Summitry Select

Summitry Select Portfolio Update – Q1 2025

4/07/25

During the first quarter of 2025, the Summitry Select Composite declined -8.5% (-8.8%, net). The Composite has returned +11.5% (+10.1%, net) annualized over the past 3 years and +8.9% (+7.6%, net) annualized since inception.

During the quarter, concerns about potential new tariffs and elevated capital spending to support AI investments weighed on shares of some Select holdings, particularly those that delivered outsized returns last year.

Some Perspective on the Current Trade War

Both the size and scope of the tariffs President Trump announced on April 2nd were shocking, and markets reacted accordingly. The S&P 500 fell by nearly -5% on April 3, another -6% on April 4. Some of our portfolio companies fared better and some fared worse. All are lower.

As we currently understand them, the primary goals behind Trump’s executive order are to eliminate, or at least greatly reduce, the US trade deficit and bring overseas manufacturing back to the US. We believe that the high tariff rates announced on April 2nd are intended to be a starting point for negotiations, and ultimately the negotiated rates are likely to be significantly lower. However, we are not wedded to this view, and Trump retains substantial latitude to raise or lower the rates based on how other countries respond.

The implications of Trump’s executive order are likely to be wide-ranging and difficult to predict, especially second and third-order effects. We also know that Trump likes to make deals and negotiations are ongoing. With so much uncertainty, we find ourselves considering past periods of extreme volatility, such as 9/11 and the dot-com crash of the early 2000’s, the Global Financial Crisis of 2008-2009, and most recently the COVID-19 pandemic that began in 2020. Each of those periods saw sharp downturns in financial markets, yet our economy and markets eventually recovered. While the current self-inflicted crisis is of a different nature, we still expect that the self-correcting features of our capital markets, legal system, and the voting booth will serve their functions. Our approach will be to remain flexible in the face of new information, continuously re-underwrite our existing investments, and search out new opportunities created by the current dislocation.

Q1 Portfolio Activity

During the first quarter we added to our position in Agilent (A) and bought a new position in Nintendo (NTDOY).

• As we have discussed in previous letters, Agilent’s business has been negatively impacted by high interest rates, since customers typically finance expensive capital equipment purchases. While financing conditions improved modestly during 2024, the weakening economy in China, which accounts for roughly 20% of Agilent’s annual revenue, and tariff concerns have curbed investor enthusiasm. We continue to believe Agilent is well-positioned to manage through the current environment due to the company’s relatively stable end markets, flexible supply chain, and limited competition.
• Nintendo is unique in the world of video games as a vertically integrated platform that competes not on the performance of its console hardware and breadth of game titles, but rather by leveraging the company’s portfolio of iconic characters (Super Mario Brothers, Donkey Kong, Legend of Zelda, et al.) to drive device sales and ancillary revenue. For perspective on the value of Nintendo’s IP, consider that the company’s Super Mario Brothers movie was the 2nd highest grossing film of 2023, 3rd highest grossing animated film of all time, and first film based on a video game to gross over $1bn globally. We decided to purchase the shares at what we believe to be an attractive valuation ahead of the company’s Switch 2 console launch later this year. We expect strong demand for the new console, which includes better video performance, exclusive launch titles (including a new version of Mario Kart), and backwards compatibility with existing Switch titles. The original Switch was launched more than 8 years ago, so there is likely to be significant pent-up demand for a new console from the current installed base.

Investment Performance

During Q1, our best performers were Visa (+11%), Nintendo (+10%), and Universal Music Group (+8%).

