Since inception, Fund positions have delivered -38.04% as of June 30, 2022. This return compares negatively to -25.89% total return delivered by the Russell 2000 Index over the same period.
- Contributors: Short Book of securities, Fluor Corp (FLR)
- Detractors: Kohl's Corp (KSS), Lazydays Holdings Inc (LAZY) & Signet Jewelers (SIG)
- Outlook: Rate hikes and margin pressure caused by persistent inflation have caused large drawdowns in U.S. and global equities in the second quarter. Although the Fed and the economy may not be out of the woods, valuations in some sectors have come down to historically low levels. In the past, such as in 2003 coming out of the Dot-com crisis, the led to sustained periods of outperformance in value stocks.
Quarter in review
- The top contributor this quarter were on the short side. Tesla Inc (TSLA) fell 37.51% as valuations contracted across the market, and as their CEO was forced to sell shares to fund a potential acquisition of Twitter. Mosaic Co (MOS) and Deere and Co (DE) sold off 28.8% and 27.65% respectively. Both cyclical companies sold off amid recession fears, after having been inflated due to Russia's invasion of Ukraine and the associated commodity inflation.
- The biggest detractors this quarter were in the consumer discretionary sector. Kohl's Corp (KSS), Lazydays Holdings Inc (LAZY), and Signet Jewelers (SIG) all suffered from multiple contractions, and to a lesser extent downwards earnings revisions, due to uncertainty around the resilience of consumer spending and the ability to maintain margins in the face of inflation and supply chain pressures. KSS was hit especially hard after a deal to be acquired for a meaningful premium fell through amid the uncertain market and interest rate environment.
- Although it is early in the earnings season, the misses and downwards revisions have been more tepid than originally feared. On the long side, it remains important to pick out companies that can both protect margins in inflationary environments and can weather a storm if sales were to decline in a recession.
- Some areas of the market are trading historically cheap vs forward earnings estimates. Specifically, Russell 2000 Value and S&P 600 Smallcap are at valuations not seen since the 2009 Global Financial Crisis. Many of these companies fly under the radar of traditional investors, and we believe the risk/reward is considerably skewed to the upside in any scenario other than a severe recession.
- When we run through scenarios on our top holdings, most would still be trading at single-digit multiples even after a 30% decline in sales. All or most have announced buybacks which allow for substantial earnings growth even if sales do not grow from the current depressed estimates.
- We continue to identify companies which are prime candidates to be acquired and add them to the portfolio, although the current interest rate/capital markets environment has created a temporary pause.
Tags: ETF, Value, Volatility