Investment Solutions

All Cap Equity Strategy

The objective of the Strategy is to generate alpha over a full market cycle by investing in a diversified portfolio of equities across all market capitalizations. The majority of portfolio holdings are domestic securities, but foreign securities may be included.

Management Approach: Team
Benchmark: S&P 1500® Equal Weight
Assets Under Management: $279.19 million*
Strategy Inception: January 2003

Fact Sheet: 1Q22 All Cap Equity

*as of 03/31/22

Typical Portfolio Attributes
Market Cap Range$250 million and greater
Number of Holdings30 - 60
Position Sizes1 - 5%
Maximum Sector Weightings Relative to the BenchmarkNo formal restrictions
Cash Levels< 5%
Portfolio ManagerTeam managed

Data subject to change.

Annualized Performance (%)

for period ended 03/31/22
 1 Year3 Year5 Year7 Year10 YearSince
Inception
All Cap Equity Composite (Gross)10.6717.7512.5010.4012.1810.71
All Cap Equity Composite (Net)9.8416.8411.799.8311.7210.05
S&P 1500® EW6.4816.3212.5611.3013.1812.39

Calendar Performance (%)

for period ended 03/31/22
 YTD20212020201920182017
All Cap Equity Strategy Composite (Gross)-1.8127.5220.2819.67-9.1712.62
All Cap Equity Strategy Composite (Net)-2.0026.5919.3118.74-9.5712.33
S&P 1500® EW-3.6430.3814.8924.50-9.5714.01

Commentary

The All Cap Equity Strategy outperformed its benchmark in the quarter because of the security selection effect. When making investment decisions, we seek to own good businesses at good prices so our sector allocations are byproducts of the businesses we own. We comment on those companies that have the most significant impact on estimated security selection.

Among the companies positively impacting security selection:

CF Industries Holdings, Inc., is a leading global manufacturer and distributor of nitrogen products, primarily fertilizer. Its nitrogen products are upgraded from ammonia and include granular urea, urea ammonium nitrate and ammonium nitrate. Manufacturing facilities in the United States, Canada, and the United Kingdom are supported by extensive storage, transportation, and distribution capabilities. Shares benefitted from additional upward pressure on fertilizer prices, which accelerated following Russia’s invasion of Ukraine. We used this as an opportunity to trim our position in the strategy. We believe CF Industries is well positioned as the low-cost leader with access to low-cost natural gas and to the largest end market – corn.

CarGurus, Inc. seeks to be the single best platform for consumers and dealers to buy and sell vehicles. Its marketplace has the largest audience of potential buyers and most dealer inventory. It has built or in the process of building end to end digitally enabled transaction capabilities including CarOffers, for dealer wholesale, Instant Max Cash Offer, for consumers to sell vehicles at the highest bid from a national network of dealers, and digital retail which allows consumers to buy directly from dealers. Quarterly results indicated durability of the core dealer listings subscription business despite low levels of inventory. Additionally, the CarOffers business has continued to quickly scale profitably. We see a full set of digitally enabled end-to-end transaction capabilities to support dealers and consumers that we expect to scale quickly and profitably. These capabilities are differentiated by its longstanding proprietary data sets including Instant Market Value, Dealer Rating, and Deal Rating. Also, the digital wholesale Buying Matrix technology allows for instant transactions, and Instant Max Cash Offer collects competing dealer bids for consumer automobiles. We also like the scalable low capital intensity approach that does not invest in inventory or refurbishing centers.

Palo Alto Networks, Inc. is one of the top providers of enterprise network security used to secure all users, applications, data, networks, and devices with comprehensive visibility and context, continuously and across all locations. Quarterly results were ahead of guidance across all metrics including billings and backlog growth, which it refers to as remaining performance obligations. Total revenues grew 30% vs. a year ago. Strength was broad based across all three security platforms and products despite supply chain challenges. Services, which account for roughly three-quarters of overall revenue, grew 32%. Products, which account for the balance of revenue, grew 21%. The geopolitical situation with Russia and expected increase in cyber-attacks also raised the financial prospects for many cyber-security providers during the quarter. Cybersecurity has become a focus as breaches increase and data is lost. Additionally, complexity has increased as the enterprise network perimeter has disappeared due to an increased number of connected devices and also working from home. Those offering enterprise-wide security solutions are best positioned as the IT landscape moves towards less vendors and complexity is increasing with distributed infrastructure and end user flexibility.

AbbVie Inc. is a global biopharmaceutical company dedicated to research and development, manufacturing, commercialization, and sale of innovative medicines. Its key commercial assets are in the therapeutic areas of immunology, hematologic oncology, neurology, and an aesthetics business. Quarterly commercial results included operational revenue growth in immunology, hematologic oncology, neuroscience, and aesthetics of 13.3%, 4.7%, 19%, and 22.8% respectively. Adjusted earnings per share guidance for 2022 reflects 10% growth at the midpoint. It confirmed its 2025 guidance for Skyrizi and Rinvoq of $15 billion in risk adjusted sales as new indications are expected to offset the impact of Rinvoq label restrictions. Longer term, we see durability in its immunology franchise after Humira’s loss of exclusivity. Two recently approved drugs, Skyrizi and Rinvoq, have proven to be superior to Humira in clinical trials and are being developed in a broader set of indications. We see potential in the drug pipeline including new therapeutic areas such as cystic fibrosis as well as earlier stage assets being developed to improve upon existing treatments. Cash flows are expected to be used to paydown debt, fund business development activities for pre-commercial, and commercial assets, as well as pay an above average dividend.

AmerisourceBergen Corporation is one of the largest providers of global pharmaceutical sourcing and distribution services helping healthcare providers and drug manufactures improve patient access. It distributes products to healthcare providers located in the United States and select global markets using a network of distribution centers. Its two business segments include U.S. Healthcare Solutions and International Healthcare Solutions. On February 25th the three largest players in the drug distribution industry, including AmerisourceBergen, agreed to proceed with the opioid settlement as 46 states and roughly 90% of sub-divisions have joined. This provided clarity to an issue that has been a long-term overhang, and the settlements terms leave ample financial flexibility. We favor AmerisourceBergen’s leading specialty pharmaceutical position, diversified business model, significant cash generation, and a history of disciplined capital allocation.

Among the companies negatively impacting security selection:

Wabash designs and manufactures a diverse range of products for the transportation logistics and distribution industries across the first-to-final mile of product transportation. Its operating segments include: Transportation Solutions, the trailer business, and Parts and Services which includes its molded structural composite (MSC) technology. The market has concerns about it adding trailer capacity. However, it sees a long-term shift toward more demand for trailers to lessen the impact of tractor driver shortages and meet increased needs related to e-commerce. The time between receiving a new order and delivering completed product tends to be shorter than the extended (year-plus) lead times typical in the industry. This is a competitive advantage as logistics companies need additional trailers to address supply-chain bottlenecks. Shorter order lead times, coupled with the weight and performance advantages of both dry and refrigerated offerings provide a path towards continuing cash flow growth, and improvement in profitability. Capital allocation priorities are reinvesting in the business, maintaining the dividend, while evaluating opportunities for share repurchases and bolt-on acquisitions.

PayPal Holdings, Inc. offers digital services to make the movement of money easy, including peer-to-peer transfers, banking services, online payment acceptance, and alternative forms of payments including cryptocurrencies. Quarterly growth was lower than anticipated due to lower e-commerce growth, lower spend on new customer acquisition, and bad actors opened accounts to capture short-term incentives without using the platform. In response, PayPal has chosen to focus more on current customer engagement and average revenue per user to drive growth with the added benefit of anticipated lower churn. It is de-emphasizing new customer acquisition, although it expects to continue to gain new customers. PayPal’s strategy is to expand services that make routine financial transactions simpler by partnering with – rather than competing against — other financial players. We believe it will be effective driving engagement and revenue from existing users while attracting new users and increasing the average transaction size.

American Eagle Outfitters, Inc. is a multi-channel retailer with two distinct brands: AE and Aerie. It specializes in apparel, active wear, intimates, and swimwear among other things and operates over 1,000 stores and licenses over 200 additional stores. Quarterly revenue, operating income, and adjusted earnings per share set records with strong demand, lower promotional activity, and average transaction value doubling. Aerie posted its 29th consecutive quarter of double-digit growth, and the AE Brand was up 11% year-over-year. However, concerns about elevated costs, supply chain strains and margin durability weighed on the shares despite it raising 2023 financial targets, which now includes $800 million in operating income. American Eagle leverages its flexible real estate lease terms to migrate the store portfolio to more profitable models. An example is closing mall locations in favor of standalone stores. Additionally, it has grown and integrated its digital presence with the bricks and mortar stores creating an attractive omnichannel experience. We see the Aerie Brand growing strongly and the slower growing AE Brand providing stability.

Western Digital Corporation is a leading developer, manufacturer, and provider of data storage devices including flash based solid-state drives (SSDs) and hard-disk drives (HDDs). Despite supply chain challenges revenues were ahead of guidance and, gross margins were in line. Cloud revenue continued to be strong with year-over-year growth of 89% and represented 40% of total revenue. Supply chain challenges will persist throughout calendar year 2022 resulting in guidance that was below expectations. Longer term, we believe its shares do not reflect the value of the SSD business, a joint venture with Kioxia. Although there are challenges to be resolved, value could be unlocked either through a Kioxia initial public offering or Western Digital purchasing Kioxia outright.

AMN Healthcare Services, Inc. is the leader and innovator in total talent solutions for the healthcare sector in the United States. Its solutions are used to optimize workforces, simplify staffing complexity, increase efficiency, and ultimately elevate the patient experience by providing staffing, recruitment, technology, and analytics. The markets continue to contemplate the impact of COVID-19 demand declines. However, quarterly guidance has continued to exceed expectations, and suggestions of a normalized $1 billion quarterly revenue run rate in the second half of this year, with 15% margins, and 10% growth was viewed favorably. Also, long term CEO Susan Salka announced plans to retire, but CFO Jeffrey Knudson appeared to use the share price decline as an opportunity to buy $500,000 shares in the open market. We see the business benefitting from the backlog of elective procedures post COVID-19 as well as increased clinician preferences for shorter term and supplemental work. Management is focused on expanding strategic customer relationships using workforce solutions that generate higher margin recurring revenues that are less economically sensitive.

