11/1/24

Third Quarter 2024 Review

Volatility increased significantly in the third quarter as we transitioned from July into August and again into September. The run-up in volatility led to sharp declines that quickly recovered in some indexes, while others, like the NASDAQ 100, remained below their mid-July highs. The volatility stemmed from the uncertainty surrounding the economic outlook and the confusion surrounding the financial data presented to the market.

Strange Data, The Fed, and Rising Rates

In August, a weak July jobs report caused concern that the economy was rapidly slowing, followed by another weak August jobs report. However, when the September jobs report was released in early October, it was better than expected and showed significant upward revisions for July and August, dramatically changing the tone. There was only more confusion when the October job report showed that non-farm payroll rose much less than expected, and August and September numbers were revised lower.  However, other economic data has been robust, and third-quarter GDP grew by 2.8%.

Amid these confusing signals, in mid-September, the Fed cut overnight rates by 50 basis points to prevent a potential economic slowdown. Ironically, in a clear example that the Fed can theorize but the market will decide, the 10-year Treasury rate has increased by about 60 basis points since then because investors are looking for more of a premium to commit to long-duration positions.

Any view of the fixed-income market is tricky because the economic data has been inconsistent, with some figures subject to substantial revisions. However, if the economy continues to exceed expectations, it will likely lead to further market-driven rate increases, a stronger dollar, tighter financial conditions, and possibly fewer rate cuts by the Fed.

Earnings Outlook

On the equity front, earnings estimates for the S&P 500 are being revised downward for 2024 and 2025—not because the economy is struggling but likely because of overestimated gross margin estimates in historical terms and because analysts seem not to recognize the effect a strong dollar can have on lowering earnings and sales estimates.

Historically, margin estimates have tended to start high and decline over time. Initial estimates were set at approximately 12.5% for 2023 and 13.0% for 2024. However, for 2025, margin estimates start at a historically high 13.8%, an elevated level that seems unlikely to be achieved. The only year gross margins rose by more than 13% was 2021 when the economy and inflation rates differed significantly from today. It is doubtful that margins will increase by 100 basis points in 2025 to 13.8%.

Assuming sales of around $2000 per share and margins of approximately 12.75%, closer to the average of 2023 and 2024 estimates, earnings for 2025 would fall from $250 to $260 per share from $272.85, the value implied from current margin estimates.

This lower EPS valuation would impact and raise the S&P 500’s PE ratio. More importantly, it would also reduce the expected growth rate for the index in 2025, lowering it to 4.5% to 8.5% from around 14%.

This may mean that stocks are even more expensive than they appear at current levels. This is concerning because growth rates are relatively low compared to the PE ratio, which has been at the upper end of its historical range since 1990.

Portfolio Update

In line with my ongoing perception that the equity market is overpriced at today’s values, I carefully assess the landscape and adjust the portfolio when necessary. Caution sometimes has its short-term cost, though, and we have continued to underperform the S&P 500 Total Return Index in 2024. Through 9/30/24, the Mott Capital Thematic Growth Portfolio had risen by 9.58%, including dividends and net of fees, versus the S&P 500 Total Return Index’s gains of 22.1%, inclusive of dividends.

	Thru 9/30/24	5-Yr Annualized	Since Inception
MCM Thematic Growth	9.58%	14.17%	9.83%
S&P 500 Total Return	22.1%	15.98%	13.43%

 

There is little new to report for the portfolio in general, and updates on our positions remain reasonably unchanged.

3Q’24 Stock Performance

With respect to specific names, the addition of Illumina has been beneficial thus far, with the stock rising by nearly 25% during the quarter, followed by Shopify’s gains of 21.3% and Intuitive Surgical’s gains of 17.7%. On the loss side, Alphabet declined 9.0% and Microsoft’s dropped 3.7%. Some more prominent technology companies have struggled since mid-July as the market started to examine their spending on new Artificial Intelligence projects more closely.  Among our holdings, Apple, Alphabet, Microsoft, and Amazon have indicated they plan to spend more in 2025 to stay ahead in the AI race.  However, to this point, the payoff has not materialized.

Boeing was the worst performer, falling by 16.5%. The company continues to struggle and recently raised cash through an equity offering to shore up its balance sheet. Now that there is a new CEO, Boeing’s stock may have reached a bottom. They are very close to ending the workers’ strike. The latest quarterly results were not impressive, but the stock has been holding around $150, roughly the price we bought it at in 2022.

Boeing operates in a duopoly, with Airbus as its only true competitor. Boeing still has an order backlog valued at over $500 billion, which has also improved in recent quarters. I believe it will perform over time, and I see no need to exit the holding.

Overall, our cash positions remain unchanged and, for most portfolios, are in the 25% to 30% range. This margin of liquidity provides ample cash to take advantage of any significant pullback in the coming months as long as valuations make sense.

Until next time,

Mike

Michael Kramer
Founder
Mott Capital Management, LLC

The Thematic Growth Strategy is also made available by Interactive Advisors through a licensing arrangement with Mott Capital Management; performance may differ from the Mott Capital Thematic Growth Composite.

Annualized Performance
		YTD	1-Year	3-Year	5-Year
Mott net		9.58 %	21.17%	9.39%	14.17%
S&P 500 TR Index		22.08%	36.35%	11.92%	15.98%

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.

Disclosure: Mott Capital Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.

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.

Mott Capital Management, LLC, is an independent registered investment adviser. Mott Capital Management, LLC (“Mott”) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards.  Mott has not been independently verified.  GIPS is a registered trademark of CFA Institute.  CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

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.

The investment management fee schedule for the composite is 2% on the first $250,000, 1.5% on the next $750,000, and 1.0% on the remainder.  Actual investment advisory fees incurred by clients may vary.  Further information regarding investment advisory fees is described in Part II of the firm’s Form ADV.

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. 

Policies for valuing portfolios, calculating performance, and preparing GIPS reports are available upon request.

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.

Mott Capital provides data to Interactive Advisors for use in its recommended portfolios. Interactive  Advisors, an SEC registered investment adviser. Mott Capital is not affiliated with Interactive Advisors. Interactive Advisors uses data provided by MOTT Capital to create a portfolio for its clients. Additionally:

1. Only investors matching a specific risk profile determined pursuant to Interactive Advisors’s risk questionnaire may invest in Mott Capital’s model portfolio on the Interactive Advisors platform;
2. Interactive Advisors clients that qualify for and subscribe to Mott Capital’s model portfolio on Interactive Advisors platform are clients of Interactive Advisors. They are not Mott Capital clients.
3. Mott Capital has a financial incentive (and therefore, a conflict of interest) in a current or prospective client investing with Interactive Advisors and investing in its portfolio on the Interactive Advisors platform because Mott will receive a portion of the annual management fee (and, if applicable, performance fee) Interactive Advisors charges clients who invest in Mott’s portfolio, so Mott will receive more money the more investors sign up with Interactive Advisors and select the Model based upon data provided by Mott Capital.