Lockstep’s Monthly Update – February 2023


Our Funds’ Performance for December 2022

Premium Fund

The Premium Fund was down -3.8% for February 2023 and is up +5.4% Year-to-Date.

The Value Fund

The Value Fund was down -2.9% for February 2023 and is up +7.3% Year-to-Date.


Performance vs the Market

The S&P 500 and Nasdaq Composite were down -2.6% and -1.1% for the month as US economic data steered the market’s direction. It started with US jobs data coming in very strong at the beginning of the month as US unemployment reached decade lows spooking the market into doubting if inflation was under control. This was followed by January’s consumer price index coming in stronger than expected. Then the release of solid retail sales data was enough to convince members of the Federal Reserve (US central bank) that more aggressive action might be needed. As a result, the market now expects a 0.5% interest rate increase at the next Federal Reserve meeting.

As we have written about, of late, the market is putting significant weight on inflation and the Federal Reserve’s reaction. Of course, high inflation and interest rates impact both businesses and consumers. Yet, the US’s leading financial institutions believe the US economy remains robust, and the US consumer remains healthy. Bank of Marica’s Brian Moynihan continues to be optimistic. Even JP Morgan’s Jamie Dimon, who was pessimistic throughout 2022, now believes the economy is healthier than initially thought.

If there is one thing the market loves, it is data, and it is easy to get caught up in the statistics. While having a finger on the economy’s pulse is essential, it is short-term data.

More important than trading on today’s news is to pick companies that will be bigger and more profitable in the future than they are today.


Drivers of Performance

The Premium Fund

The negative performance of the fund was driven by our media business, LEE, delaying its release of its 10-K and first quarter 2023 10-Q due to the company flagging weakness in its internal controls. While this is not positive news, it is something we had seen before with our investment in LEGH, which delayed filing its financials back in early 2022 also due to internal control weaknesses. As with LEGH, LEE’s control weaknesses do not impact the company’s profitability, and we believe, as with LEGH, this will improve the company in the long term. LEE has since resolved the problem and even released its financials as its digitisation strategy remains on track.

Other detractors to performance were our investment in the leading Chinese game streaming business, HUYA, which gave back some of its recent gains, and our FinTech company, BMTX, after reshuffling its management team after a dismal last 12 months.

The negative performance was somewhat offset by another of our media investments, GCI, which, like LEE, is digitising its business as print media continues to decline. The company made significant cost-cutting steps and continues reducing debt. As GCI continues growing the digital side of the business and paying down the debt, the business’s equity value can only go up.


The Value Fund

Performance for the fund was also driven by our investment in both LEE and HUYA, as well as our holding in BABA, even though its third-quarter earnings beat market expectations. HUYA and BABA traded down because US/China relations weakened. While we cannot and would never try to predict the outcome of this conflict, we do know that BABA is a high-quality business that continues to generate a significant amount of free cash.

The weak performance was somewhat offset by our investment in INMD after posting another quarter of record results, and META, although facing headwinds, is making some smart decisions


Closing Thoughts

As mentioned above, much weight is being placed on inflation data and what the Fed will do in response. Right or wrong, this is a short-term view,  and although valuations, in general, need to come down, there are fantastic opportunities to be found.

One of those opportunities we have written about extensively is SRG. The company is liquidating its property portfolio, paying off its debt and returning the remaining capital to shareholders. The company released positive news at the beginning of February, yet the share price declined during the month because the press release noted that the real estate market conditions had worsened. While there is reason for concern, the company remains on track to deliver as it has promised. Nonetheless, the market has chosen to overweight the negative news. In our opinion, this highlights the short-sightedness of the market at present.

Short-sightedness can impact short-term performance but offers opportunities for the investor with a long-term investment horizon. 


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