As we wrote last month, markets do not move in straight lines — and the events of recent weeks proved that point in dramatic fashion. The investors that are best prepared for uncertainty are not those who try to predict it, but those already positioned to weather it and benefit from what follows. April gave us a reminder of why remaining invested in quality, diversified portfolios is the right long-term approach.
When the Iran conflict escalated earlier this year, the S&P 500 sold off approximately 10%. The instinct to sell was understandable. But the recovery that followed was the fastest V-shaped rebound on record. The market erased the entire decline in just 11 trading sessions. Investors who moved to the sidelines missed it. Those who stayed invested captured positive returns. April then closed with a gain of roughly 10%, rewarding patience.
Away from the volatility, the fundamentals have continued to improve. Manufacturing activity has expanded for four consecutive months. Corporate earnings are coming in ahead of expectations. Of course, artificial intelligence (AI) remains a meaningful driver of real productivity and profitability across the U.S. economy. These are the conditions that support stock prices over time.
We continue to find attractively valued companies in this environment. Our screening process helps identify businesses that have been overlooked or swept aside amid the AI frenzy. A common misconception about AI is that change will be abrupt and sweeping. History suggests otherwise. Major technologies rarely replace entire systems overnight; they are often adapted in fits and starts. AI, in our view, will likely follow a similar path. That reality creates opportunity. Stock prices fluctuate daily; the underlying value of a business does not change nearly as much. When price dislocates from value, quality companies become available at attractive prices, and that is exactly what our screen helps us identify.
Keysight Technologies (KEYS) is a compelling example of an overlooked AI “adjacent” company within our portfolio. Not typically thought of as an AI company, Keysight’s test and measurement solutions are critical for validating the ultra-high-speed Ethernet optical links that power data center infrastructure. As AI drives explosive demand for data center buildout, Keysight has been a major beneficiary and a significant performer this year. The story is similar for Argan (AGX), which we have highlighted in previous letters. Argan’s core business — engineering and construction of large-scale power plants — has been transformed by the urgent need to power a new generation of data centers. Neither company fits neatly into the AI narrative, yet both are integral to it.
Merger and acquisition activity elsewhere in the portfolio offers different kinds of validation. Masimo Corporation (MASI), a pioneer in non-invasive patient monitoring technology, and Sealed Air (SEE), a global leader in food and protective packaging, have both been acquired at meaningful premiums. Two very different businesses, but the same message: when companies are built with durable advantages and strong fundamentals, the market eventually recognizes their value.
McCormick (MKC) is another example of the kind of opportunity that emerges when the market is hyper-focused elsewhere. While investors have been fixated on AI, McCormick was quietly consolidating its business. In April, MKC announced a landmark combination with Unilever’s food business in a nearly $45 billion deal. The transaction brings iconic brands like Hellmann’s and Knorr under the McCormick umbrella, creating a global condiments and flavor powerhouse with an estimated $20 billion in annual revenue. It is exactly the kind of disciplined strategic thinking by management that we look for when investing in a company.
The events of recent months, a sharp selloff, a record recovery, strong fundamentals, and portfolio companies both attracting buyers and making transformative acquisitions, reinforce our approach. Remaining invested and diversified is how long-term compounding works. We are grateful for your continued trust and look forward to speaking with you about your portfolio.
