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1. Given the recent volatility, if you have any specific holding or portfolio level questions, please don’t hesitate to reach out to us. We are here to help. As many of you know, a few of our strategies are our best expression of owning volatility as an asset class, the S&P 500 had sold off ~6.5% (NASDAQ closer to -10% / Small Caps were -16%) given the headline risk around tariffs. We love how we are positioned.

Historically, the market experiences three 5%+ pullbacks per year on average. These corrections are healthy and should not be alarming. The data below shows that these pullbacks are common rather than extraordinary. Since 1928, the largest intra-year drawdown averages -16.0%, yet year-end returns typically remain positive. The message here is clear: it pays to stay patient, not reactive.

Lastly, in my opinion, this feels like a normal pull back, as the areas of the market that have been hit the hardest are the places that many would consider to have had irrational exuberance in their returns since the election, i.e., high-beta stocks, highly-valued stocks, and the most risk-on areas of the market have led the pull back. When these areas of the market are leading the pullback, it tends to be a healthy and short-lived correction.

2. I’ve slowed down on my individual stock writing for the “Aptus Musings”, but given the recent pullback in the market and the moving pieces under the hood of the S&P 500, I thought I’d bring it back. For reference, dispersion across names in the S&P 500 is in the 98th percentile over the last five years. This means that there is a lot of dispersion amongst names and low correlation, i.e., names are doing wild and crazy things as we are going through a period of time where CY 2024 earnings are being reported and a potential / threat for a substantial amount of change in Washington, D.C. policy.

In today’s musing, we’ll be highlighting Aptus’ most recent addition to the portfolio – NVIDIA Corp. (NVDA).

Compounder Factsheet
Compounder Philosophy

 NVIDIA Corporation

Tech’s negative trend is probably one of the most important equity market developments to start 2025. It doesn’t mean good charts can’t be found within the sector, but the likelihood of consistently picking winners goes down without the sector at your back. But this type of weakness does breed opportunity, and we continue to believe that there is opportunity to own NVDA.

As of 3/4/2025, NVDA is -13% from its recent ATH, but the weakness in the stock feels more like a hedge fund de-grossing story for the entire semiconductor / AI space than a fundamental growth worry. And when you get pullbacks that are caused by this type of liquidity event, it’s tough to recognize when the selling will stop, so I cannot call a bottom. However, we believe that NVDA is hitting a point of valuation support.

Let’s talk valuation because I feel like that is the go-to scapegoat as a reason not to own the stock. The stock currently trades at 25x forward earnings:

1. NVDA now trades BELOW parity relative to the PHLX Semiconductor Sector Index (SOX) – something the market has seen only once or twice in the past decade;

2. NVDA only trades at a slight S&P premium, the lowest they have been since 2016.

And this is the cheapest valuation the stock has seen, and it’s at the beginning of a new product cycle, which baffles me. The stock tends to do well during new product cycles, such as the Hopper. Though I do recognize that the Blackwell introduction has not gone as smoothly as Jensen would have liked, a few of our research partners have stated that Blackwell witnessed $11B of shipments in January, suggesting that the floodgates have been opened.

We don’t just like the valuation of NVDA, we love it. And we love the growth opportunity because the U.S. is already starting to price in a slowdown of growth – and this is before the tariffs debacle. Then, global growth is also undoubtedly slowing.  We believe that this leaves the AI trade as an idiosyncratic area of growth. The scarcity growth premium might find its way back to NVDA.

So, what is there for investors to worry about?

Increased Regulation: Given the current trade tensions, there could be more restrictions and bans on China shipments. I would note that NVDA’s China sales, while reaching record levels (~$17B in FY25), are at the lowest % of revenue (13%) in the last 10 years.

AI Diffusion Occurs in May: These are basically new rules that place additional controls on where advanced AI components can be shipped. Said another way, it will force customers in many countries to obtain new licenses in order to purchase sizable amounts of NVDA hardware. We believe NVDA’s H20 shipments to China should be unaffected by the new controls as they only seem to apply to components already impacted by prior controls (the H20 is low enough performance to be exempt from restrictions).

The AI Trade is Long in the Tooth: Personally, I think that this is a bit premature. Why? Sentiment has clearly pivoted for now on the AI group. However, spending intentions seemingly continue to rise, plus a new product cycle is just kicking off. For example, there continues to be outsized investments in capex and R&D have supported the exceptional performance of US stocks during the past decade. In 2025, the Magnificent 7 companies will boost their capex by 31% YoY to $331B. If you simply rewind history back to October, just four months ago, these companies were “only” expected to spend $263B on capex (+13%).

Given how noisy 2025 has been so far, I think being quiet isn’t such a bad thing. Even though there was tremendous angst going into NVDA’s recent earnings results the other week, I would characterize the print as relatively quiet. It appears that the company is through the worst of the ramp issues, with all Blackwell configurations now in full production across the board. Gross margins at 71% might be a minor nitpick, but I won’t argue that getting product out the door should be the primary consideration at the moment, given that demand seemingly remains off the charts and the company still sees them coming back into the mid-70s range by year-end.

