Vermeer Monthly – March 2024

February was another strong month for global equities which are now up around 5.5% for the year and up 6.7% in Sterling terms. After strong performance in January, the Vermeer Global Fund kept pace with the market in February and is up 9.1% year to date and continues to run with a fully invested position.

Markets have continued to perform well despite a paring back of interest rate cut expectations in the United States, where the latest inflation report was modestly higher than expected. While inflation has fallen very quickly from its highest levels, it is possible that getting to the Federal Reserve’s ultimate 2% target from the current 2.8% inflation rate may prove the most challenging.

Japanese equities continued their very positive start to the year, with the Nikkei up 17% over the first two months and rising above a level of 38,915 set some 44 years ago. While the Yen continues to weaken, this has been more than offset by strong market performance.

The dominant market theme of artificial intelligence once again came to the fore in February and was spurred on by the astonishing set of results from Nvidia. Nvidia remains the second largest position in the portfolio at 4.8% and along with Microsoft, which has also been a great AI winner, represents around 11% of total assets in the portfolio. Nvidia’s results handsomely beat very lofty expectations with incredible strength in data centres, dwarfing the other segments of the business and reaching nearly $18billion of sales out of a company total of $21billion while guiding to strong sequential growth indicating $25billion of company revenue next quarter. Chief Executive Jensen Huang described the current environment as an inflection point for AI adoption with a trillion dollar market opportunity created by the upgrade of general purpose computing to AI factories. Nvidia has established a material lead over its competition and its ability to innovate may well enable it to maintain its advantage. We are mindful of the incredible run the shares have had and are currently trying to evaluate where and when peak profitability may occur in order to size our position correctly.

Newmont produced a very poor set of results, which showed weak production, weak cash flow and lacklustre guidance. We have reluctantly decided to move to the sidelines and cut our position in this stock. We believe there is too much uncertainty regarding the successful integration of the Newcrest acquisition that the company closed last year and were particularly disappointed with the second reduction in the quarterly dividend payment in a year to just $1 per year from a level of $2.24 in 2022.

Shares in Disney are slowly climbing off the canvas and were helped in February by a material improvement in financial performance in its latest set of quarterly results. While we acknowledge that Disney faces a number of challenges, we are hopeful that the worst is now past for the company and there are a number of reasons to be optimistic. The company’s new CFO gave a very polished performance on the results conference call as Disney finally gets to grips with costs and starts to materially improve cash flows. Price increases for Disney+ helped reduce streaming losses by around $300million compared to the prior quarter and management maintains that it is on track to reach profitability by the end of the year. Disney has been struggling at the box office with a series of poorly received movies, but the early signs for new streaming series Shōgun create some hope that the poor content run maybe coming to an end following very strong early reviews. Linear TV continues to be an incredibly difficult industry as cord cutting continues at pace, but it is hoped that as profits decline in this area, new profit avenues from streaming assets will replace the lost income from legacy television assets. Despite declines in profitability in linear TV, the division should still be able to generate meaningful cash for the foreseeable future but are clearly declining much faster than had been expected only a few years ago. Disney also announced it had signed a joint venture to combine its sports programming assets with both Fox and Warner Bros Discovery in what looks like a sensible move given the very competitive environment for sports rights and the desire of deep pocketed companies such as Amazon and Apple to increase their presence in this area. Shares in Disney have risen over 23% this year following a dismal last two years.

We started a modest position in Rolls Royce in 2023 and have added to the position this year following exceptional results and strong guidance at its recent earnings report. New CEO Tufan Erginbilgic has done a superb job in driving Rolls to better operating performance and cash flows, which historically have often been very poor and held the company back. Rolls Royce is fully benefiting from the upswing in the civil aerospace and defence industries and has an exciting opportunity in small modular nuclear reactors, which we believe have a potentially very exciting future.

We also introduced Uber to the portfolio last year and the company’s management struck an upbeat tone for its long term opportunities at its recent investor event that exuded confidence in future prospects and sent Uber’s share price to all time highs. Having been perennially loss making for many years, Uber has been transformed under CEO Dara Khosrowshahi to a profitable business in the last year that is now forecasting that it will continue to grow EBITDA at a compound rate of 30-40% over the next three years, which could see EBITDA surpass $10billion. We believe these forecasts are achievable as the company has a multitude of opportunities to use its platform to expand well beyond the scope of ride hailing and food delivery.

Caterpillar produced a solid set of results in February and although we continue to like the company’s position as a beneficiary of investment in infrastructure and the energy transition, we trimmed our position following a great recent run in the shares. Caterpillar has managed the post COVID environment really well and continues to see a normalisation in dealer inventory that will probably continue throughout 2024. We see Caterpillar as a winner from reshoring and infrastructure spending in the US and it could also be a major beneficiary of any recovery in China, which is currently seeing very weak market conditions. After very strong recent performance, we see a likely pause in the shares over the near term but do believe that the company remains well positioned and is not expensively valued for the high quality execution it is achieving.

As noted earlier, we are maintaining our fully invested position in the portfolio and remain optimistic about the continued strong performance of the companies we own within the portfolio that reflect the continuing digital transformation and energy transition themes that have been such strong performers over the last year. We also remain optimistic about the opportunity in healthcare, both in medical technology and also in some pharmaceutical stocks that reflect the boost in demand for
weight loss drugs and also those that now offer compelling valuations and can still be the beneficiaries of an ageing global population.

We acknowledge that there are market risks which include rising geopolitical tensions, increased political uncertainty and the possibility that investors become disappointed that substantial interest rate cuts that were priced in at the end of last year fail to materialise if inflation remains sticky. As always, we have a number of ideas that we are looking to add to the portfolio and have plenty of scope to do this as the fund now holds 55 positions with the ability to move up to 60 if we deemed it to be an appropriate diversification of our strategy.

Tim Gregory
Senior Fund Manager
Vermeer Investment Management