Mid Cap Equity Strategy
The objective of the Strategy is to generate alpha over a full market cycle by investing in diversified group of equities with market capitalizations between $1 billion and $10 billion at the time of purchase. The majority of portfolio holdings are domestic securities, but foreign securities may be included.
|Benchmark:||S&P MidCap 400® Index|
|Assets Under Management:||$139.18 million*|
|Strategy Inception:||January 2003|
|Fact Sheet:||3Q21 Mid Cap Equity|
*as of 9/30/21
|Typical Portfolio Attributes|
|Market Cap Range||$1 - $10 billion|
|Number of Holdings||30 - 50|
|Position Sizes||1 - 5%|
|Maximum Sector Weightings|
Relative to the Benchmark
|No formal restrictions|
|Cash Levels||< 5%|
|Portfolio Manager||Team managed|
Data subject to change.
Annualized Performance (%)for period ended 9/30/21
|1 Year||3 Year||5 Year||7 Year||10 Year||Since
|Mid Cap Equity Composite (Gross)||49.71||10.98||14.44||10.40||14.14||12.40|
|Mid Cap Equity Composite (Gross)||48.25||10.02||13.51||9.58||13.30||11.41|
|Mid Cap Equity Composite (Gross)||43.68||11.08||12.97||11.56||14.72||11.78|
Calendar Performance (%)for period ended 9/30/21
|Mid Cap Equity Strategy Composite (Gross)||16.64||16.82||20.72||-8.77||16.02||18.21|
|Mid Cap Equity Strategy Composite (Net)||15.77||15.71||19.85||-9.47||15.19||17.51|
|S&P MidCap 400® Index||15.52||13.65||26.21||-11.10||16.26||20.75|
The Mid Cap Equity Strategy outperformed its benchmark in the quarter because of security selection. When making investment decisions, we seek to own good businesses at good prices. 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:
Stamps.com Inc. sells software as a service (SAAS) subscriptions to print postage and shipping labels on site to obtain low cost and convenience. Stamps.com agreed to be acquired by private equity firm Thoma Bravo LLC for $330 per share on July 9th a 67% premium over the previous day’s stock price. The deal closed October 6th. We liked its entrenched competitive position resulting from its first-movers advantage and breadth of services, a growing market benefitting from e-commerce and convenience, and its ability to leverage operating costs and saw larger growth opportunities, beyond the small business core, in both enterprise and international.
Meredith Corporation uses media platforms including print, digital, video and broadcast television to provide consumers attractive content and deliver messages from its advertising partners. With the number one reach to women, its national media group brands include People, Parents, InStyle, Martha Stewart Living, and Better Homes and Gardens. Additionally, the local media group owns and operates several television stations in attractive markets nationwide. On September 23rd Dow Jones reported that Meredith is negotiating a sale for the remaining publishing business with IAC/InterActiveCorp. for a deal valued over $2.5 billion. This follows the announced sale of the television station and broadcasting segment to Gray Television, Inc.We like the durability of its audience and advertisers across various print and digital platforms. We expect Meredith to expand audience share and for its properties to attract premium advertising.
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. Guidance for third quarter revenue suggests year over year revenue growth in the range of 40-43% as the tight market for health care labor continues and clinician fatigue and desire for leaves of absences are compounding matters. We see the business benefitting from increased demand related to COVID 19 and the backlog of elective procedures. Management is focused on expanding strategic customer relationships using workforce solutions that generate higher margin recurring revenues that are less economically sensitive.
Tetra Tech, Inc. is a leading global provider of consulting and engineering services that focus on water, environment, infrastructure, resource management, energy, and international development. In addition to favorable quarterly results and an increase in guidance we expect additional business to result from Hurricane Ida as well as the infrastructure bill being debated in congress. Its approach is to lead with science and is differentiated by several proprietary technologies collectively referred to as Tetra Tech Delta which include smart data collection, advanced analytics, and artificial intelligence enabled solutions. These high-value services are a competitive advantage and tend to result in better margins and more stable profitability.
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. On August 17th, the US International Trade Commission (ITC) decided there is a reasonable indication that fertilizer imports from Russia and Trinidad are being sold below cost and harming the U.S. nitrogen industry. The ITC may make a final injury determination based on the US Department of Commerce investigation. Also, higher natural gas prices in Europe, coal prices in the Far East and shipping costs to the United States are placing its global competitors at a larger disadvantage. 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.
Among the companies negatively impacting security selection:
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 revenues of $1.2 billion were the highest in history and increased 19% compared to 2019’s second quarter but were below consensus estimates. Operating profit also set a record aided by significant margin expansion at AE and the 27th consecutive quarter of double-digit growth for Aerie. 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.
Westport Fuel Systems Inc. produces natural gas engines and fuel system components for on and off-highway commercial vehicles as well as passenger automobiles. Its technologies include High Pressure Direct Injection (HPDI) and spark ignition technology shared as part of a joint venture with Cummins Inc. Concerns over the semiconductor shortage impacting the transportation market as well as higher natural gas prices in Europe and China pressured the shares. We believe the company is well positioned to play a key role enabling the utilization of cheaper cleaner natural gas for the purpose of transportation.
