Dear Investors,
We hope you and your families are doing well.
We ended the fourth quarter and year with strong performance across your portfolios. Full year 2024 returns were +26-31% (net) across GROW managed portfolios versus the Russell 2000 Growth return of +15% and Russell 2500 Growth return of +14%. Please see disclosures for the historical performance data. As we enter the new year, many of the stocks in your portfolios have gains of 100% or more and therefore have grown to large weightings. We will continue the process of thoughtfully trimming when our internal price targets are achieved and redeploying the cash into new growth ideas. You may notice increased trade notifications throughout the first quarter while this process is completed. As we enter the new year, we remain optimistic that our companies can continue to deliver positive fundamentals regardless of the economic backdrop. While 2024 had strong performance, we hope to have more positive updates as we enter 2025.
Market Summary
The Trump trade carried the market in November with the S&P 500 and Russell 2000 experiencing sharp increases of +5.73% and +12.45% respectively. The rally was cut short when yields spiked as bond investors speculated that Trump’s policies on tariffs and immigration would be inflationary. The yield on the US Government’s 10-year treasury rose to 4.81% in December from a low of 4.13%, leading to a decline in the S&P 500 and the Russell 2000 Growth indices of -2.50% and -8.42% respectively.
The Fed held two meetings during Q4 in which they lowered the federal funds rate by a total of 50 bps. At these two meetings, the Fed noted that they had seen economic activity expand at a moderate pace, but inflation had made progress towards their goal of 2.00%. This could be an indication that the Fed might achieve the highly coveted “soft landing” or no landing at all.
What concerned investors in December was the lack of cuts that the Fed signaled for 2025. In their September meeting, the Fed estimated they could cut rates four times in 2025 whereas in their December meeting their outlook changed to only two rate cuts in 2025.
While the market can be volatile, we believe that what is happening on the political front will ultimately be extremely bullish for companies in the United States. While many pundits are dwelling on the potential negatives from tariffs, we believe that lower taxes and less regulation will trump all. As companies begin to generate higher cash flows and earnings due to lower taxation and less regulatory burden, they will reinvest those cash flows for growth in the form of hiring new employees and investing in technology.
As the fiscal spending burden is reduced and grift eliminated, inflation should subside and leave the Fed room to lower rates further from the current 4.25% to 4.50%, thereby creating an environment for future growth. Investment in Artificial Intelligence is already creating demand in the supply chain (chips, software, electricity, etc.), and by ultimately improving efficiency, should be a deflationary force.
Interestingly, market sentiment is in the neutral range as can be seen below in CNN’s Fear and Greed Index.
We believe that the negative sentiment is misplaced and with every piece of red tape being eliminated the unincumbered economy can flourish as in the 1920s, the 1980s, and 2017 to 2019. In 2019 inflation was below 2% and unemployment was 3.5%.
While the national debt burden is a concern and there will be ups and downs, we believe that ultimately, optimism will reign supreme and that real growth, as opposed to inflationary growth will ensue. This growth environment is and should continue to be ideal for our stock selection process.
Portfolio Review
Contributors
Argan Inc. (AGX) was a top performer throughout 2024. Argan operates in the industrial construction industry building natural gas powerplants. The retirement of coal-fired power plants is driving a multi-year cycle of new natural gas fired power plant construction. Tightening environmental regulation, favorable economics, and the rise of artificial intelligence (AI) have propelled Argan stock to all-time highs. Argan builds these power plants for utility companies like Vistra and Duke Energy. There are shortages of power across the country where companies like Microsoft and Meta are building new AI data centers. These data centers consume extreme amounts of power which the current grid capacity is not suited for. We estimate the company is on a path to reach $1 billion in revenue and $100 million in EBITDA as this buildout happens. The company has a current project backlog of $800 million with visibility of growth to $2 billion. Argan holds $430 million in cash, no debt and is highly profitable. Additionally, they recently increased their quarterly dividend to $0.375 for an annual dividend yield of 1.5%. We sold Argan for investor portfolios in January as the stock rallied to $175 per share and our long-term price target was achieved.
Graham Corp. (GHM), a company we identified in 2023 at $13 per share, has been a top performer in investor portfolios. Historically, Graham has supplied industrial equipment like vacuum and heat transfer products for the global refining and petrochemical markets. With new management and an acquisition in 2021, Graham has diversified the business serving the defense, space, and new energy markets. The strategic focus has been on growing the defense business over the past 2 years.
Graham sells critical propulsion equipment to the U.S. Navy for their nuclear submarines. They are the only supplier of the equipment they produce, giving them pricing power and margin enhancement as more subs are built. The U.S. has created the Pacific Deterrence Initiative (PDI) specifically aimed at deterring potential aggression from China in the Pacific Ocean, by bolstering U.S. military presence, and infrastructure. One of the ways the U.S. is accomplishing this is by growing and upgrading its fleet of Columbia and Virginia Class Nuclear Submarines. The U.S. has committed to building 11 more Columbia Class subs and 32 Virginia Class subs equating to $1.2-1.4 billion in projected revenue for Graham. These buildouts are expected to last through 2050.
Graham carries a backlog of $385 million, of which 80% is for the defense industry. Their annual revenues are expected to be $200 million this year, giving them multi-year visibility. Graham has transformed from being highly cyclical to highly predictable over the last few years. We trimmed Graham stock in January and continue to hold a smaller weighting in investor portfolios.
Detractor
Zeta Global Holdings Corp. (ZETA), which we identified in early 2022, has been a top performer, up over 165%. We trimmed the Zeta position in August and September as it reached an overly larger portion of investor portfolios. We continue to hold Zeta as a large weighting as we believe they can continue to take market share in the advertising industry.
Zeta is a marketing technology software company which benefits from multiple market tailwinds in the advertising industry. Zeta’s software platform combined with artificial intelligence helps companies' market more efficiently by targeting ads based on specific demographics. The Zeta marketing platform helps customers deliver advertisements through all channels such as email, social media, web, chat, connected TV and video. Zeta is unique in that their platform doesn’t use cookies. This reduces risk from a regulatory and customer standpoint as they are not impacted by these issues. Consequently, they can take market share from competitors like Adobe, Salesforce, and Oracle who have all made legacy acquisitions to enter the space (valuations of 8-20x EV/Revenues). Oracle announced they would be exiting the advertising business on their Q4 2024 earnings call, creating an incremental revenue opportunity for Zeta. Despite broader softness in software spending, Zeta remains unaffected, citing a healthy demand environment.
The company was founded by former Apple CEO, John Scully, and the management team has a strong track record of performance (the company has beat their revenue guidance for 11 consecutive quarters since their IPO in 2021).
In early September, the company increased their 3rd quarter 2024 guidance to at least $255 million in revenue, representing year-over-year growth of at least 35%. This accelerated from Q2 growth of 33% and Q1 growth of 24%. We went into detail on the factors influencing their growth in our previous two quarterly letters, and since then the thesis has begun to play out.
In mid-November, a short report by Culper Research was published on Zeta, causing the stock to drop 50% in a few days. There were multiple inaccuracies discovered in the report including the wrong auditor named as “E&Y” who has never audited Zeta (Deloitte has been their auditor since the 2021 IPO). We believe the management did a good job in refuting the claims made in the report and have since commented they have not lost a single customer because of it. In fact, they mentioned that 20+ customer upsells occurred during the quarter. Management remains confined they will report record revenues and profitability on their 4th quarter earnings call, upcoming on February 25th. Zeta management and board members personally purchased $3 million worth of stock in the days following the report in addition to the company initiating a $100 million stock repurchase program to buy their own shares on the open market. We remain confident in the trajectory of the business despite the noise and continue to hold Zeta stock in investor portfolios.
New Addition
Axsome Therapeutics Inc. (AXSM) was a new addition to investor portfolios in January and has been a positive contributor since. Axsome is a biopharmaceutical company focused on central nervous system conditions such as Alzheimer’s Disease Agitation, Major Depressive Disorder, Migraines, and Fibromyalgia. Their products target a broad range of serious conditions that impact over 150 million people in the United States. Axsome has 3 products commercially available today with 3 others in late stages of approval. These products have the potential to provide over $16 billion in peak sales in comparison to Asxome’s $385 million of revenue in 2024.
Auvelity is an oral drug used for the treatment of major depressive disorder (MDD). It was approved by the FDA in August of 2022 and has quickly ramped to over $290 million in sales in 2024. Sunosi, another one of Axsome’s products, is an oral drug for the treatment of excessive daytime sleepiness also known as EDS in patients with sleep apnea and narcolepsy. The drug was approved by the FDA in 2022 and has ramped to $94 million in 2024. Symbravo, a drug used for acute treatment of Migraine was approved by the FDA in January 2025.
The 3 drugs in late stages of approval include the treatment of Alzheimer’s Disease Agitation which has data readouts later in Q1 2025, one for the treatment of Fibromyalgia, and another for Attention Deficit Disorder. We believe the company is an attractive acquisition candidate for a larger pharmaceutical company and we continue to hold AXSM stock in investor portfolios.
Outlook
We continue to see tremendous investment opportunities in the market. In addition, we believe that the current environment provides an opportunity for stock selection and active management versus passively investing in indexes. By continuously screening for companies with new products and services, large market opportunities and high revenue growth with strong margins, we believe your portfolios are well positioned. While we are cautiously monitoring macroeconomic events, our time is best spent looking for new ideas and re-evaluating your portfolios. While the companies in our portfolios started the year well, we believe they continue to have upside potential throughout 2025.
In conclusion, we thank you for your continued trust and support. We encourage any questions or comments you may have. As always, we are available for portfolio reviews anytime. Please contact us if you are interested in learning more about the companies you own.
Best regards,
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