of the year looks even better, with 9 of 11 sectors expected to post gains in Q3 and all sectors expected to report gains in Q4. Assuming the economy holds up to the end of the year, the second half could prove very interesting for the S&P 493. And I guess that is the wild card. I think what really excited markets at the end of the week was not just the drop in the headline CPI. More important for the Fed is the core reading, which continues to drop pretty rapidly. Also having an impact was the rise in the Atlanta Fed's GDPNow estimate for Q2 GDP back to 2% after falling to 1.5% the previous week. It recovered based on nothing more than a rise in wholesale inventories - which could be positive or negative - but most people just look at the headline. The University of Michigan consumer sentiment report also showed a drop in inflation expectations to 2.9%. What all that adds up to is that expectations for an economic soft landing are rising. I have no idea whether those expectations will be met - history says the odds are against it - but for now, any evidence in favor will affect markets positively. We've entered the soft landing zone. Environment The short-term downtrends for the 10-year Treasury yield and the US dollar index have accelerated over the last 2 weeks. The 10-year yield is now lower than the October 2022 peak of 4.33% and the dollar is now down over the last 2 years. The dollar actually closed trading on Friday below the early 2017 and 2020 peaks of 103.82 and 103.96. While I think these short-term downtrends have more to go both are a bit stretched at the moment and could easily see a near term rebound. The intermediate term trends are still pretty neutral. Markets REITs have assumed the leadership over the last month along with small cap stocks, but every major asset class we follow was up. International markets were also higher, with EM leading the way. All of these trends are being driven by the short-term downtrend in rates and the dollar. Growth has maintained its lead over value in the large caps, but mid and small value are ahead over the last month and 3-months and have caught up on a YTD basis. Sectors The AI mania may have cooled off a bit last week, but technology, communications, and utilities (all driven by AI optimism) still hold a big lead YTD. Market/Economic Indicators Credit spreads have fallen back toward their lows of the cycle. More importantly, mortgage rates have fallen back to under 7%. The spread between the 10-year Treasury yield and the 30-year mortgage rate is still wider than average but is working its way down from the peak around 3%. If rate cut expectations continue to build, this spread should narrow. Mortgage rates could easily drop to the low 6s even with no change in the 10-year rate. If the market anticipates rate cuts, though, the 10-year yield will fall and mortgage rates may find their way into the 5s. That would have a profound effect on the housing market and therefore the economy. Joe Calhoun Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors. Joe has worked in the financial services industry since 1992 in various capacities, including Operations Manager, Compliance Manager, Registered Representative and Portfolio Manager. From 1997 to 2006, when he founded Alhambra Investment Management, Mr. Calhoun was a Director of Investments at Oppenheimer & Co. Mr. Calhoun holds the Series 63 (Uniform Securities Agent State Law) and 65 (Uniform Investment Advisor Law) securities licenses. He has previously taken and passed the Series 7 (General Securities Representative) and Series 9/10 (General Securities Sales Supervisor) securities exams. Joe proudly served in the U.S. Navy's nuclear submarine service for 8 years (1983-1990) and was awarded several commendations including the Navy Achievement Medal in 1987. He studied engineering at the University of South Carolina and is a graduate of the U.S. Navy's Nuclear Propulsion School. He founded Alhambra Investment Management as a registered investment advisory to address the needs of the individual investor. His market commentaries are widely read and published at various online outlets. He has appeared on Larry Kudlow's program on CNBC and various radio programs. He is also an editor of the website RealClearMarkets.com.

The Rotation Has Started: More Downside May Be Ahead

This idea was discussed in more depth with members of my private investing community, The Financial Prophet. Learn More " In our previous article, we discussed the upcoming CPI report. The market got a spectacular number, the "ideal CPI," if you will. CPI inflation dropped like a rock from 3.3% to 3.0%, better than the anticipated 3.1%. The better-than-expected inflation reading brings the market closer to the highly anticipated rate cut, with the CMEGroup's rate cut probabilities for September surging to over 90%. So, with inflation falling and rate-cut probabilities increasing, why did our favorite tech stocks sell-off? Nvidia (NVDA), one of Wall Street's top darlings, dropped by nearly 6%. Tesla (TSLA) declined by a whopping 8.5% in Thursday's post-CPI session. Micron (MU), another AI favorite, slid by 4.5%. SoundHound AI (SOUN) spiked to $6.18 (22% gain) in the early session but closed up by only 6% on Thursday. Alphabet (GOOG) (GOOGL), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), Meta (META), and all the mega-cap tech stocks closed lower after the stellar CPI report. The first words that come to mind are pullback and rotation. The mega-cap tech segment has led stocks higher for a long time, and recently, technical conditions became overheated. We can also argue that many valuations in the mega-cap tech space have become "stretched," at least in the near term. This dynamic doesn't mean valuations won't go even higher, but these stocks may need a break in the near term. On the other hand, other areas in the market became neglected, especially mid/small cap stocks. The positive CPI reading has increased the probability of a rate cut sooner than later, and we could see the first cut in September. Lower rates are very positive for the R2K stocks (small/mid caps), as lower rates lead to growth in the domestic economy, and many small/mid caps derive much of their revenue in the U.S. Of course, lower rates are also positive for the mega-cap tech stocks, but we may see a transitory period of rotation and some pullbacks before our favorite tech stocks shoot for stars again. For context, let's look at several charts that could enable us to determine why the pullback rotation period is occurring and how long it could last. Let's also look at appropriate buy-in and add levels, just in case the correction gathers steam. Apple is like the grandaddy of AI consumer hardware (in a good sense). The stock has had a considerable rally recently due to its AI prospects, becoming the world's most valuable company again. While the recent breakout and uptrend are constructive, Apple's stock became massively overbought on a near-term basis. Apple's stock surged by about 42% since about mid-April. The RSI hit around 80, and other technical indicators illustrate that the stock became overbought. Also, Apple's 2024 P/E ratio shot up to around 35, which is rather pricy for a hardware stock, even with its AI potential. Why the pullback should be transitory: While Apple seems expensive here, it could benefit considerably from the next AI-iPhone cycle and the general integration of AI into its enormous ecosystem of products and services. The positive news is that Apple's sales growth and EPS estimates could be revised higher as future earnings and guidance could beat consensus estimates. Technically, $215-200 appears like a solid area to buy in or add shares, in my view (roughly a 7-15% pullback). Microsoft is the second most valuable company globally. Its stock appreciated by about 52% from its 52-week low. These multi-trillion-dollar companies account for massive portions of major averages. At roughly 7% each, Microsoft, Apple, and Nvidia comprise roughly 21% of the S&P 500's total weight. Microsoft's RSI ran up to well above 70, as its stock surged substantially above its 200 and 50-day MAs. We also see the full stochastic moving below 80, implying that near-term momentum is worsening, signaling that the stock could correct more. From a valuation perspective, Microsoft's P/E ratio of nearly 40 seems stretched despite its enormous AI presence. Why the pullback should be transitory: While Microsoft appears expensive, the company has massive AI potential and will likely continue garnering a high multiple. Moreover, its EPS and sales growth estimates could be revised higher in future quarters, as the company will likely report better than anticipated results and guide higher. Technically, a solid buy-in/add area could be around the $430-420 support zone (roughly an 8-12% pullback). Nvidia has had an incredible run. In fact, this is the most significant appreciation for a mega-cap company in history. Nvidia is up (trough to peak) by about 250% from its 52-week low (roughly $40-140). However, if we go back slightly to its split-adjusted bear market bottom in late 2022, Nvidia was up by an astounding 1,200%. We're talking about a 13x return in under two years. I often say that trees can't grow to the sky, and we should not expect Nvidia to rise perpetually without transitory periods of decline. Nvidia recently went through about an 18% pullback, but we may see more consolidation and a more significant pullback in the weeks ahead. Technically, Nvidia became massively overbought recently. We also witnessed a blowoff top and a subsequent lower high. This dynamic implies that there may be more consolidation and transitory downside ahead. Also, the stock became quite expensive, with a fiscal 2025 P/E ratio of nearly 50 and trading at around 26 times the estimated fiscal 2025 sales. Also, we should not forget that Nvidia remains primarily a hardware company despite its enormous lead in AI. Why the pullback should be transitory: Despite its hefty valuation and significant hardware segment, Nvidia is still the undisputed king of AI. Nvidia is also gaining more share in services and software, making it the top one-stop shop for enterprise AI solutions. Furthermore, Nvidia's sales should continue surging, leading to increased profitability, and its forward P/E ratio is only around 35, arguably inexpensive for a company in its dominant market-leading position. Still, the technical pullback may continue, and a solid buy-in/add level may be around $115-100, roughly an 18-28% pullback from its recent top. I believe three crucial elements will determine the timing and magnitude of a possible broad market pullback. Now, we're seeing rotation, but the rotation may eventually transition into a correction. I'm not timing the market, but my best guess is that a broader pullback/correction may arrive around mid to late August, lasting into September. Of course, we will see about this. The Data - Inflation must remain in its downward trend, and the labor market should remain in the Goldilocks zone. We don't want the labor market showing too much strength, as this could make the Fed hold off on cutting rates for longer. On the other hand, we must avoid deterioration, as this dynamic would imply a hard landing/recession scenario is back on the table. The Fed - The probability of a September rate cut is around 95%. This means the market has priced in at least one rate cut by the September FOMC event. If the probability of a rate cut declines below 80-90%, or if the Fed surprises by not cutting in September, there could be a substantial selloff ahead. Earnings - Earnings must remain on point. Most companies need better-than-expected sales and EPS numbers, especially the high-quality AI-related mega-cap names. More importantly, we need better-than-anticipated guidance as AI revenues and efficiencies continue increasing and spreading around the market. Despite the potential for more volatility and transitory downside in high-quality tech stocks, I am not selling the bulk of my Nvidia shares. The AI bull market is likely still in its early to mid stages, and Nvidia's stock could be considerably higher next year. However, that doesn't mean we won't have notable pullbacks and corrections of 10%, 20%, and even 30% in some of our favorite stocks. I continue to adjust around the peaks and troughs, implementing covered calls and other option strategies to maximize income, limit downside, and mitigate risk. Also, despite the possibility of a broad market correction, I am keeping my year-end SPX target in the 6,000-6,200 range.

The 1-Minute Market Report July 12, 2024

The Goldilocks scenario would be a continuation of the broadening out to include small and mid-caps, while still keeping the AI revolution going strong. In this brief market report, we look at the various asset classes, sectors, equity categories, exchange-traded funds (ETFs), and stocks that moved the market higher and the market segments that defied the trend by moving lower. Identifying the pockets of strength and weakness allows us to see the direction of significant money flows and their origin. The S&P 500 (SPX) notched its 37th record high on Wednesday of last week. In a typical year, the market makes 14 new highs over the full year. The first half of this year has been particularly strong. Here's a look at the last 4 weeks. This chart shows the monthly returns for the past year. After a string of 5 positive months from November through March, the market hit a speed bump in April. The gains so far in May-July have more than made up for April's decline. Here is a closer look at the April decline, using a drawdown chart. The maximum drawdown was 5.4%. This chart highlights the 57% gain in the S&P 500 from the October 2022 low through Friday's close. We made good progress last week, even though Q2 corporate earnings so far have only shown modest improvement over last year. Here is a look at the performance of the major asset classes, sorted by last week's returns. I also included the returns since the October 12, 2022 low for additional context. The best performer last week was the small cap Russell 2000. Investors rotated out of large caps and into small and mid-cap stocks. I expect this trend to continue for the next few weeks. Commodities took a hit last week, and they are lagging behind on a YTD basis. For this report, I use the expanded sectors as published by Zacks. They use 16 sectors rather than the standard 11. This gives us added granularity as we survey the winners and losers. Home construction stocks had a great week, up 11.3%. Retailers and Real Estate also performed well. For the groups, I separate the stocks in the S&P 1500 Composite Index by shared characteristics like growth, value, size, cyclical, defensive, and domestic vs. foreign. The best-performing groups last week were the small caps. Mid-caps weren't far behind as investors shifted from large caps to smaller companies. The Mag 7 took a hit last week, but I don't believe that the AI rally is over yet. Here is a look at the seven mega-cap stocks that have been leading the market over the past year. These seven