Investment Pitches

Pitch Summary:
Thank you. To turn to BYD, we've held it for a year, hopefully we'll be holding it for a lot longer because they do seem to be really at the forefront of innovation. Only over the last three months we've seen them introduce charging technology that looked really special, but also, and I think probably more interesting, is their approach to autonomy. What's your take on their approach to autonomous driving at the moment? Well, that's been an interesting change because I remember meeting with BYD years ago, and they were extremely sceptical about the future of autonomous driving. They thought that people simply like the experience of driving cars. That's not going to go away. And they've clearly shifted that position slightly. I think that speaks to the value of having an engaged founder at the helm of a company that, when the environment changes, can change his mind and bring the entire company with him. And what they've done is they're effectively giving it away for free. So the actual software platform itself may not be top of the line. But, let's be honest, when we talk about autonomous driving for any car company, it's not really autonomous in the way that people might understand the term. You still, generally speaking, need to have your hand on the wheel. You certainly need to have your eyes on the road. The car isn't taking complete control away from you. It's more like assisted driving at this point in time. And Tesla charges quite a lot of money for that on an annual basis. BYD is giving it away for free. Does that start to pressure other car makers significantly and reduce their chances of making margins that are attractive to them? Does it open up the competitive space even further for BYD? I was surprised. I was looking the other day at folks viewing from America, I think it's $8,000 or $9,000 as an outright sale or $99 per month as a sort of royalty payment, for Tesla's FSD. So, the idea that they won't be able to, at least in China, and we're yet to see how BYD approaches the rest of the world, actually monetise that technology. So it's super interesting. I'm conscious of time, do you have any view on their charging technology? Because it now looks now like they can charge their EVs at the same speed at which you can refuel a traditional gasoline engine. I mean, that's been one of the barriers to adoption for a long time. I think there are still probably structural, infrastructural barriers. Rolling out this charging infrastructure is going to take some time, although they have fairly ambitious targets for the next few years. There's just not enough power to go around. But there, I think they're helped by the fact that, again, they're a Chinese company and China leads the world in renewable energy generation and technology. And so, if anybody can solve that issue of getting enough power to fuel this infrastructure, it's probably them.

BSD Analysis:
Baillie Gifford views BYD as a compelling long-term holding positioned at the forefront of EV innovation, having held the position for one year with intentions to maintain it significantly longer. The investment thesis centers on BYD's strategic pivot toward autonomous driving technology, demonstrating the value of engaged founder leadership in adapting to market changes. BYD's disruptive approach of offering autonomous driving features for free, while Tesla charges $8,000-$9,000 upfront or $99 monthly, creates significant competitive pressure and potentially expands BYD's market share. The company's breakthrough charging technology, enabling refueling speeds comparable to gasoline engines, addresses a critical EV adoption barrier. BYD benefits from China's leadership in renewable energy infrastructure, positioning them uniquely to solve power supply challenges for rapid charging networks. The fund recognizes infrastructure rollout challenges but believes BYD's ambitious expansion targets and Chinese government support provide competitive advantages. This strategic positioning in the world's largest EV market, combined with technological innovation and aggressive pricing strategies, supports the bullish long-term outlook despite near-term execution risks.

Pitch Summary:
Thank you. I'm sure it's one we'll be coming back to again in the future. But moving on to the second topic I think would be of interest, the auto industry. We've held Tesla in the strategy for about 10 years and it's been a phenomenally successful investment. But we've sold the last remaining holding of Tesla during the quarter. And we had been reducing and reducing over a number of years. So, it's not like I think anything's materially changed just now. You're right. We've reduced that position over time. And to a certain extent, that's just a recognition of the fact that the auto industry has become much more competitive than it was when Tesla first started out. They were the dominant EV manufacturer for a very long time, but BYD, as of last year, stole that crown. And it's a reflection that, in order to make outlier returns possible from here for this company, you need to believe in a really strong second act in something like humanoid robotics or autonomous driving. And that's still possible, that could happen, but we just didn't have a high enough level of conviction to continue underwriting the position. And then the final thing I would point out is we made quite a large reduction to the position last year after the election when you saw a very strong uptick in the share price on the basis of very little fundamental change in the company's operations. We felt that wasn't really reflecting true underlying value of the company and reduced significantly at that point.

BSD Analysis:
Baillie Gifford completely exited their decade-long Tesla position during Q1 2025, marking the end of what they describe as a "phenomenally successful investment." The decision reflects a fundamental shift in the competitive landscape, with BYD overtaking Tesla as the dominant EV manufacturer globally. The managers acknowledge that Tesla's first-mover advantage has eroded significantly as the auto industry became increasingly competitive. For Tesla to generate outlier returns from current levels, the fund believes the company needs a successful "second act" in emerging technologies like humanoid robotics or fully autonomous driving. However, Baillie Gifford lacks sufficient conviction in these potential catalysts to maintain the position. The final catalyst for the complete exit was Tesla's post-election rally, which the managers viewed as disconnected from fundamental business improvements. This disciplined approach to valuation and competitive positioning demonstrates the fund's commitment to long-term value creation over momentum investing. The exit represents a strategic pivot away from a maturing EV market toward higher-conviction growth opportunities.

Pitch Summary:
Well, it's a conference I've been going to for a couple of years now, and it's, I think, one of the best events in the calendar for just getting up to speed with what's going on in the AI space, what exciting things NVIDIA has got coming down the line, building up a network of contacts of people who are working in this industry and doing really exciting things. Obviously, the event itself is undeniably pro-NVIDIA. But the location makes it easy to go out and meet other companies at the same time and get a slightly more balanced view. And the main takeaway for me is that NVIDIA's position in this space is as strong, if not stronger, than it has been in the past. So despite ongoing perennial concerns around the rise of custom silicon and ASICs – for example Amazon talks about its Trainium chips, Meta is pushing out version two of its MTIA as well – these alternatives have not been enough to unseat NVIDIA's GPUs. And the fundamental reason for that is that NVIDIA can just push performance improvements significantly faster than anybody else. Its only focus is on making these AI chips, whereas everybody else is having to spread their attention. And as a result, the price-performance improvement has been 17-fold since 2016, for example. And the roadmap going forward has a pathway to producing more than 40-fold improvement in compute over the next four or five years. So very exciting times. Yes, that sounds about right. I mean, the main reason for that is that an ASIC is fundamentally a specialised chip for a specific use case. So, in order for it to really make sense economically, you have to know what you're going to be using it for and the algorithm that is being used on top of that chip shouldn't change too much. But I was speaking to developers, and they were saying that they can't keep up with the pace of improvements in this technology; that every day, every week, there's something new coming down the line. Yann LeCun from Facebook was saying that he would not be remotely surprised if there's another huge shift in technology over the next three or five years on the level of what transformers did in terms of enabling ChatGPT. And if that happens, you really need a generalised platform in order to implement that sort of shift. Sure. I think it's important to note that we have been trimming the position over the course of the last year as the price went up. You're right that at the end of the day, semiconductors are a very cyclical industry, and I don't really see any structural reasons for why that should change going forward. I think the hypothesis that over time NVIDIA could develop a software recurring revenue, that's still a possibility. But again, I think that pace of change is such that, at this point, it's just not a priority for them. They can't produce enough chips to keep everybody happy. They've got quite a lot on their plate already. So I think we balance that enthusiasm for the long-term opportunity with the understanding that it's a cyclical hardware-based industry. And so that's reflected in the holding size in the portfolio.

BSD Analysis:
Baillie Gifford maintains a bullish stance on NVIDIA despite acknowledging the cyclical nature of semiconductors and trimming the position as prices rose. The manager's thesis centers on NVIDIA's unassailable competitive moat in AI chips, driven by their singular focus and ability to deliver performance improvements 17-fold since 2016 with a roadmap for 40-fold improvements over the next 4-5 years. While competitors like Amazon and Meta develop custom ASICs, NVIDIA's generalized platform advantage becomes more pronounced as AI technology evolves rapidly, with developers unable to keep pace with innovation cycles. The fund recognizes the risk of technological shifts comparable to transformers enabling ChatGPT, but views NVIDIA's flexible platform as best positioned to adapt. Management balances long-term AI opportunity enthusiasm with prudent position sizing given semiconductor cyclicality. The company's current supply constraints and full capacity utilization support near-term fundamentals. NVIDIA's dominance appears sustainable as the pace of AI innovation favors generalized over specialized solutions.

Pitch Summary:
We just purchased shares in Paycom. This is a payroll software company in the US with its own specific challenges and opportunities. And we're excited about things like that.

BSD Analysis:
Baillie Gifford recently established a position in Paycom Software, a cloud-based human capital management company serving small to mid-sized businesses in the United States. While the manager acknowledges that Paycom faces specific challenges, they remain excited about the company's opportunities in the payroll and HR software market. Paycom operates in the growing HCM software sector, providing comprehensive solutions that span the entire employee lifecycle from recruitment to retirement. The company has built a strong position serving the underserved small and mid-market segment with integrated HR, payroll, and talent management solutions. Despite near-term headwinds that may be affecting the stock price, the manager sees attractive long-term growth potential in this market. The investment reflects the team's willingness to invest in quality software companies during periods of temporary weakness. Paycom's focus on the SMB market and comprehensive platform approach positions it well for continued growth as businesses increasingly digitize their HR operations.

Pitch Summary:
I'll give you an example. We've purchased shares, new position for the portfolio in Salesforce. This is a company that sells the eponymous customer relationship management software. It's entrenched in its customers. It has a lot of data about what they do. And it's using that position and that data to come up with some really powerful AI tools. It's a bit of a first mover in the space. We think that it's ahead of its rivals. And what I mean by those AI tools is it is allowing customers to use artificial intelligence agents to handle a lot of their customer contact. So if you want to get in touch with a business, you have a customer service enquiry, maybe you want to return something or you have a query, an AI agent can often handle that type of task more quickly and more effectively than a human being. That's going to lead to enormous cost saving for the customers of Salesforce and therefore we think a commensurately large revenue opportunity for the company.

