Kestrel had a modestly positive fourth quarter, as we are beginning to see some signs of stock market rotation away from the Magnificent 7 stocks which have dominated the investment scene for the past several years. The Russsell 2000® Value Index was one of the best performing indices for the quarter, an encouraging sign for value investors like ourselves.

We had a few examples of what happens when some of our unloved companies report an unexpected positive earnings surprise. Recent purchase Haemonetics (blood management solutions) exceeded modest expectations and the stock finished the quarter with a 64% gain. Photronics (photomasks used in semiconductor production) gained 39% on a quarterly earnings beat. On the other side, Cross Country Healthcare (travel nurses) dropped 43% when the FTC blocked a planned merger.

There were a few twists and turns with the next position discussed here. Adtalem Global Education (medical training schools), a rare Kestrel holding which had become a momentum stock, experienced a short-term fundamental issue and declined 33%. Fortunately, we had sold two-thirds of our holding earlier in the year when it became an outsized position and we were concerned about potential regulatory issues. While we didn't capture all the momentum upside, this allowed us to limit the portfolio impact in the fourth quarter. Adtalem has now increased its share repurchase program following the stock price decline.

We are buying companies where managements believe their stock is fundamentally undervalued and are taking action to rectify the condition. Therefore, it is not surprising that six holdings in our forty stock portfolio are either in the process of being acquired, exploring strategic alternatives, or have private equity firms evaluating the company. TreeHouse Foods (store brand groceries) is the most recent example of one of our companies being acquired by private equity. Kestrel’s portfolio remains at a deep discount to the S&P 500® (12x vs 22x respectively), based on 2026 earnings projections.

                                                                                                                                                Abbott J. Keller, CFA

                                                                                                                                            Chief Investment Officer