Investment Pitches

Pitch Summary:
Similarly, Capstone Copper is a Canada-listed copper mining company operating primarily in Chile, the US and Mexico. Capstone has a number of value-added projects and initiatives coming on line in the next 12 to 18 months — especially an expansion of its Mantoverde operation in Chile, which should materially lower operating costs and increase scale there. The CEO has been connected to Capstone's core Chilean assets for a long time — including prior to Captsone's ownership of them, which commenced over a decade ago — and believe he will make appropriate long-term decisions in stewarding the assets. Relevant to both companies, we anticipate meaningful long-term supply challenges in copper in the period ahead, given its heavy and varied use in alternative energy sources. Further, there has been a recent trend toward consolidation and M&A in the copper industry, and we believe both First Quantum and Capstone Copper could present attractive acquisition candidates for large mining companies seeking to increase their copper exposure. We capitalized on an opportunity to take a longer-term view and initiate positions in both companies at discount to our estimates of intrinsic value.

BSD Analysis:
Diamond Hill initiated a position in Capstone Copper, attracted by the company's near-term operational catalysts and experienced leadership. The fund highlights several value-added projects coming online in the next 12-18 months, particularly the Mantoverde expansion in Chile, which should materially reduce operating costs and increase production scale. Diamond Hill values the CEO's deep knowledge of the core Chilean assets, having been involved with them for over a decade including before Capstone's ownership, suggesting strong operational expertise and long-term strategic thinking. Similar to First Quantum, the investment thesis is anchored on anticipated copper supply constraints driven by alternative energy demand growth. The fund also sees potential M&A upside as industry consolidation continues, viewing Capstone as an attractive acquisition target for larger mining companies seeking copper exposure. Diamond Hill believes they acquired shares at a discount to intrinsic value, reflecting their opportunistic approach during market uncertainty. This represents a combination of operational improvement and structural commodity demand growth.

Pitch Summary:
First Quantum is a Canada-listed copper mining company operating primarily in Panama and Zambia. The business has an excellent track record of operating low-cost mines and building and developing mines in challenging parts of the world. Relevant to both companies, we anticipate meaningful long-term supply challenges in copper in the period ahead, given its heavy and varied use in alternative energy sources. Further, there has been a recent trend toward consolidation and M&A in the copper industry, and we believe both First Quantum and Capstone Copper could present attractive acquisition candidates for large mining companies seeking to increase their copper exposure. We capitalized on an opportunity to take a longer-term view and initiate positions in both companies at discount to our estimates of intrinsic value.

BSD Analysis:
Diamond Hill initiated a position in First Quantum Minerals, attracted by the company's proven track record of operating low-cost mines in challenging jurisdictions like Panama and Zambia. The fund values management's expertise in developing and operating mines in difficult geopolitical environments, viewing this as a competitive advantage. Diamond Hill's investment thesis centers on anticipated long-term copper supply constraints driven by increasing demand from alternative energy infrastructure. The managers see meaningful structural tailwinds from the energy transition requiring substantial copper for electric vehicles, renewable energy systems, and grid infrastructure. Additionally, the fund views First Quantum as an attractive acquisition target amid ongoing industry consolidation, potentially providing multiple expansion opportunities. Diamond Hill believes they acquired shares at a discount to intrinsic value, reflecting their contrarian approach during a period of copper market uncertainty. This represents a classic commodity cycle investment with structural growth drivers from the energy transition.

Pitch Summary:
Headquartered in the UK, Ferguson is a leading distributor of plumbing, waterworks, HVAC and related products in North America. In an industry where scale is key, Ferguson is a high-quality market leader, which has resulted in a virtuous cycle of share gains and margin expansion that remains in its early innings given a still-fragmented industry. Further, we believe any concerns about a softening macroeconomic environment and its potential impacts on Ferguson are largely reflected in the share price, giving us an attractive entry point.

BSD Analysis:
Diamond Hill initiated a position in Ferguson, recognizing it as a market-leading distributor in the North American plumbing and HVAC markets. The fund emphasizes the importance of scale in this industry and views Ferguson's market leadership as creating a virtuous cycle of market share gains and margin expansion. Diamond Hill believes this cycle is still in early stages due to continued industry fragmentation, suggesting significant runway for further consolidation and growth. The managers view current macroeconomic concerns as already reflected in the share price, creating an attractive entry point for long-term investors. This represents a classic consolidation play where the market leader benefits from scale advantages and can continue gaining share from smaller competitors. The fund appears confident in Ferguson's competitive positioning and ability to execute on its growth strategy despite near-term economic headwinds. The pitch reflects Diamond Hill's contrarian approach of investing when market concerns create attractive valuations.

Pitch Summary:
Epiroc is a high-quality Swedish mining equipment/service company that was spun out of Atlas Copco in 2018. The company has strong competitive positions in surface and underground drilling, and a significant share of its sales are derived from high-margin aftermarket services, adding stability to a business operating in a cyclical industry. The company is diversified in terms of metals, geographies and customers. Further, its key segments operate in largely a duopoly with another Swedish firm, so the industry tends to be rational. We believe we were able to buy a well-managed company that has a long tailwind of opportunities ahead of it and operates its business with a long-term view at a reasonable price.

BSD Analysis:
Diamond Hill initiated a position in Epiroc, viewing it as a high-quality mining equipment company with strong competitive moats. The fund values the company's dominant positions in surface and underground drilling markets, particularly appreciating the high-margin aftermarket services business that provides stability in an otherwise cyclical industry. Diamond Hill highlights Epiroc's diversification across metals, geographies, and customers as key risk mitigation factors. The managers particularly like the rational industry structure, noting that key segments operate in a duopoly with another Swedish firm, which tends to support pricing discipline and profitability. The fund believes they acquired shares at a reasonable valuation for a well-managed company with long-term growth tailwinds. This represents a classic quality-at-a-reasonable-price investment where strong competitive positioning and recurring revenue streams justify the investment despite cyclical industry exposure. The pitch reflects confidence in management's long-term strategic vision.

Pitch Summary:
Polish supermarkets operator Dino Polska has executed well and maintained its price discipline amid a highly inflationary Polish environment. As consumers trade down from more expensive retailers to discounters — which Dino effectively is — the company is taking market share from competitors. It is also benefiting from slightly elevated demand given the high number of Ukrainian refugees who have fled to Poland. Meanwhile, management has wisely chosen to temporarily pull back on new store growth to avoid undue balance-sheet strain in the higher-cost environment. Though the valuation has risen, we continue to see upside as the macroeconomic and inflationary pressures normalize and the company is able to resume growth contributions and the company is able to resume growth.

BSD Analysis:
Diamond Hill praises Dino Polska's operational execution and strategic positioning during Poland's inflationary period. The fund highlights the company's disciplined pricing strategy and its competitive advantage as a discount retailer, allowing it to gain market share as consumers trade down from higher-priced competitors. The managers note an additional demand tailwind from Ukrainian refugees, providing temporary but meaningful support to sales volumes. Diamond Hill particularly values management's prudent decision to temporarily reduce new store expansion to preserve balance sheet strength during the challenging cost environment. This demonstrates management's long-term thinking and financial discipline. Despite acknowledging higher current valuations, the fund maintains conviction that upside remains as macroeconomic pressures normalize and the company can resume its growth trajectory. The pitch reflects confidence in Dino's defensive business model and market positioning within Poland's retail landscape.

Pitch Summary:
Mexican multinational beverage retail company FEMSA has fully liquidated its long-term financial stake in Heineken, allowing the company to fully monetize the holding and reflect it in the company's valuation. We are monitoring to see whether the company will return some portion of the Heineken stake to owners via dividends or a share buyback.

BSD Analysis:
Diamond Hill views FEMSA's liquidation of its Heineken stake as a positive catalyst that unlocks value for shareholders. The fund sees this divestiture as allowing FEMSA to fully monetize a long-held financial investment and reflect this value in the company's market valuation. The managers are closely watching management's capital allocation decisions regarding the proceeds, specifically whether they will be returned to shareholders through dividends or share repurchases. This suggests Diamond Hill values management's disciplined approach to capital allocation and expects shareholder-friendly actions. The pitch implies that the Heineken stake may have been undervalued or not properly reflected in FEMSA's trading multiple. The fund appears confident that this corporate action will lead to improved valuation recognition for the core beverage retail business. This represents a classic sum-of-the-parts value realization story where asset sales unlock hidden value.

Pitch Summary:
Sweden-based digital music services provider Spotify continues adding new users despite having materially pulled back on customer acquisition spending over the last several months — a decision which is allowing profits to flow through to investors and providing a boost to investor sentiment on the company's long-term economics. Though the valuation has increased, we continue to see compelling upside potential over time if the company continues executing on its user-growth and profitability ambitions.

BSD Analysis:
Diamond Hill maintains a bullish stance on Spotify, highlighting the company's ability to grow users while reducing customer acquisition costs, which is driving improved profitability. The fund appreciates management's disciplined approach to spending, allowing more profits to flow to investors and improving sentiment around the company's long-term unit economics. Despite acknowledging that valuation has increased, the managers see continued upside potential contingent on execution of both user growth and profitability objectives. This represents a classic growth-at-a-reasonable-price thesis where operational efficiency improvements are driving margin expansion. The pitch suggests confidence in Spotify's competitive moat in digital music streaming and its ability to monetize its growing user base more effectively. The fund appears to view current valuation levels as still attractive relative to the company's long-term earnings potential. This position reflects Diamond Hill's conviction in Spotify's strategic positioning within the evolving digital media landscape.

Pitch Summary:
We also purchased an ownership stake in Target, the US-based mass retailer. The company has experienced strong traffic growth over the past several years but was disproportionally impacted by poor internal inventory forecasting in 2022, which caused near-term profitability to be negatively impacted. As near-term headwinds subside, we believe Target can restore its margin profile on a sales base that has seen a significant increase since the beginning of the pandemic. The recent stock price sell-off related to near-term controversy concerns allowed us to initiate a position at an attractive discount to our estimate of intrinsic value. Looking past the next couple of quarters, we believe Target is well positioned to gain share longer-term due to its merchandising acumen, real estate locations and omnichannel capabilities.

BSD Analysis:
Diamond Hill initiated a position in Target, viewing the recent stock weakness as an opportunity to acquire shares below intrinsic value. The fund recognizes that Target's 2022 inventory forecasting issues temporarily impacted profitability but sees this as a transient operational challenge rather than a structural problem. Diamond Hill believes Target can restore its historical margin profile as inventory management normalizes and the company benefits from its expanded pandemic-era sales base. The fund is confident in Target's long-term competitive positioning, citing superior merchandising capabilities, prime real estate locations, and strong omnichannel execution. Recent controversy-driven stock weakness provided an attractive entry point for a high-quality retailer with proven market share gains potential. Diamond Hill views Target's combination of operational excellence and strategic assets as sustainable competitive advantages. The fund expects Target to emerge from near-term challenges as a stronger competitor with enhanced market positioning.

Pitch Summary:
We added two new positions to the portfolio in Q2, one of which was Ferguson, a leading distributor of plumbing, waterworks, HVAC and related products. Bridging the gap between large and fragmented sets of customers and suppliers, Ferguson is a high-quality distributor and the market leader in an industry where scale matters. This has led to a virtuous cycle of share gains and margin expansion that we believe has a long runway given the still fragmented industry. The company has benefited from strong macro tailwinds in recent years, but the next year or two will likely be soft. We believe this is largely priced into the stock and a key reason the opportunity to initiate a position at a discount to our intrinsic value exists. We also believe that since Ferguson moved its primary listing to the NYSE in May 2022, there could be ancillary benefits from being included in Russell and S&P indices at some point, which could serve as a catalyst to help close its valuation gap versus peers.

BSD Analysis:
Diamond Hill initiated a new position in Ferguson, viewing it as a high-quality distributor with significant competitive advantages in a scale-dependent industry. The fund appreciates Ferguson's market-leading position and the virtuous cycle of share gains and margin expansion it has created in the fragmented plumbing and HVAC distribution market. Diamond Hill sees substantial runway for continued growth given the industry's ongoing fragmentation and Ferguson's superior scale advantages. The fund believes near-term macro softness is already reflected in the stock price, creating an attractive entry point below intrinsic value. The NYSE listing migration could provide additional upside through potential index inclusion, serving as a catalyst for valuation re-rating. Diamond Hill views Ferguson as a defensive growth story with strong competitive moats and long-term market share expansion potential. The combination of attractive valuation, market leadership, and potential index inclusion catalysts makes Ferguson an appealing addition to the portfolio.

Pitch Summary:
Amazon's management team has been working to improve retail profitability, and Q1 results showed progress. In the case of Amazon's web services (AWS), the market has shifted its focus from where growth will bottom in the near term to how AI can help accelerate the adoption of public cloud services in the future. We believe Amazon's competitive advantages will continue to grow and that the business has the potential to grow faster than the overall economy in the coming years.

BSD Analysis:
Diamond Hill remains bullish on Amazon, citing improving retail profitability as evidence of management's operational focus and execution. The fund sees AWS positioned to benefit from the AI revolution, which could accelerate cloud adoption and drive growth beyond current expectations. Diamond Hill believes Amazon's competitive moats will continue to strengthen, particularly as AI capabilities become more integrated into cloud services. The combination of retail margin improvement and AWS's AI-driven growth potential creates multiple value drivers for the company. The fund expects Amazon to outpace overall economic growth, suggesting confidence in the company's long-term market position and innovation capabilities. Amazon's dual focus on operational efficiency and technological advancement appears to be resonating with Diamond Hill's investment thesis. The firm views Amazon as well-positioned to capitalize on secular trends in both e-commerce and cloud computing.

Pitch Summary:
CarMax's fundamentals sequentially improved despite a challenging near-term environment for used car demand. It has been encouraging to see management's focus on consistently profitable sales, returning to market share gains following a temporary spike in competitor discounts and taking steps to reset cost structures. We believe CarMax is a well-run industry leader and should strengthen its competitive positioning during this softer industry sales period.

BSD Analysis:
Diamond Hill maintains confidence in CarMax despite challenging used car market conditions, highlighting the company's sequential fundamental improvements and management's disciplined approach. The fund appreciates management's focus on profitable sales over volume, demonstrating pricing discipline in a competitive environment. CarMax's ability to regain market share after temporary competitor pressure shows the strength of its business model and customer value proposition. The company's proactive cost structure reset positions it well for margin expansion when market conditions improve. Diamond Hill views the current industry softness as an opportunity for CarMax to strengthen its competitive moat and gain share from weaker competitors. The fund sees CarMax as a well-managed industry leader with superior operational capabilities. This defensive positioning during the downturn should enable CarMax to emerge stronger when the used car market recovers.

Pitch Summary:
AIG reported solid quarterly results for its fiscal Q1, consistent with our thesis that the company is now in the middle stages of a successful turnaround in its P&C insurance business that we believe still has meaningful runway for improvement. AIG also announced the expected sale of Validus Re (property catastrophe reinsurance) to RenaissanceRe, a transaction we view as mutually beneficial as it transfers the assets to an entity that can create the most value with the intellectual property and customer relationships. The sale is also consistent with AIG's longer-term path of reducing underwriting volatility. The proceeds from the sale, along with an additional share sale of its ownership stake in CRBG (the holding company for its life and retirement business), will generate a nice cash flow for the company, which it intends to use to repurchase stock.

BSD Analysis:
Diamond Hill maintains a bullish stance on AIG, viewing the company as being in the middle stages of a successful P&C insurance turnaround with significant improvement potential ahead. The fund sees the Validus Re sale to RenaissanceRe as strategically sound, reducing underwriting volatility while transferring assets to a more capable operator. The transaction, combined with the CRBG stake sale, will generate substantial cash flow that management plans to deploy for share repurchases, creating additional shareholder value. The solid Q1 results validate the fund's thesis that AIG's operational improvements are gaining traction. Diamond Hill appears confident in the company's strategic direction and capital allocation priorities. The fund views AIG as well-positioned to continue its transformation into a more focused and profitable insurance operation. This turnaround story appears to have meaningful runway for further value creation.

Pitch Summary:
UFP Technologies (UFPT) is an innovative designer and custom manufacturer of components, subassemblies, products and packaging primarily for the medical market. Its medical technology business (MedTech) has become the company's dominant business driver, now accounting for roughly 85% of revenues. As management adds capacity in lower-cost regions like the Dominican Republic, Mexico and Ireland, we expect gross margins to continue expanding. Free cash flow should also be helped as the company recently completed its new facility in Tijuana, Mexico. Combined, these developments speak to UFPT's ability to execute on its two-pronged growth strategy, which targets 10%-15% annual revenue growth and margin expansion via organic growth and acquisitions.

BSD Analysis:
Diamond Hill articulates a strong bull thesis for UFP Technologies centered on operational leverage and strategic execution. The manager emphasizes the company's dominant position in medical technology manufacturing, with MedTech representing 85% of revenues and providing exposure to a growing, defensive end market. The investment case hinges on margin expansion through geographic diversification, with new facilities in lower-cost regions like Mexico, Dominican Republic, and Ireland driving operational efficiency. Recent completion of the Tijuana facility should accelerate free cash flow generation and validate management's execution capabilities. The pitch highlights a clear dual growth strategy targeting 10-15% annual revenue growth through both organic expansion and strategic acquisitions. Diamond Hill views UFPT as well-positioned to benefit from healthcare sector tailwinds while demonstrating operational excellence through cost optimization and capacity expansion.

Pitch Summary:
Green Brick Partners is a homebuilder operating primarily in Atlanta and Dallas. Homebuilders have had a solid start to 2023, and Green Brick has performed especially well — its low land basis and strong fundamentals in its main Dallas-Fort Worth market have contributed to strong earnings and underlying metrics relative to competitors. We like Green Brick Partners for its solid balance sheet, which should allow it to navigate any impending cyclicality and survive a downturn. Further, its management team is long-term oriented and well-aligned with shareholders — attributes we like.

BSD Analysis:
Diamond Hill presents a compelling bull case for Green Brick Partners based on operational excellence and defensive positioning. The manager highlights the company's competitive advantages including low land basis and strong market fundamentals in the Dallas-Fort Worth area, which have driven superior earnings performance relative to peers. The investment thesis centers on the company's financial resilience, with a solid balance sheet providing downside protection during potential housing market cyclicality. Management quality emerges as a key differentiator, with the team demonstrating long-term orientation and strong shareholder alignment. The pitch reflects confidence in Green Brick's ability to outperform through market cycles while maintaining operational discipline. Diamond Hill views the homebuilding sector's 2023 performance as validation of their thesis. The emphasis on balance sheet strength and management quality suggests a value-oriented approach focused on downside protection and sustainable competitive advantages.

Pitch Summary:
After learning how to program and discovering the manual inefficiencies of the market, Thomas Peterffy spent his first years in New York computerizing options pricing. By 1977 he had saved enough money to purchase a seat on the American Stock Exchange as a market maker, a business that evolved over the decades into a low-cost online brokerage that is today Interactive Brokers (IBKR). The business serves just over two million customers across the world providing best customer value through lowest cost execution (often a few dollars per trade) with the best interest rates on cash and margin lending globally. For example, IBKR pay 4.6% today on USD cash held on account versus 0.45% at largest competitor Charles Schwab. This is achieved through an absolute focus on automation and in-house programming which simplifies the technology stack and reduces costs. Through this automation focus, IBKR achieves 20% customer growth rates at 70% operating margins, levels of profitability rivalled only by payment networks and royalty companies. For context Schwab has over 35 million customers at an operating margin in the 40s. Though Thomas remains very active in the business, fielding questions on the earnings calls, speaking at conferences and featuring in the advertising, he has instilled the culture of customer value and automation in his successors. CEO Milan Galik (also Hungarian) and CFO Paul Brody both joined Thomas in the late 80s and early 90s as programmers, working their way through the organization. The portfolio initiated a position in IBKR early in 2023, attracted by the long-term growth opportunity underwritten by the focus on cost advantage and customer service. Looking at what this business could be worth in a few years' time, we do not see the potential remotely valued in the shares. This year IBKR is likely to generate at least US$2bn of free cash flow, yet the listed equity value (there is no debt) is around 15-16 times this. We struggle to find an industry leader with this level of profitability and returns, adored by customers, still led by the founder and growing at double digit rates on this kind of valuation. It should also be noted that IBKR is positively geared to a protracted higher rate environment as it earns an attractive interest spread on its margin lending business which can represent in excess of 40% of total income.

BSD Analysis:
Cooper Investors presents Interactive Brokers as an exceptional value opportunity led by founder Thomas Peterffy, emphasizing the company's unique automation-driven competitive advantage. The manager highlights IBKR's superior customer value proposition, offering execution costs of just a few dollars per trade and 4.6% cash rates versus 0.45% at Charles Schwab. The investment thesis centers on the company's extraordinary profitability metrics, achieving 70% operating margins and 20% customer growth through relentless automation focus, rivaling payment networks and royalty companies. Cooper emphasizes the sustainable competitive moat created by in-house programming and simplified technology stack, reducing costs while improving service quality. The valuation opportunity appears compelling with IBKR trading at 15-16x free cash flow despite generating $2 billion annually with zero debt. The fund struggles to find comparable industry leaders with this profitability profile, customer loyalty, founder leadership, and double-digit growth at such attractive valuations. Additionally, IBKR benefits from higher interest rate environments through margin lending spreads representing over 40% of income, providing positive rate sensitivity.

Pitch Summary:
CDW is a reseller of IT equipment, software and services to US corporates, effectively clipping a ticket on every dollar of IT spend going through the enterprise. We have grown to admire these types of speciality value-added distributors. We see similarities between IT reselling and insurance broking, an area we have long invested in; both industries see the middleman assisting customers to navigate a complex landscape where the underlying product set is consistently evolving. Significant value is offered to vendors in the ecosystem as IT resellers provide a cost-effective route to market, particularly for smaller customers. CDW have grown nicely at high-single to low-double digit rates over the long term and as an asset light business generate excellent returns at >20% of invested capital (including acquired intangibles). With significant IT spend in FY20 through FY22 backing into the economic uncertainty today, this year will be slower as procurement gatekeepers delay decision making. As a critical trusted adviser to IT managers who are dealing with rising complexity (Cloud, Cyber Security, and now AI), we do not expect soggy operating trends to linger, meaning there is a brief opportunity to invest in a high-quality compounder leveraged to long term IT complexity at a decent discount to market.

BSD Analysis:
Cooper Investors presents CDW as an attractive value opportunity following a 25% decline due to IT spending normalization after pandemic overearning. The manager draws compelling parallels between IT reselling and insurance broking, both industries where specialized middlemen add significant value navigating complex, evolving product landscapes. CDW's business model generates excellent returns exceeding 20% on invested capital through its asset-light distribution approach. The company provides critical value to both customers and vendors, offering cost-effective market access particularly for smaller clients while serving as trusted advisors to IT managers. Cooper emphasizes the structural growth drivers from increasing IT complexity including cloud migration, cybersecurity, and emerging AI adoption. While near-term procurement delays create temporary headwinds, the fund views this as a brief opportunity to invest in a high-quality compounder at a discount. The long-term thesis rests on CDW's positioning as an essential intermediary in an increasingly complex technology ecosystem, with sustainable competitive advantages and attractive incremental returns.

Pitch Summary:
Retail cosmetics store roll-out Ulta Beauty and IT value-added reseller CDW Corp are both leaders in their fields with substantial long duration opportunities to keep growing at attractive incremental rates of return. They have strong management teams who are focused on maximising the long-term value of their businesses through sensible and disciplined capital allocation. However both enjoyed a period of overearning through the pandemic, with CDW benefitting from abnormally high IT spend and Ulta seeing demand spike for beauty products as consumers emerged from their lockdown cocoons. As the normalisation of these trends produce an air pocket in demand management adjusted full year expectations and both shares sold off sharply; Ulta fell almost 30% in May, from $560 to $400, while CDW fell 25% between February and May, from $215 to $160. Having followed Ulta closely but bided our time, RAVL has emerged here. The business continues to open stores across the US, both standalone and more 'shop-in-shop' outlets through its partnership with Target. The 'Ultamate' program is one of the best retail loyalty schemes we've seen in terms of demand generation. We think the beauty category is relatively recession resilient with increased spend on skincare and longevity, young people spending ever more time photographing and filming themselves. Challenges from e-com disruptors have been largely seen off (consumers prefer to buy in-store with advice and testers) while brand owners (L'Oreal, Estee) have a symbiotic relationship with the retailers and have zero interest in pursuing a 'Direct to Consumer' model like, say a luxury or sneaker brand might.

BSD Analysis:
Cooper Investors identifies Ulta Beauty as an attractive value opportunity following a sharp 30% selloff from pandemic overearning normalization. The manager emphasizes Ulta's market leadership position with substantial long-duration growth opportunities and disciplined capital allocation. The investment thesis centers on the company's continued US store expansion through both standalone locations and Target partnerships, supported by the highly effective 'Ultamate' loyalty program. Cooper highlights the beauty category's recession resilience driven by skincare/longevity trends and social media influence on younger consumers. The fund views e-commerce disruption risks as largely mitigated since consumers prefer in-store experiences for testing and advice. Brand relationships with suppliers like L'Oreal and Estee Lauder are symbiotic, with manufacturers having no interest in direct-to-consumer models. Following the stock closely, Cooper sees Risk Adjusted Value Latency (RAVL) emerging at current levels, presenting an opportunity to invest in a high-quality retail compounder at a temporary discount.

Pitch Summary:
Tokyo Electron, a leading SPE company. The SPE industry is highly specialised and dominated by oligopolies up and down the supply chain. Tokyo Electron collaborates extremely closely with customers to ensure they retain their leading-edge capabilities and market position. In a recent meeting with President Toshiki Kawai we noted the positive language around his expected recovery of the market in 2024. We took the opportunity to add to these names at a cyclical trough in 2022, including Tokyo Electron, a leading SPE company.

BSD Analysis:
Cooper Investors positions Tokyo Electron as a key beneficiary of the AI-driven semiconductor equipment cycle through their 'picks and shovels' investment approach. The manager emphasizes the highly specialized nature of the semiconductor production equipment (SPE) industry, which is dominated by oligopolies providing defensive competitive positioning. Tokyo Electron's close collaboration with customers ensures retention of leading-edge capabilities and market share in critical manufacturing processes. The fund's recent meeting with President Toshiki Kawai revealed positive commentary about market recovery expectations for 2024, suggesting management confidence in the cyclical upturn. Cooper strategically accumulated shares during the 2022 cyclical trough, positioning for the AI-driven equipment demand surge. The oligopolistic industry structure and specialized nature of SPE provides pricing power and sustainable competitive advantages. As AI model development requires exponentially more computational power, demand for Tokyo Electron's advanced manufacturing equipment should accelerate significantly.

Pitch Summary:
TSMC, the largest semiconductor manufacturer globally, derived 41% of revenue from high performance computing in 2022 (from 33% in 2018), now higher than smartphones at 39% of revenue. Semiconductor companies fit within our Cyclical Subset of Value though emerging technologies and more diversified use cases could dampen cyclicality as end markets have evolved from consumer-led (PCs, smartphones) to new applications with more steady secular growth. We are still in the early stages of AI, accounting for a small but growing portion of semiconductor demand. ChatGPT is an example of this, representing the first consumer use case of Generative AI for the masses. To develop AI models very large data sets must be used in the training phase. The data used as inputs for the model, as well as the subsequent generation of new information requires chips to perform computations and to store information. As demand for AI models and data sets grows exponentially it will require gains in cost and power efficiency as budgets are not unlimited. This will drive demand for the leading-edge chips that TSMC manufactures. We took the opportunity to add to these names at a cyclical trough in 2022.

BSD Analysis:
Cooper Investors presents a compelling bull case for TSMC centered on the AI revolution and secular shift in semiconductor demand. The manager highlights TSMC's strategic positioning as the world's largest foundry with 41% of revenue now coming from high-performance computing, surpassing smartphones. The investment thesis rests on the exponential growth in AI model development requiring leading-edge chips for both training and inference. Cooper emphasizes the structural shift from cyclical consumer-driven demand (PCs, smartphones) to more stable secular growth applications including AI, data centers, and automotive. The fund strategically added to TSMC during the 2022 cyclical trough, positioning for the AI-driven semiconductor upcycle. With AI still in early stages and representing a small but rapidly growing portion of chip demand, TSMC's manufacturing leadership in advanced nodes positions it to capture disproportionate value from this mega-trend.

Pitch Summary:
Warner Bros Discovery – Media conglomerate Warner Bros Discovery was the top detractor in the quarter but remained a top contributor for the first half. After a strong first quarter, the stock price faltered in the face of near-term uncertainty around the re-launch of streaming service Max. Additionally, the big budget movie The Flash has not been a success. Finally, there was well-publicized drama around CNN management, with CNN CEO Chris Licht leaving the company after only one year, which we believe was a positive resolution. The company remains dramatically undervalued today, and management continues to make positive operational progress to drive free cash flow (FCF) growth. We believe this company has seen the worst so will be less leveraged and more strategically positioned in the quarters and years to come. Its underlying holdings are high quality businesses that will drive FCF per share growth while also being attractive acquisition candidates.

BSD Analysis:
Warner Bros Discovery presents a contrarian value opportunity despite near-term operational challenges that weighed on Q2 performance. The fund managers view recent setbacks including Max streaming service uncertainty, The Flash movie disappointment, and CNN management turmoil as temporary issues rather than structural problems. The departure of CNN CEO Chris Licht is viewed as a positive development that removes management distraction. Southeastern believes the company is dramatically undervalued and positioned at a cyclical trough, with management making operational progress toward free cash flow growth. The investment thesis centers on the belief that WBD has absorbed the worst of its integration challenges and will emerge less leveraged with improved strategic positioning. The underlying media assets are characterized as high-quality businesses capable of driving FCF per share growth. The portfolio of content and distribution assets also presents potential acquisition value for strategic buyers.