The late, great investor Charlie Munger famously observed that “the big money is not in the buying and the selling, but in the waiting.” We agree. In fact, for much of this year, we’ve been patiently and hopefully waiting for demand dynamics in the economy to improve to create a tailwind for small businesses, many of which have already been put through a recession-like wringer.
In the interim, our attention has been focused on secular winners with self-help strategies in place. We define secular winners as companies that are growing their top line or taking market share in a down market. Self-help strategies are initiatives that could lead to margin improvements regardless of economic conditions. And if growth does rebound, these businesses are likely to get an added boost.
Recently, we have seen signs that conditions are starting to improve. As the chart below shows, companies in the S&P 600 Index of small stocks are seeing the first signs of year-over-year growth in three years — and the strongest profit outlook since the end of the global pandemic.
Source: Piper Sandler. Data from FactSet Research Systems Inc. and Compustat, yearly data from 1/1/2019 to 9/30/2025. This data shows the S&P 600’s price, NTM P/E, and NTM EPS estimate each year, measuring the change in both P/Es and EPS in a given year to arrive at that year’s price return. The S&P 600 is an index of small-cap stocks managed by Standard & Poor's. It tracks a broad range of small-sized companies that meet specific liquidity and stability requirements. This is determined by specific metrics such as public float, market capitalization, and financial viability, among other factors. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.
It seems as though we might finally be through the worst of the earnings trough. And now that the Federal Reserve has ended its long pause and eased rates for the first time since late last year, small companies are likely to be beneficiaries of lower financing costs along with a growing appetite for risk-taking that typically comes with a rate-cutting cycle.
Not surprisingly, the third quarter turned out to be a strong one for small-caps, with the Russell 2000® Index up 12.39% in the quarter, outperforming the S&P 500 Index, which rose 8.12%.
It’s probably too soon to say if the switch has flipped. In our case, most of the companies we own tend to be prepared for the worst and hope for the best. Right now, they find themselves somewhere in between. The economic backdrop isn’t exactly pedal to the metal, but the demand environment looks solid. And if companies can marry that with smart capital allocation decisions and effective self-help strategies, that should be a recipe for success. We seek to build in another layer of safety by relying on our 10 Principles of Value Investing™, which is designed to lead us to financially sound, well-run businesses with positive profit dynamics that are also trading at attractive prices relative to earnings, book value and cash flow.
Attribution Analysis & Portfolio Activity
The Value Plus Fund gained 8.51% in the third quarter, compared with the 12.60% gain for the Russell 2000® Value Index. Our stock selection was positive in several sectors led by Financials, Information Technology, Utilities, and Materials, which accounted for our top five performing holdings in the quarter. By contrast, the selection effect was negative in Health Care, Energy, Real Estate, Industrials, Consumer Staples, and Consumer Discretionary, which accounted for our five worst-performing stocks this quarter.
Our stock selection performs best when any optimism surrounding the improving fundamentals of companies we’re watching are confirmed by the actions of management. That can come in several forms, including active share buybacks (indicating management believes the stock is undervalued), insider buying (a sign that executive leaders believe the stock is a good value and willing to put their own money on the line), and growing dividends (a sign of management’s confidence in their future profits and cash flow). Currently, roughly one-third of our holdings in the Strategy have insider buying; 84% of our companies are in active buyback mode; and 61% have increased their dividends in the past year.
These are companies like Brady Corp. (BRC), a leading manufacturer of ID solutions and workplace safety products. In our view, the company is allocating capital wisely: They are actively buying back stock, consistently increasing dividends, and pursuing tuck-in acquisitions that complement their core business — all while maintaining low leverage.
The company’s core business is identification solutions for commercial products, allowing clients to trace and track parts. Brady’s niche is printers and related consumables such as labels for rugged industrial markets. This has been a year of restructuring and cost cutting for Brady, which is part of the company’s self-help story. Recently, management has called out strong growth in Aerospace and Data Center end markets, with the Data Center strength focused on BRC’s wire marking business.
We believe the company will begin to reap the benefits of these efforts starting next year, and in its most recent quarterly earnings announcement, Brady reported 2026 guidance that was above expectations. Still, the stock trades at a reasonable valuation. Our current price target for BRC would represent 18x our 2026 EPS estimate.
Another example is Phinia Inc. (PHIN), an auto parts company spun off from Borg Warner in 2023 that makes fuel systems for vehicle manufacturers and the after-market. In our opinion, the market has been overly pessimistic on PHIN’s outlook in the aftermath of President Trump’s ‘Liberation Day’ announcements on tariffs, and large insider purchases by the company’s CEO and two directors helped confirm our view.
We believe PHIN has a variety of ways to win, especially relative to other companies in the auto parts category. In its legacy auto OEM business, PHIN is the third player in a three-company oligopoly that collectively controls roughly 80%-90% market share. The second-biggest player in this group has deemphasized this category since COVID-19, resulting in 4%-5% market share gains for PHIN. We believe this trend is likely to continue, and PHIN could control around 20% of the market by 2030, up from the mid-teens today.
The company also has considerable exposure to the relatively stable after-market auto parts end-market, which accounts for approximately 40% of the company’s revenues and close to half of its operating profits. We believe Phinia’s after-market business could grow at a mid-single digit percentage CAGR with less cyclicality, as it is based on replacement of critical engine components. Additionally, PHIN has multiple revenue growth opportunities in under-penetrated end-markets such as aerospace, off-highway vehicles and hybrid vehicles that were overlooked as part of the much larger Borg Warner entity.
Following PHIN’s spin-off, management has executed on cost savings initiatives to improve margins and used free cash flow to consistently buyback stock and de-lever the balance sheet. PHIN is hitting on all three of the main capital allocation criteria we look for, which gives us even more confidence. Yet the stock is trading at a modest 6x EV/EBITDA. We believe PHIN is being valued by the market as an OEM auto parts manufacturer even though that exposure is less than 30% of revenue. As PHIN’s after-market and industrial end-market exposures continue to grow, we think PHIN should receive a multiple closer to after-market auto parts and industrial companies that trade in the 8-12x EV/EBITDA range.
Our top performer for the quarter was Materion Corp. (MTRN), a vertically integrated producer of high-performance advanced engineered materials based on beryllium, a rare metal that is one-third lighter than aluminum but has six times the stiffness of steel.
MTRN has been taking several steps to improve operations and bolster margins during a slower overall period for some of its end markets, such as autos, industrials, and life sciences. Over the past year, as demand has remained subdued, management divested its unprofitable Architectural Glass business in New Mexico while expanding high-margin capacity for advanced semiconductor capabilities in South Korea. The stock recently experienced outsized strength post tariff fears as Materion produced record margins with guidance for accelerating growth as a variety of end markets have visibility to a sustained rebound in demand.
Though the stock has bounced back, it’s still trading at an attractive price. If MTRN shares reach our target, that would still be a just 1.7x FY 2026 sales and 12x EBITDA.
Prestige Consumer Healthcare (PBH) — the company behind familiar over-the-counter medical products such as Dramamine, Luden’s cough drops, and Clear Eyes eye drops — was the biggest detractor to our Strategy’s performance during the quarter. That’s in part because PBH missed earnings forecasts and took down its full fiscal year EPS estimates due to supply chain issues related to its eye care business. Its core supplier was not able to ship enough products to meet demand for PBH’s Clear Eyes business.
The company took action to fix this supply chain issue, opting to acquire its eye care supplier for $100 million. This former supplier will now be 100% focused on producing for PBH after being brought in-house. We expect PBH’s FY 2027 earnings to bounce back nicely as the core business is operating well and expect a rebound in PBH’s profitable eye care business as customers re-stock inventory. At its price of $63 at the end of the third quarter, Prestige shares were trading at 13.8 times 2027 earnings. But we expect multiple expansion, as the company earnings are set to accelerate after addressing its supply chain issues.
Outlook
For months, we’ve been waiting for green shoots to emerge, and we’re starting to see signs of hope. Still, we believe this is not time to overreact. Despite initial signs of improvement in demand dynamics, we are not looking to catch falling knives. We’re still committed to identifying good companies with strong capital allocation plans in place that are reducing costs, improving their margins, and taking market share — regardless of how well the economy is doing. Self-help, though, is just one factor that we covet. As always, we are guided by our 10 Principles of Value Investing™, which helps direct us to undervalued companies with low debt, high-quality balance sheets, and competitive advantages that are useful against any backdrop.
Thank you for your continued trust and confidence in us.