U.S. equities continued to rally for the eighth straight quarter, with the S&P 500 returning 4.48%. Ongoing controversies surrounding
the White House and escalating geopolitical tensions with Russia, North Korea and Iran were not enough to derail momentum, as strong
corporate earnings and generally encouraging economic data, including a solid labor market, helped li the index to another series of record
highs. Second-quarter GDP growth of 3.1% represented the strongest year-over-year growth since the third quarter of 2015, and an August
rise in the Institute of Supply Management’s Non-Manufacturing Index suggested that the acceleration in growth during the rst six months of
the year could continue during the second half.
Despite the economy’s upward trajectory, persistently disappointing inflation has been a concern of the Federal Reserve. However, signs of firming inflation in August provided some relief and increased investor expectations for further interest rate increases and the end of this
year and in 2018. In a well-telegraphed move, the Fed announced that it would begin its balance-sheet normalization program in October,
stating that the process would be gradual and predictable. Meanwhile, a er several failed attempts at repealing the Affordable Care Act,
Congressional Republicans pivoted their efforts to tax reform, unveiling a long-awaited blueprint in September for a plan that would slash
corporate taxes and reduce the number of tax brackets for individuals.
The Fund’s Investor shares returned 4.48% for the quarter, matching the S&P 500 Index return. Security selection made a positive
contribution to relative performance, with particularly strong selection in the consumer discretionary, consumer staples and industrials
sectors partially o set by weaker selection in health care. Sector allocation made a negative contribution, with an underweight to energy and
an overweight to consumer staples detracting from relative results.
The top contributor to relative performance this quarter was Lam Research Corporation, a supplier of wafer fabrication equipment and
services to the semiconductor industry, which returned more than 31%. The company posted impressive results for its fiscal fourth quarter
and marked its h consecutive year of double-digit revenue growth, driven by strong demand from customers like Samsung, Micron,
SK Hynix and Intel. Another semiconductor equipment and services provider, Applied Materials, was also among the top contributors,
rising more than 26%. The company, which provides manufacturing equipment, services and so ware to the global semiconductor,
display and related industries, posted solid results for its fiscal third quarter, highlighted by record revenues that surpassed expectations.
Outperformance was driven by record sales of wafer fabrication equipment for circuits used to produce LEDs, optical computer equipment
and CPUs.
Lifestyle-oriented content developer Scripps Networks Interactive, which primarily produces home, food, travel and related programming
for television, internet and digital platforms, was another top contributor, returning more than 26%. The stock gained on news of its long-awaited purchase by Discovery Networks, for which
approval from the Department of Justice seems likely
given the relatively small scale of the combined entity
compared to some of its competitors.
Other top contributors this quarter included
biopharmaceutical research company Gilead Sciences
and discount home and apparel retailer Ross Stores,
which gained more than 15% and 12%, respectively.
Gilead posted better-than-expected results for the
second quarter and surprised investors by increasing
its full-year sales forecast for its declining HCV drug
franchise thanks to marketing efforts that it says have
helped the company reach new patients. The company
realized strong gains a er announcing a long-awaited
deal to purchase clinical-stage oncology company
Kite Pharma for a record $11.9 billion. Gilead believes
cellular therapies like those being developed by Kite
have the potential to become a cornerstone of cancer
treatment, and sees the acquisition as the start of a
long-term strategy to build a leading oncology platform.
Meanwhile, Ross Stores bucked the trend in retail, with
strong customer traffic and solid margins driving better
better-than-expected second-quarter results, and
raised third-quarter forecasts.
The largest detractor from relative performance this
quarter was diagnostic information services company
Quest Diagnostics, which declined more than 15% a er the Centers for Medicare and Medicaid Services released 2018 preliminary rates for
the new Clinical Laboratory Fee Schedule under the Protecting Access to Medicare Act, cutting rates to the worst-case scenario.
Chipotle Mexican Grill dropped more than 26%, as it continues to wage an uphill battle to regain its prior sales, profits and valuation levels.
The company posted mixed results for the second quarter, with slightly underwhelming revenues but better-than-expected margins, while
the third quarter started with a sharp drop in demand due to a new norovirus outbreak in late July.
Other significant detractors included technology companies IBM and F5 Networks, which both declined around 5%. IBM reported its 21st
straight quarter of year-over-year revenue declines, as it continues to struggle to make progress on a five-year-old plan to steer the company
away from legacy products like computers and operating systems, which have been a drag on growth, and toward newer technologies in services
and so ware. Despite management stating in April that it expected key contracts in the technology services and cloud platforms segment to
come through during the second quarter, segment revenues were down 5.1% year-over-year, marking the second consecutive quarter of declines
for the key business unit. Enterprise application services company F5 Networks reported slowing product growth and disappointing guidance,
with the weak near-term outlook prompting Wall Street analysts to cut forecasts.
The largest contributor to the Fund’s performance relative to the S&P 500 was Applied Materials, which provides manufacturing equipment, services, and software to the global semiconductor, display, and related industries. The stock rose almost 21% for the quarter, after reporting solid results for the fiscal first quarter, driven by record orders across all categories. Lam Research, which also provides equipment and services to semiconductor manufacturers, returned nearly 22% after fiscal-second-quarter results and third-quarter guidance exceeded expectations on both the top and bottom lines.
Global automotive supplier Visteon Corporation, a non-benchmark holding, was another top contributor, gaining more than 22% after reporting strong results fourth quarter, led by positive currency movements and strength in China, where growth in “infotainment” drove year-over-year growth of 26%.
Online shopping company eBay rose almost 13% after reporting fourth-quarter profit that beat estimates and providing a better-than-expected forecast for 2017, giving investors confidence that its rebranding campaign and data initiative are helping to lead a successful turnaround.
The Fund also benefitted from not owning benchmark holding Exxon Mobil, which is not approved for investment by the Domini Funds. The oil and gas company dropped more than 8% for the quarter.
Strong performance by these stocks was offset by weaker performers, including several conventional retailers. Department store chain Kohl’s declined more than 18% after reporting weak fourth quarter results, with a deterioration in store traffic during the holiday season driving sales lower. Fashion retailer Nordstrom was another large detractor, declining 2.5% after reporting mixed fourth-quarter results, which saw sales miss expectations due to a lower mix of promotional items, while profits were higher due to efficient inventory management.
Other significant detractors included Verizon Communications, which declined almost 8%. Verizon’s fourth-quarter profit estimates fell below analysts’ expectations, as holiday promotions and discounts to combat competitors led to diminished margins. Sysco, which distributes food products to restaurants, hospitals, schools, hotels, and other foodservice businesses, declined almost 6%.
Relative performance was also hampered by the Fund not owning benchmark-holding Facebook, which rose more than 23%.