• In January, Visa reported +11% constant-currency revenue growth for the first quarter of fiscal 2025. Growth was driven by strength in consumer spending on discretionary categories like retail, travel, and entertainment. While the business remains highly profitable with a model that is largely insulated from the negative impacts of inflation, we expect the fallout from Trump’s tariff announcement is likely to pressure consumer spending this year.
• We attribute much of the appreciation in Nintendo shares since our purchase to anticipation of a strong launch for the company’s Switch 2 video game platform later this year. As we highlighted above, the product launch should benefit from pent up demand and excitement about new features, as well as the introduction of new exclusive titles based on Nintendo’s beloved video game characters. Trump’s tariffs have thrown a wrench into the company’s launch plans, delaying pre-orders, but we believe underlying demand remains robust.
• UMG reported solid results for the fourth quarter, with both revenue and margins moving in the right direction. The business continues to increase monetization of its vast music catalog and artist relationships across nearly all channels. Most importantly, growth of streaming subscription revenue (UMG’s largest channel accounting for about 40% of total revenue) accelerated to 9% compared to the same quarter last year. We continue to believe UMG is on track to see meaningful operating margin expansion driven by a mix shift to higher margin streaming revenue, operating leverage, and continued cost discipline over the coming years.
  Our worst performers during Q1 were Zebra Technologies (-27%), Alphabet (-18%), and TSMC (-16%).
• Zebra reported exceptionally strong Q4 results in February but issued underwhelming guidance, as management chose to take a cautious approach when planning for 2025 due to uncertainty about tariffs. Management’s caution proved prescient. The company’s largest customer verticals are retailing and logistics, which are likely to be disproportionately impacted by Trump’s tariff regime. However, Zebra’s devices provide mission critical capabilities, so the company is typically able to pass on higher costs through price increases. Additionally, the company’s supply chain is diversified, with production facilities spread across Asia and Mexico. This diversification should allow the company to adapt its production footprint in response to however the tariff negotiations shake out.
• Alphabet reported strong revenue growth and profitability to close out 2024. During Q4, total revenue grew +12% and EPS increased by +31%. Revenue from Search (Google’s largest and most important business) grew +13%, accelerating sequentially and on a 2-year stacked basis. While the threat posed by generative search competitors is real, we have yet to see signs that ChatGPT, Microsoft, or other LLMs are making a dent in Google’s core business. YouTube revenue growth of +14% also accelerated sequentially and on a 2-year stacked basis. Although Google’s Cloud revenue growth decelerated to +30%, this was largely due to capacity constraints. Customer demand for cloud services, particularly AI inference, is growing rapidly and Google is investing to keep up. While increased depreciation from Cloud investments continues to impact Alphabet’s income statement, so far incremental revenue generated by those investments and cost saving measures in other areas of the company have offset the added depreciation expense. However, whether this dynamic is sustainable has become a topic of debate weighing on the shares of Alphabet and hyperscale competitors.
• TSMC customers like Nvidia, Google, Amazon, and AMD continue to see robust demand for chips powering AI applications. We expect this dynamic to continue through 2025. Meeting customer demand will require TSMC to make significant additional capital investments, but we believe TSMC’s dominant position will provide pricing power to defend the company’s attractive margins and returns on invested capital. Geopolitics remain a headwind, as the Trump administration seeks to reset relations with China, but we continue to believe the rewards outweigh the risks.

Concluding Thoughts

Clearly, the current economic environment is very fluid, so we plan to be flexible in our approach, as we incorporate new information into our assessments of the companies that make up our investable universe. We have navigated periods of great uncertainty before, and we know such periods often lead to uniquely attractive investment opportunities. Our significant cash balance should allow us to act quickly once we identify such opportunities without the need to sell existing holdings.

As always, thank you for placing your trust in us to search for those opportunities on your behalf. Please do not hesitate to reach out with any questions.

Sincerely,

The Summitry Select Team

Note: This commentary reflects the opinions of Summitry, LLC and is for informational purposes only. Nothing herein constitutes investment advice or any recommendation that any particular strategy or security is suitable for any specific person. Past performance does not guarantee future returns. Investing involves risk and possible loss of principal capital. An index is a hypothetical portfolio of securities representing a particular market or market segment used as an indicator of the change in the securities market. Indexes are unmanaged, do not incur fees and expenses and cannot be invested in directly. The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.