| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 16.5% | - | 14.4% |
| 2025 | 2024 |
|---|---|
| 14.4% | 13.3% |
Distillate Capital's Q4 2025 letter highlights the stark valuation disparity in U.S. markets, where overall indices trade at historically expensive levels while many quality stocks remain attractively priced. The firm's large cap value strategy returned 8.59% net of fees, lagging the S&P 500's 17.86% gain driven primarily by valuation expansion rather than fundamental growth. Historical analysis dating to 1900 shows that while valuation expansion can drive returns for extended periods, these cycles inevitably reverse, with fundamentals being the only sustainable long-term driver. The strategy trades at a free cash flow yield more than double the S&P 500, benefiting from systematic rebalancing that has generated superior fundamental growth. Small cap markets present significant opportunities for selective investors avoiding highly leveraged and unprofitable companies. International stocks also offer compelling value after recent outperformance. The firm emphasizes capital preservation and fundamental-driven returns, positioning defensively amid widespread optimism and rich valuations that historically precede more subdued market returns.
Despite rich overall market valuations driven by a concentrated group of expensive large stocks, significant opportunities exist in high-quality, attractively valued stocks through disciplined fundamental analysis and systematic rebalancing, with fundamentals being the only sustainable driver of long-term returns.
The firm feels much more confident about the sustainability of fundamental-driven returns especially in the face of very rich market valuations. They believe their strategies are crafted to systematically follow Buffett's advice, leaning toward being fearful at the moment with the prospect of being greedy at a later date when warranted.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jan 18 2026 | 2025 Q4 | 000660.KS, 005930.KS, BMY, CAH, CSCO, ELV, FFIV, FI, HCA, JBHT, JNJ, LOW, MO, MPC, MRK, REGN, TEL, TMUS, UBER, VST | FCF, fundamentals, international, Quality, rebalancing, small caps, valuation, value | - | U.S. equities are historically expensive by any measure and at levels typically associated with subdued future returns. The S&P 500 is trading near record multiples… |
| Oct 16 2025 | 2025 Q3 | - | Benchmark risk, free cash flow, Large Caps, Quality Investing, Valuation discipline |
CRM US ADBE US ACN US IT US |
Distillate warns that the S&P 500 remains near historic valuation extremes and concentration levels, echoing past bubbles. The fund stresses free cash flow yield and… |
| Jun 30 2025 | 2025 Q2 | - | dividends, free cash flow, Large-Cap Value, returns, Valuation discipline | - | The commentary underscores valuation expansion as a diminishing tailwind for U.S. large caps. Management emphasizes that future returns will rely more heavily on dividends and… |
| Mar 31 2025 | 2025 Q1 | - | - | - | - |
| Dec 31 2024 | 2024 Q4 | NVDA | - | - | - |
| Oct 20 2024 | 2024 Q3 | - | - | - | - |
| Jul 25 2024 | 2024 Q2 | - | - | - | - |
| 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 | - | - | - | - |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2025 Q4 |
Small CapsSmall caps getting strong start in 2026 supported by easing monetary conditions and constructive fiscal backdrop. Small caps more sensitive to economic cyclicality which is overdue for expansion. Expected to grow at better pace than large caps in 2026 after long period of underperformance. |
Value Growth Cyclical Monetary Policy Fiscal Policy |
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 | |
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 company emphasizes investing in businesses with excellent economics, durable competitive advantages, and high-integrity management. This quality focus is evident in concentrated equity holdings and operating business acquisitions. |
Durable Advantages Management Quality Economic Moats Competitive Position |
| 2025 Q2 |
ValueThe manager continues to find attractive value opportunities despite expensive markets, purchasing undervalued companies like Centene, GlaxoSmithKline, Carrefour and PayPal trading at low multiples with strong fundamentals. |
Undervalued Low Multiples Contrarian Opportunistic |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Oct 16, 2025 | Fund Letters | Thomas Cole | CRM US | Salesforce, Inc. | Information Technology | Application Software | Bull | NYSE | cash flow, cloud, efficiency, growth, Margins, Software, valuation | Login |
| Oct 16, 2025 | Fund Letters | Thomas Cole | ADBE US | Adobe Inc. | Information Technology | Application Software | Bull | NASDAQ | AI, digital media, growth, Margins, Software, Subscription, valuation | Login |
| Oct 16, 2025 | Fund Letters | Thomas Cole | ACN US | Accenture Plc | Information Technology | IT Consulting & Services | Bull | NYSE | AI, cloud, Consulting, diversification, growth, IT services, Margins, valuation | Login |
| Oct 16, 2025 | Fund Letters | Thomas Cole | IT US | Gartner, Inc. | Information Technology | Research & Consulting Services | Bull | NYSE | Consulting, growth, Margins, recurring revenue, research, stability, valuation | Login |
| TICKER | COMMENTARY |
|---|---|
| 000660.KS | SK Hynix has solidified its leadership in high-bandwidth memory (HBM), emerging as the exclusive HBM supplier for Microsoft's in-house AI accelerator and securing roughly two-thirds of NVIDIA's anticipated HBM4 demand for its next-generation platforms at meaningfully higher price points and margins than prior generations. |
| 005930.KS | Top gainers included Samsung (+38% in U.S. dollar terms) |
| 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) |
| 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 | Top gainers in the Fund this quarter included Merck (+26%) |
| 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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