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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% |
|
*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. |
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 |
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 |
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 |
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 |
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 |
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.
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