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QTD Large Cap – 1Q2024 vs. R1000V

Market Observations & Portfolio Commentary

Large Cap – 1Q2024 vs. R1000V


Market Update 

U.S. stocks posted solid gains in 1Q as stable economic growth, decelerating inflation, and some weakening in the labor market suggest a greater chance of a soft landing. Still, sticky inflation data and a tight labor market pushed out the timeline for the Fed’s first rate cut, leading to a rise in yields. Nevertheless, the S&P 500 notched its strongest start since 2019. For the quarter, the broader market, as measured by the Russell 3000 Index, rose 10%. Stocks were higher across the market cap spectrum, but larger companies exposed to growth factors posted the strongest gains. The Artificial Intelligence (AI) hype that powered 2023’s market rally extended its momentum into 2024. Although there were signs of some rotation away from the dominance of mega-caps, leadership dynamics largely remained unchanged. Market performance continued to be driven by Momentum, Growth, and Volatility market factors, while Yield, Value, and Quality factors lagged behind.


Key Performance Takeaways for the Year

  • The London Company Large Cap portfolio gained 8.3% (8.2% net) during the quarter vs. a 9.0% increase in the Russell 1000 Value Index. Sector exposure was a tailwind, while stock selection detracted from relative performance.

  • The Large Cap portfolio produced solid absolute returns and relative results that exceeded our 85-90% upside capture expectations. Our focus on Quality factors faced headwinds in a market favoring Momentum, Growth, and Volatility, and our underweight to Energy (the best performing sector, up 14%) was an additional obstacle. Taken together, we are encouraged to have delivered results in line with expectations in such a robust return environment.


Top 3 Contributors to Relative Performance 

  • Progressive (PGR) – PGR was up 31% during the quarter as it continues to report better margins and faster growth compared to the industry. PGR’s policy in force (PIF) delivered positive growth, and it achieved necessary pricing actions with existing customers. Profitability remains better than peers as PGR has been successful at lowering ad spending while growing its mix of preferred customers. PGR’s underwriting risk segmentation continues to be a competitive advantage as it has delivered industry-leading accident frequency results. We remain confident in its ability to execute in all environments, competitive advantages, and capital allocation strategy.

  • Martin Marietta (MLM) – MLM reached all-time highs during the quarter as the company executes on its value-over-volume strategy, exhibiting strong pricing power and margin expansion. The company continues to increase its leading position in aggregates by adding strategic assets that will be beneficial to overall profitability. Strategic M&A, strong financials, and resilient end market outlooks gives us confidence that the company will benefit from growth in infrastructure and construction spending for many years.

  • Fiserv (FI) – FI outperformed during the quarter, supported by strong quarterly results and encouraging guidance for the year. Growth in Merchant Acceptance has been driven by strength in its Clover platform and e-commerce share gains, while the Fintech and Payments segments continue to provide stability and recurring revenue. Management laid out an encouraging growth framework for its Merchant business focused on adding new clients and increasing penetration of the higher margin value-added services. FI has proven to be a steady compounder that provides a balanced mix of revenue stability and diversified growth. We remain confident in the company’s ability to generate durable earnings growth over time through its robust product offerings and disciplined capital allocation.


Top 3 Detractors from Relative Performance 

  • Apple (AAPL) – The first quarter was a very busy quarter of news flow, and most of it resulted in negative sentiment for the stock. Despite announcing the availability of the long-awaited Vision Pro in early February, AAPL’s stock underperformed following increasing scrutiny from US and EU regulators and an earnings report that failed to inspire the masses. Add in weakness in AAPL device sales in China, and the market capitulated on the stock. Furthermore, the halo of artificial intelligence exposure that was bestowed on so many companies by the market failed to touch AAPL, as the company’s AI plans remain shrouded in development and mystery. We remain attracted to the company’s growing services business, its strong balance sheet, excellent cash flow generation and capital allocation.

