MARKET REVIEW & MACRO OBSERVATIONS
- In 2Q24, the Russell 2000 Growth declined -2.92% and the Russell 3000 increased 3.22%.
- The Russell 3000 provides exposure to the largest 3,000 U.S.-listed companies. Effective June 30, mutual funds are required by the SEC to issue Tailored Shareholder Reports (TSR). As part of the TSR, funds must compare themselves to a broad-based market index. Needham chose the Russell 3000, which includes the largest 3,000 investable U.S. equities. We note the ten largest companies total about 1/3 of the index and include Microsoft Corp. (MSFT), Apple Inc. (AAPL), NVIDIA Corp. (NVDA), Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN) and Meta Platforms Inc. (META).
- As in 1Q24, inflation in April and May was over 3.0%, above the Federal Reserve’s 2.0% target. In May, the Federal Reserve held rates at 5.25-5.50%.
- 10-year Treasury yields increased to a peak of 4.7% in late April and closed the quarter at 4.2%. In October 2023, the 10- year hit 5.0%, which was the highest level since 2007.
IMPACTS ON PORTFOLIO PERFORMANCE
- In 2Q24, the Fund’s Institutional (NEAIX) and Retail (NEAGX) classes were down -1.80% and -1.90%, respectively,
outperforming the Russell 2000 Growth and underperforming the Russell 3000. - The Fund’s top contributors were:
- Vital Farms, Inc. (VITL), which offers a range of ethically produced eggs and butter. We were impressed by the company at its July 2020 IPO but thought the $22 IPO price was too expensive. The Fund first purchased Vital Farms in 1Q24 at $15/share.Vital Farms reported strong results in April. It is rare that the Fund benefits from such a rapid return on our investment. Look for Vital Farms’ eggs on your grocery shelves!
- Aspen Aerogels, Inc. (ASPN) reported strong earnings and outlook for its aerogel-based insulation. Aspen serves the electric vehicle (EV) and energy industrial markets. Both markets are experiencing strong demand. Aspen’s products are standard on General Motors Ultium EV platform. We are watching GM’s Equinox EV, which lists at $43,295, with a lower-priced model expected later in 2024. This is the first GM EV to address a large market.
- Veeco Instruments Inc. (VECO), which reported strong results. Veeco supplies equipment that is used for manufacturing
leading-edge logic and memory semiconductors.
- The Fund’s top detractors in 2Q24 were:
- Super Micro Computer, Inc. (SMCI), was the leading detractor for 2Q24 despite reporting a strong quarter and guidance in 1Q24. That said, the stock price fell as investors worried about how long AI spending will last and about Super Micro’s competitive position. We remain positive on both. The Fund has owned Super Micro since 2009.
- Smith-Midland Corp. (SMID), which reported solid 4Q23 and 1Q24 results and was added to the Russell 2000 Index. The stock entered the quarter at an all-time high and retreated despite the results.
- FARO Technologies Inc. (FARO), which reported short of estimates for the quarter. We believe the new management may create value by improving operations and potentially selling the company.
- With 8% turnover, the Fund does not rotate into or out of sectors but invests in companies we believe may outperform over the long term.
PORTFOLIO CHANGES
- Once again, the Fund had significant inflows in the quarter. It ended the quarter with a 15% cash position, down from 19% on
March 28. We had a productive quarter with additions to existing positions and new investments. - The largest new holdings are:
- Vishay Intertechnology, Inc. (VSH) manufactures discrete semiconductors and passive components. At it’s first-ever investor day in April, Vishay outlined a plan for investment and growth. Vishay went public in 1962 and is an over 20-year holding of the Needham Growth Fund (NEEGX/ NEEIX).
- Centuri Holdings, Inc. (CTRI) was spun out of Southwest Gas Holdings, Inc. (SWX) with an IPO in April. Centuri is a utility infrastructure services company, with Gas Utility Services, and Electric Utility Services segments.
- MDU Resources Group, Inc. (MDU) has an electric utility serving Montana, North Dakota, South Dakota, and Wyoming. MDU also distributes natural gas in Montana, North Dakota, South Dakota, Wyoming, Idaho, Minnesota, Oregon, and Washington. Like Southwest Gas, MDU announced plans to spin-out its Construction Services business.The spin-out, named Everus Construction Group, Inc, is expected later in 2024. We believe the grid needs investment and Centuri and MDU could be beneficiaries.
- Universal Technical Institute, Inc. (UTI) and Lincoln Educational Services Corporation (LINC) are leading career training schools for the trades. We strongly believe the U.S. economy will need more skilled trade workers. UTI and Lincoln serve largely different local markets with their campuses. Rather than try to pick one, we believe both will benefit from the trend.
- Major additions:
- The Fund’s largest additions were to Hammond Power Solutions, Inc. Class A (HPS.A CAN), PDF Solutions Inc. (PDFS) and Huntington Ingalls Industries, Inc. (HII).
- Positions Sold:
- The Fund completed its exit of Vacasa, Inc. (VCSA). Vacasa uses data analytics and technology to provide vacation property management services. The company excels on the Oregon Coast, but failed to scale the business with quality and financial returns. We exited the very small position and realized tax losses.
- The Fund trimmed a few holdings, mostly to realize tax losses.
OPPORTUNITIES & LOOKING FORWARD
- Our major investment theme remains the importance of U.S. infrastructure—the lesser known “pick and shovel” providers. Our companies sell into data centers, life sciences labs, semiconductor and other manufacturing plants, roads, airports, airbases, power plants, and more. The U.S. has underinvested in these areas, so there could be long tail winds.
- I’d like to highlight four areas present throughout our investments:
- Semiconductor manufacturing
- Data Centers/AI processing
- U.S. Manufacturing
- Defense technology
- We believe the AI buildout is still in an early stage. Economic returns on AI projects could be a big deal for productivity and the economy. We are hearing from companies about increases in sales from the application of AI.