While we experienced a modest loss in the third quarter, our performance was better than any of the major indices, including our benchmark Russell 2000® Value Index. Our year-to-date performance is substantially ahead of the R2V index, which is slightly negative through the third quarter. One benefit of the recent overall market decline is that we are seeing an increased number of choices for new investment.

Usually, when considering investment ideas, we either treat current news headlines as noise or as opportunities to take a contrarian position. As the third quarter ended, we were faced with an auto strike, a potential government shutdown, a re-start of student loan payments, escalating oil prices, and mortgage rates not seen for a generation. If you are a knee-jerk contrarian, it would seem to be a great time to buy a leveraged cyclical with ties to the housing industry. We are contrarians, but there is such a thing as a bridge too far, especially when considering our risk minimizing approach. So, how far would we go?

We bought a recent spin-off called PHINIA (PHIN), which was discarded from Borg Warner so the remaining company could get a higher valuation. PHINIA produces fuel injection systems for autos and trucks; definitely economically sensitive and tied strongly to internal combustion engines. What do we like here? 1) management – clear focus on returning money to shareholders with a recently announced large buyback and a generous dividend; 2) fundamentals – not nearly as bad as perceived; the installed base of internal combustion engines is not going away (generating replacement demand) and a significant percentage of sales are to heavy vehicles, where transition to battery power is not economical at present; 3) cash flow – outstanding, with relatively low leverage; 4) valuation – PHINIA is selling at about 6x estimated 2023 earnings of $4.70.

My final thought on being a contrarian is that unless you are willing to take the chance of looking really stupid if you are wrong, you are not doing justice to your philosophy. PHINIA presents us with that opportunity; the negatives are obvious, but hopefully already reflected in the stock price.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer