We have now completed our fifth consecutive year of outperforming our benchmark, the Russell 2000® Value Index. What makes this performance particularly gratifying is that it has been accomplished in a strong market environment without sacrificing risk management principles. Our beta relative to the R2V index remains below 1.0x while managing a concentrated portfolio of approximately 40 stocks. We focus on balancing risks, and we will discuss two recent investments as an illustration.

Tenet Healthcare is a large operator of hospitals in the US. We bought Tenet in late 2022 at $40, on its way down from a high of over $90. Two significant factors were squeezing earnings: 1) a high amount of leverage in a rising interest rate environment 2) heavy use of expensive temporary travel nurses to cover shortages experienced during the pandemic. Tenet stock nearly doubled in 2023, and then doubled again at its peak during 2024. Earnings per share soared as management paid down debt and repurchased shares with asset sale proceeds and sharply reduced their travel nurse expense as they adjusted to the post-pandemic environment.

Cross Country Healthcare is a large supplier of temporary travel nurses to the hospital industry. When we bought the stock in the lower $20’s in 2023, we were premature in our assumption that travel nurse demand and pricing had stabilized. The stock continued plunging in 2024, eventually bottoming near $10. Unlike Tenet, Cross Country was cash rich and debt-free, so we were comfortable holding the stock in the face of declining earnings, given that the company continued its share repurchase program.

So, what is the current status of these investments? We sold two-thirds of our Tenet holdings at over $150 (closed year-end at $126), when there was a significant sale of stock by the CEO’s family. We will await future management signals to determine the timing of the disposition of the final third. Cross Country recently received a buyout offer from a large privately held competitor for $18.61 in cash, a 70% premium to its trading price at the time. While still below our cost, we are getting partially bailed out of one of our worst investments. This does follow a pattern with our takeovers, where management seeks to maximize value when fundamentals have been disappointing and the stock market does not recognize the inherent value of the company. Despite the loss on Cross Country, these two investments combined have been highly profitable for clients.

Contrarian investors like ourselves are worriers by nature, and there is certainly an abundance of things to keep our minds occupied currently. Nevertheless, we continue to implement our strategy which has produced such strong risk-adjusted returns over the past 30 years…and we will take our forgotten forty over the magnificent seven in 2025.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer