We are reallocating capital from our semiconductor holdings into our “best ideas” software names to mitigate the primary active risk in our model portfolio, while capturing high-margin software compounding for the next phase of the AI cycle. To execute this, we are selling D.R. Horton (DHI) to fund Fortinet (FTNT) and selling Applied Materials (AMAT) to fund ServiceNow (NOW).
Sell: DR Horton (NYSE: DHI)
We decided to sell our position in DHI. It has been a half-weighted holding since the inception of the Cedar Rock Model Portfolio, and we foresee a tough backdrop for the stock. With inflation driving up the cost of materials and interest rates rising, we expect continued pressure on the homebuilding sector.
Sell: Applied Materials (NASDAQ: AMAT)
Applied Materials has been a very strong performer for the portfolio, but we expect forward returns to be lower from current levels, as value in the AI cycle starts to flow downstream into software & services. This presents an opportune time to take profits and redeploy that capital into our higher-conviction software targets.
Buy: Fortinet (NASDAQ: FTNT)
We added FTNT, a leading cybersecurity solutions provider, to our portfolio. By successfully bridging its legacy hardware dominance with leading-edge cloud security, and successfully integrating top-tier acquisitions like Lacework, Fortinet has engineered a rare combination of high growth, outsized operating margins, and unmatched free cash flow generation.
Buy: Service Now (NYSE: NOW)
We believe ServiceNow is building the underlying operating system for the AI era. The platform acts as the central nervous system for the enterprise, securely bridging disparate software solutions and data silos to take automated action. Its deep technological moat is evident in industry-leading retention rates and consistent excess growth at scale.
