Q1 2024 Commentary

Stocks marched higher in Q1 2024 with participation broadening from the mega cap winners of 2023 tomid-cap and smaller capitalization companies. U.S. economic growth, a steady consumer, and high expectations for interest rate cuts by the Federal Reserve promoted continued risk taking by investors. Gains in equity markets were largely multiple driven as earnings gains were modest and the stocks of lower quality small cap companies outpaced the returns of higher quality companies during the quarter. Using the Russell Stability indexes as proxies for high and low quality, the Russell 2000 Defensive index, containing businesses with higher Returns on Assets, lower leverage, and lower volatility underperformed low-quality businesses, as measured by the Russell 2000 Dynamic indexes, by 375 basis points for the quarter. More information including since-inception performance for each QSV strategy may be found at www.qsvequity.com.

QSV Strategy Quarterly Performance

QSV Small Cap returned .78% and .72%, gross and net of fees, respectively, lagging the Russell 2000 Value Index return of 2.90% and the Russell 2000 Index return of 5.18%. Security selection in Communication Services, Financials, and Information Technology companies aided performance relative to the index. Security selection detracted from performance in Industrials as did an underweight and company selection in Energy holdings.\ Energy delivered the strongest absolute returns in the Index during the quarter due to elevated geopolitical risks and higher demand. QSV remains significantly underweight relative to the sector due to challenges in finding quality businesses at reasonable valuations.

QSV Small Cap Top Contributors

PubMatic Inc. (PUBM), a leading platform provider of digital advertising technology, was the leading contributor to performance in Q1 2024 as it continued to expand its customer base and the volume of ad impressions processed. A rebound in digital ad pricing also lifted revenue growth to levels beyond management’s prior forecast. 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 12% on average.

Contract research organization Medpace Holdings Inc. (MEDP) contributed to performance as strong quarterly earnings exceeded expectations. MEDP is a leading provider of full-service drug development and clinical trial services to small and midsized biotechnology, pharmaceutical, and medical device firms. The company benefits from high switching costs as its tools and testing are highly scripted in regulation and practice. MEDP produces returns on invested capital of 25% on average.

QSV Small Cap Top Detractors

Forward Air (FWRD) fell 50% during the quarter due to pessimism over its acquisition of Omni Logistics. While FWRD stands as a leader in the less-than-truckload shipping business, concerns over its debt levels and integration risks persist. QSV is closely monitoring this integration and FWRD’s business performance. Despite its near-term headwinds, FWRD benefits from its substantial network of 92 terminals located at or near airports throughout North America. This network provides economies of scale and creates high barriers to entry, making replication of its capabilities a challenge.

Malibu Boats(MBUU) shares fell due to reduced forward guidance and concerns that higher interest rates will dampen sales of the company’s brands. Combined, its Malibu and Axis brands are the largest player in the ski/wakeboard market, one of the fastest-growing segments of the powerboat market. Malibu has been acquiring strong brands in a very fragmented industry and selling through its extensive dealer network of over 350 independent dealers, including 250 in North America. MBUU shares are currently at a significant discount to our estimate of intrinsic value, and QSV added to its position during the quarter.

QSV Small Cap Portfolio Activity

Shares of AMN Healthcare (AMN) and MGP Ingredients (MGPI) were sold for valuation reasons. Proceeds were invested in health management company Astrana Health (ASTH) and Vestis Corporation (VSTS), a provider of uniforms and other workplace supplies.

QSV Mid Cap returned 4.66% and 4.42%, gross and net of fees for the quarter, trailing the 8.23% return of the Russell Mid Cap Value Index and the Russell Mid Cap Index return of 8.60%. Security selection in Healthcare and Communication Services companies helped relative performance, as did our underweight to Communication Services names. Selection in the Financials, Industrials and Energy sectors detracted.

QSV Mid Cap Top Contributors

Contract research organization ICON PLC (ICLR) was the leading contributor to performance as it bounced back following concerns over its acquisition of competitor PRA Health. The cultures of ICLR and PRA Health are similar, and the combined organization will bring synergies and the benefit of reduced client concentrations. ICLR produces returns on invested capital of 10% on average, and its shares sell at a discount to our measure of intrinsic value. Lincoln Electric Holdings (LECO) also contributed to performance during the quarter with revenue and margin results that exceeded expectations. Founded in 1895, LECO is a trusted name in welding, cutting, and brazing products, with a leading global market share. While still in the commercialization phase, LECO is developing an EV charger business that represents a growth opportunity the business. The company has raised its dividend for twenty-two years and produces returns on invested capital of 20% on average.

QSV Mid Cap Top Detractors

MarketAxess Holdings (MKTX) was the leading detractor to performance during the quarter despite earnings results that exceeded analysts’ expectations and strong forward guidance. MKTX is the leading platform for trading fixed income securities, where it continues to grow market share due to the growing adoption of electronic execution. Greater adoption by retail and institutional investors 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 27% on average and its shares are at a discount to QSV’s measure of intrinsic value.

Akamai Technologies (AKAM) detracted from performance during the quarter. AKAM operates through its Security, Compute, and Content Delivery Network (CDN) segments. AKAM is known for its CDNs that the company estimates deliver between 15% and 30% of global web traffic supported by over 350,000 servers arrayed in over 4,100 networks across the globe. Its growing network and application security business is a major focus for AKAM. With revenue growth in the mid-teens, this segment is expected to produce one-half of AKAM’s revenues in 2024.

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 3.61% and 3.39%, gross and net of fees, lagging returns of the Russell 2500 Value and Russell 2500 Indexes of 6.07% and 6.92%, respectively. Select is a high conviction strategy that holds QSV’s best ideas from our Small Cap and Mid Cap strategies. Security selection was positive in Healthcare and Real Estate holdings. Selection detracted from returns in Industrials holdings while company selection and an underweight to Energy companies hurt performance.

QSV Select Top Contributors

Primerica Inc. (PRI) was the leading contributor to performance during the quarter. PRI provides financial services to middle-income households in the United States and Canada, offering life insurance, mutual funds, annuities, and other financial products. While earnings from life insurance were down for the quarter, asset-based revenues from annuities and mutual funds rose with the markets and PRI successfully grew its sales force. PRI’s shares continue to sell at a discount to our measure of intrinsic value.

Booz Allen Hamilton (BAH) rose on continued strong business performance and its reputation, as one analyst coined, as “AI at a Reasonable Price.” 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 has earned a position as the leader in artificial intelligence solutions and support for modernizing the U.S. military.

QSV Select Top Detractors

MarketAxess Holdings(MKTX) was the leading detractor to performance of QSV Select during the quarter and is discussed above.

Storage REIT National Storage Affiliates (NSA) detracted from performance during the quarter. Funds from operations in the trailing quarter were below analysts’ estimates and NSA’s guidance for 2024 revenues and net operating income were down on lower occupancy. In the long term, we remain positive on NSA as a REIT that has seen strong occupancy rates, the ability to pass along single to low double-digit rate increases, and the financial flexibility to pay down debt with an eye toward future acquisitions.

QSV Select Portfolio Activity

QSV continued to prune and add to Select to upgrade quality and address valuations. Freight broker Landstar System (LSTR), pool supply provider Pool Corporation (POOL), and Toro (TORO), an operator of oil tankers, were sold for holdings in which we have more conviction. New positions were initiated in Doximity (DOX), a digital platform for U.S. medical professionals, dating platform Match (MTCH), elevator and escalator provider OTIS Worldwide (OTIS), and Progress Software (PRGS), a provider of cloud-based security solutions.

Our Focus on the Long Term

We believe a good deal of 2024’s potential returns were pulled forward in Q4 2023. We also feel that market prices reflect near perfection in the economic and geopolitical outcomes of the coming quarters. Unfortunately, the world is imperfect and uncertain. At QSV, we do not invest in markets, but focus on building portfolios of quality businesses with durable competitive advantages purchased at reasonable valuations. We anticipate that 2024 will bring both surprises and the consequential market volatility. To prepare for this we recommend that long term investors focus on businesses with solid balance sheets, strong free cash flows, and high returns on invested capital. We continue to find these traits in the small and mid-capitalization businesses in each of the QSV portfolios and invite you to join us as we invest alongside our clients.


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.



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