Small Cap Value 3Q18
Third Quarter 2018
Looking back, equity markets marched higher during the quarter, extending their gains as most indices have now risen over 10 percent through the first three quarters. Growth outpaced value and large caps rose over small caps. Global markets also fared well though Asian markets continued to feel pressure from potential trade impacts. Headline risk remains regarding potential tariffs and responses with China. Despite the constant rhetoric on trade, progress was made with Canada and an agreement to replace NAFTA appears likely between the U.S., Mexico and Canada. However, economic strength remains a tailwind domestically as investors continue to look for signs of cracks from the earlier trade actions. The Federal Reserve agreed that the economy is well-supported, choosing to raise the Federal Funds Rate during the quarter, and interest rates rose broadly. Volatility remained muted again during the quarter, though market participants remained cognizant for potential speedbumps that might appear.
Looking forward, earnings continue to be an important measure for the strength of the underlying economy, particularly here in the U.S. Concerns over when the next recession will happen remain given the duration of the current business cycle, while the most recent series of fiscal policies regarding trade and tariffs have further added to market worries. Equities have continued to look through the headline noise having rallied year-to-date, though mid-term elections could be a potential source of disruption. Interest rates have moved higher recently, with the Federal Reserve having hiked rates again at their most recent meeting. Another worry for the markets remains centered on the potential for the Fed to make a policy error and tighten conditions too much. Despite these fears, the strength in topline growth and cash flows have made valuations much more appealing than they were over the last few years. Continued focus by investors on companies’ ability to offset inflationary pressures and deploy their capital in high-returning areas will be a key differentiator for higher-quality companies. Similarly, volatility has remained stubbornly low and we remain vigiliant in assessing absolute risk and strive to protect client capital during increased periods of volatility.
Timothy Plan Small Cap Value Fund Q3 2018 Commentary
During the third quarter, the Russell 2000 Index saw strength in the Telecommunication Services, Health Care, and Information Technology sectors while the Energy, Consumer Staples, and Real Estate sectors underperformed.
The portfolio’s relative performance benefitted from favorable stock selection in Industrials and Energy. Omnicell rose after posting strong results, as their XT rollout continued, and bookings grew into the mid-teens. Albany International moved higher after posting strong top- and bottom-line results in both their machine clothing and engineered composites segments. Comfort Systems benefitted from continued strength in non-residential construction, pushing backlog up meaningfully and supporting future growth potential. Sonic Corp. rose after agreeing to be acquired by Inspire Brands at a significant premium. Continental Building Products gained on strong volumes and positive price-cost for their wallboard operations during the quarter.
The portfolio’s relative performance was negatively impacted by unfavorable stock selection in Consumer Discretionary and Materials. Summit Materials faced weather-related pressures on their volumes and negatively impacted their realized pricing. Installed Building Products faced rising input costs, which pinched margins, as price increases are being enacted to match the inputs. SRC Energy has seen recent potential regulations in Colorado regarding setback distances for wells push the stock lower. Hostess Brands fell on weak volumes and unfavorable mix which pushed gross margins down, though they did gain share in their sweet baked goods segment. Lithia Motors posted stronger topline on better used vehicle sales, but continued to see rising personnel and marketing expenses pressure margins, driving earnings below expectations.