Shaker's Small Cap Growth - 1Q 2022 Update

The market environment was challenging during the first quarter of 2022.   Investors wrestled with inflationary trends not seen in a generation, the first of several Federal Reserve interest rate increases and geopolitical turmoil triggered by Russia’s invasion of Ukraine which led to a dramatic shift in investor risk tolerance.

The Shaker Small Cap Growth Strategy (SCG) on absolute terms declined 13.06% in the first quarter, trailing the US Small Cap Growth Index (SCGI) which declined 12.63%.  Over the last 12 months the SCG was up on absolute terms 4.83% compared to a loss of 14.83% for the SCGI.  While our goal is to outperform the index over the long term, short term underperformance can and does occur.

The following is a summary of returns for the Shaker Small Cap Growth strategy (SCG) and selected indexes for the first quarter, trailing twelve months, and last three, five, and ten years:  

	3 Months Ending 03/31/22	12 Months Ending 03/31/222	3 Year Annualized Returns	5 Year Annualized Returns	10 Year Annualized Returns
Shaker Small Cap Growth	-13.06%	4.83%	23.49%	20.76%	14.59%
Shaker Small Cap Growth (net)*	-13.31%	3.79%	22.28%	19.57%	13.47%
US Small Cap Growth Index	-12.63%	-14.33%	9.88%	10.33%	11.21%
US Small Cap Index	-7.53%	-5.79%	11.74%	9.74%	11.04%

                        *returns are preliminary and net of 1% management fee and expenses.

1Q Portfolio Update 

As is typical during market downturns, fewer sectors and stocks positively impacted performance during the 1st quarter.  Energy and consumer staples were the best performing sectors in the portfolio.  Our allocation into more defensive names late last year had a positive impact on the portfolio during the quarter.   While maintaining a concentrated portfolio we did focus on position sizes as we did not want to be over-exposed to a correction in any one sector.  As of quarter end, the top ten positions comprised 35.6% of the portfolio with no individual position size greater than 5%.   Typically, the portfolio is more concentrated (top ten holdings account for 40%-45% of the portfolio) and as our conviction level rises we will return to these levels.  Stock selection continued to be our focus and we relied on the characteristics important to Shaker. 

Given the risk-off environment in the markets we did see more turnover in the portfolio.  New positions were initiated in Matador Resources (MTDR) and Callon Petroleum (CPE).  Both are energy companies that have strong balance sheets and high-quality assets in strategic geographies. 

In addition, new positions were initiated on Amphastar Pharmaceuticals, Inc. (AMPH – specialty pharmaceutical manufacturer), Cadence Bank (CADE – a strong regional bank), CarGurus Inc. (CARG – a car research and shopping disruptor),  On Semiconductor (ON - domestic semiconductor supplier), KB Homes (KBH - homebuilder) and Winnebago Industries (WGO – manufacturer of mobile homes). 

We also added to existing positions in Diamondback Energy (FANG) and Cirrus Logic (CRUS).  

We eliminated positions in Boot Barn (BOOT), LGI Homes (LGIH), Liveperson (LPSN), Manitex (MNTX), Pager Duty (PD), Photronics (PLAB) and Qorvo (QRVO).  While many of these are companies we like, the ability to model and forecast risk in the current environment is difficult.

We reduced investments and took profits in long time holdings Alarm.com (ALRM), Charles River Laboratories (CRL), CoStar Group (CSGP), Monolithic Power (MPWR), Snap-on (SNA), Synnex (SNX), Wesco International (WCC) and Zebra Technologies (ZBRA).

The strategy does not actively use sector weight to differentiate returns, but sector weights can deviate from the benchmark weight and did account for some of the variance during the quarter. The portfolio is overweight Financials  (+5.2%) and underweight Health Care (-9.1%) and Consumer Discretionary (-5.4%). All other sectors are within +/- 3% of the benchmark weight.

The top contributors and detractors for the quarter are shown below:

Holding	Return Contrib. (%)	Sector	Original Purchase Date (Firm)
Diamondback Energy, Inc (FANG)	0.36%	Energy	Sept 2021
ServisFirst Bancshares (SFBS)	0.17%	Financials	January 2020
Sprouts Farmers Market (SFM)	0.14%	Cons. Staples	November 2017
Matador Resources (MTDR)	0.14%	Energy	January 2022
Amphastar Pharmaceuticals Inc (AMPH)	0.12%	Health Care	March 2022
Zebra Technologies Corp (ZBRA)	-0.80%	Industrials	February 2019
Axos Financial Inc (AX)	-0.84%	Financials	May 2008
The Trade Desk, Inc. (TTD)	-0.92%	Cons Discretionary	May 2017
EPAM Systems, Inc (EPAM)	-0.98%	Technology	March 2020
Installed Building Products (IBP)	-1.01%	Industrials	March 2019

Note: Individual position return contributions are preliminary and based on gross returns prior to fees, interest, and other expenses.

Among the top contributors were Diamondback Energy (FANG) and Matador Resources (MTDR) both energy.  Both are energy companies focused on exploration (Hydrocarbon and oil/natural gas) and are leaders in their respective industries.

ServisFirst Bancshares (SFBS) is a bank holding company based in Birmingham, Alabama.  We like SFBS’s footprint and earnings have been very consistent.  Sprouts Farmers Market (SFM) is a supermarket chain that offers a wide selection of natural and organic food.  Management is experienced and we like the specialty grocery niche.  It remains a long-term holding.

Largest detractors included Installed Building Products, Inc.  (IBP) and EPAM System, Inc (EPAM).  Based in Columbus, Ohio IBP is a leading insulation installer for both new residential and commercial construction. IBP saw input costs rise rapidly over the previous four quarters but gross margin did improve in 1Q2022 as management has aggressively been pushing hard to offset rising costs.  EPAM is an IT outsourcing/consulting firm based in Pennsylvania.  A concern is the company has considerably exposure to Eastern Europe but did grow revenue 50% over the last quarter.  We continue to like both businesses and maintain full positions in both stocks. 

Investment Outlook

We entered 2022 with much uncertainty and that has not changed.  Inflation, tightening monetary policy, geopolitical turmoil driven by Russia’s invasion of Ukraine, and rising Covid-19 cases in China are investing headwinds we continue to monitor. 

Against this backdrop, we expect earnings to contract as companies look to the next several quarters and lower expectations.  We believe some of this is priced in as multiples have contracted from a high of 24X (forward P/E) for large cap stocks to 17X, which is the 25 year average. 

While cautious, the US economy continues to show signs of strength.   The US labor markets remain favorable as unemployment declined to 3.6% as 1.6 million jobs were created during the quarter.  With people employed, consumer spending remains healthy as consumers spent 18% more in March 2022 than they did two years earlier (McKinsey & Company article March 4 2022). 

Small Cap Growth Outlook

While still a little premature to feel optimistic, we believe the outlook for “growth” stocks will improve later in the year as the equity markets incorporate this new interest rate environment.  The Federal Reserve has been transparent that multiple rate hikes and tightening will occur.  Small cap stocks valuations have corrected materially and currently remain below their long-term averages.  This pullback should provide opportunity for high quality companies with the growth characteristics important to Shaker Investments.

The SCG strategy continues to be a bottoms-up, long term investment strategy with a focus on high quality companies.  We will continue to focus on the characteristics that are important to a Shaker stock and when the market does ultimately bottom, there will be very attractive investment opportunities, especially for profitable growth stocks. 

We look forward to discovering more great companies in the year ahead.  

Sincerely,

The Shaker Investment Team

General Disclosures: Disclosure: Past performance is not indicative of future performance. It should not be assumed that any investment or strategy discussed in this publication will be equally profitable in the future. Investment in this strategy carries risks, including loss of principal. There is no guarantee that any specific investment strategy will be suitable or profitable. Investments in smaller companies may be riskier, less liquid, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. The strategy’s overall return is a composite of clients’ separately managed account returns. Some clients’ investment returns were more or less than the overall strategy return. Not all our client’s returns surpassed the benchmark and the strategy is more concentrated than the benchmark. The index performance information in the table is based on public information which we believe to be accurate but have not been verified.

The specific securities identified in this report does not represent all of the securities purchased or sold or recommended to clients. Holdings / sector weightings in any strategy are subject to change and should not be considered investment advice or a recommendation to buy or sell a particular security. Actual holdings may vary by client. A list of all the stocks selected for any of our strategies during the trailing twelve months is available upon request. This document is confidential and for the sole use of the intended original recipient. It is not intended as investment advice or recommendation, nor is it an offer to sell or a solicitation of an offer to buy any interest in any fund or product.