Wasatch Fund: Semi-Annual letter (March 2022)
Wasatch Fund
Wasatch Core Growth Fund
The Wasatch Core Growth Fund is managed by a team of Wasatch portfolio managers led by JB Taylor, Paul Lambert and Mike Valentine.
Trex Co., Inc. ($5.1 billion)
Trex Co., Inc.—a manufacturer of high-performance composite (non-wood) decking and accessories. The company has continued to take market share in composite decking and from traditional suppliers of wood products but faced headwinds during the quarter. Higher energy and logistics costs squeezed margins, and investors became nervous about companies like Trex that thrived during the pandemic when homebound Americans upgraded their living spaces. In addition, fears of rising interest rates disproportionately impacted higher-growth and housing-related companies. However, we believe the company’s leading position in its product category leaves Trex well-positioned to pass along future cost increases. Moreover, higher oil prices aren’t likely to significantly affect costs for the recycled plastic from which the company’s products are made. We continue to be impressed with the company’s strong cash flows.
Hamilton Lane, Inc. ($4.1 billion)
Hamilton Lane, Inc., a traditional investment firm with approximately $850 billion in assets under management/supervision, was also a large detractor. The firm’s financial-data platform, Global Evergreen, has seen promising growth. Hamilton Lane recently reported that the platform accounted for nearly $1.6 billion in assets under management in just over two years since its launch. The success of Global Evergreen is indicative of why we like Hamilton Lane. We expect this well-run firm will continue to expand quickly. But during the quarter, the stock pulled back on fears of higher interest rates and a temporarily deteriorating environment for raising assets.
HealthEquity, Inc. ($5.2 billion)
HealthEquity, Inc., the largest U.S. non-bank custodian for health-savings accounts (HSAs). Account holders have online access to their HSAs and can compare treatment options, pay medical bills, and receive personalized benefit and clinical information. HealthEquity reported strong growth in its HSA business, with total HSA assets increasing 37% year-over-year and the number of HSAs on the company’s platform up 25% from a year ago. Management’s upwardly revised forecasts for revenues and earnings in the current fiscal year also cheered investors. We believe HealthEquity is largely insulated from supply-chain constraints and rising materials costs, and is well-situated for an environment of higher interest rates.
Holley, Inc. ($316 million)
Holley, Inc., a maker of high-performance automotive parts for car and truck enthusiasts. The company’s loyal customer base, healthy margins and specialized product offerings have enabled it to pass along higher costs and better withstand the impacts of inflation. Investors reacted positively to Holley’s most recent round of acquisitions and the company’s latest earnings report confirmed its organic growth profile. Holley is a former special-purpose acquisition company (SPAC) whose stock was hurt by general concerns over SPACs because they usually issue warrants that can dilute shareholder ownership down the road. Whenever we invest in a former SPAC, we factor potential dilution into our analysis. Last year, we maintained our positive outlook for Holley and were rewarded in the first quarter of 2022.
Wasatch Global Opportunities Fund
The Wasatch Global Opportunities Fund is managed by a team of Wasatch portfolio managers led by JB Taylor, Ajay Krishnan, Ken Applegate and Paul Lambert.
Silergy Corp. ($5.7 billion)
The stock price declined amid a broader selloff in technology shares, as rising interest rates caused some investors to reassess the valuations of growth-oriented companies. Nothing has fundamentally changed for the business, however. The company manufactures high-performance mixed-signal and analog integrated circuits used in a wide array of electronic devices. We continue to believe Silergy’s business model — which is based on complex, analog-design engineering — is difficult to replicate, and provides the company with ample headroom for growth.
Kornit Digital Ltd. ($1.3 billion)
The company makes machines for the environmentally sustainable printing of designs and images on clothing and fabrics. The Covid-19 pandemic highlighted the advantages of Kornit’s on-demand technology, which reduces the need for inventory on hand and in supply chains. Having run up in price significantly during 2021, the stock pulled back in the first quarter of 2022 amid fears that persistent inflation may force the Federal Reserve onto a more aggressive path with respect to interest rates. While other investors pondered this possibility, we considered Kornit’s fundamental strengths: a large and growing addressable market, talented management team, recurring revenue streams and attractive business model with few competitors. In our view, Kornit is positioned for continued market-share gains and revenue growth.
