We are pleased to report a positive return for the second quarter, compared to a Russell 2000® Value Index decline of 3.6%. One of our biggest percentage gainers was former laggard Perficient (+33%), which received a takeover bid at a substantial premium over its previous depressed price. On the other hand, Cross Country Healthcare (-26%) was a significant loser, as hospitals cut back on post-pandemic usage of the company’s travel nurses.

Departing from our typical quarterly portfolio performance analysis, I will now delve into the distant past to present a cautionary tale, which could be somewhat analogous to current events. Coincidentally, it involves a company, National Video, which had a ticker symbol almost identical to today’s market leader Nvidia (NVD vs. NVDA).

In the early/mid 1960’s, the great consumer technology growth industry was color television. Investors believed that almost every household in the US would replace their black and white television with color (an investment thesis that actually came true), and one of the hottest stocks was National Video. The domestic television manufacturers (Admiral, Magnavox, RCA, Zenith) were rapidly ramping up production, but there was a major constraint. Capacity in one critical item, picture tubes, was controlled by National Video. So, the manufacturers were forced to rely on a single outside supplier for what was probably the most expensive item in the set. Inevitably, the set manufacturers developed their own picture tube capacity, and eventually moved production lines overseas, cutting National Video completely out of the picture (literally and figuratively).

An investment in National Video did not become completely worthless – in fact, you can currently buy an engraved certificate for 100 shares of NVD on the internet for $8. We are not even remotely suggesting Nvidia will follow this dramatic path of value destruction. However, we do see a large buildup coming for alternative chip production sources. Furthermore, technology leaders from one generation often get leap-frogged in the next. We only have to look back at the dot-com boom of the late 1990’s, when Intel had a seemingly unassailable position.

Relevance of all this to Kestrel? We are contrarians – our experience with cyclical industries (even growth cyclicals) is that managements add capacity when things look great, only to have it come on line years later when things have cooled. We prefer to buy companies with capacity in place and the capital expenditures already made, when the market has adjusted to the new level of industry capacity. Caveat emptor to the trend chasers.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer