Lockstep Investing Performance Update: October 2023

The Portfolio’s Performance for October 2023

October delivered another disappointing performance for The Portfolio, with the fund retreating by -6.3%. While The Portfolio remains positive for the year at +2.1%, we share your frustration considering that we were up +23.8% at the end of July



Drivers of Performance

InMode (INMD)

The main contributor to our negative performance, once again, was our medical aesthetics company, InMode (INMD), accounting for 45% of the decline in October.

October brought unfavourable news from the company. INMD released weaker-than-expected preliminary third-quarter (Q3) results during the month and revised its full-year (FY) guidance downward. A jittery market penalised the share price, retreating -37.3% during the month.

Subsequent to month-end, INMD released the full Q3 results, and we participated in the investor call. While the results were disappointing, we remain impressed with management and their strategic direction. Despite the current headwinds, INMD is highly profitable, generating significant cash flow with a yield of approximately 9% and holding a cash stockpile equal to 36% of the company’s market capitalisation.

We believe in the company’s resilience and continue to hold this investment.


St. Joe Company (JOE)

The second significant detractor in October was our real estate business, St. Joe Company (JOE), whose share price declined by 16% during the month.

The real estate industry has been particularly impacted by the “higher for longer” interest rate narrative we have written so frequently about. However, despite these industry headwinds, JOE continues to excel.

The company released impressive Q3 2023 results towards the end of the month, which prompted us to more than double our position. We maintain our confidence in the business and its management and are excited about the substantial position The Portfolio holds in this company.


Exited Bank of America (BAC)

JOE wasn’t the only company to report results in October; indeed, all the companies that reported, other than INMD, performed well. The only cause for concern was Bank of America (BAC), as we realised how the capital tied up in held-to-maturity investments would limit the bank’s growth potential for an extended period. As a result, we exited our position during the month.



Market Performance

October proved to be another challenging month following a tough September with the S&P 500 and Nasdaq Composite declining –2.2% and -2.8% respectively. Despite this, the S&P 500 remains up over 9.2% for the year, and the Nasdaq Composite boasts a substantial 22.8% gain for 2023, driven by standout performances from “The Magnificent Seven”, especially Nvidia and Meta Platforms.

“Higher for Longer” continued to deter investors from the stock market in October, as a robust labour market and strong consumer spending hold up an economy that the Federal Reserve is trying to cool down. The Fed did convene in the first week of November expectedly keeping interest rates flat. However, it surprised the market when The Fed Chair, Jerome Powell, used a more dovish tone than usual, sparking speculation that interest rates might have peaked.  The market has rallied since these comments, with the S&P 500 up +3.9% so far in November.

It isn’t all about economics, though, as we are in the middle of earnings season, with over half of the S&P 500 having reported earnings. Surprisingly, more than 75% of these companies have exceeded expectations, yet the market trended downward in October. The reason lies in the same Mega Cap companies responsible for driving the markets up this year. These priced-for-perfection businesses’ results have fallen short of the high expectations of jittery investors, best illustrated by Tesla’s substantial -14% drop in value after publishing underwhelming Q3 2023 results.



Closing Thoughts

Despite the recent setbacks, our enthusiasm for the Portfolio and its potential remains unwavering.

The market has started November on a positive note following the Federal Reserve’s commentary, which has led to speculation that interest rates may have peaked. With its substantial real estate exposure, the Portfolio has responded positively to this news, enjoying a +7.6% increase in November’s first three trading days.

We don’t know if the market rally is sustainable, and we don’t try to predict the market’s future. Still, we firmly believe in our investments and The Portfolio’s ability to capitalise on favourable conditions when they arise again.

We acknowledge the recent subpar performance over the last three months. While it’s never pleasant to report on such results, we remain committed to transparency.



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