Performance Attribution
The first quarter of 2025 presented a more challenging environment for equity markets than initially anticipated. Post-election optimism for lower regulatory bureaucracy and business-favorable policies from the new administration were reflected in positive returns through January across the broad market indices. These gains were rapidly reversed as investors weighed the economic and corporate profit effects of shifting tariff policy, lingering inflationary pressures, geopolitical uncertainties, and cautious sentiment around future Federal Reserve policy decisions.
Looking at ‘hard data’ on the domestic front, the U.S. economy has shown resilience. The most recent update for the 4th quarter 2024 Gross Domestic Profit (GDP) shows the economy grew 2.4%, supported by a 4.2% increase by resilient consumers. This capped off a full year 2.8% expansion. Additionally, unemployment remains low, small business hiring plans have generally improved, and indications of financial conditions suggest a ‘looser’ environment continues, with demand for loans increasing across all sizes of companies.
However, while interest rates have begun to stabilize after a reduction of 1% to the Federal Funds rate during the fourth quarter 2024, inflation remains above target as the Personal Consumption Expenditure Core Price Index (PCE Core) lingers at approximately 2.8%. This has kept the Federal Reserve in a cautious stance regarding future rate adjustments, as shown by their decision to hold rates steady in the last two meetings in January and March 2025. Their future actions are further complicated by the effects of an aggressive tariff policy by the new administration.
Additionally, Artificial Intelligence (AI) related technology stocks, having been market leaders for months, faced selling pressure as a new AI model out of China raised questions around the need for capital investment to support AI. This heightened the debate over the returns these companies will be able to generate and the infrastructure needed to support this rapidly changing industry.
All said, the S&P 500® delivered a -4.27% return during the quarter. Smaller companies were down further as reflected by the Russell 2000® return of -9.48%. Our portfolio declined more than the benchmark, net of fees, as the month of February offset outperformance in January and March.
In the first quarter, our top three contributors to performance within the portfolio were as follows:
Trubridge (TBRG), a provider of electronic health records (EHR) and revenue cycle management software for small hospitals, repeated its top contributor status from last quarter. The company delivered solid results as management actions in 2023 continue to drive better margins and cash flow, and guidance for this year suggested continued progress. With changes made and fundamentals improving, management can now turn to cross-selling efforts and broadening their target customers.
Global Medical REIT (GMRE), a healthcare-focused real estate investment trust, rose into our top category for the quarter. The REIT industry has been broadly challenged with rising interest rates but has shown some life in a lower rate environment. Though challenged with one tenant filing for bankruptcy, the management team has been disciplined in recycling its portfolio and new acquisitions. We also continue to like the company’s focus on secondary markets, which avoids some of the competitive pressures from larger players.
One Gas (OGS), a regulated natural gas utility, rounded out our top contributors. In a challenging market environment, OGS delivered a steady performance through both stable execution from management and generally by nature of its industry. Looking forward, we like the relative growth opportunities in their markets backed by a sound balance sheet.
Holdings within the portfolio that were negative contributors of performance were as follows:
Semtech (SMTC), an analog and mixed-signal semiconductor company, had a sharp pullback during the quarter after a strong upward move last year and into January. In early February the company announced that sales of a data center product would miss prior guidance due to a customer’s changes in rack architecture and the stock sold off. However, in their subsequent earnings call in March, they beat analyst estimates and provided increased guidance. We remain positive on the growth opportunities for SMTC, particularly in the data center product portfolio though it will likely continue to be volatile as investors’ moods fluctuate.
International Money Express (IMXI), a consumer finance company focused on money movement services, also weighed on our portfolio. With the company focused on remittances primarily to Latin America and the Caribbean, effects from U.S. immigration policy and employment are an investor concern. Additionally, margins will be impacted as they ramp up investment for digital growth opportunities. However, we remain constructive on their opportunities based on management’s operating history, strong retail network of agents, and solid financials.
Ameresco (AMRC), an energy solutions provider with a focus on Energy Savings Performance Contracts (ESPC), was also a negative contributor to begin the year. AMRC made solid progress last year after digesting a very large project, which led to cash flow challenges and project execution issues. With a change in upper management, the company has demonstrated better execution. Despite operating improvements, recurring profitability from owned energy assets, and significant backlog, the stock has been punished along with other companies in the renewables space on policy concerns from the new administration. Though an under-weighted position reflecting current uncertainties, we remain positive on the return opportunity based on the budget-neutral profile of their ESPC, which had support during President Trump’s first term.
Activity During the Quarter
Our team continued to be more active throughout the quarter. On the sell side, we exited our positions in Shutterstock (SSTK), Calavo Growers (CVGW), and The Shyft Group (SHYF). We locked in gains on several positions including Credo Technologies (CRDO), Artivion (AORT), CyberArk (CYBR), Truebridge (TBRG), Semtech (SMTC), and IMAX (IMAX).
Our purchases included increasing our weights to Healthcare Services Group (HCSG), Zeta Global (ZETA), Ameresco (AMRC) and AeroVironment (AVAV). We also initiated positions in The Simply Good Foods Company (SMPL), BrightView Holdings (BV), Portland General Electric (POR), Sterling Infrastructure (STRL), and Freshpet (FRPT). SMPL and FRPT, consumer staples companies, are respectively focused on weight management and fresh pet food. In the industrials sector, BV is a commercial landscaping company while STRL provides civil construction services. Plainly POR is a regulated utility that operates primarily in Oregon.
We are overweight in Technology, Utilities, Consumer Staples, and Healthcare and in-line with our benchmark in Energy. The portfolio is underweight Industrials, Financials, Consumer Discretionary, Materials, and Real Estate.
General Outlook, Current Positioning/Strategy
Uncertainty.
We were putting the finishing touches on our commentary, which discussed uncertainty around inflation and the potential economic ramifications of the Department of Government Efficiency (DOGE). Then, the global system of trading that has evolved over decades was upended by the ‘reciprocal’ tariffs from the new administration. The size, scope, and severity of the tariffs on allies and foes alike caught the world by surprise, particularly as it comes from a country with an economy that The Economist has noted is the envy of the world. In the days that have followed, officials from the administration have been hitting the news circuit and have so far been unwavering in the face of global market disruptions.
From a starting position at least, our economy begins this turmoil from a position of relative strength according to most of the “hard data,” and inflation has been trending lower, though its rate of moderation has slowed. What had been concerning prior to the recent tariff announcement is the data coming from “soft data” surveys. The NFIB Small Business Optimism® Index enjoyed a significant post-election upward spike on anticipation of lower corporate taxes, less burdensome regulation, and a more corporate-friendly administration. However, this began to reverse as policies and the effects of the Department of Government Efficiency (DOGE) began to take shape. Other surveys focused on CEO’s have also indicated a decline in confidence while consumer confidence is falling along with higher expected inflation, according the University of Michigan Consumer Sentiment Index.
So now what?
We highlighted above that our turnover in the portfolio continued to be more elevated as we began to position for uncertainty. We adopted a more defensive posture by over-weighting utilities and staples – this is the first time in decades that we have taken such a defensive position. The portfolio continues to maintain a higher exposure to healthcare as well. Though we booked some significant gains in our technology holdings, our positioning continues to be larger than the benchmark. Within this sector, we continue to emphasize software companies that we believe should benefit as enablers of AI.
Additionally, though smaller companies tend to be more domestically oriented, we have been focused within our industrial sector on increasing exposure to companies that, in our opinion, have less exposure to tariffs and may be more recession resilient. We have also continued to focus on the upper half of market capitalization of the asset class.
Our investment philosophy remains consistent as we are focused on companies that we believe are of high quality with solid fundamentals, good management teams, and niche businesses. Solid balance sheets, low or no debt, cash flow, and reasonable valuations also continue to be emphasized.
The application of our strategy in navigating the current environment has been, as noted in our commentaries over several quarters, to increase the average size of a company in the portfolio while adhering to our long-term strategy. We have also been more actively trading in recognition of a more rapidly moving environment. Though we continue to believe that quality companies can be held for long periods of time as their business evolves and grows, patience for short-term disruptions must be evaluated against complacency. This has been particularly challenging in recent years in this asset class.
Swift downturns are oftentimes during which changes made can provide the best forward returns. We are actively evaluating the potential exposures to the tariff policies and are contemplating changes, which also recognize that the situation is very fluid and dynamics are likely to keep changing rapidly. In recognition of this, we are working to balance our exposures to both defensive and growth-oriented companies and sectors while favoring domestic revenues. In recognition of the risks to our domestic economy, we are evaluating how companies may perform in a downturn.
Having managed portfolios through the Tech Bubble, the Great Financial Crisis of ’08-’09, COVID, and the post-COVID adjustments in ’22-23, we are working to maintain a steady, thoughtful approach based on over 30 years of experience. The implementation of our changes continues within the long-held fundamental aspects of our strategy, which has been developed over five decades, while we strive to balance conviction with market realities.
We remain available to discuss any questions you may have in these turbulent times.
Thank you.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Connors Investor Services, Inc. [“Connors]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Connors. Please remember, if you are a Connors client, to contact Connors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Also, remember to advise us if you have to been receiving account statements (at least quarterly) from the account custodian. Connors is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Connors’ current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.connorsinvestor.com.
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