This could be described gently as a transition quarter. Initial euphoric expectations for the Trump administration have been tempered by the threat to economic growth of tariffs. Kestrel performance was roughly in line with the 7.7% decline in the Russell 2000® Value Index, but substantially better than the 15%+ average decline of the Not-So-Magnificent-Seven (Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia and Tesla). Our performance was impacted by some surprise regulatory actions: 1) Atkore received notice that it is being investigated for PVC price-fixing post-pandemic, 2) CNX Resources received an unfavorable ruling on methane tax credits, 3) Cross Country Healthcare received a second request for information from the FTC regarding its planned acquisition by Aya Healthcare.

We have stayed true to our strategy, looking to minimize risk while staying invested with managements who feel their stock is undervalued. What has proven to be very difficult is to determine exactly what are the safe areas of the economy. Downsizing plans for government have raised questions about the resilience of areas previously considered relatively insensitive to downturns, such as defense and healthcare. Post-election, we added an electric & gas utility, MDU Resources, that was the remaining stub entity after spinning off faster growing subsidiaries. Concentrix, an operator of customer service centers with a share repurchase program was purchased at less than five times expected 2025 earnings. Management sees artificial intelligence as a positive for operations, rather than the threat apparently concerning investors. Expectations were evidently low enough that merely reaffirming guidance triggered a 40% one day gain in the stock (mostly erased in ensuing days, but the potential has been demonstrated if psychology changes). Given the potential risks involving student loan funding with the new administration, we chose to reduce our outsized position in Adtalem Global Education after the stock had more than tripled.

We are seeing an increased universe of potentially promising additions to our portfolio, given the stock market decline and some disappointing earnings reports. Valuations in our sector of the market remain reasonable, assuming current earnings estimates are valid. We will watch as tariff ramifications work their way through the economy, and we will continue looking for managements who see valuation dislocations between their stock price and company fundamentals.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer