A December to remember. Double-digit gains in the year’s final month pushed Kestrel’s net 2023 return to approximately 20%, substantially better than the Russell 2000® Value Index full-year return of 14.7%. While this pales in comparison to the NASDAQ® 2023 return of 43%, it should be noted Kestrel’s two-year return easily surpasses the NASDAQ. After a 33% loss in 2022, the NASDAQ is still down 4% on a two-year basis (Kestrel was only down single-digits in 2022 and is well into positive territory for the two years). The valuation gap between our universe and the technology stocks leading the NASDAQ and S&P 500® advances remains quite large. While the long-awaited turn toward value has thus far proved elusive, the December advance in the R2V (and small cap stocks in general) is a reminder of how powerful a sentiment shift can be if significant funds flow into a universe with relatively limited liquidity.

An important part of Kestrel’s investment approach has always been identifying managements whose interests are aligned with shareholders. This approach has helped to produce an average of three takeovers per year over our 30-year history, as these shareholder-friendly managements seek to maximize value. The fourth quarter of 2023 was particularly active in terms of value maximization transactions proposed. SP Plus, a manager of parking lots and garages, agreed to be taken private at a 50% premium to its prior trading price. HireRight Holdings, a provider of background security checks, received a bid at a 30% premium from current private equity holders. Daseke, a specialized trucking company, has agreed to be acquired by a larger freight transportation company at a 70% premium. Vista Outdoor has proposed a transaction that will separate the company’s outdoor recreation business from its ammunition division, with shareholders receiving approximately $13 per share in cash (Vista currently trades near $30). ODP Corp (formerly known as Office Depot) is currently engaged in a buyback program that may ultimately shrink the share base by as much as 50%. A shareholder recently proposed a transaction that includes an asset sale and a spinoff.

As contrarian value investors, we must confess to having slightly mixed feelings about the recent sharp market advance. Bargains are now much harder to find. However, our current portfolio still seems reasonably priced at under 12x expected 2024 earnings. Is it too much to ask for an encore in ’24?

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer