QSV Equity Investors
Q3 2022 Commentary
More information including since-inception performance for each of the strategies may be found at
www.qsvequityinvestors.com.
Stocks began the quarter during a mid-summer rally, but ended September in bear market territory, as
fears of sticky inflation, potential policy errors by global central banks and the possibility of a recession
weighed heavily on both stock and bond markets. After tagging inflation as “transitory” in 2021, Federal
Reserve Chairman Powell is now showing himself to be more Paul Volcker than Alan Greenspan, with a
willingness to tolerate “some pain to households and businesses” as he swiftly pursues a 2% inflation
target.
QSV’s Quality Value Smallcap and Quality Value Midcap strategies each outpaced its respective Russell
benchmark during the quarter, while the Select Value strategy slightly lagged its index. Of note: Select
Value, a high conviction “best ideas” portfolio of small and mid-capitalization companies, reached its fifth
anniversary, significantly outperforming both the Russell 2500 Value and 2500 Indexes with less risk and
positive stock selection over the five-year period.
QSV Strategy Quarterly Performance
The QSV Quality Value Smallcap Strategy returned -2.90% and -3.04%, gross and net of fees, leading
the Russell 2000 Value Index return of -4.61% while trailing the Russell 2000 Index return of -2.19%.
Security selection in Information Technology, Industrials and Consumer Staples helped performance,
while an underweight and negative security selection in Energy and negative security selection in
Consumer Discretionary companies detracted.
Quality Value Smallcap Top Contributors
NAPCO Security Technologies, Inc. (NSSC) was the leading contributor to performance during the quarter,
as shares rose over 40%. NSSC is a provider and manufacturer of high-tech security, and internetconnected home, video, fire alarm, access control, and door locking systems, operating globally in
commercial, industrial, residential, and government markets. Despite a slowdown due to COVID-19,
increased funding for school security and the mandated nature of fire alarm installations support stable
and growing revenues for the business. NSSC produces returns on invested capital more than 17%.
Computer Services Inc. (CSVI) shares rallied significantly after the company agreed to be taken private in
a deal valued at $1.6 billion by buyers Centerbridge Partners, L.P. and Bridgeport Partners. The acquisition
price valued CSI at more than a 50% premium to its pre-announcement price. While the deal is expected
to close in Q4, QSV took its gains and exited its position in favor of other opportunities.
Q3 2022 COMMENTARY 2
Quality Value Smallcap Top Detractors
CarGurus (CARG) was the leading detractor to performance for the quarter. Quarterly results beat street
expectations, but macroeconomic headwinds and seasonal slowness were cited as the reasons for lower
guidance for the coming quarter. Despite its challenges, asset light CARG has the competitive advantage
of a strong network effect with over thirty-nine million unique visitors each month and over 30,000 paying
dealerships globally. The company produces returns on invested capital of 12% and shares trade
significantly below QSV’s view of intrinsic value.
Shares of Dorman Products Inc. (DORM) fell during Q3 despite strong financial performance during the
trailing quarter. Inflation, rising interest rates, labor challenges and supply chain issues will test the
provider of automotive parts, yet secular trends of aging cars and more miles driven support the case for
ownership of the asset-light company. DORM is financially strong; low levels of debt and strong free cash
flows have supported share buybacks and acquisitions that broaden its product portfolio and the end
markets served.
Quality Value Smallcap Portfolio Activity
With the early quarter rally and subsequent decline, QSV Equity Investors saw many opportunities to upgrade its
portfolio and activity was higher than normal. QSV Equity Investors exited positions in Computer Services Inc. (CSVI), 1-
800 Flowers.com (FLWS),Frontdoor Inc. (FTDR),Lancaster Colony (LANC), Omega Flex Inc. (OFLX), and
UFP Technologies (UFPT).
New positions were initiated in asset manager Cohen & Steers Inc. (CNS), consumer products company
Helen of Troy Ltd. (HELE), Innoviva (INVA), a biopharma company that collaborates with GlaxoSmithKline,
and real estate company Netstreit (NTST). Also initiated were positions in semiconductor provider Power
Integrations (POWI), digital advertising platform PubMatic (PUBM), digital content provider Shutterstock
(SSTK), and UMH Properties (UMH), a real estate investment trust focused on mobile home properties.
