As I take up the pen for our quarterly newsletter, I want to begin by introducing myself. My name is Rick Ryskalczyk, and I have had the privilege of being part of Sandhill for the past fourteen years. During that time, it has been an honor to work closely with the twenty-eight members of our firm and witness the remarkable dedication and trust that underpin the relationships we have built with you.

I also want to acknowledge the exceptional work of Edwin M. Johnston, who set a high standard for thoughtful communication over many years. While my writing style may differ, it is my intention to bring a fresh perspective while assuring you that our commitment to the principles that guide your investments remains steadfast.

In this letter and subsequent quarterly newsletters, I will provide updates on our proprietary strategies, share insights on the market, and outline how we are positioning for the future. I look forward to continuing the dialogue and sharing this journey with you.

As one of the longest-tenured partners at the firm, I have seen Sandhill grow and evolve – with one underlying goal: to add genuine value for our clients. We now have hundreds of clients, and the value that we provide to each of you can come in different ways. This idea of adding value is crystallized with our mission statement: To provide financial comfort and security through trusted execution.

Our goal is to provide you comfort in knowing that we understand your unique situation and to be stewards of your trust that our team will execute a path to help you achieve your goals.

Our firm’s success is entirely dependent on the success of our clients. We are dedicated to an ongoing pursuit of excellence and continuously refining our strategies to create and deliver greater value for you, our clients.

Equities
Our Concentrated Equity Alpha (CEA) strategy is comprised of high quality, competitively advantaged businesses. You are owners of companies that are the leaders in their respective fields and their growth is underpinned by secular trends. We expect to create substantial long-term value for our clients by identifying and buying these businesses at appealing valuations, holding onto them as long-term assets, and only selling when valuations become extreme, or the thesis has run its course.

Markets can be inconsistent, and investing in a consistent strategy can lead to variability over periods of time. After two straight years of outperforming the markets, our CEA strategy did not keep up with the broader market in 2024. We do not take this lightly – our goal is to outperform the market over time. Our research team, advisors, and partners are heavily invested in the same strategies alongside our clients – we eat our own cooking.

Looking at the businesses within the strategy, I am encouraged. Asset quality remains exceptional. Balance sheet integrity (low debt levels) and strong cash generation remain core tenets of our holdings.

Intuitive Surgical (ISRG) is the leader in the emerging field of robotic surgery. Palo Alto Networks (PANW) is a leader in securing enterprises from cyber threats. We are exposed to the explosive potential of Artificial Intelligence in several ways: ServiceNow (NOW) provides enterprises productivity use cases powered by AI, Cadence (CDNS) provides the software that these new AI chips are designed and tested on, SPXC Technologies (SPXC) supplies air conditioning and air handling units for data centers (including AI data centers), and Hubbell (HUBB) is a leader in providing components to help power the grid. Although returns may not be linear, I am confident that these investments will continue to bear fruit in 2025 and beyond.

Our Large Cap Yield strategy had a solid year. Importantly, it has shown over time to do exactly what it was constructed for: a lower volatility way to gain exposure to equities, utilizing blue chip companies such as Apple (AAPL), Coca-Cola (KO), McDonalds (MCD), and J.P. Morgan (JPM). The dividend yield of this strategy is currently 2.2%.

As a reminder, we firmly believe the US capital markets are the best markets to compound wealth. Between continual value creation, an economy that fosters incredible innovations, and the integrity of the capital markets, we intentionally focus our investing within the US markets. Over the long-term, it has been a great decision to stay away from international markets, and 2024 was no exception.

Fixed Income
Our Corporate Bond strategy is well positioned and we are pleased with the portfolio of bonds that you own. We remain fully invested with a short duration of 2.9 years. Focusing on shorter-term bonds is beneficial in that it limits volatility in your bond portfolio in the midst of significant swings in interest rates. Importantly, we’ve shifted even further towards investment grade bonds – increasing the credit profile of your portfolios.

It remains challenging to find municipal bonds that meet our quality and yield threshold for our Municipal Bond strategy. We’ll continue to monitor the market for opportunities to invest in high quality New York municipal bonds with yields over 4%.

Other offerings
We remain positive on the private REIT product that we distribute. We have seen deal flow pick up over the last few quarters of 2024. New acquisitions are closing at higher cap rates (better valuations) which help to improve the overall cash flows back to the REIT.

After several years of solid returns, the investment opportunity window is currently shut on new capital entering the Preferred Equity strategy. The favorable opportunities we saw over the past couple of years have diminished over time as prices have continued to climb. This is a tactical and market-dependent offering, much like our Municipal Bond strategy. When we think the market is providing an opportunistic window, we strike.

As we look ahead to 2025, it is clear we remain in a dynamic and fast-paced world. As it pertains to equity markets, I believe we are headed into a period of heightened volatility. The equity markets are expensive, inflation concerns remain, and a new administration brings with it uncertainty. In the short-term, we are cautious. We do not chase overvalued assets and will be patient in redeploying available cash. We welcome volatility as it offers opportunities to buy great businesses at discounted valuations.

As we think about 2025, our main areas of focus center on:

Inflation & Interest Rates
Inflation remains a concern. While we have come a long way from the peak 9% inflation seen in June of 2022, inflation measures look to be holding in the 2.5-3% range (above the Fed’s target of +2% for long-term price stability) and we have seen an acceleration in pricing data over the last few months. When you add in the potential for substantial tariffs with the new administration, there are legitimate worries about inflation reaccelerating.

Any meaningful reacceleration would force the Fed to pivot from the current rate cutting cycle toward raising rates. Longer-dated interest rates have already been rising over the past few months. This will hurt those that have been impacted by inflation the most and rely on borrowing. High mortgage rates relative to the generational lows of the last few years and elevated housing prices are making buying a home unreachable for many. It also brings to the forefront the looming Federal debt crisis as interest costs are soaring.

Stock Valuations
The second area of concern is the market itself, which remains historically expensive at 21.6 times earnings, compared to the 20-year average of 16 times. Valuations at these levels have only been observed twice before: in 2021 during the post-pandemic market bubble and during the peak of the tech bubble in the late 1990s. Both instances were followed by periods of heightened volatility and significant market adjustments (and also created incredible buying opportunities).

Adding to this challenge is the unprecedented concentration within the market. At year-end, the top 10 holdings accounted for 37.6% of the S&P 500—a level we have not seen before. This means investors seeking broad diversification by “buying the market” may be exposed to a far narrower slice of the economy than they realize.

Further, sentiment surrounding stock market returns in 2025 is quite optimistic. Whether it is Wall Street strategist market predictions or results from the most recent Conference Board survey, it appears that everyone is bullish. Sandhill’s founder once told me that things are never as good as they seem and never as bad as they seem. With such a broadly one-sided outlook, caution is warranted.

The Economy
The bright spot continues to be our resilient economy. US GDP is estimated to have grown 2.7% in 2024. Strong consumer spending continues to propel the economy forward due to the wealth effect of a stock market near all-time highs and elevated housing prices. If the equity and real estate markets hold up, I expect the economy to see continued growth. Corporate earnings have also been strong, and I would expect to see double digit growth in the coming year.

Lastly, Sandhill continues to grow and expand. Tim Myers joined Sandhill as an equity analyst in December, bringing our total employee count to twenty-eight. Tim is relocating back to his native Buffalo, NY after an 8-year career at a $20B asset manager based in Columbus, OH. We look forward to adding his experience and knowledge to the research team.

I wish you all a good start to the new year.

Sincerely,

Rick Ryskalczyk, CFA
Co-Managing Partner, Co-Portfolio Manager

Disclosure: This commentary is for informational purposes only and does not constitute specific investment advice, recommendations, or offers to buy or sell any securities. Sandhill Investment Management (“Sandhill”) is a registered investment adviser with the Securities and Exchange Commission. Statements reflect Sandhill’s views as of the commentary date and are subject to change. Forward-looking statements, including economic and market projections, are speculative and not guarantees of future performance. Past performance is not indicative of future results, and all investments carry risks, including the potential loss of principal.
References to specific securities, such as Intuitive Surgical, Palo Alto Networks, and Apple, are for illustrative purposes only and do not constitute recommendations or guarantees of future performance. Economic and market discussions are based on publicly available information believed to be reliable but are not guaranteed for accuracy or completeness. Investors should carefully evaluate their investment objectives, risk tolerance, and financial circumstances before making decisions and consult their advisors to ensure any investment strategy aligns with their individual needs and goals. For a complete list of firm composites and strategy presentations, please call 716-852-0279.