With a 34.1% return, the strongest performer was Capri Holdings. Its second quarter earnings were greater than analysts’ (and our) expectations, mainly by delivering better than expected margins and successfully mitigating the inflationary and supply chain pressures. Management raised its earnings guidance and the Board authorised a new share repurchase program.
Micron Technology, the memory maker, was up 31.4% after management reported strong results and expressed their confidence in the near term. We noted in our September report that we viewed its sell-off (from April) as a buying opportunity (and we bought), so we are pleased the Fund participated significantly from this subsequent rebound. Our analysis continues to indicate that Micron remains attractively priced. It has now grown to be the Fund’s largest position at 6.7%.
McKesson, the health logistics company, was up 24.9%. It once again reported quarterly results above expectations, and management again raised earnings guidance as well as announced a few divestments and a USD 4b increase to its buyback. McKesson offers a 7.6% sustainable earnings yield (higher if one were to adopt management’s latest guidance) and double digit free cash flow yield – and in our view it remains good value. It now accounts for 5.9% of the Fund, having been a core portfolio position basically since the Fund’s inception.
Rounding out the top performers are the auto component suppliers, which we have noted had been laggards due to the semiconductor supply issues affecting motor vehicle production levels. However they rebounded during the December quarter. Lear Corporation returned 17.4%, Methode Electronics 17.3% and Linamar 14.2%. Given the industry’s challenges, there were no real surprises from their quarterly results with the exception of Linamar’s strongly positive cash flow which led to an increase in the dividend and share buyback. Together these three companies represent 10.5% of the Fund.
To the other side of the ledger – Vestas, the wind turbine business, continues to suffer (down 22.3%). There’s no letting up from the demand side, but cost blow outs have hit margins. We are disappointed, but then again it must be difficult when the prices of your raw materials (like steel and resin) have unforeseeably more than doubled! As the number one player in an industry where scale matters, our view is that these margins will normalise at an acceptable level, and together with a profitable and growing service business, Vestas is well positioned to serve the renewable energy sector over the long term.
The Omicron fears hit the airline sector – and both Southwest and Ryanair (albeit it to a lesser extent) suffered, being down 16.7% and 6.6%. They are the strongest airlines in their markets, and as we look past the pandemic and toward a normalised environment, we see these businesses as operating profitability and generating large amounts of free cash flow.
The news on Alibaba continues to be pretty much all negative – and the share price suffered for yet another quarter, being down 16.4%. To compound the listing concerns and general increased hesitancy toward investing in Chinese companies, the operating environment is becoming more challenging with additional competition fighting for what may be a reducing wallet. However, Alibaba is a quality company that is cheap, and we bought more on price weakness. We also bought more Thor Industries and Dick’s Sporting, which despite both reporting excellent results that again displayed the strength of their businesses, posted negative returns of 15.5% and 3.6% respectively. Interestingly, we were not the only ones buying. Insiders of the companies bought shares on market during the quarter, and they also have buyback authorisation in place.
Finally, T-Gaia Corporation performed poorly (down 18.8% until we sold it in December). This position was a relic of our prior, substantially quantitative approach – which we have progressively reviewed. There was some delay with T-Gaia due to a lack of updated information, which only became available (in English) in December. This revealed a continued deterioration in T-Gaia’s primary business (selling mobile phones and plans) and a lack of traction with other business lines. Given these developments, we no longer considered it appropriate to maintain our small position (less than 2% of the Fund).
We ended the quarter with 25 positions and 7.8% cash.