While we are pleased our year-to-date performance has turned positive, our third quarter results did not match the double-digit return of the Russell 2000® Value Index. We are clearly out-of-phase with what is working in the current speculative market environment, whether it be IPO’s, AI related stocks, or companies that are selling equity to “invest” in Bitcoin. Of the ten largest contributors to the R2V third quarter performance, half were unprofitable and a few of the others traded at multiples that would only qualify as value in some alternative universe. What we do find encouraging is that the R2V index outperformed both the S&P 500® and the NASDAQ® index in the third quarter. If investor focus moves away from mega cap tech stocks, it should eventually rotate in our direction. The valuation gap between the S&P 500 and our small cap value portfolio remains historically high (S&P 500 at 24x and Kestrel 12.5x forward earnings).

Private equity continues to be a source of value realization for our portfolio. Premier Inc., a provider of healthcare optimization services, agreed to be taken private at a near 30% premium to its price at the end of June. As the third quarter ended, rumors arose about potential private equity interest in Treehouse Foods, a provider of store brand groceries. We would have theorized that this investment should have done quite well in an environment where lower income consumers are squeezed, but it has been one of our worst performers to date – apparently it is difficult to draw a connection between AI and generic pickles.

Individual stock performance in the quarter reinforced our belief about the current market environment. Our best performing stock was Upwork (+38%), a company tangentially related to the AI excitement. They manage an employment website which has been getting a boost from matching AI job seekers with employers. At the bottom of our list is Prestige Consumer Healthcare (-22%), which manufactures and distributes such exciting products as Luden’s cough drops, Chloraseptic, and Dramamine (perhaps the latter will get a boost if the stock market becomes even more volatile). For now, I can only avail myself of Goody’s headache powder

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer