Sizing into conviction

On Tuesday, we exited STMicroelectronics (STM) on behalf of clients in our Offshore strategy and used the proceeds to add to our positions in Nubank (NU) and Safran (SAFRY).

The results of the trade maintain our net exposure of around 96% while keeping a small level of cash on hand to be available in the event markets move lower from here.

Let’s dive in.

We sold STMicroelectronics

Our thesis for STMicroelectronics (STM), a leading provider of microcontroller ("MCU"), analog, and other semiconductor products, was centered around the opportunity to invest in a high-growth company equipped with defensible revenue streams across attractive secular themes.

The company supports one of the broadest product portfolios and is one of the major beneficiaries of electric vehicle adoption and the broader electrification of the economy – two of the aforementioned secular themes we found compelling. Given the slowdown in some of the company’s most important end markets (EVs and industrials), we believed extreme pessimism was already priced into the stock and initiated a small starter position which we believe appropriately accounted for these risks. 

Over the past few quarters, the company has shown signs of execution/industry headwinds as industrial customer orders haven’t improved while autos have continued their decline. Combine this with pricing and capacity challenges, we believe the company’s ability to execute could become increasingly difficult over the next couple of quarters.

We believe these factors have created a substantial opportunity cost of staying invested in STM and elected to use it as a source of funds to reinvest the proceeds into our higher conviction names with more favorable risk / reward opportunities over the next twelve months (more on that below).

Sizing into conviction

Nubank (NU) has proven to be a world-class digital banking platform disrupting one of the most profitable banking sectors in the world. The company boasts an industry leading growth profile with over 40%+ compounded annual growth rate on revenues alongside 50%+ earnings-per-share growth. We believe the company’s strong fundamentals, underpinned by its high-quality management team and rapid market share gains warrant us sizing up the stock to a core position in our Offshore strategy. If you happened to have missed it, the full investment memo from our initiation in March can be found here.

Safran (SAFRY) operates a dominant aerospace franchise with over 75% market share in one of the highest barriers to entry parts of the value chain: narrowbody engines. We believe Safran remains one of the key beneficiaries of global air travel volumes with multiple levers for growth heading into the next twelve months. Thanks to a strong beat and raise results from General Electric, of which Safran shares a 50/50 revenue split through its joint-venture CFM International, we elected to add to our position with confidence ahead of their earnings print Wednesday morning.

As always, let us know if you have any questions about the recent trades; we’re happy to assist.

– Your Titan Team

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