Investment Pitches

Pitch Summary:
Finning is the world's largest dealer and distributor of Caterpillar equipment. The company operates in three regions: Canada, South America (Chile, Argentina, Bolivia), and UK & Ireland. I view FTT as a reasonably high-quality business (classic dealer model that benefits from steady service income) serving highly cyclical end markets driven by commodities, mining, energy and infrastructure. Shares appear very cheap today. As with all cyclicals though, cheapness is often a reflection of peak cycle worries. I share these concerns, which is why FTT is a modestly sized "starter" position for Upslope. Why not wait until the coast is clear before initiating the position at all? Because FTT is highly complementary to Upslope's defensive portfolio and cycle timing is notoriously difficult. I plan to discuss FTT in more detail if/when it graduates to a full size.

BSD Analysis:
The manager initiated a new position in Finning, recognizing it as a high-quality dealer business with steady service income streams. The investment thesis centers on the company's dominant market position as the world's largest Caterpillar dealer and its diversified geographic footprint across stable regions. The manager acknowledges the cyclical nature of the business and current peak cycle concerns, which explain the attractive valuation. The position sizing reflects prudent risk management given cyclical uncertainties. The strategic rationale emphasizes portfolio diversification benefits, as Finning provides cyclical exposure to complement the fund's otherwise defensive positioning. The manager's approach demonstrates disciplined value investing, recognizing that cycle timing is difficult and waiting for perfect clarity often means missing opportunities.

Pitch Summary:
Chemring is a niche defense contractor focused on flares, energetics, and cyber warfare, among other areas. The company has navigated the uncertain environment fine but has not benefited as materially as I expected. Additionally, the CFO, who played a key role in driving the company's recent turnaround, announced plans to retire. I'm not overly concerned by the change, but the loss of a key executive is another negative. We may be CHG shareholders again in the future. But, for now there appear to be better opportunities for our capital.

BSD Analysis:
The manager exited Chemring due to underwhelming performance relative to expectations and key management departure. Despite the company's solid navigation of market uncertainty, the CFO's retirement represents a significant loss given their instrumental role in the recent turnaround. The manager's neutral stance reflects measured disappointment rather than fundamental concerns about the business. The exit appears tactical rather than strategic, with the manager explicitly leaving the door open for future re-entry. This suggests the investment thesis remains intact but execution has been subpar. The decision prioritizes capital allocation efficiency over holding underperforming positions. The manager's willingness to revisit the position indicates confidence in the underlying defense sector dynamics.

Pitch Summary:
USB has the lowest stated and adjusted capital ratio bank in the country; false narratives; fragile capital levels; the bank would need additional capital;

BSD Analysis:
U.S. Bancorp faces pressures from compressed net interest margins, rising funding costs, and growing credit risk in commercial real estate. Though historically a conservative lender, USB’s heavy exposure to rate-sensitive loans leaves earnings vulnerable. Regulatory scrutiny after regional bank failures adds uncertainty. Cost of deposits continues to climb as competition intensifies, undermining profitability. Bears also worry about slower loan growth amid economic cooling.

Pitch Summary:
We mentioned in our previous quarterly letter that we had built a position in Opera Ltd and that it had just declared a dividend (along with a host of other positive business developments). We continue to hold this position after building a position at prices between $5 and $6; the stock trades as of the time of writing at $10.95. This is one of those ideas that has several elements to the investment thesis as well as a continually evolving business picture. To summarize, the thesis is a combination of value, substantial cash and investee balances creating an attractive enterprise valuation combined with growth and business opportunities. As of the last quarter cash balances were $119 million. The company also owns a portion of several investee businesses and managed to move its investment in Nanobank to the more attractive OPay business at a good valuation. The cash plus investee balances total $436 million (depending on valuation assumptions that are likely conservative for OPay) giving the company an enterprise value of approximately $550 million at the time of writing. Performing a normalized earnings analysis, we estimate a level of net income of $119 million. This is then equivalent to an EVE of 4.6x. This is even after the share price doubled in the last two months. The last (but definitely not least) leg of the investment idea is the business growth that could occur with this business. It operates a unique, custom browser model that, rather than just creating a vanilla functional browser, aims to provide additional functionality required by certain groups of users. For example, its Opera GX browser has now surpassed 20 million Gamer users. This browser was developed after research and discussions with gamers to determine their specific requirements. In case you don't have young children who like gaming, they often flick between games and walkthrough videos on YouTube and other social media and so keep their browsers on for many hours a day. At the same time, they want to maximize gaming performance, each GPU cycle costs money! As well as optimizing processing power, data bandwidth and RAM usage they want a browser that gives them many other specific features. So Opera has bundled in free VPN (the only browser to do this), gaming graphics, 2-D games, relaxing music as well as ad blockers, Twitch and Discord sidebar integrations. Based on the success of the gaming browser which hasn't been fully monetized as yet in the advertising dimension, with most revenue still coming from browser search revenue, Opera is looking at other verticals. They are experimenting with sports functionality in Opera Mini (live scores), recently added GPT functionality into their main browser to summarize web pages and have a host of other features that will boost user stickiness, revenue and growth. Given the size of the browser market, Opera's speed to market and their relative size there is a lot of potential for growth. The next few quarters should be very interesting for this company.

