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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Conestoga's Small Cap strategy underperformed in Q2 2023 due to negative stock selection in Industrials and lack of exposure to surging computer hardware. Supply chain disruptions and defense budget uncertainty weighed on key holdings like Mercury Systems."
Conestoga's Small Cap Composite returned 4.93% net in Q2 2023, underperforming the Russell 2000 Growth Index's 7.05% return. The portfolio held up well during early quarter market weakness but lagged in the subsequent rally. Performance was hindered by the rebound of unprofitable companies and negative stock selection, particularly in Industrials where 11 of 16 names detracted. Key laggards included Mercury Systems facing supply chain disruptions and defense program delays, Mesa Laboratories missing estimates amid supply chain issues, and Axon experiencing profit-taking after strong prior performance. Technology sector suffered from lack of exposure to computer hardware which surged 75%. Positive contributors included SPS Commerce benefiting from e-commerce digitization resilience, Simpson Manufacturing beating estimates despite housing weakness, and SiteOne Landscape Supply aided by stable landscape spending. The firm maintains its high quality conservative growth philosophy, employing time horizon arbitrage to identify companies capable of growing through multiple business cycles with low portfolio turnover of 20-30%.
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Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.
Market Conviction
High conviction evidenced by concentrated portfolio approach with 45-50 holdings in Small Cap strategy, detailed individual position analysis, and willingness to hold through volatility. Manager provides specific thesis for each holding and clear rationale for additions/sales, demonstrating strong conviction in selected names.
Growth Outlook
The manager acknowledges challenges like higher rates, banking turmoil, and geopolitical tensions but notes stocks have generally shaken these off. Recession forecasts deferred to 2024 and employment/consumer spending remain healthy, suggesting cautiously constructive but not bullish outlook.
Risk Appetite
Portfolio positioning appears measured with selective additions and sales. Added one new position (Federal Signal) while selling positions due to specific concerns (Douglas Dynamics chassis shortage, Health Catalyst model shift). No evidence of aggressive deployment or major risk-taking.
Capital Deployment
Limited net deployment activity with one new position added (Federal Signal) and selective sales. No cash level changes mentioned and activity appears to be rotation rather than net deployment or de-risking. Neutral positioning maintained.
Forward Guidance
Manager expects supply chain constraints to ease and sees potential for improved execution with new leadership at companies like Mercury Systems. Maintains focus on long-term growth through business cycles, suggesting modest optimism about deployment opportunities ahead.
Language Signal
Language is balanced with mix of challenges (supply chain disruptions, defense delays, margin pressures) and opportunities (secular growth themes, improving fundamentals). More descriptive than directionally bullish, with measured tone throughout.
Perceived Risk
Manager acknowledges multiple risk factors including higher rates, banking turmoil, geopolitical tensions, and recession concerns, though notes markets have generally navigated these challenges. Supply chain disruptions and sector-specific headwinds discussed but not characterized as systemic threats.
Opportunity Density
Manager identifies selective opportunities with addition of Federal Signal and maintains conviction in existing holdings despite near-term headwinds. Sees potential for improved execution as supply chain issues resolve, suggesting moderate opportunity set in their focused market segments.
Time Horizon
Explicitly states long-term investment horizon with low turnover rate of 20-30% and time horizon arbitrage approach. Philosophy focuses on companies capable of growing through multiple business cycles, and manager willing to hold through short-term volatility as evidenced by maintaining positions despite temporary headwinds.