Overall, the secular story around that demand seems as robust as ever as the market moves from pre-training to a post-training world, with management remaining bullish that compute requirements are only growing stronger from here.

Overall Thesis

We see NVDA as a major beneficiary of the 4th tectonic shift in computing, in which parallel

processing captures share in the computing market. We believe that the market underappreciates NVDA’s businesses and its transformation from a traditional PC graphics chip vendor into a supplier of high-end gaming, enterprise graphics, cloud, accelerated computing, and automotive markets. From our perspective, the company has executed consistently and has a solid balance sheet with what we believe to be a demonstrated commitment to capital returns. We understand the unwelcoming landscape regarding China and the U.S. restrictions but believe that they are manageable over time.

And don’t mention valuation to us – it trades at 25.2x forward earnings, a level lower than most of the Magnificent Seven. At this valuation level, it’s the stock’s weakest level in a year and close to 10-year lows. In fact, the stock now trades below parity relative to the SOX (something we have seen only once or twice in the past decade) and at only a slight S&P premium, the lowest they have been since 2016.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

The content and/or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors.  Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act.  If you choose to utilize or cite material, we recommend the citation be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022. ACA-2503-11.

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Index gains continue to be powered by a group of Technology (or Tech-proxy) stocks– Apple, Microsoft, NVIDIA, Amazon, Google, Meta, and Tesla. Last year, these seven stocks gained 76% on average, accounting for more than 60% of the Index’s 26% gain; the other 493 stocks in the Index gained 8% on average. While this year’s individual returns amongst the seven have been more dispersed, they have gained 33% on average, more than doubling the broad Index return. NVIDIA Corp. (NVDA) is the main outlier, up +149.5%. The remaining 493 stocks in the Index are collectively up 5%. Added together, the Mag 7 have returned nearly 110%, on average, over the last six quarters, while the other 493 stocks in the Index are up 13%.

Given this well-known concentration of returns in the Index, we remain firm believers that trading is like a pie crust; the more you mess with it, the worse off it is. And more often than not, an investor’s best trade is no trade. This is exactly what the strategy has decided to do in 2024, as our most recent trades occurred last September and October.

One of the hardest parts of stock picking is being able to navigate through the noise – deciphering what information is material, and what is not. It’s been even more difficult over the past year and a half due to the current environment. What hasn’t been difficult is trusting the management teams running all the companies in the fund. Given current market conditions, we continue to believe the stock portfolio is the perfect concoction of valuation, growth, and quality.

I once read that optimism is a way of explaining failure, not prophesying success. Said another way: saying you are optimistic does not mean you think everything will be flawless and great. It means you know there are going to be failures and problems and setbacks, but those are what motivate people to find a new solution or remove an error – and that is what you should be optimistic about.

We won’t always be correct with every single name we own in the Aptus Compounders portfolio – that’s why it’s a portfolio of stocks. But we can promise you that we will continue to learn, being pragmatic about positioning in the current environment because all an investor needs to do is compound your probability of success.

Portfolio Update:

Aptus Compounders slightly trailed its S&P 500 benchmark during Q2, by 1.3%. After outperforming by +10.6% in 2023, the strategy has given up a bit of that outperformance with its second straight quarter of relative underperformance. A lot of the drivers of relative performance last year took a breath in the first half of 2024. The relative underperformance versus the S&P 500 (-2.61% year-to-date) has simply come from not owning NVIDIA (NVDA), which contributed 4.57% to the index’s absolute performance. Despite this, the strategy has still outperformed the index over the last twelve months, by 3.0%. The strategy continues to have exposure to the artificial intelligence (“AI”) renaissance through the ownership of Adobe Inc. (ADBE), Alphabet Inc. (GOOGL), Broadcom Inc. (AVGO), and Microsoft Corp. (MSFT).

During the quarter, AI stocks were the weapon of choice. This after the market witnessed a short-lived expansion in market breadth during Q1 ’24. Managers who did not own Apple Inc. (AAPL) or NVIDIA Corp. (NVDA) during the quarter faced a relative disadvantage of 1.88% (44% contribution to S&P 500’s Q2 ’24 return) and 1.32% (31% of S&P 500 return), respectively. In total, AAPL and NVDA contributed 75% of the S&P 500’s quarterly return. Despite not owning either stock, Aptus Compounders surprisingly saw stock selection add value (+0.49%), although sector allocation detracted (-1.61%).

The Compounders’ performance was led by Broadcom Inc. (+21.53%) and Alphabet, Inc. (+20.82%), as both benefited from stronger-than-expected earnings reports, bolstered by continued innovation and guidance surrounding artificial intelligence AI. Specifically, the former (Broadcom Inc.) expertly navigated a sizeable cyclical correction in much of its business, and should benefit from continued AI ramps and a cyclical recovery elsewhere. Not only that, Broadcom’s wash-and-repeat M&A playbook continues to work, as the VMWare integration is ahead of schedule.

Chemed Corp. (-15.42%), the parent company of Roto-Rooter and Vitas, was the largest loser, as their earnings report showed weakness in the Roto-Rooter business, specifically regarding consumer spend. We were encouraged to see continued strong momentum at VITAS, which saw another quarter of double-digit census growth. Importantly, the average daily census grew well above admissions on solid growth in length of stay, which drove VITAS margins above management’s internal expectations. As less sophisticated operators struggle with labor access, management expects VITAS to continue to see solid topline momentum into the future.

A since-inception holding, Copart Inc. (-6.49%), also underperformed due to lower average selling price (“ASP”), though volumes helped insulate the damage. We remain firm believers in management’s long-term vision and appreciate the: 1) the wide moat in salvage, 2) secular tailwinds driving total loss rate, 3) growth in non-insurance vehicles, 4) total addressable market opportunity with Purple Wave, and 5) fortress balance sheet of $3.0 billion in net cash.

As mentioned, we made no trades during the quarter. We continue to like the balance of the overall portfolio, which benefits from its diverse exposures. While turnover was slightly above average last year, we like the current positioning and it has held up well this year despite not owning some of the largest contributors to the index. We’ve learned with time that sometimes the best trade is no trade, recognizing that patience can be more challenging yet more rewarding than reacting poorly to short-term underperformance. All in all, we remain confident in how we are positioned in the Aptus Compounders portfolio.

 Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed. 

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible. 

The content and/or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors.  Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act.  If you choose to utilize or cite material, we recommend the citation be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022. 

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2407-28.

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Aptus’ philosophy is rooted in the belief that simple beats complex. It’s difficult to convince people to buy into simplicity; it’s hard to believe that complex problems don’t require complex solutions. In fact, we’ve often found in this business that the simplest or most effective data is sometimes neglected on the account that it’s not intellectual enough.

Through our Yield + Growth Framework and our bias to owning both qualitative and quantitative quality, we believe that we have found a simple solution that allows investors to own a concentrated basket of stocks that has the ability to outperform over a full business cycle.

Over Time, Yield Plus Growth Drives Total Return

With this in mind, the investment approach seeks to own companies with the following characteristics:

By looking at these four factors, we believe that we tilt the odds to compound our probability of success. In fact, when you combine all four of these factors, they outperform each factor on a stand-alone basis. The result of the process is a portfolio of 15 high-quality securities with reasonable valuations, attractive growth prospects, and a durable competitive advantage.

This process helps us uncover our favorite type of stock, Compounders.

What is a Compounder Stock?

First, we do not believe that all stocks are created equally. We also believe that Morningstar’s antiquated style box has been a huge influence in driving investors to see stocks as either value or growth. We think this classification falls woefully short, is highly sector-driven, and fails to separate our favorite stocks of all, Compounders.

In a nutshell, we attempt to take the perspective of an owner, by tuning out short-term market noise and investing in businesses that we believe have the best opportunity to compound shareholder capital over many years and through many different market environments. While there isn’t just one way to skin a cat, we believe consistency leads to positive outcomes and this holds true for investing in businesses over a long time horizon.

We have a high hurdle for new ideas, but not too high that we cannot source new ideas. We seek to invest in businesses that we believe have an edge. Whether it be a competitive moat, long runway for organic growth, outstanding “Outsider” management, capital-light model, pricing inelasticity, consistent recurring revenue, or first-mover advantage. More importantly, we look for businesses that we believe have a distinct advantage over their competitors.

Many people try to make this investing game much more difficult than it should be – there’s no reason to always swing for the fences when singles and doubles will suffice. You buy good businesses for less than fair value. Sure, we can all argue about fair value, as there are always surprises in the future trajectory of a business. This game has some wrinkles and drama, but at its core, it’s simple when done correctly.

Conclusion

Each investment strategy is and likely should be different from the next person – it’s good to be different. We believe that too many investors focus on cloning others, such as Warren Buffett when it’s a mistake. It’s not who they really are. In the world of bourbon, not everyone is going to be Pappy Van Winkle. There are other bourbons, each with their own twist, that merit excellence. Instead of replicating Pappy, we want to take the valuable lessons and nuggets we obtained from studying the greats and apply them to our own processes, experiences, and personality.

We once read that optimism is a way of explaining failure, not prophesying success. Said another way: saying you are optimistic does not mean you think everything will be flawless and great. It means you know there are going to be failures, problems, and setbacks, but those are what motivate people to find a new solution or remove an error – and that is what you should be optimistic about.

And, over the years, we continue to be optimistic, while being pragmatic about improving our process. We won’t always be correct on every single stock that we own in the Aptus Compounders portfolio – that’s why it’s a portfolio of stocks. But we can promise you that we will continue to learn and adjust the portfolio as we see fit because all you need to do is compound your probability of success.