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). Component shortages and industry wide supply chain issues weighed on the equity during the quarter. 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.
Skyworks Solutions, Inc. engineers and produces highly innovative analog semiconductors integrated into a system to enable wireless connectivity for mobile phones and other broad markets such as connected home and connected car. Quarter results included revenues and diluted earnings per share growing over 50% and 70% respectively when compared to 2020. However, guidance was viewed either as conservative or reflective of the potential for supply chain disruptions. Also, on July 26th it closed the acquisition of the industrial and automotive semiconductor business from Silicon Labs and it sees opportunities to sell those products into its existing customer base. The mobile phone 5G upgrade cycle is in the early stages and leads to higher content per phone. The broad markets business is expected to benefit from expanded use cases enabled by 5Gs blink of an eye response time. Additionally, a hybrid manufacturing model leverages both internal and outsource manufacturing capacity.
American Axle & Manufacturing Holdings, Inc. is a global tier-one automotive supplier of driveline and drivetrain systems and related components for light trucks, SUVs, passenger cars, crossover, and commercial vehicles. The expected impact of the semiconductor shortage on its business has grown throughout the quarter. In response the focus is on optimizing cost structures, efficiencies, and paying down debt as it sees business improving in 2022 and beyond. Longer term, we believe it will benefit from increased driveline content as CUVs, SUVs, and trucks gain market share globally and from trends toward increased electrification and improved fuel economy.
We traded in the following companies during the quarter, unless otherwise mentioned:
We added shares of CarGurus, Inc. which seeks to be the single best platform for consumers and dealers to buy and sell vehicles. Its marketplace has the most inventory and the largest audience of potential buyers. Search results are ranked by its proprietary Deal Rating – a combination of Instant Market Value and Dealer Rating. Revenues are mainly derived from a dealer subscription model starting with the core service used to list vehicles in the marketplace. A 51% ownership interest in digital wholesale marketplace, CarOffers, allows dealers to establish criteria that can be used to automatically buy or sell inventory to other dealers. Consumers can also list vehicles on the CarOffers platform and receive an Instant Max Cash Offer from thousands of dealers in the network. We believe dealer inventory shortages related to semiconductor chip shortages have pressured subscription services and created an attractive entry point, consumer preference to leverage the digital channel has increased, and the wholesale CarOffers platform is attractive for dealers and consumers and a strong source of competitive advantage.
Performance Attribution (%)for quarter ended 9/30/21
Top Ten Holdingsfor quarter ended 9/30/21
|% of Portfolio|
|AMN Healthcare Services, Inc.||5.46|
|CF Consulting Holdings, Inc.||4.07|
|Skyworks Solutions, Inc.||4.00|
|Ziff Davis, Inc.||3.69|
|FTI Consulting, Inc.||3.69|
|Tetra Tech, Inc.||3.64|
|F5 Networks, Inc.||3.58|
Top Contributors (%)for quarter ended 9/30/21
|AMN Healthcare Services, Inc.||4.67||0.86|
|Tetra Tech, Inc.||3.07||0.69|
|CF Industries Holding, Inc.||3.39||0.31|
Top Detractors (%)for quarter ended 9/30/21
|American Axle & Manufacturing Holdings Inc||2.89||-0.43|
|Skyworks Solutions, Inc.||4.21||-0.58|
|Westport Fuel Systems, Inc.||1.77||-0.67|
|Western Digital Corporation||4.00||-0.83|
|American Eagle Outfitters, Inc.||3.69||-1.14|
Composite Characteristicsfor period ended 9/30/21
|Price/Book Value Ratio||3.75||2.63|
|Dividend Yield (%)||0.78||1.55|
|Weighted Average Market Cap||6.92||7.02|
|3 Year Annualized Tracking Error (%)||7.50||N/A|
|3 Year Annualized Standard Deviation (%)||22.84||23.56|
|3 Year Alpha||-0.26||N/A|
|3 Year Beta||0.92||N/A|
|3 Year Information Ratio||-0.01||N/A|
|5 Year Annualized Tracking Error (%)||6.69||N/A|
|5 Year Annualized Standard Deviation (%)||18.99||19.05|
|5 Year Alpha||1.27||N/A|
|5 Year Beta||0.94||N/A|
|5 Year Information Ratio||0.22||N/A|
Sector Weightsfor period ended 9/30/21
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 expense. Positions smaller than 0.05% round to 0.0%. Total may not match stated returns due to rounding effects of cash, and timing of trades.
Top contributors/detractors = 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.
S&P MidCap 400® Index is an unmanaged index that provides investors with a benchmark for mid-sized companies. The Index covers over 7% of the total U.S. equity market, and seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an on-going basis.
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 Investment Standards (GIPS) disclosure.