The following is an excerpt from our recently published Q3 Dynamic Growth Opportunities (DGO) Update. For a copy of the full document, please contact us.
As a strategy with aspirations to outperform over the long-run, i.e. 3+ years out, we pay close attention to the shorter duration scoreboard but know that this is an exercise prone to fluctuations. A fully-invested portfolio with broad sector exposure as DGO is, our strategy will be prone to fluctuations where price deviates from value. Our focus is always on the net outcome, as monthly relative performance accrues to longer-term results, in both up and down markets.
Top Portfolio Contributor: Square, Inc. Class A [SQ]: +60.6%
After making the top contributor list of our 2Q performance review, Square put in a repeat performance for 3Q that was largely due to further market recognition of our thesis drivers. The company continues to execute on capturing card volume largely in places where cash transactions occurred previously, while at the same time increasing its value proposition as a software platform for its merchant customer base. Given the sustained relative outperformance of our position, we booked some of our gains by trimming our overweight position in early October, redeploying proceeds elsewhere in the portfolio, all of which is natural maintenance to an institutional investment process. We still see a tremendous amount of upside to shares as SQ captures more gross payment volume share within a $3 trillion addressable opportunity, warranting the retention of an overweight position. We were disappointed by the announcement of a planned transition of Square’s CFO, but the driver of the decision being a CEO opportunity at a growing internet company mitigates what otherwise might be a red flag.
Top Portfolio Detractor: Visteon Corp. [VC]: -28.1%
Within the consumer vehicles and parts subsector of consumer discretionary, it’s imperative to consider the changes coming down the pike with regard to how vehicles are sold. The evidence of impending disruption is numerous: several OEMs are testing vehicle subscriptions with insurance included, drivers license registrations are down 16% over the past couple decades among the 20-24 age group, autonomous driving advancements occur on a non-linear progression by an increasing pool of innovators, Uber is growing bookings 41% YoY at a $48 billion run-rate, several governments (e.g. the Netherlands and Norway) have initiated sunset dates on combustible engine vehicle sales, etc. As investors grapple with what all of this means in terms of the average number of vehicles per household and their associated refresh rates, we have a high degree of conviction that value creation equation will undergo dramatic transition over the next decade. With Visteon, we have the opportunity to withstand many of the resulting headwinds to unit sales, as semiconductor content per vehicle stands to double over the next five years and increasing infotainment demand places VC in the strategic crosshairs for many auto OEM customers. Unfortunately, VC stands out with disproportionate China exposure at 38% of current backlog, which can take it on the chin with tariff headlines. That said, we have the bandwidth in a portfolio of 50+ names to shoulder these near-term impacts, and we look to trade resolutions with Mexico and Canada as silver linings to an eventual tariff settlement with China. Additionally, Samsung’s recent $8 billion acquisition of Harman International Industries, another infotainment focused supplier, signals increasing appetite from tangential computing device players. This is especially desirable for companies participating in the smartphone market that face limited content and unit growth.
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