| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 14.1% | - | 8.6% |
| 2025 | 2024 |
|---|---|
| 8.6% | 12.8% |
Distillate Capital's Q4 2025 letter emphasizes their systematic value approach amid historically expensive U.S. equity markets. While the S&P 500 gained nearly 20% driven primarily by valuation expansion, their U.S. FSV strategy returned 8.59% net of fees, lagging broader markets but maintaining significant valuation discipline. The firm highlights that their strategy trades at more than double the free cash flow yield of the S&P 500, providing important differentiation in an expensive market environment. They note that just 20 stocks account for over half the S&P 500's weight and trade at a 120% premium to the rest of the market. Historical analysis shows that valuation expansion periods inevitably give way to reversion, with fundamentals being the only sustainable driver of returns over time. The firm sees significant opportunities in small-cap stocks and international markets where selectivity remains key. Their systematic rebalancing approach has generated better fundamental growth than benchmarks, positioning them well for an environment where valuation multiples may become a headwind rather than tailwind to returns.
Distillate Capital focuses on systematic value investing by identifying high-quality companies with stable cash flows and attractive valuations, believing that fundamentals are the only sustainable driver of long-term returns while valuation changes ultimately net out to zero over time.
The firm believes fundamentals are the only real sustainable driver of returns in the long-term, and they feel much more confident about the sustainability of fundamental-driven returns especially in the face of very rich market valuations. They are optimistic about their strategy's prospects whether multiples simply become exhausted and hold at current levels, or if they decline as has been the case historically from current levels.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jan 18 2026 | 2025 Q4 | BMY, CAH, CSCO, ELV, FFIV, FI, GPS, HCA, JBHT, JNJ, LOW, MO, MPC, MRK, REGN, TDC, TEL, TMUS, UBER, VST | free cash flow, fundamentals, international, Quality, rebalancing, small caps, valuation, value | - | The firm emphasizes systematic value investing through their proprietary free cash flow valuation methodology. They focus on stocks trading at attractive valuations while avoiding richly… |
| Oct 16 2025 | 2025 Q3 | - | Benchmark distortion, Free cash flow yield, Quality stocks, rebalancing, stability | - | Distillates Fundamental Stability & Value strategy focuses on companies with strong cash flows and low leverage, contrasting sharply with expensive, concentrated benchmarks. The letter emphasizes… |
| Jun 30 2025 | 2025 Q2 | - | free cash flow, fundamentals, rebalancing, stability, Valuation risk | - | The commentary highlights elevated valuation risk in major indices driven by concentration and multiple expansion rather than fundamentals. Management stresses free cash flow yield and… |
| Mar 31 2025 | 2025 Q1 | - | - | - | - |
| Dec 31 2024 | 2024 Q4 | NVDA | - | - | - |
| Oct 20 2024 | 2024 Q3 | - | - | - | - |
| Jul 25 2024 | 2024 Q2 | NVDA | - | - | - |
| Apr 15 2024 | 2024 Q1 | - | - | - | - |
| Jan 24 2024 | 2023 Q4 | AAPL, MSFT | - | - | - |
| Nov 10 2023 | 2023 Q3 | - | - | - | - |
| Jul 13 2023 | 2023 Q2 | - | - | - | - |
| Apr 14 2023 | 2023 Q1 | AAPL | - | - | - |
| Jan 30 2023 | 2022 Q4 | - | - | - | - |
| Oct 10 2022 | 2022 Q3 | - | - | - | - |
| Jul 30 2022 | 2022 Q2 | - | - | - | - |
| Apr 30 2022 | 2022 Q1 | - | - | - | - |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2025 Q4 |
QualityThe portfolio has shifted toward higher quality businesses with better profitability, lower leverage, and less volatile earnings. Quality stocks underperformed significantly in 2025, creating attractive entry points for value investors. The manager maintains price discipline while seeking quality companies trading at discounts to intrinsic value. |
Quality Profitability Leverage Earnings |
Small CapsThe fund invests in a portfolio of competitively advantaged small and medium-sized businesses, which remained out of favor for most of the quarter. The strategy of owning leading small-cap businesses has been the foundation since inception, delivering 354 basis points of annual outperformance over the benchmark since inception despite recent headwinds. |
Growth Outperformance Benchmark Russell Businesses | |
ValueManager emphasizes investing in controlled companies trading at significant discounts to NAV, with European holding companies showing discounts of 30-68%. The strategy focuses on securities mispricing where real value exists, contrasting with overvalued technology stocks. |
Discounts NAV Mispricing Undervalued Controlled | |
| 2025 Q3 |
QualityThe portfolio has shifted toward higher quality businesses with better profitability, lower leverage, and less volatile earnings. Quality stocks underperformed significantly in 2025, creating attractive entry points for value investors. The manager maintains price discipline while seeking quality companies trading at discounts to intrinsic value. |
Quality Profitability Leverage Earnings |
ValuationAI-related companies continue to command premium valuations while other sectors remain reasonably priced. This valuation divide continues to guide investment activity, with the fund remaining wary of companies trading at exceedingly high valuations that imply exceptional multi-year earnings growth. |
Premium Divide Discipline Stretched Reasonable | |
| 2025 Q2 |
ValuationAI-related companies continue to command premium valuations while other sectors remain reasonably priced. This valuation divide continues to guide investment activity, with the fund remaining wary of companies trading at exceedingly high valuations that imply exceptional multi-year earnings growth. |
Premium Divide Discipline Stretched Reasonable |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| No Elevator Pitches found | ||||||||||
| TICKER | COMMENTARY |
|---|---|
| BMY | We re-initiated a position in Bristol-Myers Squibb Company (BMY), a global leader in oncology and cardiovascular treatments, anchored by flagship therapies such as Opdivo and Eliquis. The company has broadened its portfolio with recently approved drugs in hematology and immunology, as well as an acquisition in psychiatric disorders. While upcoming patent expirations pose a challenge, we believe new therapies and pipeline opportunities could offer meaningful upside. |
