Investment Pitches

Pitch Summary:
In other changes to the portfolio, we sold out of our position in HireQuest (NASDAQ: HQI). This was bittersweet as it was one of our longest held positions. The company hit a high of $29 per share last summer and looked poised to break out after being added to the Russell 2000 and announcing what should have been a very accretive acquisition. But the combination of unexpectedly high workers comp costs, lagging benefits from the acquisition and slowing demand for temporary help surprised me and other investors for two quarters in a row. With so many fast growing, compelling investment opportunities and not enough capital, selling an underperforming stock to fund a company like Grown Rogue is easy, especially when you think Grown Rogue might be trading at 1.5 times 2025 cash flow estimates. We continue to like HQI's model and hold management in high respect, but we want to see if the company's issues are a one-off or if something has changed that lowers the long-term profitability of the company and its franchise staffing model.

BSD Analysis:
The manager executed a strategic exit from HireQuest after holding the position for an extended period, demonstrating disciplined portfolio management. Despite reaching $29 per share and Russell 2000 inclusion, the company faced multiple operational headwinds including elevated workers' compensation costs and disappointing acquisition integration. The slowing demand for temporary staffing services created additional pressure on fundamentals for two consecutive quarters. While maintaining respect for management and the franchise staffing model, the manager prioritized capital allocation toward higher-conviction opportunities like Grown Rogue. The exit reflects pragmatic decision-making when faced with underperformance and superior alternative investments. The manager remains open to re-engagement pending resolution of operational issues and clarity on long-term profitability trends. This position demonstrates the importance of opportunity cost analysis in concentrated value investing.

Pitch Summary:
Grown Rogue's sole focus is craft cannabis cultivation, and they have the #1 flower brand in the ultra-competitive Oregon market, and the top 5 indoor brand in the Michigan market. Grown Rogue is using growth capital from Mindset Capital and other affiliated investors to enter New Jersey, a market that has limited licenses, limited supplies and mediocre quality legal cannabis flower. The opportunity could not be greater. Grown Rogue has learned how to compete and generate free cash flow at $800-$900 a pound indoor flower and is now entering a market where wholesale flower can command more than $3000 a pound. By the end of this year, I expect Grown Rogue could hit an annual cash flow run rate of $25 million and get to $40 million in 2025, up dramatically from $7-$8 million in 2023. What is remarkable about this is the company's fully diluted enterprise value for all convertibles, options and warrants puts the company's value at approximately $60 million. And that's at the current share price, which is 200% higher than when we first invested. When we first invested in December of 2022, it is possible we did so at a valuation that ends up being less than 1 times 2025 EBITDA! That's right one times. And even now, it potentially trades at less than 2 times 2025 EBITDA. Grown Rogue has some of the highest margins, fastest growth rate and was the best performing cannabis stock last year. And not one analyst covers the company. I think Grown Rogue is an investor's dream. It is a company with demonstrated operational and cost advantages that has a long reinvestment runway with extremely high returns on invested capital. Grown Rogue was up almost 200% last year, Mindset funds now own approximately 9.9% of the shares outstanding, and if the company executes, the stock could do even better in 2024 than it did last year.

BSD Analysis:
The manager presents a compelling bull case for Grown Rogue based on exceptional operational metrics and market positioning. The company dominates craft cannabis in Oregon (#1 flower brand) and maintains top-5 status in competitive Michigan, demonstrating proven execution capabilities. The New Jersey expansion represents a significant value inflection point, with wholesale flower prices exceeding $3,000/pound versus their proven ability to generate cash flow at $800-900/pound in Oregon. Cash flow projections show dramatic growth from $7-8 million in 2023 to potentially $40 million by 2025. At current valuation of approximately $60 million enterprise value, the company trades at less than 2x projected 2025 EBITDA, representing exceptional value for a high-growth cannabis operator. The lack of analyst coverage and institutional attention creates an information asymmetry opportunity. The manager's 9.9% ownership stake and 200% returns demonstrate conviction and successful execution of the thesis.

Pitch Summary:
Jackson Financial Inc (JXN) reported 3Q23 Adjusted Operating EPS of $3.80, -10.4% Y/Y, ahead of consensus of $3.53. Registered index-linked annuity (RILA) sales rose 43.5% Y/Y to $807MM in the quarter, while total annuity account value rose 10.1% Y/Y to $218B, primarily driven by higher equity markets over the TTM period, with capital ratios rising. During the quarter, management returned $123MM to shareholders (3.0% of market cap) via $71MM of share repurchases and $52MM in dividends, and remains on track to achieve its 2023 capital return target of $500MM at the midpoint, or 12.3% of the company's market cap.

BSD Analysis:
Miller Value Partners highlights Jackson Financial's strong execution in the annuity market with earnings beating consensus expectations. The company's adjusted operating EPS of $3.80 exceeded estimates of $3.53, demonstrating operational efficiency despite a 10.4% year-over-year decline. RILA sales growth of 43.5% to $807MM indicates strong demand for the company's index-linked products in the current market environment. Total annuity account values of $218B growing 10.1% year-over-year reflect both market appreciation and net inflows. Management's aggressive capital return program of $500MM annually represents 12.3% of market cap, indicating confidence in cash generation and commitment to shareholder value. The combination of growing RILA sales, expanding account values, and substantial capital returns positions Jackson Financial as a compelling income-generating investment in the insurance sector.

Pitch Summary:
The Buckle (BKE) was another top performer during the quarter. The retailer reported 3Q23 net sales of $303.5MM, -8.7% Y/Y, slightly below consensus of $304.0MM, and EPS of $1.04, -16.1% Y/Y, ahead of consensus of $0.88. The company generated 3Q23 free cash flow (FCF) of $53.7MM, bringing trailing-twelve month (TTM) FCF to $216.6MM, or a FCF yield of 9.0%. Management maintained its quarterly dividend of $0.35/share and also declared a special cash dividend of $2.50/share, implying a twelve-month yield of ~8.2%.

BSD Analysis:
Miller Value Partners views The Buckle favorably despite revenue headwinds, focusing on the company's strong cash generation and shareholder returns. While sales declined 8.7% year-over-year, the retailer exceeded earnings expectations significantly with $1.04 EPS versus $0.88 consensus, indicating effective cost management. The company's free cash flow generation remains robust at $216.6MM trailing twelve months, yielding 9.0% on the current market cap. Management's commitment to shareholder returns is evident through maintaining the regular dividend and declaring a substantial $2.50 special dividend. The combined dividend yield of approximately 8.2% provides attractive income in the current environment. The Buckle's ability to generate strong cash flows and return capital to shareholders despite challenging retail conditions demonstrates operational resilience and disciplined capital allocation.

Pitch Summary:
Western Alliance Bancorp (WAL) was the top contributor during the quarter. The regional bank reported 3Q23 and Earnings per Share (EPS) of $1.97, -18.6% year-over-year (Y/Y) (+0.5% sequentially), ahead of consensus of $1.91. Total deposits rose 6.5% sequentially to $54.3B at the end of the quarter, with insured and collateralized deposits representing 82% of total deposits as of quarter-end, while the bank's common equity tier 1 (CET1) ratio expanded 50bps sequentially to 10.6% as of quarter-end. Tangible book value per share (TBV/share) came in at $43.66 (P/TBV of ~1.5x) as of quarter-end, +17.5% Y/Y, as TBV/share has now grown at a 19.2% compound annual growth rate (CAGR) since the end of 2013, with management highlighting that this is more than 6x the growth rate of its peers over the same period. Management is guiding for 4Q23 deposit growth of $250MM, loan growth of $150MM, net interest margin (NIM) of 3.65%, and net charge-offs of 10bps, at the respective midpoints, and also reiterated their expectation for a return to prior balance sheet guidance for loan and deposit growth of $500MM and $2B per quarter, respectively, in 2024.

BSD Analysis:
Miller Value Partners highlights Western Alliance Bancorp as their top contributor, demonstrating strong operational performance despite challenging regional banking conditions. The bank exceeded earnings expectations with $1.97 EPS versus $1.91 consensus, while showing sequential improvement. Deposit growth of 6.5% sequentially to $54.3B indicates customer confidence, with 82% of deposits being insured or collateralized, providing stability. The bank's tangible book value growth of 19.2% CAGR since 2013 significantly outpaces peers by 6x, demonstrating superior capital efficiency. Management's guidance for resumed growth in 2024 with $500MM loan growth and $2B deposit growth quarterly suggests confidence in normalized operations. The 1.5x price-to-tangible book value appears reasonable given the growth trajectory and strong capital ratios.

Pitch Summary:
In the quarter, I sold out of one position in the fund: Playmates Toys Ltd (0869.HK). Founded in 1966 and based in Hong Kong, Playmates Toys has been in the business of manufacturing and selling toys primarily to American and European children since the 1970s. After selling dolls for over a decade, the company hit paydirt in the late 1980s when it decided to manufacture action toys for a new cartoon series called Teenage Mutant Ninja Turtles (TMNT). Having the foresight to obtain exclusive licensing rights to the brand, Playmates has enjoyed the multi-decade run of an iconic brand. To offset lost revenue when the TMNT franchise periodically laid dormant, Playmates diversified into many other licensing agreements with franchises, such as Godzilla vs. Kong, Star Trek, and the recent Netflix hit, Miraculous: Tales of Ladybug & Cat Noir, (which is also a major hit with my children!). I first took note of the company in late 2019 after the company reported poor operating results with the stock price headed in the wrong direction. Then COVID-19 hit. Needless to say, no one was going out to the movies or buying toys. Compounding the problem was that the TMNT brand was in a planned hiatus (with no scheduled toy releases) and there was nothing else to pick up the slack, including the much-anticipated Godzilla vs Kong movie release that was now delayed until 2021. In August 2020, Playmates reported dreadful semi-annual results and posted an operating loss of over -$6 million—its worst half-year result in nearly a decade. I built a material position in the stock at an average cost of HK$0.254 per share. Although I typically do not jump at the chance to buy a money-losing enterprise, there were a few factors that led me to do so. First, the financial difficulties were caused primarily by an exogenous shock that I did not perceive to be indefinite. In similar logic to our holding in Ming Fai International Holdings Ltd (3828.HK), I did not anticipate a change in their business post-COVID: things would go back to normal. At the end of the day, Godzilla vs Kong would eventually hit the big screen and kids would want the action figures. Second, Playmates had licensing agreements in place. I felt reasonably comfortable that, when things got back to normal, there would still be toys to make. Third, even with the wheels coming off during the Covid pandemic, in 18 months Playmates had only burned through a little over $10 million. At the time, Playmates had $125 million in the bank with practically no debt. In addition, Playmates subcontracts out the manufacturing of the toys, so its cost structure is quite variable. In other words, it had greater flexibility to batten down the hatches, weather the storm, and conserve cash. Although I did not know how long the COVID pandemic would last, I felt comfortable knowing Playmates would outlast it! Fourth, the company has had a history of treating its shareholders fairly. And, lastly, the stock price was enticing. At our average purchase price, the company was trading for the bargain basement price of $38 million. To put that in perspective, the cumulative operating cash flow generated by the company for the previous 5 years was a little shy of $90 million. To me, at a $38 million sales price, we were getting a pretty good deal with little risk of permanent loss of capital. Since 2020, Playmates has returned to profitability, more than doubling revenue in 2021 and generating around $14 million in combined operating cash flow in the past 30 months. Last week, Paramount Pictures released Teenage Mutant Ninja Turtles: Mutant Mayhem to positive reviews, reaping $180 million at the box office. As is customary with TMNT releases, Playmates introduced a new line of TMNT toys based on the new movie. On a lesser note, in July, Miraculous: Ladybug & Cat Noir, The Movie was released in theaters internationally and on Netflix, with Playmates supplying the accompanying toys. The near future appears bright for Playmates, but it is hard to predict. The last major TMNT up-cycle, around the release of the 2014 Michael Bay film, saw a significant increase in sales and earnings—although it did not pan out to what analysts were forecasting at the time. In their most recent report to shareholders, management "continues to be optimistic about the second half of the year" based on the release of both movies. Although I could easily find ways to be optimistic as well, our strategy is focused more on the value of the assets of the company rather than the expected future earnings. Based on the liquid assets at Playmates, what was once a screaming deal has now become reasonably valued due to the appreciation in the stock price. I decided it was better to move on to another cheaply priced asset. I sold our shares at an average price of HK$0.84 per share.

BSD Analysis:
The manager executed a successful value investment in Playmates Toys, purchasing shares during COVID-19 distress at HK$0.254 and selling at HK$0.84 for a 230% gain. The investment thesis centered on temporary disruption rather than permanent impairment, with the company maintaining strong balance sheet fundamentals including $125 million cash and minimal debt. Key catalysts included exclusive TMNT licensing rights and variable cost structure through outsourced manufacturing, providing operational flexibility during downturns. The manager recognized the asset-light business model's resilience and management's shareholder-friendly track record. The exit decision reflected disciplined value investing, as appreciation brought valuation from deeply discounted to fair value. Recent TMNT movie releases and strong box office performance of $180 million validated the franchise's enduring appeal. The investment demonstrated classic contrarian value investing during maximum pessimism with clear downside protection.

Pitch Summary:
Finally, we added Hungarian, ultra-low cost airline provider, Wizz Air Holdings plc. An investigation into the Pratt & Whitney (P&W) Geared Turbofan (GTF) engine, which powers the airlines A320 NEO family aircrafts, has grounded 22% of the fleet for 18 months presenting us with an attractive entry point. Although this issue will reduce flight capacity over the near to medium-term, WIZZ has agreed to a cash compensation package with P&W. We anticipate the overall impact on earnings will be further mitigated by the delivery of new planes, lease extensions and more optimal fly routes and schedules. At current levels, WIZZ is trading at a significant discount to our estimate of its intrinsic value and expansion prospects across Western Europe and the Middle East.

BSD Analysis:
Ariel opportunistically initiated a position in Wizz Air following a temporary operational setback, viewing the Pratt & Whitney engine investigation as creating an attractive entry point in a fundamentally strong ultra-low-cost carrier. The fund acknowledges that engine issues will ground 22% of the fleet for 18 months, reducing near-term capacity, but emphasizes that Wizz Air has secured cash compensation from P&W to offset financial impact. The manager expects earnings impact to be further mitigated through new aircraft deliveries, lease extensions, and operational optimizations including better route planning and scheduling efficiency. Ariel's bullish thesis centers on the significant valuation discount created by this temporary operational disruption, with the stock trading well below their intrinsic value estimate. The fund sees substantial long-term growth potential through expansion across Western Europe and the Middle East markets. This represents a classic contrarian value opportunity where temporary operational challenges have created a disconnect between market price and fundamental business value, allowing entry into a growth-oriented airline at attractive levels.

Pitch Summary:
We purchased manufacturer and marketer of integrated circuits, Taiwan Semiconductor Manufacturing Company, Ltd. TSMC has a dominant share of the global foundry market and is an industry leader in terms of scale, technology, customer service and execution. Although demand for smartphones and PCs is stabilizing, we expect the company to benefit from the secular growth trends of Artificial Intelligence (AI) longer-term. A downturn in the foundry industry this year presented us with an attractive entry point, as we think the current forward price-to-earnings ratio does not fully reflect the high-quality nature of the business model.

BSD Analysis:
Ariel established a position in TSMC during a cyclical downturn in the foundry industry, viewing the weakness as an attractive entry point into the world's dominant semiconductor manufacturer. The fund's bullish thesis emphasizes TSMC's unassailable competitive position with dominant global foundry market share and industry leadership across multiple dimensions including scale, technology, customer service, and execution capabilities. While acknowledging near-term headwinds from stabilizing smartphone and PC demand, the manager focuses on longer-term secular growth drivers, particularly artificial intelligence applications that require advanced semiconductor manufacturing. Ariel views the current industry downturn as temporary, creating a valuation opportunity in a high-quality business model. The fund believes the forward price-to-earnings ratio fails to reflect TSMC's superior business quality and competitive moat. The manager's conviction stems from the company's technological leadership in advanced node manufacturing, which positions it as the primary beneficiary of AI-driven semiconductor demand growth. This combination of cyclical entry timing and structural AI tailwinds creates a compelling risk-adjusted investment opportunity.

Pitch Summary:
We initiated a position in Korean-based leading manufacturer of mobile phones and smartphones, Samsung Electronic Company, Ltd. We see signs of the memory market bottoming driven by supply cuts during a time when demand is near trough levels. Heading into 2024, we expect the company will benefit from a cyclical recovery in memory as well as rising prices as supply/demand stabilizes. We also think replacement demand for smartphones will improve. Longer term, we believe there is upside optionality in Samsung's foundry and display businesses from a fundamental perspective that better transparency and more detailed financial segment reporting would unlock.

BSD Analysis:
Ariel initiated a position in Samsung Electronics at what they view as a cyclical trough in the memory semiconductor market, positioning for a recovery as supply-demand dynamics normalize. The fund's bullish thesis centers on signs that the memory market is bottoming out, driven by industry-wide supply cuts occurring while demand remains near trough levels. This setup creates favorable conditions for both volume recovery and price appreciation as the cycle turns. The manager expects Samsung to benefit from this cyclical recovery in 2024, with improving memory pricing as supply-demand imbalances correct. Beyond the core memory business, Ariel sees improving smartphone replacement demand as an additional near-term catalyst. The fund identifies longer-term upside optionality in Samsung's foundry and display businesses, suggesting these segments are undervalued due to limited financial transparency. The manager believes more detailed segment reporting would unlock value by allowing investors to better appreciate the fundamental strength of these business units. This combination of cyclical recovery and structural value unlock opportunities creates a compelling multi-layered investment thesis.

Pitch Summary:
We added Korea's largest financial company in terms of assets and customer base, KB Financial Group. We believe the company's strong and stable diversified profit structure and industry leading shareholder returns are well supported by its various business lines and subsidiaries. At current levels, KB Financial is trading at a significant discount to our estimate of private market value.

BSD Analysis:
Ariel established a position in KB Financial Group, Korea's largest financial institution, based on attractive valuation relative to the company's diversified business model and strong capital returns profile. The fund's bullish thesis emphasizes the company's market-leading position in terms of both assets and customer base, providing significant competitive advantages and market share stability. The manager highlights the company's diversified profit structure across multiple business lines and subsidiaries, which provides earnings stability and reduces concentration risk compared to pure-play banking operations. Ariel particularly values the company's industry-leading shareholder returns, suggesting strong capital allocation discipline and commitment to returning excess capital to investors. The fund's conviction appears driven by a significant valuation discount to their estimated private market value, indicating the stock trades below what sophisticated buyers would pay for the entire business. This valuation gap, combined with the company's dominant market position and diversified revenue streams, creates an attractive risk-adjusted investment opportunity in Korean financial services.

Pitch Summary:
We initiated a position in one of the largest banks in Mexico, Grupo Financiero Banorte S.A.B. de C.V., which is currently experiencing above average growth driven by positive nearshoring effects. The bank continues to see improvements in the quality of its low-cost deposit base and growing consumer loan book. In our view, these factors will allow Banorte to sustain solid net interest margins. We find the company's strong credit quality and attractive return-on-equity to be appealing long-term.

BSD Analysis:
Ariel initiated a position in Banorte to capitalize on Mexico's nearshoring trend, positioning the bank as a primary beneficiary of supply chain relocations from Asia to North America. The fund's bullish thesis centers on above-average growth driven by increased business activity as companies establish operations closer to U.S. markets. The manager highlights improving fundamentals including enhanced deposit quality with a growing low-cost funding base and expanding consumer lending portfolio. These operational improvements support the fund's expectation for sustained net interest margin strength, a key profitability metric for banks. Ariel emphasizes the bank's strong credit quality and attractive return-on-equity as indicators of management's effective capital allocation and risk management. The combination of structural tailwinds from nearshoring, improving deposit mix, loan growth, and strong profitability metrics creates a compelling investment case. The fund appears to be positioning ahead of what they view as a multi-year growth cycle driven by Mexico's strategic geographic advantage in the evolving global supply chain landscape.

Pitch Summary:
We established a position in Germany-based kidney dialysis services and products provider, Fresenius Medical Care AG & Co. Fresenius Kidney Care is the worldwide leader in the treatment of renal disease. Shares came under pressure following the release of clinical data on the efficacy of glucagon-like-peptide-1 (GLP-1) weight-loss drugs and their potential to negatively impact the demand for dialysis, providing us an attractive entry point in the name. Even assuming high rates of both uptake and effectiveness, we believe the overall impact on dialysis volumes will be small in the near-to-medium term. We also think the cardio protective effects of the GLP-1 class may enable patients to live longer, thereby increasing the overall size of the end-stage renal disease incidence pool. We believed the market misunderstood the actual long-term clinical impact on dialysis and were able to purchase at attractive valuation levels.

BSD Analysis:
Ariel opportunistically initiated a position in Fresenius Medical Care following market overreaction to GLP-1 weight-loss drug concerns, demonstrating contrarian conviction in the global dialysis leader. The fund's thesis challenges the market's pessimistic interpretation of GLP-1 drugs' impact on dialysis demand, arguing that even with high adoption rates, the near-to-medium term effect on dialysis volumes will be minimal. More importantly, the manager presents a counterintuitive argument that GLP-1 drugs' cardioprotective benefits could actually expand the addressable market by extending patient lifespans and increasing the end-stage renal disease population. This nuanced clinical analysis suggests the market fundamentally misunderstood the long-term dynamics. Ariel leveraged this misunderstanding to establish a position at attractive valuations in the world's leading renal disease treatment provider. The fund's contrarian approach appears well-researched, focusing on the company's dominant market position while the market focused on perceived threats. This represents a classic value opportunity where temporary sentiment diverged from fundamental reality.

Pitch Summary:
We added Danish multinational banking and financial services company, Danske Bank A/S in the period. Following several years of litigation concerning money-laundering violations, the company recently finalized a settlement, removing the overhang on shares. Meanwhile, the business is demonstrating solid operating momentum, highlighted by the strong credit quality of its customer base as well as improving net interest margin and strong balance sheet. We believe Danske Bank will begin returning capital to shareholders through dividends or buybacks in 2024.

