QSV Equity Investors

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.

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.

Disclaimer:

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.

QSV Equity Investors

February 25, 2022

More information including since-inception performance for each QSV strategy may be found at www.qsvequityinvestors.com.

War

Markets have been bracing for conflict between Russia and Ukraine for much of 2022 and, on Thursday, this conflict became a reality. President Vladimir Putin has stated that Ukraine “is an inalienable part of [Russia’s] history, culture, and spiritual space” and seems intent on restoring what was the U.S.S.R. Equity markets reacted with wild swings, including a near seven hundred basis point trough to peak move by the NASDAQ. The initial “risk off” reaction triggered by news of Russia’s invasion was followed by a sharp rally as investors seemed relieved by sanctions that were less severe than feared and the possibility that the Federal Reserve’s expected rate hikes be muted as it wishes to avoid economic slowdown.

The Markets

Oil and natural gas prices have been on the rise in 2022 and the conflict between Russia and Ukraine sent them higher. Prices have been driven by the recovery in global demand and the discipline shown by OPEC in sticking to its promise to slash oil production. Further, there has been a low level of investment in hydrocarbon production in recent years as energy companies have instead returned capital to shareholders. Shares of oil and natural gas exploration and production companies, including Marathon Oil, Halliburton, Hess, and Occidental Petroleum, have been propelled by these rising prices and have been the bright spots in small and mid-cap indexes during an otherwise negative 2022. Through Thursday, for example, the Energy sector was up over 19% in the Russell Mid Cap Value index while the benchmark, itself, was down 7%. Similarly, the Energy sector was up over 15% year-to-date in the Russell 2000 Value index and the benchmark was down nearly 7%.

The Case for Quality

Fears over rising inflation, the persistence of COVID, and concerns over the pace of rate hikes by the Federal Reserve were all worries for investors entering 2022. The war between Russia and Ukraine only adds to these, with uncertainty around additional sanctions, the duration of the conflict and added inflationary pressures from energy and agricultural inputs. The resulting volatility is a reminder that risk goes hand in hand with the pursuit of rewards in investing and, in our view, makes the case for long term ownership of quality businesses. Quality businesses, in QSV’s definition, deliver high returns on invested capital supported by durable competitive advantages. These companies share strong balance sheets, lower debt and pricing power, all characteristics that offer stability in volatile times. Businesses like Clorox, Campbell Soup, and McCormick & Company offer essential products and services and possess scale advantages and intangible assets that give them staying power and result in a “smoother ride” for investors in their shares. Equity investing is essential as retirement plans provide benefits to plan participants, foundations strive to fulfill their missions and families build secure futures. Allocations to quality businesses have proven to offer strong long-term results with less volatility in turbulent times.

Disclaimer:

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.

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.

QSV Equity Investors

Q4 2021 Commentary

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

Equity markets marched higher in the quarter, with returns in large capitalization indexes outpacing those of small cap indexes. Businesses and investors faced numerous challenges – research firm Sentieo cited “supply chain,” “inflation” and “variant” as the most mentioned words on Wall Street calls – but returns were lifted by an ongoing combination of favorable monetary policy and fiscal stimulus which has fueled earnings growth into the second year of economic recovery. Investors have been slowly moving away from the higher beta and long duration stocks that led the market since the 2020 lows to lower beta, higher quality defensive stocks more recently. Using the Russell Stability indexes as proxies for high and low quality, the Russell Defensive indexes containing businesses with higher Returns on Assets, lower leverage, and lower volatility meaningfully outperformed lower-quality businesses, as measured by the Russell Dynamic indexes, across the market cap spectrum.

QSV Strategy Quarterly Performance

The QSV Quality Value Smallcap Strategy returned 6.67% and 6.57% gross and net of fees, beating both the Russell 2000 Value and Russell 2000 Indexes’ returns of 4.36% and 2.14%, respectively. Quality “QSV-like” businesses, those with less sensitivity to economic and credit cycles and with more sustainable business models, outperformed. Active returns were greatest in the Healthcare, Communication Services, and Financials sectors, while Utilities and Cash detracted from performance. Security selection was a strong contributor to performance, with the most impactful contributions in Healthcare and Real Estate companies.

Quality Value Smallcap Top Contributors

Forward Air (FWRD) rose over 45% during the quarter as the company continues to grow organically and through acquisitions. FWRD is the leader in the deferred airfreight transportation market, where it provides time-sensitive ground transportation (airport-to-airport) to other transportation providers such as freight forwarders and airlines. The mix of FWRD’s business is shifting to higher margin, less labor-intensive palletized cargo which bodes well for an improvement in its already strong 12% return on invested capital.

National Storage Affiliates Trust (NSA) shares rose during the quarter as occupancy rates and pricing power remained high. The company continues to grow through acquisition, focusing on secondary markets where there is less competition for properties and where the company believes there is less sensitivity to economic fluctuations. NSA raised its dividend for the third consecutive quarter in November while maintaining a conservative payout ratio.

Quality Value Smallcap Top Detractors

Although PaySign (PAYS) beat revenue estimates for the quarter and raised the bottom end of its guidance for full year EBITDA, shares fell significantly during the quarter. The business performance continued to be impaired because of the impact of the COVID pandemic on the company’s plasma business. PAYS also cited pandemic-related government stimulus programs as disincentives for individuals to donate plasma. QSV exited its position in PAYS in favor of better ideas.

As with many retail and e-commerce stocks, shares of 1-800 Flowers.com (FLWS) fell sharply during the quarter. Headwinds to the company’s results include supply chain issues, including rising shipping and container costs, and higher labor rates. FLWS is working to offset some of these challenges with price increases and greater automation. The company has also made accretive acquisitions, including a seller of premium seafood and organic foods, Vital Choice, which offers synergies with existing holding Harry & David. FLWS continues to have strong average returns on invested capital of 12% and continues to be a holding for QSV.

Quality Value Smallcap Portfolio Activity

QSV exited positions in Physicians Realty Trust (DOC), Dril-Quip Inc. (DRQ), InterDigital Inc. (IDCC), MGE Energy, Inc. (MGEE), PaySign Inc., (PAYS), and Zynex Inc., (ZYXI). Zix Corporation (ZIXI) was excited as it was acquired by OpenText, a provider of information management solutions. QSV entered new positions in Frontdoor Inc. (FTDR), a provider of tech-enabled home services and warranties, and Getty Realty Corp. (GTY), owner of a convenience store and gasoline station properties that operate under brands including BP, Citgo, Exxon, and Shell. Also added were Postal Realty Trust (PSTL), the only publicly traded REIT focused on the management of properties leased to the U.S. Postal Service, and Progress Software Corp. (PRGS), a provider of cloud-based security solutions.

The QSV Quality Value Midcap Strategy returned 10.65% and 10.38%, gross and net of fees, for the quarter, leading both the Russell Mid Cap Value Index return of 8.54% and the Russell Mid Cap Index return of 6.44%. QSV added value in the Consumer Discretionary and Healthcare sectors, while Energy and Utilities exposures detracted from strategy performance. Security selection delivered an excess performance in 7 of 11 S&P sectors, with selection in Healthcare and Consumer Discretionary companies delivering the most meaningful returns.

Quality Value Midcap Top Contributors

Extra Space Storage Inc. (EXR) was the second largest contributor to performance during the quarter. EXR controls the second largest self-storage portfolio in the United States. Its scale advantage and the data that is derived from its portfolio allows EXR to move swiftly when adjusting pricing to reflect changing market trends. High occupancy rates and acquisitions supported robust performance during the quarter.

Swimming pool supplies provider Pool Corp (POOL) was the greatest contributor to performance during the quarter. The stay-at-home environment buoyed sales of Pool’s products and its share price. While the expected sales in new residential pools have slowed from strong pandemic growth, these represent less than 20% of sales for the company and its installed base will continue to deliver strong results, in our view. POOL has average returns on invested capital of 27% and continues to be a holding for QSV.

Quality Value Midcap Top Detractors

Core Laboratories (CLB) was the leading detractor from performance as COVID-19 related disruptions, hurricanes in the Gulf Coast, and supply chain issues impacted its business performance. CLB is the leader in providing core and reservoir analysis to oil and gas companies. Competitive advantages include its intangible assets (patents, proprietary technology, and human capital) and network effects (multi-client reservoir studies). The company anticipates growing customer demand in both the U.S. and international markets in 2022 and has increased raw materials inventories to address its supply chain challenges. CLB is one of the more profitable names in the group and continues to be a holding.

Despite quarterly performance that met expectations and raising the company’s guidance for the full year, Fleetcor Technologies Inc. (FLT) detracted from performance during the quarter. FLT is a provider of global business payment processing solutions, processing more than 1.6 billion transactions each year in segments that include trucking, lodging, toll roads and corporate payments. Its scale in these segments and the growth in business-to-business payments serve as strong moats for the business. Supply chain bottlenecks and driver shortages have impacted trucking within its fuel payments segment, but we see these as short-term issues and have conviction in the business.

Quality Value Midcap Portfolio Activity

QSV exited Physicians Realty Trust (DOC), MGE Energy, Inc. (MGEE), MSCI Inc. (MSCI), and Waste Connections (WCN), during the quarter. Aspen Technology (AZPN) was exited as it entered into a definitive agreement to be acquired by Emerson Electric, a global technology and engineering company. New positions were initiated in consumer products company Church & Dwight (CHD), the well-known provider of cleaning and disinfecting products company Clorox (CLX), food and snack company Campbell Soup (CPB), and video game publisher Take-Two Interactive Software, Inc. (TTWO).

The QSV Select Value Strategy returned 9.44% and 9.20%, gross and net of fees, leading the returns of 6.36% and 3.82% for the Russell 2500 Value and Russell 2500 Indexes, respectively. Select Value is a high conviction strategy that takes WSV “best ideas” from its Quality Value Smallcap and Quality Value Midcap strategies. Exposures in the Healthcare and Consumer Discretionary sectors aided returns, while the Industrials and Energy sectors detracted. Security selection can be credited for all the outperformance for the quarter, with Healthcare, Consumer Staples and Information Technology holdings most notably contributing.

Select Value Top Contributors

National Storage Affiliates Trust (NSA) was the leading contributor to performance during the quarter. Its results are noted above.

Pool Corp (POOL) was the second greatest contributor to performance during the quarter. Its results are discussed above.

Select Value Top Detractors

Core Laboratories (CLB) was the leading detractor from performance in the Select Value strategy and is discussed above.

Fleetcor Technologies Inc. (FLT) was the second largest detractor from performance during the quarter and is also addressed above.

Select Value Portfolio Activity

Adhering to QSV’s emphasis on owning its best small and mid-cap ideas within the Select Value portfolio, new positions were initiated in Church & Dwight (CHD), Getty Realty Trust (GTY), and Take-Two Interactive Software (TTWO). QSV exited its holdings in Aspen Technology (AZPN), MSCI (MSCI), and Waste Connections (WCN).

Our Focus on the Long Term

For much of 2021, the markets rose seemingly without concern for potential risks. QSV sees the New Year through the lens of opportunity, but with a keen eye on risk management through ownership of quality businesses. Known risks include:

• A continuation of inflation and its effects on consumers’ purchasing power and the pricing power of businesses.
• COVID, and global responses to the pandemic, persist as risks.
• Actions by the Federal Reserve that may progress at levels greater or lesser than anticipated.
• The fact that attention paid by investors to geopolitical risks stands at a four-year low, according to BlackRock, while the ambitions of China, Iran and Russia continue to rise.  Our own political landscape in the U.S. that remains highly polarized.

The potential impact of each of these is important for investors to consider, yet the macro future is not knowable. We do know that rising rates will impact the valuations of equities, particular higher growth names heavily reliant on future earnings. We also know that lower quality value stocks had their day in the sun in 2020 and early 2021 after briefly being left for dead at the start of the pandemic. QSV believes that our area of focus – quality businesses with durable competitive advantages, strong balance sheets and strong cash flow generation – will serve investors particularly well in the coming year and beyond. These businesses, purchased at reasonable valuations, have a long history of providing solid participation in rising markets and shock absorption for the surprises that come.

Disclaimer:

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.

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.

QSV Equity Investors

Q3 2021 Commentary

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

As we noted in our outlook last quarter, U.S. equity markets delivered between one and two years of expected returns in just the first six months of 2021. Equity markets pushed higher through August, but fell in September, as uncertainty regarding fiscal and monetary policy, inflation concerns, and slowing growth impacted investor sentiment. Factors driving performance shifted multiple times during the quarter. Using the Russell Stability indexes as proxies for high and low quality, the Russell Defensive indexes containing businesses with higher Returns on Assets, lower leverage, and lower volatility outperformed low-quality businesses, as measured by the Russell Dynamic indexes, across the market cap spectrum.

