INVESTMENT SCORECARD
2022 was a strong year for energy and agricultural commodities. Some of the largest contributors to performance in the fourth quarter included firms that enhance the productivity of farming and/or mining globally, including Deere & Co. (3.5% of net assets as of December 31, 2022, +29%), CNH Industrial (1.3%, +44%), and Caterpillar (1.4%, +47%). Oil and gas companies Chevron (0.7%, +26%) and Halliburton (0.3%, +60%) also fit this description. MSG Sports (1.3%, +40%), owner of the New York Knicks and New York Rangers, rebounded strongly as network and venue owner MSG Entertainment (0.4%, +2%) restructured its announced spin-off in a manner favorable to MSGS and sports asset valuations rose. Finally, inflation conduits such as Genuine Parts (2.3%, +17%), O’Reilly Auto Parts (0.9%, +20%), and Mastercard (1.5%, +22%) continued to rise. Facing cyclical headwinds around advertising and secular challenges involving changing consumption behavior, media and telecom companies such as Warner Bros Discovery (0.3%, -17%), Telephone & Data Systems (0.4%, -23%), and The Walt Disney Company (0.5%, -8%) were among the largest detractors in the fourth quarter. Rotation from historic winners, such as Brown-Forman (2.8%, -2%) and Republic Services (1.7%, -5%), also detracted from returns.
The biggest contributor by far to annual return was long-time holding Swedish Match, which was acquired by Philip Morris International. For reasons cited above, Deere & Co. (3.5%, +27%), Genuine Parts (1.4%, +27%), and Caterpillar (1.4%, +19%) were top five contributors to 2022 performance. Energy was the strongest sector (+66%) in the S&P 500, and although the Fund has historically not emphasized commodity industries, holdings in Chevron (0.7%, +58%), EOG Resources (0.5%, +57%), and ExxonMobil (0.4%, +87%) were top contributors. Communications Services, which includes media and telecom stocks as well as internet giants Alphabet (0.6%, -39%) and Meta (0.1%, -48%), was the biggest laggard in the S&P 500 (-40%). Many legacy media companies now trade at multiples not seen since the 2007-08 financial crisis. As mentioned above, media companies’ transition to new direct-to-consumer business models has been painful, but rationalization of content costs has already begun, with consolidation not far behind. This dynamic gives us confidence that many of these securities will be future stars. Sony (2.0%, -39%) was a significant drag owing to concerns about the impact of Microsoft’s proposed acquisition of Activision, chip shortages, currency mismatches, and its own media industry exposure via its TV and film studios.
LET'S TALK STOCKS
Grupo Televisa (TV, Financial) (0.2% of net assets as of December 31, 2022) (TV – $4.56 – NYSE) is Mexico’s largest cable broadband provider and satellite distribution (through its 58.7% ownership of Sky Mexico). In early 2022 Televisa merged its content production and distribution business into U.S.-based Univision in exchange for a 45% stake in the new company. With a dominant position in Spanish-language content, Televisa-Univision is poised to launch a streaming service, called ViX, addressing 600 million Spanish speakers around the world. Meanwhile, Televisa is increasing their investment in Mexican broadband where penetration of 60% lags the U.S. We expect the continued recovery in post-COVID Mexican advertising spending as well as growth in pay-TV and broadband penetration to benefit Televisa over time.
National Fuel Gas Company (NFG, Financial) (0.2%) (NFG – $63.30 – NYSE) (Williamsville, New York) is a gas and pipeline utility with a growing exploration and production business. The gas utility serves 753,000 customers in Buffalo, New York, and Erie and Sharon, Pennsylvania. The pipeline & storage (P&S) business operates 3,000 miles of pipe and 34 storage facilities primarily in the state of New York. The E&P business, Seneca Resources, operates in Appalachia (owns 1.2 million net acres), primarily the Marcellus and Utica shales. Seneca’s proved gas reserves at year-end FY 2022 were 4,172 Bcfe (compared to 3,853 Bcfe in FY 2021). NFG expects to generate $325 million in FY 2023 free cash flow (before the $175 million dividend), which will likely be used to paydown debt. NFG raised the annual dividend for the 52nd consecutive year to $1.90 per share, from $1.82 per share. S&P rates NFG’s unsecured credit ‘BBB-‘ stable. Higher gas prices increase the potential for the significant value of the 1.2 million net Marcellus/Utica acreage to be realized.
TRATON SE (XTER:8TRA, Financial) (less than 1.0%) (8TRA – XE – €14.13/$15.13) – headquartered in Munich, Germany – is a leading global manufacturer of commercial vehicles with a product portfolio that spans light, medium, and heavy duty trucks as well as buses sold under wholly owned brands Scania, MAN, Navistar, and Volkswagen Truck and Bus. TRATON spun out of parent company Volkswagen (which maintains 90% ownership) in 2019. Management’s focus remains on improving longer term profitability – driven by a restructuring at the MAN segment – as well as cost synergies achieved through the gradual rollout of TRATON’s Common Base Engine (CBE) across all divisions incorporating a greater number of common parts and components. The company is also well positioned to gain future market share in North America through its most recently acquired (2021) segment Navistar. The combination of improved profitability, share gains, and a deleveraging balance sheet will likely drive both earnings growth as well as valuation multiple expansion as TRATON trades at a meaningful discount to its best in class peers.
Returns represent past performance and do not guarantee future results. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed, they may be worth more or less than their original cost. Current performance may be lower or higher than the performance data presented. Visit www.gabelli.com for performance information as of the most recent month end.
