Economic and Investment Outlook - Third Quarter 2021 - Geneva Capital ...
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Economic and Investment Outlook
Third Quarter 2021
FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 1Economic Outlook
The economic recovery following the pandemic-driven recession of 2020 connected world, pervade a host of various products. As stimulus wanes, the
continues to unfold, with more businesses opening at full capacity and life more than 9 million unfilled job openings get filled, and supply chains
generally appearing to have some semblance of normalcy in many become unencumbered, we feel GDP growth will be a robust 7% for 2021
geographies. However, more mending is needed as new strains of the virus and moderate into a more sustainable 4% for 2022.
emerge and potentially create economic disruption. Global central banks are
still providing accommodative support, which has been stimulative to the One of the most oft-asked questions we receive from clients and partners
credit and equity markets, but aspects of the ongoing fiscal support have pertains to recent inflation trends. As an equity investor, seeing the value of
created dislocations in the labor markets. In addition to labor challenges, a company’s earnings eroded away has many implications, with multiple
there are long backlogs of product deliveries as supply chain constraints have contraction being a significant detrimental effect. We wrote in our 4th
been exacerbated by shipping congestion caused by the blockage of the Suez quarter outlook last year that we expected significant increases in building
Canal coupled with a resurgence of COVID-19 (Delta variant) in southern and manufacturing inputs, wages of qualified people, healthcare costs,
China that has snarled the world’s 3rd and 5th busiest ports. In fact, the insurance and numerous other areas. With Q1 and Q2 experiencing
monetary policy report given to Congress indicated that approximately one seasonally adjusted CPI increases of 3.7% and 5.9%, respectively, those
quarter of manufacturers cannot produce at full capacity due to insufficient pricing pressures are now clearly appearing in the data. The question is
supply of materials, labor, or a combination thereof. These developments whether these elevated levels are transitory or portending a longer-term
coinciding with a drop in Treasury yields and some commodity prices have trend. Given the COVID-19 related disruptions in supply chains, lack of
many thinking we may have a growth problem. We see things a bit shipping containers and weather related events, are likely to be rectified
differently. With yield spreads compressed to nearly all-time lows (junk bond with time, our contention is these readings will be more transitory in nature.
yields are now below inflation) and the markets exhibiting a continued We are already seeing commodities such as lumber, steel rebar and copper
insatiable appetite for credit, we expect a reasonably orderly transition from begin to correct as elevated material costs have dampened demand in some
publicly-funded economic growth to growth driven by the private sector. end markets. In addition, the rapid growth of M2 has slowed significantly
There will still be dovish behavior and rhetoric emanating from central and banks are returning excess capital back to the Federal Reserve in the
banks, but the direct fiscal stimulus will wane as businesses continue to hire form of reverse repurchase agreements, which should diminish the
back workers displaced by pandemic-related challenges and as goods and monetary impact to inflation. While the “shortage” of labor is pushing wages
services (mostly services) experience trends akin to 2019. While GDP growth higher, as unemployment moderates and stimulus wanes, the threat of wage
is currently robust at nearly 8%, imagine what it could be without push inflation should be diminished. It is certainly possible that continued
contending with the bottlenecks in various supply chains and labor markets! stimulus via the new child tax credits providing payments through the first
One potential benefit resulting from the aforementioned bottlenecks, given half of 2022 (although much smaller in magnitude than prior payment levels)
the amount of stimulus injected into the economy, is they act as a governor could prolong the transitory period of inflation and create renewed
to prevent overheating. A multitude of manufacturers have announced proclamations that a new era of persistent inflation is upon us.
production cuts due to shortages of semiconductors, which, in a digitally
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 2Economic Outlook
There are numerous reasons why we do not believe this to be so, which will year for a similar model. Our forecast for domestic U.S. auto production is
be elucidated in the longer term portion of the outlook, but we expect the for 14M units in 2021 and 16M in 2022. Similarly, retail sales remain robust
CPI to remain elevated above the Fed’s target of 2% for the medium term. and leisure markets are booming, with pent-up demand bursting like a west
The Fed has clearly articulated through their average inflation targeting Texas gusher causing elevated rates (to the point of absurd) for hotels at
policy that they are comfortable with inflation running a little “hot.” popular tourist destinations and airport TSA traffic usurping 2019 levels at
However, we believe there should be moderation in the headline numbers the beginning of July. We expect retail sales and leisure spend to remain
as we move into and through 2022. Our forecast for headline CPI to end elevated as those emerging from their homes are ready to travel, see family,
2021 at 4.0% and 2022 at 3.0% reflects this moderation. We do want to spend money and live those experiences which have been sorely missed
caveat this forecast in that Congress is currently debating two additional while being confined by COVID-19.
spending bills, which could add up to $4-5 trillion in aggregate spending over
the next decade with a substantial portion potentially frontloaded. These Companies with cyclical exposure should achieve robust results in the
numbers are staggering and when combined with the fiscal and monetary forthcoming reporting quarter given easy comparisons and a general
stimulus which has previously been executed ($5.5T fiscal and $5T improvement in economic activity. But it may be an incongruent recovery
monetary) we are witnessing truly historic spending on a scale not given the aforementioned supply chain constraints. Many of these
experienced since WWII. When combined with an accommodative Fed, the businesses have pushed through numerous price increases with little to no
probability of these actions retrospectively being a policy mistake increases pushback from customers. It appears in some cases customers would pay
dramatically and inflation may not normalize at or near the Fed’s stated goal well above market just to guarantee supply, especially if the product is a
of 2%, but rather at a level substantially higher. smaller component in a larger machine/order. One example which resonates
to us came from one of our clients who makes industrial cabinets. They
Consumer spending has come back with a vengeance due to further construct the cabinets here in Wisconsin and actually have adequate supply
improvement in employment trends and the effects of direct consumer of their inputs with the exception of hinges, which they source from China,
payments from the government. Many geographic areas in the U.S. are thus creating challenges in filling the order. There are some industries within
experiencing real estate appreciation at rates similar to the housing boom of the industrial cohort that should show relative strength, such as auto/heavy
the 2000’s, with multiple offers above list and no contingencies. Mortgage trucks, renewable energy and semiconductors as the economy continues to
rates near all-time lows and banks loosening lending restrictions continue to rebound/heal. Conversely, other sectors such as aerospace and the energy
help drive this market. A homebuilding deficit over the last decade (during a complex may continue to be challenged. Industrial production cycles tend to
time when Millennials have been forming households) could now create a be strong for a duration measured in years not quarters after turning
tailwind which lasts longer than many expect. However, houses cannot be positive, and given the strength in the Institute of Supply Management
built overnight, so our forecast for annual housing starts is moderated to (“ISM”) numbers, the current period appears to be no exception. We also
1.55M in 2021 and 1.60M in 2022. In another key sector, auto dealers are expect capex to continue to improve to address that strength, not just for
unable to keep inventory on their lots due to high demand and the lack of industrial-related companies, but also in technology, healthcare and
supply due to scarcity of parts and components. Thus, the used car market is consumer as well.
quite robust with vehicles holding their value at levels 34% higher than last
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 3Economic Outlook
The ongoing lingering question with respect to interest rates relates to how stimulus, demographics and the U.S.-China divergence (re-shoring), while the
long the Fed needs to be accommodating. Investors are wanting an answer contra-inflation considerations are technology, the more recent remote
with increasing urgency as inflation, measured by CPI, appears higher than working trend and general demographics.
anticipated. The Fed’s position is that they will continue to be
accommodating via a historically low Fed funds rate and continued monthly Henry Paulson described the fiscal stimulus applied during the Great
asset purchases. Federal Reserve Chair Powell consistently states the U.S. Financial Crisis as a bazooka. Well, based on the relative size of the current
economic recovery still has not progressed enough to begin scaling back stimulus applied to the pandemic-challenged economy, as well as ongoing
stimulus and views the recent increase in inflation as transitory, which will legislative discussions to extend or expand such support and government
remain high in the upcoming months before moderating. As stated in prior assistance, perhaps Chair Powell and Congress are wielding a nuclear bomb.
writings, we believe the Fed will continue along this path into 2022 and In addition, the laissez-faire, wait and see approach the Fed is espousing
successfully control the short end of the yield curve as rates less than five almost guarantees we are going to see inflation peak higher than most
years will remain historically low. Higher inflation longer term will cause a expect. In addition to monetary stimulus, the fiscal stimulus, which is
continued steepening in the yield curve for maturities greater than five pushing up wages for the lower end of the income spectrum, is artificial in
years. Geneva’s year-end 2021 forecast for the benchmark 10-Year Treasury the short term, but if we debase our currency it creates a whole host of
remains at 1.95% with the 30-Year Treasury increasing at 2.55%. For year- other inflationary issues. Another possibility is we see higher aggregate
end 2022, Geneva’s forecast for the benchmark 10-Year Treasury and 30- demand, such is the case with the proposed infrastructure bill, which will
Year Treasury is 2.45% and 3.05%, respectively. affect labor as well as products. Demographics play into this as well, given
the shrinking work force (more baby boomer retirements) as well as the
Longer Term Outlook
largest intergenerational wealth transfer in history allowing people to retire
younger than they would otherwise. Finally, the trade wars with China, the
The longer-term economic landscape could be defined by how inflation
pandemic and now the global supply chain dissonance have laid bare that
trends proceed. Will we see normalization in this short term spike back to
U.S. companies are too reliant on manufacturing/sourcing outside the
~2% levels, will we see inflation begin to ascend to deleterious levels, or
country. Many of our portfolio companies’ management teams have
actually see what could arguably be worse, deflation? This is acutely
discussed looking to move more production back to North America.
important as rapid price appreciation affects a myriad of business decisions,
However, if the last few decades allowed us to import deflation due to
from salary and bonuses, to procurement, to capital expenditures and capital
China’s inexpensive cost structure, reshoring then would mean that we
structure decisions. So we will attempt to delineate the longer-term
would see costs rise faster than the status quo, although companies might
inflationary and deflationary pressures we see as potentially manifesting
be comfortable with this knowing they have consistent supply.
over time. The pro-inflation forces revolve around monetary and fiscal
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 4Economic Outlook
Conversely, we have experienced the disinflationary forces that technology companies have already announced a migration to this model. Finally,
brings to bear. Be it factory automation, mobile finance, Zoom, or a myriad demographics are certainly working to thwart inflation, although it is a
of other innovations, productivity and costs are being pushed down through double-edged sword. As an aging workforce slowly retires, it reduces the
technological progress. One recent development related to this progress is number of workers, but this is also the cohort of the population where
the pandemic-forced flexible work situation, whereby a multitude of spending is most robust. Japan and Europe are examples of how this can be
industries were forced to get comfortable with employees working from a net drag to inflation.
home. This phenomenon opened up the ability of individuals to flee high
taxation, high cost states and move either to a locale with favorable cost of Our current sense is the contra-inflation forces will win out. Americans are
living or perhaps near family. Companies realized that they no longer needed realizing we cannot borrow and spend our way to prosperity, so the fiscal
such large office footprints, which means capital can be redeployed for other stimulus should wane, the emergency accommodation from the Fed will be
uses. In our industry, we also found a productivity enhancing benefit as the lifted and normal market forces will drive businesses and workers to pursue
solitude allows us to research uninterrupted for hours on end and are their own optimal outcomes. Combined with continued innovation and
hearing the same from many other human capital centric businesses. These demographics, we believe longer-term inflation will settle down somewhere
benefits have yet to fully work though individual companies costs structures, in the 2-2.5% range, which should set our economy up for stable and
but the moves are appearing to be more permanent as many large sustainable long-term growth.
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 5Economic Outlook
Third Quarter 2021
Outlook 2018 2019 2020 2021E 2022E
Real GDP 3.0% 2.2% -3.5% 7.0% 4.0%
Inflation (Headline CPI) 1.9% 2.3% 1.4% 4.0% 3.0%
Year over Year (YoY) change
Operating Earnings (S&P 500 Index) 19.9% 0.8% -18.6% 62.0% 10.0%
Annual housing starts (in thousands) 1,250 1,290 1,380 1,550 1,600
Gross private domestic investment, 6.9% 2.9% -4.0% 7.0% 5.0%
fixed investment – non-residential
U.S. auto sales, domestically 13.5 13.1 12.6 14.0 16.0
produced vehicles (in millions)
10-year Treasury (year-end) 2.68% 1.92% 0.91% 1.95% 2.45%
30-year Treasury (year-end) 3.01% 2.39% 1.64% 2.55% 3.05%
Source: 2021 and 2022 estimates data are Geneva estimates; historical data, Bloomberg, U.S. Federal Reserve, as of 6/30/2021
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 6Trajectory of Recovery
The recovery continues as COVID vaccinations increase and cases hit new lows in the United States, pushing reopening indicators to
recent highs with room to still improve.
COVID Vaccinations vs. New Cases US Economic Activity Index* 97.7
200,000,000 300,000 100
250,000
150,000,000 90
200,000
100,000,000 150,000 80
100,000
50,000,000 70
50,000
0 0 60
50
40
Jun-20
Jul-20
Apr-20
May-20
Apr-21
May-21
Jun-21
Nov-20
Feb-20
Mar-20
Jan-20
Aug-20
Sep-20
Dec-20
Feb-21
Mar-21
Jan-21
Oct-20
Number of 1st Doses Administered (Cumulative), Left Axis
Number of COVID Cases (7 Day Average), Right Axis
*US Economic Activity Index measures re-opening of the US economy using 14 data points: restaurant bookings, foot traffic, retail web traffic, mortgage applications, transit, congestion, domestic
flights, international flights, unemployment applications, work hours clocked, hiring – total listings, railroad traffic, steel production and petroleum production.
Sources: CDC, 6/30/21; Jefferies, 6/25/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 7Inflation Indicators
Inflation data continues to trend higher as demand grows and companies are increasing prices. That said, how long this environment
continues is the major question as some commodities like lumber have declined >40% from their highs.
CPI vs. Percent of Firms Raising Prices Lumber Price vs. 10Y Treasury Yield
3.0% 40 1,800 2.0
30 1,600 1.8
2.5%
1,400 1.6
20
2.0% 1.4
1,200
10 1.2
1.5% 1,000
0 1.0
800
1.0% 0.8
-10
600
0.6
0.5% -20 400 0.4
0.0% -30 200 0.2
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 0 0.0
Jul-20 Oct-20 Jan-21 Apr-21 Jul-21
CPI-U: All Items Less Food and Energy (SA, 1982-84=100), Left Axis
NFIB: % Raising Average Selling Prices, Net (SA, 3MMA, Lead 12M), Right Axis Lumber Price, Left Axis 10Y Treasury Yield, Right Axis
Notes: CPI-U stands for Consumer Price Index For All Urban Consumers and measures the changes in the price of a basket of goods and services purchased by urban consumers. The NFIB is the National
Federation of Independent Business and their small business optimism survey presents data on inflation such as percent of small businesses surveyed who are raising average selling prices.
Sources: Strategas, 6/8/21; FactSet, 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 8Inflation Expectations
Inflation expectations have moved higher year-to-date and these breakeven trends will be important to monitor moving forward to
see if the market believes the Federal Reserve’s “inflation is transitory” language.
Inflation Expectations Moving Higher YTD
US Breakeven Rates (%)
3.4%
3.2%
3.0%
2.8%
2.6%
2.4% 2.28%
2.2%
2.00%
2.0%
1.8%
1Yr. 2Yr. 3Yr. 4Yr. 5Yr. 6Yr. 7Yr. 8Yr. 9Yr. 10Yr 20Yr. 30Yr.
As of 6/17/21 As of 12/31/2020
Note: The breakeven inflation rate is measured as the spread between the yields on nominal US government bonds (Treasuries) and on Treasury Inflation-Protected Securities (TIPS) and represents
what market participants expect inflation to be over different durations.
Source: Strategas, 6/17/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 9Consumer Indicators
Consumer sentiment remains strong as vaccinations continue but higher prices for many purchases (especially big-ticket items like
cars/trucks) are a risk to monitor.
University of Michigan Consumer Sentiment CPI for Select Categories, Change from Prior Year
90 70%
+56%
60%
88
50%
86 40% +30%
84 30%
+24%
20%
82
10% +7%
80 0%
-10%
78
-20%
76 -30%
74 -40%
Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21
72
Gasoline Price YoY % Change Used Cars/Trucks YoY % Change
70
Mar-20 Apr-20 Jun-20 Aug-20 Sep-20 Nov-20 Jan-21 Feb-21 Apr-21 Airline Fares YoY % Change Energy YoY % Change
Source: St. Louis Federal Reserve (FRED), 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 10Employment
The unemployment rate continues to improve (now under 6%) but there are record numbers of job openings as wage demands
increase and industries like Leisure/Hospitality continue to struggle to re-hire workers.
Job Openings
(In Thousands)
10,000
8,000
6,000
4,000
2,000
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Average Lowest Wage Respondent Would May ‘21 Weekly UI UI Job Shortfall (vs. % of Total Job
Industry Wage Rate Benefit* Pickup Feb 2020) Shortfall
Accept for a New Job
(In Thousands of Dollars) Mining & Logging $1,435 1,017 -29% -76,000 1%
Construction $1,198 899 -25% -225,000 3%
90 90
Manufacturing $978 789 -19% -509,000 7%
80 80
Wholesale Trade $1,070 835 -22% -211,000 3%
70 70 Retail Trade $573 586 2% -411,000 5%
60 60 Information Services $1,383 992 -28% -193,000 3%
50 50 Financial Activities $1,146 873 -24% -73,000 1%
Professional &
40 40 Business Services $1,107 853 -23% -708,000 9%
2014 2015 2016 2017 2018 2019 2020 2021 Education & Health
Services $864 732 -15% -1,057,000 14%
College Degree No College Degree
Leisure & Hospitality $398 499 25% -2,538,000 33%
*50% of prior wage + $300 federal support
Sources: Bureau of Labor Statistics, 6/30/21; Federal Reserve Bank of NY, 6/30/21 and Bureau of Labor Statistics/Economic Policy Institute, 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 11Manufacturing
Manufacturing demand remains robust [see Institute for Supply Management (“ISM”) numbers] and is led by technology capex but
suppliers are struggling to keep up as they deal with record delays due to supply chain disruptions and shortages of key inputs.
US Real Capex
(YoY % Change)
ISM Numbers*
35 29.3
Non-Manufacturing Manufacturing
25
May-20 45.4 43.1
15
Aug-20 57.2 55.6 4.8
5
Nov-20 56.8 57.7
-5
Feb-21 55.3 60.8
-15
May-21 64.0 61.2
-25
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
*A measure of more than 50 indicates positive momentum
Tech Equipment Industrial Equipment
Supplier Delivery Times Hit Historic Highs
Supplier Deliveries Diffusion Index and
95 Manufacturing Supplier Deliveries are
indexed to 50 and a reading above 50
85 indicates slower deliveries (typical as
75 economy improves and consumer
demand increases) compared to the
65 prior month.
