| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| - | 8.5% | 8.5% |
Bernzott Capital's US Small Cap Value strategy gained 8.5% net in Q1 2024, significantly outperforming the Russell 2000 Value's 2.9% return. Energy holdings led performance with Archrock and Viper Energy advancing on robust compression demand and improving oil prices respectively. HCI Group was the top contributor, rising 33% on strong results and premium assumptions from Citizens Property Insurance. The manager trimmed Lancaster Colony as it approached fair value and exited Evercore and Gentex after achieving targets. Materials detracted as MP Materials declined 28% on weak rare earth prices, though the manager added to the position. The firm added PotlatchDeltic as a new timber REIT position. The manager believes small cap valuations relative to large caps are near 20-year lows despite higher growth expectations, creating an unsustainable gap. They expect market broadening and normalizing rates to benefit small caps as mega-cap momentum fades. The strategy focuses on high quality companies with strong fundamentals trading at significant discounts to fair value.
Bernzott Capital seeks high quality small cap companies with market leadership, recurring revenue, high margins, strong returns on capital, and shareholder-friendly management teams trading at significant discounts to fair value, believing these attributes will outperform over full market cycles.
The manager believes the gap between small cap and large cap valuations is unsustainable and should narrow over time as inflation cools and rates normalize. They expect the broadening out of the market to benefit small caps as the momentum trade in mega-cap stocks fades, creating a constructive backdrop for small cap investing.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| May 7 2024 | 2024 Q1 | AROC, EVR, GNTX, HCI, HHH, LANC, MP, PCH, PLXS, VNOM | energy, financials, materials, Quality, small caps, value | PCH | Bernzott's small cap value strategy outperformed significantly in Q1 on energy strength and selective stock picking. The manager sees small caps trading at unsustainable discounts to large caps near 20-year lows despite better growth prospects. They expect market broadening and rate normalization to close this valuation gap as mega-cap momentum fades. |
| Jan 30 2024 | 2023 Q4 | ADTN, APG, ECPG, GVA, HALO, HCI, JRVR, NNN, PTEN, SP, SRC | energy, financials, infrastructure, Quality, real estate, small caps, value |
AFM CN|B4B GR|BLU SJ|COH SJ|HCI|KO|KSPI|MGROS TI|MTN SJ|NE|NPK SJ|OCE SJ|PPI|PRX NA|SAHOL TI|SES|WINE LN GVA PTEN COO|CW|DKNG|FSS|HALO|ZD NNN |
Bernzott's small cap value fund returned 14.1% in Q4, driven by infrastructure beneficiary Granite Construction and insurance play HCI Group. The manager sees attractive opportunities in small caps trading at a 3-turn discount to large caps, expecting this gap to narrow as market returns broaden beyond mega caps. |
| Jul 18 2023 | 2023 Q2 | ADTN, APG, ATSG, COOP, EHC, ENOV, GDEN, LPRO, PLXS, WKC | financials, healthcare, Quality, small caps, technology, value |
EHC APG LPRO FWRD. GDEN ENOV COOP PLXS |
Bernzott runs a concentrated small cap value strategy targeting high quality companies with sustainable competitive advantages. The portfolio underperformed in Q2 as quality factors faced pressure, but the manager added four new positions while maintaining focus on businesses with market leadership, recurring revenue, and strong management teams trading at attractive valuations. |
| Mar 31 2023 | 2023 Q1 | ATSG, BV, GVA, HALO, HCI, HLMN, PTEN, SRCL, TA, TCBI, WSC | Banking, Commercial real estate, Quality, small caps, value |
HLMN PTEN |
Bernzott's small cap value strategy outperformed benchmarks in volatile Q1 2023 by avoiding banking sector weakness through quality-focused stock selection. The manager added energy and industrial names while maintaining discipline around high-quality businesses with strong cash flows. With recession risks mounting, their focus on resilient companies at attractive valuations positions the portfolio defensively. |
| Feb 22 2023 | 2022 Q4 | BV, GV, GVA, HALO, HHC, JRVR, KN, MP, QUOT, SP, SSTK, UPLD, VNOM | - | - | |
| Sep 11 2022 | 2022 Q3 | ADTN, BV, CHRD, EHC, HCI, KN, SRC, TCBI, VNOM, WSC | - | - | |
| Jun 30 2022 | 2022 Q2 | CADE, CMP, HHC, QUOT, TREE, TRNO | - | - | |
| Mar 31 2022 | 2022 Q1 | CMP, HALO, HCI, HI, JBI, MP, VNOM | - | - |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2024 Q1 |
EnergyEnergy holdings were the leading contributor to portfolio returns with Archrock benefiting from robust demand for compression equipment and Viper Energy advancing on improving oil prices and M&A visibility. The manager continues to hold positions in both companies. |
Oil Natural Gas Compression Midstream Exploration & Production |
ValueThe manager seeks high quality companies trading at significant discounts to fair market value, employing a time-tested investment philosophy based on deep fundamental analysis. Small cap valuations relative to large cap remain very attractive near 20-year lows. |
Discount Fair Value Fundamentals Quality Small Caps | |
QualityThe investment philosophy focuses on high quality companies with market leadership, recurring revenue, high margins, strong returns on capital, financial flexibility, and shareholder-friendly management teams with skin in the game. |
Market Leadership Recurring Revenue High Margins Returns on Capital Management | |
| 2023 Q4 |
Small CapsSmall caps led the market rally in Q4 with 14.0% returns, outperforming large caps. Despite the rally, small caps trade at over a 3-turn discount to large caps, which the manager believes should narrow over time. The broadening out of market returns should benefit small caps, as historically when large cap returns broaden, small caps tend to outperform. |
Value Discount Outperformance Broadening Returns |
Infrastructure SpendingInfrastructure spending for roads and bridges continues to be robust, benefiting holdings like Granite Construction. The pace of new contract awards continues to accelerate as overall funding focused on improvement in the nation's infrastructure begins to materialize. Legacy contracts are rolling off and backlog of new, more profitable business continues to grow. |
Roads Bridges Construction Contracts Funding | |
ValueThe fund seeks high quality companies trading at a significant discount to fair market value. Their investment process identifies what they consider to be high quality businesses with shareholder friendly management teams. Value beat growth for the quarter but trailed growth for the year. |
Discount Quality Management Fundamentals Process | |
| 2023 Q2 |
Small CapsThe portfolio focuses on small cap value investing with a significant valuation discount to large cap persisting. Quality factors were under pressure during the quarter with stocks having characteristics the manager finds unattractive performing well. The manager seeks high quality companies that can compound returns over long periods while proving resilient in downturns. |
Value Quality Valuation Discount Resilience |
QualityThe manager emphasizes high quality companies with characteristics including market leadership, recurring revenue, high margins, high returns on capital, financial flexibility, and strong management teams. Quality factors were under pressure during the quarter as stocks with unattractive characteristics outperformed. |
Leadership Margins Returns Management Recurring | |
ValueValue lagged growth for the fourth consecutive quarter as growth stocks were buoyed by the Fed's pause and less exposure to banks. The significant small cap valuation discount to large cap persists, with the S&P 500's forward P/E now at 19.1x, above its 25-year average of 16.8x. |
Discount Valuation Growth Multiples Undervalued | |
| 2023 Q1 |
ValueManager emphasizes commitment to investment philosophy focused on high quality businesses with attractive cash flow and strong balance sheets. Attention to valuation should support investment returns as current interest rate regime inhibits valuation expansion. Small cap valuations look attractive relative to large caps. |
Value Quality Valuation |
Commercial Real EstateFalling values in several segments of commercial real estate, notably office, is a top watch list item as operators grapple with higher debt payments and face a coming wave of maturities over the next few years. |
Commercial Real Estate Office Credit | |
Regional BanksDramatic failures of three domestic banks, most notably Silicon Valley Bank, sparked bank-run contagion fears and roiled markets. Under allocation to banks helped relative performance as banks were by far the worst performing industry. Texas Capital has strong capital ratios and liquidity with below average exposure to CRE. |
Regional Banks Credit Stress Banking |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Mar 1, 2024 | Fund Letters | Bernzott Capital Advisors - US Small Cap | PCH | PotlatchDeltic Corp | Materials | Paper & Forest Products | Bull | NASDAQ | Cyclical, dividend, Housing, Lumber, materials, REIT, Timber, vertical integration, Wood Products | Login |
| Jun 30, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | PLXS | Plexus | Information Technology | Electronic Equipment, Instruments & Components | Bull | NASDAQ | Aerospace, Defense, Electronic Manufacturing, healthcare, Industrial, New business funnel, Outsourcing, ROIC, supply chain | Login |
| Jun 30, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | EHC | Encompass Health | Health Care | Health Care Facilities | Bull | NYSE | expansion, healthcare, Labor Costs, market share, Post-Acute Care, Rehabilitation, volume growth | Login |
| Jun 30, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | APG | APi Group | Industrials | Commercial Services & Supplies | Bull | NYSE | defensive, economic uncertainty, Industrials, inspection services, Margin execution, recurring revenue, Revenue Growth | Login |
| Jun 30, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | LPRO | Open Lending | Financials | Consumer Finance | Bull | NASDAQ | Auto lending, credit unions, Fintech, Lending enablement, Near-prime, Risk analytics, volume growth | Login |
| Jun 30, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | FWRD. GDEN | Golden Entertainment | Consumer Discretionary | Hotels, Restaurants & Leisure | Bull | NASDAQ | capital investment, casino, Convention market, Events calendar, Gaming, Nevada, Pure-Play, STRAT property | Login |
| Jun 30, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | ENOV | Enovis | Health Care | Health Care Equipment & Supplies | Bull | NYSE | Ambulatory surgery, M&A, margin expansion, medical technology, New products, Reconstructive, strong balance sheet | Login |
| Jun 30, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | COOP | Mr Cooper | Financials | Thrifts & Mortgage Finance | Bull | NASDAQ | capital return, Free Cash Flow, Inexpensive valuation, Mortgage servicing, Rising rates, Servicing duration, Share Buybacks | Login |
| Mar 31, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | HLMN | Hillman Solutions | Consumer Discretionary | Specialty Retail | Bull | NASDAQ | cash flow generation, Consumer Discretionary, deleveraging, Distribution, Hardware, market leadership, Retail Partnerships, Value | Login |
| Mar 31, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | PTEN | Patterson-UTI Energy | Energy | Oil, Gas & Consumable Fuels | Bull | NASDAQ | capital discipline, Contract Drilling, Cyclical, Energy Services, High-Spec Rigs, Oil & Gas, Pressure Pumping, Return of Capital | Login |
| Dec 1, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | AFM CN|B4B GR|BLU SJ|COH SJ|HCI|KO|KSPI|MGROS TI|MTN SJ|NE|NPK SJ|OCE SJ|PPI|PRX NA|SAHOL TI|SES|WINE LN | HCI Group | Financials | Insurance | Bull | NYSE | Casualty Insurance, Insurance Technology, IPO Catalyst, premium growth, Property Insurance, Proprietary technology, value unlock | Login |
| Dec 1, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | GVA | Granite Construction | Industrials | Construction & Engineering | Bull | NYSE | construction, contract backlog, Engineering services, Government Spending, Heavy Civil, infrastructure, margin expansion | Login |
| Dec 1, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | PTEN | Patterson-UTI Energy | Energy | Oil, Gas & Consumable Fuels | Bull | NASDAQ | cash flow generation, Cost Reduction, Cyclical Recovery, Drilling Services, energy equipment, Merger Synergies, oilfield services | Login |
| Dec 1, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | COO|CW|DKNG|FSS|HALO|ZD | Halozyme Therapeutics | Health Care | Biotechnology | Bull | NASDAQ | biotechnology, drug delivery, licensing agreements, Oncology, Pharmaceutical Partnerships, recurring revenue, royalty revenue | Login |
| Dec 1, 2023 | Fund Letters | Bernzott Capital Advisors - US Small Cap | NNN | NNN REIT | Real Estate | Equity Real Estate Investment Trusts (REITs) | Bull | NYSE | Acquisitive Growth, conservative balance sheet, Defensive Income, Dividend Growth, Real Estate, REIT, triple net lease | Login |
| TICKER | COMMENTARY |
|---|---|
| HCI | Strong results and the assumption of in-force premiums from Citizens Property Insurance Corporation drove stock performance. The company is also seeking to unlock value of TypTap, a proprietary technology that identifies profitable insurance customers, via an IPO. We maintained our position. |
| AROC | Strong results driven by robust demand for compression equipment drove the outperformance. Utilization remains extremely tight while pricing continues to move higher providing significant visibility over the next 24 months. The company also increased their dividend by 6.5%. We maintained our position. |
| LANC | Strong results driven by continued growth within their licensing segment and easing food commodity prices drove stock performance. We reduced our position as the stock approached fair value. |
| MP | Despite an inline quarter, the stock declined as NdPr prices weakened. Seasonal factors and lower demand for Electric Vehicles and other industrial applications hurt their forward-looking outlook. Despite this, we remain confident in the long-term fundamentals and added to our position on the decline. |
| HHH | The company exceeded expectations during the quarter, however the stock declined as higher interest rates weighed on REITs in general. We added to our position during the quarter. |
| PLXS | Quarterly results were below expectations as the company felt the negative impact from de-stocking from their customers, more specifically within their healthcare segment. This should be temporary with growth reaccelerating in future quarters. Backlog continues to grow which gives us confidence going forward. We maintained our position. |
| PCH | PCH is one of three publicly traded timber REIT's. The company is vertically integrated allowing them to be one of the lowest cost providers of wood products and has the most leverage amongst peers to an improving overall lumber price environment. Lumber prices should benefit from an improving housing environment driven by peaking/lower interest rates, a lack of overall housing supply, a growing cohort of homebuyers, and an undersupplied timber market. |
| EVR | The companies achieved our fair value target, and we exited the positions with sizable gains. |
| GNTX | The companies achieved our fair value target, and we exited the positions with sizable gains. |
| VNOM | Improving oil prices served as a tailwind for Viper Energy's quarterly results, while the recent M&A transaction by Diamondback Energy provides significant visibility into additional growth for Viper Energy. Viper remains a top position in the portfolio. |
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