Insights

Portfolio Managers Quoc Tran and Michael Im, CFA, summarize the equity market at the beginning of 2025, how market volatility creates investment opportunity, and their outlook going forward.

How would you summarize the equity market in the first few months of the year?

Early in 2025, we saw widespread optimism as inflation eased and employment remained strong. This positive investor sentiment was further fueled by the presidential administration’s policy goals, which aimed to lower government regulation and extend the 2017 tax cuts, measures that would sustain economic growth, boost capital investments and drive an increase in mergers and acquisitions activity. As a result, equity returns were strong in January.

Optimism faded as the White House’s tariff program surprised market participants. “Liberation Day” triggered concerns of spiking inflation, higher unemployment, retaliatory trade responses, and increased recession risk. Volatility rose as investors digested the fast stream of statements from the administration.

We believe the market has largely priced in tariff concerns. This represented an attractive entry point as countries negotiate lower reciprocal tariff deals, thus giving President Trump a win and enabling his administration to pivot to potentially lower government regulations and extend the 2017 tax cuts.

How did market volatility create opportunities for the Cromwell Tran Focus Fund?

During periods of market selloffs, we often add high-quality companies selling at a discount to our estimate of their value. Two investments we added during this selloff included GE Vernova and CoStar Group.

GE Vernova, recently spun out of GE, is the leading provider of gas turbines and other power generation sources. GE turbines are an efficient and powerful way to produce energy to meet the world’s ever-growing energy needs. We believe GE Vernova has two areas of opportunity: It has a backlog of over $120 billion or over four years’ worth of revenue. Additionally, only about 25% of GE’s customers have signed up for its maintenance contracts. We believe this percentage could grow substantially.

It appears GE Vernova has an opportunity to grow revenues at an attractive rate and increase profit margins as it increases maintenance contracts to existing and new customers. Its products are essential to supporting growing AI data centers as well as upgrading global energy infrastructure.

CoStar was founded over 35 years ago with the mission of building a proprietary database of commercial real estate data to empower owners, tenants, real estate brokers, banks, and investors with the most relevant and current information to make informed decisions. CoStar sells its data in a subscription model that has generated high margins and high returns on capital. CoStar subscriptions routinely renew at a 90% rate with 4-5% annual price increases.

The company owns properties including CoStar Suites, LoopNet, Apartments.com and Homes.com. Historically, CoStar used its free cash flow to reinvest in its business and make tangential acquisitions. With Homes.com, CoStar has been investing $900 million each year to grow the business. In doing so, margins have declined precipitously over the last few years. We believe either Homes.com’s results will improve or CoStar will cut back on its investments. Either way, we see margins improving significantly over the next one or two years.

Additionally, our research sees signs of a recovery in the commercial real estate sector. As businesses continue to return to the office, CoStar’s data will be critical for tenants and building owners to strike the right balance in its leases.

What is your outlook for the next several months?

The U.S. economy appears to be strong with healthy trends in inflation and unemployment. While the stock market drawdown in April was unnerving, it appeared to be mostly driven by headlines around Trump’s aggressive tariff policy announcements. We are now seeing signs of easing from the initial framework with some bilateral trade agreements.

History shows us that leaning in after market drawdowns has been rewarded. At Tran Capital, we are using the market’s volatility to add high-quality companies to the portfolio and believe that our companies will continue to grow at attractive rates. Importantly, the Fund does not own the entire market, but rather a collection of our best ideas.