SMCI - Distillate Capital Q1 2024 Letter To Investors

2024-04-09 07:45:00 ET

Summary

• Distillate Capital Partners LLC was formed in 2017 and is based in Chicago, IL. The firm is 100% employee-owned, and DCP’s partners each have invested significantly in the firm’s investment strategies.
• In the face of a 2.6% headwind to relative performance from simply not owning NVIDIA, our large-cap U.S. FSV strategy lagged the S&P 500 by 0.99% in the first quarter with a total return net of fees of 9.57% compared to the S&P 500’s comparable 10.55%.
• Strong gains for the S&P 500 Index continued into 2024 with a total return of 10.55% in the first quarter.

Letter Summary

Last year’s concentrated market gains among the “Magnificent 7” have diverged entering 2024, and you might now argue that the Mag-7 has become the “Magnificent 1”, as staggering gains in NVIDIA ( NVDA ) have put the company nearly in a category of its own. NVIDIA’s rise in market capitalization to nearly $2.5 trillion, from around $350 billion at the start of last year, is stunning in an absolute sense, and large enough to have a meaningful impact on the overall market’s apparent valuation levels. We will explore that issue and the stock within our framework and provide some historical comparisons. Away from NVIDIA and AI, we continue to find interesting valuation opportunities that meet our quality standards, where we believe the risk/reward relationships are favorable for investors. Our large-cap U.S. FSV strategy’s free cash flow yield of 6.6% on next-twelve-month consensus estimates is over 60% higher than the S&P 500’s corresponding 4.1% yield, and this relative premium is the widest it has been in our strategy’s history (See Figure 1 ). Our small/mid U.S. and international portfolios likewise offer very attractive combinations of valuation and quality, with comparable free cash flow yields of 9.0% and 8.2%, respectively.

Performance Summary

U.S. Fundamental Stability & Value (U.S. FSV): In the face of a 2.6% headwind to relative performance from simply not owning NVIDIA, our large-cap U.S. FSV strategy (U.S. FSV) lagged the S&P 500 by 0.99% in the first quarter with a total return net of fees of 9.57% compared to the S&P 500’s comparable 10.55%. The strategy outperformed the Russell 1000 Value ETF’s total return of 8.94% by 0.63%. Annualized net of fee performance since inception in May 2017 is 2.49% ahead of the S&P 500 and 5.25% ahead of the Russell 1000 Value ETF....

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