Here's Why Kelly Services (KELYA) Slid in Q3

Palm Valley Capital Management, an investment management firm, has released the “Palm Valley Capital Fund” fourth-quarter 2025 investor letter. A copy of the letter can be downloaded here.  In the fourth quarter, Palm Valley Capital Fund appreciated 0.66% compared to a 1.70% gain for the S&P SmallCap 600 and a 3.12% rise in the Morningstar Small Cap Total Return Index. At the beginning of the quarter, the Fund allocated 74.1% to Treasury bills and increased to 76.3% by the end of the quarter. The equity holdings of the Fund rose by 1.12% over the past three months (excluding the effects of fund operating expenses). The performance of equities was positively influenced by the investments in precious metals, particularly as silver has been the Fund's largest allocation for the past few years. In addition, please check the fund’s top five holdings to know its best picks in 2025.

In its fourth-quarter 2025 investor letter, Palm Valley Capital Fund highlighted stocks such as Kelly Services, Inc. (NASDAQ:KELYA). Kelly Services, Inc. (NASDAQ:KELYA) is a staffing solutions provider to various industries. The one-month return of Kelly Services, Inc. (NASDAQ:KELYA) was -1.70%, and its shares lost 37.12% of their value over the last 52 weeks. On January 5, 2026, Kelly Services, Inc. (NASDAQ:KELYA) stock closed at $8.69 per share, with a market capitalization of $307.096 million.

Palm Valley Capital Fund stated the following regarding Kelly Services, Inc. (NASDAQ:KELYA) in its fourth quarter 2025 investor letter:

"In the fourth quarter, the Fund’s top three detractors from performance were Kelly Services, Inc. (NASDAQ:KELYA), Forrester Research (ticker: FORR), and Flowers Foods (ticker: FLO). Kelly’s stock was slammed after it failed to achieve its third quarter guidance and provided a weak outlook for the coming quarters. Kelly’s business had significantly outperformed the staffing industry the past two years. Now, its fortunes are reversing right as overall demand for temporary labor may be stabilizing, with the ASA Staffing Index reporting year-over-year gains in hours and the SIA Bullhorn Staffing Indicator’s comparisons shrinking to low single-digit declines versus a year ago. Although some investors believe AI will keep its boot on the neck of staffers in the coming years, we believe AI is being used frequently as a scapegoat when firms reduce headcount for other reasons. Amazon recently announced 30,000 corporate job cuts aimed to reverse pandemic over hiring.

Kelly, like many companies, is guilty of removing the red from its results by carving out discrete items, including recent customer impacts from federal government contractors experiencing DOGE-related staffing cuts. However, unlike many other firms, Kelly’s stock was punished swiftly for its guidance miss. The shares are trading for a meaningful discount to our cash flow valuation, 4x trailing operating profit, and at a 30% trailing free cash flow yield. However, even if we’re massively wrong about our normalized margin assumption, Kelly’s shares are also selling for less than half of tangible book value. They’re at their lowest price in 15 years, even though Kelly has produced solid profitability over the last twelve months, posting its highest-ever margins."

Kelly Services, Inc. (NASDAQ:KELYA) is not on our list of 30 Most Popular Stocks Among Hedge Funds. According to our database, 21 hedge fund portfolios held Kelly Services, Inc. (NASDAQ:KELYA) at the end of the third quarter, compared to 24 in the previous quarter. Kelly Services, Inc. (NASDAQ:KELYA) reported revenue of $935 million in Q3 2025, reflecting a decrease of 9.9% versus Q3 of last year. While we acknowledge the potential of Kelly Services, Inc. (NASDAQ:KELYA) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

In another article, we covered Kelly Services, Inc. (NASDAQ:KELYA) and shared Palm Valley Capital Fund's views on the company in the previous quarter. In addition, please check out our hedge fund investor letters Q3 2025 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.