Q4 2024 Commentary
The fourth quarter capped a second consecutive calendar year of leadership by large cap technology stocks, with the “Magnificent 7” companies being joined by Broadcom to become the “BATMMAAN” confederation of stocks that have dominated market performance. Returns for small and mid-cap value indexes ended in negative territory for the quarter as markets pulled back during a dismal December that reflected expectations for fewer interest rate cuts from the Federal Reserve in 2025 and rising bond yields. Across market capitalizations – large, mid, and small – lower quality stocks, as represented by the Russell Dynamic Indexes, outperformed higher quality stocks, as represented by the Russell Defensive Indexes. Against this backdrop, QSV’s Small Cap, Mid Cap and Select strategies each underperformed their respective benchmarks for the quarter and full calendar year.
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 -1.51% and -1.60%, gross and net of fees, respectively, trailing the Russell 2000 Value Index return of -1.06% and the Russell 2000 Index return of 0.33%. Security selection in Healthcare and Consumer Discretionary companies helped performance. An overweight to Healthcare, along with security selection in Information Technology and Consumer Staples companies detracted from returns.
QSV Small Cap Top Contributors
As in Q3 2024, Doximity, Inc. (DOCS) was the leading contributor to performance in Q4, supported by continued strong revenue and earnings, highlighted by a 24% increase in revenues from the company’s top twenty clients on a trailing 12-month basis. DOCS offers a suite of tools that support an online community for physicians, nurse practitioners and physicians’ assistants, enabling them to coordinate patient care, conduct patient visits and manage their careers. DOCS benefits from strong network effects with over 80% of U.S. physicians using the platform. The company has returns on invested capital of 18%.
Automotive parts producer Dorman Products Inc. (DORM) rose more than 15%, as revenue and earnings growth exceeded expectations, and the company updated its full year guidance to reflect higher expected earnings. DORM is a supplier of original equipment parts and has a unique competitive advantage in the development of products where it gets feedback from its network of repair technicians that identify failure prone parts. Management’s growth plans and the rising average age of vehicles in the U.S. supports a positive long-term outlook for Dorman’s products. DORM has returns on invested capital of 11%.
QSV Small Cap Top Detractors
MGP Ingredients Inc. (MGPI) was the leading detractor during the quarter as sales slowed in both its branded spirits and ingredients businesses and management lowered guidance. Management noted weakening conditions in the American Whiskey category, with elevated inventories and slower growth leading to lower demand. MGPI is one of the five largest distilleries in the United States and has grown sales and profits through its acquisitions of branded portfolios. MGPI has plans to optimize its cost structure in response to lower production volumes. The company produces returns on invested capital of 13%.
Value-based care provider Astrana Health Inc. (ASTH) detracted from performance during the quarter as shares dropped on decreased utilization and the news of its largest acquisition to-date, Prospect Health. We see the purchase as accretive to earnings and believe there will be synergies beyond the market’s expectations. ASTH works directly with physicians to deliver patient-centered care while using their feedback to lower costs. The company delivers 8% returns on invested capital and shares sell at a significant discount to QSV’s estimate of intrinsic value.
QSV Small Cap Portfolio New Buys and Sells
Shares of Caretrust REIT Inc. (CTRE), an operator of skilled nursing, seniors housing and other healthcarerelated properties, were purchased, as were shares of Cognex Corporation (CGNX), a provider of machine vision technologies that improve efficiency and quality in industrial end markets. Generac Holdings (GNRC) was sold for valuation reasons and retail commercial real estate operator Netstreit Corporation (NTST) was sold in favor of better ideas.
QSV Mid Cap returned -2.95% and -3.19%, gross and net of fees for the quarter, trailing the -1.75% return of the Russell Mid Cap Value Index and the Russell Mid Cap Index return of 0.62%. Security selection in Healthcare and Consumer Discretionary companies helped performance. Company selection in Information Technology detracted from performance, as did selection and an overweight to Industrials companies.
QSV Mid Cap Top Contributors
Paycom Software Inc. (PAYC) was the leading contributor to performance as shares rose by over 23%. Paycom’s unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management solution. PAYC benefits from high switching costs, which has resulted in a 93% client retention rate. The company has approximately 5% penetration of its total addressable market, which we believe it can expand. PAYC has returns on invested capital of 25%.