55
SLIM is Strategas’ Leading Indicator of
45 Manufacturing and provides an early
indication of change in U.S.
35
manufacturing activity during the
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 current month by focusing on New
Orders and Supplier Deliveries as
SLIM Supplier Deliveries Diffusion Index indicators of present and future
growth or contraction in the sector.
ISM Manufacturing Supplier Deliveries (Seasonally Adjusted)
Sources: ISM, 6/30/21; Cornerstone Macro, 6/24/21; Strategas, 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 12Housing
The housing market remains hot but the current problem is not demand despite affordability becoming a bigger concern, but rather
supply shortages and input cost inflation.
Consumer Sentiment, Housing: Prices and Rates Consumer Sentiment, Housing: Affordability
70 90 20
60 80 18
70
50 16
60
40 50 14
Low rates 40
30 12
continue to be
30 10
20 a support for
housing 20
10 8
10
0 0 6 Only 8% say
4 they can’t
afford a
2 house!
% of Consumers Who Think Home Prices are High, Left Axis 0
2014
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2017
2020
% of Consumers Who Think Interest Rates are High, Right Axis
US Household Formations: Owners US New and Existing House Inventories
(4 Quarter Average, In Millions) (3 Month Average, In Millions)
5.0 5.0
4.0 4.0
3.0
3.0
2.0
2.0
1.0
0.0 1.0
-1.0 0.0
1988 1992 1996 2000 2004 2008 2012 2016 2020 1988 1992 1996 2000 2004 2008 2012 2016 2020
Source: Cornerstone Macro, 6/15/21 and 6/24/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 13Monetary Policy and Interest Rates
The Fed has become more influential in the Treasury market since March 2021 as QE purchases continue, but it will be important to
watch the timeline for tapering as 2013 shows it can have an outsized impact on 10Y yields and the overall market.
Fed Purchases of Treasury Issuance Since March 2020 10Y Real Yields vs. Global Composite PMI
vs. 10Y Treasury Yield 1.5 60
70% 2.0 Tapering 58
1.0
discussed?
65% 1.5 56
0.5 Tapering*
announced 54
60% 1.0
0.0 52
55% 0.5 50
-0.5
50% 0.0 48
-1.0
May-20
Jul-20
Jul-21
Apr-20
Jun-20
Nov-20
Apr-21
May-21
Jun-21
Jan-21
Aug-20
Sep-20
Dec-20
Feb-21
Mar-21
Oct-20
46
-1.5 QE3/QE3+ QT QE4 44
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
% of Treasury Issuance Bought By Fed Since Pandemic, Left Axis
10 Year Real Yields, Left Axis
10 Year Treasury Yield, Right Axis
Global Composite PMI, Right Axis
*Notes: Tapering is the reduction of the rate at which a central bank accumulates new assets on its balance sheet. QE3 stands for the third round of the Federal Reserve’s quantitative easing program
that was announced in September 2012 and ended in October 2014. QT stands for quantitative tightening and represents contractionary monetary policy where a central bank decreases amount of
liquidity within the economy. QE4 stands for the fourth round of the Federal Reserve’s quantitative easing program.
Sources: Bloomberg, Raymond James, 6/14/21; Treasury.gov, Strategas, 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 14Investment Outlook
Markets continue to climb a wall of worry, shrugging off renewed inflation valuation of Robinhood at $40B as they have seen the number of trading
concerns and supply chain disruptions, and powering through volatility to accounts on their platform increase over 150% to 18 million since the onset
nearly double-digit returns across all growth indices as we are writing this of the pandemic in March 2020. That said, while this speculative behavior
commentary. Clearly, the Fed’s accommodative stance continues to push should be monitored, we believe the markets will continue to move higher
investors out on the risk curve as non-investment grade debt yields are with occasional spurts of volatility as the Fed attempts to articulate their
currently priced below inflation. Non-investment grade debt yields relative plan for removing their COVID-19 emergency measures and as concerns
to equity yields are at their most expensive level since 2014, which surrounding new COVID-19 variants ebb and flow. Our 2021 and 2022 S&P
consequently was the lowest since junk bonds were invented. What this 500 earnings estimates are $205 and $220 respectively, which based on our
means on an apples-to-apples basis is that the relative earnings multiple valuation model equates to a 7.5% return from current levels, leading to a
(“P/E”) of junk debt is currently ~4x the P/E of the equity market. We hear possible third consecutive solid double-digit return year.
the chorus of market watchers singing the frequent refrain that stocks are
too expensive, and concede there are areas of the market which are Strategy Commentary
displaying bubble type valuations. However, consensus earnings forecasts
have consistently underestimated the ferocity of this recovery, which, Geneva Mid Cap Growth
consistent with our previous writings, has caused a steady revaluation and
concurrent appreciation of equities.
For the quarter ended June 30, 2021, the Geneva Mid Cap Growth strategy
returned 9.77% (preliminary, gross of fees) vs 11.06%, underperforming by
The central question is which direction the market will take from this 1.29%. Generally speaking, U.S. equities were driven by lower quality
juncture. We believe a plausible path would be a continuation higher driven companies this quarter; C&D rated companies returned 11.36% versus
by an amelioration of the clogged supply chain, continued (albeit less) 4.47% for A+ rated companies. Within the Russell Midcap Growth Index, the
stimulus, the lagged effects of the implementation of recent price increases, story was similar with low ROE, higher beta and low P/E companies leading
and a steady re-opening of world economies as the pandemic wanes. In the way for low quality. We did see some of the higher quality factors such
addition, retail investors continue participating in the markets, providing a as high growth rate companies and lower debt-to-cap perform well, which
boost to equity flows. However, it does appear that many of these investors helped to counteract the low quality headwinds. At the industry level, the
are trading tickers as opposed to buying shares in companies, a subtle but top detracting industries were health care, telecommunications and real
important distinction, which has given rise to the “meme stocks” (i.e. estate; these industries detracted 1.23%, 0.55% and 0.24%, respectively.
GameStop, AMC, etc.). This point is laid bare with the recent pre-IPO
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 15Investment Outlook
At the stock level, the top detractors were Fiserv, Global Payments and in slightly ahead of consensus, and adjusted EBITDA also coming in ahead of
Frontdoor; these stocks detracted 0.25%, 0.19% and 0.10%, respectively. expectations. Revenue grew 12% YoY (7% volume, 5% price) with renewals
Fiserv was the top detractor this quarter with shares down just over 10% in up 12% from growth in HSPs (home service plans) and price realization, DTC
spite of the company posting strong quarterly results. In late April the (direct-to-consumer) 16% stronger as marketing investments continue to
company reported in-line revenue and an EPS beat of $1.17 vs $1.13, pay off, and real estate saw 2% growth that was mostly price as the strong
although driven by lower than expected taxes. The company posted a 4% seller’s market has been tough – although they continue to make progress
internal revenue growth this quarter, better than 3% expected. FY guidance on shifts to focus on buyer. While not broken out, Proconnect and Streem
was raised at the lower end from $5.30-$5.50 to $5.35 to $5.50. Full year also performed well and they maintained their target for $20M in
internal revenue growth (IRG) was raised to 9-12% from 8-12%. The contribution this year and there appears to be upside to this figure. On the
Merchant Acceptance segment was very strong with 8% IRG, low DD growth margin side, gross margin was down about 440 bps YoY and below
in North America and Clover GPV growth accelerated to 36%. The Financial consensus, due to elevated service costs, higher inflation on appliances and
Technology segment saw 2% IRG with a 150bps headwind from timing of plumbing, and unfavorable weather. With that being said, they still
periodic revenue, driven by termination fees. Payment segment IRG was 2% maintained their GM target of 38% for the full year, and that includes
headlined by 16% debit transaction growth, 100% growth in Zelle and more elevated service costs throughout the year. Guidance was re-affirmed for the
than double the number of clients on Zelle. Weighing on shares was the full-year.
announcement of a secondary offering on behalf of KKR – the amount of the
secondary was 20M shares or 3.5% of outstanding shares. Shares of Global The top contributing sectors were consumer discretionary and financials;
Payments were down just over 7% although the company reported a better these industries contributed 1.18% and 0.11%, respectively. At the stock
than expected quarter. Quarterly revenue was up 5% YoY and beat by nearly level the top contributors were Pool Corp, EPAM Systems and Intuit; these
3%, EBIT was up 9% and beat slightly despite margin coming in a bit below stocks contributed 0.99%, 0.92% and 0.92%, respectively. Pool Corp shares
consensus although it was up 160 bps YoY to 40.6%, and EPS was up 15% to were up over 33% in the quarter as the company continues to surprise to the
$1.82 vs. consensus $1.77. The Merchant segment posted a very modest upside. Sales grew by a remarkable 51% y/y vs consensus for 16% growth,
beat with revenue up 4% and EBIT 6% higher, the Issuer segment was EBITDA came in 2x expectations and the company saw 40bps of gross margin
roughly in line, and the largest part of the beat was in the Business & expansion. Management raised FY EPS guidance 30% at the midpoint and
Consumer Solutions segment with revenue up 19% and EBIT up 54% as sales growth is now expected to be 20%+ vs the prior guidance of high-single
disbursements of stimulus helped. Not surprisingly, momentum increased digit to low double-digit. Management raised guidance based on the
for all 3 segments starting in March and management sound fairly optimistic stronger than expected first quarter, but also on the increased confidence
about the current trendline as they continue to see robust bookings growth for the remainder of the year. Sales momentum continues to be strong and
across their businesses that are helping them to outperform broader builders have reported strong pipelines into 2022.
payment volumes trends in their Merchant segment. Management raised
2021 revenue guidance by 0.5% and EPS by 1% at the midpoints, although
the guidance does not include M&A they also announced and it broadly
seems conservative. Frontdoor reported a solid quarter with revenue coming
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 16Investment Outlook
EPAM Systems reported first quarter revenue which modestly beat Geneva Small Cap Growth
estimates and adjusted EPS was $1.81 vs. $1.69 expected. Revenue grew
20% YoY as reported, an acceleration from last quarter’s 14% growth. All For the quarter ended June 30, 2021 the Geneva Small Cap Growth strategy
verticals grew double digits, with the exception of business information & retuned 5.13% (preliminary, gross of fees) versus 3.92% for the Russell 2000
media which was up 7%, and travel & consumer (18% of total revenue) Growth Index, outperforming by 1.21%. Generally speaking U.S. equities
recovered to 16% YoY growth. By geography, North America (60% of total) were driven by lower quality companies this quarter; C&D rated companies
grew 21% YoY and Europe (33% of total) grew 16% YoY. Gross margin returned 11.36% versus 4.47% for A+ rated companies. Within the Russell
compressed 60bps YoY to 34.9%, driven by YoY calendar comparison and 2000 Growth Index the quality factors told a different story with high quality
some elevated labor costs in certain geographies. Adj. EBIT margin expanded leading the way. This was evidenced by the fact that nonearners, low ROE
130bps YoY to 17.5%, driven by strong expense control. Second quarter and higher debt companies all underperformed. At the strategy level the top
guidance came in ahead of Street estimates and full year revenue guidance contributing industries were health care, technology and energy; these
was raised to 29% growth (28% ex-FX) vs. prior 23% growth and Street est. industries contributed 2.58%, 0.34% and 0.19%, respectively. The holdings
24%, full year adj. EBIT margin was reaffirmed at 16.5-17.5% given ongoing with the greatest contribution to returns were STAAR Surgical, Fox Factory
planned investments in talent and geographic expansion, and full year adj. Holding and Bio-Techne; these holdings contributed 0.97%, 0.74% and
EPS was raised by ~5% at the midpoint and came in ahead of Street 0.55%, respectively. Shares of STAAR Surgical were strong throughout the
estimates. Management is encouraged by strong demand across end quarter as the company reported very strong earnings. Revenue and EPS
markets and will continue to invest in the business to support long-term came in ahead of consensus, with revenue at $51M vs. $44M consensus and
growth. Intuit fiscal third quarter results were preannounced early in the growth of 41% YoY. They reported broad-based strength across all regions
quarter and were quite strong. The Tax business grew 34% YoY, but we will but growth was especially strong in China at +63% YoY. Other products were
see a decent portion of activity in the upcoming quarter due to the filing down 27% due to a third party manufacturer product yield issue, but that
deadline extension. Small business and self-employed revenue grew 20% YoY should be back to normal by Q2. Gross margin was up 670 bps YoY and
overall with the online ecosystem growing 28% YoY, online services growing operating margin was up 14.2% YoY compared to negative in Q1 2020. The
34% and international online revenue growing 38% ex-FX. Credit Karma company continues to invest in sales and marketing and DTC campaigns
reached a quarterly record revenue level of $316M, comprising ~8% of total ahead of the launch in the US. Full year guidance was raised and
revenue, driven by member engagement reaching a new record high with management expects Q2 will see 50%+ growth and full year growth will be
both monthly active users and frequency of member visits at all-time highs. 30% YoY. Fox Factory Holdings reported a great quarter and raised guidance
INTU revised FY guidance higher, now expecting ~22% FY revenue growth vs. by more than the beat. Revenue grew 52.5% and earnings more than
prior ~15-17%, driven by 11-12% growth in tax business and 14% growth in doubled YoY. The business was strong across the board with the only issue
small business and self-employed group. INTU is seeing good cross-sell being supply. The bike business grew 85% and they see demand continuing
traction with ~40% of new Credit Karma members coming from TT and at this strong pace over time. Power Vehicles grew 35% and organically grew
Turbo customers. Management expects to return to 30%+ online ecosystem 9% with growth in power sports. The after-market side was also very strong.
revenue growth next year, driven by 10-20% growth in both customers and The company remains well positioned with demand outstripping supply and
ARPC (contribution from products like QBO Advanced and Live). the new Georgia facility is contributing nicely. Margins also impressed with
gross margin expansion of 410bps and 450bps of EBITDA expansion.
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 17Investment Outlook
Shares of Bio-Techne were up nearly 18% this quarter after the company opportunities and general corporate purposes, including the acquisition of
reported a better than expected quarter. Revenue beat estimates by ~7% aircraft and repayment of existing debt. Bright Horizons reported revenue
and adjusted EPS beat by ~16%. Revenue grew 25% YoY as reported and roughly in line with estimates and earnings came in slightly ahead. Revenue
organic revenue grew 22% YoY, an acceleration from last quarter’s 21%/19% decreased 23% YoY, an improvement from last quarter’s down 28% as the
growth rates. Growth driven by strong demand and good execution across company continues to see the economic backdrop improve. Full service
both operating segments, with Protein Sciences segment achieving record revenue (~74% of total) declined 29%, an improvement from last quarter’s
24% organic growth and Diagnostics & Genomics segment delivering 17% down 37% and better than management’s expectation for a decline of 30-
organic growth. End markets continued to improve through the quarter, 35%. Approx. 900 of 1,015 centers are open at this point and occupancy
with biopharma remaining strong and academic labs continuing to reopen. levels continue to improve MoM; management expects a return to pre-
Cell and gene therapy related demand continues to be strong, with GMP COVID levels by year-end. Backup revenue (~20% of total) grew 3%, below
protein business growing over 90% in the quarter. Consolidated adj. EBIT management’s expectation of 10-12% growth due to mix of traditional vs.
margin expanded 370bps YoY to 40.1% due to volume leverage and strong reimbursed care usage. Educational advisory revenue (6% of total) grew
cost management, and representing the strongest margin profile since 2014. 16% YoY on new client additions and expanded use of services.
Protein Sciences EBIT margin expanded 290bps to 47.6% and Diagnostics & Management is still not providing FY21 guidance, but based on directional
Genomics EBIT margin expanded 360bps YoY to 17.9%. Management is very commentary management expects full service revenue to continue to ramp
encouraged by demand recovery in end markets and has a very favorable while the backup business will face tough comps in the upcoming quarter.
view on LT opportunities across the business. Management does not view long-term WFH/hybrid models as a structural
headwind, but rather an opportunity to serve more families in its centers
The top detracting industries were consumer discretionary, financials and and feels good about the business pipeline with employers interested in on-
industrials; these industries detracted 1.01%, 0.37% and 0.26%, respectively. site and near-site care centers. Shares of ESCO were down over 13% in the
The holdings which detracted the most from returns were Allegiant Travel, quarter as the company’s end markets continue to lag the broader market
Bright Horizons Family Solutions and ESCO Technologies; these holdings recovery. The company reported a good quarter with revenues coming in-
detracted 0.43%, 0.32% and 0.26%, respectively. Shares of Allegiant were line with expectations and earnings coming in ahead. Gross margin
down just over 20% in the quarter as investors rotated out of the name. The expanded 80bps and SG&A declined. The company reported a record
company reported results that were in line with expectations, but they amount of cash flow from operations as management focused on working
continue to be the best of any U.S. airline given their domestic leisure capital. The company announced a change in CFO, although this was well
focused ecosystem. Managed continues to operate the business extremely telegraphed to investors. Management continues to not provide formal
well and it is exiting the pandemic in a place of competitive strength, which guidance given the uncertainty in the end markets.
combined with a solid balance sheet and first-to-return to profitability
should afford it opportunity to take market share and growth. Shortly after
earnings the company announced a stock offering of 1.35M shares, which
represents 8-10% dilution. The proceeds will be used for airline growth
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 18Investment Outlook
Longer Term Outlook and witness those multiples crater. It took Paul Volcker acting in the early
1980’s to depress inflation by significantly increasing interest rates and
With inflation expectations rising and as the eventual taper of Fed purchases slamming the breaks on the economy. The arduous path to that point,
gets closer to reality, we believe the market could experience more violent including the buildup of historically high inflationary forces and the
swings with steep corrections and quick rebounds. This behavior is subsequent recession that followed, proved painful for most equity
compounded by the involvement of retail investors who appear to be investors. This is not our base case, but even if the market speculates that
complacent in the face of tougher Fed talk. It has been decades since scenario could be a reality, the results could be unforgiving. We think the
investors have had to navigate through an inflationary environment and most likely scenario is more volatility as market participants oscillate
consequently, given the historically low interest rates which have caused between preparing for transitory inflation (most likely, in our view) versus
significant multiple expansion, there is plenty of room for multiples to inflation which becomes more embedded. If inflation does prove to be
contract, which tends to happen during these periods. It could be quite transitory, the bear market of last year (-34%) and the incredible monetary
dangerous to invest in companies with lots of growth and momentum but and fiscal stimulus injected into global economies, sets the stage for markets
possessing low quality factors and stratospheric multiples, only to see to experience a multi-year run driven by robust earnings growth as opposed
inflation manifest more quickly and stubbornly than the Fed has predicted to continued multiple expansion.
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 19Investment Outlook
Third Quarter 2021
Geneva’s forecast of capital markets total returns – 12 months forward
30-day 2-year 10-year 30-year
commercial paper Treasury note Treasury note Treasury note S&P 500 Index
12 month return potential* 0.15% 0.01% -0.55% -3.00% 7.50%
Level on 6/30/2021 0.12% 0.25% 1.47% 2.09% 4,298
* These potential returns are based on the projected yields discussed or presented herein. Actual returns may be more or less than projections.
Source: Geneva Capital Management, Bloomberg, as of 6/30/2021
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 20Rising Forward EPS Estimates
Forward EPS estimates for the S&P 500 have been increasing steadily as a record number of companies are beating estimates due to
stronger-than-anticipated momentum amid the economic reopening.
Bloomberg S&P 500 Consensus EPS Estimates
90%
Percent of S&P 500 Companies Beating Earnings
87%
$220 $211.22 Estimates by Quarter
85%
$210
$200 80%
$189.40
$190 75%
$180
70% Average 66%
$170
$160 65%
$150 2021E EPS 60%
$140 2022E EPS 55%
$130
50%
$120
Jul-20
Jun-20
Jun-21
Apr-20
May-20
Apr-21
May-21
Aug-20
Nov-20
Dec-20
Jan-20
Feb-20
Mar-20
Sep-20
Jan-21
Feb-21
Mar-21
Oct-20
45%
1994
1995
1996
1998
1999
2000
2002
2003
2004
2006
2007
2008
2010
2011
2012
2014
2015
2016
2018
2019
2020
Sources: Bloomberg and Strategas, 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 21Earnings-Driven Market YTD
Although strong EPS growth has been the driver of market returns to date in 2021, the overall NTM P/E multiple for the market
remains elevated relative to historical levels. Given current valuations and an expectation that EPS trends sustain solid momentum,
we think earnings performance will continue to be a key force behind the market.
S&P 500 Performance Attribution for 2021 S&P 500 NTM P/E Ratio
1.25 23
22 21.3
1.20
21
1.15 20
19
1.10 18
17
1.05 16
15
1.00 14
13
0.95 12
0.90 11
10
Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
BEst EPS BEst P/E Ratio Price
Notes: “BEst” stands for Bloomberg Estimate for EPS and P/E ratio over the next 12 months. 2021 chart data is normalized to 12/31/2020.
Source: Bloomberg, as of 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 22Perspective on Factors Influencing Performance
Lower quality factors like high beta and high leverage continue to outperform on a YTD basis as compared to higher quality factors
like high ROIC and high growth. That said, performance amongst these various factors were much tighter in Q2 vs. Q1, possibly
indicating a returning preference toward high quality stocks.
2021 YTD Factor Performance
S&P 500 Sector-Neutral
20%
15%
Cumulative % Return
10%
Beta
5% Net Debt to
EBITDA
0% Sales Growth
ROIC
-5%
-10%
-15%
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21
Notes: Factor performance is calculated by subtracting the lowest quintile basket for each factor by the highest quintile basket for each factor. The analysis is sector neutral given that the quintiles for
each factor are calculated separately for each sector, and then aggregated together. I.e., the highest quintile for Beta is comprised of the combination of the highest quintile for Beta for each of the
S&P 500’s 11 different GICS sectors, thus removing sector bias from the data.
Source: Cornerstone Macro, 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 23Technology vs. Interest Rates
The level and trajectory of interest rates is a meaningful driver of performance and valuations for some growth sectors such as
technology. Rising interest rates could present a near-term headwind for growth sectors like technology.
NASDAQ 100 Relative Performance vs. Real Interest Rates
NASDAQ 100 Index / S&P 500 Index (12/31/19 = 1.00)
1.35 -1.2
1.30 -1
10 Year U.S. Treasury Real Yield (inverted)
1.25
-0.8
1.20
-0.6
1.15
-0.4
1.10
NASDAQ 100 vs. S&P 500 (LHS)
-0.2
1.05
10 Year U.S. Treasury Real Yield (RHS; inverted)
1.00 0
0.95 0.2
May-20
Feb-20
Apr-20
Jul-20
Sep-20
Feb-21
Apr-21
May-21
Mar-20
Jun-20
Mar-21
Jun-21
Dec-19
Aug-20
Nov-20
Dec-20
Jan-20
Jan-21
Oct-20
Notes: 1) NASDAQ 100 Index relative performance is calculated as the price ratio of the NASDAQ 100 Index vs. the S&P 500 Index, indexed to the ratio as of 12/31/19. The NASDAQ 100 Index is
considered a corollary for the technology sector given that this index had a 57% weighting to the technology sector as of 6/30/21. 2) Real interest rates reflect the return after deducting inflation. The
10 year U.S. Treasury real yield is based on Treasury Inflation Protected Securities (TIPS) at "constant maturity," which reflect composites of secondary market quotations obtained by the Federal
Reserve Bank of New York.
Source: U.S. Treasury, Bloomberg, 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 24Market Volatility
Broader market volatility has been low so far in 2021, with the VIX (volatility index) near to only slightly above pre-pandemic levels.
History would suggest that the market could see a larger intra-year correction relative to what has been experienced to date.
S&P 500 Calendar Year Return vs. Largest Intra-Year Decline
40% 34%
31% 30%
27% 29%
30% 26% 27% 26%
23%
20% 20% 19%
20% 16%14%
12% 14% 13% 13%
11% 10%
7% 9%
10% 4% 4%
2% 3%
0%
-2% 0% -1%
-10% -3% -3% -4%
-7% -6% -6% -5% -6% -7% -6% -7%
-8% -8% -9% -8% -10% -8% -7% -8%
-11% -12% -13% -14% -10% -10% -11%
-12%
-20% -16%
-19% -17% -19%
-20% -20%
-30% -23%
-30% -28%
-40% -34% -34% -34%
-38%
-50%
-48%
-60%
1988
1987
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
YTD 2021
Notes: The VIX is the Chicago Board Options Exchange Volatility Index that represents a market estimate of the expected volatility of the S&P 500 Index and is calculated by using the midpoint of real-
time S&P 500 Index option bid/ask quotes.