BSD Analysis:
Ariel initiated a position in Danske Bank following the resolution of a major legal overhang, viewing the settlement of money-laundering litigation as a key catalyst for share price recovery. The fund's bullish thesis centers on the removal of this regulatory uncertainty, which had weighed on the stock for several years. Beyond the legal resolution, the manager highlights strong underlying business fundamentals including solid operating momentum, high credit quality in the customer base, and improving net interest margins. The combination of a strong balance sheet and normalized regulatory environment positions the bank well for capital returns to shareholders. Ariel expects dividend payments or share buybacks to commence in 2024, providing additional return potential. The timing of the investment appears strategic, as the fund is positioning ahead of what they view as a normalization in both regulatory status and capital allocation policy. The manager sees this as an attractive risk-adjusted opportunity in European banking.

Pitch Summary:
Finally, Dutch international grocer, Koninklijke Ahold Delhaize N.V., traded lower in the quarter. Despite an increase in free cash flow guidance and the announcement of a new €1 billion buyback authorization, slower sales and margin pressure in the U.S. driven by lower food inflation weighed on shares. We continue to believe Ahold's strong market share, stable business model and solid balance sheet should help the company navigate the current market environment. We also think there is potential for Ahold to unlock additional value through its online channel, bol.com.

BSD Analysis:
Despite recent underperformance, Ariel maintains confidence in Ahold Delhaize's long-term value proposition, viewing current weakness as temporary margin pressure rather than structural deterioration. The fund acknowledges near-term headwinds from slower U.S. sales and margin compression due to lower food inflation, but emphasizes positive developments including increased free cash flow guidance and a substantial €1 billion share buyback program. The manager's bullish thesis rests on the company's strong competitive positioning through significant market share, stable business model, and robust balance sheet strength. Ariel sees these defensive characteristics as particularly valuable in navigating challenging market conditions. Additionally, the fund identifies a potential value unlock catalyst through the company's online platform bol.com, suggesting upside optionality beyond the core grocery operations. The combination of shareholder-friendly capital allocation and digital growth opportunities supports the manager's constructive outlook despite current headwinds.

Pitch Summary:
Japanese auto manufacturer, Subaru Corporation, also weighed on results in the period. We believe this recent price action to be primarily driven by appreciation in the Japanese yen and think the weakness in shares runs counter to the company's strong business model. Subaru recently reported healthy earning results driven by robust demand in North America and lower raw materials prices. We remain focused on Subaru's solid business fundamentals and view its EV roadmap as a long-term opportunity to increase market share.

BSD Analysis:
Ariel views recent weakness in Subaru shares as a currency-driven temporary setback rather than a fundamental issue, maintaining a bullish stance on the Japanese automaker. The fund attributes the stock's underperformance to Japanese yen appreciation, which negatively impacts the translation of overseas earnings back to yen. Despite this headwind, the manager emphasizes Subaru's strong underlying business fundamentals, highlighted by healthy earnings driven by robust North American demand and favorable raw material cost trends. The fund sees the company's electric vehicle roadmap as a significant long-term catalyst for market share expansion. Ariel's conviction stems from the disconnect between the stock's recent performance and the company's solid operational metrics. The manager appears confident that currency effects are temporary while the fundamental business strength and EV transition opportunity provide sustainable value creation potential.

Pitch Summary:
By comparison, China's internet search and online community leader, Baidu, Inc. traded lower alongside Chinese equities as intensifying problems in China weighed on investor sentiment during the period. The company continues to invest heavily in Artificial Intelligence (AI) and recently launched its generative AI, Ernie Bot, aimed at rivaling Open AI's ChatGPT. While monetization of the new technology is largely dependent on regulatory review, we think Baidu should continue to experience margin improvement with the ongoing implementation of efficiency and profitability initiatives. While some investors remain on the sidelines due to uncertainty surrounding China's economic growth, government regulations, and the political rhetoric towards Taiwan, we remain enthusiastic about Baidu's longer-term opportunity for revenue growth and margin expansion across internet search, cloud, autonomous driving, artificial intelligence and online video.

BSD Analysis:
Despite near-term headwinds affecting Chinese equities, Ariel maintains a bullish long-term view on Baidu, positioning it as a compelling AI play in the Chinese market. The fund highlights Baidu's strategic investment in artificial intelligence, particularly the launch of Ernie Bot, which directly competes with ChatGPT in the generative AI space. While acknowledging that AI monetization depends on regulatory approval, the manager expects continued margin improvement through ongoing efficiency initiatives. The fund demonstrates conviction despite macro concerns around China's economic growth, regulatory environment, and geopolitical tensions. Ariel's thesis centers on Baidu's diversified revenue streams across internet search, cloud services, autonomous driving, AI, and online video. The manager views current market pessimism as creating an attractive entry point for a dominant Chinese internet company with significant AI capabilities and multiple growth vectors.

Pitch Summary:
Additionally, leading market maker in European derivatives Deutsche Boerse AG, which operates the Frankfurt stock exchange, experienced strong stock price performance in the period. As we have noted before, the company's revenue generation and earnings power benefits from high market volatility, rising rates and increased demand for interest rate derivatives. In our view, Deutsche Boerse is well positioned to drive value creation in the year ahead, particularly amidst the current capital market backdrop of high inflation, elevated uncertainty surrounding interest rates and monetary policies around the globe.

BSD Analysis:
Ariel presents a bullish thesis on Deutsche Boerse, emphasizing the company's favorable positioning in the current volatile market environment. The fund highlights how the exchange operator benefits from structural tailwinds including high market volatility, rising interest rates, and increased demand for interest rate derivatives. These factors directly translate to higher revenue generation and earnings power for the business model. The manager views the current macroeconomic backdrop of high inflation and monetary policy uncertainty as particularly advantageous for Deutsche Boerse's operations. The fund's confidence stems from the company's role as a leading market maker in European derivatives and operator of the Frankfurt stock exchange. This positioning creates a natural hedge against market turbulence, as increased volatility typically drives higher trading volumes and derivative demand.

Pitch Summary:
Stellantis is the biggest household name you probably never heard of. It is actually the name of the conglomerate recently formed by the merger of Fiat-Chrysler Automobiles and PSA Group, and encompasses Peugeot, Chrystler, Fiat, Opel, Ram, Jeep, Alfa Romeo, Lancia, Vauxhall and a number of smaller brands. This stock is thoroughly hated by the investment industry. It must be, because it is trading at a trailing P/E multiple under 3 despite having an extremely solid balance sheet. The existence of these opportunities for more than 12 months makes me pull out my hair, but here we are. Apparently, people thoroughly believe Chinese EV's will take over the car industry and there will be no room for European carmakers within five years. Or maybe people believe the upcoming recession will destroy American carmakers like it did in 2008. Or maybe investors think Tesla's Full Self Drive will make all other cars inferior. We are here to tell you this is extremely misguided, and none of it makes sense. Let us tackle these arguments one at a time: -Chinese EV's: The reality is that outside of automotive, markets are afraid of DE-globalization, not globalization. Trade with China is declining, not accelerating. And governments are trying to support this 'reshoring'/'friendshoring' effort. Specifically for this industry, we see the EU actively investigating what tariffs they can impose on Chinese EV imports. Similarly, Italy has its own plans to reduce Chinese imports. One should also not forget protectionism has a long history in this industry, specifically in Stellantis' primary markets. If anything, a tailwind is coming for Stellantis, not a headwind. -EV technology: While it is true that Stellantis is lagging behind when it comes to EV sales, it is difficult to see them not catching up. Seeing how many brands are successfully entering this market, one can hardly say the technology itself is an in surmountable roadblock. -The recession: When a recession hits, this typically hits automotive even harder. In 2008, it basically bankrupted the US car industry, for instance. However, this time is substantially different, as in that episode carbuilders had heavily indebted themselves (to buy back shares, which was very much in vogue at the time). This time around, Stellantis carries the leftovers from more than two extremely profitable years (2021/2022/2023). Even if a serious recession arrives, the starting position is completely different. This also applies to a scenario with very high interest rates, with the extra benefit that the debt they have have been secured at very attractive interest rates in 2020. -Autonomous Drive: In contrast to many, I believe autonomous driving will have vastly more impact on the automotive landscape than EV. I simply cannot fathom anyone buying a 25.000 dollar car without autonomous drive when such a feature is available elsewhere. But here's the catch: while Elon Musk has done a brilliant job at making everyone believe Tesla will be the first to deliver FSD, the truth is Tesla is actually lagging behind in this technology. Currently, 33 companies have permits for [Testing with a driver] in the US, three have an additional permit for [Driverless testing], and only four companies have obtained the actual permit for [deployment]: Cruise LLC, Merc Benz, Nuro and Waymo LLC. Tesla is one of the 33 laggards still at stage one! Stellantis, on the other hand, is the preferred partner of Waymo and therefore in pole position to get this technology to market. If anything, Tesla is losing this race! To drive the point home further vis-à-vis Tesla: Stellantis boasts four times higher revenue, a higher profit margin with a better trajectory, has more cash on its balance and able to spend almost double on R&D. But while Tesla carries a 782.5 Billion USD market cap, Stellantis is currently valued at… 59 billion USD.

BSD Analysis:
The manager presents a compelling contrarian thesis on Stellantis, arguing the stock is severely undervalued at a P/E under 3 despite strong fundamentals. The investment case centers on market overreaction to perceived threats from Chinese EVs, recession fears, and Tesla's autonomous driving narrative. The manager systematically debunks these concerns, highlighting protectionist tailwinds against Chinese imports, Stellantis' strong balance sheet from profitable 2021-2023 years, and the company's advantageous Waymo partnership for autonomous technology. The valuation disconnect is stark - Stellantis trades at $59B market cap versus Tesla's $782B despite superior revenue, margins, cash position, and R&D spending. The thesis relies on mean reversion as markets recognize the fundamental strength and strategic positioning. This represents a classic deep value opportunity with multiple catalysts for re-rating.

Pitch Summary:
Veralto, a recent spin-off of Danaher, offers a diverse range of products and services in end markets including Water Quality (60%) and Product Quality & Innovation (40%). From state-of-the-art software solutions designed for seamless integration across various platforms to robust digital infrastructure services, Veralto addresses evolving needs in markets that include municipalities, industrials, and consumer packaged goods. Veralto's product portfolio is comprised of innovative applications in analytical measurement instruments, chemical-based water treatment, UV disinfection, membrane filtration, inkjet printers, packaging workflow software and color management. Clients benefit from Veralto's commitment to leading technological advancement, ensuring their products and services remain at the forefront of innovation. Mergers and acquisitions are key factors in Veralto's growth story. The company's cyclical growth, capital intensity, profit margins, and cash flows are all top of its peer group. We purchased a modest position in this high-recurring revenue, high-margin company due to its significant secular growth opportunities and superior operational performance.

BSD Analysis:
Mar Vista's Veralto investment capitalizes on a high-quality Danaher spin-off with exposure to attractive end markets. The fund highlights the company's diversified portfolio spanning water quality (60%) and product quality & innovation (40%), serving municipalities, industrials, and consumer goods companies. Veralto's technological leadership in analytical instruments, water treatment, and digital workflow solutions positions it well for secular growth trends. The manager emphasizes superior operational metrics including best-in-class margins, cash flows, and capital efficiency relative to peers. High recurring revenue characteristics provide stability while M&A capabilities offer additional growth avenues. The spin-off structure often creates temporary valuation dislocations, potentially providing an attractive entry point for a quality business. Veralto's exposure to water infrastructure needs and industrial automation trends should drive long-term demand growth. The combination of defensive recurring revenues, superior operational performance, and secular growth opportunities makes this an attractive addition to the portfolio.

Pitch Summary:
We initiated a new position in Analog Devices (ADI) as the margin of safety (discount to intrinsic value) provided a favorable entry point due to the semiconductor industry's cyclical correction. Analog Devices is one of the world's largest analog chipmakers, with a market-leading position in analog signal processing and power management. The company is well-positioned to benefit from its exposure to the industrial and wireless communication infrastructure markets, as well as the electrification of automobiles, all of which require more advanced, higher-priced semiconductor content. We believe Analog Devices' competitive advantages are tied to its proprietary analog chip designs and high customer switching costs. The depth and breadth of ADI's intellectual capital includes a proprietary library of analog chips exceeding 75,000 SKUs. Customers choose these products based on performance, not price, as analog chips generally comprise a small portion of a product's bill of materials. Once a design socket is won, it is generally retained for the life of the product, as it is an onerous and expensive process to swap out an analog chip for de minimis savings. Analog Devices will likely benefit as devices become smarter and more connected. This should drive semiconductor content growth in its primary markets, supporting what we estimate could be high-teens intrinsic value growth over the intermediate term.

BSD Analysis:
Mar Vista initiated Analog Devices during a semiconductor cyclical downturn, capitalizing on an attractive valuation entry point. The fund emphasizes ADI's market-leading position in analog signal processing with over 75,000 proprietary SKUs creating significant intellectual property moats. The manager highlights powerful switching costs, as customers select analog chips based on performance rather than price, and replacement costs far exceed potential savings. Key growth drivers include industrial automation, wireless infrastructure, and automotive electrification, all requiring higher semiconductor content. The pitch notes that analog chips represent a small portion of total product costs but are critical for functionality, providing pricing power. ADI's exposure to secular trends toward smarter, more connected devices should drive sustained demand growth. The combination of cyclical entry timing, structural competitive advantages, and exposure to long-term technology trends supports the manager's expectation of high-teens intrinsic value growth over the intermediate term.