GPS-enabled hardware and software provider Garmin Ltd. (GRMN) also contributed to performance during the quarter as its shares rose 18%. The company significantly beat earnings estimates and raised its full year earnings guidance by over 10%. Garmin has diverse end market exposure in wearables, marine, automotive and aviation, with its premium priced fitness and outdoor products representing most revenues. The company produces returns on invested capital of 18%.
QSV Mid Cap Top Detractors
Shares of Booz Allen Hamilton (BAH) fell more than 20% on fears that its double-digit growth may be at risk following the loss of two top ten programs over the past year. Concerns also exist due to the change in administrations and geopolitical tensions, which could impact end market visibility. Quarterly results included double digit revenue growth, strong margins, and improved guidance for the full fiscal year. BAH produces returns on invested capital of 14%. We remain confident in BAH due to its scale advantages as a provider of artificial intelligence, cybersecurity, data analytics, and augmented reality 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.
Semiconductor manufacturer Monolithic Power (MPWR) fell during the quarter over fears of a potential market share loss at Nvidia, to whom MPWR sells components for its Blackwell processors. MPWR does not expect it will lose market share in this market and predicts a resurgence in demand going into 2025. While Nvidia is important to MPWR, its business is well diversified into industrial, automotive, computing, storage, and consumer products. The company produces returns on invested capital of 22% and its shares sell at a significant discount to our measure of intrinsic value.
QSV Mid Cap New Buys and Sells
Exploration and production company APA Corporation (APA) was sold to fund a better idea during the quarter. That idea is Halliburton (HAL), North America’s largest oilfield service company as measured by market share, during the quarter. Other trims were made to existing positions based upon valuation and our convictions in the fundamentals of the businesses.
QSV Select returned -1.99% and -2.23%, gross and net of fees, trailing the returns of the Russell 2500 Value and Russell 2500 Indexes of -0.26% and 0.62%, 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 Consumer Discretionary names. Company selection detracted from returns in Consumer Staples and Financials companies, while an overweight to Financials added to performance.
QSV Select Top Contributors
Doximity Inc. (DOX) was the leading contributor to performance during the quarter and is discussed above in our Small Cap commentary.
Paycom Inc. (PAYC) was a top contributor to performance and is discussed above in our Mid Cap commentary.
QSV Select Top Detractors
MGP Ingredients Inc. (MGPI) was the leading detractor during the quarter and is discussed in our Small Cap commentary above.
Booz Allen Hamilton (BAH) was the second leading detractor during Q4 and is discussed in our Mid Cap commentary.
QSV Select New Buys and Sells
Limited trading was done in QSV Select during the quarter, with trims and additions made to address valuations and quality upgrades. Shares of Caretrust REIT Inc. (CTRE), an operator of skilled nursing, seniors housing and other healthcare-related properties, were purchased, funded by the proceeds from the sale of retail commercial real estate operator Netstreit Corporation (NTST).
Our Focus on the Long Term
We begin 2025 with cautious optimism for the markets and for the stocks of quality small cap and mid cap companies, in particular. Risks exist, as always, and we go about our company analysis and portfolio construction with our eyes wide open. The new administration brings uncertainty, with the potential positives of lowered regulation, reduced corporate tax rates, and the renewed animal spirits that could increase IPO and merger and acquisition activity. Tariffs offer a mixed bag of potential positives – reshoring of business, increased revenues for the government – and the potential negative impact of inflationary cost increases for consumers and a challenging global trade environment.
One risk that gives us less concern is the refrain of “unforgiving valuations” cited about our stock markets. As investors in quality small and mid-cap stocks, analyzed and valued one by one, we see opportunities that stand in contrast to the high valuations of the market indexesthat have become momentum driven. Smaller companies’ valuations are meaningfully lower than U.S. large caps. Some of this is justified due to the lack of profitability of many smaller companies and the higher borrowing costs they incur, yet we continue to find companies with strong balance sheets, free cash flows, and high returns on invested capital that have been overlooked while investors have been infatuated with big tech. We will continue to invest with optimism in these businesses and invite you to do so alongside 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 QSV Small Cap strategy are compared to the historical performance of the Russell 2000 Indices as they are 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 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 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 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.
