QSV Equity Investors Q1 2022 Commentary

QSV Equity Investors

Q1 2022 Commentary

More information including since-inception performance for each of the strategies may be found at www.qsvequityinvestors.com.

QSV concluded its commentary last quarter with a list of “known risks” that included a continuation of inflation, the Federal Reserve’s tightening cycle and trajectory, and the fact that attention paid by investors to geopolitical risks stood at a four-year low, while the ambitions of China, Iran and Russia continued to rise. These risks emerged in more profound ways than we expected, with war in Ukraine, a more hawkish Fed, and inflation spiking to 40-year highs. Markets reacted to these risk factors with heightened volatility and negative returns across equity market caps. Performance by energy stocks greatly outstripped all other sectors as worries over global supply – already escalated prior to the war in Ukraine – rose further.

Rusell 2000 Chart Q1 2022

QSV Strategy Quarterly Performance

The QSV Quality Value Smallcap Strategy returned -6.50% and -6.58%, gross and net of fees, lagging the Russell 2000 Value Index return of -2.40% while leading the Russell 2000 Index return of -7.53%. QSV has historically been significantly underweight in Energy holdings, as these businesses generally do not have the high returns on invested capital or consistency of business performance we seek. This created meaningful headwinds to performance, as did robust performance by certain index constituents in the Defense and Shipping industries. Healthcare and Communication Services holdings helped performance, while holdings in the Energy and Industrials sectors detracted.


Quality Value Smallcap Top Contributors

Energy services company Core Laboratories (CLB) rose over 40% as investor sentiment turned favorable toward the company’s prospects in its reservoir description and production enhancement services divisions. CLB is the singular energy holding in the QSV strategy and has competitive advantages that include its intangible assets (patents, proprietary technology, and human capital) and network effects (multi-client reservoir studies). Prior to the start of the conflict in Ukraine, CLB announced that it expects double digit gains in 2022 for both its business segments; these gains could improve further as exploration and production increases.

Shares of on-line automotive sales platform CarGurus, Inc. (CARG) also rose during the quarter. CARG offers a leading marketplace for both individuals and dealerships to buy, market and sell vehicles in the U.S. as well as Canada and the U.K. CARG has a strong network effect competitive advantage with over thirty-nine million unique visitors each month and over 30,000 paying dealerships globally. Positive stock performance was supported by quarterly revenues that exceeded Street expectations by over 20% and by the company’s investment in dealer-matching service CarOffer.

Quality Value Smallcap Top Detractors

Shares of 1-800 Flowers.com (FLWS) fell 45% during the quarter. Challenges to the company’s margins included higher freight, shipping, and labor rates all hitting during its important holiday season. FLWS is working to offset these challenges by adding more automation into its manufacturing and distribution facilities, raising prices where possible, and building additional inventories. FLWS continues to have strong and growing free cash flows and delivers average returns on invested capital of 12%. FLWS has a proven record of making accretive acquisitions, something we expect will continue to boost business performance.

Shares of Watts Water Technologies, Inc. (WTS) fell during the quarter, along with the other housing related companies, despite strong earnings that exceeded expectations. WTS is a global provider of Smart and Connected water conservation, safety, and flow control products. Share price performance was impacted by conservative guidance for the coming year; WTS has tough comparisons to beat for the first two quarters of 2022 and is making growth investments in its business. The company does have pricing power and we expect price increases and the shift to energy efficient products to aid performance in the second half of 2022.

Quality Value Smallcap Portfolio Activity

QSV exited its position in Eagle Pharmaceuticals (EGRX). Prior to the invasion of Ukraine, a new position was initiated in Aerojet Rocketdyne Holdings, Inc. (AJRD), a manufacturer of aerospace and defense products and systems. Also initiated was a position in Medpace Holdings Inc. (MEDP), a leading clinical contract research focused primarily on full-service project work for small- and mid-sized biopharmaceutical clients. AJRD and MEDP each produce high returns on invested capital, 18% and 16% respectively, and each sells at a meaningful discount to QSV estimate of intrinsic value.

The QSV Quality Value Midcap Strategy returned -7.06% and -7.29%, gross and net of fees, for the quarter, lagging the Russell Mid Cap Value Index return of -1.82% and the Russell Mid Cap Index return of -5.68%. QSV security selection added value in the Industrial and Financials sectors, while selection in Healthcare and a meaningful underweight to Energy holdings detracted from strategy performance. QSV has historically been significantly underweight in Energy holdings, as these businesses generally do not have the high returns on invested capital or consistency of business performance we seek.

Quality Value Midcap Top Contributors

Energy services company Core Laboratories (CLB) was the leading contributor to performance and is discussed above.

W.R. Berkley Corporation (WRB) rose over 20% during the quarter as earnings exceeded expectations. WRB provides specialty coverages within the property and casualty insurance and reinsurance markets. The company expects strong business performance to continue, as rate increases in excess of claims trends are anticipated to continue. WRB continues to sell at a significant discount to QSV’s estimate of intrinsic value.

Quality Value Midcap Top Detractors

Masimo Corporation (MASI) shares fell in mid-quarter on the news of its planned acquisition of consumer technology company Sound United. MASI is a medical technology company which develops, manufactures, and markets non-invasive vital sign monitoring devices. While the thesis behind the acquisition is confusing on the surface, it makes strategic sense as MASI is eager to build infrastructure and relationships for marketing its future consumer-focused products, such as the Masimo W1 smartwatch. MASI produces returns on invested capital of 18% and remains a key portfolio holding. QSV will closely monitor the integration of Sound United along with the overall business performance of the company.

Icon PLC (ICLR) shares fell over concerns that business would slow, post COVID, and that it could stumble in its integration of newly acquired PRA Health. ICLR – and PRAH – are clinical research organizations (CROs) providing outsourced development services to the pharmaceutical, biotechnology, and medical device industries. ICLR has a history of being conservative as it communicates its outlook and previously communicated its expectations for 2022. The cultures of ICLR and PRA Health are similar, and the combined organization will bring synergies and benefit from reduced client concentrations.

Quality Value Midcap Portfolio Activity

QSV exited Amdocs Limited (DOX), Maximus Inc. (MMS), and Qualys Inc. (QLYS) during the quarter. New positions were initiated in EPAM Systems Inc. (EPAM), a provider of software and digital platform engineering services, global freight forwarding company Expeditors International of Washington (EXPD), and Helen of Troy Ltd. (HELE), a consumer products company with brands including Braun, Hydro Flask and Revlon.

The QSV Select Value Strategy returned -8.76% and -8.96%, gross and net of fees, trailing the returns of -1.50% and -5.82% for the Russell 2500 Value and Russell 2500 Indexes, respectively. Select Value is a high conviction strategy that takes QSV’s “best ideas” from its Quality Value Smallcap and Quality Value Midcap strategies. Security selection more than offset the negative impact of an overweight in Technology companies during the quarter. QSV’s overweight and its security selection detracted from performance in Healthcare and its meaningful underweight to Energy also detracted.

Select Value Top Contributors

Energy services company Core Laboratories (CLB) was the leading contributor to performance and is discussed above.

Financial technology company Jack Henry & Associates, Inc. (JKHY) was the second greatest contributor to performance during the quarter. JKHY provides automation software, payment processing, and outsourcing solutions to community banks and credit unions and has moved up market into larger banking organizations over the past ten years. The company produces returns on invested capital of 20%, supported by high switching costs and a scalable business model.

Select Value Top Detractors

As in the Quality Value Midcap strategy, holdings Masimo Corporation (MASI) and Icon PLC (ICLR) were the greatest detractors. Comments on each are noted above.

Select Value Portfolio Activity

Adhering to QSV’s emphasis on owning its best small and mid-cap ideas within the Select Value portfolio, QSV exited Amdocs Limited (DOX), Maximus Inc. (MMS), and Qualys Inc. (QLYS) during the quarter. New positions were entered in Clorox (CLX), an existing holding in the QSV Quality Value Midcap strategy, and Helen of Troy Ltd. (HELE).

Our Focus on the Long Term

With today’s “perfect storm” of risk factors, the near-term outlook is more cloudy than usual. Inflation, the Fed’s tightening cycle, and geopolitical concerns all weigh on the markets and seem likely to persist during 2022. What seems certain is that economic growth will be slower, leading to slowing corporate earnings growth. The earnings cycle and earnings growth, company by company, will be in focus, favoring stable and profitable quality businesses such as those emphasized in the QSV strategies.

QSV advises clients that investing in high quality businesses is a winning strategy over time, but we know there will be periods of underperformance. The first quarter of 2022 was painfully such a time, as energy and companies tied to commodity prices drove returns, while stable companies with high returns on invested capital lagged significantly. Investors who can accept these near-term “disconnects” with benchmarks and have the patience to commit to long term ownership are rewarded over time with higher returns and less volatility. We continue to stay true to our investment process and seek out quality businesses that can be “price makers” in these challenging times.


Returns are for the respective composites of QSV Equity Investors (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 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 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 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 receive a GIPS report, please contact QSV at (844) 3-BALLAST.

CSV 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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