From the onset of the COVID-19 pandemic in 2020, questions were raised about the feasibility of hosting events, such as the Tokyo Summer Olympics, which were expected to be one of the more notable economic casualties. In what marked a year of many firsts, the International Olympic Committee (IOC) made the unprecedented decision to postpone the event to 2021, instead of cancelling it. Why is that? An easy answer would be that the only other times this decision had to be made, during World Wars I and II, decision-makers did not know how long the Olympics would have to be postponed, making it an easier choice to cancel the games altogether.

A more thorough look at the economics of Olympic events provides a more complex answer. It is well known that hosting the Olympics is a costly endeavor, and has become more so over the years as the number of participating countries and number of sports have increased significantly. Since 2000, the average cost of hosting the summer Olympics has been upward of US$5 billion in infrastructure investments and operational costs. Further, the benefits of hosting the event are heavily debated, with many arguing that there is no net benefit, even when accounting for indirect gains from tourism and other variables. As such, following the US$45 billion Beijing games in 2008 and the US$20 billion Rio de Janeiro games, many cities voiced their skepticism and withdrew their candidacy for the 2022, 2024 and 2028 games. The wave of withdrawals forced the IOC to assign the 2024 and 2028 Olympics to Paris and Los Angeles as early as 2017, as they were the only remaining viable options.

With that in mind, it is not hard to imagine why the IOC would be wary of not giving Tokyo the opportunity to recoup some of its costs after almost a decade of preparation and a well-known failed bid for the 2016 Summer Olympics and Paralympics that cost the city US$150 million. Indeed, the Olympic Committee has strict infrastructure requirements for hosting the summer games, which is usually much bigger in scope than the winter games. For example, the committee requires the host city to have a minimum of 40,000 available hotel rooms, in addition to other transportation requirements, such as airport capacity and train lines.

One of the more direct ways for host cities and the IOC to recoup their costs is through sponsorship programs. The highest level of partnership is through the Olympic Partner Programme, which grants category-exclusive marketing rights to the Summer, Winter and Youth Olympic Games to a select group of global companies and is used to fund IOC activities and costs. Created in 1985, the Olympic Partner Programme provides the IOC with a range of support, such as technology, staff deployment, marketing, essential services to athletes, and broadcasting experience.

Under the Olympic Partner Programme there are three categories of local sponsorships to support the staging of a specific Olympic event. The local sponsorship programme for the Tokyo Olympics is comprised primarily of Japanese companies that stand to enhance the image of the events. Unlike other sporting events, no commercial advertising is allowed at the venue under the Committee’s clean venue policy. Instead, the sponsors obtain various levels of rights to use Olympic and Paralympic designations and imagery, such as the logo, as well as to the right to supply their products and services to athletes and spectators.

Global Alpha owns shares in a company that is directly involved in the local sponsorship programme for the Tokyo Olympics: ASICS. ASICS is a renowned manufacturer of sports shoes, sportswear and sports equipment that sponsors many Olympic athletes around the world involved in activities such as tennis, running, wrestling and more. Headquartered in Japan, the company was created in 1949 under the name of Onitsuka Tiger. The modern name ASICS is derived from the Latin proverb “Anima Sana In Corpore Sano,” which means a “sound mind in a sound body,” and the company has remained committed to this philosophy to this day.

In 2015, the 2020 Tokyo Olympic Committee announced that ASICS was selected as a gold partner of the Tokyo 2020 Olympics, the highest local sponsorship level, and that it would be supplying the uniforms for the Japanese teams and volunteers. Under the IOC product-category exclusivity policy, ASICS is the only company allowed to advertise under the sporting goods section, often thought to be one of the more lucrative sections. We expect the company to hold up well to the scrutiny stemming from the exposure.

Strength

• Solid brand recognition
• Strong expertise in biomechanics and material science, reflected in their shoes’ quality
• Outstanding ESG profile

Weakness

• Lagging in fashionable sports shoes and sportswear

Opportunities

• Growing worldwide interest in healthy activities, especially performance running
• China embracing performance running, as reflected in the number of marathon events rising rapidly

Threats

• Competition within the industry
• Rising costs of raw material and labor

While the company is not allowed to disclose the cost of the sponsorship, it expects to spend a total of $US128.5 million on event-related expenses. Unlike some of the experiences of past host cities, there is good reason to believe that Asics will be able to make a profit from its investment, and that the event will provide a good tailwind for the company over the next few years.

