| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 10.7% | 3.7% | 1.4% |
Appalaches Core LO returned 3.7% net in Q2 2026 versus 15.1% for the S&P 500, as the concentrated fifteen-stock portfolio diverged meaningfully from AI-driven market leadership. Manager views this as an excellent opportunity to buy high-quality businesses being sold to fund AI speculation. The fund increased stakes in AutoZone, CME Group, and Progressive, and initiated a position in McKesson Corporation. AutoZone is undergoing large-scale Mega Hub distribution buildout that temporarily suppresses earnings but should drive commercial competitiveness and margin expansion as intensity peaks. CME faces overblown competitive fears from perpetual futures, with institutional client dominance and liquidity barriers protecting the franchise. McKesson offers exposure to generic pharmaceutical market stabilization driven by the 2028 patent cliff and biosimilar growth, with 50%+ ROIC and high single digit gross profit growth potential. Manager expresses caution on memory semiconductors and AI-vulnerable software, preferring businesses solving physical challenges with tangible competitive advantages. Portfolio is close to fully invested with optimistic long-term outlook despite near-term underperformance.
Manager pursues concentrated value investing in high-quality businesses with durable competitive advantages trading at reasonable valuations, focusing on idiosyncratic opportunities ignored by markets chasing AI-related momentum.
Manager is optimistic about the portfolio based on today's opportunity set and prices, despite disappointing short-term results. Believes current market environment favors buying great businesses that are being sold to fund AI-related purchases. Cannot predict with precision when favorable results will show up in performance figures, but maintains conviction in concentrated, differentiated approach. Expects AutoZone earnings growth to accelerate as distribution buildout peaks and CME to maintain dominance despite competitive threats. Sees McKesson positioned for sustainable gross profit growth at high single digit rate with margin expansion.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jul 22 2026 | 2026 Q2 | ACGL, AZO, CME, GOOGL, MCK, PGR | AI, Concentration, disruption, Distribution, Exchanges, Pharmaceuticals, software, value | MCK | Manager deployed capital aggressively into AutoZone, CME, and McKesson while markets chased AI momentum, creating 11.4 percentage point Q2 underperformance. Sees AutoZone's distribution buildout nearing inflection, CME's competitive moat intact despite perpetual futures threat, and McKesson positioned for sustained margin expansion from 2028 patent cliff. Avoids memory chips and AI-vulnerable software. Portfolio fully invested in fifteen concentrated positions with strong conviction despite near-term divergence. |
| Apr 20 2026 | 2026 Q1 | ASML, CNI, CP, GOOGL, LRCX, MA, V | AI, payments, Railroads, semiconductors, uncertainty, value |
V MA |
Appalaches outperformed in Q1 by selling overvalued semiconductor equipment stocks and buying Visa and Mastercard during AI and regulatory fears. Manager believes payment networks' structural advantages and scale will persist through challenges, with both companies already developing agentic commerce protocols. Focus remains on quality businesses at attractive prices during uncertainty. |
| Jan 20 2026 | 2025 Q4 | ACGL, ASML, AZO, EXP, GOOGL, PGR, PM, VMC | alpha, Concentration, large cap, long-term, Patience, Quality, value |
GOOG ASML |
Appalaches Core LO delivered 16.5% net returns with 6.1 points of alpha through concentrated investing in 12 quality companies with durable competitive advantages. The manager successfully navigated market volatility by buying discounted large-cap stocks like Alphabet and ASML, challenging efficient market assumptions while maintaining patient capital deployment focused on long-term value creation. |
| Oct 20 2025 | 2025 Q3 | ACGL, AMZN, AZO, BRK-B, CME, COST, CP, CSX, GOOGL, LRCX, PGR | Concentration, insurance, long-term, Railroads, semiconductors, value |
PGR CSX LRCX PGR CSX LRCX |
Concentrated value investor delivered 7.0% Q3 returns through disciplined capital allocation. Sold overvalued Lam Research and competitively challenged CSX, reinvesting in Progressive's scale economies shared model and Canadian Pacific's unique rail network. Maintains significant cash for opportunities while avoiding speculative market behavior, focusing on quality businesses at substantial discounts to intrinsic value. |
| Jul 19 2025 | 2025 Q2 | ACGL, ASML, AZO, CNI, CSX, EFX, EXP, GOOG, LRCX, MLM, SGOV, VMC | Barriers, Building Materials, durability, Quality, Railroads, semiconductors, Trade Policy, value |
EXP US LRCX US ASML US EXP |
Appalaches gained 7.4% in Q2 by capitalizing on trade policy-driven selloff to add aggressively to semiconductor equipment stocks Lam Research and ASML, plus initiating Eagle Materials position. Despite markets returning to all-time highs with fevered sentiment, manager maintains focus on durable, advantaged businesses that can compound capital over time. |
| Apr 21 2025 | 2025 Q1 | ACGL, ASML, AZO, CME, CNI, CSX, GOOG, LAD, LRCX, SGOV | Cyclical, insurance, Quality, Railroads, semiconductors, tariffs, Trade Policy, value |
ACGL ASML LRCX |
Despite Q1 tariff volatility causing broad market declines, Appalaches Capital outperformed by focusing on quality companies at attractive valuations. New positions in semiconductor equipment and insurance capitalize on cyclical recovery and structural advantages. While trade policy creates near-term uncertainty, the manager believes America's institutional strength and the fund's disciplined approach will generate long-term value. |
| Jan 18 2025 | 2024 Q4 | AZO, CME, CNI, CPNG, CSX, GOOG, LAD, MKL, SAFT, SGOV | Concentration, insurance, Railroads, small caps, technology, value | - | Appalaches returned 7.9% in 2024 while navigating excessive market froth and regulatory risks. Manager sold frothy positions and South Korean exposure after martial law, maintaining focus on railroads, insurance, and exchanges trading below fair value. Despite disappointing results, conviction grows in concentrated value approach as market excess creates opportunities for selective stock picking. |
| Sep 30 2024 | 2024 Q3 | AZO, CME, CNI, CPNG, CSX, GOOGL, LAD, OCI, TELL | Auto Aftermarket, E-Commerce, Event-Driven, Exchanges, Railroads, spinoffs, value | - | Appalaches deployed cash during Q3 volatility into railroads betting on service-driven volume growth, exchanges facing overblown competition fears, and dominant Korean e-commerce at attractive valuations. The concentrated value approach targets businesses with scale-reinforced competitive advantages. Portfolio now two-thirds allocated to risk assets with remaining cash earmarked for similar discount opportunities. |
| Jun 30 2024 | 2024 Q2 | AZO, GOOGL, LAD, PLX, SGOV | Absolute Returns, Auto Dealers, Cash, Concentration, value | LAD | Appalaches Core LO's absolute return strategy underperformed in Q2 as market concentration favored mega-caps over value opportunities. Manager maintains disciplined cash position while finding selective opportunities like Lithia Motors in misunderstood automotive dealership sector. Believes current bifurcation mirrors late 1990s, creating value in discarded corners as indices become increasingly concentrated and expensive. |
| May 2 2025 | 2024 Q1 | AZO, GOOGL, NVDA, PLX.PA, SAFT, SYENS.PA, VSTS | AI, Behavioral Finance, Europe, risk management, Specialty Chemicals, Spin-Offs, value |
VSTS SYENS PLX GOOGL |
Appalaches Capital delivered 4.1% in Q1 with low market exposure, selling Vestis on execution concerns while adding European spin-offs Syensqo and Pluxee. The manager warns against AI availability bias but sees productivity benefits. Despite rich valuations and limited opportunities, the fund maintains its disciplined, concentrated approach while planning to increase position sizing going forward. |
| Feb 8 2024 | 2023 Q4 | GOOG, MKL, SAFT, VSTS | Cash, insurance, Patience, small caps, Spin-Offs, value |
SAFT VSTS |
First-quarter manager maintains large cash position and low equity exposure despite market rally, focusing on mispriced securities driven by non-economic factors. Top holdings Safety Insurance and Vestis represent fire sale and spinoff opportunities respectively. Strategy emphasizes patience and flexibility over benchmark performance, positioning for attractive risk-adjusted returns across full market cycles through concentrated value investing approach. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q2 |
AIManager discusses AI as a major market theme driving investor excitement and capital flows, but expresses caution about valuations in AI-related stocks. Notes the use of AI coding assistants (Claude Code) to automate business functions and create custom software. Distinguishes between vulnerable Systems of Action software and durable Systems of Record software in the context of AI disruption risk. |
Disruption Software Valuation Automation |
Auto AftermarketManager increased stake in AutoZone, viewing current weakness as opportunity during large-scale distribution investment phase. AutoZone is building out Mega Hub network to improve delivery times from six hours to 45 minutes for commercial customers. Manager expects earnings growth to accelerate as buildout peaks and store economics improve through enhanced commercial competitiveness. |
Distribution AutoZone Commercial Infrastructure | |
ExchangesManager increased stake in CME Group despite market fears about competition from Kalshi's perpetual futures. Argues that perpetual futures have structural disadvantages versus traditional futures for institutional clients who represent 85-90% of CME's volume. Points to FMX Futures Exchange handling less than 1% of CME's volume as evidence of liquidity barriers to entry. |
CME Liquidity Competition Derivatives | |
GenericsManager sees stabilization coming to generic pharmaceutical market after decade of price weakness. Nearly $100 billion of branded drugs expected to go off patent in 2028, creating sustainable tailwind through at least 2045 based on New Molecular Entity approval trends. Capacity exits by Teva and Sandoz shifting to complex deliveries should support price stability. Biosimilars offer higher margin growth opportunity. |
Pharmaceuticals Patent Cliff Pricing Biosimilars | |
Medical DistributionManager initiated position in McKesson Corporation, one of the Big Three drug distributors controlling over 90% of U.S. distribution. Views the business as insulated from AI disruption due to physical logistics complexity and regulatory requirements. Expects gross profit growth at high single digit rate driven by generic and biosimilar pipeline, with margins expanding. Return on invested capital exceeds 50% through high capital turnover. |
McKesson Logistics Barriers to Entry ROIC | |
Semiconductor CycleManager expresses caution on memory chips despite current supply constraints and incumbent benefits. Views memory as a commodity with low barriers to entry for new capacity among incumbents. Expects supply side to win out as incumbents aggressively raise capital for uncertain future demand, following the principle that the cure for high prices is high prices. |
Memory Supply Commodities Capacity | |
| 2026 Q1 |
AIManager views AI as creating uncertainty for legacy providers but believes great businesses will adapt. Discusses AI threats to payment networks through agentic commerce but argues Visa and Mastercard are well-positioned with their own agentic protocols. |
Artificial Intelligence Agentic Commerce Technology |
PaymentsMajor new investments in Visa and Mastercard despite regulatory and technological headwinds. Manager believes their network advantages and scale provide structural moats that will persist through challenges. |
Credit Cards Networks Interchange | |
SemiconductorsSold ASML and previously Lam Research due to significant price appreciation outpacing earnings growth. Manager concerned about valuations requiring nearly triple earnings growth for satisfactory returns. |
Equipment Valuations EUV | |
| 2025 Q4 |
AIAI has been the defining theme of market leadership in 2025, driving data center capex and benefiting semis, electrical equipment, and tech hardware. The theme reasserted dominance after NVIDIA's strong earnings in late November, though concerns about durability caused temporary rotation. |
Data Centers Semiconductors Infrastructure |
ElectrificationPortfolio maintains largest absolute and relative exposure to Industrials sector representing conviction in the Electrification theme. Bloom Energy benefited from AI data center power demands, with fuel cells providing reliable onsite power generation. |
Power Generation Grid Infrastructure Energy Storage | |
BiotechnologyBiotech delivered its best quarter in five years driven by improving rate environment, easing regulation enabling more M&A, and excitement around AI's promise in drug discovery efficiency. Sector was a standout performer during the quarter. |
Drug Discovery M&A Regulation | |
SolarFirst Solar benefited from Trump Administration's 'One Big Beautiful Bill' driving US demand for non-China solar products. Company differentiates with thin-film CdTe technology offering better performance in hot/humid/low light conditions. |
Manufacturing Trade Policy Technology | |
SpaceRocket Lab operates as end-to-end space company in Launch Services and Space Systems segments. Stock gained nearly 50% on strong earnings and growing backlog, though late-quarter initiation meant it was a relative performance detractor. |
Launch Services Satellites Defense | |
| 2025 Q3 |
InsuranceProgressive represents a scale economies shared model where the company maintains a 96% combined ratio target, passing scale efficiencies to customers through lower premiums. This creates a flywheel effect attracting more customers and enabling further cost reductions through better data and economies of scale. |
Auto Insurance Combined Ratio Underwriting Market Share Pricing |
RailroadsSold CSX due to competitive pressures from the Union Pacific-Norfolk Southern merger creating a coast-to-coast network that CSX cannot match. Reinvested proceeds into Canadian Pacific which offers unique connectivity across Canada, US, and Mexico that no other railroad provides. |
Rail Networks Mergers Transportation Cross-Border Competition | |
SemiconductorsCompletely divested Lam Research after the stock nearly doubled from initial purchase and tripled from April lows. Despite similar business expectations, prospective returns became far less appealing at current elevated prices compared to earlier in the year. |
Valuation Equipment Cyclical Price Appreciation Returns | |
| 2025 Q2 |
Trade PolicyManager discusses how tariff threats caused market panic in Q2, leading to 20%+ drawdowns in some indices. While tariffs were subsequently reduced or delayed, the threat remains though investors seem less reactive now. Trade policy uncertainty continues to affect businesses assessing supply chain impacts. |
Tariffs Supply Chain Policy |
SemiconductorsAdded aggressively to Lam Research and ASML during April selloff when shares traded 25-30% below February highs. These companies are perceived as highly sensitive to trade policy due to Asia revenue exposure, but manager believes semiconductor production will continue somewhere and these companies will remain essential suppliers. |
ASML Lam Research Asia Foundries | |
Building MaterialsInitiated position in Eagle Materials, a cement and wallboard producer. Cement industry benefits from high barriers to entry due to environmental regulations, capital intensity, and proximity requirements. Supply-demand imbalance exists with US consuming 110M tons but producing only 86M tons, creating pricing power for inland producers. |
Cement Wallboard Barriers Pricing Power | |
RailroadsRailroad holdings have shown resilient traffic data in first half of year. Merchandise carloads showed modest growth despite trade policy uncertainty. Rails transport essential commodities at unmatched scale and cost versus other transportation modes. |
Rail Traffic Commodities Transportation | |
| 2025 Q1 |
Trade PolicyNew tariff policies announced in February and March have created market volatility, with reciprocal tariffs causing the S&P 500 to drop 20% below recent highs. The manager draws parallels to historical trade restrictions but believes current policies will not end American hegemony due to strong institutional foundations. |
Tariffs Trade Policy Globalization Uncertainty |
SemiconductorsInitiated positions in ASML and Lam Research as the semiconductor industry recovers from cyclical trough. Foundries have announced large capital expenditure increases flowing to equipment manufacturers. Both companies operate in highly consolidated industries with high barriers to entry and strong competitive moats. |
Semi Equipment Capital Expenditure Cyclical Recovery Consolidation Barriers | |
InsuranceInitiated position in Arch Capital Group, a Bermuda-based diversified insurer. The company manages agency costs through unique ten-year lookback compensation for underwriters and maintains one of the lowest combined ratios at 88% over 15 years. Bermuda capital requirement increases benefit strong incumbents. |
Underwriting Agency Costs Combined Ratio Reinsurance Capital Requirements | |
RailroadsCanadian National and CSX are positioned to benefit from tightening trucking markets and potential volume shifts to Mexican and Canadian Pacific ports due to increased Chinese port fees. Both companies could benefit from any industrial production rebound resulting from tariffs. |
Freight Trucking Industrial Production Port Volume Transportation | |
| 2024 Q4 |
Risk AppetiteManager observes excessive risk-seeking behavior in markets, with crypto currencies obtaining market capitalizations large enough for S&P 600 inclusion and quantum computing stocks inflating to unbelievable valuations despite minimal revenues. This frothy environment makes the manager uneasy despite being wrong about pessimism last year. |
Speculation Valuations Froth Crypto |
RailroadsRecently initiated railroad holdings continue to look increasingly attractive as boring but highly profitable businesses that can benefit under a variety of regulatory frameworks. These positions are still finding their footing in the portfolio. |
Infrastructure Transportation Regulation | |
RegulatoryManager discusses regulatory capture risks, noting that populist attitudes globally are leading to increased scrutiny of entities perceived as taking advantage of systems. This creates left-tail risks for businesses with regulation-driven moats, as seen with meal voucher companies facing fee caps and competition requirements. |
Populism Capture Moats Government | |
| 2024 Q3 |
RailroadsNorth American railroads have not seen volume growth over 20 years despite being the cheapest, cleanest, and safest freight transportation due to poor reliability. Recent implementation of scheduled railroading by CSX and Canadian National should improve service metrics and drive real volume growth. Both companies are reinvesting in service rather than just cutting costs. |
Transportation Infrastructure Service Volume Scheduled |
E-commerceCoupang dominates South Korean e-commerce with nearly half the population as active customers. The company offers same-day delivery to 70% of South Korea's population and is targeting 10% free cash flow margins as it matures. Trading at less than 10x estimated 2030 normalized free cash flow with significant growth runway. |
Marketplace Delivery Korea Growth Margins | |
ExchangesCME Group maintains 99% share of US treasury futures despite new competition from BGC Group's FMX exchange. Trading fees are small portion of costs compared to spreads, and CME benefits from cross-margining across diverse products. New competitor has gained minimal traction with only 1,177 contracts versus CME's 12 million. |
Futures Liquidity Competition Derivatives Treasury | |
Auto AftermarketAutoZone benefits from a self-reinforcing flywheel where scale enables better inventory management and supplier relationships. The fragmented automotive aftermarket requires immediate availability of parts, giving AutoZone favorable payment terms and more flexible supplier credit that enables stocking more inventory. |
Inventory Distribution Scale Suppliers Fragmentation | |
| 2024 Q2 |
Auto DealersManager initiated position in Lithia Motors, the largest automotive dealership group in the US. Believes dealership industry is misunderstood as dealers now generate majority of gross profit from ongoing maintenance, parts, warranty, insurance and financing services rather than vehicle sales. Lithia's strategy of acquiring independent lots and improving operations creates value through expanded footprint and operational improvements. |
Dealerships Automotive Services Acquisitions Aftermarket |
ValueManager emphasizes absolute return framework requiring securities to meet specific return hurdles before investment. Maintains cash position not for market timing but due to valuation discipline. Believes current market bifurcation creates opportunities in discarded corners while indices become increasingly concentrated and expensive. |
Valuation Absolute Returns Cash Discipline Concentration | |
| 2024 Q1 |
AIArtificial Intelligence has dominated market attention with NVIDIA's share price nearly doubling in Q1. The manager views AI as creating productivity gains across industries through better insurance underwriting, inventory management, and targeted advertising. However, the manager warns against the availability heuristic affecting investment decisions, citing Google's temporary decline on AI-related concerns as an opportunity. |
NVIDIA Google Productivity Semiconductors Search |
Spin-offsThe manager has found opportunities in European spin-offs including Syensqo and Pluxee, where forced selling and data provider errors created mispricings. While spin-offs may no longer provide automatic outperformance, specific situations still offer unique opportunities for those willing to provide liquidity during initial trading periods. |
Syensqo Pluxee Forced Selling Mispricing Liquidity | |
EuropeThe manager has shifted focus to European markets due to significant valuation gaps versus the US. European companies like Syensqo and Pluxee are multinationals with global exposure that aren't dependent on local European economic strength, offering attractive opportunities despite regional stagnation. |
Valuation Gap Multinationals Syensqo Pluxee Stagnation | |
Specialty ChemicalsSyensqo represents a high-margin specialty chemicals producer with broad end market exposure and top-3 positions in 90% of its markets. The company benefits from moderate pricing power due to high switching costs, though volumes remain subject to specific end market conditions. |
Syensqo Margins Pricing Power End Markets Switching Costs | |
| 2023 Q4 |
ValueManager focuses on purchasing securities at significant discounts to intrinsic value, emphasizing patience and waiting for attractive valuations rather than following market momentum. The strategy involves identifying mispriced securities where non-economic factors drive undervaluation. |
Undervalued Intrinsic Value Discount Mispricing Valuations |
P&C InsuranceSafety Insurance represents a profitable underwriter with 97% combined ratio over the last decade, operating conservatively with fixed-income investments. The company was caught in regional banking crisis selling despite not being directly affected, creating opportunity. |
Combined Ratio Underwriting Claims Premiums Fire Sale |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Jul 22, 2026 | Fund Letters | Appalaches Capital | MCK | McKesson Corporation | Medical Distribution | Health Care Distributors | Bull | New York Stock Exchange | biologics, Biosimilars, capital efficiency, defensive, Generic Drugs, Healthcare Supply Chain, high-ROIC, oligopoly, Patent cliff, Pharmaceutical Distribution, Value | Login |
| Apr 20, 2026 | Fund Letters | Appalaches Capital | V | Visa Inc. | Credit Services | Data Processing & Outsourced Services | Bull | New York Stock Exchange | Artificial Intelligence, financial services, Fintech, international exposure, network effects, Payment Networks, Regulatory risk, Technology Disruption | Login |
| Apr 20, 2026 | Fund Letters | Appalaches Capital | MA | Mastercard Incorporated | Credit Services | Data Processing & Outsourced Services | Bull | New York Stock Exchange | Artificial Intelligence, financial services, Fintech, international exposure, network effects, Payment Networks, Regulatory risk, Technology Disruption | Login |
| Jan 20, 2026 | Fund Letters | Jake Keys | GOOG | Alphabet Inc. | Communication Services | Interactive Media & Services | Bull | NASDAQ | advertising, AI, Largecap, mispricing, Search | Login |
| Jan 20, 2026 | Fund Letters | Jake Keys | ASML | ASML Holding N.V. | Information Technology | Semiconductor Equipment | Bull | NASDAQ | AI, Lithography, mispricing, Monopoly, semiconductors | Login |
| Oct 20, 2025 | Fund Letters | Jake Keys | PGR | Progressive Corp. | Financials | Property & Casualty Insurance | Bull | NYSE | combined ratio, Cost leadership, Flywheel, market share, Pricing power, Scale economies, Underwriting margin | Login |
| Oct 20, 2025 | Fund Letters | Jake Keys | CSX | CSX Corp. | Industrials | Railroads | Bear | NASDAQ | Competition, execution risk, Leadership Change, network effects, Pricing pressure, Rail consolidation | Login |
| Oct 20, 2025 | Fund Letters | Jake Keys | LRCX | Lam Research Corp. | Information Technology | Semiconductor Equipment | Bear | NASDAQ | capital intensity, Cycle risk, Export controls, multiple expansion, valuation, Wafer fab equipment | Login |
| Oct 20, 2025 | Fund Letters | Jake Keys | PGR | Progressive Corp. | Financials | Property & Casualty Insurance | Bull | NYSE | combined ratio, Cost leadership, Flywheel, market share, Pricing power, Scale economies, Underwriting margin | Login |
| Oct 20, 2025 | Fund Letters | Jake Keys | CSX | CSX Corp. | Industrials | Railroads | Bear | NASDAQ | Competition, execution risk, Leadership Change, network effects, Pricing pressure, Rail consolidation | Login |
| Oct 20, 2025 | Fund Letters | Jake Keys | LRCX | Lam Research Corp. | Information Technology | Semiconductor Equipment | Bear | NASDAQ | capital intensity, Cycle risk, Export controls, multiple expansion, valuation, Wafer fab equipment | Login |
| Jul 19, 2025 | Fund Letters | Jake Keys | EXP US | Eagle Materials Inc. | Materials | Construction Materials | Bull | NYSE | Barriers, Cement, construction, materials, Pricing | Login |
| Jul 19, 2025 | Fund Letters | Jake Keys | LRCX US | Lam Research Corporation | Information Technology | Semiconductor Equipment | Bull | NASDAQ | Cyclicals, Equipment, Foundries, semiconductors, technology | Login |
| Jul 19, 2025 | Fund Letters | Jake Keys | ASML US | ASML Holding N.V. | Information Technology | Semiconductor Equipment | Bull | NASDAQ | Equipment, Euv, Lithography, semiconductors, technology | Login |
| Jun 30, 2025 | Fund Letters | Appalaches Capital | EXP | Eagle Materials | Materials | Construction Materials | Bull | NYSE | Cement, commodity, construction materials, Gypsum, manufacturing, Pricing power, regulatory barriers, Share Buybacks, supply constraints, Wallboard | Login |
| Mar 31, 2025 | Fund Letters | Appalaches Capital | ACGL | Arch Capital Group Ltd. | Financials | Property & Casualty Insurance | Bull | NASDAQ | Agency Costs, Bermuda, combined ratio, E&s, Insurance, PMI, Reinsurance, underwriting, Value | Login |
| Mar 31, 2025 | Fund Letters | Appalaches Capital | ASML | ASML Holding N.V. | Information Technology | Semiconductor Equipment | Bull | NASDAQ | Capital equipment, Cyclical, EUV lithography, high switching costs, Monopoly, Netherlands, semiconductors, technology | Login |
| Mar 31, 2025 | Fund Letters | Appalaches Capital | LRCX | Lam Research Corporation | Information Technology | Semiconductor Equipment | Bull | NASDAQ | Capital equipment, Cyclical, Deposition, Etch Equipment, Memory, Nand, patents, semiconductors, Value | Login |
| Jun 30, 2024 | Fund Letters | Appalaches Capital | LAD | Lithia Motors, Inc. | Consumer Discretionary | Specialty Retail | Bull | NYSE | acquisition strategy, Automotive Dealerships, contrarian, Floor Plan Financing, Franchise Laws, margin expansion, OEM Relationships, Omnichannel, Parts and Service, Service revenue, Specialty retail, Value | Login |
| Mar 31, 2024 | Fund Letters | Appalaches Capital | VSTS | Vestis Corporation | Commercial Services & Supplies | Commercial Services & Supplies | Bear | NYSE | Commercial Services, competitive positioning, deleveraging, management execution, spinoff, turnaround, Uniform Rental | Login |
| Mar 31, 2024 | Fund Letters | Appalaches Capital | SYENS | Syensqo | Materials | Specialty Chemicals | Bull | Euronext Brussels | Cyclical Recovery, Data Discrepancy, European Equity, high margins, market leadership, specialty chemicals, spinoff | Login |
| Mar 31, 2024 | Fund Letters | Appalaches Capital | PLX | Pluxee N.V. | Information Technology | Data Processing & Outsourced Services | Bull | Euronext Paris | duopoly, Employee Benefits, European Equity, Float Income, Payments Network, Prepaid Cards, regulatory barriers, spinoff | Login |
| Mar 31, 2024 | Fund Letters | Appalaches Capital | GOOGL | Alphabet Inc. | Communication Services | Interactive Media & Services | Bull | NASDAQ | Artificial Intelligence, Behavioral Mispricing, contrarian, cost-cutting, market dominance, search engine, technology | Login |
| Dec 31, 2023 | Fund Letters | Appalaches Capital | SAFT | Safety Insurance Group, Inc. | Financials | Property & Casualty Insurance | Bull | NASDAQ | Banking Crisis, combined ratio, conservative management, Fire Sale, low duration, Property & Casualty Insurance, Regional Insurer, Small-Cap Financial, Underwriting Profits, Value | Login |
| Dec 31, 2023 | Fund Letters | Appalaches Capital | VSTS | Vestis Corporation | Industrials | Commercial Services & Supplies | Bull | NYSE | Discount to Intrinsic Value, Fragmented Industry, High retention, Incremental Returns, management experience, Post-spin Selling, Recession-resistant, Route-based Business, spin-off, Uniform Services | Login |
| TICKER | COMMENTARY |
|---|---|
| AZO | Now, the disappointing relative showing this quarter can be attributed to waning investor sentiment in some of our largest holdings, namely AutoZone and CME Group. For AutoZone, the company is currently undergoing a large-scale investment project that has inhibited near-term earnings growth. As I have written before, auto parts distribution is an availability game—whoever can deliver the part in the least amount of time typically wins the business. Both AutoZone and O'Reilly have consequently continued to invest in their distribution capabilities while finding ways to efficiently stock more parts in more stores. AutoZone has been in the process of building out a network of 'Mega Hubs' over the last several years but has particularly ramped its development cadence over the last two years. These ~40,000 sq. ft stores act as local distribution hubs and provide faster restocking and delivery for satellite stores within a region. Delivery times for commercial customers can fall from six hours to just 45 minutes in some cases. From a business owner's point of view, investing in their distribution network makes perfect sense, however, for the impatient investing public, the lack of immediate earnings growth is uninspiring. It is my view that this will reverse as the buildout reaches its peak intensity in the coming year and store economics accelerate as AutoZone becomes more competitive in its commercial programs. |
| CME | Now, the disappointing relative showing this quarter can be attributed to waning investor sentiment in some of our largest holdings, namely AutoZone and CME Group. On the other end of the spectrum, CME Group's declining stock price can be attributed to fearful anticipation of competition. The CFTC approved the listing of perpetual futures for Bitcoin on Kalshi, a prediction markets platform. The general concern in the market is that 1) Kalshi is not a traditional competitor, 2) perpetual futures are a novel asset class not currently present in traditional finance, and 3) that this opens the door to obsolescence of the traditional futures market that CME dominates. While the first point is axiomatic, the second is debatable, and the third is not so poignant as a threat as many may expect. Perpetual futures are indeed a new product, being created in 2016, but they borrow their mechanics for settlement from traditional swap mechanisms. Swaps, like perpetual futures, require ongoing payments to a party in exchange for exposure to an underlying asset. Unlike swaps, whose payments are typically tied to floating rate benchmarks like SOFR, the payment between parties on a perpetual future is instead tied to a funding rate. The funding rate is in place to incentivize the price of the perpetual future to closely track the price of the underlying. When the perpetual future is cheaper than the spot price, those long the contract are paid the funding rate, and conversely, when the contract is more expensive than the spot price, those long the contract must pay the funding rate to those who are short. This funding rate can increase in times of significant changes in spot prices, which increases the cost to hedge when it matters most. I do not see a world in which perpetual futures are favored over highly predictable, established, and liquid futures contracts for institutions and commercial users. Considering that 85-90% of CMEs volumes are from institutional clients, I do not think that the underlying business is overly threatened. We had a similar opportunity for our initial purchase of CME when BGC Group launched its FMX Futures Exchange. Today, FMX handles less than 1% of the total volume that CME does—showing just how intense a barrier to entry liquidity is and how ingrained market standards are. |
| PGR | We have had the opportunity to invest in a couple of new businesses this quarter, and the great opportunity to invest more in some of our current holdings. We increased our stakes in AutoZone, CME Group, and Progressive. |
| MCK | We had the opportunity to invest in shares of McKesson Corporation (MCK) during a bout of general market apathy towards defensive businesses. McKesson is one of the 'Big Three' drug distributors in the U.S. As a group, they control over 90% of all drug distribution. Centralized drug distributors are important due to the complexity of the pharmaceutical supply chain, and they are necessary for connecting two highly fragmented ends of the market. Even if sourcing drugs was relatively straightforward, that is, if every drug was branded and sold by one manufacturer, pharmacies would still need to coordinate the delivery of hundreds of separate SKUs per day. Manufacturers would also need to coordinate their own delivery logistics, of which the handling is highly regulated under federal law. You could easily imagine an unwieldy complicated system where a pharmacy has dozens of trucks stopping by at all hours of the day. Instead, distributors make life easy by consolidating inventory and managing the entire change-of-control process. The opportunity for McKesson is a rapidly changing backdrop in the generic pharmaceutical market. The last decade has been challenging for the company due to weakness amongst generic manufacturers, and the litigation overhang as a consequence of the opioid crisis. Today, however, there is strong reason to believe that stabilization is coming to the generic market and the risks from opioid litigation have been largely resolved. Under their traditional distribution model, McKesson acquires and distributes branded and generic drugs to pharmacies, doctors offices, and hospitals. Within branded drugs, McKesson is typically compensated under a fee-for-service arrangement, which leads to fixed gross profits on inflated prices. In this case, McKesson is working with one manufacturer and many pharmacies, resulting in limited negotiating power on the buy side and on the sell margin. Generic drugs on the other hand, are manufactured by many different parties, resulting in stronger negotiating leverage for McKesson on the buy margin. Gross margins on generics are consequently upwards of 10x higher than branded drugs. Since 2016, the generic drug market has experienced prolonged price depreciation after a dearth of new generic offerings came to market in the prior decade, which stimulated competition and price wars amongst manufacturers. Drug distributors were consequently unable to capture as much margin on generics, which is where a significant portion of their gross profits are made. There are many reasons to believe that stabilization is occurring and is likely to be sustainable for the foreseeable future. The most obvious of which is that nearly $100 billion worth of branded drugs are expected to go off patent in 2028 alone. This upcoming patent cliff acts as a tailwind for generic price stability, as well as a mix shift margin opportunity for distributors. Instead of having to fight tooth and nail to gain volume in existing products, manufacturers will have the opportunity to focus on new generic launches and alleviate the constant undercutting in existing products. This tailwind is sustainable as well. With a typical patent life being twenty years, the drugs coming off patent today were first released around 2006. This marked a low point in development for the industry, and the approval of New Molecular Entities (NMEs) began a strong trend upward lasting until today. This suggests that the opportunity set for new generic formulations could grow until at least 2045 before seeing any significant drought. This was not the case during the last major patent cliff in 2016, due to a dramatic increase in NMEs in 1996 but less approvals in the years following. Capacity within the generic drug manufacturing industry has also exited or has been retooled for other purposes. Major players like Teva and Sandoz have rationalized their portfolios to exit traditional oral solids and shifted their capacity towards more complex deliveries, like inhalers and injectables. All else equal, less supply should lead to further improvements in price stability. Just like high prices, low prices inevitably work themselves out in the free market. Biologics have been coming into vogue over the last couple of decades, and so many of McKesson's largest opportunities are in this category. As the name implies, biologics are derived from living organisms rather than static formulas of chemicals. These typically require more delicate storage and handling, for example, Pfizer states their COVID-19 vaccine is required to be stored between -90°C and -60°C. Biologics, with their more complicated handling requirements, allow McKesson to provide more services and consequently collect higher fees. Now that many of these are also going off patent as biosimilars (the analog for generics in this category), McKesson has a clear line of sight towards sustainable, higher margin volume growth here. The pharmaceutical industry as a whole possesses very high barriers to entry that stem from the sheer scale of these operations. The gross margin on the entire business in 2025 was just 3.7%, driven in part by fee for service arrangements but also by a generally low toll collected from the value chain. This commitment to non-extractive pricing results in a market that cannot support other competitors. Given that performing this service cheaply and with high levels of availability is what drives value for customers and suppliers, it only makes sense that the industry would remain consolidated. There is little incentive to require a new competitor because there is clear value already being provided. Even in new launches that have sought a direct-to-consumer model, such as GLP-1s, the pharma industry has still largely relied on the big three for managing the logistics. High margins can be admirable, but even more admirable is a company taking a small spread and turning it into high profitability through well managed efficiency – McKesson's return on invested capital is over 50%, which is driven primarily by their high utilization and turnover of their capital base. In terms of a variant view, my estimates for the coming year do not differ too far from the average analyst. However, based on the current valuation of around 16x forward free cash flow, the collective market does not seem to think that this growth is very persistent. With the attractive generic and biosimilar pipeline, I believe gross profits could grow at a high single digit rate for the foreseeable future which will provide a further uplift to margins. With continued repurchases shareholders should stand to do well from here. |
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