Q4 2023 Commentary

Q4 2023 reminded investors that the only thing constant is change. While the prior quarter saw markets fall due to the Federal Reserve’s commitment to keep rates higher for longer in its fight against inflation, the fourth quarter brought an “everything rally” with stocks, bonds, and crypto all rising in anticipation of interest rate cuts and a belief that a soft landing for the economy is likely. Small and mid‐cap stocks participated in the rally, notching most of their calendar year gains in the final three months of 2023. Each of the QSV strategies, focused on quality businesses that possess competitive moats, delivered strong outperformance for the calendar year relative to its respective value index. More information including since‐inception performance for each strategy may be found at www.qsvequity.com.

QSV Strategy Quarterly Performance

QSV Small Cap returned 15.03% and 14.93%, gross and net of fees, respectively, slightly lagging the Russell 2000 Value Index return of 15.26% while leading the Russell 2000 Index return of 14.03%. The most significant positive impact was made in Energy companies, where an underweight to the index aided performance, and Communication Services companies, where QSV’s overweight detracted but security selection added value. An underweight and company selection in Consumer Discretionary companies detracted from relative returns. QSV’s overweight to Healthcare helped returns, but security selection detracted.

QSV Small Cap Top Contributors

After a significant drop in Q3 on news of its restatement of three quarters’ financial results, Napco Security Technologies (NSSC) was the leading contributor to performance during the quarter as its shares rose 54%. NSSC is a global provider and manufacturer of high‐tech security, and internet connected home, video, fire alarm, access control, and door locking systems. QSV was concerned about management’s controls that led to the need for the restatement and closely monitors the business. NSSC delivers returns on invested capital of 14% and sells at a discount to our measure of intrinsic value.

PubMatic (PUBM) was a leading contributor to performance as revenues, earnings and forward guidance all exceeded expectations. PUBM is a leading platform provider of the digital advertising technology, helping publishers that supply digital ad inventory to better manage their inventory, selling a high percentage of their inventory and maximizing revenue per ad sold. Competitive advantages include switching costs ‐ the time, effort, and money required to transfer platforms once an advertiser is set up on PUBM’s platform – and cost advantages through its investment in infrastructure and off‐shore research and development. PUBM produces returns on invested capital of 18%.

QSV Small Cap Top Detractors

Core Laboratories (CLB) fell 26% during the quarter, detracting from performance. The company has competitive advantages in reservoir analysis and production enhancement services, serving hydrocarbon exploration and production companies as they seek to improve production levels and economics. The company also anticipates significant future growth from the application of its technologies to carbon capture and sequestration projects. A risk inherent to the business is the cyclicality of oil prices, as was seen in Q4 2023.

Ituran Location and Control Ltd. (ITRN) shares fell in response to the war in Israel where the company has operations and a sizable portion of its client base. ITRN provides stolen vehicle recovery, fleet management, and other value‐added services. Its subscription‐based model adds 80,000 to 100,000 net new customers per year, derived from after‐market sales, OEMs, and insurance companies, and currently reports over 1.8 million subscribers across Israel and Latin America. ITRN management affirmed that the company has not seen any impact to its ongoing operations in Israel. Company headquarters are in the center of the country, just outside of Tel Aviv, and not near any borders. ITRN produces returns on capital of 19% and its shares are currently at a significant discount to intrinsic value.

QSV Small Cap Portfolio Activity

Trims and additions were made in five holdings during the quarter, but there were no new positions added. Shares of foodservice packaging company Karat Packaging (KRT) were sold for valuation reasons. QSV had sold portions of the KRT position two other times in 2023, taking gains in this long‐term holding.

QSV Mid Cap returned 12.32% and 12.05%, gross and net of fees for the quarter, leading the Russell Mid Cap Value Index return of 12.11% before fees while narrowly lagging the Index after fees. Mid Cap lagged the Russell Mid Cap Index return of 12.82%. Security selection in Information Technology and Financial companies helped relative performance, while selection in the Energy and Industrials sectors detracted. Underweights in Energy and Materials businesses helped relative performance, while over weights to Healthcare and Technology companies detracted from performance.

QSV Mid Cap Top Contributors

Monolithic Power Systems (MPWR) was the leading contributor to performance in the quarter as the company delivered strong earnings growth. MPWR is a global provider of high‐performance, semiconductor‐based power solutions. As a “fabless” company – one that does not manufacture the chips used in its products – MPWR has benefitted from devoting more resources to chip design rather than capital expenditures, resulting in greater free cash flows, higher margins, and Returns on Invested Capital of 24%.

Shares of Bank OZK (OZK) gained more than 35% during the quarter, supported by strong business performance including loan growth in its Real Estate Specialties Group that was greater than expected. OZK management noted that they will focus less on share buybacks in 2024 versus 2023 due to their expectations for further loan growth. OZK has a long history of exemplary credit, best‐in‐class profitability, and strong management. The bank produces Returns on Tangible Equity of 18% and its shares are trading at 1.1 times tangible book value.