QSV Strategy Quarterly Performance

The QSV Quality Value Smallcap Strategy returned -1.68% and -1.77%, gross and net of fees, beating both the Russell 2000 Value and Russell 2000 Indexes’ returns of -2.98% and -4.36%, respectively. Quality “QSV-like” businesses, those with less sensitivity to economic and credit cycles and with more sustainable business models, outperformed. Information Technology and Communication Services holdings helped performance, while Energy and Consumer Staples holdings hurt performance. Security selection was a strong contributor to performance, adding more than 100% of the strategy’s relative outperformance.

Quality Value Smallcap Top Contributors

Shares of Hollysys Automation Technologies (HOLI) rose significantly during the quarter as multiple offers were presented to acquire the business. HOLI is a China-based leader in integrated solutions for industrial automation and rail transportation and has been a long-term QSV holding. With the tailwinds presented by the buyout offers, QSV exited its position in HOLI during the quarter for valuation reasons.

Specialty pharmaceutical company Eagle Pharmaceuticals, Inc. (EGRX) rose over 30% during the quarter, supported by a court ruling that determined the company’s marketing application for Vasopressin did not infringe on patents held by the makers of the generic Vasostrict. We believe the outlook for EGRX is bright, with numerous late-stage pipeline assets, new collaborations with certain biotech companies, and additional indications in development for its existing products.

Quality Value Smallcap Top Detractors

In spite of a quarterly earnings beat and management raising guidance, Leslie’s Inc. (LESL) was the largest detractor to returns during the quarter. LESL is the largest consumer-facing omni-channel brand in the U.S. pool and spa care industry, operating more than 900 locations across 38 states. Quarterly earnings comparisons have gotten more difficult, and “reopening” has likely resulted in some shift in consumer spending from the home and pool to travel, restaurants, and other discretionary spending. That considered, QSV believes the competitive advantages of LESL remain intact, which includes the company’s installed base of customers driving strong recurring maintenance revenues.

Simulations Plus Inc. (SLP) shares were down during the quarter as its revenues disappointed as a result of a drop in its services business. We believe this dip to be temporary. SLP is a software and services provider to the pharmaceutical industry, aiding those businesses with software and services that support their drug discovery, product quality and innovation. The company is approaching a 20% market share of the companies that would be potential users of its software and consulting services. We see the outlook as strong for SLP, both due to organic growth and through acquisitions supported by its strong balance sheet.

Quality Value Smallcap Portfolio Activity

Rising markets and volatility presented abundant opportunities to sell positions for price reasons and to buy where better opportunities arose. Positions added during the quarter were on-line auto marketplace Car Gurus (CARG), on-line retailer 1-800 Flowers (FLWS), and Hawkins (HWKN), a provider of chemicals and ingredients for water treatment and nutrition. Also added were Johnson Outdoors (JOUT), a manufacturer of outdoor recreation products, insurer Primerica (PRI), and media company World Wrestling Entertainment (WWE). In addition to the previously mentioned sale of HOLI, QSV exited positions in US Ecology Inc. (ECOL), J&J Snack Foods (JJSF), Sensient Technologies (SXT), and airport operator Grupo Aeroportuario del Centro Norte (OMAB).

The QSV Quality Value Midcap Strategy returned 1.49% and 1.25%, gross and net of fees, for the quarter, leading both the Russell Mid Cap Value Index return of -1.01% and the Russell Mid Cap Index return of -0.93%. QSV added value in the Healthcare and Real Estate sectors, while Energy and Consumer Staples holdings detracted from strategy performance. Overall, security selection delivered more than 100% of the outperformance relative to the index during the quarter.

Quality Value Midcap Top Contributors

Microchip manufacturer Monolithic Power Systems Inc. (MPWR) was the top contributor to performance during the quarter. In the midst of a chip shortage, MPWR continues to progress in its transformation from a semiconductor device company to a technology solutions company, which we believe will drive meaningful revenue growth in the coming years. The mission of MPWR to reduce total energy consumption in end systems is well suited to the demands of its clients in the automotive, industrial, communications, and consumer end markets.

Icon PLC (ICLR) contributed to performance as shares were propelled by strong business results and optimism over expected synergies in its acquisition of PRA Health. ICLR is a late-stage contract research organization that provides drug development and clinical trial services to pharmaceutical, biotechnology, and medical device firms. While the business has operated globally, its purchase of PRA Health is expected to enhance these capabilities and deepen its relationships with clients including Pfizer.

Quality Value Midcap Top Detractors

Core Laboratories (CLB) dropped nearly 30% during the quarter, detracting from performance. CLB helps oil and gas companies better understand how to improve production levels and economics with core and reservoir analysis. Competitive advantages include its intangible assets (patents, proprietary technology, and human capital) and network effects (multi-client reservoir studies). Quarterly results were disappointing as COVID-19 related disruptions weighed on margin performance.

Shares of Scotts Miracle-Gro Company (SMG) declined sharply in September, in part due to investors’ concerns over the oversupply of cannabis in California. SMG’s Hawthorne division is a leading supplier of hydroponics products to the cannabis industry. While this news makes for click-worthy headlines, SMG remains the largest player in the U.S. gardening industry with a market share greater than 50% with its Scotts Miracle-Gro, Ortho, Tomcat, and Roundup brands. As a result, Scotts can charge materially higher prices than its competition. QSV added to its position on the weakness in share price.

Quality Value Midcap Portfolio Activity

As in the Quality Value Smallcap Strategy, portfolio activity was higher than typical as rising markets and volatility presented opportunities for taking gains and allocating to better opportunities. Positions added were management consulting firm Booz Allen Hamilton Holding Corp. (BAH), government health and human service provider Maximus Inc. (MMS), and Trinet Group Inc. (TNET), a provider of human resource solutions to small businesses. QSV exited its positions in US Ecology Inc. (ECOL), J&J Snack Foods (JJSF), SEI Investments (SEIC), and Waters Corp. (WAT).

The QSV Select Value Strategy returned 2.04% and 1.82%, gross and net of fees, leading the returns of -2.07% and -2.68% 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. Holdings in the Healthcare and Financials sectors aided returns, while the Consumer Staples and Energy sectors detracted. As with QSV’s Quality Value Smallcap and Midcap strategies, more than 100% of excess returns were a result of security selection in the Select Value strategy.

Select Value Top Contributors

Icon PLC (ICLR) was the leading contributor to performance. Our comments on ICLR are noted above. Shares of real estate management and investment firm Jones Lang LaSalle (JLL) rose over 25% as earnings results exceeded expectations. While some drivers behind this outperformance are temporary, the key drivers were the strong recovery in transactional leasing activity and the benefit of more permanent cost-saving measures. Competitive advantages of JLL include its retention rate of 90% when it takes over real estate management services from its clients.

Select Value Top Detractors

Core Laboratories (CLB) was the leading detractor to performance. Our comments on CLB are noted above.

Fair Isaac Corp. (FICO) detracted from performance as shares fell on disappointing aspects of its quarterly results. The company is a leading data and analytics company focused on predicting consumer behavior through its scores and software. FICO Scores serve as a benchmark “currency” in the U.S. consumer credit industry that are embedded in both industry processes and regulation, and in financial institutions’ systems and workflows. The scale advantage enjoyed by FICO supports high margins and free cash flows and the company produces Returns in Invested Capital of 12%.

Select Value Portfolio Activity

New positions in Booz Allen Hamilton Holding Corp. (BAH), CSG Systems International (CSGS), a leading provider of billing services to the cable, broadband and satellite industry, Maximus (MMS), and workforce solutions provider Insperity (NSP) were initiated in the Select Value strategy during the quarter. QSV exited its holdings in CBOE Global Markets (CBOE), J&J Snack Foods (JJSF), MGP Ingredients (MGPI), and Waters Corp. (WAT).

Our Focus on the Long Term

There is no shortage of risks in equity markets, including the above-mentioned uncertainty over fiscal and monetary policy, inflation concerns, and slowing economic growth. Tax policy looms as a potential impact to corporate margins and supply chain issues persist. While the potential impact of each of these is important for investors to consider, the macro future isn’t knowable. What we do know is the importance of maintaining a focus on fundamentals and quality businesses that have pricing power and persistent performance.

With 42% of the Russell 2000 companies lacking positive earnings in the trailing twelve months, we know that cheap money and government stimulus have propped up the market returns of low-quality companies. Selectivity will be critical in the coming months, and we will serve our clients through careful diligence and a continued attention to the sustainability of business performance and the price paid for each holding in our strategies.

Disclaimer:

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.

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.

QSV Equity Investors, LLC
Q2 2021 Commentary

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

Further reopening of the U.S. economy fueled robust economic growth and rising markets during the quarter. In just five memorable quarters, we have gone from a severe economic contraction and uncertainty to rapid recovery and increasing optimism. Estimated GDP growth of 9.4% for the second quarter buoyed this optimism and likely represents a peak before we return to more normal rates of growth. The near-term “voting machine” of the markets has propelled the stocks of cyclical companies tied to the recovery, companies with limited or no earnings, and those that rely on cheap liquidity. To a degree, this is understandable, as many of these stocks had been trounced in the downturn of early 2020, but QSV believes there is merit to focusing on businesses that possess pricing power and sustainable business models for the days ahead.

QSV Strategy Quarterly Performance

The QSV Quality Value Smallcap Strategy returned 2.97% and 2.83%, gross and net of fees, lagging both the Russell 2000 Value and Russell 2000 Indexes’ returns of 4.56% and 4.29%, respectively. Stocks of “QSV-like” businesses, those with less sensitivity to economic and credit cycles and with more sustainable business models, lagged more cyclical and higher beta stocks during the period. This was reflected in the nearly 500 basis points of outperformance posted by the Russell 2000 Dynamic (higher beta) Index relative to the returns of the Russell 2000 Defensive Index that contains businesses with higher Returns on Assets, lower leverage, and lower volatility. At a sector level, Utilities and Real Estate helped performance, while Communication Services and Healthcare hurt performance. Virtually all of our underperformance in Communication Services (and approximately one-half of QSV’s underperformance relative to the Index) was due to the contribution to the Index from meme stock AMC Entertainment that rose 455% in the quarter.

Quality Value Smallcap Top Contributors

Shares of National Storage Affiliates Trust (NSA) rose during the quarter as occupancy rates remained high. Self-storage REITs are operating in an increasingly strong environment, where extremely high occupancy levels along with strong demand are pushing the rates charged to new customers higher while existing customer rent increases are at high single to low double-digit levels. The acquisition of 23 properties also contributed to NSA’s growth during the quarter.
Lemaitre Vascular (LMAT) sales were impacted by a lower number of vascular procedures during the pandemic, yet LMAT continues to demonstrate strong business performance. LMAT engages in the design, sales, service, and technical support of medical devices and implants for the treatment of peripheral vascular disease. LMAT estimates it supplies over half of the 15,000 vascular surgeons and 4,500 hospitals worldwide. A competitive advantage is its focus on niche markets; LMAT has over 15 product lines where it maintains a #1 or #2 market share. This niche focus helps the business resist reimbursement pressures and generate an average return on invested capital of 14% over the last five years. The company’s new product pipeline will support strong future growth.

Quality Value Smallcap Top Detractors

Emergent BioSolutions (EBS) was the largest detractor to returns during the quarter. EBS is a leading maker of vaccines and other products that address public health threats. Quality control came into question at one EBS plant and 75 million doses of the Johnson & Johnson coronavirus vaccine produced there were destroyed because of suspected contamination. The company is also being investigated over allegations that they leveraged government contacts to win the vaccine production business and whether federal officials failed to oversee the firm’s work. QSV exited its position in EBS and will continue to monitor the company.

PaySign, Inc. (PAYS) shares were down during the quarter as the headwinds of the COVID pandemic on the company’s plasma business continued. PAYS has cited pandemic-related government stimulus programs and the current $300 weekly Federal unemployment aid payments (on top of state unemployment benefits) as disincentives for individuals to donate plasma. Revenues in the plasma segment were down 27% in Q1 2021 and headwinds are expected to continue into Q3. In spite of these challenges, QSV believes PAYS will remain strong in this segment where it intends to add a total of sixty new plasma centers in 2021, exiting this year with at least 400 centers, a growth rate of 18% over 2020. PAYS shares sell at a significant discount to QSV’s estimate of intrinsic value. QSV added to its position on weakness in the share price.

Quality Value Smallcap Portfolio Activity

Positions added during the quarter included Evertec, Inc. (EVTC), a payment processing and information technology consulting firm, workforce solution provider Insperity, Inc. (NSP), and food packaging company Karat Packaging, Inc. (KRT). Also added were Leslie’s, Inc. (LESL), the largest direct-to-consumer provider of pool and spa care services, and Zynex Inc. (ZYXI), a medical device manufacturer specializing in pain management products. In addition to the previously mentioned sale of EBS, QSV exited positions in firearms manufacturer Sturm Ruger & Co. (RGR), and Valmont Industries (VMI). NIC Inc. (EGOV) exited the portfolios as it was acquired by Tyler Industries.

The QSV Quality Value Midcap Strategy returned 6.75% and 6.50%, gross and net of fees, for the quarter, leading the Russell Mid Cap Value Index return of 5.66% while lagging the Russell Mid Cap Index return of 7.50%. Security selection helped performance in the Consumer Discretionary and Technology sectors and detracted from performance in the Materials sector.

Quality Value Midcap Top Contributors

Pool Corporation (POOL) was the top contributor to performance during the quarter. As the largest distributor of swimming pool supplies in the world and a leading distributor of landscape and irrigation products, POOL saw strong tailwinds during the shelter in place environment of the pandemic. We expect those positive trends to continue supported by the company’s large installed base of customers and the trend toward de-urbanization.
Index and portfolio analytics provider MSCI Inc. (MSCI) contributed to performance as shares were propelled by the growing adoption of environmental, social and governance (ESG) investing, which the company sees as a $3.9 billion revenue opportunity. Indexes provided by MSCI are an embedded part of a growing number of investment products, including exchange traded funds, and account for 75% of the company’s operating profits. The company produces 20% returns on invested capital and these “sticky” streams of revenue should support strong continued results.

Quality Value Midcap Top Detractors

Casey’s General Stores, Inc. (CASY) dropped nearly 10% during the quarter, detracting from performance. The operator of 2,200 convenience stores completed the purchase of the 94 store Bucky’s Convenience Stores chain. Business performance remains strong and CASY produced same store sales growth during the quarter in each of its business segments. CASY benefits from a geographic competitive advantage, as it is often the only store within miles of its competitors, and it owns 99% of its stores.

Quality Value Midcap Portfolio Activity

No new positions were initiated during the quarter nor were any positions sold in the Quality Value Midcap Strategy.

The QSV Select Value Strategy returned 4.31% and 4.09%, gross and net of fees, lagging the returns of 5.00% and 5.44% 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. Stock selection in the Consumer Discretionary and Financials sectors aided returns, while selection in the Materials and Information Technology sectors detracted. As with QSV’s Quality Value Smallcap strategy, robust returns of more cyclical small cap businesses created headwinds for Select Value, particularly the outsized returns within the Index of AMC Entertainment.

Select Value Top Contributors

National Storage Affiliates (NSA) and Pool Corporation (POOL) were the leading contributors to the performance of the Select Value Strategy during the quarter. Our comments can be found above.

Select Value Top Detractors

Emergent BioSolutions (EBS) and Scott’s Miracle-Gro, Inc. (SMG) were the leading detractors to the performance of the Select Value strategy and commentary is noted above.

Select Value Portfolio Activity

Payment processing and information technology consulting firm Evertec, Inc. (EVTC) was added as a high conviction holding to the Select Value strategy during the quarter, using the proceeds from the sales of Emergent BioSolutions (EBS) and PaySign, Inc. (PAYS).

Our Focus on the Long Term

U.S. equity markets have packed between one and two years of expected returns into the first six months of 2021. Economic activity has rebounded, and company earnings have been strong, coming off of a low base following the downturn. Supportive monetary and fiscal policy have also contributed to these results, although the stimulus from fiscal policy will fade in the second half of the year. We are pleased to have these returns and know our clients are, as well, but we caution that fundamentals matter and that elevated markets generally go hand in hand with higher risk. QSV always favors quality businesses, those with strong balance sheets and steady and growing free cash flows supported by durable competitive advantages. We see this emphasis on sustainable businesses purchased at reasonable valuations as critically important in the coming quarters, helping our investors navigate the opportunities and challenges that will come.

Disclaimer:

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 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 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 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 a 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.
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.

QSV Equity Investors

Q1 2021 Commentary  

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

Vaccines and stimulus provided a double-barreled boost to equity markets in the quarter, with particularly sharp gains in lower quality, more economically sensitive stocks. These sharp gains produced significant headwinds for the quality-biased strategies managed by QSV and were most pronounced in small caps where low-quality D and E ranked companies outpaced high-quality ranked companies in the QSV universe by 780 basis points. Companies with no net income in 2020 outperformed those with earnings by substantial margin and this, again, was most extreme in small caps where those with no net income outperformed by 10% during the quarter.

A steepening yield curve prompted worries about inflation and turned investors’ attention to financial stocks that offer a possible hedge against rising rates. GameStop made headlines for both its volatility and short term returns along with other “back from the dead” stocks in industries such as airlines, construction, retailers, hotels and restaurants. And while the “meme” stock trading in GameStop and other companies prompted media criticism of newly minted retail investors, those Robinhood account holders were not alone; a survey from State Street of institutional investors noted “evidence of a sustained rotation from cash and fixed income into equities since July 2020.”

QSV Strategy Quarterly Performance

Against this backdrop, the QSV Quality Value Smallcap Strategy returned 11.81% and 11.53%, gross and net of fees, lagging both the Russell 2000 Value and Russell 2000 Indexes’ returns of 21.17% and 12.70%, respectively. At a sector level, significant under weights to Consumer Discretionary stocks hurt performance; within the Index, GameStop and retailer Express produced returns of 907% and 341%, respectively. QSV’s holdings in Financials and Real Estate helped returns.

Quality Value Smallcap Top Contributors

Ligand Pharmaceuticals (LGND) shares rose sharply during the quarter in response to short covering, moving the price well above QSV’s estimate of fair value and prompting its sale from the strategy. The biopharmaceutical company is involved in drug discovery, early-stage drug discovery and reformulation and partners with leading pharmaceutical and biotech businesses. LGND operates as a quasi-royalty fund and benefits from a broad pipeline of drugs to fuel future revenue and earnings growth.

Economic tailwinds to the performance of bank financials and the strong business performance of Premier Financial Corporation (PFC) supported strong returns for our holding in PFC during the quarter. PFC focuses on traditional banking, property and casualty, life and group health insurance in northwest and central Ohio, southeast Michigan and northeast Indiana. We see PFC as a quality franchise producing 16% return on tangible equity and 3.5% net interest margins. The company focuses on organic growth but has also proven adept at integrating bolt-on acquisitions.

