We had a strong finish to an outstanding year. What made these gains particularly noteworthy is that they were accomplished without deviating from our risk minimization approach. We have always maintained that there are three factors which produce long-term excess returns for our restructuring strategy. We will outline each one below and illustrate how they contributed to 2021 performance.

First, our purchase discipline has us buying depressed stocks which management has signaled as being undervalued. We have found this usually limits the downside risk. In 2021, we did not have a single stock that finished the year down more than 10%. Our biggest losers were Xperi Holding Corp (-10%) and PROG Holdings Inc (-8%). Xperi is undergoing a strategic review that will potentially result in the company being split into two pieces that will ultimately be more valuable than the current entity, but the review is taking much longer than anyone (certainly us) ever expected. PROG is in the initial year of a spin-off, when companies can often experience difficulty gaining traction within the stock market. The company recently repurchased over 10% of its outstanding shares through a Dutch tender offer.

The second tenet of our approach is to use management signals as a sell decision tool rather than the price targets that many other managers use. This allows us to hold winners past the point when most value managers feel compelled to take profits. Vista Outdoor (+94%) nearly doubled again in 2021 following a more than 100% gain from our initial purchase price in 2020. This manufacturer of outdoor activity equipment (bicycle helmets, water bottles, cooking grills) and ammunition benefited both from pandemic leisure trends and increased levels of gun ownership. While Vista was the largest contributor to our return in 2021, it accounted for less than one-tenth of our total gain, indicating that our performance was strong across the entire portfolio.

The third factor is our governance review, which ensures that management interests are aligned with shareholders. This works in our favor when either fundamentals do not improve as anticipated, or the market does not recognize what management is doing to increase the company’s value. Management may then look to external parties who might offer them a fair price for their companies. We had six takeovers announced in our 40-stock portfolio in 2021, of which three are scheduled to close in 2022. The most recent announcement was Verso Corp, a coated paper producer that had struggled through the pandemic, and was one of our weaker performers in 2020. Because of the nature of our approach, quite often takeovers bail us out of underperforming positions.

We do not know what the future holds for the stock market. We only know that we will maintain our strategy discipline, which has produced strong results for our clients over our 28-year history.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer