8/4/25

The current market environment isn’t for the faint of heart. Significant drawdowns in the first quarter, followed by substantial rallies in the second, have created one of the most challenging landscapes I’ve encountered in years.

Writing these letters is rarely easy, and this quarter is certainly no exception. In the first quarter, trimming our Microsoft position appeared to be the right decision. The news at the time suggested caution, and given the stock’s considerable weighting in our portfolio, reducing the position by half seemed prudent. When the market declined sharply in April, I was relieved to have made that call.

But, as fate would have it, the company reported a stunning first quarter, sending its shares soaring. Of course, we still held the stock—just not as much as before—and that weighed on our performance. Microsoft recently posted its second-quarter results, which were also impressive, accompanied by strong forward guidance.

At this stage, I find myself genuinely conflicted about Microsoft, given its valuation and uncertainty about its future returns. On the one hand, I recognize the hype surrounding AI and acknowledge that excitement alone could continue to drive the stock higher. However, the company’s substantial spending on data centers to support its AI initiatives is concerning. A critical, unanswered question remains whether Microsoft—and indeed the entire AI sector—will ultimately recoup these considerable investments.

AI undoubtedly possesses appealing characteristics, but it also carries significant drawbacks. Moreover, differentiating among the numerous existing models can be a challenging task. Without clear differentiation, I fear AI risks becoming just another commoditized technology over time. At this juncture, I’m closely watching how earnings season unfolds before making any significant decisions, but don’t be surprised if Microsoft is soon removed from our portfolio.

Conversely, the decision to reduce our exposure to Apple and Intuitive Surgical currently appears prudent, as both stocks have encountered recent headwinds. Given their significant exposure to China and ongoing trade tensions, these challenges are likely to persist for the foreseeable future.

Our defensive stance has resulted in the Mott Capital Thematic Growth Composite returning just 0.53% through June 30, net of fees and transaction costs, and inclusive of dividends. This compares to the S&P 500 total return index’s gain of 6.2%. This quarter was undeniably frustrating, especially since our cautious approach leading into the March and April downturn initially appeared correct. Predicting the scale and speed of the market’s subsequent rebound proved exceptionally difficult.

 

	Thru 6/30/25	5-Yr Annualized	Since Inception Annualized
MCM Thematic Growth	+0.53%	+12.8%	+9.91%
S&P 500 Total Return	+6.20%	+16.6%	+13.3%

 

On the other side of the decision ledger during the quarter, we redeployed some of our defensive positioning by acquiring UnitedHealth on May 2. UnitedHealth is the largest health insurance company in the United States and recently faced pressure due to disappointing first-quarter results and the resignation of its CEO. Having tracked this company closely for years, I viewed the investment as a high-risk, high-reward opportunity. Although there’s always a chance the stock could decline further, the expectation is that UnitedHealth will resolve its current challenges, creating significant upside. This situation is reminiscent of our previous experience with Boeing, where a turnaround took years but eventually paid off. Considering the risk-reward balance, the decision felt justified, betting on the idea that UnitedHealth is too significant to fail entirely, and even if dismantled, substantial value would remain.

Additionally, although outside the second quarter timeframe, we added Zoetis to the portfolio on July 1. Zoetis specializes in veterinary pharmaceuticals, and pet owners likely recognize many of their products. The surge in pet ownership during the pandemic has expanded the company’s addressable market, as pets age and require increased medical care, driving higher healthcare costs. Zoetis offers a compelling investment case due to its stable growth trajectory, strong profit margins, and current undervaluation in a market segment that has fallen out of favor, making its shares attractively priced at levels not seen in years.

The second quarter did not unfold as anticipated or planned. Looking ahead, the market will likely face multiple challenges in the year’s second half, and I expect volatility to return. Given the significant shifts occurring in fiscal policy and the ongoing uncertainties surrounding tariffs and their potential impact on global trade.  Although there appears to be a cautious (and perhaps fatigued) “wait and see” sentiment around these issues it seems unlikely that the market’s complacent outlook will persist.

Until next time,

-Mike

Michael Kramer
Founder
Mott Capital Management, LLC

N.A. – Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.

^†  Performance reflects the non-annualized performance from 8/1/2014 to 12/31/2014.

** For periods with less than 36 months of composite performance, no 3-year ex-post standard deviation measurement is available.

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An investment may be risky and may not be suitable for an investor’s goals, objectives and risk tolerance. Investors should be aware that an investment’s value may be volatile and any investment involves the risk that you may lose money. Investment performance of a model depends on the performance of the underlying investment options and on the proportion of the assets invested in each underlying investment option over time. The performance of the underlying investment options depends, in turn, on their investments. The performance of these investments will vary day to day in response to many factors. Asset allocation strategies are subject to the volatility of the financial markets, including that of the underlying investment options’ asset class. Diversification does not ensure a profit or guarantee against a loss. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.

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The Thematic Growth Composite is a blend strategy of different market capitalizations, which is approximately divided equally among three sectors.  The Core Growth sector includes large multi-national companies, the Growth Sector includes mid- to large-cap companies, and the Aggressive Growth sector includes small- to mid-cap companies.  The strategy is concentrated, and typically includes approximately 20 positions, and 5% cash.  The portfolio may hold fewer positions in times of market uncertainty, when raising cash as a hedge.  The strategy only invests in stocks, ADRs, and ETFs denominated in USD.  The Thematic Growth Composite was created June 2015.   The inception date of the strategy is August 1, 2014.

The S&P 500 is a free-float capitalization-weighted index of 500 large-cap common stocks actively traded in the United States.  The index is shown as a general market indicator, and may not reflect the same exposures as the composite.

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Past performance is not indicative of future results.  The U.S. Dollar is the currency used to express performance.  Performance shown represents total returns that include income, realized and unrealized gains and losses.  Net of fee performance was calculated using actual fees.  Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains.  Withholding taxes may vary according to the investor’s domicile. 

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The annual composite dispersion presented is an asset-weighted standard deviation calculated using net returns of accounts in the composite the entire year.  The 3-Year Standard Deviation represents the annualized standard deviation of actual net composite and benchmark returns, using the rolling 36-months ended each year-end.

 

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