The QSV Equity Investors Quality Value Midcap Strategy returned -3.17% and -3.41%, gross and net of fees, for the
quarter, leading both the Russell Mid Cap Value Index return of -4.93% and the Russell Mid Cap Index
return of -3.44%. QSV Equity Investors’ security selection added value in the Information Technology, Financials and
Consumer Staples sectors, while an underweight and negative security selection in Energy detracted.
Quality Value Midcap Top Contributors
ETSY Inc. (ETSY) rose during the quarter as earnings beat expectations, driven by cost controls and higher
take rates, or fees charged to sellers on the retailer’s platform. ETSY is a high margin retail platform
specializing in handmade and vintage products. ETSY also offers services to improve the productivity of its
sellers, including advertising, logistics and payments. ETSY has strong network effects from a seller base
which is loyal to the platform and dependent on it for its active buyer base of 90 million. ETSY produces
returns on invested capital of 17% and shares are currently at a significant discount to QSV Equity Investors’ estimate
of intrinsic value.
Shares of global technology services company EPAM Systems Inc. (EPAM) rose during the quarter on
strong business performance, guidance from management, and positive news about its global workforce.
EPAM has a network of multidisciplinary teams, 60% of which were in the conflict region of Russia, Belarus,
Q3 2022 COMMENTARY 3 and Ukraine as of February 2022. This exposure has been lowered to 40% of EPAM’s global delivery
footprint and management has targeted 30% by year-end. Most of the firm’s revenues are generated from
U.S. customers and returns on invested capital stand at 18%.
Quality Value Midcap Top Detractors
Helen of Troy Ltd. (HELE) shares fell as the company reduced revenue and earnings guidance for 2023
due to the macroeconomic environment and inventory gluts. HELE is a consumer products company with
leading brands that include OXO, Hydro Flask, Honeywell, Braun, Vick’s, PUR, Hot Tools, Drybar and
Osprey Packs. The company has a strategy to focus more resources on its leading brands; 81% of fiscal
2022 revenue came from its top brands while the company’s leadership brands accounted for 56% of
revenue in 2014. This operational rigor also includes expense control and reductions that we believe will
benefit the company. Shares sell for a significant discount to QSV Equity Investors’ view of intrinsic value.
Shares of household and personal care product producer Church & Dwight Co. Inc. (CHD) fell during the
quarter due to weak quarterly results and reduced guidance because of inventory issues at clients,
including Wal-Mart. We believe the sell-off of CHD shares is overdone and that these headwinds should
turn into tailwinds as pricing stays firm, but supply constraints improve. CHD has strong management and
a 120-year history of paying dividends, buying back shares, and making acquisitions. The company
produces returns on invested capital of 16%.
Quality Value Midcap Portfolio Activity
With the early quarter rally and subsequent decline, QSV Equity Investors saw many opportunities to upgrade its
portfolio and activity was higher than normal. QSV Equity Investors exited Fortinet Inc. (FTNT), Jack Henry & Associates
(JKHY), Lancaster Colony (LANC), Service Corporation International (SCI), and The Scotts Miracle Gro
(SMG).
New positions were initiated in cybersecurity vendor Check Point Software Technologies (CHKP),
MarketAxess Holdings Inc. (MKTX), the leading platform for the electronic trading of corporate bonds,
Teradyne Inc. (TER), a leading provider of semiconductor chip testing equipment and West
Pharmaceutical Services, Inc. (WST), a provider of packaging and delivery components for injectable
therapeutics.
The QSV Select Value Strategy returned -4.72% and -4.93%, gross and net of fees, trailing the returns
of -4.50% and -2.82% for the Russell 2500 Value and Russell 2500 Indexes, respectively. Select Value is a
high conviction strategy that takes QSV Equity Investor’s “best ideas” from our Quality Value Smallcap and Quality
Value Midcap strategies. Security selection helped performance most notably in Information Technology
and Communication Services companies, while detracting in Consumer Discretionary holdings. An
underweight and negative security selection in Energy detracted from performance.
Select Value Top Contributors
As in the QSV Equity Investors Quality Value Smallcap portfolio, NAPCO Security Technologies, Inc. (NSSC) was the
leading contributor to performance during the quarter and is discussed above.
Lancaster Colony Corp (LANC) shares aided performance during the quarter as the company delivered
results well above the market’s expectations. LANC is a provider of specialty food products sold through
retail and food service channels. The company leverages certain products from its food service channel,
such as Chick-fil-A sauces and Buffalo Wild Wings sauces, which are sold under exclusive licensing
agreements. LANC has been successful in responding to inflation with price increases and cost savings
programs to partially offset these higher costs. Shares were sold during the quarter for valuation reasons.
Select Value Top Detractors
As in the Quality Value Midcap strategy, Consumer Staples companies Church & Dwight Co. (CHD) and
Helen of Troy Ltd. (HELE) were the leading detractors from performance during the quarter. Both are
discussed above.
Select Value Portfolio Activity
Keeping with its approach to invest in the best ideas of QSV Equity Investors’s Quality Value Smallcap and Midcap
strategies, QSV Equity Investors sold and purchased several holdings, upgrading its portfolio. QSV exited positions in
Jack Henry and Associates (JKHY), Lancaster Colony (LANC), Service Corporation International (SCI),
and The Scotts Miracle Gro (SMG).
QSV Equity Investors initiated positions in Cohen & Steers, (CNS), MarketAxess Holdings, Netstreit (NTST), PubMatic
(PUBM), and West Pharmaceutical Services, Inc. (WST) during the quarter.
Our Focus on the Long Term
The Federal Reserve’s tightening cycle threatens to “break things” and may tip the economy into a
recession, with declines in corporate earnings to follow. A silver lining of the bear market is more
reasonable equity valuations relative to early 2022 and long-term averages, yet it is difficult to know the
outlook for earnings – and the validity of current valuation estimates – when so many uncertainties exist.
We would like to think that “everything is priced in,” but experience has shown we cannot know
everything. Bottom line: we do not think that we are out of the woods yet and the economy and markets
will likely get worse before getting better.
Rising interest rates and stubborn inflation have shown there are few places for investors to hide. There
are companies with greater resilience to these challenges, though, which provide the “QSV” we seek
for our clients’ portfolios. Businesses with pricing power, lower levels of debt, lower capital intensity and
competitive “moats” offer attractive opportunities for long term investors to upgrade their portfolios and
benefit from the long-term compounding that results. We invite you to join us.
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 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 Equity Investors 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 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 Investors 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 2022 Commentary
More information including since-inception performance for each of the strategies may be found at
www.qsvequityinvestors.com.
Stocks began the quarter during a mid-summer rally, but ended September in bear market territory, as
fears of sticky inflation, potential policy errors by global central banks and the possibility of a recession
weighed heavily on both stock and bond markets. After tagging inflation as “transitory” in 2021, Federal
Reserve Chairman Powell is now showing himself to be more Paul Volcker than Alan Greenspan, with a
willingness to tolerate “some pain to households and businesses” as he swiftly pursues a 2% inflation
target.
QSV’s Quality Value Smallcap and Quality Value Midcap strategies each outpaced its respective Russell
benchmark during the quarter, while the Select Value strategy slightly lagged its index. Of note: Select
Value, a high conviction “best ideas” portfolio of small and mid-capitalization companies, reached its fifth
anniversary, significantly outperforming both the Russell 2500 Value and 2500 Indexes with less risk and
positive stock selection over the five-year period.
QSV Strategy Quarterly Performance
The QSV Quality Value Smallcap Strategy returned -2.90% and -3.04%, gross and net of fees, leading
the Russell 2000 Value Index return of -4.61% while trailing the Russell 2000 Index return of -2.19%.
Security selection in Information Technology, Industrials and Consumer Staples helped performance,
while an underweight and negative security selection in Energy and negative security selection in
Consumer Discretionary companies detracted.
Quality Value Smallcap Top Contributors
NAPCO Security Technologies, Inc. (NSSC) was the leading contributor to performance during the quarter,
as shares rose over 40%. NSSC is a provider and manufacturer of high-tech security, and internetconnected home, video, fire alarm, access control, and door locking systems, operating globally in
commercial, industrial, residential, and government markets. Despite a slowdown due to COVID-19,
increased funding for school security and the mandated nature of fire alarm installations support stable
and growing revenues for the business. NSSC produces returns on invested capital more than 17%.
Computer Services Inc. (CSVI) shares rallied significantly after the company agreed to be taken private in
a deal valued at $1.6 billion by buyers Centerbridge Partners, L.P. and Bridgeport Partners. The acquisition
price valued CSI at more than a 50% premium to its pre-announcement price. While the deal is expected
to close in Q4, QSV took its gains and exited its position in favor of other opportunities.