BSD Analysis:
The manager presents a compelling multi-faceted bull case for Opera Ltd, emphasizing both value and growth characteristics. The investment thesis centers on an attractive enterprise valuation of 4.6x normalized earnings despite the stock doubling from $5-6 to $10.95. With $119 million in cash and $436 million in total cash plus investee balances (including the strategic OPay investment), the company trades at an enterprise value of approximately $550 million. The growth narrative focuses on Opera's differentiated browser strategy, particularly the successful Opera GX gaming browser which has reached 20 million users by providing specialized features like free VPN, gaming optimization, and integrated social platforms. The manager highlights significant monetization potential as the gaming browser hasn't been fully monetized through advertising yet, with most revenue still coming from search. Opera's expansion into new verticals including sports functionality and GPT integration demonstrates the company's ability to innovate and capture additional market share in the large browser market.

Pitch Summary:
This quarter, we exited our homebuilder stocks of Lennar (NYSE:LEN) and D.R. Horton (NYSE:DHI). While the companies have excelled since we invested, rising rates have caused contract cancellations to explode higher and their construction backlog to shrink significantly. Compared to the Q1 of the prior year, Lennar's 2023 Q1 saw a 33% decrease in construction backlog and a 18% decline in new orders (by dollar value). The cancellation rate increased to 21% from 10% last year. While both homebuilders are still quite profitable and well-run, we wanted to exit before they are impacted by an impending recession. We used the capital to buy shares of the Charles Schwab (NYSE:SCHW) which dropped in price due to the 2023 banking crisis. We previously wrote about our investment thesis for Schwab in our Q1 2019 letter. We later sold our position in 2020 in order to free up capital for other opportunities that became available during the chaos of the Covid crash. Now the panic over the current banking crisis has created an opportunity to reenter this investment. Schwab began as one of the first low-cost electronic brokerages in 1971. Over the years, Schwab's banking division and financial advisor custody services have both grown to be an increasingly large portion of the business. An equity brokerage business like Schwab is very attractive due to scale providing a barrier to entry. The costs of running a brokerage are largely fixed, so the industry naturally evolved to an oligopoly of a few major players that can all earn attractive returns on capital. Schwab's bank allows customers to have their banking and brokerage needs integrated under one roof. Charles Schwab Bank has grown to become one of the largest banks in the country, and at the end of 2022 had $126.6B of bank deposits in 1.7M accounts. Schwab acquired T.D. Ameritrade and the investment management business of USAA in 2019 and at the end of 2022 had $7.05T of client assets in 33.8M accounts. Schwab is now the second largest broker in the United States, with only Vanguard holding more assets. When clients invest their money at Schwab's brokerage or keep money in Schwab Bank, they only collect a small interest from Schwab on their cash balances. These clients are fairly yield insensitive as they are storing their money at Schwab primarily for the convenience and the overall utility and service of the platform. In an April 6th statement, the two co-chairmen of the firm wrote "we know there is a level of cash clients prefer to keep in a highly liquid form, what we call transactional cash. That is money available to take advantage of investing opportunities that arise or for day-to-day personal cash flow needs. Typically, that transactional cash is in the range of 5-10% of a client's overall assets here at Schwab." Schwab can then invest this cash at market rates of interest which is much higher than what they pay for these cash balances. Over the years, net interest has become an increasingly large proportion of Schwab's income. In 2022, net interest revenue made up 51% of all net revenue. Generally, higher interest rates translate into Schwab generating higher net interest revenue. Schwab's 2019 annual report had a rate sensitivity analysis which showed that a 100 basis point increase in rates led to a 4.8% increase in net interest revenue and the opposite led to a 7.4% decrease. Rate increases expand the spread that they collect. However, too much of a good thing can be toxic. The rate increases have made many of the rate insensitive customers begin to rethink their capital allocation as they move cash from uninvested bank and brokerage balances into money market funds at the brokerage arm. As rates increase, more customers pull their cash from uninvested into money market funds. If Schwab is forced to access programs like the BTFP or write CDs in order to meet liquidity needs, then their cost of capital increases. Currently, Schwab pays interest rates of between 0.45%-0.48% APY for uninvested cash in checking accounts, brokerage accounts, and savings accounts. However, some of their CDs and money market funds pay as much as 4.94% and 4.84%, respectively. Schwab believes that this rotation will eventually slow down as customers desire some cash to be uninvested and available for transactions. The Federal Reserve's rate increases in 2022 and 2023 so far exceeded Schwab's forecasts. At the end of 2022, Schwab had unrealized losses of over $29 billion in their HTM securities. Their HTM balance sheet is generally made up of fixed income securities. As these HTM securities mature, their unrealized losses will decrease as their market price moves towards the par value. The danger is if they are forced to sell their HTM portfolio before they can mature in order to meet customer redemptions. Fortunately, the Charles Schwab Corporation has a very deep liquidity pool. At the end of 2022, their Tier 1 capital leverage was at 7.2% vs. the 4.0% required minimum. For the consolidated corporation, this translates to $40.3B in Tier 1 capital vs $22.5B required. The aforementioned programs and measures mean that they can access additional capital without needing to liquidate. The size and financial strength of Schwab is an advantage to attracting worried depositors during a banking crisis. The company reported that in the month of March, the firm pulled in $53 billion of net new client assets. In summary, we do not believe that Schwab is at risk of a liquidity crisis. They have deep pools of capital reserves and have many sources of liquidity that they can access. Higher interest rates help their main engine of profitability in the long-term. They should remain profitable enough to earn their way out of the unrealized losses they have accumulated before it becomes an issue. The concentration dynamics of the brokerage industry give them a sustainable business advantage. Our investment in Schwab is not based upon a variant perception on interest rate forecasts or their earnings and revenue for the next few quarters. Rather, we believe that Schwab is a high-quality business, will be able to survive the current crisis, and thrive for the long-term. The current valuation is cheap after the drop and suggests a high forward rate of return. Current analyst consensus forecasts are for an 11.6% growth in net revenues for 2024 over 2023. At a $50.77 price and a consensus $4.47 EPS for 2024, it trades at a forward PE of 11.3. We don't have a specific price target in mind, but instead will compare our estimated forward rate of return for Schwab to our other opportunities. Our current position size in Schwab is relatively small. Depending on the Federal Reserve's rate hike decisions, the banking crisis could become significantly worse. This could also cause the unrealized losses in Schwab's investment portfolio to become much worse, and the stock price to decline further. As long as we continue to believe the chance of their insolvency to be low, we will use price drops as an opportunity to build our position.

BSD Analysis:
Blue Tower Asset Management presents a compelling contrarian investment thesis for Charles Schwab during the 2023 banking crisis. The manager views the market panic as creating an attractive entry point for a high-quality business with durable competitive advantages. Schwab's oligopolistic position in the brokerage industry, supported by scale economies and fixed cost structures, provides sustainable barriers to entry and attractive returns on capital. The firm's integrated banking and brokerage platform creates customer stickiness, with clients maintaining yield-insensitive cash balances for transactional convenience. While Schwab faces near-term headwinds from $29 billion in unrealized HTM losses and customer cash rotation to higher-yielding products, the manager emphasizes the company's strong capital position with 7.2% Tier 1 leverage ratio versus 4.0% minimum requirement. The investment case centers on Schwab's ability to weather the current crisis and benefit from higher long-term interest rates, which expand net interest margins that comprise 51% of revenues. At 11.3x forward P/E with 11.6% expected revenue growth, the valuation appears attractive for a market-leading franchise. The manager plans to opportunistically add to the position on further weakness, viewing temporary volatility as a pathway to superior long-term returns.

Pitch Summary:
Examples of this in our portfolio include Universal Music Group (UMG), a leading music label providing streaming platforms (e.g. Spotify, Apple Music, Amazon Music, etc.) with the evergreen content they need and hence growing secularly alongside them without stepping into their fiercely competitive arena. Or Visa/MasterCard, whose payment rails are benefitting from the growth in digital payments, irrespective of who is winning among the growing fintech competition on the front end.

BSD Analysis:
Stenham positions Mastercard as critical payment infrastructure that captures secular growth in digital payments while avoiding competitive risks at the consumer fintech level. The manager views Mastercard's payment rails as essential back-end infrastructure that benefits from digitization trends regardless of which front-end fintech companies succeed or fail. This strategic positioning provides exposure to the global shift toward digital payments without the technological disruption risks faced by consumer-facing competitors. Mastercard's network effects and regulatory advantages create substantial barriers to entry that protect its market position. The company generates predictable transaction-based revenues as global commerce increasingly moves digital, providing visibility into long-term growth. Stenham appreciates the business model's stability compared to technology companies facing rapid change and disruption cycles. Mastercard's role as essential financial infrastructure offers pricing power and defensive characteristics. This investment exemplifies Stenham's strategy of owning back-end infrastructure that underpins secular trends rather than attempting to pick winners in highly competitive technological markets.

Pitch Summary:
Examples of this in our portfolio include Universal Music Group (UMG), a leading music label providing streaming platforms (e.g. Spotify, Apple Music, Amazon Music, etc.) with the evergreen content they need and hence growing secularly alongside them without stepping into their fiercely competitive arena. Or Visa/MasterCard, whose payment rails are benefitting from the growth in digital payments, irrespective of who is winning among the growing fintech competition on the front end.

BSD Analysis:
Stenham views Visa as essential payment infrastructure that benefits from secular growth in digital payments while avoiding front-end fintech competition. The manager positions Visa's payment rails as back-end infrastructure that grows alongside digital payment trends regardless of which fintech companies succeed or fail at the consumer level. This strategic positioning provides Visa with exposure to the digitization of payments without the technological disruption risks faced by front-end competitors. The company's network effects and regulatory moats create significant barriers to entry that protect market share. Stenham appreciates Visa's ability to generate predictable transaction-based revenues as global commerce increasingly shifts digital. The business model offers superior stability compared to technology companies facing rapid change and disruption cycles. Visa's role as essential financial infrastructure provides pricing power and long-term growth visibility. This investment exemplifies Stenham's preference for owning back-end infrastructure that underpins secular trends rather than trying to determine technological winners and losers in competitive markets.

Pitch Summary:
Examples of this in our portfolio include Universal Music Group (UMG), a leading music label providing streaming platforms (e.g. Spotify, Apple Music, Amazon Music, etc.) with the evergreen content they need and hence growing secularly alongside them without stepping into their fiercely competitive arena. Or Visa/MasterCard, whose payment rails are benefitting from the growth in digital payments, irrespective of who is winning among the growing fintech competition on the front end.

BSD Analysis:
Stenham positions Universal Music Group as a strategic back-end infrastructure play in the technology and communications sectors. The manager views UMG as a leading music label that provides essential evergreen content to streaming platforms like Spotify, Apple Music, and Amazon Music. The investment thesis centers on UMG's ability to grow secularly alongside streaming platforms without competing directly in their fiercely competitive arena. This positioning provides UMG with exposure to digital music growth while avoiding the technological disruption risks faced by front-end platforms. The company's vast catalog of music rights creates significant barriers to entry and provides predictable royalty streams. Stenham appreciates UMG's role as essential infrastructure that benefits from long-term secular trends in digital entertainment consumption. The business model offers superior stability compared to technology companies facing rapid change and disruption. This investment exemplifies Stenham's preference for owning back-end infrastructure that underpins secular trends rather than trying to pick technological winners and losers.