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Holly LaFon
Holly LaFon
Articles (8982)  | Author's Website |

Schneider Small Cap Value Fund 1st Quarter Commentary

Discussion of markets

May 08, 2018 | About:

Portfolio Objective

The Fund seeks long-term capital growth by investing primarily in common stocks of companies that have a market capitalization that are less than the largest company in the Russell 2000 Index and which Schneider Capital Management believes are undervalued.

Arnold C. Schneider III is primarily responsible for the day-to-day management of the Fund’s portfolio.

All investments contain risks and investors should consider the risks associated with investing in these types of Funds. Investments made in small capitalization companies are subject to a higher degree of market risk because they tend to be more volatile and less liquid when compared to larger more established companies.

Performance Review and Portfolio Strategy (cont.)

Despite oil prices rising 5 percent, energy equities fell more than the index in the quarter as investors focused on a long term forward curve still in the low $50 per barrel range. We expect our energy stocks to ultimately follow fundamentals. Our Exploration and Production companies are selling below today’s Net Asset Value and we expect NAVs to rise as long term oil prices increase. The industry significantly expanded announced share repurchases in the quarter in recognition of the value in their equities.

While it appears the equity markets as a whole has peak margins and Return on Equity, our portfolio consists largely of companies coming out the trough of their earnings cycle. This leads to one of the largest potential portfolio valuation gaps versus the market in recent years as deep value appears to be unusually cheap.

Outlook

Oil fundamentals continue to be strong with inventories steadily declining over the past year, despite disruptions that are 600,000 barrels per day below average. Venezuela is in secular production decline, with boycotted presidential elections in May potentially leading to external or internal disruption. On May 12 it is unlikely that President Trump will renew Iranian sanctions waivers, leading to a modest amount of Iranian oil exports unable to find a home.

While spot oil prices have rebounded, the oil industry primarily uses long term prices to determine returns on new projects. Given the depressed forward curve, global capital spending is only budgeted up about 10 percent in 2018 which is about half peak 2013 levels. This sustained shortfall has led overall international reserves to shrink in recent years which will make it difficult for production to keep up with demand growth in the medium term even with a shale boom. The Permian remains the hottest location in shale. Logistical difficulties are already apparent, which will make the universally aggressive multiyear growth goals difficult for Permian focused producers.

While the Federal Reserve continues to normalize rates, overall financial conditions are still accommodative. Rising short and long rates should be a positive for our bank positions. Wage inflation is rising, particularly in lower skilled areas, but at a measured pace. The core working age labor force participation rate is still 100 basis points below the long term average, slowing the rise in wages.

The recent steel and aluminum tariffs are a tiny $9 billion in total and we expect will have little effect on global GDP. China appears to be the likely main target of trade policies given our large trade deficit with them,and their higher relative tariffs. Additionally, China’s forced transfer of intellectual property and outright IP theft was estimated at $225 to $600 billion annually in the 2017 IP Commission Report. A trade war is unlikely given China’s trade vulnerability.

Positively, the individual portion of the tax bill passed last year is expected to add $100 billion to U.S. consumers after tax income this year adding a tailwind to consumer spending. Household net worth is 50 percent above the 2007 previous peak. National Federation of Independent Business small business confidence survey is the second highest ever. The Business Roundtable large business confidence survey is the highest in five years.

Value stocks may remain undervalued for extended periods of time and the market may not recognize the intrinsic value of these securities. There are no guarantees that any investment style will result in favorable performance over time. Investing in foreign securities poses additional market risks since political and economic events unique in a country or region will affect those markets and their issuers.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website


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