| CAH | CARDINAL HEALTH INC contributed 0.30% to relative performance |
| CSCO | It took Cisco, the leading provider of internet equipment and briefly the world's most valuable company, a quarter of a century and another technology bubble to regain its peak. |
| ELV | The holdings in Applied Materials, Elevance Health, LVMH and Anheuser-Busch InBev were exited |
| FFIV | F5 Inc. is a global provider of application delivery, security, and performance solutions that help enterprises run and protect applications across hybrid and multi-cloud environments. Shares fell after the company disclosed that state-backed hackers from China had breached its networks and gained access to certain files from the company's BIG-IP application services. While the direct impact of the breach has been limited – no sensitive customer data was leaked and F5's operations were not impacted – management expects a modest impact to new bookings in the near term as customers are currently focused on evaluating the security posture of existing IT assets rather than buying new products. In response to the breach, F5 offered weak guidance for next quarter, and consensus earnings expectations have declined 7% for 2026 relative to pre-breach levels. While the breach may have a near-term impact on profit growth, our research suggests that the impact of security breaches at similar IT vendors have been short-lived and have very rarely led to impairment of long-term earnings power. Also, F5's strong free cash flow, net cash balance sheet, and high switching costs should help protect the company from any near-term impacts to bookings that may occur this year. We believe F5 should be able to grow revenue in the high-single-digits for many years given the strong tailwinds the company is seeing related to data center modernization and application traffic growth and limited competition in its core markets. Now trading at about 10x our estimate of next year's normal operating profit, F5's shares offer a very attractive risk/reward outlook, in our opinion. |
| FI | Notable detractors from performance came from Fiserv (-43bps absolute and -39bps relative) |
| GPS | Our research suggests the company's transformation plan supports better sales growth, driven by improved on-trend styles at Old Navy and the namesake brand |
| HCA | HCA Healthcare (the operator of 186 hospitals and around 2,400 ambulatory sites) reported pleasing results and management upgraded its full year's earnings guidance by 4.8% at the EPS level. With it buying back more shares, and after making some other tweaks, our valuation increased by 5%. But, with a share price increase of 9.7% over the quarter, the premium widened. |
| JBHT | J.B. Hunt, which falls into the Deep Value bucket, is a diversified transportation company focusing on intermodal shipping. Customers hire Hunt to move freight using different methods of transportation to reduce cost. The company owns the largest fleet of 53-foot shipping containers, which allow for three ocean-freight shipping units to be consolidated into two Hunt containers that can then be moved by rail and company-owned trucks. Hunt's mode agnostic approach sets it apart from the competition, as does its size. JBHT's intermodal business is roughly twice as big as the next largest competitor, resulting in a scale and cost advantage that has produced high returns on capital and better prices for customers. In recent years, the freight market has been put through the wringer, as supply chains during and after the pandemic experienced a tremendous amount of volatility. In Q3, however, Hunt beat analysts' forecasts, owing to recent actions to reduce costs. Management's focus on improving areas that they can control seems to be working, as operating margins for JBHT's intermodal segment expanded by 100 basis points year over year, despite fewer loads shipped in the quarter. While managing through a freight recession, cash flow generation remains strong, the company's balance sheet is in fantastic shape with a leverage ratio of less than 1x, and management has been aggressively repurchasing company stock below our view of intrinsic value. In 2025, the company bought back more than 5% of the shares outstanding. JBHT currently trades at 11.8 times consensus next 12-month EV/EBITDA, which represents a 25% discount to the Industrial sector. |
| JNJ | During the quarter, we switched out of a long-held position in Johnson & Johnson into a new holding in Merck. |
| LOW | Stocks like Lowe's and Home Depot have suffered from the housing slowdown. |
| MO | ALTRIA GROUP INC detracted -0.15% from relative returns |
| MPC | Rare refinery earnings miss on operational items that we believe to be one-time in nature. Favorable 2026 capex guidance. |
| MRK | During the quarter, we switched out of a long-held position in Johnson & Johnson into a new holding in Merck. |
| REGN | Performance was driven by strength in large-cap longs, specifically Regeneron |
| TEL | Longtime holding TE Connectivity benefitted in 2025 from continued demand growth in several of the markets in which it sells into, including: AI infrastructure and data center connectivity; energy and grid update cycling; and industrial automation. TE also acquired Richards Manufacturing earlier in the year, which helped strengthen the company's competitive position in industrial and utility markets, and raised the dividend throughout 2025. |
| TMUS | T-MOBILE US INC detracted -0.32% from relative performance |
| UBER | UBER was a detractor in the fourth quarter following its third-quarter 2025 earnings report, which delivered strong operating performance but was met with a muted market reaction. Gross Bookings and adjusted EBITDA both came in near the high end of management's guidance, driven by accelerating demand across both Mobility and Delivery. However, investor focus shifted to commentary around reduced margin expansion as the company steps up investment in growth initiatives, including autonomous vehicle partnerships, platform innovation, and commerce expansion. |
| VST | On January 9, Meta Platforms unveiled a new agreement with Vistra—the largest generator of competitive electricity in the United States—as well as with TerraPower and Oklo. |
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