Commentary and Looking Forward

The market over the last 10 years was built up largely on the back of growth-tech stocks. The FAANG stocks ended up an awful lot like a teenager hitting a massive, early, growth spurt. Participants in the market were ecstatic at the rate of growth and the benefits. All of a sudden, the market (thanks to tech) was a full foot taller than all the other kids and was dunking a basketball in the 8th grade! They were a top college prospect because of their sheer size. What we saw happen in Q4 was a plateau. The previously untouchable basketball player, or the FAANG stocks, stopped growing at the same speed. This had scouts and investors nervous, they were no longer sure our “golden boy” stocks were worth their price. These doubts then infected the whole market. Scouts were thinking “If we were wrong about this kid, were we wrong about all of our recruits?” As a result, the sell-off was steep and it was fast. So, while we may no longer be dealing with the next Michael Jordan, in our opinion, we are still looking at a player with very solid fundamentals and quite a bit of upside to go.

Volatility is inherently more present when dealing with small cap stocks. They’re basically college freshman playing against professionals. While they may have the same level of knowledge and talent, they simply get pushed around in the paint. This isn’t something we’re concerned about. Our job is to find the stocks who have “large cap talent” and ride their ascent to the pros. This aspect is what excites us about small cap stocks, while we don’t necessarily deal with the Lebron James’ and Kevin Durants of the financial world, our job is to find the next one. And the benefit to finding the next Lebron is the length of the career. Of course, every team wants a Lebron, but wouldn’t it be even better to have the next Lebron in his first couple of years in the league?

Looking forward, we expect to see more volatility through Q1 and potentially Q2. We do expect a relatively significant rebound somewhat soon. Just like the Warriors, the market is finally showing some weakness, but we still have a very strong underlying economy to fall back on, and the Warriors still have arguably the best basketball team ever assembled. What we’re saying is, the current sell-off is still just noise. The underlying factors point to more upside. The only things that may offset the strong economy are the tariffs, trade war, and Fed.

Portfolio Review

In what is traditionally the strongest quarter of each year, the equity market posted, in many terms, a historically poor quarter erasing all the gains experienced during the previous three quarters in 2018. What started out as a well needed correction turned into a rolling “Bear-Market.” It was a very disappointing quarter for most market participants, including us, despite having outperformed our primary and secondary benchmarks for the quarter and year. During the quarter the Small Cap Strategy declined -18.80% versus a decline of -21.65% and -20.14% for the Russell 2000 Growth Index and Russell 2000 Index, respectively. For the year our Small Cap Strategy declined -7.93% versus a decline of -9.22% and -11.00% for the Russell 2000 Growth Index and the Russell 2000 Index, respectively. Finally, the Yorktown Small Cap Fund (Ticker: YOVIX) that Sapphire Star Capital sub-advises, ended the year in the top 8% of its size and style category—small cap blend.