Dear Partners and Friends:
The major indices followed a strong second quarter with a strong third quarter. Smaller stocks performed the best in the quarter with the Russell Microcap rising 17.0% and the Russell 2000 increasing 12.4%, while the DJIA rose only 5.6%. The NASDAQ and S&P500 rose 11.2% and 8.2%, respectively in Q3. Cedar Creek was up 9.9% in the third quarter, net of fees and expenses. Year to date, Cedar Creek was up 26.5%, outperforming all the major indices we track. 1
While Cedar Creek Partners focuses primarily on microcap stocks, and over-the-counter stocks in particular, we compare our returns against larger indices as well since we believe we need to outperform the most prominent passive benchmarks over time in order to justify our existence.
Cedar Creek’s average annual return over our 19 ¾ year history is 14.80%, net of fees and expenses, which compares favorably to all the indices we compare against. Cumulative returns since inception for Cedar Creek were 1,418.1%, net of fees and expenses.
Fund Holdings are at Incredibly Attractive Prices
On the whole, as of the end of September 2025, the fund’s holdings were trading at 7.7 times our estimate of earnings for the coming year, and 6.2 times expected earnings net of cash at the respective businesses. 2 As I write this, the ratios are now 6.8 times our earnings estimate and 5.2 times our estimates net of cash. Trailing earnings multiple was 12.4 times as of September 30 and is 10.6 today. Weighted price-to-book was 1.2. As I write this it is 0.9. Dividend yield was 1.5% as of September 30. Weighted expected return on equity as of September 30, 2025, was 15.4%. (note – in most of the fund’s investments, we are earnings focused and not book value or dividend yield focused.)
Cash Levels and Fund Repositioning
We started the quarter with cash levels at 3% and ended the quarter at 17% largely due to the sale of PharmChem (PCHM) at the buyout price of $3.75 per share in September and closing out our position in Citizens Bancshares (OTCPK:CZBS) in July. We decided to sell our shares back to Citizens to allocate to what we felt were better opportunities. Citizens is cheap with a price-to-earnings multiple of roughly seven and certainly trades well below adjusted book value if we assume the ECIP preferred can be repurchased at 28% of face value. It has been more than three years since receiving the funds and Citizens and most other ECIP recipient banks have done little. We had expected if internal growth was not possible that the funds would be used for acquisitions, which has yet to be the case. We still believe Citizens has an incredible opportunity to grow and better serve their customer base and shareholders; however they seem too cautious in our opinion. The fund made 2-3x its investment and determined that the best course of action was to move on. Most of the proceeds were used to increase our position in Phi Group (OTCPK:PHIG) in the $27-$28 price range.
In September we received the proceeds from the PharmChem sale. We have been busy putting those funds to work. One area we particularly like is smaller community banks. We have found a number trading at 5-6 times our forward earnings estimates. We are still accumulating shares so we cannot give any specific names. We can say that they are quite similar to Skyline Bankshares (OTCQX:SLBK) which we profiled in our Q1 letter, and still own. Small community bank where earnings are growing and valuation is extremely low. Then, Skyline was at $12.50 per share resulting in a market cap of just $70 million. A recent merger hid true earnings. Adjusting for merger related expense put Q4 2024 earnings at $0.61 per share or $2.45 annualized. We thought additional cost savings might be possible but at just over five times earnings, the thesis didn’t require it. Dividend yield was near 4%. We thought it should trade closer to $25, which would be just ten times earnings. Fast forward six months, earnings are likely to be $0.70 per share in Q3 plus some intangible costs resulting in cash earnings of $0.74 per share, or an annualized run rate of $2.96 per share. The stock has climbed to $17.25 per share but the price-to-earnings ratio is still under six.
Expert Market Exposure
Our exposure to stocks trading in the expert market increased to 41% of the fund. Expert market stocks are companies impacted by SEC Rule 15c2-11. For those unfamiliar, the rule prevents brokers from not only displaying quotes for non-reporting companies but also restricts transactions for retail customers to selling only. Institutional accounts, depending on the broker, are not subject to the buying restriction. Them’s the rules.
There are a wide range of differences among “non-reporting” companies. Some are completely dark – meaning they do not communicate any financial results to shareholders (unless forced to under law). Others update quarterly or annually on their website, sometimes behind a password login. Others mail annual results out to shareholders, or just shareholders of record, but do not post them publicly.
Five positions make up about 87% of the fund’s expert market exposure – Propel Media (OTC:PROM) is about 16% of the fund, Phi Group is 8% of the fund, First IC (OTC:FIEB) is 6%, PD-Rx Pharmaceuticals (OTC:PDRX) and Pacific Coast Oil Trust (OTC:ROYTL) are each roughly 3% of the fund.
Propel Media agreed to be purchased by Vitruvian Partners for $1.451 per share. Subsequent to quarter end we received the proceeds. There is the possibility of a further payment due to some funds in escrow. The fund’s valuation of Propel increased from $0.90 per share to $1.451 in the quarter. While the overall return on the investment was roughly six times what we invested, we had hoped for more. The deal apparently involved a lot of bonus payments to management and adjustments related to debt and working capital that took the topline number down significantly.
As we noted in our last two letters, First IC is being acquired by MetroCity Bankshares (MCBS) for cash and stock. As of July 15, the deal has received all necessary shareholder and regulatory approvals. According to MetroCity, the deal is expected to close early in the fourth quarter.
As noted earlier, we significantly increased our position in PHI Group during the quarter. As of today, it is nearly an 8% position. We think it is worth two to three times the most recent trading price. PHI Group is a leading provider of helicopter flight services for the global oil and gas exploration and production industry and the air medical industry. The Company emerged from bankruptcy protection in September 2019. The bankruptcy was primarily due to excessive debt rather than poor financial performance. PHI has subsequently focused on improving its margins and prioritizing a conservative balance sheet. The Company had filed an S-1 registration statement but withdrew it in May of this year.
Performance Attribution
Last quarter we noted that we currently think of the fund as having three categories: expert market stocks, control positions (where the fund manager is on the board and can have greater influence over decision making), and generally undervalued securities.
Most of the fund’s performance in the third quarter was due to the increase in the valuation of our expert market positions. They increased 26% in aggregate in the quarter, primarily due to Propel Media and Phi Group. Our control stocks increased in value by just over 4% in the third quarter, while our generally undervalued securities increased 7%.
Update on Our Control Positions
As we noted above, by control, we mean that the fund manager is on the Board or in a position to significantly influence decision making, not that he has total control and gets what he wants. Both Solitron and PharmChem have/had strong independent boards, which is the way it should be at all companies.
PharmChem – As noted above, the sale of PharmChem closed during the third quarter. The fund was the largest owner, at 33% of outstanding shares, and I served as Chairman of the Board. I took over as Chairman when an investor of the fund contributed his shares as a contribution-in-kind in August 2023 with a basis of $2.85 per share. The fund received a $0.25 per share dividend in October 2024. With a cashout price of $3.75 per share buyout price, total gross return over two years was approximately 40%. It leaves the fund with only one control position.
Solitron Devices (OTCPK:SODI) – The bid price for shares increased from $15.75 per share to $16.40 per share during the third quarter. As a reminder, the fund manager is CEO and a board member of Solitron. The fund owns 11.6% of Solitron’s outstanding shares and the fund manager owns 2.5% personally.
While reported earnings have been soft the last few quarters due to lower revenues owing to timing of receipt of orders, Solitron started seeing a material uptick in orders beginning in the November 2024 quarter. In the fiscal third quarter ending November 30, 2024, bookings were $8.0 million in the quarter, versus sales of $3.4 million. That quarter included a large order for HIMARS (High Mobility Artillery Rocket System) components from L3Harris (LHX) – Solitron’s second largest defense customer. In the fiscal fourth quarter ending February 28, 2025, Solitron did even better. Bookings in the February 2025 quarter were $8.9 million versus sales of $3.1 million, and included over $5 million from Solitron’s largest defense customer, RTX (formerly Raytheon (RTX)) for AMRAAM (Advanced Medium-Range Air-to-Air Missile) components. In the May and August quarters bookings exceeded sales despite no orders related to HIMARS or AMRAAM. Solitron expects the next AMRAAM order to be awarded soon.
Update on Other Fund Holdings
ENDI Corp (OTCQB:ENDI)— We profiled ENDI in our 2024 first quarter letter when the share price was around $6.50 per share. The share price rose during the third quarter from $15.65 per share to $17.55 per share. ENDI owns CrossingBridge Advisors which manages fixed income mutual funds and a few managed accounts. Assets under management (‘AUM’) for CrossingBridge grew over 30% in 2024, from $2.6 billion at the beginning of 2024, adjusted for the acquisition of the RiverPark Short Term High Yield Fund (RPHIX), to $3.4 billion at the end of 2024. According to their website, as of the end of September 2025, AUM was in excess of $4.2 billion, an increase of over 22% in the first nine months of 2025. With short term rates falling, we think investors may move into the short-term bond category to gain higher yield than money markets.
ENDI’s reported operating margins do not reflect what is happening at the company. In the September 2024, December 2024 and March 2025 quarters, operating margins were 32%, but that is misleading. ENDI incurs significant amortization charges related to its acquisition of CrossingBridge and other investment management contracts. Adjusted operating margin was 46 to 48% for those quarters. In the June 2025 quarter there were additional transaction expenses which resulted in reported operating margin of only 4%. Adjusting for the non-cash amortization and the one-time transaction fees, operating margin would have been 49%. While we don’t normally like adjusted EBITDA, the company’s reported number in the second quarter shows the continued improvement in the business as it rose from $2.2 million in Q1 to $3.0 million in Q2.
During the second quarter ENDI announced a cash investment in CrossingBridge in exchange for 25% membership interest. The price was $25.9 million. The fund, and other entities affiliated with the fund manager, including Solitron, participated in the transaction. We think it is a win-win deal. It shows the value of CrossingBridge as of the end of 2024 and provides additional capital to good capital allocators to grow assets under management. We discussed it in our second quarter letter.
Our fair value estimate just keeps rising as the company continues to execute (which is what you ideally want in all your equity investments). We wrote in our 2024 year-end letter that, based on their recent growth rate, a valuation of 12 to 15 times cash earnings plus net cash seems more reasonable. Using 12 to 15 times the current run rate of cash earnings plus net cash would result in a value between $21.85 and $26.50 per share versus the current $17.50 share price. 3 The sale of 25% of CrossingBridge increased net cash to $43 million, or $36 million net of the non-controlling interest portion at CrossingBridge, which equates to $6.75 per share using the smaller figure. This provides some downside protection while also giving management funds to use for accretive acquisitions.
Room for New Members and/or Additional Funds
We continue to have more attractive ideas than capital. Thus, there is plenty of room for existing partners to increase their investment and for others to join. Please consider referring friends of yours who may be potential new investors. The basic requirements are 1) that each invests a minimum of $100,000 and 2) that new members are accredited (high net worth) individuals. Subsequent investments must be for a minimum of $10,000.
If this letter was passed on to you and you would like to be added to our monthly distribution list, please email me at the email address below. You can find more letters at eriksencapitalmgmt.com/investor-letters . Should you have any questions regarding the fund, please don’t hesitate to call or email.
Sincerely,
Tim Eriksen
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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