Commentary

Concentrated Strategy

December 31, 2023

THE MARKET ENVIRONMENT

U.S. equity markets showed strength during the fourth quarter, despite pressure in October when Hamas, an Islamist political and military organization, orchestrated an attack against Israel, shaking markets and the geopolitical landscape. The U.S. reported its strongest quarter of gross domestic product growth in nearly two years at 4.3% annualized, which, along with a resilient labor market, added fuel to the narrative that a soft landing for the economy is possible. The U.S. dollar index declined nearly 5%, marking its largest quarterly decline of the year, and WTI Crude fell over 20%.

The U.S. 10-year yield reached as high as 5% in the quarter before declining and ending the period around 3.86% as investors continue to digest economic data and expectations on interest rates. In November and December, the U.S. Federal Reserve met and held its benchmark interest rate steady at 5.50%. The December meeting showed a noticeable shift in rhetoric from the Federal Open Market Committee, which appears more dovish than in recent meetings. Headline inflation in the U.S. declined during the quarter and ended at 3.1% in the most recent release.

We believe our intensive research process and focus on the long term help us find opportunities despite the pervasive theme of the time. When the market does not separate the macro from the micro, there is an exploitable opportunity for long-term investors, such as ourselves. We use moments of uncertainty and volatility to strategically position our portfolios for long-term success and believe this approach best positions us for achieving the protection and appreciation of our investors’ capital over the long term.

THE PORTFOLIO

Top Performers:
Capital One Financial, which specializes in consumer finance, was the top contributor for the quarter due to strong third-quarter results. The company’s earnings per share of $4.45 was about 37% above consensus estimates, and its loan growth, net interest margin, non-interest income, operating expenses and charge-offs were all better than consensus estimates. In regard to credit quality, management noted that while portfolio-wide monthly delinquency and charge-off rates slightly exceeded 2019 levels, those trends were stabilizing. In addition, Capital One maintains sizeable capital and liquidity buffers. Overall, we appreciate the company’s value-focused management team, consistent reinvestment in technology development and stable deposit base.

CBRE Group was a contributor during the fourth quarter. In October, the U.S.-headquartered real estate company released third-quarter results, in our view. We found CBRE’s outsourcing business’ results to be positive as revenue grew 13% organically, the pipeline hit a new record, and margins modestly expanded. Management repurchased around $500 million in shares during the third quarter, which we view as notable following a few slow quarters. We continue to appreciate that around half of the company’s revenues are from stable and recurring fee-based businesses, such as property management. We believe CBRE’s property management segment combined with its brokerage business differentiates its service offerings from some smaller brokerage competitors. We are confident in our investment in CBRE Group, and continue to believe it remains a solid holding for patient investors such as ourselves.

Charles Schwab was a contributor during the fourth quarter. The U.S.-headquartered financial firm released November metrics with an increase in core net new assets of $21.7 billion. Importantly, the firm reported a month-over-month increase in transactional sweep cash levels of $5 billion, representing the largest monthly increase since March 2022. This is notable as declining cash sweep has weighed negatively on earnings over the last year resulting in the financial firm taking on high-cost short-term funding to manage the outflow. We believe Charles Schwab’s wide-moat business model and enduring competitive advantages will support years of rapid growth in assets and earnings.

Bottom Performers:
Charter Communications was a detractor during the fourth quarter. In October, the U.S.-headquartered communication services company’s share price fell as its third-quarter broadband subscriptions fell short of consensus estimates. Despite the shortfall, volume remains above peers. Adjusted earnings were in-line with consensus estimates, and we believe should improve next year as there are multiple tailwinds including expense growth, mobile promotion roll-offs and a higher contribution from rural subs. In December, Charter’s presentation at the UBS conference resulted in the company’s volatility. CFO Jessica Fischer’s comments during the presentation led investors to conclude that unfavorable trends in the third quarter have continued. “In our third quarter call…we had seen a little bit of carryover churn related to the combination of Disney and rate impacts that occurred inside of Q3. November has been similarly soft, so I can certainly see that it’s likely that we could end up with negative internet net ads inside of Q4.” However, management believes this is a short-term challenge and that its total broadband opportunity in the long term has not changed. Despite the market’s reaction in the short term, we believe that Charter Communications is a solid investment.

ConocoPhillips was a detractor during the fourth quarter. In October, the U.S.-based energy company completed its purchase of the remaining 50% interest in Surmont from TotalEnergies EP Canada Ltd., a deal that the market reacted unfavorably to in May. In December, Conoco announced its plans to proceed with the development of the Willow project in Alaska, after Judge Sharon Gleason upheld the Biden administration’s approval of the company’s oil project during court in November. In our view, Conoco is one of the highest quality independent oil producers in the world today and has decades of low-cost drilling inventory in attractive oil basins, minimal leverage and industry-leading returns on invested capital. We continue to believe in the long-term prospects of ConocoPhillips.

Wendy’s was a detractor during the fourth quarter. The U.S.-headquartered consumer discretionary company reported third-quarter results in November. Same-restaurant sales trends accelerated each month during the quarter with momentum projected to continue into the fourth quarter. We appreciate that Wendy’s held dollar and traffic share in the quick-service restaurant burger category despite strong performance from its peers. Wendy’s saw decent progress in unit development during the third quarter, in our view, with 51 net openings globally. The company is on pace to increase around 70 net units during the fourth quarter, which would represent the strongest quarter Wendy’s has had in more than 19 years. We continue to believe in the long-term prospects of Wendy’s.

During the quarter, we purchased shares of American Express, Lithia Motors Cl A, Paycom Software and Phillips 66. We eliminated Amazon, BlackRock, Oracle and Wendy’s from the portfolio.

Past performance is no guarantee of future results.

The specific securities identified and described in this report do not represent all the securities purchased, sold, or recommended to advisory clients. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time one receives this report or that securities sold have not been repurchased. It should not be assumed that any of the securities, transactions, or holdings discussed herein were or will prove to be profitable. Holdings are representative of Harris Associates L.P.’s Concentrated Value Equity composite as of 12/31/2023.

Certain comments herein are based on current expectations and are considered “forward-looking statements”. These forward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.

The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.