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In the first quarter of 2026, O'Keefe Stevens Advisory adopted a cautious investment strategy, emphasizing a defensive stance amidst a challenging market landscape. The S&P 500 experienced its initial negative quarter since the tariff shock of Q1 2025, leading the firm to bolster its cash reserves. This proactive measure involved divesting positions in companies such as Alibaba, Fannie Mae common, BMW, and Mercedes-Benz, while also reducing holdings in Corning and exiting Tri Pointe Homes due to its impending sale. The firm's approach is rooted in a disciplined valuation philosophy, ensuring investments are made only when prices reflect ordinary outcomes for acceptable returns. This quarter also saw the introduction of Baxter International to the portfolio, selected for its attractive valuation and potential for operational improvements. Despite market volatility, including a significant downturn in the software sector, O'Keefe Stevens Advisory remains committed to a process-driven strategy, prioritizing research quality and risk management to navigate an unpredictable economic environment.

O'Keefe Stevens Advisory's Q1 2026 Investment Report: Market Dynamics and Strategic Adjustments

In the initial quarter of 2026, the S&P 500 experienced its first downturn since the tariff-induced shock of Q1 2025, declining by 4.3%, while the Nasdaq Composite fell by 7%. This period also marked a negative turn for the "Magnificent 7" stocks, with Microsoft contributing significantly to the S&P's decline. Amidst this volatility, the equal-weight S&P index surpassed its cap-weighted counterpart by approximately 5%, signaling a shift towards a market favoring discerning stock-pickers. Against this backdrop, O'Keefe Stevens Advisory opted for a more conservative stance, prioritizing defensive positioning.

Reflecting this strategy, O'Keefe Stevens Advisory divested its stakes in Alibaba, Fannie Mae common, BMW, and Mercedes-Benz. The firm also trimmed its holdings in Corning and exited Tri Pointe Homes following the announcement of its sale. These strategic moves allowed the firm to significantly increase its cash reserves. The firm emphasized that its defensive posture is not a bearish market call but a commitment to valuation discipline, avoiding investments where projected returns rely on overly optimistic scenarios.

The elevated cash position carries an opportunity cost, particularly given the 10-year Treasury's yield of 4.38% at quarter-end, compared to the S&P's long-term real return of approximately 7%. However, the firm believes this liquidity provides flexibility and a hedge against market downturns.

Key market concerns included the rising price of oil, which contributes to inflation and poses risks to global supply chains, especially given geopolitical tensions in the Strait of Hormuz. This situation has diminished the likelihood of interest rate cuts and increased the probability of rate hikes, which could ultimately impact housing affordability.

The software sector witnessed a significant decline in Q1, with the S&P Software Index falling by 22.5%. This downturn was driven by a re-evaluation of valuations amidst questions regarding growth sustainability, margin durability, and the true impact of AI spending. O'Keefe Stevens Advisory's minimal direct exposure to software companies largely shielded its portfolios from this correction. The firm noted that the reliance on stock-based compensation within the tech industry could lead to further dilution or talent retention challenges if stock prices remain depressed.

Despite the sector-wide challenges, O'Keefe Stevens Advisory seeks opportunities when market correlations converge, making entire sectors appear undervalued. The firm anticipates continued volatility in tech and software investments but remains open to strategic entry points.

In terms of portfolio performance, Corning (GLW) was a notable winner, with its stock rising by 55.60% following a multi-year agreement with Meta for optical fiber and a raised sales target. Sphere Entertainment (SPHR) also performed strongly, driven by impressive ticket sales for "The Wizard of Oz" and plans to develop smaller-scale venues, transforming its business model towards content licensing. Callaway (CALY) benefited from the sale of its Topgolf stake, which allowed the company to reduce debt and initiate share repurchases, simplifying its investment profile.

Conversely, Perrigo (PRGO) was the quarter's biggest laggard, continuing its underperformance from 2025 with a 21% decline. The company faced challenges with infant formula revenue and a significant goodwill impairment, leading to a revised earnings outlook. O'Keefe Stevens Advisory increased its position in Perrigo, viewing its distressed valuation as a potential catalyst for activist involvement or a complete business sale, believing the underlying franchise is not in secular decline.

A new position was initiated in Baxter International (BAX) in the high teens. The investment thesis for Baxter is centered on its undervalued stock, potential for margin improvement under a new CEO, and portfolio diversification benefits. Risks include ongoing product recalls and potential long-term shifts in customer behavior, but the firm believes the valuation adequately compensates for these uncertainties.

Additional portfolio activity included increasing holdings in Weyerhaeuser (WY), anticipating a recovery in softwood lumber prices due to reduced Canadian supply and lean inventories. The firm exited Tri Pointe Homes (TPH) after its acquisition by Sumitomo Forestry, and Alibaba (BABA) due to evolving geopolitical tensions and a shift in its capital allocation strategy towards heavy reinvestment in AI buildout.

O'Keefe Stevens Advisory concluded its letter by emphasizing the importance of process control, disciplined research, and decisive action based on valuation, rather than market timing. The firm remains grateful for the trust placed in its investment approach.

The investment approach detailed by O'Keefe Stevens Advisory offers valuable insights for navigating turbulent markets. Their commitment to a disciplined, valuation-driven strategy, rather than market timing, underscores the importance of fundamental analysis and risk management. In a volatile environment, maintaining a defensive posture and having the conviction to invest when securities trade at attractive prices, even amid negative sentiment, can be a potent strategy. This report also highlights the need for continuous reassessment of investment theses, as exemplified by their decision to exit Alibaba due to a change in its capital allocation and geopolitical landscape. Ultimately, the firm's focus on a robust investment process, rather than chasing trends, provides a steady course through unpredictable financial waters, offering a template for long-term value creation.