Q3-2023: Letter to Investors
Dear Investor,
This summer ended with the fund slumping 6.88% (vs a 3.6% loss in the S&P), bringing our net gains for the year to 13.81% (vs 11.68% for the S&P). Though our long-equity strategy prevents us from broadly protecting the fund’s portfolio from such downturns, we did take actions that we expect to promote long-term outperformance. As this summer’s tech market surge dwindled in August, our focus turned to liquidating select positions that no longer supported our investment thesis to prepare for a projected market downtrend extending through September.
Key among our tactical moves was exiting our Snowflake stake before a precipitous earnings shortfall. Additionally, the volatile political climate around federal funding and the surprising indifference to restocking U.S. arsenals compelled us to retreat from defense giants such as General Dynamics, Raytheon, and Northrop Grumman. This reallocation of resources facilitated new positions in Oracle, Super Micro Computer, and Nexterra, and bolstered our presence in Moderna, Advanced Micro Devices, and Vertex Pharmaceuticals. Our investments in Oracle, Moderna, and SMCI were particularly pronounced.
Moderna (MRNA) has consistently been on our acquisition radar since the fund's genesis, but COVID driven valuation spikes deterred us from investment. The recent valuation moderation, however, offered an attractive entry point, especially considering Moderna’s promising pipeline of vaccines and treatments. We perceive Moderna’s stock as neutral below $125 and as a bargain under $88, with a resilient floor around $76, irrespective of their future in the COVID vaccine market. With Moderna comprising roughly 2.5% of our assets, we aim to double this share, exploiting the market's overvaluation of developmental hurdles ahead of critical research junctures.
Super Micro Computer Inc. (SMCI) emerged as a central figure among rapid shifts in datacenter hardware demand driven by the ascendancy of AI and other data-intensive technologies. The company's market valuation experienced a contraction due to supply constraints, which dampened earnings, and offered an attractive opportunity to invest at the start of a substantial sustained uptick in demand for SMCI's solutions.
Oracle (ORCL) built the tools that brought the world’s big businesses into the digital age with management software (now cloud applications), middleware, and databases. It fell behind other big-tech peers when it failed to move as aggressively as needed into cloud computing. Now, Oracle is catching up in cloud computing just in time to take advantage of a revolution in data processing for which AI is the poster child. With a substantial customer base that is unlikely to greenfield solutions, Oracle is poised to reap enormous benefits from the AI shift with minimal risk of having its business disrupted.
We believe these investments will prove to be important drivers of extraordinary returns over the next few years, and look forward to keeping you apprised of their performance.
-Nicholas Carpenter,
Manager, NJC Capital Management LLC