Source: Bloomberg and Strategas, 6/30/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 25Yield Curve and Cyclicals
A steeper yield curve historically has been a positive for the relative performance of cyclical stocks.
U.S. Treasury Yield Curve vs. Cyclicals Performance
Cyclicals vs. Small Cap Relative Performance (Dec. 1994 = 1.0)
3.0 2.0
U.S. Treasury 10-Year Yield Minus 2-Year Yield (in %)
1.9
2.5
1.8
1.7
2.0
1.6
1.5 1.5
1.4
1.0 1.3
1.2
0.5
1.1
1.0
0.0
0.9
-0.5 0.8
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2016
2017
2018
2019
2020
U.S. Treasury 10-Year Minus 2-Year Spread (LHS) Cyclicals vs. Small Cap Relative Performance (RHS)
Notes: Small cap performance is based on the Russell 2000 Index. Cyclicals performance includes the Russell 2000 Index sectors of Consumer Discretionary, Energy, Financials, Industrials, Materials,
and Semiconductors. Chart data for cyclicals vs. small cap relative performance is normalized to Dec. 1994.
Source: Jefferies, 6/21/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 26M&A and Small Cap Performance
M&A activity is off to a fast start in 2021 and strong M&A activity historically translates into to strong performance, particularly for
small caps relative to large caps.
Number of Small Cap M&A Deals in Jan-May Period Annual Performance in Different M&A
70 20.0 Environments from 1994-2020
61 16.9
16.0
Average Annual Performance (in %)
60 15.4
54 54 15.0 Increasing M&A Years
49 48 12.8
50 11.9
45 10.8 Decreasing M&A Years
10.3 9.8
40
40 36 37 34 34
10.0
33 7.3 All Years
31 30 31 30 31 31
30 27
21 22 22 5.0
16 18 17
20 14 1.6
11 0.6 0.5 0.9
9
10 0.0
-1.1
0 -2.5
-5.0
1998
2011
1994
1995
1996
1997
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021 Small Mid Large Small vs. Large Mid vs. Large
Notes: Small cap performance is based on the Russell 2000 Index, mid cap is based on the Russel Midcap Index, and large cap is based on the Russell 1000 Index. “Increasing M&A Years” are years in
which M&A activity within the Russell 3000 Index is higher than the prior year, while “Decreasing M&A Years” are years in which M&A activity within the Russell 3000 Index is lower than the prior year.
Source: Jefferies, 6/21/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 27Inflation and ROE Factor Performance
High ROE stocks typically outperform low ROE stocks in periods of rising and/or above-average inflation. With low ROE valuations
appearing more extended than high ROE valuations, relative to historical levels, the setup for high ROE stocks appears attractive if
inflation does in fact remain higher than pre-COVID-19 levels.
Price-to-Sales Ratios for Highest and Lowest ROE High ROE vs. Low ROE Small Cap Performance
Cohorts in the Russell 2000 in Different Inflation Environments
10.0 2.6 15.0 12.6
Lowest ROE (LHS) 11.9 11.6
Average Annual Performance (in %)
9.0 2.4
8.0 Highest ROE (RHS) 2.2 10.0
7.0 2.0
6.0 1.8 5.0
5.0 1.6 0.6
4.0 1.4 0.0
3.0 1.2 -0.6
High ROE
2.0 1.0 -5.0
1.0 0.8 Low ROE
-5.9
0.0 0.6
-10.0
2015
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2017
2019
2021
CPI Increase CPI Above Median CPI Between 2% & 4%
Notes: Data is based on the Russell 2000 Index. ROE is classified by quintile and is calculated by dividing net income by average shareholders’ equity.
Source: Jefferies, 6/21/21
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 28Performance
US Small Cap Growth model strategy top contributors and detractors for the quarter ended 6/30/2021
Strategy Strategy
Top Contributors Top Detractors
Ending Weight (%) Contribution (%) Ending Weight (%) Contribution (%)
STAAR Surgical Co 2.80 0.97 Allegiant Travel Co 1.59 -0.43
Fox Factory Holding Corp 3.92 0.74 Bright Horizons Family Solutio 1.93 -0.32
Bio-Techne Corp 3.41 0.55 ESCO Technologies Inc 1.82 -0.26
Globus Medical Inc 2.18 0.47 Exponent Inc 2.51 -0.24
Omnicell Inc 2.94 0.44 WD-40 Co 1.03 -0.20
The holdings identified in this table, in compliance with Geneva policy, do not represent all of the securities purchased, held or sold during the period. To obtain a list showing every holding as a percentage of the
portfolio at the end of the most recent publicly available disclosure period, contact (414) 224-6002.
Performance (%) 2Q21 YTD 1 yr 3 yr 5 yr 10 yr
Composite (gross) 5.13 8.54 38.65 18.82 20.41 16.41
Composite (net) 4.99 8.26 37.93 18.17 19.75 15.75
Russell 2000® Growth Index 3.92 8.98 51.36 15.94 18.76 13.52
Past performance cannot guarantee future results. Investing involves risk, including the possible loss of principal and fluctuation of value. Returns greater than one year are annualized. Please see
pages 31-33 for additional performance information and important disclosures.
Information relating to portfolio holdings is based on the model strategy for the composite and may vary for accounts in the strategy due to asset size, client guidelines and other factors. The model
strategy reflects the portfolio management style.
Security contribution to performance is measured by using an algorithm that multiplies the daily performance of each security with the previous day’s ending weight in the portfolio and is gross of
advisory fees. Fixed income securities and certain equity securities, such as private placements and some share classes of equity securities, are excluded. As of 6/30/21 the top 10 portfolio holdings of
the US Small Cap Growth Model Strategy are: Fox Factory Holding Corp (3.92%), Bio-Techne Corp (3.41%), Fair Isaac Corp (2.95%), Omnicell Inc (2.94%), STAAR Surgical Co (2.80%), Trex Co Inc (2.65%),
Exponent Inc (2.51%), Kinsale Capital Group Inc (2.49%), LHC Group Inc (2.31%), RBC Bearings Inc (2.24%). There are no assurances that any portfolio currently holds these securities or other securities
mentioned. Portfolio holdings are as of the date indicated, and are subject to change. This material should not be construed as a recommendation to buy or sell any security.
Geneva Capital Management | FOR INSTITUTIONAL OR HIGH NET WORTH INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION 29You can also read
