After five consecutive quarters of strong positive performance, our portfolio and the small cap value universe experienced a moderate setback in the third quarter. Common refrains among our manufacturing and retail holdings were supply chain inefficiencies, higher commodity costs, and increased labor expenses. A retailer was our biggest loser, having tough comparisons against pandemic inflated results from 2020 in addition to the above mentioned three challenges. On the bright side, a consumer brands company gained when their shareholder friendly management sold their largest and most profitable division because they felt the valuation was not being reflected in the stock price. Part of the proceeds will be allocated to share repurchases.

As you may have seen, 2 senators have proposed a 2% excise tax on buybacks, saying that buybacks use resources that would otherwise go to workers. We believe this is a false dichotomy, since virtually every company we review treats its first priority as internal investment (either labor or capital projects) for growth and only then deals with how to manage the residual after-tax free cash flow. The three options for this are typically 1) acquisitions 2) dividends 3) buybacks. A 2% excise tax will marginally change the balance between these choices, making acquisitions slightly more attractive by avoiding immediate double taxation. If it should get passed, at 2% we doubt that this proposed tax would have a meaningful impact on our buyback universe – if a company feels its stock is undervalued at $20, an increase to $20.40 shouldn’t make a big difference. If larger companies with excess capital shift more toward acquisitions, it might actually benefit our portfolio of undervalued small cap companies.

Speaking of acquisitions, this has been a good year for us, with six of our portfolio holdings either acquired or awaiting deal closure. The most recent announcement was from an asset light logistics company now having a very strong year. They are beneficiaries of supply chain problems, as they are skilled at determining the most efficient way to get goods to the proper destination. We will endeavor to be equally efficient in steering our portfolio to a destination which will make our clients happy.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer