Lockstep’s Performance Update: April 2023


Our Funds’ Performance for April 2023

Premium Fund

The Premium Fund was down -2.2% for April 2023 and is down -10.4% Year-to-Date.

The Value Fund

The Value Fund was down -1.4% for April 2023 and is up +0.9% Year-to-Date.


Market Performance

It was another decent month for the S&P, which finished up 1.5%, while the Nasdaq Composite ended April 2023 flat. Year-to-Date, the S&P 500 and Nasdaq Composite are up 8.6% and 16.8%, respectively.

While it is good to see the market moving in the right direction, it is essential to note that 80% of the gains are from just seven companies. On a weighted basis, these seven companies are up almost 40%. The rest of the market is up only 2% (on an equally weighted basis)

Although these 7 businesses are of exceptional quality, we cannot justify buying them at an average weighted valuation of over 65x profit (P/E). Only META we felt was cheap enough to justify owning.

The Fed vs Inflation vs The Banks

While the abovementioned companies drive the market higher, inflation and recession concerns persist. Although inflation is trending down, it is still higher than the Federal Reserve (US Central Bank) would like, and the consensus is that the Fed will increase rates by 0.25% when it meets in the first week of May to try and reduce it further.

We echo the words of Barry Sternlicht, the CEO of Starwood Capital; the problem with the rate increases is that they are a driving force behind the regional bank failures in March and a significant reason for the deposit flight from First Republic Bank. As the Fed keeps raising rates, it increases the probability of more bank failures.

Based on market perception, the Fed doesn’t appear willing to change course; however, they should stop raising rates and start lowering them to reduce the pressure on the US financial system. Given their assessment of the failure of Silicon Valley Bank, it seems unlikely they will change their thinking in the short term.


Drivers of Performance

Negative Performers

As with March, the Premium Fund’s negative performance drivers were our ex-REIT holding SRG and our media business LEE. LEGH, our manufactured housing investment, also added to the negative performance.

Our investments in the abovementioned companies plus BABA and IMMR, negatively impacted the Value Fund.

Even though these companies’ share prices declined in April, there was no negative news on any of them. On the contrary, SRG posted a first-quarter (Q1) transaction update stating that they had almost $500 million of assets sales in the pipeline. If those sales close, it will reduce SRG’s debt from a high of $1.6 billion less than a year ago to around $300 million. The CEO of the company commented yesterday that the company will be debt free in early 2024.

Positive Contributors

Our investments in INMD and INVA somewhat offset the Premium Fund’s negative performance.

INMD released preliminary Q1 2023 results during the month, beating management’s initial guidance.

INVA benefitted from the FDA committee unanimously recommending the approval of the company’s drug sulbactam-durlobactam. The FDA will make a final verdict by the end of this month (May 2023).

The Value Fund’s benefitted from its investments in both INVA and INMD. Additional positive contributors were CUBI, the community bank whose share price regained some losses after it reported pleasing Q1 2023 results and META, whose Q1 2023 results beat the market’s estimates.


Closing Thoughts

Our funds have not performed well relative to the Nasdaq and S&P 500 year-to-date; however, when you break down the indices’ performance, as above, you quickly realise that only a few companies are driving the market higher.

While these 7 companies offer outstanding quality, we believe our portfolios provide more opportunities in the long term.

For example:

One of the stocks driving the S&P 500 returns this year is Nvidia. As the world leader in specialised computer chips, it is a high-quality business but is valued at 100x operating income. Nvidia has to show tremendous growth to justify us paying that valuation, and a lot has to go right for the business to grow into that valuation. Yet only one or two things need to go wrong, and the market will decide it is overvalued. So the way we see it is that the risk far outweighs the reward.

Compare Nvidia to our investment in INTC; INTC is a very high-quality company, although arguably, Nvidia is in better shape today. But at only 5x forward operating income, only a little has to go right for INTC for the market to decide it is undervalued. Management is working towards making sure a lot goes right in the next few years, and thus the reward far outweighs the risk.

We believe our portfolio is made of such companies as INTC, and while our performance might not look great on paper today when the economic outlook improves (which it always does), we stand to benefit greatly.


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