Our Concentrated Equity Alpha strategy had a challenging fourth quarter. Our results were impacted by company-specific volatility from a few holdings.

Palo Alto Networks (PANW), a long-term core holding and leader in cybersecurity, reported its first-quarter earnings in November. Operational results exceeded analyst expectations and included raised guidance, but the market was expecting better forward guidance. PANW also announced a small acquisition which added to the negative sentiment in November. We remain confident in the company’s strategy and believe cybersecurity demand will continue to accelerate as AI adoption expands.

AECOM (ACM) hosted an investor day in November. Management outlined ambitious medium-term financial targets centered around the use of AI to drive efficiency and profitability. The market reacted skeptically, and the stock retreated from its all-time highs in the days following the event. We increased our position on the weakness as we believe management can execute its stated goals.

While we maintain meaningful exposure to technology, our portfolio has a greater weighting toward software companies, which underperformed other areas such as semiconductors and capital equipment in the back half of 2025. ServiceNow (NOW), a leading provider of workflow software to major enterprises, came under pressure after announcing an acquisition late in the year.

Cumulatively, these market movements weighed on fourth-quarter results. We maintain strong conviction in these businesses and our investments. Looking ahead, our responsibility is clear: we must deliver for our clients in 2026. We remain positioned around several long-term themes that we believe will be increasingly rewarded by markets, including cybersecurity, aerospace, robotic surgery, and the continued explosion of data.

While much of the value in the AI revolution thus far has gone to those powering AI, such as chip manufacturers and large language model providers, we expect value creation to increasingly shift toward companies that are utilizing AI to drive tangible business outcomes. Hundreds of billions of dollars have been invested in AI research and development, and there must be real value-add use cases to justify this massive investment. We believe markets will ultimately reward companies who can deploy AI to accelerate revenue growth, improve profitability, or both.

Separately, our Large Cap Yield strategy continues to provide equity exposure through high-quality, blue-chip businesses while generating consistent income. The strategy currently offers a dividend yield of approximately 1.9%.

Our Corporate Bond strategy remains well positioned. The portfolio is fully invested and conservatively structured, with a duration of approximately 2.8 years and an average yield to maturity of 4.47%. With credit spreads remaining tight and the yield curve relatively flat, we are being judicious with new capital and maintaining a focus on quality.

Within our Municipal Bond strategy, we continue to search for high-quality New York municipal bonds yielding above 4%, though opportunities remain limited. Similarly, while we actively monitor the preferred equity market, attractive entry points remain scarce. Both strategies remain disciplined and opportunistic by design, deploying capital only when our criteria are met.

Finally, the private REIT offering which we distribute continues to perform well. The underlying real estate portfolio remains diversified and cash-flow generative. While transaction activity remains below historical levels, we expect deal flow to improve due to lower rates as we move further into 2026.

The economy enters 2026 at a crossroads. Strong GDP growth in 2025 is now intersecting with a cooling labor market and a lower-income consumer that remains strained after years of elevated inflation. While recent headlines have focused on softening employment data, we see encouraging signs beneath the surface in business confidence that support our constructive outlook for the year ahead.

The ISM Services PMI, a proxy for large corporate sentiment, reached its highest level of the year in December, and small business confidence metrics have shown sequential gains as well. We believe this improvement reflects diminishing uncertainty around taxes and tariffs. Increased confidence provides a foundation for corporations to invest more willingly, helping stabilize the labor market and support continued consumer spending.

From a market perspective, valuations remain elevated. The S&P 500 trades at approximately 22x earnings, above long-term averages. Less appreciated, however, is that the average stock trades closer to 17x earnings, only modestly above its long-term average. In other words, valuation risk is concentrated.

Coupled with the likelihood of periodic market pullbacks, particularly given ongoing geopolitical uncertainty, we believe 2026 will present attractive opportunities for disciplined investors. Market declines of 5% occur nearly every year, and 10% corrections historically occur roughly once every two years.

Entering the year, we trimmed several positions where valuations had become extended and raised cash accordingly. This provides flexibility to deploy capital opportunistically moving forward.

We are grateful for the trust you place in us and look forward to serving you in the year ahead.

Sincerely,
Rick Ryskalczyk, CFA
Managing Partner, Portfolio Manager

Disclosure: This newsletter is provided for informational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security or investment product. The views expressed are those of Sandhill Investment Management (“Sandhill”) as of the date of publication and are subject to change without notice. References to market conditions, economic trends, securities, or investment strategies are for illustrative purposes only and do not represent a guarantee of future results. Forward-looking statements reflect current expectations and assumptions and are inherently uncertain; actual results may differ materially due to market, economic, geopolitical, and other factors. Sandhill Investment Management is a registered investment adviser with the U.S. Securities and Exchange Commission and is independently owned and operated. Registration does not imply a certain level of skill or training. The Concentrated Equity Alpha Strategy is an all-cap core equity strategy that may invest in large-, mid-, and small-capitalization U.S. common stocks, American Depositary Receipts (A.D.R.s), domestic exchange-traded funds (ETFs), sector ETFs, and cash. The Large Cap Yield Strategy focuses primarily on large-capitalization U.S. equities, A.D.R.s, and ETFs. The Corporate Bond Strategy invests primarily in individual corporate bonds generally rated single-B to single-A, with typical maturities ranging from approximately three to nine years, as well as cash and cash equivalents. Portfolio holdings, allocations, and characteristics are subject to change and may differ across client accounts. Any market or index references (including the S&P 500 Index) are provided for general informational purposes only. Indices are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is not indicative of future results.

Private REIT Disclosure: References to private real estate investments are provided for informational purposes only. Non-traded private REITs are offered solely to investors who qualify as accredited investors under applicable securities laws. These investments are illiquid, involve a high degree of risk, and may require investors to hold their investment for an extended or indefinite period. Distributions, if any, are not guaranteed and may include a return of capital. Investors should carefully consider their financial circumstances and consult with their financial and tax advisors before investing.

All investments involve risk, including the potential loss of principal. For additional information or full strategy disclosures, please contact Sandhill Investment Management at 716-852-0279.