Q3 2025 Investor Letter

Dear Investors,

We hope you and your families are doing well.

We ended the third quarter of the year with a strong performance across your portfolios. Third quarter 2025 returns were +18% to +25% (net) across GROW managed portfolios versus the Russell 2000 Growth return of +12% and Russell 2500 Growth return of +7%. Please see disclosures for the historical performance data.

As we enter the fourth quarter, we remain optimistic that our companies can continue to deliver positive fundamentals regardless of the economic backdrop. While the market can be volatile, we believe that the noise on the political front will ultimately be eclipsed by revenue and earnings growth.  We hope to have more positive updates through the end of the year.

Market Summary

Interest Rate Cuts

The Federal Reserve lowered the Federal Funds Rate by 25 basis points on September 17^th. This cut marks the first cut since December of 2024.  Jerome Powell, the Chairman of the Federal Reserve, stated that “job gains have slowed, and the growth of economic activity has moderated” while “inflation has moved up and remains somewhat elevated.”  From our perspective, this cautious tone leaves the door open for more cuts through year end, which should be positive for stocks. Historically, small companies have typically outperformed during rate cutting cycles. While interest rate cuts could be a tailwind, the individual companies we own aren’t dependent on them to continue to perform well.

Healthcare Positioning

While we remain optimistic about the outlook for rate cuts, we acknowledge that stocks have had a tremendous run over the last few months. Over this time, we have shifted the portfolios towards an overweight in healthcare which is both offensive and defensive. Offensive in that these companies have new products (devices, drugs, diagnostics), addressing large market opportunities and defensive in that they are nondiscretionary and less economically sensitive. Pharmaceuticals, in particular, are an area we are positioned in to take advantage of novel therapies that address large market opportunities (see Xeris Pharmaceuticals, XERS below).

Artificial Intelligence

In our last letter, we discussed the “magnificent 7” stocks which have had a tremendous run. Much of the performance has come from investment in AI infrastructure and training models (see Cap-ex trends below). Companies like Microsoft, Meta, Amazon, and Google have invested hundreds of billions of dollars into these projects with the hopes of “winning” the AI race. The outcome of these investments is still unknown, and we have yet to see the “killer app” that demonstrates a high return on investment.

Recent partnerships like the one signed by Oracle, Nvidia and OpenAI remind us of the dot com era in which Cisco started to provide vendor financing to its customers. This practice created a false sense of revenue growth which ultimately unraveled.  The benefits of AI are undoubtably going to increase productivity, but over the longer term, the capabilities may be less than what is expected today.

Sentiment and Valuation

Valuations remain elevated for the magnificent-7 relative to the rest of the market (shown above). Small and mid-cap stocks are trading for 16x earnings, considerably less than the large and mega-cap stocks. Interestingly, market sentiment is in the neutral range as can be seen below in CNN’s Fear and Greed Index. Recall, that just in April, the index was at extreme fear and in June it was at extreme greed. This gauge tends to be a contrarian indicator which is why we remained confident in a rebound in April.

We have taken some gains in your portfolios and have tried to offset them with losses as best we can. While there is still uncertainty in the broader macroeconomic and political landscape, we are laser focused on how the companies in your portfolio are handling these challenges. 

Portfolio Review

Contributors

MDxHealth (MDXH) is a prostate cancer diagnostics screening company we initially purchased at around $2 per share a year ago. Prostate is the second most diagnosed cancer type overall and the most common in men. Their portfolio includes Select mdx, Confirm mdx, Genomic Prostate Score (GPS), and the hereditary prostate cancer test. The company has a network of over 7 thousand physicians and has completed over 250 thousand tests in total. With their series of non-invasive tests, they offer physicians and patients additional guidance when making treatment decisions. MDXH has grown revenue each of the last 12 quarters at over 20% and we believe they can accelerate that rate as they recently acquired an additional prostate test. Despite the positive momentum the stock only trades at 2x EV/Revenues vs. peers at 5-9x for similar growth and margin profiles.

Xeris Pharmaceuticals Inc. (XERS) is a specialty pharmaceutical company with unique products serving large unmet medical needs. Their main product includes Recorlev which is a medication prescribed for the treatment of Cushing’s Syndrome (CS).  CS is a serious medical condition where out of control cortisol levels wreak havoc on the body, leading to fatigue, weight gain, and hypertension. XERS recently hosted an Investor Day presentation where they announced a 2030 model of $750 million in revenue from the current portfolio, particularly Recorlev. For reference, the total company is expected to generate $285 million in 2025. The gross margins for Recorlev are around 80% and profitability is expected to ramp significantly in the coming years as the company leverages the investments they’ve already made. Xeris expanded their salesforce by an additional 40 reps in November of 2024. Those reps are now contributing to the 54% quarterly revenue growth XERS achieved in the 2^nd quarter. This is an acceleration from Q1 where they grew 44% year over year. While the stock has almost doubled since June when we bought it, we continue to hold it in investor portfolios due to the large opportunity ahead.

Zeta Global Holdings Corp. (ZETA) is a marketing technology software company which benefits from multiple market tailwinds in the advertising industry. Zeta’s software platform combined with artificial intelligence helps companies' market more efficiently by targeting ads based on specific demographics. The Zeta marketing platform helps customers deliver advertisements through all channels such as email, social media, web, chat, connected TV and video. Zeta is unique in that their platform doesn’t use cookies. This reduces risk from a regulatory and customer standpoint as they are not impacted by these issues. Consequently, they can take market share from competitors like Adobe, Salesforce, and Oracle, who have all made legacy acquisitions to enter the space at valuations of 8-20x EV/Revenues.  ZETA trades for 3x EV/Revenues.   Oracle announced they would be exiting the advertising business on their Q4 2024 earnings call, creating an incremental revenue opportunity for Zeta. Despite the broader softness in software spending, Zeta remains unaffected, citing a healthy demand environment. The company was founded by former Apple CEO, John Scully, and the management team has a strong track record of performance (the company has beaten their revenue guidance for 16 consecutive quarters since their IPO in 2021). Zeta’s stock has been volatile throughout the past few months as investors digested a short report in November. As noted above Zeta trades at a significant discount to peers in the software industry at only 3x EV/Revenues vs. 5-7x for the group, despite stronger growth and operating margins. 

Detractor

Elutia Inc. (ELUT) was a detractor from performance during the quarter. Elutia is a medical device company that produces a biologic envelope to hold cardiac devices (CIED) in place beneath the skin. These devices are typically implanted near the shoulder and have issues with migration (moving beneath the skin). Elutia developed a biologic form of these devices versus plastic versions that are produced by Medtronic. We thought they would sell the whole company to Boston Scientific as they compete directly with Medtronic. Unfortunately, management sold the product to Boston Scientific for only $88 million, far less than what we and they would have expected they would get for it.  Management has made the decision to use the money to develop unapproved products to the detriment of shareholders.  We had expected a purchase price of over $200 million. While it was a small position across portfolios, it is disappointing, nonetheless. We sold the remaining holdings of ELUT on this news.

Outlook

We continue to see tremendous investment opportunities in the market. In addition, we believe that the current environment provides an opportunity for stock selection and active management versus passively investing in indexes.  By continuously screening for companies with new products and services, large market opportunities and high revenue growth with strong margins, we believe your portfolios are well positioned. While we are cautiously monitoring macroeconomic events, our time is best spent looking for new ideas and re-evaluating your portfolios.   

We thank you for your continued trust and support. We encourage any questions or comments you may have. As always, we are available for portfolio reviews anytime. Please contact us if you are interested in learning more about the companies you own.  

Best regards,  

GROW Funds Q3 2025 Investor Letter.pdf

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