We are extremely pleased to have performed better than a strongly advancing Russell 2000® Value Index with what we believe is a portfolio with below average risk. Once again, any discussion of performance relative to our benchmark must begin with the stocks we do NOT own. While the first quarter featured the economic reopening stocks (airlines, hotels, restaurants), the second quarter belonged to the meme stocks, especially AMC Entertainment. This stock gained 445%, becoming the biggest weight in the Russell 2000® Value Index and contributing about 120 basis points to the index return.

While we applaud AMC’s ability to sell overpriced stock along with their overpriced popcorn, our focus remains on managements who consider their stock to be underpriced, and are looking for ways to unlock value. A recent addition to the portfolio is an office product supplier, which plans a spinoff of its retail stores as well as a substantial share buyback. Subsequent to our purchase, its major competitor has made an offer to purchase our company’s retail division and has indicated that they believe they can now win government antitrust approval for the combination (this isn’t their first rodeo with the targeted company). Given its extremely strong financial condition and shareholder orientation, we are comfortable with our holding regardless of the eventual outcome.

Plus ça change, plus c’est la même chose; “the more things change, the more they stay the same” has taken on a double meaning this year, because this market has been all about the meme things. We have seen speculative manias in the past and they usually end badly for the direct participants. When the meme stocks make substantial moves, it affects Kestrel in several ways. As we indicated before, it can inflate our benchmark return. However, there can also be some benefits. Some of our unpopular stocks occasionally experience a flurry of interest, as market attention rotates toward value stock laggards. Finally, from our perspective, anything that takes focus away from the mega cap tech companies which have dominated the market in recent years creates the possibility of better performance for small cap value stocks, as we have witnessed in the first half of 2021. The valuation of our portfolio remains reasonable at under 15x forward earnings estimates, and offers the potential for solid returns, even if current favorites falter.

                                                                                                                                                 Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer