Actively managed mid-cap growth strategy that relies on fundamental research and analysis to identify companies with strong and accelerating business momentum, increasing market acceptance and attractive valuations.
Seeking a More Favorable Risk/Return Trade-off
- For the quarter, the Strategy outperformed its benchmark, the Russell Midcap Growth index (the “index”), primarily due to allocation effects.
- An allocation to cash, although within the typical range, along with stock selection in the industrials sector contributed the most to performance.
- Stock selection within the consumer discretionary and health care sectors proved to be the greatest headwind.
- Russia’s war on Ukraine continued to warp market dynamics, pushing a surge of inflation.
Current Strategy and Outlook
Russia’s war on Ukraine continued to warp market dynamics, pushing a surge of inflation. In response, the Federal Reserve pivoted to raising interest rates aggressively. The Fed policy response prompted worries that rate hikes would overshoot the need to curb inflation and cause a recession. Economic data began to show signs of slowdown in manufacturing and job growth, though prices continued to climb. On average, the number of S&P 500 companies issuing negative earnings per share (EPS) guidance for calendar year 2022 increased, though that number was about the middle of the range for the last ten years. Investors responded to these signals with accelerated stock selling, which pressured prices lower.
At some point, declining financial markets, higher interest rates and a stronger U.S. dollar ought to tighten financial conditions enough to curb inflation and give the Fed room to moderate its policy stance. Hopefully, this would allow the economy to stabilize without slipping into recession. Also, S&P 500 EPS guidance varies by sector: the highest numbers of companies issuing negative guidance occur within the health care, industrial and utility sectors; on the other hand, the highest numbers issuing positive guidance occur within the information technology, health care and industrial sectors. These variations suggest there may be room for equity markets to stabilize as inflation and monetary policy moderate.
For the quarter, the Strategy outperformed its benchmark, the Russell Midcap Growth index (the “index”) primarily due to allocation effects. An allocation to cash, although within the typical range, along with stock selection in the industrials sector contributed the most to performance. Stock selection within the consumer discretionary and health care sectors proved to be the greatest headwind.
Stocks that contributed the most to the quarter’s performance were United Therapeutics Corporation, Quanta Services, Inc. and Seagen, Inc.
An overweight position in United Therapeutics Corporation (UTHR) contributed to performance. UTHR posted a blowout 1Q22 with revenue and earnings coming in well ahead of expectations. The growth was solid across the board, driven by key drivers: Tyvaso, Remodulin and Orenitram for pulmonary arterial hypertension (PAH) as new patients start vastly improved post Covid-19. Additionally, during the quarter, the company announced that the Centers for Medicare and Medicaid Services (CMS) granted coverage for Tyvaso for PAH associated with interstitial lung disease (ILD) — a larger market opportunity with limited treatment options. The medicare reimbursement coupled with Food and Drug Administration (FDA) approval for a new dry powder inhaler device (DPI) in May are two important catalysts that could further accelerate the Tyvaso launch.
An overweight position in Quanta Services, Inc. (PWR) contributed to performance. The company had a strong 1Q22, beating on earnings and revenue, and made a slight raise to guidance for FY22. PWR also posted a material topline beat in its largest segment, electric power. Despite supply chain disruptions and regulatory challenges, PWR has been resilient thus far, and while 2Q22 saw the broad market enter bear market territory, its stock price continued to climb. President Biden also enacted an executive order in June allowing solar imports from countries in the Department of Commerce (DOC) free of certain duties for 24 months — a favorable policy for PWR.
An overweight position in Seagen, Inc. (SGEN) contributed to performance. Following the resignation of the CEO in mid-May, takeout speculation began to heat up, driving the stock price higher. Later in the quarter, more credible reports that Merck may be pushing ahead with a potential deal to acquire the company ahead of 2Q22 earnings lent further credence to these rumors. Additionally, the company announced encouraging new data for several of its oncology assets at the annual American Society for Clinical Oncology (ASCO) meeting in June, including Tivdak in first-line cervical cancer and Tukysa in colorectal cancer, making it an appealing oncology target for a large pharmaceutical company.
Key detractors for the quarter were Bill.com Holdings, Inc., Expedia Group, Inc. and DexCom, Inc.
An overweight position in Bill.com Holdings, Inc. (BILL) detracted from performance. Shares traded off due to investor concerns regarding the potential recession impact on its small to medium-sized business client base and transaction activity. In addition, higher rates negatively impacted its relative multiple versus the overall technology sector.
An overweight position in Expedia Group, Inc. (EXPE) detracted from performance. EXPE’s stock has been hit hard of late, dropping approximately 50% during the second quarter. Investor uncertainty around travel expectations due to Covid-19 and inflationary pressures has generated negative sentiment.
An overweight position in DexCom, Inc. (DXCM) detracted from performance. The company reported a modest revenue beat and reiterated guidance for the year, despite an incremental foreign exchange (FX) headwind, but investors likely expected more for a high multiple growth stock. DXCM’s primary competitor, Abbott, presented better-than-expected headline clinical data for their Libre 3 product at the Advanced Technologies and Treatments of Diabetes (ATTD) medical conference in late-April, creating an overhang for the stock. DXCM was also impacted by growing speculation that it might acquire Insulet Corporation (PODD), which offers a patch-pump insulin delivery system for diabetics. Investors reacted negatively to a potential combination, which would have been quite dilutive initially. Libre 3 has since gained FDA approval and DXCM announced they are not in active discussions with PODD regarding a merger at this time
Companies mentioned in this report – percentage of portfolio investments, as of 06/30/22: United Therapeutics Corporation 1.67%, Quanta Services, Inc. %, Seagen, Inc. 2.27%, Bill.com Holdings, Inc. 0%, Expedia Group, Inc. 1.61% and DexCom, Inc. 2.44%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.