QSV Mid Cap Top Detractors

Core Laboratories (CLB) was the leading detractor to QSV Mid Cap performance and is discussed above. Oil and natural gas producer APA Corporation (APA) detracted from performance during the quarter. While both revenues and earnings beat analysts’ expectations for the quarter, APA shares declined along with commodity prices. APA produces strong free cash flows and is committed to returning 60% to shareholders in the form of buybacks and share repurchases. Following the end of the quarter, APA announced its acquisition of Callon Petroleum (CPE) in an all stock deal, furthering the trend of M&A to build scale in the exploration and production industry. The combined company should see meaningful synergies through reduced overhead, interest expenses and operating synergies.

QSV Mid Cap Portfolio Activity

There were no total sales or purchases of positions during the quarter. QSV did add to its position in the payroll and human capital management platform Paycom (PAYC) on weakness in its share price.

QSV Select returned 13.98% and 13.74%, gross and net of fees, leading the 13.76% returns of the Russell 2500 Value before fees, while slightly lagging the Index after fees. QSV Select outperformed the 13.35% return of the Russell 2500 Index. Select is a high conviction strategy that takes QSV’s best ideas from our Small Cap and Mid Cap strategies. Security selection helped performance in Financial, Information Technology and Real Estate holdings, while detracting from performance in Industrials, Energy and Consumer Discretionary businesses. An underweight in Energy holdings aided performance.

QSV Select Top Contributors

Napco Security Technologies (NSSC) was the leading contributor to performance during the quarter and is discussed above.

Glacier Bancorp (GBCI) rose as quarterly results were better than anticipated. GBCI benefits from an operating footprint in seven economically vibrant U.S. states which supports robust organic growth. Additionally, the company has used cash flows to take a partnership approach to acquisitions which have led to the bank producing Returns on Tangible Common Equity of 14%.

QSV Select Top Detractors

Core Laboratories (CLB) was the leading detractor to performance of QSV Select during the quarter and is discussed above.

Human capital management provider Paycom (PAYC) detracted from performance during the quarter. PAYC’s revenues were down due to its conversion of clients to a new, innovative solution that lessens errors and reduces the need for additional payroll runs as a result. PAYC targets customers with 50 – 10,000 employees and is expanding its business with larger enterprise deals and a push into both Mexico and Canada. The company has approximately 5% penetration of its total addressable market which we believe it can expand through its best‐in‐class salesforce. PAYC has returns on invested capital of 24%.

QSV Select Portfolio Activity

Turnover during the quarter was minimal, but QSV made one addition to upgrade its portfolio. Using the proceeds from Masimo (MASI), which was exited at the end of Q3, Amdocs (DOX) was purchased. DOX is a forty‐year‐old provider of software and services solutions for communications, entertainment, and media industries.

Our Focus on the Long Term

2023 stands as a stark reminder that predictions of market returns are folly. Few would have anticipated that markets would rise so significantly or that world events would take the turns – often tragic – that they did. While we cannot (and do not) predict, we can prepare. The strong results of 2023 have pulled forward market returns in expectation that interest rates will be cut, that inflation will continue to fall, and that corporate earnings will grow. One or more of these may not come about. The leveraged consumers that have bullishly supported the economy, and the labor market that has supported them, may cool. Geopolitical events may present challenges.

Preparing for uncertainty leads QSV to its focus on long term investment in quality businesses, those with limited debt, high interest rate coverage and strong free cash flows. We continue to find compelling opportunities in small and mid‐cap stocks of these quality firms, at reasonable valuations, and believe they will serve our clients well as we invest alongside them.

Disclaimer:

Returns are for the respective composites of QSV Equity Investors. Gross returns are calculated net of trading fees. Net returns are calculated net of trading fees and net of the firm’s management fee. All dividends are assumed to be reinvested. The returns of the QSV Small Cap strategy are compared to the historical performance of the Russell 2000 Indices as they are a widely used benchmarks for small capitalization securities. The returns of the QSV Mid Cap strategy are compared to the historical performance of the Russell Midcap Indices as they are a widely used benchmarks for mid capitalization securities. The returns of the QSV Select strategy are compared to the historical performance of the Russell 2500 Indices as they are a widely used benchmarks for SMID capitalization securities. An investment with QSV Equity Investors should not be construed as an investment in a program that seeks to replicate, or correlate with, these indices. Market conditions vary between the QSV products and these indices. Furthermore, these indices do not include any transaction costs, management fees and other expenses, as do the QSV products. Lastly, QSV may invest in securities and positions that are not included in these indices.

No client or potential client should assume that any information presented should be construed as personalized investment advice. Personalized investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Investing carries risk of loss.

QSV Equity Investors, LLC claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of the CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To view a GIPS report, please visit www.qsvequity.com.

QSV Equity Investors, LLC is a registered investment advisor. For additional information about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov.

QSV Equity Investors

Q3 2023 Commentary

Q3 2023 was difficult for U.S. equities as the reality that “higher for longer” truly will mean higher interest rates for longer gelled in the minds of investors. The Federal Reserve is intent on fighting inflation and seems committed to keeping rates high and conditions tight for the foreseeable future, causing concerns over the impact on the economy. Economic growth and interest rates impact smaller companies more than large, and small caps experienced a double digit drop from their July peak through the quarter-end. Three months is a brief period for investors focused on the long term, yet Q3 2023 was a quarter, given the market environment, where we expected our stock selection in the QSV strategies to perform better.
Particularly within the QSV Small Cap and Select strategies, a handful of companies disappointed. Some of these, we believe, still deserve a place in the portfolios and we have added to certain names at lower prices where the disappointment is believed to be temporary. Others we have exited in favor of higher conviction positions.

Beyond security selection, the headwinds to our portfolios from being underweight in energy were considerable this quarter. The Energy sector was up over 18% within the Russell 2000 Value index, while every other sector – save Financials at +1.04% – were in negative territory. QSV has historically been underweight in energy companies. In a period of $90 per barrel oil, many energy companies can boast high returns on invested capital; at more “normal” prices it is challenging to find energy businesses with competitive advantages, disciplined management, and the high business returns that we require.

QSV’s Small Cap and Select strategies underperformed their respective Russell value indexes during the quarter while QSV Mid Cap was in line with its index. More information including since-inception performance for each of the strategies may be found at www.qsvequity.com.

QSV Strategy Quarterly Performance

QSV Small Cap returned -5.24% and -5.31%, gross and net of fees, lagging the Russell 2000 Value Index return of -2.96% and the Russell 2000 Index return of -5.13%. The most significant positive impact was made in Consumer Discretionary companies, where QSV added value in security selection and was underweight compared to the index, and in Healthcare, where QSV was overweight and added value through security selection. An underweight and company selection in Energy companies accounted for nearly all the Small Cap portfolio’s underperformance relative to the index. Company selection in Real Estate also detracted from relative returns.

QSV Small Cap Top Contributors

Capri Holdings, Ltd. (CPRI) was the leading contributor to performance during the quarter as shares rose 46%. The purveyor of Michael Kors, Jimmy Choo and Versace agreed to be acquired by Tapestry (TPR) for $57 per share. We expect the deal with TPR to close in 2024 and exited our position placing the proceeds in companies we believe provide better opportunities.

For the second consecutive quarter, foodservice packaging company Karat Packaging (KRT) was a leading contributor to performance. Gross margins improved as KRT continued to benefit from lower input and shipping costs. Core products continue to show sales growth and the company’s Eco-friendly product sales are trending above 30%. The company initiated a quarterly dividend during the quarter, underscoring the strength of its free cash flow. KRT generates returns on invested capital of 15%.

QSV Small Cap Top Detractors

After being one of the portfolio’s greatest contributors for the year, shares of Napco Security Technologies, Inc. (NSSC) dropped on the news that it would restate the prior three quarters’ results due to understating cost of goods sold. NSSC is a global provider and manufacturer of high-tech security, and internet-connected home, video, fire alarm, access control, and door locking systems, serving commercial, industrial, residential, and government markets. Management has said the issue is resolved and will not impact results going forward. We have concerns about management’s controls that led to the need for the restatement and will continue to closely monitor the business. Prior to this restatement, we had sold
a meaningful amount of the position on strength.

Forward Air (FWRD) shares were hit on news that they are merging with private company Omni Logistics, a provider of global freight forwarding and third-party logistics services. The merger will roughly double the scale of FWRD and will add new growth opportunities with an asset light business, yet it does present integration risks. QSV acknowledges these risks but sees opportunities for growth and cost synergies within the business. We added to our position in FWRD on weakness in its shares.

QSV Small Cap Portfolio Activity

The acquisitions of Capri Holdings (CPRI) by Tapestry and PDC Energy (PDCE) by Chevron prompted the exit of those positions during the quarter. Johnson Outdoors (JOUT), UMH Properties (UMH), and UniFirst Corporation (UNF) were sold due to business performance that did not meet our expectations and the opportunity to upgrade to better ideas. New positions were initiated in professional medical platform Doximity (DOCS), business process management company ExlService (EXLS), LabCorp spin-out Fortrea Holdings (FTRE), Hanover Insurance (THG), real estate finance company Walker & Dunlop (WD), and digital media company Ziff Davis (ZD).

QSV Mid Cap returned -4.32%, gross of fees for the quarter, leading the Russell Mid Cap Value Index return of -4.46% and the Russell Mid Cap Index return of -4.68%. The net return of -4.55% lagged the Russell Mid Cap Value Index while exceeding the Russell Mid Cap Index. Security selection in Consumer Discretionary and Industrials companies helped relative performance, while selection in Financials and Real Estate businesses detracted.

QSV Mid Cap Top Contributors

Outsourced payroll and human capital management provider Trinet Group, Inc. (TNET) was the leading contributor to performance in the quarter. Increasing use of technology, digitization of the HR function, employment growth in new industries and increasing geographic decentralization of the small and medium-sized business workforce all create favorable trends for TNET. TNET has competitive advantages relative to its peers that include its scale and the efficiencies offered through the consolidation of its operating units on a single technology platform. TNET generates returns on invested capital of 28% and shares are at a discount to our estimate of intrinsic value.

Shares of APA Corporation (APA) gained more than 20% during the quarter on rising oil prices, contributing to the results of QSV Mid Cap. APA produces oil and gas with operations in the U.S., Egypt and the United Kingdom, and exploration activities offshore in Suriname. APA generates strong free cash flows and is committed to returning 60% to its shareholders, primarily through share repurchases, dividends and paying down its debt.