stocks account for 66% of the total YTD gain in the S&P 500. That's down from 87% just a few months ago, providing evidence that participation in the bull market is broadening once again. Home construction stocks led the pack last week, and they have doubled since this bull run began in October 2022. Clean Energy, including Solar, had a strong week as well. Carbon Credit ETFs have had a dismal week, YTD, and bull market run. Here are the 10 best-performing stocks in the S&P 1500 last week. Emergent BioSolutions, the maker of NARCAN (used to treat drug overdoses), is up 343% YTD. That's double the gain in Nvidia (NVDA, NVDA:CA). Super Micro Computer (SMCI), a server maker, is on fire. It's up 220% year-to-date. Its servers are used for cloud computing and AI applications. Here are the 10 worst-performing stocks in the S&P 1500 last week. The S&P 500 is up 17.7% in 6.5 months vs. 5.2% for a typical year. The 37 new highs so far this year is another bullish indicator. Over the past 96 years, when the new high count reaches 37, the average gain for the full year is 23%. The Goldilocks scenario would be a continuation of the broadening out to include small and mid-caps, while still keeping the AI revolution going strong. I think there's a decent chance of pulling that off, as long as Nvidia doesn't stumble on an earnings report. If the Fed begins to cut rates later this year, the market will likely have a strong finish. All in all, it looks like 2024 is on pace for a strong showing. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

New Leadership Should Emerge During The Bull Market's Next Inning

This idea was discussed in more depth with members of my private investing community, The Portfolio Architect. Learn More " Last week, I asserted that three rate cuts by year end, starting in September, should be sufficient to prolong the expansion, while anything less may put that outcome at risk. I surmise that Chairman Powell agrees, considering his emphasis during last week's Congressional testimony on the risks between growth and inflation now being "balanced." That was affirmed after last week's stellar inflation report for June. In reaction, 2-year Treasury yields plunged to 4.5%, and stock prices soared, led by the Russell 2000 small-cap index, which gained nearly 4%. It appears that we are entering a new phase of this bull market whereby the laggards become leaders, instigated by slower rates of economic growth, more stable prices, and the onset of a new rate-cut cycle by the Federal Reserve. Following better-than-expected inflation news, the probability that the first quarter-point cut comes at the September meeting increased to 93% in the CME's Fed Funds futures market. More importantly, the likelihood that we will have three rate cuts by year end, which would require a quarter-point cut at the November and December meetings, increased to better than 50%. That lines up perfectly with the short-term Treasury yield falling to 4.5%. I think this probability will continue to increase, especially when we receive the personal consumption expenditure ("PCE") price index report for June before month end. The bear camp, which has thinned dramatically since the start of the year, contends that when the uber-expensive technology sector, fueled by AI euphoria, comes back down to earth, it will take the rest of the market with it. That is not what happened last week. We did see a sharp pullback in the largest technology stocks, led by the Magnificent 7, but investors rotated into more interest rate and economically sensitive sectors. This is in anticipation of lower interest rates, but also reflects confidence that the economic expansion will continue. Another criticism of this relatively young bull run has been that small-cap stocks have significantly underperformed. Considering their domestic focus, that underperformance raised doubts about the resilience of the economy in what was expected to be a higher-for-longer interest rate environment. We saw a major breakout last week in the Russell 2000 index when it rose nearly 6% to a new 52-week high. Again, the market is telling us that a soft landing is on the horizon, as investment flows move into higher risk segments of the stock market. Earnings season has started off strong. Profit growth for the S&P 500 was expected to be 8.9% on a year-over-year basis at the end of the second quarter, which would be the fastest rate of growth since the first quarter of 2022. Already, the estimate has been lifted to 9.3% when accounting for the 27 earnings reports that came in last week. Better yet, growth is expected to broaden, with eight of the 11 sectors reporting annualized growth. I think we will see double-digit growth by the end of the reporting period, which is consistent with the improvement in breadth we saw last week. Rotation out of technology stocks is not a necessity to fund the investment flows into remaining sectors and smaller market capitalizations. There are still trillions of dollars in money market accounts and very short-term Treasuries, or cash equivalents, earning better than a 5% risk-free yield. As the Fed starts to reduce its benchmark rate, the rate earned on this mountain of cash will also decline. While most of it may extend to longer maturities in a variety of fixed-income securities to capture more competitive yields, I think flows will also support higher valuations for dividend paying stocks and risk assets in general.