Lockstep Investing Performance Update: August 2023

The Portfolio’s Performance for August 2023

The Portfolio (aka The Value Fund) declined -7.7% for August but remains up +14.3% Year-to-Date.

Note: We are no longer reporting on the Premium Fund as it is closed to existing members only.



Drivers of Performance

August proved to be a turbulent month. Several factors contributed to our performance;

The most significant detractor, accounting for over 35% of the negative performance, was our investment in SRG. The company’s second quarter (Q2) 2023 results brought both positive and negative news, with a $70 million loan prepayment offset by a $101.5 million impairment of their premium asset, Aventura. Despite this setback, we firmly believe in the value of Aventura, especially as leasing is finally starting to progress. SRG was also affected by the broader real estate sector’s decline as the market adjusted to the possibility of sustained higher US interest rates. Despite this headwind, we remain confident in SRG’s long-term potential and added to our position during the month.

Our community bank investment, CUBI, experienced a share price retraction after a strong July. Industry-wide downgrades by rating agencies and proposed stricter regional bank regulations impacted CUBI’s performance. However, our research suggests that the impact on CUBI is minimal, and we consider the bank to be undervalued based on current earnings.

LEE, our media business, contributed approximately 10% to the negative performance for the month. While the company’s Q3 2023 results missed expectations, we are encouraged by the continued growth of its digital business, with subscriber numbers increasing by over 23%. Our primary concern remains the company’s ability to reduce its debt over the next three years, but after detailed discussions with the CFO, we reaffirmed our thesis and increased our position.

On a positive note, the retailer BKE was the sole contributor to positive performance during the month, with Q2 2023 results surpassing analyst estimates.



Market Performance

August was also a challenging month for the broader market, with all three major indices in the red. The Dow Jones Industrial Average (DJIA) declined by 2.4%, the S&P 500 by 1.8%, and the Nasdaq Composite by 2.5%.

The prevailing theme for the month was the belief that interest rates will likely remain higher for an extended period, evident by the increase in US Treasury yields. Additionally, Fitch downgraded the US’s credit rating due to increased government debt in a higher interest rate environment. Moody’s followed suit by downgrading multiple banks, citing unresolved issues from the regional banking crisis earlier this year. Toward the end of the month, S&P Global downgraded several regional banks due to concerns about their exposure to commercial real estate during high-interest rate periods, potentially leading to increased loan defaults.

However, amidst these concerns, positive indicators are suggesting a potential turnaround. July’s Consumer Price Index (CPI) showed lower-than-expected inflation, and revised labour market figures for March 2023 were 7.5% lower than initially estimated. These developments have been of critical concern for the Federal Reserve. Additionally, S&P Global’s Purchasing Manager’s Index, a leading economic indicator, hinted at an economic contraction, signalling to the Fed that the economy is slowing. Despite these positive signs, Federal Reserve Chairman Jerome Powell stated at the Fed’s Jackson Hole Symposium that the Fed will continue raising interest rates if necessary.



Closing Thoughts

In the face of market turbulence, it’s essential to maintain a long-term investment perspective. Market volatility is a natural component of financial systems and can present opportunities for savvy investors to capitalize on undervalued assets and industries poised for growth.

Despite the challenging performance in August, we firmly believe the portfolio is well-positioned for the long term. The majority of our investments are significantly undervalued, in our opinion, and we have taken advantage of share price weakness by adding to our positions in SRG, LEE, and INMD.

In conclusion, while short-term fluctuations are inevitable, we remain confident in our investment strategy. We cannot guarantee immediate results, but our commitment to thorough research and long-term thinking continues to guide our decisions.



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