QSV Mid Cap Top Detractors

Masimo Corporation (MASI) fell on poor financial results and lowered future guidance. Results were impacted by issues that included lower hospital volumes, elevated channel inventory levels, and hospital labor inflation that is impacting capital equipment demand. MASI is a medical technology company which develops, manufactures, and markets non-invasive vital sign monitoring devices and offers consumer audio products. The integration of its acquisition of Sound Audio has continued to present challenges to the business and we exited the position in favor of higher conviction businesses.

Etsy Inc. (ETSY) detracted from performance during the quarter. Etsy markets differentiated products through its “House of Brands” which includes Esty.com, Reverb, and Depop. Competitive advantages include the diversity of its offerings, a strong base of active buyers and sellers, and productivity tools it offers sellers. Despite these advantages, with rising fuel prices, the resumption of student loan payments, and a shift by consumers to “experiences” over goods, we believe there are better opportunities for our investors, thus we exited the position during the quarter.

QSV Mid Cap Portfolio Activity

Turnover during the quarter was higher than usual as QSV took opportunities to upgrade its portfolio. As noted above, Etsy (ETSY) and Masimo (MASI) were exited for business performance reasons. A.O. Smith (AOS), Cintas (CTAS), and Ross Stores (ROST) were sold for valuation reasons and Mid-America Apartment Communities (MAA) was sold to allocate to better ideas. New positions were initiated in digital services provider Amdocs (DOX), nitrogen producer CF Industries (CF), LabCorp spin-out Fortrea Holdings (FTRE), GPS-enabled hardware and software provider Garmin (GRMN), Match Group (MTCH), elevator and escalator manufacturer OTIS Worldwide (OTIS), and Waters (WAT), a provider of liquid chromatography and mass spectrometry products.

QSV Select returned -6.25% and -6.45%, gross and net of fees, lagging the returns of -3.66% and -4.78%, respectively for the Russell 2500 Value and the Russell 2500 Indexes. Select is a high conviction strategy that takes QSV’s best ideas from our Small Cap and Mid Cap strategies. An underweight and company selection in Consumer Discretionary companies helped performance as did QSV’s absence in the poorly performing Utilities sector. Company selection detracted from performance in the Financials sector as did our underweight and underperformance in Energy businesses.

QSV Select Top Contributors 

Brady Corporation (BRC) was the leading contributor to performance during the quarter as the company beat consensus earnings estimates and raised its guidance for the full year. The company manufactures and sells identification and workplace safety products through its Identification Solutions and Workplace Safety segments. BRC has niche advantages in safety, identification, and compliance markets and has a diversified customer base, products, and geographic footprint. The company’s strong free cash flows have supported dividend increases for thirty-seven consecutive years, share buybacks and strategic acquisitions.

EPAM Systems, Inc. (EPAM) rose as quarterly results were better than anticipated. The company has diversified its workforce away from its previous exposure to Ukraine and the belief that demand for the company’s services may be bottoming raised investor sentiment. The global technology services company has a network of multidisciplinary teams delivering software product development and digital platform engineering services. Most of the firm’s revenues are generated from U.S. customers and its top twenty clients (representing 41% of revenue) have been with EPAM for an average of ten years. Returns on invested capital stand at 17%.

QSV Select Top Detractors

Masimo Corporation (MASI) and Napco Security Technologies, Inc. (NSSC) were the leading detractors from performance in Q3 and are discussed above.

QSV Select Portfolio Activity

QSV took opportunities to upgrade the Select portfolio during the quarter. Shares of PDC Energy (PDCE) were sold as Chevron (CVX) acquired the business. Generac Holdings (GNRC) was sold for valuation reasons. Positions were initiated in CF Industries (CF) and Fortrea Holdings (FTRE).

Our Focus on the Long Term

Investors began the last quarter on an optimistic note, while bullishness faded in September. Strength of the consumer continues to be touted as a positive for the economy (Americans Are Still Spending Like There’s No Tomorrow), as are strong employment and rising labor participation rates. Yet credit card debt is high and student loan payments are again due. Persistent inflation and higher interest rates will also weigh on the consumer as well as on corporate earnings. The Financial Times notes that 30% of the debt of Russell 2000 companies is variable rate debt (as compared to 6% for S&P 500 companies), presenting risks to lower quality, more leveraged businesses.

At this stage in the market cycle, we believe that QSV’s style of investing and our investors should do well. Late cycle investing favorsthe lower volatility stocks of quality businesses, those that have limited debt, high interest rate coverage and strong free cash flows. Selectivity is important and opportunities abound in small to mid-cap stocks that have been overlooked in the narrow market that dominated the first half of the year. Investors will also do well to check their asset allocation; the mega-cap led markets of 2023 have left many portfolios in an unbalanced state and shifts in allocations may be due.

Disclaimer:

Returns are for the respective composites of QSV Equity Investors. Gross returns are calculated net of trading fees. Net returns are calculated net of trading fees and net of the firm’s management fee. All dividends are assumed to be reinvested. The returns of the QSV Small Cap strategy are compared to the historical performance of the Russell 2000 Indices as they are a widely used benchmarks for small capitalization securities. The returns of the QSV Mid Cap strategy are compared to the historical performance of the Russell Midcap Indices as they are a widely used benchmarks for mid capitalization securities. The returns of the QSV Select strategy are compared to the historical performance of the Russell 2500 Indices as they are a widely used benchmarks for SMID capitalization securities. An investment with QSV Equity Investors should not be construed as an investment in a program that seeks to replicate, or correlate with, these indices. Market conditions vary between the QSV products and these indices. Furthermore, these indices do not include any transaction costs, management fees and other expenses, as do the QSV products. Lastly, QSV may invest in securities and positions that are not included in these indices.

No client or potential client should assume that any information presented should be construed as personalized investment advice. Personalized investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Investing carries risk of loss.

QSV Equity Investors, LLC claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of the CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To view a GIPS report, please visit www.qsvequity.com.

QSV Equity Investors, LLC is a registered investment advisor. For additional information about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov.

QSV Equity Investors

Q2 2023 Commentary

Stocks climbed a wall of worries in the first half of 2023 that included a banking crisis, higher interest rates and inflation, the debt ceiling debate, and geopolitical concerns. Looking specifically at the “Magnificent Seven” large cap technology stocks, returns of those shares did not climb, but vaulted the wall, leaving other segments of the market in the distance. Bullishness in June lifted shares of lower quality businesses creating headwinds to the quality biased QSV strategies in Q2 2023. Using the Russell Stability indexes as proxies for high and low quality, the Russell Defensive indexes containing businesses with higher Returns on Assets, lower leverage, and lower volatility underperformed low quality businesses, as measured by the Russell Dynamic indexes, across the market cap spectrum for the quarter. QSV’s Small Cap and Mid Cap strategies outperformed their respective Russell value indexes during the quarter while QSV Select slightly underperformed. More information including since-inception performance for each of the strategies may be found at www.qsvequity.com.

QSV Strategy Quarterly Performance

QSV Small Cap returned 3.31% and 3.22%, gross and net of fees, leading the Russell 2000 Value Index return of 3.18% while trailing the Russell 2000 Index return of 5.21%. The most significant positive impact was made in Healthcare, where QSV added value in security selection and was overweight compared to the index, and in Financials, where QSV was underweight and added value through security selection relative to the index. Security selection in Information Technology and Industrials detracted from performance.

QSV Small Cap Top Contributors

Generac Holdings Inc. (GNRC) was the leading contributor to performance during the quarter. Demand for home standby generators is strong and headwinds from high inventory levels in the company’s supply chain are abating. GNRC benefits from a scale advantage in the home generator market with a market share four times greater than their next competitor. The company produces returns on invested capital of 15% and is actively deploying free cash flow from its legacy generator business into its newer clean energy business. QSV trimmed its position in GNRC as the price appreciated.

Karat Packaging (KRT) contributed to performance as shares rose nearly 40%. The foodservice packaging company benefitted from lower input and shipping costs for its products and from increased sales supported by greater distribution capacity in its Midwestern region. KRT produces returns on invested capital of 13% and uses its free cash flow for tuck in acquisitions and capacity expansion.

QSV Small Cap Top Detractors

Shutterstock (SSTK) was the leading detractor to performance for the quarter. Shares fell due to concerns that the stock imagery business of SSTK will be disrupted by Artificial Intelligence generative imagery. While this is a risk to monitor, SSTK is developing its own AI capabilities and is leading its peers with this initiative. SSTK purchased GIPHY from META during the quarter, increasing its total addressable market by adding the world’s largest collection of GIFs and stickers. SSTK produces returns on invested capital of 15%

Glacier Bancorp (GBCI) fell during the quarter as investors reacted to the bank’s lower net interest margins and higher deposit costs. While these results are disappointing, they were not unexpected given the current market environment. We see GBCI as a strong banking franchise with prudent expense management and a thirty-year history of making acquisitions to fuel growth in its business. GBCI produces returns on tangible equity of 16% and has net interest margins more than 3%.

QSV Small Cap Portfolio Activity

Following strong stock performance, Choice Hotels (CHH), Core Laboratories (CLB), Lemaitre Vascular (LMAT), Morningstar (MORN), and Watts Water Technologies (WTS) were sold for valuation reasons. Methode Electronics (MEI) was sold due to concerns over its ability to effectively integrate its acquisition of Northern Lights. World Wrestling Entertainment (WWE) was sold as it approached its acquisition by Endeavor. New positions were initiated in AudioCodes (AUDC), a provider of voice over IP and data networking solutions, Capri Holdings (CPRI), the holding company for retail brands Michael Kors, Jimmy Choo and Versace, consulting services firm ICF International (ICFI), Malibu Boats (MBUU), and Scotts Miracle Gro (SMG). QSV Mid Cap returned 4.09% and 3.84%, gross and net of fees, for the quarter, leading the Russell Mid Cap Value Index return of 3.86% and lagging the Russell Mid Cap Index return of 4.76%. Security selection and an overweight relative to the index in Industrials helped performance as did security selection and an underweight in Utilities. Company selection in Financials and an underweight and security selection in Consumer Discretionary names detracted.

QSV Mid Cap Top Contributors

Management consulting firm Booz Allen Hamilton (BAH) was the leading contributor to performance in the quarter. BAH has scale advantages as a provider of cybersecurity, data analytics, augmented reality, and artificial intelligence projects for the Department of Defense, that, like all U.S. government contracts, are subject to elevated levels of scrutiny that serve as barriers to entry for competitors. The company’s standing as the leader in artificial intelligence solutions to the U.S. government helped propel its share price during the quarter. Shares of vehicle salvage auctioneer Copart (CPRT) gained more than 20% during the quarter. The rate at which insurers choose to total vehicles following accidents has increased due to elevated repair costs, providing CPRT better access to salvaged vehicles for resale. Sales volumes and price per unit sold were up and margins increased during the quarter. CPRT produces returns on invested capital of 26% and net operating margins of 31%. QSV trimmed its position in CPRT during the quarter for valuation reasons.

QSV Mid Cap Top Detractors

MarketAxess Holdings (MKTX) fell on concerns over slightly lower trading volumes that resulted from uncertainty in the banking sector and seasonal patterns. MKTX is the leading platform for trading fixed income securities, where it continues to take market share due to the growing adoption of electronic execution. It is expected that higher yields will drive greater allocations of assets to fixed income and increased participation by retail & institutional investors. Greater adoption by these buyers and by the company’s network of dealers improves liquidity and the effectiveness of the platform for its clients. MKTX produces returns on invested capital of 28% and its shares are at a discount to QSV’s measure of
intrinsic value.

Etsy Inc. (ETSY) declined during the quarter over concerns that consumers’ spending was shifting from goods to services and that the company would be challenged to profitably add customers. Etsy markets differentiated products through its “House of Brands,” which include Esty.com, Reverb, a musical instrument marketplace, Depop, a resale marketplace, and Elo7, a Brazilian marketplace for handmade goods. ETSY joined 7.5 million active sellers with 95.1 buyers as of December 2022. Customer acquisition costs are elevated from COVID era levels, but we see the diversity of its offerings, the strong base of active buyers and sellers, and the productivity tools it offers sellers as competitive advantages. ETSY shares sell at a meaningful discount to our measure of intrinsic value.

QSV Mid Cap Portfolio Activity

QSV took opportunities to upgrade its portfolio during the quarter. New positions were started a previous QSV holding, Jack Henry & Associates (JKHY), a provider of bank technology and payment processing services, and equity exchange Nasdaq Inc. (NDAQ). QSV Select returned 4.03% and 3.80%, gross and net of fees, lagging the returns of 4.37% for the Russell 2500 Value Index and the return of 5.22% for the Russell 2500 Index. Select is a high conviction strategy that takes QSV’s best ideas from our Small Cap and Mid Cap strategies. Company selection in Communication Services and Consumer Staples contributed to performance, while selection in Financials and Real Estate detracted.

QSV Select Top Contributors

Generac Holdings Inc. (GNRC) was the leading contributor to performance during the quarter
and is discussed above. Management consulting firm Booz Allen Hamilton (BAH) was a leading contributor to performance and
is also discussed above.

QSV Select Top Detractors

After being a top contributor to performance of the Select strategy in Q1, shares of electronic trading platform MarketAxess Holdings (MKTX) detracted from performance in Q2. MKTX is discussed above.

Glacier Bancorp (GBCI) fell during the quarter and is also discussed above.

QSV Select Portfolio Activity

QSV took opportunities to upgrade the Select portfolio during the quarter. Shares of Church & Dwight (CHD), Pubmatic (PUBM), and WD-40 (WDFC) were sold for valuation reasons and to purchase higher conviction companies. Positions were initiated in EPAM Systems, Inc. (EPAM), Jack Henry & Associates (JKHY), and Paycom Software (PAYC).

Our Focus on the Long Term

Optimism has returned to the markets and to consumer sentiment, and somewhat rightfully so. 401(k) and brokerage account balances have improved measurably from the end of 2022. This optimism has supported stronger consumer spending on services and is reflected in the performance of certain stocks, with cruise line operators Carnival, Norwegian and Royal Caribbean standing out as the top three S&P 500 performers in Q2. For those still seeking out areas for concern (and not believing that it is different this time) risks exist. Core inflation, the measure excluding food and energy, remains well above target and is declining at a glacial pace. The Federal Reserve and its peer central banks have not yet gotten the desired results from a string of rate hikes. Chairman Powell’s comments that we have “a long way to go” in getting back to 2% policy rates signal more rate increases to come. Elevated borrowing costs are likely to eat into corporate profits and we believe this puts the current valuations of lower quality, more leveraged small and mid-cap companies at risk. Opportunities exist for equity investors, and we counsel an emphasis on quality businesses with limited debt, high interest rate coverage and strong free cash flows. As always, this remains our focus for delivering long-term results for our clients as we invest alongside them.

Disclaimer:

Returns are for the respective composites of QSV Equity Investors. Gross returns are calculated net of trading fees. Net returns are calculated net of trading fees and net of the firm’s management fee. All dividends are assumed to be reinvested. The returns of the QSV Small Cap strategy are compared to the historical performance of the Russell 2000 Indices as they are a widely used benchmarks for small capitalization securities. The returns of the QSV Mid Cap strategy are compared to the historical performance of the Russell Midcap Indices as they are a widely used benchmarks for mid capitalization securities. The returns of the QSV Select strategy are compared to the historical performance of the Russell 2500 Indices as they are a widely used benchmarks for SMID capitalization securities. An investment with QSV Equity Investors should not be construed as an investment in a program that seeks to replicate, or correlate with, these indices. Market conditions vary between the QSV products and these indices. Furthermore, these indices do not include any transaction costs, management fees and other expenses, as do the QSV products. Lastly, QSV may invest in securities and positions that are not included in these indices.

No client or potential client should assume that any information presented should be construed as personalized investment advice. Personalized investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Investing carries risk of loss.

QSV Equity Investors, LLC claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of the CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To view a GIPS report, please visit www.qsvequity.com.

QSV Equity Investors, LLC is a registered investment advisor. For additional information about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov.

QSV Equity Investors (formerly Ballast Equity Management)

Q1 2023 Commentary

Equity markets finished the quarter with positive returns, while the path to those gains was a rocky one. January was marked by robust performance, with shares of lower-quality, higher beta companies showing significant gains. Markets were dampened in February with news that inflation, while cooling, persists and employment remains strong. March followed with the big story of the quarter, the “don’t say bailout” banking crisis, and the ninth in a string of interest rate increases from the Federal Reserve. Each of the QSV strategies produced returns ahead of their respective Russell value and core indexes during the quarter supported by positive stock selection. More information including since-inception performance for each of the strategies may be found at www.qsvequity.com.

QSV Strategy Quarterly Performance

QSV Small Cap returned 3.40% and 3.31%, gross and net of fees, leading both the Russell 2000 Value Index return of (.66)% and the Russell 2000 Index return of 2.74%. The most significant positive impact was made in Financials, where QSV added value in security selection and was underweight compared to the index, and in Communication Services, where QSV was overweight and outperformed the index. Our underweight and underperformance compared to the Consumer Discretionary sector detracted from performance.

QSV Small Cap Top Contributors

NAPCO Security Technologies (NSSC) was the leading contributor to performance during the quarter. Shares rose over 36% on better-than-expected revenues for the quarter and positive trends toward more recurring revenues. NAPCO manufactures security products for intrusion, fire, access control, and door locking systems. The company’s revenue primarily comes from commercial customers and products are sold through NAPCO’s ecosystem of 10,000 dealers and 2,000 integrators. Shares of media company World Wrestling Entertainment (WWE) were up more than 33% as expectations of a sale of the business rose. WWE has a strong brand within a niche audience, especially for its popular Raw and SmackDown content. Most revenues for WWE come from North America, but we believe there is an opportunity for growth outside the U.S. It was announced on April 3 that Endeavor Group (EDR) will form a new company, combining the UFC and WWE brands.

QSV Small Cap Top Detractors

Seacoast Banking Corp of Florida (SBCF) was the leading detractor to performance for the quarter as shares dropped in tandem with the banking industry. SBCF offers commercial and consumer banking, wealth management, and mortgage and insurance services in the rapidly growing Florida market. While QSV Commentary Q1 2023 shares fell along with their regional bank peers, we see SBCF as a well-capitalized business with growing net interest margins, Returns on Tangible Equity of 10% and Returns on Equity of 7%. Also in the banking industry, Horizon Bancorp (HBNC), fell during the quarter, detracting from performance. HBNC offers commercial and consumer banking, wealth management, and mortgage and insurance services to customers in Central Indiana and Michigan. Its network of branches includes those acquired from TCF Financial in 2021. While negatively affected by the quarter’s banking crisis, we see HBNC as a strong enterprise, with Returns on Tangible Equity of 18% and Returns on Equity of 13%.

QSV Small Cap Portfolio Activity

Aerojet Rocketdyne Holdings Inc. (AJRD) shares were sold early in Q1 as the company was acquired by L3Harris Technologies. QSV initiated new positions in investment banking and wealth management firm Evercore Equity (EVR), Kulicke & Soffa Industries (KLIC), a maker of capital equipment and tools for the semiconductor industry, and NexPoint Residential Trust (NXRT), an operator of multi-family properties
in the southeastern U.S. The QSV Mid Cap strategy returned 5.28% and 5.02%, gross and net of fees, for the quarter, leading both the Russell Mid Cap Value Index return of 1.32% and the Russell Mid Cap Index return of 4.06%. QSV’s security selection added value in the Energy and Consumer Staples sectors, while security selection in Financials detracted.

QSV Mid Cap Top Contributors

West Pharmaceutical Services (WST) rose by 47% during the quarter on further evidence of pricing power and margin increases across its portfolio of products. WST has competitive advantages as a key supplier to pharmaceutical, biotechnology, and generic drug businesses, with expertise in the development and manufacture of supplies for the containment and administration of injectable drugs. The company delivers Returns on Invested Capital of 22%.

Monolithic Power Systems Inc (MPWR) gained more than 40% during the quarter on optimism over the firm’s year-over-year results, diversification of its manufacturing capabilities, and long-term growth prospects. MPWR is a global provider of high-performance, semiconductor based power solutions. As a “fabless” company – one that does not manufacture the chips used in its products – MPWR has benefitted from devoting more resources to chip design rather than capital expenditures, resulting in greater free cash flows, higher margins, and Returns on Invested Capital of 24%.

