July saw a resumption of positive returns for Forge First Asset Management Inc. after an ever so brief hiatus. Given our strong focus on free cash flow and continuous bottom up analysis, we typically find that earnings season treats us reasonably well. It’s a quarterly reminder to the investing world that the companies we own have strong underlying fundamentals while those that we are short may be overvalued for any number of reasons; but again the presentation of financial statements leaves little room to hide. We were particularly encouraged by the broad based contributions to July’s performance, with the top ten made up of energy E&P longs (3) and shorts (1), technology longs (2), a REIT, a financial, an industrial and an energy marketer that seemed left for dead less than a year ago. Concerning the last stock in that list, we thought mid-year might be a decent time to lay out what has been our thesis for some time on one of our favourite names.
The month of June was a somewhat frustrating one for us at Forge First as the portfolios struggled to gain traction amidst a market that also seems inclined to take two steps forward and two steps back. Our portfolio returns were largely held back by the kneejerk nature and short term focus of this market reacting to the “will they, won’t they?” trade war rhetoric. We truly have no opinion on whether they “will” or “won’t”, but we would prefer that the public servants get their bluster out of the way so we can invest accordingly.
Capital markets regained their footing during the month of May with the first part of the month being dominated by the various narratives around strengthening oil prices while earnings season played out in Canada. Our funds posted a slightly negative month, our first of 2018, as a couple of long positions reported earnings that proved underwhelming to the street. More broadly speaking, the return of low volatility and strength in momentum names characterized the back half of the month, with the VIX (volatility) index continuing its downtrend and the large and mega-cap technology names regaining a bid, rendering the tumult of the first quarter a distant memory. We continue to believe that our acute focus on free cash generation is the single most important factor upon which to focus when investing in equities, and as a result we should continue to outperform throughout both the market and business cycles.
April experienced more of the same volatility in equity markets that has persisted for most of the year, and as a result, Forge First continued to play things safe, ending another month with positive net returns for investors. Expectations around inflation caused the US 10-Year Treasury yield to briefly touch 3% for the first time in over four years, oil prices increased 7% for the month (making commodities the top performing asset class), and of the 32% of S&P 500 companies having reported more than 75% exceeded expectations. The TSX Total return index generated a 1.8% return for April (-2.8% YTD) and the S&P 500 Total Return Index (US$) was up a modest 0.4% for the month (-0.4% YTD).