*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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The Bond Market in the Driver’s Seat

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The bond market took center stage in 3Q26, delivering investors a double-barreled hit of a 25-basis point hike in Fed Funds on Sept. 16th and a whopping upward move in the yield on the 10-year treasury to 5.25% vs. 4.46% on June 30th and 4.167% on Dec. 31, 2025. (3)

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We believe the increase in the yield on the 10-year was the largest factor driving the weakness in the broad equity markets in 3Q26. While the return of the S&P 500 of 2.3% for 3Q26 might lead some to conclude that the equity markets shook-off the moves in the bond market, we note that the Equal Weight S&P 500 index was down 1.87% in 3Q26, as just 4 mega-cap stocks, which cumulatively account for 23.76% of the index weighting, drove the index move, Microsoft up 39%, Meta up 29%, Apple up 16.6% and Nvidia up 15.5%. (4,5)

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Treasury Yields: A Casualty of the Iran Conflict

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In our 2Q letter, we noted that we believed the military conflict with Iran represented the largest risk to the equity markets in 2H26. As the conflict dragged on in 3Q26, the rise in oil prices, in our view, was the largest factor driving up yields. WTI Oil prices rose to $90.42 in 3Q26, up from $69.50 on June 30th, with prices spiking to a high of $105.83 on September 15th (the day before the Fed hike). (6)

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As the prospect of a quick resolution faded, investors priced in the risk of oil price inflation spilling over into core goods and services. While the Fed’s preferred measure of inflation, Core PCE, excludes food and energy prices, in our view, this measure would capture a longer-term impact of higher oil prices across the supply chain from transportation to finished goods. We believe the Fed wanted to proactively move to prevent oil inflation from derailing future PCE declines.

The Impact of Data Center Spending

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The final reading on 2Q26 GDP growth, released September 30th, rose to 2.2% vs. the prior estimate of 1.5%. Moreover, the Atlanta Fed GDPNow forecast currently estimates 3Q26 GDP growth of 3.73%.

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We believe a significant portion of this growth is from the boom in data center construction. S&P Global estimates that just the five largest hyperscalers (Microsoft, Alphabet, Amazon, Meta, and Oracle) will spend over $750 billion on data center construction in 2026, roughly equivalent to 2.3% of GDP. Furthermore, these spending levels are forecast to soar to a trillion dollars per year through 2030. While we think this spending is clearly the largest driver of GDP growth currently, we also believe that this spending will not be cooled by higher oil prices or higher interest rates. (7,8)

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The Hyperscaler Borrowing Boom

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Through August 10th, 2026, S&P estimates that these five hyperscalers have raised $220 billion in corporate bonds, and further estimates that they will raise over $300 billion in bonds in 2026. We do not believe this spending is creating an over build of capacity. In our view, AI use is accelerating for corporations and individuals, and these hyperscalers all report that they are short on compute. (9,10)

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The Deficit and Hyperscalers are Driving Long-Term Rates

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We have written about the long-term upward pressure on interest rates from the expanding Federal debt. As of August, total federal debt had reached $40.1 trillion, up from $38.5 trillion at year-end. While we believe the ever-increasing funding needs of the Treasury are pushing yields higher, we also see the massive borrowing by the hyperscalers are adding to that pressure. Importantly, we think most of these companies are well positioned to keep borrowing at this pace for years.

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We note that Microsoft is rated AAA, higher than the U.S. government at AA+, while Alphabet, Amazon and Meta are all in the

AA range and only Oracle is BBB-. JPMorgan also notes that these companies have interest coverage of approximately 32x times their debt, versus 11x for the investment grade rated industrial group. JPMorgan also points out that the market is repricing and not rejecting this issuance, with spreads over treasuries for this group rising 30 bps this year. Thus, we expect the hyperscalers to continue to fund their growth, albeit at modestly higher borrowing costs and increasingly in competition with the U.S. government, given their comparable credit ratings. (11,12)

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We Don’t Expect Long-Term Yields to Fall Anytime Soon

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Our bottom line is that we see the inflation shock of both higher oil prices and the booming borrowing of the hyperscalers as pushing up the yields on long-term treasury bonds. Without a resolution of Iran hostilities that leads to lower oil prices and/or a significant slowdown in the growth of the U.S. treasury debt, we don’t expect long-term yields to decline anytime soon.

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Continued Opportunities in Concentrated Active

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It is important to remember that we don’t own the market, and our macro views are applied only to our individual investment cases.

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One of my colleagues made the following remark years ago that still endures today “if you can’t find something to do in the equity market, you are being lazy.” This sentiment is why we pursue a concentrated active approach to investing. We do not need the broader market to cooperate; we can focus on a select few opportunities that can potentially create value regardless of market conditions.

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Examples of where we see opportunities today are oil infrastructure and service – as global oil production and transportation are reshaped due to the Iran conflict; Data Center capital spending - spanning semiconductors, wiring, cooling and even cement; Aerospace and Defense – both commercial production and a rebuilding and reshaping of defense priorities. We also continue to find unique opportunities that do not fit neatly into a thematic category. While macro trends may serve to heighten near-term market volatility, we think our potential universe of over 6000 companies provides a fertile hunting ground for investment opportunities. (13)

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How We Think About AI

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The second pillar of our investment philosophy, the Ability to Grow, acknowledges that companies that are not growing, or that don’t have the potential to grow, are highly likely to melt into value traps. The key for RAM is to identify where growth expectations are too low, yielding room for valuation upside.

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Two Categories of AI Winners? Sellers and Users

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We see two separate categories of companies that are growing value from AI.

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Sellers: We see the sellers of AI capacity growth as beneficiaries of the surging CAPX boom for compute expansion, i.e., Data Centers. The widely discussed boom in CAPX shows no signs of slowing demand. The impact on the economy will likely not be insignificant, as seen in GDP growth estimates.

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Users: We note that behind the surge in revenues for AI model providers are users paying for the models and targeting positive returns from this spending.

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A Productivity Surge Coming?

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One of the lasting benefits of the internet boom was the sustained productivity gains that followed the initial capital spending, as companies integrated the internet into their operations. We believe AI has the potential to drive an even larger and faster wave of productivity gains.

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Over the course of 2026, we have seen an increasing number of companies describe measurable cost savings from integrating AI into their workflows, particularly in financial services and consulting. We expect this trend to accelerate and broaden to most every industry.

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Of course, we are cognizant of the multitude of risks this from new technology and its implementation, and there will certainly be both winners and losers as companies navigate through change. Still, we think the users of AI will likely have a more durable benefit from AI than the CAPX driven spenders.

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Portfolio Highlights

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We added five new positions in 3Q26 and sold two positions. We hold thirty-four positions. At quarter end, the combined weight of our top ten holdings was 39.4%. Cash was 4.63 % of the portfolio. Although we use the Russell 2500 Value Index as our benchmark, our average weighted market cap is much lower at $4.87 bil. vs. $9.44 bil., and closer to the Russell 2000 Value average of $3.48 bil.

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Seven of our composite holdings had net cash on the balance sheet and only our two utility stocks had a debt to EBITDA ratio over 3x. Ten holdings were trading at or less than 1.5x book value. (14,15)

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Wesdome Gold Mines Ltd.

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Wesdome, owned via the ADR WDOFF, was our strongest performer in the quarter, rising 44.4%. Investors responded well to WDOFF’s teach-in meeting where the company detailed their extensive acreage position and high-grade reserve extensions. Our thesis on WDOFF is that its reserves are at least as strong as local peers, and that its extensive land position should be able drive proved reserve life higher for many years. (16)

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Ultra Clean Holdings, Inc. (UCTT)

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Following back-to-back quarters as our top performer, UCTT was our weakest position in 3Q26, falling 42.7%, but still up 214.6% YTD. Shares pulled back with the broader semiconductor/equipment group. We remain positive on UCTT, following a strong 2Q26 and healthy industry metrics. We did trim back our position at higher levels, which gave us room to add at lower prices in 3Q26. (17)

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Mayville Engineering Company (MEC)

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We reestablished a position in Mayville Engineering company in the quarter. MEC is a $385 million market cap company, headquartered in Mayville, WI, providing metal fabricating services, including prototyping, manufacturing, and assembly.

We exited our position in 1Q26 at over $20 per share, as the new debt taken on from the Accu-Fab acquisition pushed the net leverage from the company to 4.4x TTM EBITDA and the outlook for the Class 8 truck cycle, in our view, had deteriorated.

 

However, with the completion of a $100 million stock offering at $20 per share in 2Q26 and the re-acceleration of both the class 8 truck market and the commercial and access markets, combined with a severe price sell-off, down to $15 at quarter end, we now see a compelling valuation opportunity.

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From a Balance Sheet perspective, the secondary allowed Mayville to pay down over $77 million in debt and reduce its leverage to 2.9x. The company indicated it is now should reach its goal of 2.5x by year-end 2026. We see a re-acceleration of Free Cash flow into 2H26, driven by improving revenues and recovering margins. We think investors who were disappointed by margins in 2Q26 overlooked the fact much of this weakness was due to the launch costs of significant new business programs. Indeed, on its 2Q26 call, management raised its 2026 estimates for Revenues and Free Cash flow, as 75% of its business lines appear to be accelerating into cyclical upside.

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We see several avenues of growth for Mayville into 2027 and beyond. First, on its 2Q26 call, MEC reported that its Class 8 truck revenues, 29% of the company total, grew 3.4% and order activity exceeded its expectations. Moreover, ACT research stated that 2H26 industry build slots were sold out and production was expected to accelerate, driven by pre-buy activity ahead of the new fuel standards for 2027, as well as the strengthening of the trucking industry. Second, MEC also reported that both its construction and access markets (14% of revenue) and Other, primarily aluminum extrusion (16% of revenue) are expected to accelerate into 2H26 as well. Last, MEC’s newly acquired data center equipment segment, Accu-Fab, showed strong order growth in 2Q26 with no signs of slowing. Indeed, MEC incurred higher costs to outsource production from this segment to meet customer demand.

 

The outlook for longer term strength is robust. MEC is targeting $50 million capx for the next two years ($40 cash and $10 leases) to meet accelerating demand. This includes $25-$30 for the facility acquired in Georgia, announced October 1st, which adds $50 million to its existing $850 million revenue capacity.

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The severe sell-off in shares in 3Q26, from a high of $37 down to a close of $15, has created an attractive risk vs. reward scenario in our view. While we think the brief spike to $37 was excessive, the current price is 25% below its recent secondary. Moreover, the sell-off is a bit confusing too, as the company beat revenue and earnings estimates and raised guidance on its 2Q26 report.

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As we see the core business as strong and improving, margins accelerating, cash flow improving and a strong outlook for investment led growth, we have set our price target at $22 per share, up over 46% from 3Q’s close. We are using a modest 8x 2027 EV/EBITDA multiple for this target. We would not be surprised if this target were exceeded, as investors gain visibility into the reacceleration of MEC’s business, and note that each multiple point is worth approximately $3.42 per share. (18,19)

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Looking Forward

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While the S&P outperformed smaller cap indices in the quarter, due to a few concentrated positions, we still believe the rotation away from the S&P 500 to broader indices will continue over time.

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While the path to peace with Iran will likely remain bumpy and simmering tensions will likely remain, we think over the next year, which is clearly in our investment horizon, a peace agreement will likely be reached which should lead to lower oil prices and moderating inflation.

 

Regardless of the actual results however, our investment philosophy remains unchanged: we focus on financially strong companies that can withstand periods of volatility and execute on clear value-creation plans over a 2–3 year horizon. Over our 36 years of professional investing, we have come to expect the unexpected. Our disciplined, long-term approach allows time to become an ally and creates opportunities to invest at attractive valuations, and to withstand the economic and geopolitical bumps that are likely to occur.

 

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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Notes:

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 September 30, 2026. 2022-3Q26 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 Data regarding the Russell 2500 Value Total Return Index, Russell 2000 Value Total Return Index, the S&P 500 Index, the S&P 500 Equal Weighted Index, and the Bloomberg Magnificent 7 Total Return Index 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.

• 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.

3. 10-year Treasury yield information sourced from Bloomberg.

5. Stock price information for APPL, Meta, MSFT and NVDA sourced from Bloomberg. 

6. WTI (West Texas Intermediate Crude) prices sourced from Bloomberg.

7. 2026 Quarterly U.S. GDP statistics are sourced from the Bureau of Economic Analysis and Bloomberg.

8. Atlanta Fed GDPNow GDP forecast data sourced from Bloomberg.

9. CreditWeek: Will Rising Capex Test Hyperscalers’ | S&P Global Ratings

10.Hyperscalers: Now also a credit story | J.P. Morgan Asset Management

11. U.S. Total Debt Estimates sourced from CBO 61981-MBR—2026-06 and Bloomberg.

12. Ratings on U.S. debt and debt of AMZN, GOOGL, META, MSFT, ORCL sourced from Bloomberg.

13. Estimated “universe” for RAM Smid sourced from Bloomberg is 6118 companies and represents U.S. domiciled public company common equity securities between $100 million and $18 billion. This list is only an estimate, and RAM Smid can own securities that are larger, smaller or outside the U.S.

14. 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 September 30, 2026. These statistics will likely change over time. Debt/EBITDA ratio comments exclude financial companies due to non-comparability.

15. Information for Russell indices sourced from Russell Fact Sheets at https://research.ftserussell.com/

16. All financial ratios, statistics, and projections discussed in the Wesdome Gold Mines (WDOFF) commentary are sourced from WDOFF company filings, company press releases, company public conference calls and webcasts, company slide presentations, RAM discussions with management, Bloomberg, WDOFF company webpage and Rewey Asset Management proprietary financial analysis and Rewey Asset Management industry due diligence. Historical share price information sourced from Bloomberg.

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

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

19. ACT research information sourced from MEC conference calls and ACT public statements 2026 Trucking Industry Forecast & Market Outlook | ACT Research | ACT Research

 

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 guaranteed. Past performance is not indicative of future results. Investing involves risk, including the loss of principal.

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