QSV Equity Investors Q4 2022 Commentary

QSV Equity Investors

Q4 2022 Commentary


Q4 2022 began with a bear market rally that continued into November but waned in December. Rate hikes
by the Federal Reserve and Chairman Powell’s comments that it was too soon to consider a pause tested
investors’ resolve. November’s mid-term election delivered the ingredients for gridlock in Washington,
and we ended 2022 with investors feeling the sting of a difficult year that offered few places to hide from
sharply negative results.

The exceptional place to hide for equity investors in 2022 was the energy sector. QSV has generally
found few businesses in this sector that we believe make prudent capital allocation decisions and our
underweight to these companies was a meaningful drag on our annual performance.


Russell 3000 Cy 2022


QSV’s Quality Value Smallcap strategy did produce returns ahead of both the Russell 2000 Value and
Russell 2000 indices in 2022. Our Quality Value Midcap and Select Value strategies each lagged their
respective Russell value indexes while outperforming the Russell Mid Cap and Russell 2500 indexes,
respectively. We remain confident in our ability to outperform these benchmarks over full market cycles
and have done so since the inception of each product. More information including since-inception
performance for each of the strategies may be found at www.qsvequityinvestors.com.

QSV Strategy Quarterly Performance

The QSV Quality Value Smallcap Strategy returned 6.58% and 6.49%, gross and net of fees, lagging
the Russell 2000 Value Index return of 8.42% while leading the Russell 2000 Index return of 6.23%. Security
selection in Healthcare and Energy helped performance, while an underweight and negative security
selection in Consumer Discretionary companies detracted.

Quality Value Smallcap Top Contributors

Rocket propulsion supplier Aerojet Rocketdyne Holdings Inc. (AJRD) was the leading contributor to
performance during the quarter. Shares rose nearly 40% on news that the company would be acquired by
L3Harris Technologies (LHX) after AJRD was courted by multiple suitors. Earlier in 2022, an acquisition of
the company by Lockheed was scuttled over antitrust concerns. We continue to hold AJRD and believe
the likelihood that the deal will close in early 2023 is high.

Shares of property and casualty insurer RLI Corp. (RLI) rose more than 35%. Despite the impact of
Hurricane Ian, RLI quarterly results were strong, with lower-than-expected losses and a 13% increase in
gross premiums written. Earnings reflected the gains on the sale of RLI’s minority ownership in eyewear
maker Maui Jim for $686 million, a stake held for more than 25 years due to RLI’s legacy ophthalmic
services subsidiary.

Quality Value Smallcap Top Detractors

Simulations Plus Inc. (SLP) was the leading detractor to performance for the quarter as shares dropped
on earnings that were below street expectations. SLP is a leading provider of software and services used
by major pharmaceutical, biotech, and regulatory agencies to make better informed, data-driven
decisions. While earnings are expected to be more muted in the coming year due to higher labor costs,
we see long term value due to the company’s high switching costs, intellectual assets, and a 93% renewal
rate by its customers. SLP produces operating margins of 29% on average and its shares are well below
our estimate of intrinsic value.

Shares of direct-to-consumer pool and spa provider Leslies Inc. (LESL) fell during Q4 on recession concerns
and worries over consumer spending. LESL is the industry leader globally, with both physical stores and
strong digital distribution, and benefits from recurring revenues from meeting its customers’ maintenance
needs. While we have confidence in its business model, we sold our position in LESL for better

Quality Value Smallcap Portfolio Activity

With the early quarter rally and subsequent decline, QSVsaw many opportunities to upgrade its
portfolio. QSV exited positions in Allied Motion Technologies (AMOT), CarGurus Inc. (CARG), Leslies
Inc. (LESL), and John B. Sanfilippo and Son Inc. (JBSS).
New positions were initiated in title and specialty insurer First American Financial (FAF), home generator
manufacturer Generac Holdings (GNRC), exploration and production company PDC Energy (PDCE), and
UFP Industries (UFPI), a provider of lumber and treated wood products.

The QSV Quality Value Midcap Strategy returned 9.03% and 8.76%, gross and net of fees, for the
quarter, lagging both the Russell Mid Cap Value Index return of 10.45% and the Russell Mid Cap Index
return of 9.18%. QSV’s security selection added value in the Energy and Consumer Staples sectors, while
security selection in Financial names detracted.

Quality Value Midcap Top Contributors

Ross Stores Inc. (ROST) rose by 38% during the quarter driven by strong Q3 results and optimism for the
coming quarter and 2023. Lower income consumers that drive sales for ROST have been challenged in
2022 by higher energy, housing, and food costs, but employment and wage growth appear as positives.
ROST is expected to continue to benefit from competitive advantages that include significant vendor
relationships and strong inventory management. Returns on invested capital stand at 30% on average.

Shares of management consulting firm Booz Allen Hamilton (BAH) rose during the quarter as the
company both beat quarterly expectations and raised guidance for revenue and earnings for the full year.
BAH is a leading provider of management and technology consulting. Its “best of breed” status stands as
a competitive advantage as it captures contracts from the U.S. government, generating 97% of the
company’s revenues. BAH generates returns on invested capital of 15% on average.

Quality Value Midcap Top Detractors

First Financial Bankshares Inc. (FFIN) shares fell as rising interest rates increased deposit costs and loan
demand moderated. FFIN is a highly profitable bank holding company with a footprint in the thriving Texas
market. FFIN produces returns on tangible equity of 16% and its shares are priced at a discount to our
view of its intrinsic value.

Shares of self-storage owner and operator Extra Space Storage (EXR) fell during the quarter as
management lowered earnings guidance. Lower share prices also reflected the impact of higher interest
rates; 38% of the company’s debt was variable at the end of Q3 2022. We continue to have confidence in
the long-term prospects for EXR, supported by its same-store occupancy rate of 96% and its size and scale,
giving it a significant cost advantage and marketing presence over smaller peers.

Quality Value Midcap Portfolio Activity

With the early quarter rally and subsequent decline, QSV saw many opportunities to upgrade its
portfolio. QSV exited Celanese Corp. (CE), Clorox (CLX), Take Two Interactive (TTWO), and Helen of
Troy (HELE).
New positions were initiated in exploration and production company APA Corp. (APA), industrial and
office REIT EastGroup Properties (EGP), Lennox International (LII), a leader in heating, ventilation and
cooling products, Northern Trust (NTRS), offering leadership in custody and wealth management services,
and Zebra Technologies (ZBRA), a leader in automatic identification and data capture technology.

The QSV Select Value Strategy returned 8.00% and 7.76%, gross and net of fees, trailing the return of
9.21% for the Russell 2500 Value Index while leading the return of 7.43% for the Russell 2500 Index. Select
Value is a high conviction strategy that takes QSV “best ideas” from our Quality Value Smallcap and
Quality Value Midcap strategies. Security selection helped performance most notably in Healthcare and
Industrials companies. An overweight and negative security selection in Information Technology
detracted from performance as did an underweight and negative security selection in Consumer
Discretionary names.

Select Value Top Contributors

Booz Allen Hamilton (BAH) was the leading contributor to performance during the quarter and is
discussed above.
Getty Realty Corporation (GTY) shares aided performance during the quarter as shares rose by over 27%.
The company met earnings expectations for the quarter and management raised guidance for the full year
2022. GTY owns a portfolio of more than 1000 properties that are leased at 99.5% with annual rent
escalators averaging 1.6%. Properties are predominantly convenience stores and gas stations which are
e-commerce and recession resistant.

Select Value Top Detractors

PubMatic Inc. (PUBM) was the leading detractor to performance during the quarter. PUBM is a leading
platform provider in the programmatic digital advertising technology market, 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 15% and its shares are currently at a significant discount to our
measure of intrinsic value.

National Storage Affiliates Trust (NSA) detracted from performance as rising interest rates are expected
to impact both the company’s variable rate debt and its borrowing costs for future acquisitions.
Additionally, occupancy rates were off more than anticipated. NSA is the fourth largest publicly traded
REIT focused on self-storage and benefits from high switching costs. We continue to have conviction in
high-quality NSA as it produces funds from operation well above its peers driven by its focus on properties
in secondary markets that are often overlooked by its competitors. While lower occupancies are cause for
concern, these levels follow post-COVID increases that were significant and unsustainable.

Select Value Portfolio Activity

Continuing with our approach to investing in the best ideas of QSV’s Quality Value Smallcap and
Midcap strategies, QSV sold and purchased several holdings, upgrading its portfolio. QSV exited
positions in Clorox (CLX), John B. Sanfilippo & Son (JBSS), Take Two Interactive (TTWO), and Helen of
Troy (HELE).

QSV initiated positions in EastGroup Properties (EGP), Generac Holdings (GNRC), PDC Energy (PDCE),
and Zebra Technologies (ZBRA) during the quarter.

Our Focus on the Long Term

The folly of predicting macro events was laid bare in 2022 as the Federal Reserve and Wall Street were
wildly wrong concerning the persistence of inflation and the direction of equity and bond markets. We
suspect that the Federal Reserve has more interest rate hikes in store for us in 2023, that a recession is
possible, that downward earnings revisions are likely, and that consumers face trouble as personal savings
rates are down while debt levels are up. To the positive, the employment picture remains strong, although
questions remain whether inflation can come down without impacting the labor market.
We know that the macro events of the coming year are unknowable, so, as always, we prepare for the
challenges and opportunities to come through ownership of quality businesses that possess competitive
“moats.” This approach has proven to be a cornerstone in building enduring wealth over the long term.
The price paid for ownership of these businesses is critical to success. There is great uncertainty as to the
outlook for corporate earnings in 2023 but we know that a focus on quality provides some clarity;
businesses with low leverage, stable and growing cash flows and stable and growing returns on invested
capital give us a far better starting point for making sound assessments of the future cash flows each
business will deliver. We believe the carnage of the past year has created tremendous opportunities to
upgrade to higher quality, small and mid-cap businesses, setting our clients up for success.


Returns are for the respective composites of QSV Equity Management (BEM). 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 BQV Midcap 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 BQV Smallcap 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 Select Value 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 Management should not be construed as an investment in a
program that seeks to replicate, or correlate with, these indices. Market conditions vary between the BEM
products and these indices. Furthermore, these indices do not include any transaction costs, management
fees and other expenses, as do the BEM Products. Lastly, BEM 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 Management, 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.qsvequityinvestors.com.
QSV Equity Management, 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.


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