CIO Letter Q1 2025

Performance

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For the quarter ended March 31, 2025, our Flagship declined 7.61%, net of fees. The S&P 500 Index lost 4.27%.  We are not satisfied with this outcome.

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Review

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Share prices declined in the first quarter largely because much of the “soft data,” as commentators are calling consumer and business surveys, indicated that the U.S. economy is slowing. Concerns about business spending, especially regarding tech stocks such as those in the Magnificent Seven also frayed investors’ nerves. The “hard data,” such a spending, job creation and GDP growth indicate an economy that is still growing at a reasonable pace.

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The week after the first quarter ended, our government announced its intent to impose high tariffs on almost all our trading partners. There may be substance and purpose to the new tariff barriers but to most of the world, their roll-out did not show the deft touch of statecraft. Nonetheless, several countries have declared their desire to hammer out bilateral trade agreements with our government. Discussions to renegotiating economic agreements with countries such as the U.K., Vietnam, Japan, the EU are underway and may lead to worthwhile and calming outcomes. In reaction to the tariff announcement, the Chairman of the Federal Reserve Bank stated that tariffs will most likely result in, “slower growth and higher inflation.”  

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One is reminded of the seventeenth-century French playwright who said, “To meet with approval, plans need to have succeeded.”  Investors, most foreign governments and the financial press have withheld their approval as last week’s declines in the major indices attest.  

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Lastly, the holdings in your portfolio continue to have good growth in earnings power.  We estimate that for the first quarter of 2025 the Look-through Earnings of your investments grew in aggregate 17% .  For the year 2025, we estimate that the Look-through Earnings of the portfolios will grow 21% which we consider to be very strong growth.  

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We made no significant changes to the portfolios.

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Emerging Opportunities

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Grey clouds darken the future. Investors fear the possibility of a global trade war and the slowdown that would accompany it. Worse yet is a slowdown in which inflation stays the same or even worsens.

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The year-to-date decline of the S&P 500 Index, however, has begun to unearth strong investment opportunities in the portfolios.  In aggregate, the holdings in your portfolios are selling at 11X-12X our estimated earnings for 2030. This valuation is a little more than March of 2020, the Covid-induced stock market low, and within measuring distance of the bear market low in early 2009.    

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It increasingly appears that there may be a near-term slowdown that might hurt the earnings growth of many of the companies in the portfolio; however, we remain focused on their long-term prospects as we have during past periods of volatility.  As you may recall, in 2020, the year there was a global shutdown and U.S. unemployment increased 15%; in that year three-quarters of our holdings had notable earnings gains.  During the five- year period, 2019 to 2024, the earnings of our holdings grew 16.3% on an annualized basis (more than twice the rate of the typical S&P 500 company) despite the two bear market cracks that occurred during that time.  We believe that strongly growing, exceptional companies adjust and course correct.  Moreover, many of the shares we own on your behalf were among our holdings in the 2020 Covid collapse and the 2022 downturn.  

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Conclusions

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If we are not already nearing an important bottom for the exceptional, high-quality growth businesses we prefer, we believe that we may be getting close.  Few of us are prescient enough to pick the end of a market decline but our view is that prices are becoming attractive now, and excellent gains from this level are possible over the next few years.  

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My colleagues and I wish you a prosperous and productive spring.  

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Very truly yours,

Thomas M. Valenzuela

Chief Investment Officer

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* Performance Disclosures

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The returns for the first quarter of 2025 is the performance of an account (“Flagship Portfolio”) that the Firm believes fairly represents the performance of the Stewart Asset Management Team’s (“SAM”) strategy (“Strategy”).  The “net” returns presented are after the deduction of management fees as well as other expenses, including costs associated with brokerage. The returns provided are based on performance of the Flagship Portfolio starting from January 1, 2025 to March 31, 2025.

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Annualized returns provided herein are based on performance of the Flagship Portfolio starting from January 1, 2019 to December 31, 2024. Performance returns reflect the average annual rates of return.  Performance from January 1, 2019 to March 14, 2024, reflects SAM’s investment performance as a team at Stewart Asset Management, LLC, which was a period prior to SAM’s move to and continued management of the Strategy at Ingalls & Snyder, LLC (“Ingalls”).  Generally, the Strategy maintains an allocation ranging from 1% to 4% in cash.

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In addition to the annualized returns mentioned in this letter, the returns from April 1, 2024 to March 31, 2025 was 1.21%, net of fees.  The annualized returns for a 10-year period from April 1, 2015 to March 31, 2025 was 13.57, net of fees, and the performance for a 5-year period from April 1, 2020 to March 31, 2025 is 16.63%, net of fees.

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Ingalls believes that the stated performance is an accurate representation of SAM's prior performance. The Flagship Portfolio represents how SAM generally implements its investment process under normal market conditions.  Past performance is not an indication of future results. The performance of each client’s managed account may differ due to specific investment guidelines, restrictions and time period which the account has been open and under the management of SAM. Accordingly, individual results will vary.  

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Additional Disclosures

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This Strategy are subject to market risk, which is the possibility that the market values of securities owned in an account will decline. Accordingly, you can lose money investing in this Strategy.  Please be aware that this Strategy may be subject to certain additional risks. In general, equity securities' values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. American Depositary Receipts (ADRs) represent an ownership interest in securities of foreign companies and involve many of the same risks as those associated with direct investment in foreign securities, including currency, political, economic and market risks.  The Strategy may, from time to time, invest in stocks of small- and medium-capitalization companies which entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies.

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The Flagship Portfolio has employed the investment strategy in a similar manner to that employed in the SAM’s separately managed accounts (“SMAs”). However, portfolio management decisions made for the Flagship Portfolio may differ.  The holdings and portfolio activity in the Flagship Portfolio may not be representative of some SMAs managed under this Strategy due to differing investment guidelines, client restrictions, and the time period the account was opened and managed by SAM.

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There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.  Please consider the investment objectives, risks and fees of the Strategy carefully before investing.

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Any third-party data has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy, completeness or timeliness. Third party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data.

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Ingalls & Snyder, LLC is a SEC registered investment adviser and FINRA member broker dealer. For important information about the investment manager, please refer to Form ADV Part 2 and Form CRS which are located here.

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¹ “Flagship” refers to an account that the Firm believes fairly represents the Stewart Asset Management Team’s strategy (“Strategy”), and how it generally implements its investment process under normal market conditions. The return provided is the performance of the Flagship that the Firm believes fairly represents the performance of the Strategy for the first quarter of 2025.  

² "Look-Through Earnings" refers to an investment approach where an investor evaluates a company's long-term earning capacity rather than focusing solely on its current reported financials or short-term fluctuations. This concept often involves assessing the underlying fundamentals and potential of the business, including its ability to generate sustainable free cash flow, its competitive position, and its exposure to favorable market trends.