“General Electric Company (NYSE:GE) – Industrial conglomerate General Electric (GE) was the top performer for the year. We exited this multi-year investment as its price went above our appraisal. In 1Q23, GE spun out GE Healthcare, which we sold as it traded at our value. The share price continued its strong performance throughout the spring and summer, and we ultimately sold the position in the third quarter when we no longer saw a margin of safety for the business. CEO Larry Culp was a great partner who created significant value for shareholders by reducing leverage, cutting costs, streamlining operations, improving company culture and simplifying the structure with plans to split the company into three businesses. We hope to have the opportunity to partner with him again in the future.”

“UnitedHealth Group Incorporated (NYSE:UNH) contributed less to portfolio performance than the majority of our holdings during the quarter. The Company reported double-digit revenue, operating earnings and earnings per share growth during their third quarter. The Company has been able to adjust pricing in its health care segment to keep up with medical cost inflation while working with its Optum units to deliver more value-based care that replaces the traditional fee for service health care model. Value-based care is a sensible, long-term growth opportunity for the Company to pursue and also differentiates it from the vast majority of healthcare providers, particularly as it relates to Medicare patients. For example, the Company’s value-based care programs provide more preventative care opportunities and home-based care visits for patients which helps save the U.S. healthcare system billions in unnecessary spending while also providing patients with better outcomes, as diseases and behaviors are caught or corrected at earlier stages. The Company has invested in several core assets over many years to execute this value-based strategy and it will become the standard of care as the proportion of people in the U.S. with healthcare insurance coverage continues to reach new highs.”

“Additional tailwinds to performance came from robotic surgical system pioneer Intuitive Surgical, Inc. (NASDAQ:ISRG). We believe Intuitive Surgical will continue to innovate and launch new products that enhance surgical outcomes, and we think the company has a long runway for growth.

Intuitive Surgical, Inc. sells the da Vinci surgical robotic system for minimally invasive surgical procedures. The stock rose on investor speculation that the company could launch a new robotic system in 2024. We believe Intuitive Surgical will continue to innovate and launch new products that enhance surgical outcomes, and we think the company has a long runway for growth.”

“Alibaba Group Holding Limited (NYSE:BABA) (Long -18%) shares weakened in recent months as Chinese reopening strength faded and macro-economic datapoints began sequentially declining. Nevertheless, we believe the Chinese government will use consumption as a key lever to reinvigorate the economy post-COVID lockdowns. Alibaba remains a high-quality business with leading positions in both eCommerce and Public Cloud, and management is taking proactive steps to unlock shareholder value. It has announced plans to split into six major business groups – Cloud Intelligence, Taobao Tmall, Local Services, Global Digital, Cainiao Smart Logistics and Digital Media, and Entertainment Group. Each group will be managed independently, with a separate CEO and board, have the flexibility to raise external capital and potentially pursue separate IPOs. We believe this restructure will be a strong positive catalyst to unlock the sum-of-the-parts valuation upside in the company.”

“Visa Inc. (NYSE:V) reported a strong result with net revenue increasing 11% year-on-year to $8.6 billion and non-GAAP earnings per share increasing by 21% to $2.33. As has been the case for many years now, the scalable nature of the business allows for revenue growth to outpace its costs, which places the company in a good position to navigate through this inflationary period. The network continues to grow, with credentials and merchant locations up 7% and 17%, respectively. Cross-border travel-related spend also maintained its robust growth, increasing 26% year-on-year while Visa Direct reported 7.5 billion transactions, up 19% yearon-year, progressing on penetrating categories such as cross-border remittances. Altogether, we’re pleased with how the business is tracking and remain positive on Visa’s outlook.”

"We underestimated the company's ability to deliver margins, which drove the strong stock performance last year," Baird's Rob Oliver said.

“In the fourth quarter, the top relative and absolute contributors to the Portfolio’s performance were Netflix, ServiceNow, and Salesforce, Inc. (NYSE:CRM).

Salesforce has continued to grow its revenues at what we see as a healthy rate despite market concerns about the impact of the weaker macroeconomy on its business and penetration rates in its core CRM offering. Even its most mature and largest offerings, Sales Cloud and Service Cloud, are still growing revenue at double-digit rates. In addition, management realized that their cost structure, especially in salespeople, had gotten too bloated. Over the past year and a half, the company has run a much more streamlined expense structure that has led to strong operating margin expansion and earnings growth. Importantly, we do not feel Salesforce has cut into its innovation or sales muscle through these cost cuts but has eliminated unnecessary excess fat from the organization.”

“Mastercard Incorporated (NYSE:MA) (7.21% weight in the Fund): Payment companies are data companies. As we discussed last quarter in our write up of Mastercard, merchants can generate significant value from analyzing payment data to better understand their customers. Mastercard has long built AI-based products to enhance payment security and provide merchants with rich data analytics. In December, they rolled out Muse, a new online shopping companion that merchants who utilize certain Mastercard services can install on their own websites.

Muse seeks to replicate the instore experience of working with a salesclerk by allowing the customer to use natural language to browse products. Online shopping already works well if you know exactly what you are looking for, but Muse is striving to help customers find things to buy even when they aren’t sure what they are looking for.

Mastercard (7.21% weight in the Fund): In late October, Mastercard reported earnings that investors interpreted as pointing to a near term slowdown in payment growth. The stock fell 5.6% on the day. By the end of the next week, the stock had recovered its losses and went on to reach a new all time high on the last day of the year. But the 7.9% gain on the quarter slightly trailed the S&P 500.”

“Uber Technologies, Inc. (NYSE:UBER): UBER was the top contributor in the quarter following a better-than-expected 2Q23 earnings report and 3Q23 guidance. Gross bookings of $33.6 billion were up 16% year over year. Mobility gross bookings of $17 billion grew 25% over last year driven by a combination of product innovation and driver availability. Delivery gross bookings of $16 billion were up 12% from last year. 2Q Adjusted EBITDA of $916 million, up $552 million year over year, significantly beat Street estimates of $845 million and the company generated $1.1 billion of free cash flow. Management guided to continuing growth in 3Q Gross Bookings (17%-20% growth) and Adjusted EBITDA (of $975-1,025 million).

UBER remains the undisputed global leader in ride sharing, with a greater than 50% share in every major region in which it operates. The company is also a leader in food delivery, where it is number one or two in the more than 25 countries in which it operates. Moreover, after a history of losses, the company is now profitable, delivering expanding margins and substantial free cash flow. We view UBER as more than just ride sharing and food delivery, but also as a global mobility platform with the ability to sell to its 130 million users (by comparison, Amazon Prime has 200 million members) and penetrate new markets of on-demand services, such as package and grocery delivery, travel, and worker staffing for shift work. Given its $4.3 billion of unrestricted cash and $4.4 billion of investments, the company’s enterprise value of $95 billion equates to just over 20x next year’s estimated free cash flow.”

“Danaher Corporation’s (NYSE:DHR) acquisition offer for ABCM was approved by shareholders on 11/6/23. Shareholders approved the deal based on trough fundamentals (potential China weakness) and trough valuation (the broader market bottomed on 10/27). DHR took advantage of broader market fears and mis-aligned management incentives to acquire Abcam at a cheap price. While disappointing, ABCM was still a very successful investment for Headwaters as it outperformed the market by +27% during our ownership. The cash received from the acquisition was immediately re-deployed into the newest addition to the portfolio, IPAR (discussed below).”