Access our Equity Case Studies here.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward-looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2304-14.

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1. Quick Market Commentary
2. Stock of the Quarter

Before I start, please remember that we do great individual stock work for concentrated positions of clients. I have opinions and convictions that I’m more than willing to spew.

We were very fortunate with the performance of the Compounders sleeve last year and hope to continue that momentum in ’24. In today’s musing, we’ll be highlighting Aptus’ most recent addition to the portfolio – Diamondback Energy, Inc. (FANG).

Compounder Factsheet
Compounder Philosophy
Compounder Case Studies

Quick Market Commentary

Now that we are past earnings, here are a few facts on the market that really stick out to me:

Where does valuation figure into the Magnificent Seven vs the S&P 493 Debate?
The PE ratio on the Magnificent Seven is 29x, which places it in the 81st percentile of post-GFC history. The PE ratio on the S&P 493 is 18x – placing it in the 88th percentile of the same lookback window. So, while I concede that the former is superficially much higher than the latter, based on looking at each cohort relative to its own history, it’s not at all obvious to me that the 493 are all necessarily “cheap” in comparison. In this context, look at NVDA – it has added around $1.7T of market cap over the past 16 months, and the P/E has barely budged, i.e., earnings are driving the stock’s performance (Think back to our Yield + Growth +/- Valuation Framework).

Is Something Structural Going On?
This isn’t breaking news and it’s something I’ve been saying a lot on TV lately: US mega-cap tech companies have some of the biggest and best balance sheets in the world. They generate huge free cash flow and return a large chunk of that to shareholders (recall the recent buyback math for AAPL, GOOG, META, et al – META actually announced a dividend!).

Here’s another stat that I find eye-popping: the Magnificent Seven reinvests 60% of that cash flow into growth capex and R&D. Think about the compounded power of that over time and note that it’s more than 3x what the other 493 S&P companies reinvest. There are elements of winner-take-all at play here, and it’s not something I’m willing to structurally fight – own more stocks, less bonds, and remain risk-neutral.

My Favorite Valuation Chart
Only time will tell if the market is “overvalued” or “undervalued”, but we don’t think comparing today’s S&P 500 valuation to its history, especially longer-term history, might be the best comparison. A fair value approach to the index based on long-term trends in earnings and cost of equity would have grossly underestimated S&P 500 returns in recent years.

As always, given that NVDA is a hot topic (and the comments above), let me know if you’d like my written commentary on the stock.

Stock of the Quarter – Diamondback Energy, Inc. (FANG)

Why Did I Decide to Review FANG? Many folks have reached out to me asking about the company’s recent acquisition of Endeavor (privately held).

One of the biggest things catching my eye in the energy space has been the record amount of mergers & acquisitions, or M&A (XOM à PXD | FANG à Endeavor | CVX à Hess / etc.). We are nearly 10 years into the meteoric rise of US Shale, alongside major basins being more mature, we’ve seen inventories start to decline and productivity start to wane. So, to maintain their foothold in the Permian basin and elsewhere, oil majors are snapping up prized plots.

From a sector perspective, one of the big rationales for owning Energy was the capital allocation changes happening across the spectrum. This has continued as free-cash-flow yields continue to increase, providing more levers for companies to return cash to shareholders. This is partly a function of capital scarcity due to institutional divestitures and political pressure that has helped constrain Oil & Gas capital expenditures (“CAPEX”). In any event, the result is the highest-ever cash flows which have been helping bolster the return to shareholders via fixed/variable dividends + share repurchases.

As I mentioned above, the path to new reserves has been the same playbook for many companies, via M&A. Rather than exploring for and/or developing new projects, large companies are pursuing a more risk-averse strategy of buying existing production. In 2023, the North American energy sector had seen $270B worth of M&A deals.

Given this onslaught of M&A, FANG took advantage of multiple competitors being tied up with other deals to pounce on the crown jewel of private companies in the Permian Basin. Following XOM-PXD pending merger and OXY’s recent acquisition of CrownRock, FANG became the only logical player to take down the long sought-after private. Thus, FANG and Endeavor are merging in what is the fourth energy mega-deal announced in the last six months.  The combined entity will be the third largest producer and 5th largest acreage holder in the basin while sitting tied for third in core-inventory locations.

Source: Diamondback Investor Presentation as of 02.12.2024

However, whereas in the other three, the acquirer trailed the S&P energy sector by an average of -1.15% and the S&P 500 by an average of -2.30% on the day of the announcement, FANG soared, outperforming both by 8.28% and 9.47%, respectively.

Which begs the question, why? Most analysts agreed that FANG paid a fair to full price for Endeavor… it wasn’t like they got a bargain. Perhaps the answer can be found plastered on every single slide of the merger pitch deck put out by FANG, which read “The Must-Own Permian Pure Play.” Haughty, perhaps. Presumptuous, definitely. But when you look at it, they’re right.

With PXD out of the picture, FANG/Endeavor’s scale and complementary acreage position in the most prolific US shale basin make it the go-to E&P for energy-hunting portfolio managers, like myself. Moreover, in some respects, Endeavor was seen as the ultimate prize. Founder Autry Stephens started the company in 1979, having come from humble beginnings on a peanut and watermelon farm. Long thwarting reported acquisition attempts from multiple public behemoths, Endeavor rose as the major privately held producer in the Permian. His patience paid off; post-transaction, Mr. Stephens’ net worth is pegged at just under $26B, placing him at 64 on Bloomberg’s wealth list.

Hat tip to a member of our own team, Joseph Sykora, CFA, who used to do boots-on-the-ground work in the Permian, so we’ve very much had our ear to the ground in this space.

Alongside the announcement, FANG offered up even more good news: they are increasing the base dividend by 7% to $3.60/share annually. That being said, they also reduced the minimum payout from 75% of free cash flow to 50% of FCF in an effort to quickly reduce debt associated with the deal and provide the company with more financial flexibility going forward. The 75% minimum payout was previously the highest in the industry (along with PXD). We believe this is the smart business decision.

All-in-All: Simply said, FANG bagged a Unicorn.

In our opinion, this deal is an absolute homerun for Diamondback, with the company now asserting itself as the premier pure-play E&P in the country. Other details of the deal we like are the 18-month lock-up for the Endeavor stockholder group which should go a long way towards easing any selling pressure put on by the acquired party. Diamondback now has zero inventory concerns, with a huge quantity of known strong locations alongside a considerable amount of upside should more zones become viable. Overall, we would expect multiple expansions in the wake of the deal as FANG takes their place as the sitting King of the Permian.

Momentum / Technicals
FANG took a turn for the better when it announced it was acquiring Endeavor Energy Resources on 2/12, breaking out on 3.5x average volume. This volume has created a floor for FANG @ the $160 level, and further momentum into earnings on 2/20 pushed it to the $180 area (new ATH). It has historically moved in $20 increments as can be seen in the below chart.

With price and volume confirming direction (up) the trade now becomes one of trend vs fundamental value. Price will, most likely, hang around $180 until its 20 or 50 sma’s catch up to it and continue on trend (up) and look to test the round $200 number before attempting its next major pause.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

 This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

 The content and/or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors.  Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act.  If you choose to utilize or cite material, we recommend the citation be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

 Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2403-15.

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And now, CHE is continually asked by shareholders if they should break apart into two publicly-traded companies and the CEO, Kevin McNamara, always has a resounding and emphatic… “No”. So, what are the two (2) businesses that Chemed runs? 

The Che Guevara Business – Surprisingly, CHE and Che have a few things in common, though they remain far different. The latter was an expert in guerilla warfare and is notorious for his involvement in killings throughout Cuba, Venezuela, and Africa. The former is also known in the death space – though, unlike Che, they help assist in the most peaceful of manners. Over 50% of Chemed’s revenue comes from being the #1 hospice player in the United States, with the company VITAS.

The Cousin Eddie Business – Happy Christmas time. Cousin Eddie is most infamous for draining his RV’s waste into a sewer in the suburbs of Chicago in the movie, National Lampoon’s Christmas Vacation. However, he chose to use a different subset of verbiage while performing the act in a short bathroom robe that would barely yield the coverage of a Kentucky Derby jockey. Instead of performing this act, Cousin Eddie should have called Chemed’s other Business, Roto-Rooter, which happens to be the largest plumbing company in America.

Let’s dive in.

Chemed Corporation (CHE)

What Does the Company Do?

Chemed (CHE) is a conglomerate that operates in two distinct businesses:

VITAS Healthcare (55% of Revenues): Largest provider of Hospice Services for patients with severe, life-limiting illnesses with approximately 7% of the U.S. market share. Operates a comprehensive range of hospice services through 45 operating programs in 15 states and the District of Columbia.

Roto-Rooter (45% of Revenues): The largest provider of plumbing and drain cleaning services in North America with services to ~90% of the U.S. and 40% of the Canadian population. This is a fragmented market where Roto-Rooter maintains an estimated 15% of drain cleaning market share and only 2%-3% of same-day service plumbing market.

Why Have I Been So Impressed With the Company and Its Management Team?

The below chart states everything that you need to know. Growing your dividend at double-digit rates and buying back over $2B (on an $8B mkt. cap stock) since 2007 shows the strength of this business, as this would not be possible if they were not able to grow revenue, expand margins and increase the bottom line.

What Has Impressed Aptus Lately?

It’s no secret that keeping and retaining labor has been a very difficult task for companies and CHE has been no different. In fact, it has substantially de-railed some of VITAS’ growth aspirations. But this past quarter was a pretty large clearing event and this is why the stock was +10% after the report.

This past quarter we were most impressed with the results of the company labor retention program, which we believe will set them up relative to peers for quite some time – having the right, consistent labor is in fact a competitive advantage in this space. The program was just another highlight of continued management execution during periods of adversity. Management had previously assumed a slight uptick in turnover and a slowdown in hiring at the end of the program, which fortunately did not materialize. The strong labor market for CHE has prompted management to increase its current year average daily census (“ADC”) growth guidance for the second consecutive quarter to 9.3-9.5% (from 6.5–7.5%).

VITAS is finally back to growth mode.

Walk Through the Yield + Growth Framework:

Chemed has multiple levers to successfully grow. Many believe that CHE likely has a GDP-like growth, given that the Roto-Rooter business and the Hospice business reimbursement is controlled by the government. This is not exactly true, particularly on the Roto-Rooter business (“RR”). The company has continued to grow organically, even via new lines of business, such as water restoration (which began in 2016). Inorganically, RR continues to snatch up non-controlled franchises. VITAS is unlikely to grow inorganically, as the compliance and integrations tend to be complicated, especially with a lot of government scrutiny – in a heavy reimbursement-based business, it’s sometimes best to not have the spotlight on you.

Nonetheless, the company has substantial room to grow with a lot of pricing power.

Sales Growth Rate + Roto-Rooter Inorganic Growth + Margin Expansion + Share Repurchases = Growth Rates: 6.50% + 1.00% + 0.50% + 2.00% = 10.00%

Should the Company Break Into Two Companies?

Surprisingly, when speaking with the management team, I don’t take a contentious stance here because I actually agree with keeping the companies together. Both sides of the business ying and yang with each other, as the RR business tends to be a bit more cyclical, given the exposure to restaurants, while VITAS is more of a staple. From a valuation perspective, I don’t think the move would benefit them, but if you want to have that conversation, we can take that offline.

From a portfolio standpoint, specifically in the Aptus Compounders 15-stock, non-diversified portfolio, I prefer to own a conglomerate. Since we’re limited in the number of holdings that the portfolio can have, I like increasing diversification with a business that performs work in the Health Care and Industrial sectors.

Why are We so Convicted in CHE?

We believe that CHE is a very strong operator with tailwinds on both sides of its business. On the Roto-Rooter segment, given its above-peer margins, its asset-light model, the reduced exposure to economic cycles (due to its growing exposure to water restoration), and limited online competition, we believe that this line of business deserves an above-average premium relative to peers. Meanwhile, given the size of the VITAS platform (scarcity value), the positive outlook for the hospice industry, and the positive near and medium-term outlook for Medicare reimbursement rates, we believe that VITAS also deserves an above-average premium relative to peers.

CHE has demonstrated to be a very strong operator, with minimal leverage at the corporate level, a growing dividend, and accretive share repurchases. With this, we believe that the company is very undervalued relative to peers and should be an all-weather holding in a portfolio given its downside protection along with its outperformance in normalized market scenarios.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. Forward looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

The content and/or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors.  Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act.  If you choose to utilize or cite material, we recommend the citation be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2312-8.

The post Aptus Musing: Stock Highlight – Chemed Corporation (CHE) appeared first on Aptus Capital Advisors.

What if there has been a foundational change in what the absolute level in which the market will be priced at moving into the future? To me, it can sometimes feel like the market is always over-valued. Back in the 2000s, many investors thought that 13x earnings was wildly overpriced – we’re 50% higher than that now. Even as recently as 2015, some stock pickers wouldn’t even touch a stock greater than 18x forward earnings. Look at us now!

Over the last few decades, there has been an increased usage of diversification, which could make investors understand that they need to accept higher valuations, given ease of access to information and relative times savings. The best analogy that I have heard regarding this is: Imagine that you’re an investor in the 1930s/1940s and you wanted diversification. You’d have to buy mutual funds that has exuberant fee loads of like 7% – 9% (plus annual mgmt. fees). And, if you didn’t want to realize those fees, investors could do the work themselves. But that requires time and would be an even more difficult task to execute on, given the lack of access to information. Not to mention the time necessary to manage those holdings after time of purchase.

Then, imagine the unknown in the market after the Great Depression – the worst economic crisis in our history – without easy access to information, it would have been very difficult to make a well-informed decision on if one should stay invested. Today, it feels like investors have just kept buying … “just because”. Investing today is far simpler and cheaper that it was nearly a century ago…and that’s just the new cost of investing that has demanded a higher multiple relative to before.

Now, I’m not going to say that this market isn’t expensive, as I think that it’s saying more that investors may need to tread lightly at this level. What I am trying to say is that valuation is just another arrow in one’s quiver – it shouldn’t be the sole rationale as to why one should not currently invest. Remember, using valuation as a short-term timing tool is a fool’s errand. As the market changes, investors must also change, or they could quickly become a sacrificial lamb.

Now, let’s talk UNH – luckily, we believe that their valuation is very palatable.

