The overall macro environment provided tailwinds for US equities in the first quarter of 2024 — and growth over value, in particular.  The Russell 2000® Growth Index (the benchmark) rose +7.58% for the first three months of 2024, in comparison to the value counterpart’s +2.90% gain.  Hood River’s US Small Cap strategy rose +14.23% (net of fees) for the quarter, outpacing the benchmark by 665 basis points (“bps”).  This places the strategy up +1,047 bps (net) versus the benchmark over a one-year period ending 3/31/2024.

The majority of the strategy’s alpha for the quarter was driven by stock selection (+582 bps), which is to be expected given Hood River’s proprietary, fundamental research process.  Sectors contributing the most to stock selection included industrials (+527 bps), consumer discretionary (+187 bps), and materials (+102 bps). Across industrials, consumer discretionary, materials, and financials, the strategy had limited downside stock detractors, specifically tied to negative forward outlooks, which helped performance in all of those sectors.  With macro a little less volatile, stocks have become more linked to fundamental outlooks, which is good for the strategy.

Detracting sectors included information technology (-321 bps), health care (-35 bps), and energy (-12 bps).  Hood River’s underweight in Super Micro and MicroStrategy hurt technology performance.  The index has experienced extreme market capitalization volatility and when those stocks leave it in June along with several others, the index’s market capitalization will most likely take a large step function down. 

From a macro perspective, the US economy has shown resilience and adaptability in the face of various challenges.  Worries of a looming recession have subsided but concerns of interest rates remaining higher for longer persist.  Indeed, recent data points on the state of the labor market and inflation suggest the anticipated Fed rate cut may be pushed out in the calendar.  The biggest risk, in our view, is if inflation ticks up in a meaningful way, causing the Fed to raise rates before cutting them once again. 

This is not our base case scenario, however.  Through our hundreds of interactions during the quarter with management teams, customers, suppliers, etc., we believe the US should avoid a recession and pricing pressures should not be sufficient to warrant a rate hike.  Under this scenario, US small caps should stand to benefit.  If rates are flat to down, we believe this would create a good environment for US small caps.  Despite the recent rally in small caps, valuations remain attractive.  The Russell 2000® Growth Index is trading at 19.4x 2025 earnings versus the S&P 500’s 20.0x — the former typically trades at a ~20% premium to the latter.  Further, the Russell 2000® Index is trading at 14.0x 2025 earnings — the more ‘core’ small cap index is relatively cheaper as it includes companies with lower multiples and lower growth, e.g. in the materials, financials, and health care services sectors.  Hood River has historically found attractive investments across the ‘growth’ and ‘core’ spectrums. 

In general, our conversations with management teams during Q1 suggest they are operating with increased confidence.  Most do not see demand deteriorating, are hiring up and down the supply chain, plan to make investments, and are more assured in their ability to forecast.  Thus, we feel fairly good about investors’ 2024 expectations and are finding companies that we believe are set up for positive earnings revisions.  As we mentioned in the Q4 2023 commentary, historically we have done well around broader market inflections.

Heading into Q2, our portfolio remains fairly close to the Russell 2000® Growth Index weightings.  Our largest overweight is industrials (+730 bps), which as we’ve written in the past, is generally a catch-all for companies that don’t fit cleanly in another sector.  In fact, many of our AI-related investments are classified as industrials.  Our largest underweight is health care (-490 bps) — this is largely due to buy-outs during the quarter.

The investment team remains diligent as we head into Q2 to ensure our best ideas are reflected in the portfolio.  Thank you for your time in reading this commentary — we greatly appreciate your partnership and confidence in the Hood River team.  Please reach out to our marketing team if you would like additional details or to schedule a call.

Brian Smoluch & David Swank

Investors in Hood River’s Small-Cap Growth strategy acknowledge and agree that (I) any information provided by the Firm is not a recommendation to invest in the strategy and that the Firm is not undertaking to provide any investment advice to the investor (impartial or otherwise), or to give advice to the investor in a fiduciary capacity in connection with an investment in the strategy and, accordingly, no part of any compensation received by the Firm is for the provision of investment advice to the investor and (II) Hood River has a financial interest in the investor’s investment in the strategy on account of the fees and other compensation the Firm expects to receive from the client.
Hood River Capital Management LLC, a Delaware limited liability company, is a registered investment adviser under the Investment Advisers Act of 1940. The Firm offers investment advisory services to individuals, pension and profit-sharing plans, trusts, estates, corporations, as well as other institutional clients. Hood River has an arms-length service level agreement with Mar Vista Investment Partners, a registered investment adviser, to provide back and middle office services. For purposes of compliance with GIPS®, Hood River has defined itself to not include bundled/WRAP fee accounts in the firm’s assets. Hood River maintains a complete list and description of firm composites and a list of broadly distributed pooled funds, which is available upon request.
On 01/01/13, Brian Smoluch, Robert Marvin and David Swank formed Hood River to manage a small-cap growth strategy. Brian Smoluch, Robert Marvin and David Swank were dual employees until 05/31/13 when all of the assets under their management at Roxbury Capital Management, LLC transitioned to Hood River through a sub-advisory arrangement. On 1/20/15, Hood River finalized an agreement that put 100% of its equity in the hands of Hood River’s three Principals, divided equally among them. All assets under management are managed by Hood River. Information provided for the period from June 2002 through December 2012 represents the performance of portfolios managed by Mr. Smoluch, Mr. Marvin and Mr. Swank while employed by Roxbury. Hood River claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of the CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Benchmark returns are not covered by the report of independent verifiers. Performance prior to 01/01/13 meets GIPS® portability requirements. ACA served as the verifier, conducted a verification and examined the composite’s performance history that was ported over to Hood River prior to 1/1/13.
The Small-Cap Growth composite was created in 2002 with an inception date of 06/30/02. On 01/01/13 the name of the composite changed from Small-Cap Growth (Portland Team) to Small-Cap Growth. All returns are based in U.S. dollars and are computed using a time-weighted total rate of return. The composite is defined to include all fully discretionary, taxable and tax-exempt portfolios with a minimum portfolio value of $500,000 managed in accordance with Hood River’s Small-Cap Growth strategy and that paid for execution on a transaction basis. Any account crossing over the composite’s minimum threshold due to contributions shall be included in the composite at the end of the month it increased in value. Any account which drops below 65% of the composite’s minimum threshold because of considerable cash withdrawals and not due to manager performance will be removed from the composite at the beginning of the month it declines in market value.
The benchmark is the Russell 2000® Growth Index, defined as an unmanaged, capitalization weighted index of those Russell 2,000 companies with higher price-to-book ratios and higher forecasted growth values. Index returns include dividends and/or interest income and do not reflect fees or expenses. In addition, unlike the composite, which periodically maintains a cash position, the Russell 2000® Growth Index is fully invested. Investors cannot directly invest in an index.
For returns presented gross of fees, results were calculated prior to a deduction for investment management fees. Client returns will be reduced by Hood River’s investment management fees. The fee schedule is disclosed in Part 2A of Form ADV filed with the Securities and Exchange Commission. Performance results presented reflect the reinvestment of dividends and other earnings. Gross performance is net of all transaction costs. Net performance is net of transaction costs, the maximum performance-based fees if applicable and actual management fees, but before any custodial fees. All returns are calculated net of withholding taxes on dividends and interest. Actual results may differ from composite results depending upon the size of the portfolio, investment objectives and restrictions, the amount of transaction and related costs, the inception date of the portfolio and other factors. Policies for valuing portfolios, calculating performance, and preparing GIPS® Composite Reports are available upon request.
Information has been gathered from sources that are considered reliable, however its accuracy cannot be guaranteed. The security mentioned in this letter was held in the account of a Small-Cap Growth client that Hood River believes to be representative of the accounts that Hood River manages for this investment strategy during the period from December 31, 2023-March 31, 2024. Other Hood River clients managed with different investment objectives may hold different securities than those listed. The securities listed in this letter should not be considered a recommendation to purchase or sell any particular security. The reader should not assume that investments in the specific securities identified herein were or will be profitable.  Sector attribution information is as of 12/31/23 in an account of a client that Hood River believes to be representative of the Small-Cap Growth accounts Hood River manages. Clients of Hood River managed with different investment objectives or restrictions may have different sector performance and daily beta than those listed. Information is provided as supplemental to the Small-Cap Growth GIPS® Composite Report. A Small-Cap Growth GIPS® Composite Report is available upon request by contacting Hood River directly at 561-484-5699 or via email at [email protected].. Past performance is no guarantee of future results. Not FDIC insured, no bank guarantee, may lose value.