It was a great quarter to be an investor in US Equities. While the large cap market continued to trend higher, more stocks participated in the rally, a trend we also saw in the fourth quarter of 2023. The market continues to be led by the “mega cap” companies, with the ten largest companies accounting for one-third of the S&P 500, a level not seen since the 1970’s.
In the small cap space, we saw a similar trend as two technology darlings; Super Micro Computers (SMCI) and Microstrategy (MSTR) surged higher. MSCI has benefited from the surge in AI related stocks while MSTR holds its corporate cash in Bitcoin and its stock has increased with the rise in cryptocurrency. These two stocks have been a force in the small cap benchmark and accounted for 3.93% of the benchmark’s 7.58% quarter return.
Economic growth remains strong, unemployment is low and the inflation rate remains stubbornly above the 2% Federal Reserve target. Consensus expectations have declined to just one or two rate cuts for 2024, that may get pushed further into the future if inflation remains above the Fed’s target range. This suggests the recent economic and market backdrop will persist with reduced potential for a cyclical reacceleration.
Discussion of First Quarter Performance and Positions
For the quarter, the Shaker Small Cap Growth Strategy trailed its benchmark rising 6.8% (net of fees) versus the benchmark’s advance of 7.6%. Part of the underperformance reflects no exposure to MSTR and being underweight SMCI. As mentioned earlier these two stocks accounted for a significant increase in the benchmarks.
Industrials, energy and technology were contributors to returns while healthcare and telecommunications detracted from returns. Stock specific contributors and detractors are shown on the following page.
We continue to look for great companies at reasonable valuations that meet our criteria. The are out there in the small cap asset class, but often you have to dig and find them!
Top Contributors
Installed Building Products (IBP) – IBP is one of the best insulation contractors for residential and commercial builders.
Medpace Holdings (MEDP) – MEDP is a small and growing clinical research organization (CRO). Their full-service approach continues to drive industry leading sales, bookings, and earnings growth.
Sprouts Farmers Market (SFM) – SFM is one of the nation’s fastest growing grocers with a unique open layout experience that inspires wellness.
Kirby Corp. (KEX) – KEX is the premier tank barge operator in the US, transporting items throughout the Mississippi River System, the Gulf Intracoastal Waterway, and along three US Coasts.
ICON PLC (ICLR) – ICLR is a leading CRO with a worldwide footprint. ICLR continues to grow at a rapid pace.
Top Detractors
Concentrix (CNXC) – CNXC is a global technology and services company benefitting form the growth in AI spend.
Upwork (UPWK) – UPWK connects freelancers to the companies that need their skills. There is a concern AI is taking share from freelancers, and subsequently the prospect of company growth.
Globant SA (GLOB) – An IT outsourcing company, GLOB has potential to be an industry leader in AI. The industry is seeing some softness, reflected in the share price.
Insulet (PODD) – PODD is the maker of an insulin management system for patients with diabetes. In a competitive landscape, PODD saw weakness in growth and heightened competition.
Amphastar Pharmaceuticals (AMPH) – AMPH is a company that specializes in developing, manufacturing and distributing pharmaceutical products. We continue to like the company’s high margin business.
Changes in the Portfolio
During the quarter we saw initiations in 6 new companies and exits in 5. One of the new purchases/exits in the portfolio came in the IT Distributor space – replacing TD Synnex (SNX) with Insight Enterprises (NSIT). NSIT is the fourth largest IT solutions provider in the space, gaining share in the market. NSIT acquired a competitor (PCMI) in 2021 which allowed them to expand their hardware focus. Revenue and EPS growth has been substantial and they believe this should continue for years ahead.
One of the 5 exits this quarter include The Boston Beer Company (SAM). SAM, the brewer of Samuel Adams, Twisted Tea, and Truly Hard Seltzers has seen a cyclical recession since Covid-19. Truly became one of the nations largest hard seltzers brands before quickly being overrun by a multitude of competitors. Additionally, the price of aluminum and use of third-party bottlers has been a headwind on margins. Near-term outlook for the company looks bleak and the source of cash was utilized by the PMs to upgrade the portfolio.
One portfolio upgrade this quarter was Camtek Ltd. (CAMT), a provider of advanced inspection and metrology systems which include integrated hardware and software. We have owned CAMT in the past and believe 2024 is poised for growth as CAMT has exposure to the accelerating semiconductor industry.