HealthEquity, Inc. ($5.2 billion)
The company is the largest U.S. non-bank custodian for health-savings accounts (HSAs). Account holders have online access to their tax-advantaged HSAs and can compare treatment options, pay medical bills, earn wellness incentives, and receive personalized benefit and clinical information. HealthEquity reported strong growth in its HSA business during the quarter. Management’s upwardly revised forecasts for revenues and earnings in the current fiscal year also cheered investors. We believe HealthEquity is largely insulated from supply-chain constraints and rising materials costs. The company also appears well-positioned for an environment of higher interest rates.
Wasatch Global Select Fund
The Wasatch Global Select Fund is managed by a team of Wasatch portfolio managers led by Ken Applegate, Paul Lambert, Linda Lasater and Mike Valentine.
Silergy Corp. ($5.7 billion)
The stock price declined amid a broader selloff in technology shares, as rising interest rates caused some investors to reassess the valuations of growth-oriented companies. Nothing has fundamentally changed for the business, however. The company manufactures high-performance mixed-signal and analog integrated circuits used in a wide array of electronic devices. We continue to believe Silergy’s business model—which is based on complex, analog-design engineering—is difficult to replicate, and provides the company with ample headroom for growth.
HealthEquity, Inc. ($5.2 billion)
The company is the largest U.S. non-bank custodian for health-savings accounts (HSAs). Account holders have online access to their tax-advantaged HSAs and can compare treatment options, pay medical bills, earn wellness incentives, and receive personalized benefit and clinical information. HealthEquity reported strong growth in its HSA business, with total HSA assets up 37% year-over-year and 25% growth in the number of HSAs on the company’s platform. Management’s upwardly revised forecasts for revenues and earnings in the current fiscal year also cheered investors. We believe HealthEquity is largely insulated from supply-chain constraints and rising materials costs. The company also appears well-positioned for an environment of higher interest rates.
Wasatch Long/Short Alpha Fund
The Wasatch Long/Short Alpha Fund is managed by a team of Wasatch portfolio managers led by Mick Rasmussen.
HealthEquity, Inc. ($5.2 billion)
The company is the largest U.S. non-bank custodian for health-savings accounts (HSAs). Account holders have online access to their tax-advantaged HSAs and can compare treatment options, pay medical bills, earn wellness incentives, and receive personalized benefit and clinical information. HealthEquity reported strong growth in its HSA business, with total HSA assets increasing 37% year-over-year and the number of HSAs on the company’s platform up 25% from a year ago. Management’s upwardly revised forecasts for revenues and earnings in the current fiscal year also cheered investors. We believe HealthEquity is largely insulated from supply-chain constraints and rising materials costs, and is well-situated for an environment of higher interest rates.
Century Aluminum Co. ($797 million)
Century produces “primary aluminum,” in both molten and ingot form, through facilities located in West Virginia, South Carolina and Kentucky. The war in Ukraine boosted commodity prices—which benefited companies like Century.
Vroom, Inc. ($174 million)
Vroom, Inc., an online seller of new and used cars, spare parts and accessories. The company also provides maintenance, repair, funding, insurance and vehicle-renting services. While Vroom operates in an important segment of retailing, the company lacks overwhelming competitive advantages, its margins are low, its valuation seems high and its stock has exhibited relatively poor momentum.
Wasatch Micro Cap Fund
The Wasatch Micro Cap Fund is managed by a team of Wasatch portfolio managers led by Ken Korngiebel and Natalie Pesqué.