We traded in the following companies during the quarter unless mentioned above:

We sold Aerojet Rocketdyne Holdings, Inc. which makes rocket boosters for the Department of Defense (DoD), the National Aeronautics and Space Administration (NASA) from the strategy. Its merger with Lockheed Martin was terminated following the Federal Trade Commission decision to sue to block the deal. The DoD, while initially in favor of the deal decided to not stand in the FTC’s way.

 

 

Performance Attribution (%)

for quarter ended 03/31/22
 Sector
Allocation
Impact
Stock
Selection
Impact
Total
Impact
Consumer Discretionary0.54-0.410.13
Consumer Staples-0.02-0.20-0.22
Energy-1.580.00-1.58
Financials-0.010.300.29
Healthcare0.001.771.77
Industrials-0.06-0.41-0.47
Information Technology-1.121.450.33
Materials-0.131.231.10
Real Estate-0.100.00-0.10
Communication Services-0.060.740.68
Utilities-0.280.00-0.28
Total-2.814.461.65

Top Ten Holdings

for quarter ended 03/31/22
 % of Portfolio
Fortinet, Inc.5.77
Palo Alto Networks, Inc4.44
AECOM4.10
CVS Health Corporation3.47
CarGurus, Inc.3.37
AmerisourceBergen Corporation3.32
AMN Healthcare Services, Inc.3.26
AbbVie Inc.3.25
CF Industries Holdings, Inc.2.94
Bershire Hathaway, Inc. - CL B2.81

Top Contributors (%)

for quarter ended 03/31/22
 Average WeightContribution
CF Industries Holdings, Inc.3.231.49
CarGurrus, Inc.2.960.78
AbbVie Inc.2.790.58
AmerisourceBergen Corporation2.880.48
Palo Alto Networks, Inc.3.890.46

Top Detractors (%)

for quarter ended 03/31/22
 Average Weight Contribution
PayPal Holdings, Inc.1.48-0.57
Wabash National Corporation2.37-0.56
American Eagle Outfitters, Inc.1.69-0.56
Western Digital Corporation2.17-0.52
AMN Healthcare Services, Inc.3.36-0.49

Composite Characteristics

for period ended 03/31/22
 CompositeBenchmark
Price/Earnings Ratio21.4019.63
Price/Book Value Ratio35.542.32
Dividend Yield (%)1.091.43
Weighted Average Market Cap122.77650.61
3 Year Annualized Tracking Error (%)7.41N/A
3 Year Annualized Standard Deviation (%)20.5623.53
3 Year Alpha3.13N/A
3 Year Beta0.83N/A
3 Year Information Ratio0.19N/A
5 Year Annualized Tracking Error (%)6.50N/A
5 Year Annualized Standard Deviation (%)18.2220.73
5 Year Alpha0.99N/A
5 Year Beta0.84N/A
5 Year Information Ratio-0.01N/A

Sector Weights

for period ended 03/31/22
 CompositeBenchmark
Consumer Discretionary6.6812.14
Consumer Staples1.306.19
Energy2.453.59
Financials10.5811.12
Healthcare18.8712.32
Industrials21.988.13
Information Technology28.3825.22
Materials4.772.71
Real Estate0.003.05
Communication Services4.9713.03
Utilities0.002.49
Total100.00100.00

Sources for all data are Stewart Capital Advisors and Bloomberg.

Past performance is not indicative of future results. There is no guarantee a specific investment strategy will be successful.

Portfolio attributes, sector weightings, and holdings represent individual equity holdings excluding cash, pooled investments, and other non-equity holdings and may change without notice.

Performance attribution does not incorporate the effects of cash, unclassified securities or expenses. Positions smaller than 0.05% round to 0.0%. Totals may not match stated returns due to rounding, effects of cash, and timing of trades.

Top contributors/dectractors = average weight x total return during the time period.

The contributors/detractors listed do not represent all securities purchased or sold for our clients. To obtain a list showing the contribution of each holding that contributed to overall performance during the quarter and the calculation methodology, please call 855.783.9227.

The S&P 1500® Equal Weight is an unmanaged index of U.S. stocks made of all stocks in S&P 500®, S&P 400® and S&P 600®. About 90% of all the U.S. market stock capitalization are encompassed here and each stock is equally weighted.

The information contained herein does not constitute a solicitation or recommendation by Stewart Capital Advisors, LLC (SCA). The views expressed by the portfolio managers are as of the quarter-end specified. The information may contain opinions or forward-looking statements that are subject to change at any time without notice, and is not intended to predict the performance of any individual security, market sector, or portfolio. No assurance can be given that these opinions or statements will prove accurate or profitable. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings.

This information is solely for supplemental information purposes, intended for institutional investors, and may not be provided unless directly accompanied by the fully compliant Global Investments Standards (GIPS) disclosure.