Lockstep’s Performance Update: May 2023

Our Funds’ Performance for May 2023

Premium Fund

The Premium Fund was up +0.9% for May 2023 and is down -9.6% Year-to-Date.

The Value Fund

The Value Fund was up +0.8% for May 2023 and is up +1.7% Year-to-Date.

Market Performance

Things are looking up – sort of. The S&P 500 and Nasdaq Composite ended the month up +0.2% and +5.8%, respectively. But this is not a situation of a rising tide lifting all boats – the Nasdaq Composite was driven higher by just a handful of companies. In fact, 90% of the index’s performance came from the following eight alone:

We’ve included the price-to-earnings (P/E) ratios above to highlight that these companies driving the indices higher aren’t exactly cheap (The lower the P/E, the better, and we look to buy below a P/E of 20). So we certainly aren’t rushing out to buy the stocks above!

The most pressing issues continue to be persistently high inflation and the Federal Reserve’s (US Central Bank) response, raising interest rates for a 10^th consecutive time at the beginning of May.

The downside to the Fed’s action is that the higher the interest rates, the more issues it creates for regional banks. The more trouble the banks are in, the tighter lending becomes to the economy, possibly causing problems for commercial real estate.

Drivers of Performance

Positive Contributors

The Premium Fund ended the month higher thanks to our pharmaceutical business, INVA. INVA’s drug, XACDURO, received FDA approval, and the largest shareholder continued buying shares at these depressed prices. We added significantly to our position in the fund.

Performance was also driven by our media investments, LEE and GCI. Both companies traded higher despite a lack of news on either of them. We put it down to general market sentiment; last month, both companies’ share prices declined on no company-specific news.

The Value Fund ended the month higher due to its holdings INVA (we also bought more shares for the fund) and LEE. Our home building exposure was an additional contributor as GRBK and BLDR released strong first quarter (Q1) 2023 results.

Negative Performers

The Premium Fund’s and Value Fund’s performance was somewhat offset by our manufactured housing investment, LEGH, which released (Q1) 2023 results during the month.

LEGH’s Q1 2023 revenue declined over 10% compared to Q1 2022; however, thanks to strong cost management, the company improved its operating income year-on-year. Compared to the industry, whose sales declined on average 28% YoY, it shows how well the company is managed. Long-term, we believe the opportunities of this company remain excellent and therefore are not overly concerned about a short-term downturn in the industry.

Both funds’ performance was also negatively impacted by our medical technologies holding, INMD, whose share price declined despite reporting outstanding Q1 2023 results.

Closing Thoughts

While both the S&P 500 and the Nasdaq Composite are having a solid year thus far, with both up +8.9% and +23.6%, respectively, year-to-date, it is critical to realise that only a handful of stocks are driving the market higher. The Dow Jones Industrial ended May down -1% for the year, illustrating how the rest of the market is still struggling with economic headwinds.

While the eight stocks (above) driving the market higher are too expensive for us to buy, and the economy faces difficult times, that doesn’t mean there aren’t exciting opportunities out there.

We believe both our portfolios consist of such prospects!