  • Nestle (NSRGY) – Sentiment across the packaged food space is low as it emerges from two years of unprecedented food price inflation (not seen since the 1970s). High prices pressured volumes and margins industry-wide, and caused consumers to trade-down to value and private label. We view NSRGY as attractively positioned in categories that have stable, long-term volume tailwinds such as coffee, pet food, and nutritional health. We believe the stock can re-rate as volume-led growth returns, and the company continues to execute against profitability and operational goals.

  • Air Products (APD) – Stock weakness continued in 1Q as slower industrial production in the China and semis markets is weighing on the base business. However, APD’s take-or-pay contracts provide strong downside protection in these scenarios; weak end markets materialize as lower EPS growth (+6-9% expected in 2024), rather than ex-growth. APD’s multiple compressed significantly in past months to 19.5x PE (vs. close peer Linde {LND} at 30.5x) which points to investor skepticism in both management’s ability to execute competitively in the core business and in the capital allocation strategy focused on clean energy megaprojects. We spoke with the CEO this quarter and he is prioritizing the restoration of investor trust while also protecting the company’s long-term strategy. We believe the stock is positioned to both re-rate as APD delivers consistent execution in the base business, and compound over time as offtake agreements offer tangible return profiles for megaprojects.


Sector Influence

We are bottom-up stock pickers, but sector exposures influenced relative performance as follows:

  • What Helped: Underweight both Real Estate & Health Care (two weaker performing sectors)

  • What Hurt: Underweight Energy (a better performing sector) and overweight in Consumer Discretionary (a weaker performing sector)


Trades During the Quarter

  • Reduced: Apple (AAPL) – Reduction reflects strong performance in 2023 and resulting elevated valuation. We believe the outlook for AAPL remains strong with slow growth in iPhone (now #1 global market share) and faster growth in the higher margin services business. R&D will continue to drive new products and AAPL now has over 2 billion installed devices around the world. While near term earnings expectations appear reasonable, we felt it was prudent to reduce the position size based on risks to valuation.

  • Increased: Air Products (APD) – Addition follows recent weakness reflecting headwinds from higher inflationary costs and the associated impact potential on expected returns from some of APD’s largest projects. Fundamentally, APD is in a strong position to capitalize on the clean energy revolution due to their scale, experience, technology, and customer relationships. Management has shown they will allocate capital efficiently and effectively by walking away from deals that do not meet return thresholds, while taking advantage of government policies, tax credits, and favorable green bond prices. We remain confident in the long-term outlook, and a recent large share purchase by the CEO is a strong sign of conviction.


Looking Ahead

With slowing inflation, signs of better balance in the labor market, and normalized GDP growth expectations, the Fed will probably start to lower rates later this year. We believe the Fed will proceed with caution, attempting to balance the risk of easing policy too early against the risk of maintaining rates in a restrictive position for too long. While the odds of a recession in the near term have declined, risks remain. Longer term, we remain positive regarding the U.S. economy and expect real annualized GDP growth in the 2% range driven by growth in the labor force and improving productivity.

In terms of the equity market, we believe returns in the near term may be modest, with shareholder yield (dividends, share repurchase, debt reduction) comprising a significant percentage of the total return. After such a strong five-month rally, it’s fair to question the sustainability of the market’s strength. Narrow, top-heavy markets are fragile, and the recent surge in insider selling activity, especially in tech companies, likely reflects the extreme valuations and unsustainability of this AI momentum trade. The odds of a recession have come down, but our cautious posture persists due to high valuations, market concentration, looming debt challenges, and the lengthiest inversion of the yield curve in history. Continued multiple expansion in a higher rate environment is unlikely. We suspect the S&P 500 will eventually track earnings, so we would expect more volatility, especially in stocks where a lot of growth is already priced in. We see a greater opportunity for quality operators with durable cash flow generation, strong balance sheets, and attractive shareholder yields in the years ahead.


Annualized Returns 

As of 3/31/2024

1Q2024 Large Cap vs Russell 1000 Value Annualized Returns

Inception date: 6/30/1994. Past performance should not be taken as a guarantee of future results. Performance is preliminary. Subject to change.

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