UNH Case Study

UnitedHealth Group, Inc. (UNH):
What Do They Do?: UnitedHealth Group, the largest private health insurer in the U.S., provides a diverse and comprehensive array of health and well-being services to people through all stages of life. The company provides medical benefits to over 50 million members through employer-sponsored, self-directed, and government-backed insurance plans in the U.S. and internationally. UnitedHealth has two operating units: UnitedHealthcare (77% of Revenue) and Optum (23% of Revenue).

Overall Thesis: We remain convicted on UNH due to an attractive valuation, potential for hardening pricing in 2024, and attractive LT growth in value-based care. As I wrote about in our Aptus Compounders Halftime Report – 1H ’23, time is one of our best assets. Going back a year, we liked the UNH story, but were not too enthusiastic about its valuation. But, when you own for longer periods of time, you have to deal with the ebbs and flow of valuation as you let your capital compound for you. Yet, today, we don’t just like the valuation of UNH, we love it. About 12 months ago, the stock traded at a 30% premium to the market, now it trades at a 10% discount. With the stock down ~3% YTD and valuation down to 0.9x of SPX, we believe most of the associated uncertainty regarding medical costs are priced in. We believe UNH is a best-in-class managed care organization (“MCO”) and value-based care (“VBC”) company, and current valuation offers a unique opportunity to buy a piece of a business with a large runway of growth in front of it at very attractive valuation.

Yield + Growth Frameworks:
Dividend Yield: 1.48%
Growth Rate: 12.00%
Y + G = 13.48%

I’m deriving our growth rate from the following information:

1. Optum: We see gov’t MCO and OptumCare as strong growth pillars for UNH and are interested in what will emerge over the next 5-10 years as their 3rd pillar of their business model. Given their HC system technology, UNH’s management expects 13-16% LT EPS growth targets for Optum.

2. United HealthCare: Health care spending has grown consistently for many years and comprises approximately 18% of U.S. GDP. This trend is likely to continue as baby boomers continue to age. With this, I’d expect this segment to grow at a healthy rate.

The Valuation: UNH relative valuation at 0.9x is very attractive relative to historic levels. We believe that investors could see the stock trading at 1.1x – 1.2x for UNH, and view 1.2x as a normal high-end of historic relative valuations. During ’22, we saw valuations getting as high as 1.4x, which we felt were stretched. The current 0.9x is very attractive to us, near “Medicare for All” lows of 0.85x. We believe long term UNH will trade at 1.1 to 1.2x the market, presenting further upside.

The Wildcard: UNH typically derives ~1/3rd of its growth from M&A, of which, they have a great track record – we’ll see what happens with Amedysis (AMED), which is coincidentally one of the largest competitors to Chemed Corp.’s (CHE) subsidiary, Vitas – which is held in the Aptus Compounders portfolio.

UNH did a great job growing Optum, which diversified its business from UnitedHealth, but we believe that management will start looking for a third leg to the stool with another large, transformational acquisition. We’d assume that they are looking for a high growth business to complement its VBC and government MCO businesses. We believe UNH is developing growth engines in health system enablement and consumerism. We believe the health system enablement strategy should present an explosive opportunity leveraging AI and care automation to revolutionize the costs of care delivery.

In its current form, OptumInsights is focused on incremental health system enablement, in areas like revenue cycle management and efficiencies. UNH is positioned to assist health systems in the transition to VBC by enabling the taking and managing of clinical risk, leveraging its OptumHealth and UHC capabilities. The biggest long-term opportunity though is the leverage of digital and AI to expand the supply of care delivery to reduce costs and expand volume for health systems. While many will target this opportunity, UNH is well positioned given its capabilities and existing role with health systems.

Technical Thoughts: UNH – Since the end of 2021, UNH has essentially gone nowhere. It was up in 2022 while most things were down and has severely underperformed the broader indices and its sector YTD. But, through all that, it’s also found a nice base in the $450-$500 range, and recently exhibited a “double bottom” support move off of $450 with higher volume pushing it above $500. While not exactly saying “full steam ahead”, it’s arguable that it’s found a low and should compound higher over the medium- to long-term from here. Targets are pretty obvious @ $550 and a breakout there would see it easily clearing $600 and beyond after making this 1.5 year base / consolidation move around $450. Could be a multi-year upside move once it gets started.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed. 

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness.

This is not a recommendation to buy or sell a particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. A complete list of holdings is available upon request. 

The content and/or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors.  Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act.  If you choose to utilize or cite material, we recommend the citation be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies, and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2307-27.

The post Aptus Musings: Stock Highlight – UnitedHealth Group, Inc (UNH) appeared first on Aptus Capital Advisors.

During the second quarter, the Mega-Cap Tech stocks told the rest of the market that if you’re not first, you’re last, as investors either owned technology exposure and outperformed or owned everything else and underperformed. Basically, investors quickly saw the banking fears of Q1 fade into an all-out Artificial Intelligence (“AI”) FOMO trade in Q2, leading the S&P 500 higher by 8.7% for the quarter.

