Q1 An Uneventful Quarter
The first quarter was relatively uneventful in our portfolio. The Small Cap Composite finished the quarter flat, trailing the Russell 2000 Index. The stocks of our largest positions were mixed, some helping, some hurting, causing the rather pedestrian performance. Underneath the stock performance the fundamental picture is quite positive. We are pleased with the progress that our companies continue to make to drive long-term value.
BGC, our largest holding, was up in the quarter. The company continues to show double digit earnings growth in its core business, it got approval to launch a competing business to the CME, and management continues to buy back stock with their strong cash flow. Despite all of these positives, the stock is still trading for less than 10x estimated earnings. We continue to cheer on management as they unlock the value of their multiyear investments.
Energy Fuels, our second largest holding, was down in the quarter. Uranium prices pulled back after a wild run last year, weighing on sentiment in the sector. Energy Fuels, in our opinion, has irreplaceable assets that could allow them to become a US based hub to generate strategically important materials, such as uranium for nuclear power, rare earth magnets for industrial and military applications, and isotopes for medical care. Management continues to sign long-term contracts, invest in assets, and negotiate supply agreements to bolster an already strong position.
Re-iterate Q4 Statement
Not much has changed since I wrote my Q4 write up, which I have included below for those wanting more detail about our philosophy and investment approach. Since yearend, the economy has been moderate to OK depending on the industry. The stock market, especially large caps, has performed well on the back of a few high-fliers, such as Nvidia. Small caps bounced at the end of the quarter after spending most of the quarter in the red. Lastly, geopolitical risk remains high and we have a contentious election coming up. Putting all of this information together, it is hard to know what that means for the rest of the year.
Luckily, my strategy is not trying to predict every market move. If I am correct about the value being created by the companies we invest in, the ups and downs in the market and the good and bad quarters versus the index should be background noise over time. In fact, the four previous calendar years of the strategy, we ended the year ahead of the index. In each of those years we had one to two quarters of underperformance. Clearly after Q1, this year will be no different. In a highly concentrated, idiosyncratic portfolio we will vary widely from the index and if we outperform it will most likely come in chunky bursts, similar to the past. The quarter-to-quarter timing of that success is impossible to predict.
To conclude, we are excited about the prospect of the companies in our portfolio and believe they offer nice return opportunities relative to the risk for those willing to look through the near-term vagaries of the market. Our long-term performance highlights the success to date of that approach.
With kind regards,
Zack
Small Cap Q1 2024 Commentary
Zack Perry
Q1 An Uneventful Quarter
The first quarter was relatively uneventful in our portfolio. The Small Cap Composite finished the quarter flat, trailing the Russell 2000 Index. The stocks of our largest positions were mixed, some helping, some hurting, causing the rather pedestrian performance. Underneath the stock performance the fundamental picture is quite positive. We are pleased with the progress that our companies continue to make to drive long-term value.
BGC, our largest holding, was up in the quarter. The company continues to show double digit earnings growth in its core business, it got approval to launch a competing business to the CME, and management continues to buy back stock with their strong cash flow. Despite all of these positives, the stock is still trading for less than 10x estimated earnings. We continue to cheer on management as they unlock the value of their multiyear investments.
Energy Fuels, our second largest holding, was down in the quarter. Uranium prices pulled back after a wild run last year, weighing on sentiment in the sector. Energy Fuels, in our opinion, has irreplaceable assets that could allow them to become a US based hub to generate strategically important materials, such as uranium for nuclear power, rare earth magnets for industrial and military applications, and isotopes for medical care. Management continues to sign long-term contracts, invest in assets, and negotiate supply agreements to bolster an already strong position.
Re-iterate Q4 Statement
Not much has changed since I wrote my Q4 write up, which I have included below for those wanting more detail about our philosophy and investment approach. Since yearend, the economy has been moderate to OK depending on the industry. The stock market, especially large caps, has performed well on the back of a few high-fliers, such as Nvidia. Small caps bounced at the end of the quarter after spending most of the quarter in the red. Lastly, geopolitical risk remains high and we have a contentious election coming up. Putting all of this information together, it is hard to know what that means for the rest of the year.
Luckily, my strategy is not trying to predict every market move. If I am correct about the value being created by the companies we invest in, the ups and downs in the market and the good and bad quarters versus the index should be background noise over time. In fact, the four previous calendar years of the strategy, we ended the year ahead of the index. In each of those years we had one to two quarters of underperformance. Clearly after Q1, this year will be no different. In a highly concentrated, idiosyncratic portfolio we will vary widely from the index and if we outperform it will most likely come in chunky bursts, similar to the past. The quarter-to-quarter timing of that success is impossible to predict.
To conclude, we are excited about the prospect of the companies in our portfolio and believe they offer nice return opportunities relative to the risk for those willing to look through the near-term vagaries of the market. Our long-term performance highlights the success to date of that approach.
With kind regards,
Zack
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