World View

Vermeer Monthly – June 2024

5th June 2024

May was a better month for global equities, reversing April’s losses and positively contributing to the strong start seen so far in 2024. The Vermeer Global Fund returned 2% during the month and is up 12.3% year to date.

Continued uncertainty over US interest rate policy and the looming presidential election did little to deter investors from pushing US equities to the best May performance since 2009, with the S&P rising by 5%. Nvidia was the main contributor to market performance, rising by just under 27% to end the month with a market capitalisation of $2.7trillion.

This strong performance was the result of the company producing yet another astounding set of quarterly results. The explosion in demand for AI data centres has driven revenues from just $10billion this time last year to an astonishing $26billion in the first quarter of its fiscal 2025. Full year analyst forecasts suggest that revenue from data centres will exceed $100billion, dwarfing the gaming segment of the company that not long ago was the key driver of the company’s performance.

As companies like Microsoft, Meta, Alphabet and Amazon significantly increase their spending on artificial intelligence, demand for Nvidia’s GPUs, and its ethernet networking capabilities, is exceeding their ability to increase supply, providing Nvidia with greater visibility into 2025. This demand/supply imbalance also increases the company’s confidence that its new generation of products will enable it to maintain its growth trajectory. We have reduced our position in Nvidia twice this year to be prudent and we will be carefully reviewing what we consider to be an appropriate position size in our portfolio given the stock has now risen around 10x from its lows of around $112 in October 2022. 

The incredible demand for AI related data centres is increasing concerns about how the energy transition is going to be managed. We started investing in this theme some time ago when it became apparent that aggressive government mandated targets to reach net zero by 2050 were going to require significant investment in existing power sources. However, at that time there was no discussion about the enormous power requirements of a new generation of data centres for AI. This is a major investment theme as investors scramble to determine who are going to be the winners and losers from this enormous capex cycle.

We have positions in both Schneider Electric and Siemens as we see the continued growth in demand for electricity requiring a meaningful increase in investment in existing power infrastructure. We also see the role of nuclear energy as increasingly important and have a position in Cameco to reflect this. Even our position in Caterpillar has seen a tailwind from its relatively modest exposure to power generators. Caterpillar shares have performed well this year and are up 15% year to date as at the end of May but have fallen back since its results in late April. While its results were good, they were unable to meet a very high bar of investor expectations that had been propelled by speculation around how much EBITDA could be generated from the surging demand for power for data centres discussed above. We are continuing to evaluate this investment theme with both new and existing ideas that tie into this very important area of investment opportunity.

UK equities have performed a little better in recent months, at a time when it feels many investors had given up on them. We have a number of UK domiciled positions in our global portfolio and while most of them are global franchises, Cranswick is a small cap domestic supplier of fresh food products to UK food retailers and produced another excellent set of results in May. Cranswick is one of the only companies in the industry which has continued to invest aggressively to build a business that now generates over £2billion in sales, £140million in pre-tax profits with a return on invested capital of over 15%. We believe Cranswick has outstanding management, and it is only in the last twelve months that shareholders have been rewarded for their patience as the stock has risen over 16% this year to a high of £44.45 at the end of May.

We have several other UK positions in the portfolio including, BP, Oxford Instruments, Rolls Royce, and Unilever, all of which we think are well positioned to perform well. Rolls Royce had a positive AGM statement in May, highlighting once again the material turnaround in performance that has taken place under new management.

US retail results have been mixed overall, highlighting that the consumer is being impacted by persistently high inflation and a higher for longer interest rate environment. This is leading consumers to look for better value for money and one sector that appears to be benefiting from this trend is “off-price” retail. We own Burlington Stores in this space and over the last couple of years this has been a very volatile investment, falling at one point from a high of $342 in August 2021 to a low of $116 in October last year and has now recovered back to $240.

Burlington’s results at the end of the month clearly showed the benefit of strong execution and a value for money proposition to lower income consumers who are clearly being impacted by higher rates and inflation. The company is guiding for comparable sales growth this year of around 2% but we see this as conservative. However, the major investment case for Burlington is its intention to nearly double its store footprint from just over 1,000 to 2,000 stores, with net new store openings of around 100 per year. This can all be achieved from existing cash and future cash flows and should also lead to a material enhancement of returns to shareholders.

Shares in German ophthalmic devices and microsurgery company Carl Zeiss Meditec have continued to struggle following their results early in May. While the company maintained its full year guidance, quarterly results were disappointing and leave the company with a lot to do in the second half of the year. Management indicated that they remain confident that the severe negative impact from destocking in China that they have been experiencing, was nearing an end. We are looking closely into the disappointing performance from its US business, which underperformed peers during the quarter and whether the company’s significant R&D spend is not translating into a good return on investment. We are in the process of reviewing the position.

We have maintained our cash weighting at around 6% and feel relatively comfortable that this balances the possibility that equities continue to perform well against a risk of persistent inflation, and interest rates remaining high for a longer period. We also remain cautious about the likely upcoming volatility that the US presidential election could cause towards the end of the year.

We have several new ideas that we are working on for inclusion in the portfolio, especially in businesses that are well managed but are still suffering from a post COVID normalisation of their business model. Alongside the increasingly important themes of AI and the energy transition, we still see very good long term opportunities in secular growth themes such as healthcare and an ageing population.

Tim Gregory
Senior Fund Manager
Vermeer Investment Management