Palm Valley Capital Management reported that its fund gained 1.61% in the third quarter of 2026, a performance that outpaced the S&P SmallCap 600 Index, which fell 7.93%, and the Morningstar Small Cap Total Return Index, which decreased by 5.60%. The firm attributed the positive results largely to positions in staffing companies, noting that Kelly Services, Inc. (NASDAQ: KELYA) was a leading contributor to the fund's return during the period.
In its investor letter, Palm Valley Capital stated that Kelly Services, ManpowerGroup (MAN), and Amdocs (DOX) were the three positions contributing most to the Fund's return. The firm explained that demand for Kelly and Manpower shares rose as investors bet on a turnaround in the staffing industry. According to the letter, this sector has seen activity levels rise in 2026 for the first time in several years. Specific performance metrics cited in the letter included Manpower's constant currency growth of +6% in the second quarter, supported by strong U.S. demand, while Kelly's second-quarter results improved significantly sequentially and exceeded guidance.
As of October 2, 2026, Kelly Services closed at $15.72, resulting in a market capitalization of $568.33 million. The staffing company, headquartered in Troy, Michigan, posted a year-to-date gain of approximately 79.89% during that period. Its stock traded within a 52-week range of $7.98 to $17.75. Despite the fund's positive stance on the staffing sector, Palm Valley Capital noted that small caps underperformed large caps during the quarter, with the S&P 500 nearing its highs.
The investment firm also highlighted broader market conditions in its letter, observing that high volatility in stocks during a rising market is similar to conditions seen during the tech bubble. Palm Valley Capital argued that current trends show a preference for protecting present wealth over ensuring future prosperity, a dynamic it said causes wealth redistribution through rising asset prices. The firm pointed to federal debt exceeding $40 trillion as an example of resources consumed today leading to future obligations, raising questions about wealth distribution over time rather than just current disparities.
Data from Insider Monkey indicates that 18 hedge fund portfolios held Kelly Services at the end of the second quarter, an increase from 15 portfolios in the previous quarter. While acknowledging the potential of Kelly Services as an investment, Insider Monkey stated that it believes certain AI stocks offer greater upside potential and carry less downside risk. The firm did not include Kelly Services on its list of the 40 Most Popular Stocks Among Hedge Funds.
Palm Valley Capital's fund had 75.5% of its assets in Treasury bills as of the reporting period, with equity-only performance recorded at 4.8%. The fund's top five holdings for 2026 are available for download through the firm's investor letter resources.