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.

QSV Equity Investors Q3 2020 Commentary

Additional information and since-inception performance for each of the QSV strategies may be found at www.qsvequityinvestors.com.

QSV Strategy Performance

The QSV Quality Value Smallcap Strategy returned 1.41% and 1.16%, gross and net of fees, lagging the 2.56% and 4.93% returns, respectively, of the Russell 2000 Value and Russell 2000 Indexes. An overweight and strong selection in Healthcare companies aided performance, while an underweight and underperformance in Consumer Cyclical companies detracted. Year-to-date, the QSV strategy returned (13.27%) and (13.91%) gross and net of fees, in comparison to returns of (21.54%) and (8.69%), respectively, for the Russell 2000 Value and Russell 2000 Indexes.

Quality Value Smallcap Top Contributors

Omega Flex Inc. (OFLX) and Simulations Plus, Inc. (SLP) were the top contributors to performance for the quarter, each with tailwinds related to the COVID economy.

As COVID-19 restrictions eased in the U.S., investor optimism returned to Omega Flex and other industrial stocks related to construction. OFLX is a manufacturer of flexible metal hose with products used in residential and commercial construction. Residential housing has been a positive during 2020 and OFLX profits as more homes use gas for heating. Leadership extends to other markets, including road transportation, semi-conductor, medical, pharmaceutical, and petrochemical products. OFLX benefits from high switching costs once its solutions are designed into these products. Returns on Invested Capital are 33% and OFLX has net margins of 16%.

Simulations Plus 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. Positive results are also expected as employees of pharma and biotech customers return to work following the COVID-19 pandemic and commit to new engagements with SLP. High switching costs, intellectual property and high contract renewal rates support operating margins of 28%.

Quality Value Smallcap Top Detractors

Top detractors to performance during the quarter were PaySign, Inc. (PAYS) and Oil Services International, Inc. (OIS).

PaySign, Inc. provides prepaid card programs specializing in corporate incentive products, payroll cards, general purpose re-loadable cards, and travel cards. Areas of growth for the business include its pharmaceutical payment assistance programs and plasma donor network services. PAYS offers promotional campaigns to limit a patient’s out-of-pocket prescription drug costs through a prepaid debit card in the former and donor payment programs in the latter. PaySign benefits from a high level of contractually recurring revenue, but still suffered from impacts related to the pandemic that lowered revenues in its Pharma and Plasma businesses during the second quarter. While challenges exist, Returns on Invested Capital are 32% and shares are selling at a significant discount to QSV’s view of intrinsic value.

Oil Services International was a leading detractor during Q3 2020. OIS is a provider of specialty products and services to the drilling, production and infrastructure sectors of the oil and gas industry. Barriers to entry are high in each of its markets which supports high margin products. QSV has been mindful of risks to the business including being levered to the number of new wells completed in the U.S. We believe OIS to be well managed but have concerns over its balance sheet because of challenges to its end markets. QSV exited its position in early September, avoiding the subsequent slide in OIS’ stock price.

Quality Value Smallcap Portfolio Activity

Activity during Q3 2020 focused on lowering cyclicality and upgrading quality. In addition to the previously mentioned sale of Oil Services International, QSV sold positions including retailer Kohl’s and bank financials Summit Financial Group (SMMF) and Southern First Bancshares (SFST). Proceeds funded purchases of NIC Inc. (EGOV), a provider of technology services to state and local governments, and Sensient Technologies Corporation (SXT), a manufacturer of colors, fragrances, and flavors. Both businesses benefit from high switching costs. Also added was life sciences company Meridian Bioscience, Inc. (VIVO), a leader in providing diagnostic test kits, antigens and reagents to agri-bio and pharmaceutical companies. The QSV team has owned VIVO on and off for many years and believes its fundamentals and current share price offer a compelling opportunity.

The QSV Quality Value Midcap Strategy returned 5.38% and 4.96%, gross and net of fees, lagging the 6.40% return of the Russell Mid Cap Value Index and the 7.46% return of the Russell Mid Cap Index. Relative to the Value Index, QSV’s performance was helped by an overweight and stock selection in Technology companies. An underweight and security selection in the Consumer Cyclical sector detracted from performance as highly cyclical companies held by the index in that sector rallied on optimism of the economy reopening. Year-to-date, the QSV strategy returned (.09%) and (.96%) gross and net of fees, comparing favorably to returns of (12.84%) and (2.35%) for the Russell Mid Cap Value and Russell Mid Cap Indexes.

Quality Value Midcap Top Contributors

Copart Inc. (CRPT) and Varian Medical Systems Inc. (VAR) were the leading contributors to performance for the QSV Quality Value Midcap strategy during Q3 2020.

Concerns over fewer miles driven during the pandemic weigh on Copart, Inc., but its business performance continues to be strong, with better than expected revenues and improving margins. CRPT is the largest player in the automotive salvage market, providing auction and related services to approximately 40% of the North American market. CPRT has a long history of generating real economic returns, supported by its competitive moats, and delivers a robust 26% return on invested capital. Its strong balance sheet has supported an increase in capital expenditures including expansion into non-U.S. markets, particularly in Germany, and over 50 expansion projects that the company has in the construction and engineering phases.

Varian shares rose significantly during the quarter on news that the company would be acquired by Siemens Healthineers AG in an all cash transaction worth $177.50 per share, a 24% premium to the company’s share price prior to the announcement of the deal. Varian Medical Systems designs, manufactures, and sells radiation technology for use in its oncology systems and proton therapy segments. VAR benefits from tremendous scale in radiation therapy and has a market share that is nearly double that of its nearest competitor, Elekta.

Quality Value Midcap Top Detractors

The Energy sector was the sole index sector in the red during Q3. Within that, Quality Value Midcap holdings Oil Services International, Inc. (OIS) and Core Laboratories (CLB) were the leading detractors from performance during the quarter.

Our commentary on Oil Services International is noted above.

After serving as a top contributor last quarter, Core Laboratories was a leading detractor to performance in Q3 2020. QSV had opportunistically purchased shares of CLB in April, quickly benefitted from a substantial increase in share price during Q2 and trimmed its position in June. Core Laboratories helps oil and gas companies improve production levels and economics with core and reservoir analysis. Its core analysis business has been virtually unchallenged for three decades. While its end markets are currently challenged, QSV believes the competitive advantages of CLB to be sound and sees shares of the company to be selling at a significant discount.

Quality Value Midcap Activity

As with QSV’s Quality Value Smallcap accounts, activity was focused on lowering cyclicality while upgrading the quality of the Quality Value Midcap strategy. Oil Services International and Kohl’s were sold, as was global money transfer and payment processing firm Euronet Worldwide (EEFT). Risks to EEFT that were previously identified by QSV included currency risk and a sensitivity to global tourism and the business grew more challenged because of the COVID economy. Proceeds from these and other sells funded the purchases of ACI Worldwide (ACIW), MSA Safety (MSA), Aspen Technology (AZPN), and Qualys Inc. (QLYS). ACI is a leader in providing payment processing services to the financial services industry and benefits from 75% recurring revenues. MSA Safety offers essential safety products to municipal fire departments and other customers. Aspen Technology performs software development and IT services for clients with contracts of five to six years, supporting 90% recurring revenues. Qualys is a leader in cloud security, serving 46% of the Forbes Global 500 and producing Returns on Invested Capital of 17%. These high quality companies have been on QSV’s radar for some time and the volatility late in the quarter provided attractive entry points for each.

The QSV Select Value Strategy returned 3.37% and 2.99% gross and net of fees, lagging the 3.54% return and the 5.88% return of the Russell 2500 Value and the Russell 2500 Indexes, respectively. The portfolio’s overweight and stock selection in Healthcare helped performance, while security selection in the Financial sector detracted. Year-to-date, the QSV strategy returned (4.46%) and (5.27%) gross and net of fees, comparing favorably to returns of (18.39%) and (5.82%) for the Russell 2500 Value and Russell 2500 Indexes.

Select Value Top Contributors

Reflecting the “best ideas” nature of the Select Value strategy, Varian Medical Systems Inc. (VAR) and Copart Inc. (CPRT), both top contributors in the Quality Value Midcap strategy, were leading contributors to the Select Value in Q3 2020. Each is discussed above.

Select Value Top Detractors

Paysign (PAYS) and Citizens & Northern Corporation (CZNC) were leading detractors to the performance of the Select Value strategy during the quarter; Paysign is discussed above in our commentary for QSV Quality Value Smallcap.

Shares of Citizens & Northern Corporation fell 20% during the quarter, detracting from performance of the Select Value strategy. CZNC operates as a holding company for community bank operations in North Central Pennsylvania and Southern New York State. QSV’s sale of this position and the investment of its proceeds are discussed below.

Select Value Activity

Drawing from the best ideas of QSV’s Quality Smallcap and Quality Midcap strategies, positions were added in Aspen Technologies, MSA Safety, NIC, Inc., all of which are discussed above. These purchases were funded through the sale of companies including Kohl’s, Vail Resorts, and Euronet Worldwide. Citizens & Northern Corporation was sold to take a tax loss, as were the strategy’s other bank holdings, Civista Bancshares (CIVB), Premier Financial Corporation (PFBI), Southern First Bancshares (SFST), and West Bancorp (WTBI). QSV’s team saw an opportunity to replace these banks with what it believes to be higher quality banks in states showing population growth. Positions were initiated in Synovus (SNV), FB Financial Corp. (FBK), Glacier Bancorp (GBCI), and Bank OZK (OZK).

Focused on the Long Term

In our commentary last quarter, we noted that it is important to consider that recent gains were driven by stimulus efforts, by an optimistic view that the worst of the pandemic is over and that progress on potential vaccines will soon yield results. Our thoughts remain the same as they were three short months ago; risks persist and should be managed. As investors, QSV’s team must balance optimism about the prospects for our holdings with risk management, both at the macro level and in assessing the potential challenges to the companies in our portfolios. One pundit recently noted that historians in the future will need to specify in which quarter of 2020 they specialize, given the continuous stream of events and surprises the year has presented to us all (and may yet offer). Despite the risks we know and those that we do not, QSV sees complacency on the part of many investors. We believe it is better in this environment than offense. We play defense by owning high quality small and mid-cap companies, purchased at reasonable valuations, and monitored closely by experienced analysts. As always, we remain personally invested alongside our clients and welcome questions and opposing views.

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