Grid Dynamics Holdings, Inc. ($943 million)
The company serves Fortune 1000 businesses by providing digital-transformation consulting and implementation services. We see strong demand for Grid’s services in a digital-revolution era. During the quarter, the stock was down because a portion of Grid’s workers are in Ukraine. At the onset of Russia’s invasion, the company quickly shifted work to other areas and relocated its Ukrainian employees to safer locations. Grid’s recent earnings have been strong and customers haven’t shown signs of decreased spending.
Kornit Digital Ltd. ($1.3 billion)
The company makes machines for environmentally sustainable printing on clothing and fabrics. The Covid-19 pandemic highlighted the advantages of Kornit’s on-demand technology, which reduces the need for inventory on hand and in supply chains. Having run up in price significantly during 2021, the stock pulled back in the first quarter of 2022 amid fears that inflation may force the U.S. Federal Reserve to raise interest rates more aggressively. While other investors pondered this possibility, we considered Kornit’s fundamental strengths—a large and growing addressable market, talented management team, recurring revenue streams and attractive business model with relatively few competitors.
Intra-Cellular Therapies, Inc. ($4.9 billion)
Intra-Cellular Therapies, Inc., which develops therapeutics for central nervous system disorders. Intra-Cellular reported robust prescription growth for Caplyta, which was recently approved for the treatment of bipolar depression in adults. Previously labeled for schizophrenia, the drug’s appeal for treating bipolar depression is enhanced by its favorable safety and tolerability profile. Intra-Cellular aims to expand approval for Caplyta to treat major depressive disorder, certain neurologically based sleep disorders and Parkinson’s disease.
Holley, Inc. ($316 million)
The company makes high-performance automotive parts for car and truck enthusiasts. Holley’s loyal customer base, healthy margins and specialized product offerings enable it to pass along higher costs and better withstand the impacts of inflation. Investors reacted positively to Holley’s recent round of acquisitions, which are expected to help unlock large, strategic markets. Holley’s latest earnings report confirmed its organic growth profile, further underpinning confidence in the company’s prospects.
Wasatch Micro Cap Value Fund
The Wasatch Micro Cap Value Fund is managed by a team of Wasatch portfolio managers led by Brian Bythrow and Thomas Bradley.
Grid Dynamics Holdings, Inc. ($943 million)
The Fund’s largest individual detractor from performance was Grid Dynamics Holdings, Inc. The company serves Fortune 1000 businesses by providing digital-transformation consulting and implementation services. We see strong demand for Grid’s services in a digital-revolution era. During the quarter, the stock was down because a portion of Grid’s workers are in Ukraine. At the onset of Russia’s invasion, the company quickly shifted work to other areas and relocated its Ukrainian employees to safer locations. Grid’s recent earnings have been strong, and customers haven’t shown signs of decreased spending.
Evolution Petroleum Corp. ($257 million)
Evolution acquires established oil and gas fields—and applies specialized technology to increase production rates. The stock has clearly benefited from higher energy prices. And we’ve been especially impressed with CEO Jason Brown, who joined the company in 2019. Prior to Mr. Brown’s arrival, Evolution’s balance sheet was overcapitalized. In our view, the balance sheet has now been properly utilized. Moreover, the company has continually raised its dividend, which we see as an additional indication of Mr. Brown’s appropriate financial management of Evolution.
Wasatch Small Cap Growth Fund
The Wasatch Small Cap Growth Fund is managed by a team of Wasatch portfolio managers led by JB Taylor, Ken Korngiebel and Ryan Snow.
Kornit Digital Ltd. ($1.3 billion)
The company makes machines for the environmentally sustainable printing of designs and images on clothing and fabrics. The Covid-19 pandemic highlighted the advantages of Kornit’s on-demand technology, which reduces the need for inventory on hand and in supply chains. Having run up in price significantly during 2021, the stock pulled back in the first quarter of 2022 amid fears that inflation may force the U.S. Federal Reserve to raise interest rates more aggressively. While other investors pondered this possibility, we considered Kornit’s fundamental strengths—a large and growing addressable market, talented management team, recurring revenue streams and attractive business model with relatively few competitors. We think Kornit is positioned for continued market-share gains and annual revenue growth north of 30%.
