Lockstep Investing Performance Update: September 2023

The Portfolio’s Performance for September 2023

The Portfolio faced a challenging month, declining -4.6%, slightly better than the S&P 500’s performance for September of -4.9%, resulting in a year-to-date gain of 9.0%.


Drivers of Performance

The most significant detractor for the month, responsible for nearly 40% of the Portfolio’s negative performance, was InMode (INMD). The medical aesthetics manufacturer share price saw a -22% decline in September, seemingly without any substantial developments to justify this drop. In fact, the most recent news has been positive, with the company reporting outstanding results in late July, prompting an upward revision of its full-year guidance. INMD’s share price is somewhat volatile. As such, we expected this market movement and reduced our position when the company released preliminary results. We have been adding as the share price retreated with our most recent purchase last week. INMD is valued at 14.0x operating income, growing revenue at nearly 20% per year, and generates significant free cash. It is sitting on almost 25% of its market cap in cash. Therefore, we will likely keep buying stock if the share price declines further.

Another notable detractor was Legacy Housing (LEGH), whose share price declined by over -30%. The share price retreat was somewhat expected due to the headwinds caused by rising interest rates, adversely affecting demand for manufactured housing. Despite the business’s long-term prospects due to housing shortages in the US, particularly in LEGH’s operational areas, we substantially reduced our position before releasing disappointing results as our research pointed to a slowing housing market. The share price has retreated more than it should have, so keep an eye out as we will add to our position should the share price drop below $19.00.

The primary contributor to performance for the month was our top position, Seritage Growth Properties (SRG). SRG has continued its liquidation plans and recently made another prepayment on its loan, reducing debt from $1.6 billion to $400 million in 21 months. SRG’s share price appreciated as a result.


Market Performance

It was a challenging month for the market, with the Dow Jones retreating -3.5%, S&P 500 down -4.9% and the Nasdaq Composite declining -5.8%. This instability is primarily a result of the Federal Reserve’s unwavering battle against inflation, as it employs a combination of interest rate hikes and quantitative tightening.

Global politics have only exacerbated matters. Oil prices surged 11% during the month as Russia and Saudi Arabia extended their voluntary supply cuts, and Russia announced a temporary export ban late in September. Meanwhile, China-US relations appear even more strained, with China forbidding its government workers from using Apple products, sparking fears of a ban contagion.

Typically, high oil prices aren’t an ideal solution for curbing inflation, and neither are restrictive trade policies. At the same time, strikes and government shutdowns don’t instil confidence in the market either. Consequently, it seems that fighting inflation will be more challenging than anticipated, leading to expectations of ‘higher for longer’ interest rates, as reiterated by the Federal Reserve.

US treasury yields have reached levels not seen since 2006, primarily driven by these developments, leading investors to seek refuge in these less risky government bonds rather than invest in stocks. When treasury yields near 5%, they certainly are more attractive than the S&P 500 1.5% dividend yield, especially given the index’s current overvaluation vs. the historical average.


Closing Thoughts

While it’s never pleasant to report negative performance, especially when the Portfolio was up 24% for 2023 not long ago, keeping our eyes on the prize is critical. We are long-term investors, and a couple of months of negative performance will hopefully be of little concern when looking back in five years.

We remain optimistic about the Portfolio. We’ve achieved some successes this year but believe there is significant upside within the Portfolio as it currently stands. And while the market is in turmoil and the short-term outlook is not rosy, we have the maturity to know that things will turn around in the long term and the patience to wait for that to happen!



Share Article


Install Lockstep App

Join Our Community

Sign up for our Daily Newsletter, Investing Insights, and Monthly Performance Updates.

Enable Notifications OK No thanks