The so-called “Magnificent Seven,” which appears to be the biggest winner of the AI trade, has driven the market, as they have a story that is impossible with which to argue – a new technology that promises to transform business controlled by companies that, by and large, hold tons of cash and are in no way capital constrained. It is likely to take years to fully determine whether AI is revolutionary or evolutionary, but in the absence of significantly higher long-term interest rates it may not make much of a difference to the likes of Microsoft, Apple, Google, Amazon, and Facebook. They have the time and the capital to get the benefit of the doubt.

One of the hardest parts of stock picking is being able to navigate through the noise – deciphering what information is material, and what is not. It’s been even more difficult over the past year due to the current environment. What hasn’t been difficult is trusting the management teams running all the companies in the fund. Given current market conditions, we continue to believe the stock portfolio is the perfect concoction of valuation, growth, and quality.

I once read that optimism is a way of explaining failure, not prophesying success. Said another way: saying you are optimistic does not mean you think everything will be flawless and great. It means you know there are going to be failures and problems and setbacks, but those are what motivates people to find a new solution or remove an error – and that is what you should be optimistic about.

We won’t always be correct on every single name we own in the Aptus Compounders portfolio – that’s why it’s a portfolio of stocks. But we can promise you that we will continue to learn, being pragmatic about positioning in the current environment because all an investor needs to do is compound your probability of success.

Portfolio Update

Aptus Compounders outperformed the S&P 500 during the quarter and for the year, by +0.3% and +4.1%, respectively. The strategy is up 21.0% on the year, outperforming the benchmark due to strong security selection. In fact, all of the outperformance and some came from securities held in the strategy, as our sector exposure detracted from performance, specifically Energy and Staples. Even though our portfolio tends to have a smaller relative exposure to the mega-cap stocks, which have driven the majority of the performance in ’23, we outperformed as we held some of the smaller cap names that have done well. We continue to believe our bias of what we consider to be high-quality characteristics that exhibit pricing power, profitability, pricing inelasticity, and competitive moat, leaves us excited for how the portfolio is currently positioned. We remain convicted. 

The performance data represents past performance & does not guarantee future results. 
Investment return & principal value of an investment will fluctuate, so an investor’s 
shares may be worth more or less than original cost when sold. Current performance may 
be higher or lower than quoted performance. Returns are expressed in US dollars, & 
periods >1 year are annualized. Returns are calculated net of all fund fees and expenses. 
Net returns shown include the deduction of the highest sub-advisory fee charged to our 
clients in sub-advisory arrangements, 0.15%. This is the maximum subadvisory fee paid 
during the time periods presented, and individual accounts may pay a lower effective fee. 
For our fee schedule please refer to Form ADV 2A, which is available upon request. 
Actual client results may be lower based on imposition of additional advisory fees, 
platform fees, & custodial fees charged by firms. 

The strategy’s best performer during the quarter was Broadcom, Inc. (+35.9%) as the company continued to benefit from the hype surrounding artificial intelligence (“AI”). We believe that Broadcom may be one of the few initial companies what will have tangible benefits from the innovative technology. Adobe Inc. (+26.9%) is also an AI beneficiary as it has seen results of subscriber growth in its generative AI-supported photoshop program, Firefly. Both of these companies benefitted from valuation expansion, as sentiment around the names continued to increase. As always, we did have a few under-performers, specifically Dollar General (-19.1%), as the company has a very difficult quarter. Newly added Progressive Corp. (-7.4%) also trailed, given some headwinds in FL. 

During periods of volatility, we tend to have elevated turnover, given market dislocations. Year-to-date, turnover remains elevated, even though we did not make any trades during the quarter. As a reminder, we had two trades that positioned the portfolio to be more defensive in nature. We sold our two best performing stocks, Nvidia Corp. and PulteGroup, as we believed that the stocks would take a breather, given their ferocious rally during the quarter. With these trades, we continued to bring down overall portfolio valuation, while increasing the dividend yield of the portfolio. With our proceeds, we purchased Progressive Inc. (PGR) as we believe the company embodies a competitive moat that can provide a long-term runway of growth. Lastly, we bought Broadcom Inc. (AVGO), which is a play for the “cyclically nervous”, given better visibility and control of their semiconductor business. The latter, performed well in the quarter.

Conclusion

Lastly, let’s touch base on the Aptus Compounder’s competitive advantage. Our biggest advantages is time. One of our most difficult tasks, when qualitatively selecting a company to invest in, is the long-term execution of a management team. That’s why we have created the Aptus Sleeves – Core, Value, and Growth to help monitor the actions and effectiveness of management teams over the course of time. We want to invest in management teams that continually execute, have shared interests with investors and efficiently invest in the future. 

To exploit this advantage, we need time. This sentence may make one believe that we have been underperforming – but that is far from the truth. We have navigated the current environment quite well. In fact, we remain highly convicted on every position in the Aptus Compounder Sleeve.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible. The S&P 500® Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.

The content and/or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors.  Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act.  If you choose to utilize or cite material, we recommend the citation be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2307-22.

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