COVID-19 has led to a turbulent economy characterized by faster adoption of technology, increased environmental urgency and inflation from unprecedented stimulus. The widespread government support is resulting in inflation across many goods as economy rebounds quickly. Fortunately, the debt service ratio of consumers in the United States (US) is at a 40-year low, meaning they can probably handle rising prices for some time.

While certainly not linear, inflation is exacerbated by the unprecedented stop-and-start occurring across economic sectors, especially when comparing goods versus services. Demand is high for some products such as those related to home improvement, yet low for others like restaurant equipment. Demand for goods are presently outweighing demand for services in a major way. The imbalance is inflating prices notably through a supply chain shock that has significantly increased transport prices. The US Consumer Price Index is higher by 11% y/y at the goods level, while its service counterpart is down 5% y/y.

The rush for certain goods, such as personal electronics has created a global semiconductor chip shortage. As a result of increased demand, the personal computer sector grew by 10% in 2020, and surging demand in the fourth quarter reached 25.4%. The impact of this high demand was felt across the entire technology supply chain.

Why are automakers shutting down production?

Automakers spent $43 billion on microchips in 2019, representing 10% of global semiconductor sales. Chips are more critical to automakers than automakers are to chip manufacturers. In 2020, car manufacturers planned for a 35% drop in sales, but ended up with a drop of 8%, thus they quickly needed more chips to fill inventories. These emergency chip orders went to the back of the line behind larger electronics clients, which had better estimated their future needs during the crisis. The impact on 2021 production could mean 1.5% of new cars not being available, a material number that will certainly affect availability and pricing.

The average electric car features roughly 3,000 chips. Cars have become a laboratory for human machine interface, where manufacturers continue to innovate at a frantic pace. This will certainly continue to provide us with interesting investment opportunities. There are a number of emerging human interface trends that will change the way we use our cars, including:

• Screens: A full-screen interior, with infotainment screens up to 48 inches wide on the dashboard.
• Voice commands: As voice recognition technology evolves, so does its complexity, with functions from adjusting following distance in adaptive cruise control, to fully self-driving cars that don’t require physical steering, braking, or acceleration input.
• Touch to movement: BMW is already using gesture control technology, where cameras “see” hand movements to perform in-vehicle functions. Taking it further, under development is technology to give the sensation of virtual touch response in the air using ultrasound.
• Driver assistance: Rather than the constant go, stop, and steer motions a driver must perform, driver assistance commands are alleviating the need for attentiveness and active participation.
• Virtual assistants: Based on emotional and physical demeanor, machine learning can predetermine the best outcomes for driving routes, temperature control, communication and musical preferences.

Global Alpha is exposed to the noted trends and futuristic electronics in the automotive sector. Gentherm (THRM:US) is the uncontested leader in thermal management with heated and cooling seat systems. Among new smart products, Gentherm is launching its ClimateSense system, featuring sensors that detect heat from each passenger and optimize the climate with exterior conditions throughout the car. The company expects to save up to 50 miles driven in electrical capacity.

Cerence (CRNC:US), a leader in speech integration and digital content delivery for the automotive industry, is launching Cerence Look, a new product enabling drivers and passengers to interact with points of interests outside the car, like a machine co-pilot. Mercedes-Benz is the first carmaker to launch this technology in its Travel Knowledge feature.

These trends confirm that carmakers will continue to increase their dependence on technology and semiconductor chips.

The chip shortage will subside but could signal an onshoring trend in semiconductor production. Taiwan-centric TSMC, the world’s largest semiconductor manufacturer, controls over 70% of the world’s chip production.

Industry players sensed the importance of strategic semiconductor assets, and 2020 was one of the highest years on record in terms of M&A activity. Global Alpha is participating in this phenomenon, as three different companies have publically disclosed their offer to acquire one of Global Alpha’s holdings, Coherent (COHR:US), a leading provider of laser-based technologies to the semiconductor industry.

The chip shortage crisis provided additional insights, including a supply quasi-monopoly by TSMC with its mega factory, heightened international trade tensions, and the erratic effects of an intense stimulus or expansive monetary policy. Historically, the situation is very similar to the 1970s oil crisis, without the geopolitical catastrophe. Interestingly, the semiconductor has become the new oil; the most critical component to every machine we use. Now, we just need to hope that lessons learned from the 1970s can help us handle higher levels of inflation.

Every day we deal with vast and rapidly growing amounts of data. Some of us might even feel like we are drowning in this deep ocean of messages, emails, spreadsheets, images, sounds, and videos. To make sense of it, various organizations employ diverse data analytics tools that help them gain insights and identify new opportunities. If acted upon appropriately, they can lead to improved decisions, better outcomes, and happier stakeholders. However, we should not neglect the risks associated with data and sophisticated technology. Hackers, criminals, and terrorists also leverage technology for their benefit, often at the expense of companies, citizens, and governments. To mitigate these risks, organizations worldwide need to stay ahead of them by processing their data and identifying actionable insights.

This is exactly what Cognyte Software, one of our portfolio companies, has been enabling its clients to do. Its security analytics tools help to fuse and analyze the data siloed across organizations, connecting the dots and providing critical information at the right time to prevent multiple threats before the damage is done. The environment is highly fluid, as well-funded and organized perpetrators relentlessly evolve their skills and methods to achieve their goals and avoid detection. Security organizations, in turn, cannot afford even a moment of complacency.

This brings to mind the Red Queen effect, in that organizations must adapt and evolve to survive. Cognyte turned that challenge into a big opportunity, recognizing the need for a scalable, open-analytics platform that provides real-time, actionable intelligence that can help find a needle in a haystack. Its cutting-edge solutions are driven by artificial intelligence, and are used by the most sophisticated security organizations across the globe. In one reported case, a European client’s investigative team leveraged Cognyte’s platform to prevent a radical group from driving a large vehicle into a crowd. More than 1,000 corporate and government clients in over 100 countries see Cognyte as their reliable partner to manage their security challenges and empower them to protect lives and assets and make the world safer.

Cognyte operated as a division of Verint Systems for more than two decades until a spin-off was completed in early February 2021. As a global leader in security analytics software, Cognyte empowers governments and enterprises with actionable intelligence to address a broad range of security challenges, including threats to national security, business continuity, and cybersecurity. The company has a strong track record of solving complex security challenges and unmatched domain experience. Over 400 government customers account for 80% of total revenue, while around 600 enterprise customers make up the other 20%.

Revenue mix

• Software revenue (42%), including primarily term-based and perpetual licenses.
• Software service revenue (45%), including support and cloud-based SaaS subscriptions.
• Professional service and other revenue (13%), including installation and integration services, customer-specific development work, and others.

Target market

• Cognyte estimates its total addressable market at $30 billion, evenly divided between government and enterprise sectors, with a steady growth rate of 10% per year¹. Security challenges are becoming more complex, with rapidly growing data and the increasing adoption of open analytics tools by security organizations among the key industry tailwinds.
• The market is highly fragmented. Despite being one of the leading players, Cognyte has a market share of 1.5%.
• Some public peers include a point solutions vendor, FireEye, and big data analytics vendors, Palantir and IBM. Cognyte differentiates itself from competitors through a focused security analytics approach, deep domain expertise, and by creating a holistic view of data in delivering actionable insights. However, Cognyte primarily competes with organizations’ in-house capabilities. Governments and enterprises have traditionally approached their security challenges with homegrown solutions. In our view, these tools cannot keep up with the evolving threats, are costly to build, and complex to maintain. For this reason, we see a secular shift towards open-analytics platforms.

Growth strategy

• Increase penetration of existing customers.
• New client wins.
• Developing partners to expand in enterprise vertical.
• Bolt-on acquisitions.

Strengths

• Cutting-edge security analytics and artificial intelligence (AI) technology. Broad portfolio addressing a wide range of security challenges.
• Unparalleled security domain expertise and focus.
• High revenue visibility. Large portion of recurring revenue (~50%), significant contribution from repeat customers (~90%) and a healthy backlog¹.
• Well-diversified client portfolio (across segments and regions).
• High customer stickiness.
• Strong balance sheet.
• Seasoned management team with strong track record.

Opportunities

• Margin expansion.
• Fast and wide adoption of open analytics software.
• Industry roll-up opportunities.

From 2018-2020, as a division of Verint Systems, Cognyte recorded strong financial results, with revenue and EBITDA compounded annual growth rate of 8% and 26%, respectively¹. EBITDA margin saw a very impressive expansion of 500 basis points to 18% over the same period. As a standalone public company, Cognyte announced three-year financial targets of double-digit revenue growth and EBITDA margin expansion, driven by faster adoption of open analytics software and ongoing revenue mix improvement. Given the strength of the underlying business and vast opportunities ahead, we believe this trajectory could prove to be conservative.

In the last week, record cold weather hit most of the United States (US), causing gas and power prices to spike across the country, from less than $3/btu to over $600. Texas regulators ordered rolling blackouts as the cold weather froze wind turbines, and snow and ice reduced solar energy production. Some experts were quick to blame renewable energy as the cause of these blackouts. Even if the growing use of wind and solar energy meant the grid may be less reliable, Texas still produces over 50% of its electricity from non-renewables, and that was also affected as gas was in short supply and water pipes froze. In this commentary, we will provide an update on the situation regarding renewable energies.

In 2020, more US states mandated renewable energy targets.

With or without these mandates, 2020 was another record year around the world for the growth of renewables. In the US, 78% of new electrical generating capacity commissioned was renewables, according to a review by the Federal Energy Regulatory Commission (FERC). Combined, it accounted for 22,451 megawatts (MW) or more than 78.09% of the 28,751 MW of new utility-scale capacity reported to have been added last year. Wind (13,626 MW or 47.4%) and solar (8,543 MW or 29.7%) each contributed more new generating capacity than natural gas (6,259 MW or 21.7%).  

Current capacity of renewables is now above 24% of total capacity in the US and should exceed 30% by 2025.

We often hear that renewables require subsidies to compete with oil and gas, coal and nuclear. Let’s take a look at the total cost and production cost of these various sources. The costs include capital costs, operations, maintenance, and de-commissioning and remediation. Recent major global studies of generation costs note that wind and solar power are the lowest-cost sources of electricity available today.

What about the reliability of wind and solar energies? If they could never represent 100% of generating capacity, what should the base load be? We can see in the above chart that geothermal energy is also attractive in terms of costs. It’s clean and renewable, and better yet, is available 24/7, meaning it could be a base load energy. However, in 2019, geothermal only represented 0.5% of US electricity generation. 

There are signs that things could change. A report released in May 2019 by the Department of Energy suggested that US geothermal power capacity could increase by more than twenty-six times by 2050, reaching a total installed capacity of 60 GW, thanks to accelerated technological development and adoption. This is turn would greatly reduce costs. 

Since 2008, we’ve held Ormat Technologies in our portfolio, a world-leading geothermal energy company. Ormat Technologies (ORA US, ORA IT) was founded in Israel in 1965 to pursue its objective to further develop renewable energy. Active in the geothermal field since the early 1980s, the Integrated Two-Level Unit (ITLU) was a vital development in maximizing the thermodynamic efficiencies of lower-temperature resources. The patented ITLU design revolutionized the industry and, to this day, distinguishes Ormat from other companies. The company has been public since 2004, and has established its headquarters in Reno Nevada. Further, Ormat is an energy producer with 933 MW of production globally. Another important achievement is regarding the world’s largest single binary geothermal power plant – the Ngatamariki in New Zealand – that began its commercial operations in 2013.  Ormat provided the engineering, procurement and construction for the 100 MW geothermal project that delivers sustainable energy to power 80,000 homes annually.

In addition to its geothermal expertise, Ormat is now a leading player in the field of energy storage and management. Its solutions started from energy and demand response management, and energy storage systems. The company provides grid operators with the power to enhance grid performance, stability, and responsiveness, while delivering capacity at the right time and the right price. It also provides commercial, industrial and municipal clients with reliable and good quality power solutions, as well as peak shaving and demand charge management solutions to lower their utility bill and, in the unregulated markets, provide ancillary market services to generate revenue.

Coming back to Texas, last August, Lone Star Demand Response, LLC and Viridity Energy Solutions, Inc. signed a new five-year business-to-business agreement to continue the delivery of first-class demand response (DR) curtailment management services throughout times of high electricity demand. This will bring Lone Star Demand Response into a position to carry on with protecting the various generation and transmission systems from overloading during peak times and to fine-tune the demand to match the available supply. While Lone Star Demand is not part of the portfolio, Viridity is owned by Ormat.   

In short, geothermal and energy storage may be the solutions to increase the reliability of electricity production while keeping with the goal of increasing renewables and reducing the environmental impact.

In the blink of an eye, the month of January is behind us. Despite the fact that most indices have barely moved (MSCI World Index -1.05%, Nasdaq 0.29%, S&P 500 -1.11%, MSCI World Small Cap 2.03%, MSCI EAFE Small Cap -0.42%, and Russell 2000 4.85% – as of January 31, 2021), the year has gotten off to an eventful start. A “David and Goliath” phenomenon is taking shape on social media and it is wreaking havoc on the stock market.

Retail investors are targeting certain stocks, which happen to be the most shorted by top global hedge funds. Spreading their message across social media, these investors have created a ripple effect, which has impacted the fundamental structure of the stock market. Many media outlets are calling this wave “the battle of David and Goliath”.

The Great Short Squeeze?

Like many brick-and-mortar retailers, GameStop (GME) was battling to survive in the ecommerce world. Not surprisingly, given the challenges the business faced, its stock price was steadily falling. Because of poor fundamentals, GME became one of the favourite shorts of many hedge funds, resulting in over 100% of the outstanding shares being sold short. What followed was a textbook example of a short squeeze. A few traders started the trend and it quickly created a snowball effect as retail investors on social media sites (like Reddit) jumped on board.

As more people started to buy GME shares, the short sellers had no choice but to cover their positions, creating further demand and leading to higher prices. This resulted in chaos. According to Reuters, estimated losses from shorting GME have topped over $1 billion. That number skyrockets to $71 billion if we include all the shorts in the United States (US) so far in 2021. And, this is just the tip of the iceberg. An army of over 2.8 million Reddit users, from a group called WallStreetBets, continues the hunt for other highly shorted stocks.

In the beginning of January, three large hedge funds, Melvin, Maplelane and D1, saw their assets drop over 25%. The drop in their NAV may have breached International Swaps and Derivatives Association

This report is provided solely for informational purposes and nothing in this document constitutes an offer or a solicitation of an offer to purchase any security. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not constitute a representation that any investment strategy is suitable or appropriate to a recipient’s individual circumstances. Global Alpha Capital Management Ltd. (Global Alpha) in no case directly or implicitly guarantees the future value of securities mentioned in this document. The opinions expressed herein are based on Global Alpha’s analysis as at the date of this report, and any opinions, projections or estimates may be changed without notice. Global Alpha, its affiliates, directors, officers and employees may sell or hold a position in securities of a company(ies) mentioned herein. The particulars contained herein were obtained from sources, which Global believes to be reliable

(ISDA) triggers, which in turn would lead to mass liquidation by their prime brokers. Melvin got a

$2.75 billion capital injection from Citadel and P72 to meet capital requirements, without which we may have seen an even larger meltdown.

This wave has gone Global

Hitting Wall Street like a tsunami, the ripple effect is being felt around the world. A Goldman Sachs basket of the most heavily shorted stocks has surged over 50% in January – its biggest monthly gain since at least 2008 (index start date).

An online community called Bursabets is the Malaysian version of Reddit. It has over 8,000 members who are targeting shares of glove makers. This sector was the most shorted as Malaysia lifted its short selling ban in 2021. Plus, with vaccine roll outs in the news, yesterday’s COVID pandemic winners are quickly turning to losers.

On Stockal, an Indian trading platform, GME shares are over 15% of trading volume and among the top five most-traded names on the platform. In India, leverage is not allowed while trading foreign stocks, so people are risking their savings hoping to cash in on the trend.

The situation is no different in China, where chat rooms frequented by retail investors are showing similar trends. GME and AMC Entertainment are the most-traded US names on Futu Holdings, a trading platform used by individual investors in China and Hong Kong.

Fundamental Impacts on the market?

Brokers – This increased trading also impacts the basic infrastructure of the financial system. The Depository Trust & Clearing Corporation (DTCC) is a post-trade financial services company providing clearing and settlement services to the financial markets. The DTCC has demanded large sums of collateral raising industry capital requirements to $33.5 billion, an increase of 29% in just one week.

This capital increase impacted all brokers including Robinhood, who has been forced to draw millions on its credit lines, and raise over three billion to meet higher margin requirements. Robinhood had no choice but to comply.

Options market – As a levered instrument, the short-squeeze also impacts the options market. There has been an increase in small trades (less than 10 contracts) in the option market, leading to a bullish feedback loop. As most option sellers trade volatility and hence are short gamma, they are hedging this risk by buying the underlying security when it goes up in price. This creates the bullish feedback loop as dealers buy the underlying stock as a hedge.

This report is provided solely for informational purposes and nothing in this document constitutes an offer or a solicitation of an offer to purchase any security. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not constitute a representation that any investment strategy is suitable or appropriate to a recipient’s individual circumstances. Global Alpha Capital Management Ltd. (Global Alpha) in no case directly or implicitly guarantees the future value of securities mentioned in this document. The opinions expressed herein are based on Global Alpha’s analysis as at the date of this report, and any opinions, projections or estimates may be changed without notice. Global Alpha, its affiliates, directors, officers and employees may sell or hold a position in securities of a company(ies) mentioned herein. The particulars contained herein were obtained from sources, which Global believes to be reliable

Is there a bubble brewing somewhere else?

SPAC-tacular – There is an increase in special-purpose acquisition companies (SPAC), which are shell companies that raise money through initial public offerings (IPO) to acquire a private company, which then merges with the SPAC and becomes public.

To put in perspective, in 2014, SPACs raised $1.8 billion in US IPOs, based on the data from SPAC Research. In 2021, SPAC IPO have already raised $16 billion compared to $4 billion raised across nine traditional IPOs in the first three weeks in 2021. In 2019, SPACs represented 59% of total US IPO capital raising $76 billion in equity proceeds. The movement of billions of dollars in SPAC may highlight people’s real fear of missing out (FOMO), by jumping on the bandwagon.

Over The Counter (OTC) – It should come as no surprise that the lightly regulated OTC market is not immune to day trading effects. As penny stocks are back in vogue, over one trillion shares have changed hands on the OTC market. Many penny stocks have seen trading volume in billions of shares.

Will history repeat itself?

At the moment, euphoria has set in and everyone is having a good time, but not thinking of the consequences of excessive indulgence.

Tech Bubble – The environment today is similar to what investors saw before the tech bubble in 2000. Back then chat rooms were used by day traders as a source of ideas. Unprofitable company stock prices skyrocketed, as fundamentals did not matter. A new breed of amateur day traders poured their life savings into companies they knew very little about. Stock markets became the world’s largest casinos. When the music stopped, many companies went bankrupt and many retail investors lost everything.

The great financial crisis of 2008 – Back then home prices were expected to only appreciate. So individuals started buying houses they could not afford by leveraging themselves with freely available credit. We are seeing a similar phenomenon with the “David and Goliath” effect. Many retail investors think stock prices will continue going up forever. However, over the long run, stock prices are driven by fundamentals not speculation.

Unsurprisingly, many retail investors do not even know what they are buying. For example, an Australian company called GME Resources with the stock ticker GME (same as GameStop) jumped up 60% as its volume increased by 2,000% driven by retail investors who thought they were buying the real GameStop.

This report is provided solely for informational purposes and nothing in this document constitutes an offer or a solicitation of an offer to purchase any security. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not constitute a representation that any investment strategy is suitable or appropriate to a recipient’s individual circumstances. Global Alpha Capital Management Ltd. (Global Alpha) in no case directly or implicitly guarantees the future value of securities mentioned in this document. The opinions expressed herein are based on Global Alpha’s analysis as at the date of this report, and any opinions, projections or estimates may be changed without notice. Global Alpha, its affiliates, directors, officers and employees may sell or hold a position in securities of a company(ies) mentioned herein. The particulars contained herein were obtained from sources, which Global believes to be reliable

Portfolio Impact

While every media channel is overly focused on GameStop, the reality is the market cap is a very small percentage of the total US market capitalization. Could GameStop be the canary in the coal mine?

Many hedge funds are being forced to delever and right size their portfolios. This is leading them to sell higher quality names to cover the shorts, and giving fundamental investors an opportunity to buy quality companies at attractive valuations.

According to Goldman Sachs, there are over 265 SPACS with over $82 billion in equity currently searching for acquisition targets. Combined with leverage this would equate to over $410 billion, or 12% of US merger and acquisition (M&A) volume during the last two years. Corporations and private equity firms are also sitting on trillions of dollars of cash on their balance sheets – an optimal situation for increased M&A activity. Historically, our portfolio has seen a few acquisitions almost every year, and as the M&A market picks up, it is possible that more of our names may get acquired.

Our ability to be highly selective and nimble in our portfolio holdings leaves us well positioned to enter a period of great opportunity for fundamental stock pickers. Our focus on high-quality companies with defensible business models and strong balance sheets should help outperform our small-cap benchmark. As we reflect on the state of markets and the fundamentals of our target companies, we are excited about the current environment and future growth opportunities.