Investment Strategy, Quarterly Letters & Portfolio Analysis
| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| - | - | - |
Arauca Capital returned +25.26% gross in H1 2026, driven by exceptional exits including Kioxia (5x in five months), Shelly Group (6x in three years), and Alphabet (synthetic position from mid-$150s to $370). The manager aggressively monetized AI-related positions as valuations removed margin of safety, noting that the easiest AI opportunities with free optionality are largely gone. He sold all memory positions despite extraordinary earnings growth, citing concerns that memory's rise from 8% to 30% of hyperscaler CAPEX is unsustainable given the industry's historically deflationary nature and emerging inference efficiency improvements. The fund now holds significant dry powder in short-dated bonds and maintains exposure to AI power infrastructure through Texas Pacific Land and LandBridge, viewing power as the clearest remaining AI opportunity. New positions include VersaBank, a specialized digital bank expanding into the US with blockchain optionality. The manager is excited about South Korean governance reforms creating future opportunities. He remains cautious about US fiscal dynamics with debt exceeding $40 trillion and Treasury buybacks resembling financial repression, while acknowledging strong corporate earnings growth continues supporting markets.
Arauca Capital focuses on identifying mispriced small-cap opportunities where the market has not yet recognized fundamental value or earnings potential, with particular emphasis on utilization platforms and businesses undergoing structural change. The manager actively monetizes positions when valuations reflect excessive optimism, maintaining discipline around margin of safety even during strong performance periods. Current positioning emphasizes dry powder for future opportunities, exposure to AI power infrastructure as the clearest remaining AI opportunity, and exploration of newly reformed South Korean markets, while remaining cautious about businesses where AI is rapidly changing competitive dynamics.
The manager is very excited about having significant dry powder available for opportunities, particularly as the market evolves. He views South Korea as a new market with plenty of future opportunities following governance reforms. The manager believes the easiest part of the AI opportunity with free optionality is largely gone, but power infrastructure remains the clearest opportunity. He expects memory stocks to experience violent volatility and anticipates another opportunity to re-enter. The manager is cautious about the macro environment given unsustainable US fiscal dynamics and financial repression, but notes that profits at the largest US companies are still growing strongly, which is holding the market up.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Sep 4 2026 | 2026 Q2 | AAPL, AMZN, GOOGL, LB, NVDA, SHLY.TA, SWAV, TPL, TSLA, VBNK.TO | AI, Blockchain, Memory, semiconductors, small caps, South Korea, technology, value | - | Arauca delivered 25% returns in H1 2026 by aggressively monetizing AI winners including a 5x on Kioxia and exiting Alphabet's synthetic position at $370. The manager sold all memory exposure despite record earnings, viewing 30% hyperscaler CAPEX concentration as unsustainable. Portfolio now holds significant dry powder, maintains AI power infrastructure exposure, and explores newly reformed South Korean markets while remaining cautious on US fiscal risks. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q2 |
AIAI has fundamentally changed the fund's operations and the manager sees it as one of the most profound shifts in value creation he has witnessed. The manager uses AI extensively for research, data gathering, and administrative work, saving considerable time. However, he cautions that AI is rewriting business economics faster than before, requiring constant reassessment of holdings. The easiest AI opportunities with free optionality are largely gone, with valuations now reflecting considerable optimism where earnings paths are clear. |
Data Centers Cloud Semiconductor Cycle Infrastructure Spending |
MemoryMemory stocks experienced extraordinary earnings growth, with Kioxia generating operating profit of ¥1,326 billion versus ¥45.2 billion the year before. However, the manager sold all memory positions including Kioxia at a 5x return in five months, citing concerns that memory has gone from 8% to 30% of hyperscaler CAPEX in two years, primarily from price increases rather than volume. He questions the sustainability of what has historically been a deflationary industry now being priced as structurally inflationary, and notes inference efficiency improvements may reduce memory demand. |
Semiconductors Memory Data Centers AI | |
PowerThe manager views power infrastructure as the clearest AI opportunity today, as every data center requires electricity, land, and water, with infrastructure taking years to permit and build. Recent Texas directives requiring data centers to fund their own electric infrastructure favor behind-the-meter or private power solutions. The fund holds exposure through Texas Pacific Land Corporation and LandBridge, and has initiated a smaller position in a pure-play private power campus. |
Energy Infrastructure Data Centers Utilities AI | |
BlockchainVersaBank represents a rare combination of being both a regulated bank and fluent in blockchain technology, trusted by regulators. The bank's Real Bank Tokenized Deposits can pay interest, which US stablecoin law prohibits. VersaBank was selected by Stablecorp for custody and expects to earn 50 basis points on deposits. The manager believes tokenized deposits may become more valuable than stablecoins to banks because they can pay interest and fund lending, though he assigns no value to this optionality today. |
Crypto FinTech Payments Banking | |
South KoreaThree rounds of commercial law reform have rewritten what boards owe minority shareholders in South Korea, with treasury shares now required to be cancelled rather than warehoused. The manager believes this governance shift enforced through law has not been fully appreciated by market participants outside South Korea. He is taking time to learn the market and considering a business trip within six months, viewing it as a source of future opportunities. |
South Korea Value Small Caps Governance | |
Fiscal RiskUS debt has crossed $40 trillion with the deficit running close to 6% of GDP despite full employment, and 30-year Treasury yields around 5.2%. Net interest expense now exceeds the defense budget. The manager notes the Treasury has started increasing long-end buybacks to push yields lower despite inflation remaining above target, which he views as financial repression that may backfire if investors demand higher yields to compensate for inflation and fiscal risk. |
Rates Inflation United States Risk |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| No Elevator Pitches found | ||||||||||
| TICKER | COMMENTARY |
|---|---|
| GOOGL | We built the largest synthetic position in the fund's history when the shares traded in the mid-$150s and fully exited at around $370 during this period. As the share price moved substantially above the call strike in the period, the calls behaved increasingly like a large (in fact very large) synthetic holding and accumulated a substantial unrealised gain. The decision to exit reflected a clear change in the risk profile. Operating results remained strong, with Cloud growing more than 80% and Search around 17%, but capital expenditure was accelerating sharply, the balance sheet had become heavier, and the valuation particularly looking at free cash flow multiples completely changed. At around $370, the margin of safety that existed in the mid-$140/50s was largely gone. With the options also moving closer to expiry, a meaningful fall in the share price could have erased a substantial part of the accumulated gain or the totality of it if spot crosses the strike on the way down. I therefore decided to monetise the derivative position and sell the remaining shares. |
| TPL | This strengthens the case for owners of strategic land and for platforms able to provide private power at scale. We already have exposure through Texas Pacific Land Corporation and LandBridge. |
| LB | This strengthens the case for owners of strategic land and for platforms able to provide private power at scale. We already have exposure through Texas Pacific Land Corporation and LandBridge. |
| VBNK.TO | During the period, I initiated a position in VersaBank, a branchless bank founded and still run by David Taylor. VersaBank operates a highly specialised digital business to business model and does not lend directly to consumers. Instead, through what it calls the Structured Receivable Program, it funds point of sale finance companies, the businesses offering financing for things such as HVAC systems, kitchen renovations and commercial equipment. VersaBank buys the cash flows from these loans, but the credit risk remains with the financing partner. VersaBank has operated this program in Canada for sixteen years. During the last five years, it grew at a compound annual rate of 27%, provided more than C$9 billion of financing to point of sale lenders and produced no credit losses. Until August 2024, VersaBank did not have its own American bank. That changed when it acquired a small bank in Minnesota and, with it, a national US bank charter. The charter allows VersaBank to gather deposits and fund loans directly in the United States, in the same currency and without taking exchange rate risk. Management has said that its US cost of funds is approximately one percentage point lower, compared with a margin of roughly 250 basis points in Canada. VersaBank funded US$310 million in the United States during fiscal 2025. The US SRP credit-asset book then grew from US$472.0 million at 31 January 2026 to US$604.9 million on 30 April 2026. Management has committed to funding at least US$1 billion in the United States during the current fiscal year. Total assets reached a record C$6.4 billion, up 28% in one year, while deposits grew 31% to C$5.5 billion. Net interest margin on credit assets reached 2.71% in the quarter, up 12 basis points year on year and among the highest of any federally licensed Canadian bank. At $17, I paid roughly 1.3 times book value and less than 9 times my estimate of next year's earnings. |
| SWAV | Revenue reached $30.0 million, up 43% year-on-year, net income came in at $2.5 million, and the company finished the quarter with $38.8 million of cash and no meaningful debt. Despite that, the market took the stock from roughly ILS 45 to ILS 33 in the weeks following the release. Growth, while still extremely high and impressive in my opinion, slowed from 46% in Q1 to 43% in Q2. Management acknowledged for the first time that lower-cost Korean and Chinese systems are expanding globally, at the same time that many of the key Thermage-related RF patents have effectively expired. The quarter showed little operating leverage. Sales and marketing expenses grew 45%, faster than revenue itself, leaving operating margins, excluding one-off items, broadly unchanged from the prior year. Usage-fee revenue grew 51%, well ahead of total revenue, and reached 46% of sales, its highest quarterly mix to date, while gross margin rose to 76.5%. Equipment revenue itself still grew 35%, usage revenue grew 51%, and the recurring portion of the business reached its highest level to date. Between July and August, the number of providers listed on the company's public provider locator kept increasing (with notable growth in Korea), all while these low-cost producers are entering. The sell-off briefly pushed Sofwave down to around 10 times my 2028 earnings estimate, assuming growth slows to roughly 30%. |
| SHLY.TA | After Shelly's Q4-2025 numbers were released and between February and early March 2026, I sold our entire position in Shelly Group at prices above €60. It was an excellent investment for Arauca and became a six-bagger for the fund in approximately three years. |
| NVDA | Cash flow is the other side of it: the AI spenders are under pressure from capex (Alphabet and Tesla already printed negative free cash flow in Q2). Nvidia and Apple are the exceptions. |
| AAPL | Cash flow is the other side of it: the AI spenders are under pressure from capex (Alphabet and Tesla already printed negative free cash flow in Q2). Nvidia and Apple are the exceptions. |
| TSLA | Cash flow is the other side of it: the AI spenders are under pressure from capex (Alphabet and Tesla already printed negative free cash flow in Q2). Nvidia and Apple are the exceptions. |
| AMZN | FactSet's latest Q2 2026 figure has S&P 500 earnings up 52% year over year. Strip out Alphabet and Amazon, whose GAAP results include large mark-to-market investment gains, and growth is still 34%. |
| Ticker | Put/Call | Amount Bought | Shares Bought | % Change | Weight % |
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| Ticker | Put/Call | Amount Sold | Shares Sold | % Change | Weight % | Status |
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| Industry | Prev Quarter % | Current Quarter % | Change |
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