Editor’s Note: Before Fadel Lawandy joined Chapman University, he was co-founder of HW Capital Partners, a portfolio manager at Morgan Stanley Smith Barney and an executive in Wells Fargo’s financial and mortgage departments.
The end of 2023 marked the one-year anniversary of the Chapman University OC25 Index, which is a market cap weighted Orange County Equity Index composed of the largest, by market cap, companies domiciled in Orange County.
The index returned 20.42% in 2023 compared to the S&P 500’s 24.2% for the same period. The constituent companies delivered returns ranging from as high as 90% to as low as -37%.
In evaluating the performance of the index for the year, it is evident that the index’s constituent companies in the healthcare sector, namely, Masimo, Healthpeak Properties, Alignment Healthcare, Envista Holdings, Staar Surgical, and ICU Medical, provided the downward pressure on the index’s return. The negative returns of these holdings ranged from -20.8% to -36.7%.
This might be surprising for some since the healthcare sector tends to be a defensive sector and should have performed well in a volatile market like the one experienced in 2023.
Unfortunately for the sector, there were several factors creating enough headwind resulting in the lowest performance in several decades. Such factors included regulatory and legislative pressures, the speculation that the sector may experience long-term slow growth as weight-loss medications like Ozempic gain popularity and improve the overall health of the populations, and investors favoring AI-related stocks (like the “Magnificent Seven” of the S&P 500) over all others.
On the other hand, the top-performing companies in the index represented a variety of sectors and ranged in market capitalization from Chipotle at $62.76 billion to MeridianLink at $1.95 billion.
The Good
Leading the pack is Tri Point Homes, with an annual return of 90.4%. Tri Point is a national homebuilder that offers its customers home options at different price points.
The near doubling of the company’s stock in 2023 is attributed to its ability to increase orders and increase active selling communities despite the rising mortgage rate environment.
In fact, the rising mortgage rates benefited the company as existing homeowners with low mortgage rates (national average is 3.5%) became more reluctant to put their homes on market and walk away from a favorable mortgage rate.
This resulted in a noticeable decline in the inventory of existing homes, driving interested homebuyers to the products offered by homebuilders like Tri Point Homes.
Coming in second was Glaukos, with an annual return of 82%. Providing therapies for the treatment of retinal disease, glaucoma, and corneal disease, the company maintained meaningful sales growth driven by multiple new products launched and a strong demand across international markets.
Western Digital’s return of 66% for the year was powered by the announcement to split the business in two, separating its HDD and Flash businesses into two separate companies, which the market continues to view favorably and is believed to add value to shareholders once the split is completed.
Chipotle’s solid performance of approximately 65% return to its shareholders in 2023 continues to be powered by a strong business, proactive menu innovations, and “Limited Time Offers” that have proven to persistently driven foot traffic to the company’s locations.
The Cyclical
When it comes to First American, one can count on consistent performance on the long run. Having said that, the company’s short-run performance is much more correlated to the volume of real estate transactions.
When I reported last on the index, First American’s stocks had returned a modest 8% for the first three quarters of 2023. At the time, the company was experiencing headwinds resulting from a raising mortgage rate environment.
As mortgage rates began to retreat in the fourth quarter, the prospects of First American improved, and the company stock brought the year to a conclusion with a respectable annual return on its stock of 23%.
The Struggling
MeridianLink, a software and services company, provides software solutions for financial institution and consumer reporting agencies in the United States. The company offers a multi-product platform that can be tailored to meet the needs of its customers.
MeridianLink experienced a run-up in its stock price in 2023 resulting in an annual return of 80.4%.
Fueling the run-up in 2023 was a combination of the recovery from a brutal 2022 sell-off in the company’s stock, and consistent growth in revenue as the company continues to find its way to positive profits. Reaching a peak price of $25.75 in 2023, the stock has retreated this year to a price of approximately $19 (a 26% decline) as investors moderated their expectation and have become cautious in the early months of 2024.
Rivian is another great performer in 2023 that has experienced a meaningful retreat in price in 2024. Rivian’s stock climbed by 27.3% in 2023.
A year marked by an increase in quarter-over-quarter production and reaffirmation of the company’s production outlook. Since then, Wall Street’s concerns about the company’s ability to execute in 2024 has tempered its enthusiasm for Rivian, driving the company’s stock down by more than 50% since the beginning of 2024.
Looking forward into 2024, this whimsical attitude of the market may be the theme of the year as investors await the results of the 2024 election, multiple and meaningful rate cuts by the Fed, earnings data, and economic data in support of a successful soft landing.
As always, it is important to recognize that nothing in this article constitutes investment advice. You should always consult a properly licensed and credentialed professional prior to making any investment decisions.