Q3 2022 COMMENTARY 2
Quality Value Smallcap Top Detractors
CarGurus (CARG) was the leading detractor to performance for the quarter. Quarterly results beat street
expectations, but macroeconomic headwinds and seasonal slowness were cited as the reasons for lower
guidance for the coming quarter. Despite its challenges, asset light CARG has the competitive advantage
of a strong network effect with over thirty-nine million unique visitors each month and over 30,000 paying
dealerships globally. The company produces returns on invested capital of 12% and shares trade
significantly below QSV’s view of intrinsic value.
Shares of Dorman Products Inc. (DORM) fell during Q3 despite strong financial performance during the
trailing quarter. Inflation, rising interest rates, labor challenges and supply chain issues will test the
provider of automotive parts, yet secular trends of aging cars and more miles driven support the case for
ownership of the asset-light company. DORM is financially strong; low levels of debt and strong free cash
flows have supported share buybacks and acquisitions that broaden its product portfolio and the end
markets served.
Quality Value Smallcap Portfolio Activity
With the early quarter rally and subsequent decline, QSV Equity Investors saw many opportunities to upgrade its
portfolio and activity was higher than normal. QSV Equity Investors exited positions in Computer Services Inc. (CSVI), 1-
800 Flowers.com (FLWS),Frontdoor Inc. (FTDR),Lancaster Colony (LANC), Omega Flex Inc. (OFLX), and
UFP Technologies (UFPT).
New positions were initiated in asset manager Cohen & Steers Inc. (CNS), consumer products company
Helen of Troy Ltd. (HELE), Innoviva (INVA), a biopharma company that collaborates with GlaxoSmithKline,
and real estate company Netstreit (NTST). Also initiated were positions in semiconductor provider Power
Integrations (POWI), digital advertising platform PubMatic (PUBM), digital content provider Shutterstock
(SSTK), and UMH Properties (UMH), a real estate investment trust focused on mobile home properties.
The QSV Equity Investors Quality Value Midcap Strategy returned -3.17% and -3.41%, gross and net of fees, for the
quarter, leading both the Russell Mid Cap Value Index return of -4.93% and the Russell Mid Cap Index
return of -3.44%. QSV Equity Investors’ security selection added value in the Information Technology, Financials and
Consumer Staples sectors, while an underweight and negative security selection in Energy detracted.
Quality Value Midcap Top Contributors
ETSY Inc. (ETSY) rose during the quarter as earnings beat expectations, driven by cost controls and higher
take rates, or fees charged to sellers on the retailer’s platform. ETSY is a high margin retail platform
specializing in handmade and vintage products. ETSY also offers services to improve the productivity of its
sellers, including advertising, logistics and payments. ETSY has strong network effects from a seller base
which is loyal to the platform and dependent on it for its active buyer base of 90 million. ETSY produces
returns on invested capital of 17% and shares are currently at a significant discount to QSV Equity Investors’ estimate
of intrinsic value.
Shares of global technology services company EPAM Systems Inc. (EPAM) rose during the quarter on
strong business performance, guidance from management, and positive news about its global workforce.
EPAM has a network of multidisciplinary teams, 60% of which were in the conflict region of Russia, Belarus,
Q3 2022 COMMENTARY 3 and Ukraine as of February 2022. This exposure has been lowered to 40% of EPAM’s global delivery
footprint and management has targeted 30% by year-end. Most of the firm’s revenues are generated from
U.S. customers and returns on invested capital stand at 18%.
Quality Value Midcap Top Detractors
Helen of Troy Ltd. (HELE) shares fell as the company reduced revenue and earnings guidance for 2023
due to the macroeconomic environment and inventory gluts. HELE is a consumer products company with
leading brands that include OXO, Hydro Flask, Honeywell, Braun, Vick’s, PUR, Hot Tools, Drybar and
Osprey Packs. The company has a strategy to focus more resources on its leading brands; 81% of fiscal
2022 revenue came from its top brands while the company’s leadership brands accounted for 56% of
revenue in 2014. This operational rigor also includes expense control and reductions that we believe will
benefit the company. Shares sell for a significant discount to QSV Equity Investors’ view of intrinsic value.
Shares of household and personal care product producer Church & Dwight Co. Inc. (CHD) fell during the
quarter due to weak quarterly results and reduced guidance because of inventory issues at clients,
including Wal-Mart. We believe the sell-off of CHD shares is overdone and that these headwinds should
turn into tailwinds as pricing stays firm, but supply constraints improve. CHD has strong management and
a 120-year history of paying dividends, buying back shares, and making acquisitions. The company
produces returns on invested capital of 16%.
Quality Value Midcap Portfolio Activity
With the early quarter rally and subsequent decline, QSV Equity Investors saw many opportunities to upgrade its
portfolio and activity was higher than normal. QSV Equity Investors exited Fortinet Inc. (FTNT), Jack Henry & Associates
(JKHY), Lancaster Colony (LANC), Service Corporation International (SCI), and The Scotts Miracle Gro
(SMG).
New positions were initiated in cybersecurity vendor Check Point Software Technologies (CHKP),
MarketAxess Holdings Inc. (MKTX), the leading platform for the electronic trading of corporate bonds,
Teradyne Inc. (TER), a leading provider of semiconductor chip testing equipment and West
Pharmaceutical Services, Inc. (WST), a provider of packaging and delivery components for injectable
therapeutics.
The QSV Select Value Strategy returned -4.72% and -4.93%, gross and net of fees, trailing the returns
of -4.50% and -2.82% for the Russell 2500 Value and Russell 2500 Indexes, respectively. Select Value is a
high conviction strategy that takes QSV Equity Investor’s “best ideas” from our Quality Value Smallcap and Quality
Value Midcap strategies. Security selection helped performance most notably in Information Technology
and Communication Services companies, while detracting in Consumer Discretionary holdings. An
underweight and negative security selection in Energy detracted from performance.
Select Value Top Contributors
As in the QSV Equity Investors Quality Value Smallcap portfolio, NAPCO Security Technologies, Inc. (NSSC) was the
leading contributor to performance during the quarter and is discussed above.
Lancaster Colony Corp (LANC) shares aided performance during the quarter as the company delivered
results well above the market’s expectations. LANC is a provider of specialty food products sold through
retail and food service channels. The company leverages certain products from its food service channel,
such as Chick-fil-A sauces and Buffalo Wild Wings sauces, which are sold under exclusive licensing
agreements. LANC has been successful in responding to inflation with price increases and cost savings
programs to partially offset these higher costs. Shares were sold during the quarter for valuation reasons.
Select Value Top Detractors
As in the Quality Value Midcap strategy, Consumer Staples companies Church & Dwight Co. (CHD) and
Helen of Troy Ltd. (HELE) were the leading detractors from performance during the quarter. Both are
discussed above.
Select Value Portfolio Activity
Keeping with its approach to invest in the best ideas of QSV Equity Investors’s Quality Value Smallcap and Midcap
strategies, QSV Equity Investors sold and purchased several holdings, upgrading its portfolio. QSV exited positions in
Jack Henry and Associates (JKHY), Lancaster Colony (LANC), Service Corporation International (SCI),
and The Scotts Miracle Gro (SMG).
QSV Equity Investors initiated positions in Cohen & Steers, (CNS), MarketAxess Holdings, Netstreit (NTST), PubMatic
(PUBM), and West Pharmaceutical Services, Inc. (WST) during the quarter.
Our Focus on the Long Term
The Federal Reserve’s tightening cycle threatens to “break things” and may tip the economy into a
recession, with declines in corporate earnings to follow. A silver lining of the bear market is more
reasonable equity valuations relative to early 2022 and long-term averages, yet it is difficult to know the
outlook for earnings – and the validity of current valuation estimates – when so many uncertainties exist.
We would like to think that “everything is priced in,” but experience has shown we cannot know
everything. Bottom line: we do not think that we are out of the woods yet and the economy and markets
will likely get worse before getting better.
Rising interest rates and stubborn inflation have shown there are few places for investors to hide. There
are companies with greater resilience to these challenges, though, which provide the “QSV” we seek
for our clients’ portfolios. Businesses with pricing power, lower levels of debt, lower capital intensity and
competitive “moats” offer attractive opportunities for long term investors to upgrade their portfolios and
benefit from the long-term compounding that results. We invite you to join us.
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 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 Equity Investors 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 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 Investors 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