Q4 2024 Commentary
The fourth quarter capped a second consecutive calendar year of leadership by large cap technology stocks, with the “Magnificent 7” companies being joined by Broadcom to become the “BATMMAAN” confederation of stocks that have dominated market performance. Returns for small and mid-cap value indexes ended in negative territory for the quarter as markets pulled back during a dismal December that reflected expectations for fewer interest rate cuts from the Federal Reserve in 2025 and rising bond yields. Across market capitalizations – large, mid, and small – lower quality stocks, as represented by the Russell Dynamic Indexes, outperformed higher quality stocks, as represented by the Russell Defensive Indexes. Against this backdrop, QSV’s Small Cap, Mid Cap and Select strategies each underperformed their respective benchmarks for the quarter and full calendar year.
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 -1.51% and -1.60%, gross and net of fees, respectively, trailing the Russell 2000 Value Index return of -1.06% and the Russell 2000 Index return of 0.33%. Security selection in Healthcare and Consumer Discretionary companies helped performance. An overweight to Healthcare, along with security selection in Information Technology and Consumer Staples companies detracted from returns.
QSV Small Cap Top Contributors
As in Q3 2024, Doximity, Inc. (DOCS) was the leading contributor to performance in Q4, supported by continued strong revenue and earnings, highlighted by a 24% increase in revenues from the company’s top twenty clients on a trailing 12-month basis. DOCS offers a suite of tools that support an online community for physicians, nurse practitioners and physicians’ assistants, enabling them to coordinate patient care, conduct patient visits and manage their careers. DOCS benefits from strong network effects with over 80% of U.S. physicians using the platform. The company has returns on invested capital of 18%.
Automotive parts producer Dorman Products Inc. (DORM) rose more than 15%, as revenue and earnings growth exceeded expectations, and the company updated its full year guidance to reflect higher expected earnings. DORM is a supplier of original equipment parts and has a unique competitive advantage in the development of products where it gets feedback from its network of repair technicians that identify failure prone parts. Management’s growth plans and the rising average age of vehicles in the U.S. supports a positive long-term outlook for Dorman’s products. DORM has returns on invested capital of 11%.
QSV Small Cap Top Detractors
MGP Ingredients Inc. (MGPI) was the leading detractor during the quarter as sales slowed in both its branded spirits and ingredients businesses and management lowered guidance. Management noted weakening conditions in the American Whiskey category, with elevated inventories and slower growth leading to lower demand. MGPI is one of the five largest distilleries in the United States and has grown sales and profits through its acquisitions of branded portfolios. MGPI has plans to optimize its cost structure in response to lower production volumes. The company produces returns on invested capital of 13%.
Value-based care provider Astrana Health Inc. (ASTH) detracted from performance during the quarter as shares dropped on decreased utilization and the news of its largest acquisition to-date, Prospect Health. We see the purchase as accretive to earnings and believe there will be synergies beyond the market’s expectations. ASTH works directly with physicians to deliver patient-centered care while using their feedback to lower costs. The company delivers 8% returns on invested capital and shares sell at a significant discount to QSV’s estimate of intrinsic value.
QSV Small Cap Portfolio New Buys and Sells
Shares of Caretrust REIT Inc. (CTRE), an operator of skilled nursing, seniors housing and other healthcarerelated properties, were purchased, as were shares of Cognex Corporation (CGNX), a provider of machine vision technologies that improve efficiency and quality in industrial end markets. Generac Holdings (GNRC) was sold for valuation reasons and retail commercial real estate operator Netstreit Corporation (NTST) was sold in favor of better ideas.
QSV Mid Cap returned -2.95% and -3.19%, gross and net of fees for the quarter, trailing the -1.75% return of the Russell Mid Cap Value Index and the Russell Mid Cap Index return of 0.62%. Security selection in Healthcare and Consumer Discretionary companies helped performance. Company selection in Information Technology detracted from performance, as did selection and an overweight to Industrials companies.
QSV Mid Cap Top Contributors
Paycom Software Inc. (PAYC) was the leading contributor to performance as shares rose by over 23%. Paycom’s unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management solution. PAYC benefits from high switching costs, which has resulted in a 93% client retention rate. The company has approximately 5% penetration of its total addressable market, which we believe it can expand. PAYC has returns on invested capital of 25%.
GPS-enabled hardware and software provider Garmin Ltd. (GRMN) also contributed to performance during the quarter as its shares rose 18%. The company significantly beat earnings estimates and raised its full year earnings guidance by over 10%. Garmin has diverse end market exposure in wearables, marine, automotive and aviation, with its premium priced fitness and outdoor products representing most revenues. The company produces returns on invested capital of 18%.
QSV Mid Cap Top Detractors
Shares of Booz Allen Hamilton (BAH) fell more than 20% on fears that its double-digit growth may be at risk following the loss of two top ten programs over the past year. Concerns also exist due to the change in administrations and geopolitical tensions, which could impact end market visibility. Quarterly results included double digit revenue growth, strong margins, and improved guidance for the full fiscal year. BAH produces returns on invested capital of 14%. We remain confident in BAH due to its scale advantages as a provider of artificial intelligence, cybersecurity, data analytics, and augmented reality 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.
Semiconductor manufacturer Monolithic Power (MPWR) fell during the quarter over fears of a potential market share loss at Nvidia, to whom MPWR sells components for its Blackwell processors. MPWR does not expect it will lose market share in this market and predicts a resurgence in demand going into 2025. While Nvidia is important to MPWR, its business is well diversified into industrial, automotive, computing, storage, and consumer products. The company produces returns on invested capital of 22% and its shares sell at a significant discount to our measure of intrinsic value.
QSV Mid Cap New Buys and Sells
Exploration and production company APA Corporation (APA) was sold to fund a better idea during the quarter. That idea is Halliburton (HAL), North America’s largest oilfield service company as measured by market share, during the quarter. Other trims were made to existing positions based upon valuation and our convictions in the fundamentals of the businesses.
QSV Select returned -1.99% and -2.23%, gross and net of fees, trailing the returns of the Russell 2500 Value and Russell 2500 Indexes of -0.26% and 0.62%, 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 Consumer Discretionary names. Company selection detracted from returns in Consumer Staples and Financials companies, while an overweight to Financials added to performance.
QSV Select Top Contributors
Doximity Inc. (DOX) was the leading contributor to performance during the quarter and is discussed above in our Small Cap commentary.
Paycom Inc. (PAYC) was a top contributor to performance and is discussed above in our Mid Cap commentary.
QSV Select Top Detractors
MGP Ingredients Inc. (MGPI) was the leading detractor during the quarter and is discussed in our Small Cap commentary above.
Booz Allen Hamilton (BAH) was the second leading detractor during Q4 and is discussed in our Mid Cap commentary.
QSV Select New Buys and Sells
Limited trading was done in QSV Select during the quarter, with trims and additions made to address valuations and quality upgrades. Shares of Caretrust REIT Inc. (CTRE), an operator of skilled nursing, seniors housing and other healthcare-related properties, were purchased, funded by the proceeds from the sale of retail commercial real estate operator Netstreit Corporation (NTST).
Our Focus on the Long Term
We begin 2025 with cautious optimism for the markets and for the stocks of quality small cap and mid cap companies, in particular. Risks exist, as always, and we go about our company analysis and portfolio construction with our eyes wide open. The new administration brings uncertainty, with the potential positives of lowered regulation, reduced corporate tax rates, and the renewed animal spirits that could increase IPO and merger and acquisition activity. Tariffs offer a mixed bag of potential positives – reshoring of business, increased revenues for the government – and the potential negative impact of inflationary cost increases for consumers and a challenging global trade environment.
One risk that gives us less concern is the refrain of “unforgiving valuations” cited about our stock markets. As investors in quality small and mid-cap stocks, analyzed and valued one by one, we see opportunities that stand in contrast to the high valuations of the market indexesthat have become momentum driven. Smaller companies’ valuations are meaningfully lower than U.S. large caps. Some of this is justified due to the lack of profitability of many smaller companies and the higher borrowing costs they incur, yet we continue to find companies with strong balance sheets, free cash flows, and high returns on invested capital that have been overlooked while investors have been infatuated with big tech. We will continue to invest with optimism in these businesses and invite you to do so alongside 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 QSV Small Cap strategy are compared to the historical performance of the Russell 2000 Indices as they are 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 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 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 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.