*Note that there are material limitations inherent in any comparison between RAM Smid strategy and the R2500 Value Total Return Index. The R2500 Value Total Return Index is unmanaged, and you cannot invest directly in an index. The RAM portfolio is actively managed and holds concentrated investments in the equity securities of small-mid capitalized companies. Please see important disclosures at the end of this letter.

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Tariff Tantrum!

 

​The dominant theme impacting the markets in 1Q25 was the uncertainty regarding the potential negative economic impacts of Trump’s tariffs. These fears were amplified on April 2nd, as Trump announced wide-ranging tariffs to take effect on April 5th and April 9th.

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While we think Trump is serious in correcting some of the imbalances with U.S trade partners, we disagree with the pundits who think that Trump will stay resolute in his stance and not look for deals. In our view, Trump views himself as a deal maker and is very concerned with ratings, and the market’s sell-off after the announcement has provided him with a poor ratings feedback loop.

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A contributing factor to Trumps’s tariffs stance is what we see as a pressing need to reduce the nation’s budget deficit and substantially decelerate the growth of the national debt. We see Trumps’s tariffs as one of the two methods this administration is using to attempt to reign in the budget deficit. There are three direct ways to reduce the U.S. budget deficit. First, raise taxes, and we don’t think this is a path Trump will pursue. Second, cut costs – and this in our view what is behind the efforts of DOGE. Third, grow GDP. We think Trump sees tariffs as a way to spur domestic production, either through relocating industries back to the U.S., or by removing foreign tariffs and thus potentially increasing exports. Viewed through this lens, we believe that the Trump administration is unlikely to back off its tariff related goals, but the eventual outcome of what tariffs remain in place remains uncertain for now.

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Self-Inflicted Market Pain from a Strong Starting Point

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In comments April 4th, Fed Chair Powell noted that despite the uncertainty the tariffs have created, the economy, as of now, is in solid shape. The Fed’s dot plot estimate for 2025, released March 19th, was for GDP growth of 1.7%. We note that the Atlanta Fed’s 1Q25 GDPnow estimate of -3.67%, released April 1st is biased downward by total net imports, which are negative to GDP, estimated to be -4.75% (non-productive gold imports are -2.3% of this decline). We think that some of this negative import pressure, excluding gold, was pre-buying ahead of tariffs, which should be positive to GDP in future quarters. (5,6)

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Other factors potentially supporting a soft-landing scenario remain intact: nonfarm payrolls continued to rise in March, up 228K, and wages continue to rise, up 3.8%. Also, the Fed’s preferred inflation barometer, the PCE, came in at 2.5% for February, flat with January and down 0.1% from December, a signal that inflation, while more persistent than the Fed prefers, is not accelerating. (7,8)

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While the Fed dot plot on March 19th showed a potential 25-50 basis points cuts in Fed funds in 2025, we would take Powell at his word that he will wait for clarity on how the tariffs impact inflation and economic growth. Trump’s tariffs, in our view, represent a self-inflicted shock to the economy, vs. systematic or exogenous pressures that existed in the 2007-2009 financial recession and in the 2020 Covid sell off. If Trump backs off his high reciprocal tariff levels and seeks deals to improve trade, we think the economic impact of tariffs could be blunted vs. worst case market fears of a recession.

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How to Deal with Tariffs? Lengthen Your Time Horizon

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We encourage investors to lengthen their time horizon and remain calm in the face of tariffs. In our view, ex-tariff risk, the outlook for the economy in 2025 remains healthy. We recommend investors focus on companies that fit our Rewey investment philosophy: 1) have a strong balance sheet and the financial strength to help them ride out tariff or other external shocks that could emerge, 2) have the ability to growth sales, earnings and free cash flow over time – we use a 2-3 year investment horizon, and 3) focus on valuation opportunities with strong upside and manageable downside risk.

 

Tariffs, and the fear of tariffs, are likely creating attractive valuation opportunities. We are focusing on companies with a strong and visible likelihood of positively compounding value over the next 2-3 years, with an opportunistic eye to use short-term bumps to potentially build positions in companies that should survive and thrive long-after the tariff impact has passed.

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The Rotation Away from High Expectations Continued

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Aside from tariff fears, the other factor that continued in 1Q25 was a rotation away from the high-expectation holdings that dominate the large cap indices. The ‘Magnificient 7’ stocks still dominate the performance of the S&P 500, and as a group fell 15.74% in 1Q25, underperforming both the Nasdaq composite, down 10.26% and the S&P 500 down 4.28%. This rotation is clearly seen, in our view, in the performance of the equal weight S&P 500 (the SPW) down 0.61% in 1Q25. (9,10)

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While we do believe that many of the investment themes regarding this group of mega-cap stocks are compelling and enduring, including the development of artificial intelligence, we see the valuations of this group as stretched on high expectations. We think it could take a while for this group to grow into their current valuation levels. Further, the concentration of this group detracts from a core thesis of ETF investing, i.e. diversifying your investment over the broad universe of stocks. Thus, we think investors are likely to continue to rotate and rebalance their holdings away from this group.

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Neglect in Small/Mid-Cap

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While many market analysts point out risks in investing in small cap ETFs, mainly due to the large number of companies with negative earnings and cash flow, we assert that one of the main benefits of active management is the ability to avoid these through stock selection. Of the 1796 companies in the Russell 2500 value index, there are approximately 672 companies with negative income for 2024. Cutting through this neglect, we point out that we have no intention of owning the index but see fertile hunting ground in the companies we think can generate strong returns over the next 2-3 years. (11)

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Portfolio Highlights

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At the end of 1Q25, seven of our composite holdings had net cash on the balance sheet and nine others had net debt to EBITDA less than or equal to 1.5x. Eighteen holdings were trading at less than 1.5x book value. At quarter-end, our RAM Smid cash level averaged 5.3%, but was closer 9.3% when considering Patterson Co.s has agreed to be acquired for cash. This level of cash is higher than normal for RAM, but we have been cautious about deploying capital in front of the expected tariff announcements. That said, we are seeing new opportunities to invest, we added four new and sold five holdings in 1Q25, and we believe we have ample opportunity to increase weightings in existing portfolio positions. (12)

 

Aginco Eagle (AEM)

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AEM was our strongest percentage gainer in the quarter, although we sold the position to zero, half in late January and the balance in mid-March. AEM is a good example of our philosophy of not selling a stock just because its market cap grows out of our Smid range, as it ended 1Q25 at a $53 bil. market cap. Initially, we acquired Kirkland Lake, which was subsequently acquired by AEM for stock. We held the position, and the combined entity posted strong returns for RAM. We sold our position as it rose to our price target on strong gold pricing, and on our view that the medium-term production plateau forecast by the company would likely leave the company as a just a pure play on gold prices. We continue to own Wesdome Gold Mines (WDOFF) which is forecast to post strong production growth and cost reductions and is located in the same Abitibi gold belt sweet spot as AEM’s core operations. (13)

 

Zynex (ZYXI)

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Zynex was our worst performer in the quarter, as the company announced that its top insurance payor was pausing reimbursement while it reviewed the company’s shipping practices for consumable supplies. The company continues to ship consumables as requested during the review and has stated they are compliant with the relationship post an audit 2-years ago. While we did trim our position on this news, the leading pillar of our investment case, the introduction of the company’s NiCO pulse laser oximeter in late 2025, remains in-tact. This pulse oximeter uses a laser to measure blood oxygen levels during surgery and is more accurate than current light-based estimated readings which are obstructed by pigment levels in skin. Leading reviews of the NiCO device have been positive, and we think it could become the standard of care. (14)

 

Duocommun (DCO)

 

We see a compelling investment case in Ducommun (DCO), a military and commercial aerospace supplier that fits one of our strongest current investment themes. We believe the aerospace and defense sector could see revenue growth regardless of a potential tariff impact or economic slowdown. On the defense side, the U.S. needs to rebuild the stockpiles sent to support the Ukraine and Israel, replace equipment left in Afghanistan and re-tool their equipment for 21st century threats like drone and electronic warfare. We believe that procurement should be little impacted by DOGE cuts and note the recently passed continuing budget resolution and the prospective 2026 budget under consideration in the Senate both show a rise in defense expenditures. European NATO members are also increasing their defense procurement budgets. On the commercial side, both Boeing and Airbus have struggled to deliver planes despite very strong demand and backlogs. We think that production rates at both companies should continue to improve off the bottom, driving higher sales and earnings results through their supplier base.

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DCO, a 175-year-old company with a $859M market cap, is relatively unknown provider in the military, space, and commercial aircraft industries. In 2024, 54% of its revenue came from military and space, 42% from commercial aerospace, and the rest from industrial. With diverse products like cabling, lighting, and motion control, we see DCO as a good proxy for military and commercial spending. RTX Corp. (Raytheon) is its largest customer, and the top 10 customers comprise 60% of revenues.

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The company’s strong financial position should support organic growth and acquisitions. At the end of 2024, net debt was $205.2M, with an EBITDA leverage ratio of 1.76x. A fixed-rate interest hedge on $150M this debt at 1.7% through 2031 is hidden asset in the capital structure. We expect free cash flow to more than double year-over-year to $48.4M in 2025, driven by revenue growth and improved working capital efficiency. Over the past five years, book value growth has compounded at an impressive 18.4% CAGR, with a year-end per share value of $45.21.

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We see a visible growth path for revenue, earnings and cash flow. DCO’s military and space backlog rose $100 million to $625 million in 2024, with a notable win from RTX for Tomahawk missiles. DCO also posted a notable European NATO order in early in 2025 from Bayer-Chemie of Germany for PAC2 electronic cable assemblies. We believe DCO’s military sales cadence should support strong revenue growth over the next few years. Moreover, we see this revenue growth rate accelerating as Boeing and Airbus improve their production cadence and deliver on their multi-year backlogs. DCO has won significant content on the Boeing 737 and 787, as well as the Airbus A220 and A320 family of aircraft.

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In its 4Q25 earnings call, Ducommun reiterated its Vision 2027 goals of $950 million to $1 billion in revenue and an adjusted EBITDA margin of 18%, representing roughly 24% revenue growth and 50.6% EBITDA growth, at the mid-point, from 2024. In addition to revenue leverage, DCO sees margin improvement driven by an increase in engineered product mix and cost reductions, including closing two high-cost facilities in CA and AK that should save roughly $10 million. 

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We think the end of quarter sell-off in DCO shares has created a compelling entry point in Ducommun shares. Shares ended the quarter at $58.03, down 17.0% from their January 21st closing price of $69.90. We have set our near-term AFV price target for DCO at $75.50, up 30% from its 1Q25 close. Given the long-term visibility we see in revenue, earnings, margin and free cash flow growth, we think DCO’s is a good candidate for a multi-year compounder, and we are optimistic that our AFV target could rise if the company delivers on its Vision 2027 targets and beyond. (15)

 

 

Looking Forward

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We think the potential impact of tariffs is likely be a source of market volatility through at least the first half of 2025, both in the potential negative inflation impact and the fear and uncertainty they create. Due to this uncertainty, we encourage investors to lengthen their timelines but also to keep an opportunistic eye out for potentially compelling investment opportunities.

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Our investment approach prioritizes financial strength to withstand volatility, paired with a clear plan for value creation over the next 2–3 years. A robust investment case and a long-term view creates time as a powerful ally for value creation and provides a roadmap for purchasing securities at potentially attractive long-term valuation levels.

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We appreciate your trust and support. As always, please feel free to contact us to discuss our commentary or to share your thoughts.

Chip

 

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____________________________________________________________________________________________________________

1. Past performance is no guarantee of future results. The RAM SMID Value Composite schedule of net investment performance of Rewey Investment Management LLC (the “Schedule”) represents the activity of separate customer trading accounts managed collectively (collectively the “Accounts”) for the annual and cumulative periods from January 1, 2019 through Mar. 31, 2025.  2022-2024 performance unaudited. Please see full Marcum footnotes for RAM Smid composite 2019-2021 at Microsoft Word - {A44BB912-3141-4B59-AE8E-3D695C6B8BD4} (reweyassetmanagement.com). Performance graphic not to scale. The performance results for the period of 1/1/19-11/8/2021 are from accounts managed by Chip Rewey while affiliated with Advisory Services Network.

2,4,10.

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• The Russell 2500 Value Total Return Index, Russell 3000 Value Total Return Index, Russell 2000 Value Total Return Index, Russell 2500 Growth Index, the S&P 500 Total Return Index and the S&P 500 equal weighted index market cap information and the NASDAQ composite index performance levels are sourced from Bloomberg. Each of these indices are an unmanaged group of securities considered to be representative of the small and mid-cap stock market, and the large-cap stock market in general, respectively. Indexes are unmanaged and do not incur management fees, costs, or expenses.

• The Russell 2500 Value -Dynamic Index® measures the performance of the small to mid-cap value-dynamic segment of the US equity universe. It includes Russell 2500 Index companies with relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2 year) growth and lower sales per share historical growth (5 years) and relatively less stable business conditions that are more sensitive to economic cycles, credit cycles, and market volatility based on their stability variables.

• S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. 

• The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500.

• It is not possible to invest directly in an index. There are material differences between the RAM SMID Value Composite portfolio and the indexes used for comparison purposes. The RAM portfolio is actively managed and holds concentrated investments in the equity securities of small-mid capitalized companies. An index is generally designed to illustrate the performance of a specific asset class (i.e. small cap) but is not actively managed and the index performance does not reflect the impact of advisory fees and other investment costs.

• Company level member data for the S&P 500 Index and Russell 2500 Value index are sourced from Bloomberg.

 

3,12. All portfolio discussions are based off our model RAM Smid portfolio of separately managed accounts. Company financial estimates sourced from Rewey Asset Management proprietary analysis, and Bloomberg BEST company estimates. Historical pricing and company financial data sourced from company 10Q and 10K filings, and Bloomberg. Individual portfolios may hold slight deviations in position sizes, cash levels and positions held. Portfolio statistics discussed are from December 31, 2024. These statistics will likely change over time. Debt/EBITDA ratio comments exclude financial companies due to non-comparability.

5. Atlanta GDP now forecast GDPNow - Federal Reserve Bank of Atlanta

6. Federal Reserve Board and Federal Open Market Committee release economic projections from the March 18-19 FOMC meeting Federal Reserve Board - Federal Reserve Board and Federal Open Market Committee release economic projections from the March 18-19 FOMC meeting.

7. U.S. Non-Farm Payrolls sourced from the Bureau of Labor Statistics through Bloomberg.

8. U.S. PCE (Personal Consumption Expenditures) sourced from the Bureau of Economic Analysis through Bloomberg.

9. Magnificent 7 1Q25 performance information is sourced from the Roundhill Magnificent 7 ETF Index through Bloomberg.

11. Company level member data for the Russell 2500 Value index and profitability data is sourced from Bloomberg and Rewey Asset Management proprietary analysis.

13. Agnico Eagle Mines Ltd. (AEM) and Wesdome Gold Mines (WDOFF) quarterly performance information sourced from Bloomberg. Other AEM and WDOFF commentary sourced from company earnings releases, 10Q, 10K filings, company presentations, RAM discussions with management, Bloomberg and Rewey Asset Management proprietary analysis.

14. Zynex Inc. (ZYXI) quarterly performance information sourced from Bloomberg. Other ZYXI commentary sourced from company earnings releases, 10Q, 10K filings, company presentations, RAM discussions with management, Bloomberg and Rewey Asset Management proprietary analysis.

15. All financial ratios, statistics, and projections discussed in the Duocommun (DCO) commentary are sourced from DCO 10K, Proxy, 10Q filings, company press releases, company public conference calls and webcasts, company slide presentations, RAM discussions with management, Bloomberg, DCO company webpage and Rewey Asset Management proprietary financial analysis and Rewey Asset Management industry due diligence. Historical share price information sourced from Bloomberg.

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results. These views/opinions are subject to change without notice. No one can predict or project performance, and forward-looking statements are not guarantees. Past performance is not indicative of future results. Investing involves risk, including the loss of principal.

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This material is for informational purposes only and is not a recommendation or advice. Investments and strategies mentioned are not suitable for all investors. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. There is no assurance that any securities discussed herein will remain in the portfolio at the time you receive this report or that the securities sold have not been repurchased. Securities discussed do not represent the entire portfolio and in aggregate may represent only a small percentage of the portfolio’s holdings. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor.

 

Rewey Asset Management is a registered investment advisor in the State of New Jersey