HealthEquity, Inc. ($5.2 billion)
HealthEquity, Inc., the largest U.S. non-bank custodian for health-savings accounts (HSAs). Account holders have online access to their HSAs and can compare treatment options, pay medical bills, and receive personalized benefit and clinical information. HealthEquity reported strong growth in its HSA business, with total HSA assets increasing 37% year-over-year and the number of HSAs on the company’s platform up 25% from a year ago. Management’s upwardly revised forecasts for revenues and earnings in the current fiscal year also cheered investors. We believe HealthEquity is largely insulated from supply-chain constraints and rising materials costs, and is well-situated for an environment of higher interest rates.
Intra-Cellular Therapies, Inc. ($4.9 billion)
The company develops therapeutics for central nervous system disorders. Intra-Cellular reported robust prescription growth for Caplyta, which was recently approved for the treatment of bipolar depression in adults. Previously labeled for schizophrenia, the drug’s appeal for treating bipolar depression is enhanced by its favorable safety and tolerability profile. Intra-Cellular aims to expand approval of Caplyta to treat major depressive disorder, certain neurologically based sleep disorders and Parkinson’s disease. A post-Covid environment in which patients are returning to in-person health-care visits should also support prescriptions. Now that Intra-Cellular has proven the efficacy of its intellectual property, we view it as a developing pharmaceutical business rather than as a biotech “lottery ticket.”
Wasatch Ultra Growth Fund
The Wasatch Ultra Growth Fund is managed by a team of Wasatch portfolio managers led by John Malooly.
Kornit Digital Ltd. ($1.3 billion)
The company makes machines for environmentally sustainable printing on clothing and fabrics. The Covid-19 pandemic highlighted the advantages of Kornit’s on-demand technology, which reduces the need for inventory on hand and in supply chains. Having run up in price significantly during 2021, the stock pulled back in the first quarter of 2022 amid fears that inflation may force the Fed to raise interest rates more aggressively. While other investors pondered this possibility, we considered Kornit’s fundamental strengths—a large and growing addressable market, talented management team, recurring revenue streams and attractive business model with relatively few competitors. We think Kornit is well-positioned for continued market-share gains.
Trex Co., Inc. ($5.1 billion)
The company manufactures wood-alternative decking primarily from recycled materials. Although higher energy and logistics costs squeezed margins in the company’s most recently reported quarter, Trex raised prices with little impact on demand. We believe the company’s leading position in its product category leaves it well-positioned to pass along future cost increases as well. Moreover, higher oil prices aren’t likely to significantly affect costs for the recycled plastic from which the company’s products are made.
Intra-Cellular Therapies, Inc. ($4.9 billion)
Intra-Cellular Therapies, Inc., which develops therapeutics for central nervous system disorders. Intra-Cellular reported robust prescription growth for Caplyta, which was recently approved for the treatment of bipolar depression Type 1 and Type 2 in adults. Previously labeled for schizophrenia, the drug’s appeal for treating bipolar depression is enhanced by its favorable safety and tolerability profile. Intra-Cellular aims to expand approval for Caplyta to treat major depressive disorder, certain neurologically based sleep disorders and Parkinson’s disease. A post-Covid environment in which patients are returning to in-person health-care visits should also support prescriptions.
HealthEquity, Inc. ($5.2 billion)
HealthEquity, Inc., the largest U.S. non-bank custodian for health-savings accounts (HSAs), was also a significant contributor. Account holders have online access to their HSAs and can compare treatment options, pay medical bills, and receive personalized benefit and clinical information. HealthEquity reported strong growth in its HSA business, with total HSA assets increasing 37% year-over-year and the number of HSAs on the company’s platform up 25% from a year ago. Management’s upwardly revised forecasts for revenues and earnings in the current fiscal year also cheered investors. We believe HealthEquity is largely insulated from supply-chain constraints and rising materials costs, and is well-situated for an environment of higher interest rates.