Small-Cap Equity Re-Rating Potential in Q3 2025: A Deep Dive into KAR Fund Holdings

The small-cap equity market has emerged as a compelling arena for investors in Q3 2025, driven by resilient macroeconomic conditions, sector-specific tailwinds, and a shift in market dynamics favoring value-oriented strategies. The KAR Fund's Small-Cap Value Strategy, which focuses on undervalued companies with strong re-rating catalysts, has outperformed broader benchmarks, with the Russell 2000® Value Index surging nearly 13% during the quarter. This performance underscores the growing appeal of small-cap equities, particularly in industrials and cyclicals, as investors seek higher returns amid a maturing economic cycle.

The KAR Fund's Strategic Positioning

The KAR Fund's success in Q3 2025 was fueled by its exposure to companies benefiting from infrastructure spending and operational efficiency. Two standout contributors were Construction Partners (NASDAQ: ROAD) and Armstrong World Industries (NYSE: AWI). Construction Partners, a leader in infrastructure services, reported a 51% year-over-year revenue increase in Q3 2025, driven by a record project backlog of $2.94 billion. Its adjusted EBITDA surged 80% year-over-year, reflecting robust demand for transportation infrastructure projects. Meanwhile, Armstrong World Industries, a building products innovator, delivered a 10% year-over-year revenue growth and a 13% rise in earnings per share, supported by strategic acquisitions and margin expansion.

These results highlight the KAR Fund's ability to identify undervalued small-cap stocks with strong earnings momentum and re-rating potential. However, the portfolio is not without risks. For instance, Prestige Consumer Healthcare underperformed due to supply chain constraints and reduced guidance, illustrating the volatility inherent in small-cap investing.

Re-Rating Catalysts: Valuation Metrics and Earnings Trends

To assess the re-rating potential of KAR Fund holdings, it is critical to analyze valuation metrics and earnings trends. Construction Partners, for example, trades at a trailing P/E ratio of 91.8, significantly above the industry median of 29.9. While this multiple appears elevated, it is justified by the company's 51% revenue growth and 13.7% return on equity (ROE) in 2025. Its book value per share of $15.23 as of November 2025 and a P/B ratio of 6.69 suggest that the market is pricing in continued margin expansion and operational scalability.

Armstrong World Industries, on the other hand, has seen its share price surge 44.9% in 2025, driven by a 29% projected growth in its Architectural Specialties segment and a 43% five-year ROCE growth rate. Analysts have raised price targets for AWI, citing improved sector multiples and the company's ability to navigate macroeconomic headwinds like tariffs and rising input costs. Despite a P/E ratio that some argue is slightly overvalued, Armstrong's strong earnings revisions and disciplined capital allocation-evidenced by a 10% dividend increase and $1.2 billion in share repurchases-reinforce its re-rating narrative.

Broader Market Dynamics and Risks

The KAR Fund's performance aligns with broader trends in the small-cap market. Micro-cap stocks advanced 25.0% in Q3 2025, reflecting a rotation into economically sensitive sectors as large-cap dominance wanes. This shift is supported by strong small-cap earnings growth, with companies in industrials and energy outperforming expectations. However, risks remain. Macroeconomic volatility, particularly in AI-driven growth sectors, could disrupt momentum, while a potential slowdown in infrastructure spending could pressure companies like Construction Partners.

Conclusion: A Case for Strategic Exposure

For investors seeking to capitalize on small-cap re-rating opportunities, the KAR Fund's holdings offer a compelling case. Construction Partners and Armstrong World Industries exemplify how strategic positioning in high-growth sectors-coupled with disciplined capital allocation-can drive outsized returns. While valuation metrics for these stocks appear stretched, their earnings trajectories and industry tailwinds justify the premium. As the market cycles shift and large-cap valuations normalize, small-cap equities with strong re-rating catalysts are likely to remain a key driver of portfolio performance in 2025.