As usual, the stock market has found a way to surprise most participants. It remained resilient in the face of tariff threats, budgetary problems and American involvement in a Middle East war. Given this trifecta of events, a strong showing of all the major indices would have seemed to be an unlikely outcome. While we had a solid quarter, we lagged behind the Russell 2000^® Value Index, not unusual for us in this kind of market environment.

What surprised us this past quarter was that our worst performers were in the supposedly “safe” categories of razor blades and generic groceries. Our comment last quarter about the difficulty in identifying safe areas of the economy has proven to be prescient. Edgewood Personal Care (-25%), a manufacturer of razor blades, feminine hygiene products and sunscreen, experienced sluggish demand for its products. Treehouse Foods (-28%), a producer of store brand groceries, is seeing higher short-term costs resulting from a product recall.

On the positive side, we have considerable activity pending on the takeover front. At quarter end we had four companies in various stages of merger transactions. Dun & Bradstreet has received shareholder and regulatory approval for its acquisition, which should close imminently. Brighthouse Financial has reportedly received two bids from private equity firms and negotiations are ongoing. Cross Country Healthcare has received a second request for information from the FTC, creating uncertainty as to whether its planned acquisition by Aya Healthcare will be completed (but is now selling at a huge discount to the proposed takeover price). Just before quarter end, MRC Global agreed to be acquired by DNOW in a merger of energy sector equipment distributors. While not in the takeover category, management of recent purchase Matthews International is planning to enact transactions that will unlock shareholder value.

Valuation differentials between our portfolio at 11x forward 12-month consensus estimates and the large cap technology companies which dominate the S&P 500^® still seem extreme. While the earnings estimates for some of our companies might be somewhat suspect in the face of potential economic weakness, we are confident that their cash flow will allow continued execution of buyback programs.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer