Small Cap Value 1Q19
First Quarter 2019
Looking back, the S&P 500 reversed course from the end of the year and rallied for one of the best first quarters to start the year in two decades. The major worries of the market that pressured shares turned into tailwinds. Fears over growth were placated for the majority of companies when they reported earnings. While some areas remain challenged, most companies continue to ascribe to the view that the U.S. economic backdrop is supportive for another year of positive growth. This optimism drove small cap stocks to outpace large caps and growth stocks to rally over value stocks. The next headwind-turned-tailwind was the major pivot by the Federal Reserve, as their dot plot forecast removed any further interest rate hikes in 2019. Investors shifted their expectations to now believe the likely next action is a rate cut, with an increasing probability of that occurring into 2020, rather than a rate hike. Optimism also rose for a potential trade deal with China, as some progress appears to have been made which helped bolster both domestic and global markets during the quarter.
Looking forward to 2019, corporate earnings growth remains the most likely outcome for the full-year, though the next quarterly set of reports could be more challenged on difficult comparisons from 2018. While some companies may report slight declines in year-over-year earnings as a result, the majority of companies are expected to remain positive. Consumer strength remains a driver for continued economic growth as labor markets remain tight even amidst these macroeconomic uncertainties. Corporate investments continue to face headwinds from the global uncertainty, and investors remain keenly focused on the behavior of companies regarding their uses of cashflow, whether for long-term capital expenditures, returning it to shareholders, or reducing their leverage. These issues we believe will further separate those businesses with pricing power and higher- quality models as those decisions are key to creating long-term shareholder value. We remain vigilant in assessing absolute risk in the securities we invest in and striving to protect client capital during these times for potential volatility from the uncertainty.
Timothy Plan Small Cap Value Fund Q1 2019 Commentary
During the first quarter, the Russell 2000 Index saw all sectors post positive returns, with Information Technology and Energy gaining the most and Consumer Staples and Financials the least.
The portfolio’s relative performance benefitted from favorable stock selection in Materials and Utilities. ProPetro posted a strong quarter as their relationships in the shale basins, particularly the Permian, helped offset broader industry pressures. Installed Building Products gained after allaying fears regarding pricing power in the insulation installation business with tailwinds from improving housing sentiment. Innospec beat earnings handily driven by better sales and margins in their fuel specialties and oil field segments. Novanta rallied on solid organic growth and better margins as their focus on higher-growth end markets that began several years ago continues to pay dividends. Omnicell beat expectations as issues with a product transition appear to be fully resolved and execution remains good.
The portfolio’s relative performance was negatively impacted by unfavorable stock selection in Financials and an underweight to Information Technology. Penn Virginia declined after their plan to merge with another energy producer was abandoned. Columbia Banking System moved lower after missing expectations as slowing loan growth combined with higher expenses pressured their earnings. Gentherm suffered from weaker automobile volumes, leading to lower near-term guidance but management maintained their long-term guidance. Lattice Semiconductor, a recent purchase, moved modestly lower in sympathy with the market. Continental Building Products posted solid results but saw investor concerns over potential weakening in wallboard prices send shares lower as the quarter came to a close.
Past performance is not indicative of future results. Portfolio returns reflect the reinvestment of dividend and interest income. All information provided is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. A description of the methodology used to calculate the attribution analysis or a complete list of each holding’s contribution to overall performance during the measurement period may be obtained by contacting email@example.com. Benchmark Data Source: © 2019 FactSet Research Systems Inc. All Rights Reserved. Russell Investment Group is the owner of the trademarks, service marks, and copyrights related to its indexes, which have been licensed for use by Westwood.