All SG Capital Management Strategies posted positive returns for the first quarter of 2023. Stock selection drove the alpha generation, and we are proud to deliver positive returns for our investors despite the noteworthy volatility in the economic landscape. Our primary universe, the Russell 2000, was down 4.58% in March and up 2.74% for the quarter. Small capitalization equities experienced extreme volatility during the quarter, with the Russell 2000 dropping 13.82% from its high on February 2nd through March 23rd.
SG SUCCESSFULLY NAVIGATES A CHALLENGING Q1 ENVIRONMENT:
For the first three months of the year, stocks vacillated back and forth driven by the second and third largest bank failures in U.S. history, as well as the continued speculation surrounding the Federal Reserve. While all four major US indexes logged gains, a narrow breadth of companies buoyed the positive returns. Looking below the surface revealed the challenging performance for the overwhelming majority of U.S. traded companies.
The 10 largest stocks in the S&P 500 were responsible for 90% of the index’s first-quarter increase. The entire gain for the S&P 500 came from the top 15 largest companies, and the remaining 485 companies actually lost value through the end of March. Mega-cap tech stocks’ P/E expansions, not positive earnings estimate revisions, were the key drivers to the index’s performance. Since the start of the year, forward EPS projections for the S&P 500 have fallen by -1.0%, while P/E multiples have increased from 16.7x to 18.0x. We believe the speculation that the Fed is coming to the end of their interest rate hikes, combined with the high volatility of treasury yields, sent investors flocking back to the perceived safety and secular growth of the mega-cap tech stocks.
At SG Capital, our focus remains on small and mid-sized companies, which dramatically underperformed large caps in the first three months of 2023. Through the end of March, the average stock in the Russell 2000 was down -35.2% from their respective 52-week highs. Notably, we were able to produce positive returns despite the continued downward pressure across many of the names in our universe.
The stark difference in performance between smaller capitalization companies and larger companies can sometimes create challenges for fund managers who have market capitalization mismatches. Fortunately, we have learned this lesson over the last twenty years and pay close attention to this factor risk. The difference in performance had no material impact on our portfolios in the March quarter.
Similarly, the first quarter also witnessed a significant divergence between the growth versus value factors. Growth names greatly outperformed, with the revised market expectation of interest rate cuts coming earlier than previously expected. We are pleased that our risk management disciplines again helped us avoid being caught on the wrong side of the growth vs value performance differences.
Finally, the regional banking industry’s blowups created a number of challenges that we managed through relatively well. SG Capital did not own any bank stocks, but the tightening credit conditions had implications for many other industries in which we traffic. We quickly identified our risk exposure and took action to minimize the impact to the portfolios. Overall, the March quarter is one that required disciplined risk management.
LOOKING FORWARD:
At SG, we continue to manage risk exposure tightly while taking advantage of dislocations in stock prices. Notwithstanding the challenging markets and exogenous events, we are confident that we are well positioned for the upcoming earnings season and will continue to strive to deliver positive performance for our investors.
Going forward, we will continue to focus on generating new ideas while also revisiting companies that we have followed for years. As was the case in the first quarter, we will be on the road attending company conferences, calling on managements, and doing channel checks to guide our fundamental perspective.
Thank you for your support and for trusting SG Capital. We will continue to work hard to provide our investors with strong performance over the coming months.