Quality Value Smallcap Top Detractors

Simulations Plus (SLP) was the leading detractor to returns after rising significantly in 2020 on optimism over its role in resolving the COVID-19 pandemic. SLP produces software and provides consulting analytics for use in drug discovery. SLP is approaching a 20% market share of the pharmaceutical, biotechnology, and generic companies that would be potential users of its software and consulting services. Its StrategiesPlus COVID-19 ACT Program, launched in early 2020, is designed to help speed pharmaceutical research and accelerate the process of regulatory approval, contributing to resolving the COVID-19 pandemic. During the quarter, one significant contract was signed with a large pharma client for this program. Governance of the business is strong and founders of SLP own 23% of the outstanding voting stock.

US Physical Therapy Inc. (USPH) shares were down on profit taking during the quarter. Revenues have been impacted by the pandemic and UPH lowered guidance due to anticipated declines in Medicare reimbursement. Despite these challenges, we are optimistic about the company’s near and long-term prospects; USPH has lowered expenses and our outlook is for both improved revenues and margins. USPH generates consistently strong free cash flows and is skilled at using that cash to acquire physical therapy practices within the fragmented rehabilitation industry. USPH completed the acquisition of five additional clinical practices in late March.

Quality Value Smallcap Portfolio Activity

With the continued rise in small cap stocks, QSV sold holdings for valuation reasons. In addition to Ligand Pharmaceutical, EBIX, Inc. (EBIX), Armanino Foods of Distinction, Inc. (AMNF), Balchem Corp.
(BCPC) and Badger Meter (BMI) were sold as they rose above our estimates of fair value. NIC Inc. (EGOV) was sold as it agreed to be acquired by another of our holdings, Tyler Technologies (TYL), creating a powerful combination of two quality businesses. With the proceeds from these sales, QSV purchased NAPCO Security Technologies (NSSC) and CSG Systems International (CSGS). NSSC provides security products, including door locking products, intrusion and fire alarm systems and video surveillance products. The company benefits from high recurring revenues and gross margins of over 80% in its services business. CSGS is a provider of revenue management and digital payment solutions. The company benefits from high switching costs and recurring revenues and produces returns on invested capital of 10%.

The QSV Quality Value Midcap Strategy returned 7.27% and 7.01%, gross and net of fees, for the quarter, lagging both Russell Mid Cap Value Index return of 13.05% and the Russell Mid Cap Index return of 8.14%. Security selection helped performance in the Energy and Financials sectors and detracted from performance in the Technology and Industrials sectors.

Quality Value Midcap Top Contributors

As in the previous quarter, Synovus Financial (SNV) shares were higher based on strong financial results and optimism over a reopening economy. Synovus is a significant banking force in higher growth markets in the Southeastern U.S. and is recognized as one of the country’s “Most Reputable Banks” by American Banker and the Reputation Institute. The bank reported higher loan growth and improving net interest margins. Management is keenly focused on managing expenses and is turning its attention to revenue generation with the improving economy.

First Financial Bankshares (FFIN) contributed to performance and the company announced its 34th year of consecutive annual earnings growth. Like Synovus, FFIN operates within a high growth footprint in the South, in the case of FFIN, through 78 locations in Texas where markets reopened quickly and are operating at near normal conditions. Positive migration trends to certain markets in Texas have spurred FFIN to consider additional acquisitions that could further its growth. We believe FFIN to be a leading franchise with strong net interest margins, a solid balance sheet and high capital levels.

Quality Value Midcap Top Detractors

Copart Inc. (CRPT) detracted from performance due to profit taking and concerns over the impact of COVID-19. As the largest player in the automotive salvage market, concerns over fewer miles driven during the pandemic led to expectations of fewer accidents and dampened revenues. Sales volumes were down only slightly, however. With fewer cars on the road, drivers were willing to engage in riskier behavior, leading to higher accident frequency and greater loss rates. Auction results for salvaged vehicles reached record levels, partially offsetting volume declines. We see CRPT as a core holding due to the wide moats created by its strong network. The company has a long history of generating real economic returns, supported by its competitive moats, and delivers a robust 26% return on invested capital.

Rollins Inc. (ROL) dropped 11% during the quarter, detracting from performance. Much of the pest control company’s residential business has been fueled by the work from home trend and concerns persist over the impact of the reopening economy. ROL believes this impact can be offset by an anticipated recovery in commercial sales. The pest control business is quite fragmented and ROL benefits from operating leverage and strong free cash flow generation as it acquires and integrates smaller firms.

Quality Value Midcap Portfolio Activity

As with Quality Value Smallcap, a number of long-term holdings in the Quality Value Midcap strategy were exited during the quarter. ACI Worldwide (ACIW), AptarGroup Inc. (ATR), Cracker Barrell (CBRL) and Vail Resorts (MTN) are all quality businesses but exceeded our estimates of fair value. TCF Financial Corporation (TCF) was sold as it was acquired by Huntington Bancshares (HBAN), Varian (VAR) was sold as it was acquired by Siemens, and Xilinx (XLNX) was sold due to its acquisition by AMD. Proceeds from these sales were committed to positions in Equity LifeStyle Properties (ELS), Pool Corporation (POOL), and Gentex Corporation (GNTX). ELS is a manufactured housing and RV REIT that operates 413 properties in 33 states and British Columbia. Favorable demographics and a rising demand for camping support growth in ELS’ business and its size provides a competitive advantage. POOL has scale advantages within the highly fragmented pool supplies industry and has returns on invested capital of 33%. GNTX produces automatic-dimming mirrors, aircraft windows and commercial smoke alarms and signaling devices for the fire protection industry. Its competitive strength delivers returns on equity of 21% and supports a free cash flow yield of 5%.

The QSV Select Value Strategy returned 10.27% and 10.04%, gross and net of fees, lagging the returns of 16.83% and 10.93% for the Russell 2500 Value and Russell 2500 Indexes, respectively. Stock selection in the Real Estate and Consumer Staples sectors aided returns, while selection in the Information Technology and Industrial sectors detracted. Select Value is a high conviction strategy that takes QSV’s “best ideas” from its Quality Value Smallcap and Quality Value Midcap strategies.

Select Value Top Contributors

Synovus Financial (SNV) was the leading contributor to the performance of the Select Value Strategy during the quarter. Our comments can be found above.

ABM Industries (ABM) contributed to performance of the Select Value strategy during the quarter boosted by enthusiasm over the reopening of the economy. ABM is the largest and only truly national janitorial company in the U.S., with 350 U.S. & international locations, 20,000 clients and 140,000 employees. The company benefits from economies of scale relative to its peers in a very fragmented business. COVID-19 led to a clear and indisputable need for evolving cleaning and disinfecting capabilities that ABM is uniquely situated to provide.

Select Value Top Detractors

Copart Inc. (CRPT) was the leading detractor to the performance of the Select Value strategy and commentary is noted above.

Masimo Corp. (MASI) detracted from performance of the Select Value strategy as profit taking and a “reverse COVID” trade occurred in the quarter. MASI is a medical technology company, which develops, manufactures and markets non-invasive patient monitoring technologies, medical devices and sensors. The company’s patents, global footprint and seasoned team stand as competitive advantages and enable the business to produce returns on invested capital of 20%.

Select Value Portfolio Activity

AptarGroup Inc. (ATR), Badger Meter (BMI), and Balchem Corp. (BCPC) were each sold from the portfolio as the share prices of each rose above QSV’s view of fair value. NIC Inc. (EGOV), Varian (VAR), and Xilinx (XLNX) were each sold on the news of acquisitions, as described above. Proceeds from the sale of these businesses was committed to NAPCO Security Technologies (NSSC), Pool Corporation (POOL), and Gentex Corporation (GNTX), each of which are discussed above.

Our Focus on the Long Term

QSV calls Chicago its home and our professionals grew up as fans of its sports teams. The drought that value investors endured in recent years felt like the dry spell we have faced since the Bears’ Super Bowl Championship in 1985. The question now is whether value will persist in its dominance of growth or falter going down the stretch. With the fuel provided by stimulus programs, the reopening of the economy and strong economic performance, it is likely that value stocks’ out performance will persist for some time. The long-term disparity of returns – small cap growth companies have delivered nearly 3% per year greater performance than small cap value over the trailing ten years – also stands in favor of the value style, as mean reversion continues. We believe that the strong rally by lower quality stocks has largely played out. Strong balance sheets, cash flows and earnings persistence will come back into the picture and businesses with durable competitive advantages will continue to reward investors. Selectivity is important in seeking out these wealth creating businesses and this is where we continue to work to serve our clients.

Disclaimer:

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.

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.

Stonks, Stocks, Traders and Owners

February 2021

If you owned two businesses, one profitable and growing and the other chronically losing money and languishing, to which would you allocate additional resources? Business owners are tasked with making successful capital allocation decisions that will propel their companies forward for the long-term benefit of their shareholders, their employees, and their customers. Why, as an investor in a stock, would anyone want to think otherwise? Much of the frenzy around meme “stonks” and short-term trading recently has caused some to lose sight of what stocks truly represent: the opportunity to own part of a business.

Index mutual funds and ETFs can serve an excellent purpose, giving investors a low cost, tax efficient means to owning various segments of the market. Usually, these funds also offer the benefit of diversification, offering investors small or large the ability to spread risk across hundreds of portfolio companies. But the recent trading in GameStop and other heavily shorted stocks reveals a significant problem with these indexes, particularly those investing in small cap companies. According to Carson Block of Muddy Waters Capital, approximately 25% of GameStop shares were owned by passive funds. As short sellers were forced to cover, share price rose and passive index funds with inflows from investors were buying more at higher prices. Some small cap index funds had greater than 10% positions in GameStop in late January 2021 as a result of the rise in share price. Suppose you bought one of these index funds as a long-term investment, considering yourself an owner, not a trader. Is a company like GameStop where you, as an owner, would allocate additional capital? Would it be prudent to turn your back on company fundamentals and valuation?

Legendary investor Charlie Munger is credited with the statement that “a great business at a fair price is superior to a fair business at a great price.” This is the way that we see value at QSV Equity Investors. We do not buy cheap stocks or make short term bets in pursuit of quick gains. We seek out great businesses with competitive advantages that enable them to persistently deliver high returns on invested capital. We have found that the irrational behavior of investors combined with patience will eventually provide us with the opportunity to purchase these quality businesses at a fair price. We make these decisions supported by extensive valuation work to determine our view of the company’s true value. Risks abound in the stock market and it is our job at QSV to manage these hazards while seeking out businesses that can compound wealth for our clients over time. We believe this approach is a better form of ownership than the possibility of a hidden “stonk” inside an index fund.

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[1] The ‘stonk’ bubble poses significant global risks | Financial Times (ft.com)

[2] BoardIQ – GameStop Roils Index Funds’ ETF Weightings

QSV Equity Investors
Q4 2020 Commentary

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

2020: A Long Strange Trip

Investors who decided to ignore the news, leave their brokerage statements unopened and simply view the results of the full twelve months of 2020 would be both pleased at the outcome and shocked to learn about all of the events and volatility that was packed into one short year. Those of us who watch such events daily and (often to our detriment) pay attention to the news, would argue that 2020 was hardly a “short” year and was unprecedented, to use an overworked word, in countless ways. A global pandemic, economic recession and job loss, political turmoil and social unrest topped the list of issues that disrupted our lives in ways we did not anticipate on New Year’s Day 2020.

One year ago, QSV began its commentary stating that “2019 began with U.S. equities at reasonable valuations and, as a result of tepid earnings growth during the year, ended at more fully valued levels. Accordingly, the team at QSV Equity Investors feels that selectivity and an emphasis on stable, quality companies purchased at reasonable valuations will be increasingly important in the year ahead.” That selectivity served our investors well when markets fell sharply in March of this year and each QSV strategy outperformed its respective indexes during the drawdown.

Our focus on quality detracted from performance as markets roared back from the short, steep bear market, favoring lower quality stocks with limited or no earnings and lacking economic moats. QSV uses a proprietary ranking system for its universe of prospective holdings, with companies ranked in the top two (A and B) quintiles recognized as high quality and those in the bottom two (D and E) quintiles considered low quality. From the bottom of the bear market drop in March through December 31, 2020, the stocks of high quality companies in this universe lagged those of low quality businesses by 33.08%. Looking at small cap (below $3 billion market cap) businesses in this universe, high quality was outpaced by low quality by 36.62%.

QSV Strategy Quarterly Performance

While not as pronounced as the returns of the Q3 2020, the fourth quarter saw strong returns in U.S. equity markets with bullish investors propelling the stocks of lower quality businesses ahead of those of high quality companies.

The QSV Quality Value Midcap Strategy returned 17.91% and 17.62%, gross and net of fees, for the quarter, lagging both Russell Mid Cap Value Index return of 20.43% and the Russell Mid Cap Index return of 19.91%. Security selection helped performance in the Energy and Financials sectors and detracted from performance in the Technology and Industrials sectors.

Quality Value Midcap Top Contributors

TCF Financial (TCF) was the leading contributor to performance during the quarter as news of a proposed acquisition of the bank by rival Huntington Bancshares (HBAN) lifted its shares. QSV believes the fit between the two banks to be good and expects the all-stock transaction to close in Q2 2021 at a share price of $39. QSV continues to hold its shares with an eye toward capturing the remaining acquisition premium.

Synovus Financial (SNV) shares rose during the quarter buoyed by strong financial results and optimism over a reopening economy. Synovus is a significant banking force in higher growth markets in the Southeastern U.S. Positive results have included improving fee income growth in its mortgage banking and capital markets businesses. Management is keenly focused on managing expenses and the bank has Returns on Tangible Equity of 13% and its stock currently yields 4.2%.

Quality Value Midcap Top Detractors

Despite solid earnings that were ahead of expectations, Waste Connections, Inc. (WCN) detracted from performance as its share price was flat during the quarter. QSV believes WCN will emerge as a winner in the fragmented waste collection business due to its competitive advantages that include scale, hard to obtain regulatory permits and route density. Solid waste collection is an essential, recession-proof business and WCN continues to grow through acquisitions.

After trading up in Q3, shares of McCormick & Company (MKC) dipped slightly during Q4 2020, detracting from performance. The company added to its flavor portfolio during the quarter with its acquisition of hot sauce maker Cholula. Strong free cash flows have supported the company’s acquisition of smaller U.S. and international companies, as well as enabling share buybacks and dividend payments. McCormick’s leading brands, cost advantages and shareholder base stand as competitive advantages and the company has U.S. market share of more than 50%.

The QSV Quality Value Smallcap Strategy returned 23.06% and 22.76%, gross and net of fees, lagging both the Russell 2000 Value and Russell 2000 Indexes returns of 33.36% and 31.37%, respectively. Security selection detracted most notably from performance in the Healthcare sector, where QSV was overweighted to under performing stocks. An underweighting to Real Estate stocks aided performance.

Quality Value Smallcap Top Contributors

Advanced Energy Industries (AEIS) is a leading provider of advanced power supplies with strong business performance evidenced by operating margins of 13% and Returns on Invested Capital of 9%. 43% of its revenue is presently generated from the semiconductor equipment industry, but AEIS has been diversifying into less cyclical applications, including medical, industrial and telecommunications. Share performance was strong during the quarter as AEIS’ results in its core semiconductor power segment were strong and sales rebounded along with improving economic prospects.

Badger Meter, Inc. (BMI) shares rose more than 44% during the quarter. BMI is one of the largest water meter companies in the U.S. and competes effectively against larger companies in the international arena. BMI is well situated to capitalize on the move to connected technologies with smart meters and data analytics technologies. Management intends to further these capabilities through acquisitions, such as its Q4 2020 purchase of Austria-based private company s::can GmbH. We expect that BMI’s market will continue to grow as countries replace old meters and install meters for the first time. Business performance has been strong, and the company produces operating margins of 15% and Returns on Invested Capital of 14%.

Quality Value Smallcap Top Detractors

Shares of leading biodefense contractor Emergent BioSolutions (EBS) fell during the quarter as sentiment shifted regarding the winners and losers involved in solving the COVID crisis. EBS shares rose approximately 80% for the year but sold off from highs as Pfizer and Moderna got to the finish line before EBS and its partners, Johnson & Johnson and AstraZeneca. QSV originally purchased EBS due to its exclusive government contracts to manufacture BioTrax for the prevention of anthrax and other vaccines, therapeutics, and anti-infectives and still has high levels of conviction in the company.

PaySign (PAYS) detracted from performance as a revenue recognition issue in its pharma business and impacts of the COVID pandemic on the company’s plasma businesses led to disappointing Q3 2020 financial results. The change in revenue recognition for the Pharma segment, recommended by PAYS’ auditors, resulted in a one-time $6.3 million reversal of past revenues. Shuttered plasma centers and a reluctance of donors to visit those remaining open lowered revenues and the near-term outlook for that segment. QSV believes PAYS will remain strong in this segment supported by its 41% market share. Four large companies operating plasma collection centers control over 70% of the centers in the U.S. and generate nearly 80% of total collections. We believe PaySign currently only works with two of the four operators and growth opportunities exist by developing business with the other two.

The QSV Select Value Strategy returned 18.58% and 18.34%, gross and net of fees, lagging the returns of 28.51% and 27.41% for the Russell 2500 Value and Russell 2500 Indexes, respectively. Stock selection in the Financials and Real Estate sectors aided returns, while selection in the Technology and Consumer Defensives sectors detracted.

Select Value Top Contributors and Detractors

Select Value is a high conviction strategy that takes QSV’s “best ideas” from its Quality Value Smallcap and Quality Value Midcap strategies. Badger Meter, Inc. (BMI) and Synovus Financial (SVN) were the leading contributors to performance of the Select Value Strategy during the quarter and our comments on each company are found above. Emergent BioSolutions (EBS) and PaySign (PAYS) were the leading detractors to performance of the Select Value strategy and commentary on each is also provided above.

Our Focus on the Long Term

The issues of 2020 are a reminder that forecasts are often worthless and that known facts can turn on a dime, leading to unexpected outcomes. We began last year commenting on fully valued markets and, again, find ourselves concerned with valuations and what the New Year may bring. In addition to valuations, risks to the market include growing corporate and federal debt levels, potential challenges to the rollout and acceptance of the COVID-19 vaccine, and a stage that seems set for higher taxes and interest rates.

We do see opportunities for the market to continue its upward trajectory in 2021. The rapid pace with which vaccines were developed underscores the ingenuity of researchers and the conviction of the businesses and governments supporting the development efforts. Rollout of the vaccine sets the stage for an improving economy supported by consumer and business confidence. This improvement may continue the swing of the stock market pendulum and may continue the bubbly nature of performance of lower quality stocks. Rather than chasing these “stocks of the moment,” QSV will continue to focus on quality businesses purchased at reasonable valuations. We know that these businesses, supported by their durable competitive advantages, will stand up to the risks that eventually come and will generate strong, risk-adjusted returns for our clients over full market cycles.

Disclaimer:
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 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 composite report, please contact QSV at (844) 3-BALLAST

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.

To borrow heavily from Jerry Garcia and Bob Weir of the Grateful Dead, what a long, strange trip 2020 has been. After beginning the year with great expectations (remember images like the one below?) and with the strong market returns of 2019 vivid in the minds of investors, the world faced the reality of a global pandemic that shocked the markets in February and March.