QSV Mid Cap Top Detractors

Shares of exploration and production company APA Corp (APA) fell as recessionary concerns and waning oil and natural gas prices weighed on investor sentiment. We see APA as a strong operator with geographically diversified sources of production and the ability to emphasize oil or gas production as each presents itself as more advantageous. APA is committed to returning 60% of its strong free cash flow to shareholders in the form of dividends and share repurchases. Shares of management consulting firm Booz Allen Hamilton (BAH) pulled back during the quarter due to a potential Federal government shutdown and feared budget cuts. While these actions would impact QSV Commentary Q1 2023 revenues to BAH, the current backlog of projects should produce growth for the business in 2023 and beyond. Additionally, BAH has been more resilient as it focuses on large government-wide acquisition contracts (GWACs) that can be less susceptible to reductions across government agencies.

QSV Mid Cap Portfolio Activity

With the early quarter rally and later decline, QSV took opportunities to upgrade its portfolio. QSV exited Casey’s General Stores (CASY), Skyworks Solutions (SWKS), and Snap-on Inc (SNA). New positions were started in multi-family real estate investment trust Mid-America Apartment Communities (MAA) and Paycom Software (PAYC), a provider of payroll and human capital software. The QSV Select strategy returned 6.68% and 6.45%, gross and net of fees, leading the returns of 1.40% for the Russell 2500 Value Index and the return of 3.39% for the Russell 2500 Index. Select is a high conviction strategy that takes QSV’s best ideas from our Small Cap and Mid Cap strategies. An underweight and outperformance in Financials helped performance, as did an overweight and outperformance in Healthcare holdings. The leading detractor from performance was our overweight and underperformance in Industrials.

QSV Select Top Contributors

West Pharmaceutical Services (WST) was the leading contributor to performance during the quarter and is discussed above.

MarketAxess Holdings (MKTX), the leading platform for the electronic trading of corporate bonds, contributed to performance during the quarter as investors continued to move from voice-negotiated trading to electronic trading of bonds. MKTX’s dominance in corporate bonds also stands as a risk, as revenues are tied to the level of corporate bond issuance and credit spread volatility. Trends toward increasing turnover in these bonds and capabilities in trading U.S. Treasuries and municipal bonds should help boost revenues. MKTX produces Returns on Invested Capital of 28% and its shares are at a discount to QSV’s measure of intrinsic value.

QSV Select Top Detractors

Following a solid quarterly earnings report, shares of Synovus Financial Corp (SNV) fell along with the banking industry during the March banking crisis. SNV offers shareholders an opportunity to take part in the rapidly growing southeastern U.S. market. The company produces Returns on Tangible Equity of 20% and Returns on Equity of 16%. Shares sell at a significant discount to QSV’s measure of intrinsic value.

Booz Allen Hamilton (BAH) shares also detracted from performance. BAH is discussed above.

QSV Select Portfolio Activity

Turnover was limited during the quarter. As in the QSV Mid Cap strategy, we exited shares of premium tool provider Snap-on Inc (SNA) for valuation reasons.

Our Focus on the Long Term

The banking crisis puts the Federal Reserve in a tenuous spot as it considers added rate increases in the battle against inflation. Pressure on banks’ balance sheets caused by both the stresses on existing borrowers and the need to raise rates credited on deposits will lead to tightened lending standards and diminished lending. This, in turn, will put the brakes on growth and contribute to the risks of a recession. QSV cannot predict with any greater accuracy than the next person whether a recession occurs, but we do know that challenging times such as these generally favor quality businesses that can self-fund growth through free cash flows and less reliance on debt markets. Investors sought quality in a compact list of mega-cap tech companies in early 2023; we believe more compelling opportunities exist in small and midcap companies for investors able to dig out those with durable competitive advantages and reasonable valuations.

Disclaimer:

Returns are for the respective composites of QSV Equity Investors. Gross returns are calculated net of trading fees. Net returns are calculated net of trading fees and net of the firm’s management fee. All dividends are assumed to be reinvested. The returns of the QSV Small Cap strategy are compared to the historical performance of the Russell 2000 Indices as they are a widely used benchmarks for small capitalization securities. The returns of the QSV Mid Cap strategy are compared to the historical performance of the Russell Midcap Indices as they are a widely used benchmarks for mid capitalization securities. The returns of the QSV Select strategy are compared to the historical performance of the Russell 2500 Indices as they are a widely used benchmarks for SMID capitalization securities. An investment with QSV Equity Investors should not be construed as an investment in a program that seeks to replicate, or correlate with, these indices. Market conditions vary between the QSV products and these indices. Furthermore, these indices do not include any transaction costs, management fees and other expenses, as do the QSV products. Lastly, QSV may invest in securities and positions that are not included in these indices.

No client or potential client should assume that any information presented should be construed as personalized investment advice. Personalized investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Investing carries risk of loss.

QSV Equity Investors, LLC claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of the CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To view a GIPS report, please visit www.qsvequity.com.

QSV Equity Investors, LLC is a registered investment advisor. For additional information about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov.