Active Equity

(Jan 14, 2025)

Yesterday we added two new positions and sold two existing positions in our CCM Active Equity AI and High Net Worth Models.  The positions added were GE Vernova (GEV) and Talen Energy (TLN).  The two companies are somewhat similar as there is some exposure to both nuclear and natural gas production.  Growing demand for AI is driving a surge in data center construction, which requires massive amounts of power.  These companies should both benefit from this demand.

As of the time of this writing, GEV was up around 5% and TLN was up 4.5% on the day.

BUYS…

GEV

Nuclear

GE Vernova has a long history in nuclear power, dating back to 1957.
It is well positioned for the renewed interest in nuclear power around the world. GEV services recommissioned plants through: plant performance improvements, life extension, long-term asset management, parts and outage management, and production of fuel bundles.
The company is also developing small modular reactors (SMRs), such as the BWRX-300, to address the challenges of traditional nuclear power plants. This is the “optionality” part of the story and more of a long term bet. 

Nat Gas

The only way to fill the gap of electricity demand until renewables or nuclear arrive in sufficient capacity is through nat gas.
GEV is a leader in the space. Its gas-powered data center solutions, including gas turbines and combined cycle systems.
These solutions offer high power density, modular design, and fast installation capabilities.
GE Vernova has secured multiple contracts to supply gas turbines for data centers in the last 30 days.

Predicted Growth

GEV should grow earnings at around an average of 40% per year for the next 3 years if things go well.  The order book is deep.  The management team is extremely competent.  In addition, it has a good mix of real earnings in the short term and a good long term “total addressable market” via the small nuclear reactor story.

 TLN

 Nuclear

On the nuclear side, TLN has a multi-decade deal with AMZN (via the Three Mile Island) which underpins significant near-term EBITDA growth and could ultimately drive growth upside and runway should TLN supply the full 960 MW expected.
Nat Gas

Talen Energy runs a near pure-play Pennsylvania, New Jersey, Maryland nat gas generator fleet that has an opportunity to generate more stable earnings in an elevated capacity price backdrop..
TLN offers the highest leverage to PJM pricing trends and upside in a higher demand growth outlook due to the large growth in data centers in Virginia etc.
Additionally, Talen remains a candidate for inclusion across multiple indices, including the Russell 1000, S&P 400, and others.
At its current 2.0x leverage ratio, Talen maintains strong balance sheet positioning for meaningful capital allocation flexibility, including share repurchases.

Predicted Growth

Company guidance is for 40% and 27% EBITDA growth in 2025 and 2026, respectively

Sells…

EMR Emerson Electric

Emerson has been very good to CCM.  The stock has been in the portfolio since the beginning and is up 72% since then.  Nothing wrong with it at this point.  We just felt the upside was better in the two new names.

AMD

AMD was a loser for us.  While it might bounce at some point, It seems that AI is sucking all of the air out of the room both in mindshare and actual spending.  In a world where there is a fixed amount of capital spending sollars available, it's all going to AI and AMD’s legacy businesses are feeling it and its unable to get traction in AI

(Oct 17, 2024)

New Buys…

ORCL

This buy was inspired by the last earnings call.  It's one thing for an unknown or untested CEO to make bold statements on conference calls, but one needs to take notice when an eighty year old legend in the industry makes the following statement:

“So actually, we have 162 data centers now. I expect we will have 1,000 or 2,000 or more Oracle data centers around the world, and a lot of them will be dedicated to individual banks or telecommunications companies or technology companies or what have you or nation states, sovereign clouds, all of this other stuff."

It's pretty shocking.  Oracle also now has partnerships with every major hyperscale cloud provider and is squarely in the center of the AI trade. It also is forecasted to have over 20% earnings growth for as far as the eye can see.  Almost 100% of its revenue is recurring revenue. All this for only slightly above market multiple.

META

Obviously we wish we would have bought this long ago…but we can only look forward.  Meta is cheap.  It got somewhat lucky by buying tons of Nvidia chips starting around 2 years ago for the “metaverse” which really was a misallocation of capital in the short term.  Thankfully those chips happened to be perfect for AI and large language models which they pivoted to quickly and well.  They are open sourcing their Lama model which is a great model in our opinion.  Meta is in the center of the future of AI and its current businesses are almost monopolistic and spin off ridiculous amounts of cash 78 billion or so after all the investment.  In addition, they are using AI to improve the top line while simultaneously reducing the headcount of their own business.

CRWD  

CrowdStrike has established itself as a technology leader in the Endpoint Security market with a disruptive platform that has enabled it to penetrate core and adjacent markets with a high level of efficiency. Considering valuation at compelling levels,strengthening secular demand trends, and an outlook that implies ongoing fundamental improvement, we believe now is the right opportunity to own CrowdStrike.  We believe that CrowdStrike can continue to fuel its growth

by taking share from the vast installed base of the legacy vendors.We also believe CrowdStrike has extended its platform beyond traditional endpoints to protect cloud workloads, which should further augment growth.  

While the PE is high, the growth in revenues is over 20% and GAAP EPS is forecast to grow over 100% for the next two years

UNH

AS mentioned above, part of the rebalance is to make the portfolio slightly less sensitive to the economy. United Health has a unique position within the U.S. healthcare system, not only as a

dominant payor of scale (in commercial, Medicare, and Medicaid markets) but also as a large and growing presence in local care delivery (physicians and ambulatory via OptumHealth), scale in pharmacy benefits management (OptumRx), and a fast-growing HCIT/consulting/RCM business leveraging its own data warehouse (OptumInsight). Despite its large size, we believe that UNH can deliver double-digit earnings growth while returning capital to shareholders over the next three to five years.

UNH should also benefit from use of AI to reduce its own headcount and will benefit from a republican presidential win. UNH has sold off over the last few days so it provides a good buying opportunity.

The PE of UNH is  a below market eighteen approximately for 2025 with EPS growth forecast to be mid teens over the next several years.

BSX

Boston Scientific's end-market exposure positions the company well within multiple attractive treatment areas growing in the mid-single-digit plus range, on average. With PFA representing a step-function improvement in the company’s growth on top of other high-growth opportunities, combined with a robust pipeline of products and a proven track record of execution on high-value tuck-in acquisitions, we are bullish on the company’s growth outlook for 2025 and see room for numbers to move higher.

We are particularly bullish on Farapulse which is used for pulsed-field ablation on the heart muscle.  This is a less invasive way to treat atrial fibrillation.  This is a huge market and this product is disrupting the field.

The PE of BSX has been high historically, but it's been earned. EPS growth should be in the 20s over the next few years and should not be subject to macroeconomic weakness.

MDT

Medtronic trades at a discount to large-cap MedTech due to some recent issues with pipeline and mixed execution.  They seem to be emerging from this and are executing well. They've done a good job of evolving the thesis toward a pipeline-driven growth story.  We are particularly bullish on a new product called Simplicity Spyrial. The Symplicity Spyral system supplies  precisely controlled and targeted radiofrequency energy to renal nerves, safely disrupting the overactive signaling between the kidneys and brain to help reduce blood pressure. There is a huge unmet need in this space.  The extent of future insurance coverage is uncertain, but our bet is that it will be better than expected.  This along with other pipeline assets could propel EPS growth to low to mid double digits over time at a time when the PE ratio is 15-16. 

PFE

The market hates Pfizer. There has been a post-Covid hangover and a belief that the company overpaid for some acquisitions. Having said that, the company is expected to grow earnings by high single digits over the next two years.  In addition, while they might have overpaid for Seagen, it doesn't mean that the pipeline has no value.  Over time, this value could be quite large.  It is, of course, difficult to predict when any of this value will be realized.  But at such a low valuation (sub 10 PE) and getting paid a 6% dividend to wait, we think the risk reward is good here.  As a kicker, Starboard (an activist investor) just acquired a one billion dollar stake in the company.

ABBV

Abbvie is a diversified pharma growing EPS double digits with a good yield and trading at only a 15 PE.  They should benefit under a republican administration should it happen.  It should also be recession proof. 

EXITS…

MDB, DDOG and VEEV

We sold MongoDB, Datadog and Veeva.  Software has not done well in general.  We thought these players would benefit somewhat from AI, but it appears they are getting outcompeted.  In some cases it could be that AI is actually a negative for software.  For example if a company charges based on the number of employees using the product productivity from AI could result in fewer employees and therefore lower revenue.

It's possible we are too early and that our thesis might just take more time.  This happened with our exit from Accenture which has come back since our sale.  Accenture is actually effectively using AI for clients and also their own business.

FCX

We are using the optimism from the China stimulus rally to sell Freeport.  It's done well (up 76%), but we are moving to what we feel are better opportunities.

BMRN 

We successfully called FDA approval for novel gene therapy drugs.  Commercial success, however, has been way way slower than we hoped.  Took the tax loss to offset some gains.

NVO

Novo Nordisk was part of a double barrel GLP-1 trade with Eli Lilly.  The trade worked but we want to take some chips off of this bet.  We retain Eli Lilly for exposure to these miracle drugs.

ASML

Exiting ASML gives us the opportunity to reduce risk in semiconductors.  Their earnings missed recently issued guidance by quite a large amount.  The miss was due to non AI related equipment.  Our only interest in semis is because of AI.  Exiting ASML helps us reduce exposure to non-AI parts of the market.

(June 17, 2024) We made a few shifts in the CCM Active Equity Portfolio (The “Equity Sleeve”) on Monday June 17.  While every client account will have different performance based on the original starting point, YTD the Portfolio was up around 16% YTD as of June 20. 

We wanted to refine our allocation to AI names as the space evolves and the landscape becomes a little clearer.  We will continue to be nimble here.  No one knows how this will evolve and when we are uncertain of a company's prospects we will exit quickly. There will be big winners and big losers in the tech sector as the new tech is extremely disruptive.  

 Exits

 ACN

We are exiting our small position in Accenture as we think AI will: 1) Reduce the need for admin personnel in organizations 2) Reduce the need for employees that use tech such as CRM etc. 3) Might reduce the need for consultancy services over time. This all seems to indicate lower structural demand.  This is all contrary to our original thesis.  We might be wrong about lowered demand and disruption to the business model, we are choosing to not stick around to find out. 

 AMD

We are exiting ½ of the position.  AMD should do ok over time, but the new allocations listed below are in the semiconductor space and we wanted to reduce some existing exposure to avoid concentration.

 OXY 

As we look across all of the Portfolio’s existing exposure, we decided energy would be the best place to raise capital at the moment. New supply in the oil sector is coming from OPEC and others which is somewhat bearish.  While we could be wrong on this, capital was needed for what we perceive to be better opportunities.. We decided to sell OXY.   We retain Exxon.

 New Positions

 MU

We initiated a 3% allocation to Micron Technology.  Micron is a leading global manufacturer of memory and storage solutions. Its primary products include DRAM memory chips for PCs, servers, and mobile devices, as well as NAND flash memory and solid-state drives (SSDs) for data storage within enterprises or data centers. Within the DRAM category Micron offers a new and growing product called HBM (High Bandwidth Memory) for high-performance computing applications on devices as well as data centers. 

The HBM part of the equation is central to our bullishness on the stock. While Micron does not provide specific revenue figures for HBM, based on the available information, we assume HBM currently contributes a single-digit percentage of Micron's total revenue. High-bandwidth memory (HBM) is a key component of AI-infrastructure and data center expansion given increasing bandwidth requirements and demand for memory content. We estimate that HBM could grow at a 50% rate over the next five years. We expect Micron to benefit from accelerating HBM demand as Nvidia's H200 ramps up and the company gains share over the next 1-2 years. 

Micron may also benefit from expanding HBM content in smartphones and PCs driven by on-device AI. In recent weeks an arms race has started among smartphone and PC OEMs to include more AI functionality, which could lead to content gains in 2025.

While Micron has run up recently, it still trades at a reasonable PE of 17 and EV to EBITDA of 9 on 2025 earnings. 

 QCOM

We have also initiated a 3% allocation to Qualcomm QCOM.  Qualcomm should be the beneficiary of both cyclical and secular themes in the coming years.  

Secular 

Snapdragon on PCs 

Qualcomm’s Snapdragon platform is equipped with NPUs or “Neural Processing Units” which can perform AI tasks on devices efficiently and can make Microsoft Copilot experiences possible on Windows devices. AI workloads are off-loaded from the CPU and GPU to the NPU delivering better performance as well as power savings. Snapdragon delivers 50% faster performance and at 65% less power consumption relative to competitors. Qualcomm has the highest NPU performance per watt for laptops, which is up to 2.6x Apple's M3 chips and 5.4x Intel’s Core Ultra 7. Power efficient compute platforms also enable multi day battery life for laptops, along with lower heating of the devices. 

New partnerships with PC OEMs have validated Qualcomm's leadership and momentum. There was recently a wave of over 20 Copilot PCs powered by Snapdragon X Elite and Snapdragon X Plus announced from Acer, ASUS,, HP, Lenovo, Samsung, Dell, and Microsoft for Surface and Surface Pro. The broad-based adoption across multiple OEMs shows that Qualcomm is positioned well in driving AI as a feature in mainstream devices rather than remaining confined to high-end PCs. 

Cyclical

Smartphone Refresh Cycle

One of the biggest businesses Qualcomm has is selling modems into iPhones.  iPhone sales have been flattish over the last few years and the average age of existingiPhones is high. Apple has recently given consumers a reason to upgrade in its announcement of AI features which will only be available on newer iPhones.

PC Refresh Cycle

It should be noted here that Windows 10 is sunsetting and the average age of pc’s is four years which is the oldest on record. This seems to indicate that a natural upgrade cycle should be near. In addition, with the advent of “AI PCs”, there is an extra reason to upgrade.

If consumers gravitate to these new AI PCs and a new smartphone refresh cycle is at hand, Qualcomm should be in the sweet spot at a time where it trades at a somewhat reasonable PE of 20 on 2025 earnings.

(April 24, 2024)Additions…

We have made new allocations within CCM Active Equity ( “The Equity Sleeve”) to Vertiv Holdings (VRT) 3.3% and Eaton (ETN) 2.75%. We view data centers as an above-average and possibly generational growth market. In addition, reshoring and increasing electricity demand have been themes we have been emphasizing.  Both VRT and ETN give us exposure to these themes.  

Vertiv

Vertiv Holdings Co. is a global leader in designing, building, and servicing critical infrastructure that enables vital applications for data centers, communication networks, and commercial and industrial facilities.

VRT is a leading global supplier to data centers, with a product portfolio of highly trusted brands ranging from power and cooling to monitoring and control services footprint. In addition to data centers, it also has a strong position in supplying manufacturing facilities which is a sector that also has strong tailwinds and is a theme we have been bullish on (reshoring).The company has shown improved organic growth since becoming independent in 2017. 

One key part of the global AI/Datacenter investment wave that Vertiv can navigate more nimbly than a software or semiconductor manufacturer is the complex geopolitical/military/sovereign competition surrounding AI.  Increasingly, countries are building proprietary data centers for AI due to military and cultural reasons.  In addition they are increasingly regulating control over data more broadly.  Vertiv is not in the crosshairs of these sovereigns as they are not involved with any sensitive aspects surrounding data.  Vertiv’s strong international footprint should enable them to benefit from global data center growth without being as exposed to headline risk from regulation.

Eaton

Eaton Corporation Plc (Eaton) is a power management company. It designs, develops, and sells energy-efficient products, technologies and services.  Our primary interest in the company is its exposure to data center growth via its electrical business (both US and International). ETN estimates the global Data Center TAM at around $34B (ETN has 10% market share), with a market growth rate of around 10.8%. We think this estimate is low and will probably increase.

In addition, Eaton’s win rates on mega scale projects historically at 40% have been increasing.

Another general market tailwind is a traditional data server rack consumes around 8-10 kW while AI applications take around 10x the power.  This bodes well for future power products made by Eaton and others.  In addition, as a longer term theme,  the power consumption of data centers in the United States is expected to nearly double by the end of the decade. As of 2022, data centers collectively consume approximately 17 gigawatts (GW) of electricity. However, due to growing demand for AI and machine learning-ready servers, this figure is projected to soar to 35 GW by 2030. This will aid other parts of ETN related such as their utility business.  In sum ETN should be in the sweet spot of many secular growth  themes.

Reductions…

In order to raise capital for these purchases we had to lighten up on a few existing positions.

Biomarin 

Biomarin is still an attractive pure play on gene therapies and have recently gotten FDA approval for Rocatavian which is a cure for hemophilia.  However, the uptake has been slow due to a novel pricing structure. We still retain a position but cut it from 5.20% to 3.09%.

 Accenture

Accenture is a great company and will continue to grow earrings.  In the short term (one year), however their guidance was somewhat weak in the last earnings call.  So we cut our exposure from 4% to 2% to take advantage of ETN and VRT opportunity.

 Snowflake

We knew in 2023 when we allocated to AI plays we would not get it all 100% right.  We also knew that we would have to be nimble in this space and not get married to any stocks.  At that time as a package we allocated to small chunks of Mongo DB, Datadog, and Snowflake.  Our thought was as AI took off, these smaller software plays would benefit disproportionately.  This is taking longer than expected and it seems as though some of the hyperscalers might be outcompeting the smaller players. In this space we own large chunks of AMZN and MSFT.  We decided to sell Snowflake (2% to 0%) and keep MDB and DDOG as Snowflake’s valuation is quite high and most at risk.  So we keep some exposure to the smaller players.