Our domestic fund remained steady in March despite the swings in the overall stock market.

 

 

March

Year to Date

Since Inception (Annualized)

Motley Fool Small-Mid Cap Growth Fund (TMFGX)

-0.08%

3.49%

14.46%

Russell 2500 Growth Total Return

0.82%

2.38%

14.31%

For a standardized list of performance for the Small-Mid Cap Growth Fund, please click here. For fund holdings, please click here.

March was a flat month for the Small-Mid Cap Growth Fund, though it was marked by plenty of exciting up and down days in the market along the way. For the month, the investor class shares of the fund returned -0.08% as compared to 0.82% returns for the benchmark Russell 2500 Growth Index. For the first quarter of the year, the fund returned 3.49% vs. 2.38% for the benchmark.

March is not a big month for quarterly earnings reports (the first two months of the quarter contain the lion’s share of the quarterly reports), so share price movements were more muted than in many other months, particularly on the upside, where no individual position moved up even 10%. Leading the list of top performers were Watsco (9.4%), Broadridge Financial Solutions (9.3%), Jones Lang LaSalle (8.7%), and SBA Communications (8.7%).

The more interesting and significant moves in individual positions came from the negative side even though, as noted, the fund as a whole was essentially flat for the month. Long-time holding, and by some measures the most profitable investment for the fund during its nearly eight-year history, American Woodmark was down 23.3% for the month. Even after that loss, the stock is still up more than 600% from where the fund first started acquiring shares six years ago, but 20% off a major fund holding is still worth discussing despite the much better looking long-term picture.

American Woodmark is one of the few companies in the fund that did report earnings during the month, and that was the source of the weakness for the stock. Actually, the real weakness came not on the publication of the initial report on March 9, but on March 12, when a correction was issued and the company revealed that free cash flow for the quarter was $16 million, instead of the $81.8 million noted in the initial report.

On the positive side, net sales were up 17%, but this was largely due to its recent acquisition of RSI Home Products at the end of December. Excluding the acquisition, organic sales were only up 2% for the quarter. A major problem for the company was promotional activity by its competitors on lower-end units – a problem for margins even as total sales rose. On the whole, though things in the cabinet-making business look more competitive, we remain confident in American Woodmark and its management.

Other laggards for the month were Ionis Pharmaceuticals (down 16.5%) and Hasbro (down 11.8%). Hasbro was negatively affected by the announced closing of all Toys R Us stores, an action that has and will continue to put a lot of Hasbro inventory on sale to the public. Additionally, Hasbro will have fewer outlets for its products. It is certainly not a good development for Hasbro, although it is likely to affect Hasbro’s major competitor Mattel even more severely, as Hasbro has done a better job of building its business around mobile gaming than Mattel has.

Finally, Thor Industries was down 10.7% for the month. Like American Woodmark, Thor has been one of the best and largest holdings for the fund, so the long term shows a better picture than the short in this case. In Thor’s case, the recent weakness in the stock is the result of the aluminum and steel tariff news capturing the headlines these days.

Although Thor has reported that most of its steel and aluminum is sourced domestically, and not directly affected by the tariffs now in place on Chinese product, nevertheless, the cost of domestic steel and aluminum is going to go up as there will be greater demand for it, and less competition from foreign product. Sales of RVs remain quite strong, though at the end of the month, the Recreational Vehicle Industry Association released February shipment data showing growth of “only” 9.2%, significantly cooler than the 25.3% growth of January. Taking the two months together, total shipments are up 16.6%, basically the same as the 17.2% growth in 2017.

We’re not too worried about the long-term health of the RV market, as demographic shifts have worked out favorably for RV makers, with millenials showing a surprising but welcome interest in buying at much earlier ages than previous generations, but margins are definitely going to be affected by the trade wars that are brewing. This is also affecting LCI Industries, though its stock held up better this month than Thor’s.

The Small-Mid Cap Growth Fund changed its name from The Great America Fund on December 31, 2017.

Note: The Morningstar RatingTM for funds, or 'star rating', is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. As of 3/31/2018, the Motley Fool Small-Mid Cap Growth Fund (Investor shares) was rated in the Mid Cap Growth Funds category, receiving a four-star rating among 549 funds over a three-year period and a four-star rating among 485 funds over a five-year period.

Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10- year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Past performance is no guarantee of future results.

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