Market Review & Macro Observations
- In 2Q25, the Russell 2000 Growth and Russell 3000 returned 11.97% and 10.99%, respectively.
- The market was rocked by President Trump’s tariff pronouncements. While the daily volatility was painful, if you had looked only at your month-end statements and ignored the daily news, you would have no idea there were any issues. There is a lesson for all of us.
- The President announced tariffs on April 2 after the market close. The market fell April 3 and bottomed April 7. We tried to determine the impact of the proposed tariffs and concluded that our portfolio companies are adaptable and tariffs may have little impact.
- Economic data and Federal Reserve announcements faded from importance in the face of trade policy discussions.
- We believe it is important to follow Treasury Secretary Scott Bessent’s public comments. He has discussed targets of 3% GDP growth, 3% deficit to GDP, and increasing oil production by three million barrels per day. He has also emphasized that his priority is to grow the U.S. economy faster than its debt, and that reshoring U.S. manufacturing, even if it requires dollar devaluation, is a matter of strategic security. The One Big Beautiful Bill Act supports this agenda by offering accelerated depreciation for manufacturing facilities and allowing companies to expense research and development costs, providing incentives for companies, domestic and abroad, to increase investment in the United States.
- Many of our investments are focused on infrastructure broadly defined and could benefit from accelerated reshoring of manufacturing.
Impacts on Performance
- In 2Q25, the Fund’s Institutional (NEAIX) and Retail (NEAGX) classes returned 26.92% and 26.75%, respectively, significantly outperforming the Russell 2000 Growth and the Russell 3000. Among the Fund’s many contributors:
- ThredUP, Inc. (TDUP) is a leading marketplace for the resale of lightly used clothing. ThredUP’s U.S. operations were EBITDA positive for the sixth consecutive quarter. We believe ThredUP could benefit from tariffs placed on clothing manufactured abroad. It could also benefit from the elimination of the de minimis tariff exemption, which allows foreign companies, including leading Chinese e-commerce companies Temu and Shein, to ship packages of under $800 into the United States without tariffs. The de minimis tariff exemption ended May 2.
- nLIGHT, Inc. (LASR) is a leading U.S.-based manufacturer of laser diodes and systems that sells into commercial and defense markets. Our investment thesis is that within five years, high-power lasers could be put in use to defend against drone attacks. nLIGHT has had low-margin DoD funding for several years. In the quarter, Israel announced that an adapted version of its Iron Beam defense system that incorporated a high-power laser was used to shoot down “scores of enemy threats,” including rockets, mortars, and drones. After years of research, the U.S. Army reported a successful test at Fort Sills and inclusion of the Enduring High Energy Laser program in the fiscal year 2026 budget. This will be the first U.S. directed-energy program of record. These announcements are happening several years earlier than we had expected.
- FARO Technologies, Inc. (FARO) provides 3D measurement and imaging solutions including portable measurement arms, laser scanners and trackers, and software used in manufacturing, construction, and public service markets. For years, the company spent too much effort pursuing unrealistic growth targets. CEO Peter Lau joined the company in July 2023 and transformed the business. He focused the company, controlled expenses, and achieved realistic growth. In May, AMETEK, Inc. (AME) announced the acquisition of FARO. We expect FARO will be our third acquisition to close this year, after Altair Engineering, Inc. (formerly ALTR) in 1Q and Logility Supply Chain Solutions, Inc. (formerly LGTY) in 2Q.
- The Fund’s top detractor was small relative to the contributors in this very positive quarter:
- Northern Technologies International Corp. (NTIC) supplies chemicals for rust prevention for automotive and other industries. The company is investing in sales for its ZERUST corrosion mitigation solutions for storage tanks and pipeline casings for the oil and gas industry. Northern Technologies’ Natur-Tec division uses its materials expertise to make biodegradable resins, plastic bin-liners, and cutlery products. ZERUST and Natur-Tec announced double digit, year-over-year revenue declines, although both are expected to turn positive in the second half of 2025.
- With 14% annualized 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
- The Fund ended the quarter with a 1.0% cash position. The three largest new investments were in Select Water Solutions, Inc. Class A (WTTR), Sportradar Group AG Class A (SRAD), and in the IPO of Circle Internet Group, Inc. (CRCL). The three largest additions to established positions were Vishay Intertechnology, Inc. (VSH), Thinkific Labs, Inc. (THNC), and TETRA Technologies, Inc. (TTI).
- The Fund exited its position in Logility after its acquisition by private-equity backed Aptean closed. The largest reductions to existing positions were thredUP, nLight and Carter’s Inc. (CRI).
Opportunities & Looking Forward
- We believe that to achieve our mission of creating wealth for long-term investors, we must assume that, a few years out, the U.S. economy will be largely fine. It’s interesting to consider the news and the bear cases, but to create wealth over time requires one to be an optimist at heart.
- The Trump Administration’s economic development strategy has a goal of revitalizing manufacturing in the United States. Our major investment theme remains the importance of U.S. infrastructure—the lesser-known “pick and shovel” providers. Our portfolio companies sell into data centers, life sciences labs, semiconductor and other manufacturing plants, roads, airports, power plants, and more. Despite the current uncertainty, the U.S. has underinvested in these areas, so there may be long tailwinds. After this market pull-back, we believe there may be compelling valuations in our small-cap “picks and shovels” universe.
- 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.
- For additional information, please see The Growth Factor Vol. 44, “The Tariff Tantrum and Opportunities,” which we published during the quarter.
[1] https://www.needhamfunds.com/growth-factor/the-tariff-tantrum-and-opportunities/