BSD Analysis:
Baillie Gifford initiated a new position in Salesforce, viewing the company as a prime beneficiary of AI adoption in enterprise software. The manager highlights Salesforce's entrenched customer relationships and vast data assets as key competitive advantages that enable superior AI tool development. Salesforce is positioned as a first-mover in deploying AI agents for customer service automation, allowing businesses to handle customer inquiries more efficiently than human representatives. This AI-powered customer service capability represents a significant value proposition that can drive substantial cost savings for Salesforce customers. The manager expects this to translate into meaningful revenue growth opportunities for Salesforce as enterprises increasingly adopt these AI solutions. The company's dominant position in CRM software provides a strong foundation for cross-selling these advanced AI capabilities. This investment reflects the team's strategy of identifying companies that can most effectively leverage AI to enhance their existing business models. Salesforce represents a compelling way to participate in the AI transformation of enterprise software.

Pitch Summary:
So for us, that means establishing positions in companies like Disco, which makes cutting and grinding equipment for the silicon wafers that then become the chips that power AI at the one end and at the other we want to think more sharply about those companies that will be able to use AI most effectively.

BSD Analysis:
Baillie Gifford has established a position in Disco Corporation as part of their strategy to gain exposure across the AI value chain. Disco manufactures specialized cutting and grinding equipment essential for processing silicon wafers into semiconductor chips that power AI applications. The company occupies a critical position in the semiconductor manufacturing process, providing the precision tools needed to create the advanced chips driving the AI revolution. As AI demand continues to accelerate, the need for more sophisticated semiconductor manufacturing equipment should grow correspondingly. Disco's specialized technology and market position in wafer processing equipment makes it a key beneficiary of the ongoing AI infrastructure buildout. The manager views this as a way to participate in AI growth through the essential manufacturing tools rather than just the end-use applications. This investment reflects the team's approach of seeking diversified exposure to transformative themes like AI. Disco represents a picks-and-shovels play on the AI boom through its critical role in chip manufacturing.

Pitch Summary:
Quick example, AutoZone. We own shares in this car parts retailer. It imports a lot from Mexico and China, so it attracts concern for things like tariffs. But when you go into what makes AutoZone different, one of the facts that stands out is that 90 per cent of its revenue goes to customers that need the parts for either maintenance or repair. It can't really be put off. The customer also has a much broader selection of products than a lot of its rivals, which tend to be smaller businesses. This all gives the company pricing power, the ability to pass through tariffs and to gain market share. So whilst the headlines can seem negative for that particular asset, we think there's still an attractive long-term growth opportunity so we are happy holders of those shares.

BSD Analysis:
Baillie Gifford maintains confidence in AutoZone despite concerns about potential tariff impacts on its supply chain from Mexico and China. The manager emphasizes AutoZone's defensive business model, with 90% of revenue derived from non-discretionary maintenance and repair needs that customers cannot defer. This creates a stable demand base that is relatively recession-resistant. AutoZone's competitive advantage lies in its superior product selection compared to smaller competitors, giving the company significant pricing power. The manager believes this pricing power enables AutoZone to pass through any tariff costs to customers while potentially gaining market share from less competitive rivals. The investment thesis centers on AutoZone's ability to grow through market share gains and pricing optimization, supported by its essential service offering. Despite macro headwinds, the company's defensive characteristics and competitive positioning make it an attractive long-term holding. This represents the type of quality compounder that can navigate challenging environments while delivering consistent growth.

Pitch Summary:
We purchased shares in Enphase Energy, which we think has a really attractive competitive position within microinverters for solar panels. Out of favour at the moment, we think a long-term attractive growth story.

BSD Analysis:
Baillie Gifford established a position in Enphase Energy, recognizing the company's strong competitive moat in the microinverter segment of the solar industry. The manager acknowledges that the stock is currently out of favor, presenting an attractive entry point for long-term investors. Enphase's microinverter technology offers superior performance and reliability compared to traditional string inverters by optimizing energy conversion at the individual panel level. The company has built a dominant market position in residential solar installations, particularly in the US market. Despite near-term headwinds affecting solar stocks, the manager believes the long-term growth trajectory remains compelling driven by continued adoption of distributed solar energy. This investment aligns with the portfolio's focus on companies with unique technological advantages and structural growth opportunities. The contrarian timing of this purchase reflects the team's willingness to invest when quality companies trade at attractive valuations.

Pitch Summary:
We've purchased shares in Nubank. This is a Brazilian bank that competes against a comparatively sleepy incumbent. It's got a great cost advantage and a customer proposition, and it is attracting new customers hand over fist in Brazil and elsewhere in Latin America.

BSD Analysis:
Baillie Gifford initiated a position in Nubank, viewing it as a disruptive digital bank with significant competitive advantages in Latin America. The manager highlights Nubank's superior cost structure and customer value proposition compared to traditional incumbent banks in the region. The company is experiencing rapid customer acquisition across Brazil and expanding into other Latin American markets. This represents a classic disruptor play where a technology-enabled financial services company is gaining market share from established players. The investment thesis centers on Nubank's ability to leverage its digital-first approach to offer better services at lower costs. The manager sees this as an attractive opportunity to capitalize on the ongoing digital transformation of banking in emerging markets. Given the portfolio's focus on growth companies with unique competitive positions, Nubank fits well within their disruptor category.

Pitch Summary:
A new theme in the portfolio is the building materials sector in Europe, which has experienced significant volatility over the past two decades, marked by the housing crisis and the COVID-19 pandemic. More recently, construction activity surged to a post-financial crisis high in 2021 in Europe, only to collapse by 60% in 2023 due to over-investment and rising interest rates. Current data, however, shows signs of stabilization, particularly in building permits, suggesting the market may be finding its footing. There are several key points worth highlighting about this cycle. First, current construction volumes are well below historical averages, which could lead to structural shortages if these levels persist. As a classic cyclical market, it is not a matter of if these volumes recover, but when. We believe that recovery could come sooner rather than later, especially with the current interest rate cycle appearing to turn in favor of growth. The recent cuts by the ECB are expected to continue at least through June, and increasing tariff uncertainties may spur additional rate cuts. Another significant factor at work here is related to fiscal stimulus. Germany recently announced a €500 billion infrastructure investment plan. While this was surprising, what was equally, if not more so, was the loosening of its constitutional debt brake. This shift in policy, considered sacrosanct, signals the government's commitment to stimulating growth. While it is largely speculation, it's plausible that other E.U. countries may follow suit. Additionally, the potential end to the war in Ukraine presents a long-term rebuilding opportunity; everything from concrete and doorknobs to utility services will be required. While investment in Ukraine is currently minimal, post-war recoveries often lead to a surge in construction, sometimes doubling pre-war levels and lasting for a decade. Given the size of Ukraine's population (nearly 10.0% of the E.U.), a post-war rebuilding effort could tighten the building supply markets, driving up manufacturing volumes and pricing. Additionally, tariffs present a new wildcard, particularly for the U.S., which will most likely lead to higher prices as it is a net importer of cement. This should benefit European producers, who have significant exposure to this market. The building materials industry is inherently cyclical, which is often seen as a disadvantage for investment. However, we believe the cycle is at a turning point, creating an attractive opportunity. We have specifically focused our attention on the cement market for several compelling reasons. Cement is a highly localized market wherein a single plant will only serve a radius of customers within 200-400 kilometers due to the weight and bulk of the product. Similar to many other industries like memory chips, airlines, and railroads, the cement industry is now run by MBAs who have figured out that consolidation is critical to maintaining pricing power. Over the past two decades, we have witnessed a flurry of M&A activity, reshaping the industry and resulting in a highly profitable landscape even at the bottom of their cycle. Margins are currently near all-time highs across the industry, which is highly unusual for a cyclical commodity. While we have been unable to get plant-by-plant market share figures, it is widely accepted across the industry that within each region, there are typically no more than two or three dominant operators. This concentration has enabled cement companies to hold or even raise prices despite operating at just 60% utilization in their European plants. The last important driver of our thesis relates to carbon emissions and the growing pressure to reduce them. Cement production, which involves plants essentially baking limestone, inherently releases CO2. The process itself and the fuel used to generate the necessary heat both contribute to CO2 emissions. As a result, cement companies face increasing regulatory scrutiny and regulatory pressures to reduce their carbon footprint. The cement companies have been given credits for free, but those grants are being reduced annually, forcing companies to either purchase additional credits in the marketplace or bury their CO2 through carbon capture. For perspective, the current price of cement is about €120 per ton and the cost to offset the carbon for each ton is another €30-40 today. These credits trade on an exchange and analysts anticipate a growing shortage that could increase this cost by multiples. Companies are experimenting with carbon capture (and the first plant should go live next month), but the technology is costly, and pricing for cement processed this way is expected to reach €300-500 per ton. It remains to be seen if the powers that be will have the stomach to continue down this path. What is certain, however, is that no one is going to build a new plant, and the 20-30% of the market that is still "mom & pop" operators will most likely sell to the handful of companies remaining. While carbon charges seem like a bad thing for the industry, the opposite is the case as they drive further consolidation, more pricing power, and less competition. Starting next year, a carbon border adjustment will be imposed, meaning foreign manufacturers shipping cement into the E.U. will also have to purchase these credits, further tightening the market. Given the top-down dynamics described above, we were surprised that many of these companies are still trading at very low valuations. We have holdings in Buzzi (Italy), Cementir (Italy), Titan (Greece), and Wienerberger (Germany). Wienerberger is slightly different from the other names as they control about one-third of the European brick market and are even more cyclically exposed than the cement names. The average P/E ratio for these is around 8x, with the highest at 9x. Free cash flow yields are around 10% and all pay 2-3% dividends. We believe these stocks have significant upside potential, driven by a volume recovery that could substantially boost earnings and a potential rerating of valuation multiples. Cyclical stocks that can deliver record margins at the bottom of a cycle typically trade at much higher multiples. We expect investors will begin to recognize this opportunity as the current downturn fades and growth resumes.

BSD Analysis:
Apis Capital presents a compelling cyclical recovery thesis for European building materials, specifically targeting Wienerberger which controls approximately one-third of the European brick market. The fund argues that current construction volumes are well below historical averages, creating structural shortage potential as the cycle inevitably turns. Key catalysts include ECB rate cuts, Germany's €500 billion infrastructure plan with constitutional debt brake loosening, and potential Ukraine reconstruction demand representing nearly 10% of EU population. Wienerberger is noted as being even more cyclically exposed than cement companies, suggesting greater upside potential during recovery. The building materials industry has undergone significant consolidation over two decades, creating oligopolistic market structures that enable pricing power even at low utilization rates. Carbon emission regulations paradoxically strengthen the investment case by forcing further consolidation as smaller operators cannot afford compliance costs. At 8x P/E ratios, 10% free cash flow yields, and 2-3% dividends, these companies trade at deep cyclical discounts despite maintaining record margins at cycle lows. The fund expects significant multiple expansion as volume recovery drives earnings growth and investors recognize the structural improvements in industry dynamics.

Pitch Summary:
A new theme in the portfolio is the building materials sector in Europe, which has experienced significant volatility over the past two decades, marked by the housing crisis and the COVID-19 pandemic. More recently, construction activity surged to a post-financial crisis high in 2021 in Europe, only to collapse by 60% in 2023 due to over-investment and rising interest rates. Current data, however, shows signs of stabilization, particularly in building permits, suggesting the market may be finding its footing. There are several key points worth highlighting about this cycle. First, current construction volumes are well below historical averages, which could lead to structural shortages if these levels persist. As a classic cyclical market, it is not a matter of if these volumes recover, but when. We believe that recovery could come sooner rather than later, especially with the current interest rate cycle appearing to turn in favor of growth. The recent cuts by the ECB are expected to continue at least through June, and increasing tariff uncertainties may spur additional rate cuts. Another significant factor at work here is related to fiscal stimulus. Germany recently announced a €500 billion infrastructure investment plan. While this was surprising, what was equally, if not more so, was the loosening of its constitutional debt brake. This shift in policy, considered sacrosanct, signals the government's commitment to stimulating growth. While it is largely speculation, it's plausible that other E.U. countries may follow suit. Additionally, the potential end to the war in Ukraine presents a long-term rebuilding opportunity; everything from concrete and doorknobs to utility services will be required. While investment in Ukraine is currently minimal, post-war recoveries often lead to a surge in construction, sometimes doubling pre-war levels and lasting for a decade. Given the size of Ukraine's population (nearly 10.0% of the E.U.), a post-war rebuilding effort could tighten the building supply markets, driving up manufacturing volumes and pricing. Additionally, tariffs present a new wildcard, particularly for the U.S., which will most likely lead to higher prices as it is a net importer of cement. This should benefit European producers, who have significant exposure to this market. The building materials industry is inherently cyclical, which is often seen as a disadvantage for investment. However, we believe the cycle is at a turning point, creating an attractive opportunity. We have specifically focused our attention on the cement market for several compelling reasons. Cement is a highly localized market wherein a single plant will only serve a radius of customers within 200-400 kilometers due to the weight and bulk of the product. Similar to many other industries like memory chips, airlines, and railroads, the cement industry is now run by MBAs who have figured out that consolidation is critical to maintaining pricing power. Over the past two decades, we have witnessed a flurry of M&A activity, reshaping the industry and resulting in a highly profitable landscape even at the bottom of their cycle. Margins are currently near all-time highs across the industry, which is highly unusual for a cyclical commodity. While we have been unable to get plant-by-plant market share figures, it is widely accepted across the industry that within each region, there are typically no more than two or three dominant operators. This concentration has enabled cement companies to hold or even raise prices despite operating at just 60% utilization in their European plants. The last important driver of our thesis relates to carbon emissions and the growing pressure to reduce them. Cement production, which involves plants essentially baking limestone, inherently releases CO2. The process itself and the fuel used to generate the necessary heat both contribute to CO2 emissions. As a result, cement companies face increasing regulatory scrutiny and regulatory pressures to reduce their carbon footprint. The cement companies have been given credits for free, but those grants are being reduced annually, forcing companies to either purchase additional credits in the marketplace or bury their CO2 through carbon capture. For perspective, the current price of cement is about €120 per ton and the cost to offset the carbon for each ton is another €30-40 today. These credits trade on an exchange and analysts anticipate a growing shortage that could increase this cost by multiples. Companies are experimenting with carbon capture (and the first plant should go live next month), but the technology is costly, and pricing for cement processed this way is expected to reach €300-500 per ton. It remains to be seen if the powers that be will have the stomach to continue down this path. What is certain, however, is that no one is going to build a new plant, and the 20-30% of the market that is still "mom & pop" operators will most likely sell to the handful of companies remaining. While carbon charges seem like a bad thing for the industry, the opposite is the case as they drive further consolidation, more pricing power, and less competition. Starting next year, a carbon border adjustment will be imposed, meaning foreign manufacturers shipping cement into the E.U. will also have to purchase these credits, further tightening the market. Given the top-down dynamics described above, we were surprised that many of these companies are still trading at very low valuations. We have holdings in Buzzi (Italy), Cementir (Italy), Titan (Greece), and Wienerberger (Germany). Wienerberger is slightly different from the other names as they control about one-third of the European brick market and are even more cyclically exposed than the cement names. The average P/E ratio for these is around 8x, with the highest at 9x. Free cash flow yields are around 10% and all pay 2-3% dividends. We believe these stocks have significant upside potential, driven by a volume recovery that could substantially boost earnings and a potential rerating of valuation multiples. Cyclical stocks that can deliver record margins at the bottom of a cycle typically trade at much higher multiples. We expect investors will begin to recognize this opportunity as the current downturn fades and growth resumes.

BSD Analysis:
Apis Capital presents a compelling cyclical recovery thesis for European building materials, specifically targeting cement companies like Titan at what they believe is a sector trough. The fund argues that current construction volumes are well below historical averages, creating structural shortage potential as the cycle inevitably turns. Key catalysts include ECB rate cuts, Germany's €500 billion infrastructure plan with constitutional debt brake loosening, and potential Ukraine reconstruction demand representing nearly 10% of EU population. The cement industry has undergone significant consolidation over two decades, creating oligopolistic market structures with 2-3 dominant operators per region, enabling pricing power even at 60% utilization rates. Carbon emission regulations paradoxically strengthen the investment case by forcing further consolidation as smaller operators cannot afford compliance costs, while carbon border adjustments protect against foreign competition. At 8x P/E ratios, 10% free cash flow yields, and 2-3% dividends, these companies trade at deep cyclical discounts despite maintaining record margins at cycle lows. The fund expects significant multiple expansion as volume recovery drives earnings growth and investors recognize the structural improvements in industry dynamics.

Pitch Summary:
A new theme in the portfolio is the building materials sector in Europe, which has experienced significant volatility over the past two decades, marked by the housing crisis and the COVID-19 pandemic. More recently, construction activity surged to a post-financial crisis high in 2021 in Europe, only to collapse by 60% in 2023 due to over-investment and rising interest rates. Current data, however, shows signs of stabilization, particularly in building permits, suggesting the market may be finding its footing. There are several key points worth highlighting about this cycle. First, current construction volumes are well below historical averages, which could lead to structural shortages if these levels persist. As a classic cyclical market, it is not a matter of if these volumes recover, but when. We believe that recovery could come sooner rather than later, especially with the current interest rate cycle appearing to turn in favor of growth. The recent cuts by the ECB are expected to continue at least through June, and increasing tariff uncertainties may spur additional rate cuts. Another significant factor at work here is related to fiscal stimulus. Germany recently announced a €500 billion infrastructure investment plan. While this was surprising, what was equally, if not more so, was the loosening of its constitutional debt brake. This shift in policy, considered sacrosanct, signals the government's commitment to stimulating growth. While it is largely speculation, it's plausible that other E.U. countries may follow suit. Additionally, the potential end to the war in Ukraine presents a long-term rebuilding opportunity; everything from concrete and doorknobs to utility services will be required. While investment in Ukraine is currently minimal, post-war recoveries often lead to a surge in construction, sometimes doubling pre-war levels and lasting for a decade. Given the size of Ukraine's population (nearly 10.0% of the E.U.), a post-war rebuilding effort could tighten the building supply markets, driving up manufacturing volumes and pricing. Additionally, tariffs present a new wildcard, particularly for the U.S., which will most likely lead to higher prices as it is a net importer of cement. This should benefit European producers, who have significant exposure to this market. The building materials industry is inherently cyclical, which is often seen as a disadvantage for investment. However, we believe the cycle is at a turning point, creating an attractive opportunity. We have specifically focused our attention on the cement market for several compelling reasons. Cement is a highly localized market wherein a single plant will only serve a radius of customers within 200-400 kilometers due to the weight and bulk of the product. Similar to many other industries like memory chips, airlines, and railroads, the cement industry is now run by MBAs who have figured out that consolidation is critical to maintaining pricing power. Over the past two decades, we have witnessed a flurry of M&A activity, reshaping the industry and resulting in a highly profitable landscape even at the bottom of their cycle. Margins are currently near all-time highs across the industry, which is highly unusual for a cyclical commodity. While we have been unable to get plant-by-plant market share figures, it is widely accepted across the industry that within each region, there are typically no more than two or three dominant operators. This concentration has enabled cement companies to hold or even raise prices despite operating at just 60% utilization in their European plants. The last important driver of our thesis relates to carbon emissions and the growing pressure to reduce them. Cement production, which involves plants essentially baking limestone, inherently releases CO2. The process itself and the fuel used to generate the necessary heat both contribute to CO2 emissions. As a result, cement companies face increasing regulatory scrutiny and regulatory pressures to reduce their carbon footprint. The cement companies have been given credits for free, but those grants are being reduced annually, forcing companies to either purchase additional credits in the marketplace or bury their CO2 through carbon capture. For perspective, the current price of cement is about €120 per ton and the cost to offset the carbon for each ton is another €30-40 today. These credits trade on an exchange and analysts anticipate a growing shortage that could increase this cost by multiples. Companies are experimenting with carbon capture (and the first plant should go live next month), but the technology is costly, and pricing for cement processed this way is expected to reach €300-500 per ton. It remains to be seen if the powers that be will have the stomach to continue down this path. What is certain, however, is that no one is going to build a new plant, and the 20-30% of the market that is still "mom & pop" operators will most likely sell to the handful of companies remaining. While carbon charges seem like a bad thing for the industry, the opposite is the case as they drive further consolidation, more pricing power, and less competition. Starting next year, a carbon border adjustment will be imposed, meaning foreign manufacturers shipping cement into the E.U. will also have to purchase these credits, further tightening the market. Given the top-down dynamics described above, we were surprised that many of these companies are still trading at very low valuations. We have holdings in Buzzi (Italy), Cementir (Italy), Titan (Greece), and Wienerberger (Germany). Wienerberger is slightly different from the other names as they control about one-third of the European brick market and are even more cyclically exposed than the cement names. The average P/E ratio for these is around 8x, with the highest at 9x. Free cash flow yields are around 10% and all pay 2-3% dividends. We believe these stocks have significant upside potential, driven by a volume recovery that could substantially boost earnings and a potential rerating of valuation multiples. Cyclical stocks that can deliver record margins at the bottom of a cycle typically trade at much higher multiples. We expect investors will begin to recognize this opportunity as the current downturn fades and growth resumes.

BSD Analysis:
Apis Capital presents a compelling cyclical recovery thesis for European building materials, specifically targeting cement companies like Cementir at what they believe is a sector trough. The fund argues that current construction volumes are well below historical averages, creating structural shortage potential as the cycle inevitably turns. Key catalysts include ECB rate cuts, Germany's €500 billion infrastructure plan with constitutional debt brake loosening, and potential Ukraine reconstruction demand representing nearly 10% of EU population. The cement industry has undergone significant consolidation over two decades, creating oligopolistic market structures with 2-3 dominant operators per region, enabling pricing power even at 60% utilization rates. Carbon emission regulations paradoxically strengthen the investment case by forcing further consolidation as smaller operators cannot afford compliance costs, while carbon border adjustments protect against foreign competition. At 8x P/E ratios, 10% free cash flow yields, and 2-3% dividends, these companies trade at deep cyclical discounts despite maintaining record margins at cycle lows. The fund expects significant multiple expansion as volume recovery drives earnings growth and investors recognize the structural improvements in industry dynamics.

Pitch Summary:
A new theme in the portfolio is the building materials sector in Europe, which has experienced significant volatility over the past two decades, marked by the housing crisis and the COVID-19 pandemic. More recently, construction activity surged to a post-financial crisis high in 2021 in Europe, only to collapse by 60% in 2023 due to over-investment and rising interest rates. Current data, however, shows signs of stabilization, particularly in building permits, suggesting the market may be finding its footing. There are several key points worth highlighting about this cycle. First, current construction volumes are well below historical averages, which could lead to structural shortages if these levels persist. As a classic cyclical market, it is not a matter of if these volumes recover, but when. We believe that recovery could come sooner rather than later, especially with the current interest rate cycle appearing to turn in favor of growth. The recent cuts by the ECB are expected to continue at least through June, and increasing tariff uncertainties may spur additional rate cuts. Another significant factor at work here is related to fiscal stimulus. Germany recently announced a €500 billion infrastructure investment plan. While this was surprising, what was equally, if not more so, was the loosening of its constitutional debt brake. This shift in policy, considered sacrosanct, signals the government's commitment to stimulating growth. While it is largely speculation, it's plausible that other E.U. countries may follow suit. Additionally, the potential end to the war in Ukraine presents a long-term rebuilding opportunity; everything from concrete and doorknobs to utility services will be required. While investment in Ukraine is currently minimal, post-war recoveries often lead to a surge in construction, sometimes doubling pre-war levels and lasting for a decade. Given the size of Ukraine's population (nearly 10.0% of the E.U.), a post-war rebuilding effort could tighten the building supply markets, driving up manufacturing volumes and pricing. Additionally, tariffs present a new wildcard, particularly for the U.S., which will most likely lead to higher prices as it is a net importer of cement. This should benefit European producers, who have significant exposure to this market. The building materials industry is inherently cyclical, which is often seen as a disadvantage for investment. However, we believe the cycle is at a turning point, creating an attractive opportunity. We have specifically focused our attention on the cement market for several compelling reasons. Cement is a highly localized market wherein a single plant will only serve a radius of customers within 200-400 kilometers due to the weight and bulk of the product. Similar to many other industries like memory chips, airlines, and railroads, the cement industry is now run by MBAs who have figured out that consolidation is critical to maintaining pricing power. Over the past two decades, we have witnessed a flurry of M&A activity, reshaping the industry and resulting in a highly profitable landscape even at the bottom of their cycle. Margins are currently near all-time highs across the industry, which is highly unusual for a cyclical commodity. While we have been unable to get plant-by-plant market share figures, it is widely accepted across the industry that within each region, there are typically no more than two or three dominant operators. This concentration has enabled cement companies to hold or even raise prices despite operating at just 60% utilization in their European plants. The last important driver of our thesis relates to carbon emissions and the growing pressure to reduce them. Cement production, which involves plants essentially baking limestone, inherently releases CO2. The process itself and the fuel used to generate the necessary heat both contribute to CO2 emissions. As a result, cement companies face increasing regulatory scrutiny and regulatory pressures to reduce their carbon footprint. The cement companies have been given credits for free, but those grants are being reduced annually, forcing companies to either purchase additional credits in the marketplace or bury their CO2 through carbon capture. For perspective, the current price of cement is about €120 per ton and the cost to offset the carbon for each ton is another €30-40 today. These credits trade on an exchange and analysts anticipate a growing shortage that could increase this cost by multiples. Companies are experimenting with carbon capture (and the first plant should go live next month), but the technology is costly, and pricing for cement processed this way is expected to reach €300-500 per ton. It remains to be seen if the powers that be will have the stomach to continue down this path. What is certain, however, is that no one is going to build a new plant, and the 20-30% of the market that is still "mom & pop" operators will most likely sell to the handful of companies remaining. While carbon charges seem like a bad thing for the industry, the opposite is the case as they drive further consolidation, more pricing power, and less competition. Starting next year, a carbon border adjustment will be imposed, meaning foreign manufacturers shipping cement into the E.U. will also have to purchase these credits, further tightening the market. Given the top-down dynamics described above, we were surprised that many of these companies are still trading at very low valuations. We have holdings in Buzzi (Italy), Cementir (Italy), Titan (Greece), and Wienerberger (Germany). Wienerberger is slightly different from the other names as they control about one-third of the European brick market and are even more cyclically exposed than the cement names. The average P/E ratio for these is around 8x, with the highest at 9x. Free cash flow yields are around 10% and all pay 2-3% dividends. We believe these stocks have significant upside potential, driven by a volume recovery that could substantially boost earnings and a potential rerating of valuation multiples. Cyclical stocks that can deliver record margins at the bottom of a cycle typically trade at much higher multiples. We expect investors will begin to recognize this opportunity as the current downturn fades and growth resumes.

BSD Analysis:
Apis Capital presents a compelling cyclical recovery thesis for European building materials, specifically targeting cement companies like Buzzi at what they believe is a sector trough. The fund argues that current construction volumes are well below historical averages, creating structural shortage potential as the cycle inevitably turns. Key catalysts include ECB rate cuts, Germany's €500 billion infrastructure plan with constitutional debt brake loosening, and potential Ukraine reconstruction demand representing nearly 10% of EU population. The cement industry has undergone significant consolidation over two decades, creating oligopolistic market structures with 2-3 dominant operators per region, enabling pricing power even at 60% utilization rates. Carbon emission regulations paradoxically strengthen the investment case by forcing further consolidation as smaller operators cannot afford compliance costs, while carbon border adjustments protect against foreign competition. At 8x P/E ratios, 10% free cash flow yields, and 2-3% dividends, these companies trade at deep cyclical discounts despite maintaining record margins at cycle lows. The fund expects significant multiple expansion as volume recovery drives earnings growth and investors recognize the structural improvements in industry dynamics.

Pitch Summary:
Arista Networks is a prominent player in the cloud networking sector, specializing in high-performance switching and routing solutions tailored for data centers, campus environments, and AI-driven infrastructures. At the core of Arista Networks is Ethernet, which, as you all probably know, is the standard networking architecture for the internet. But for data centers and AI networking, there are two competing network architectures: Ethernet and InfiniBand (which is Nvidia's proprietary offering that they acquired through the Mellanox acquisition). Understanding the network architecture landscape is important to understanding where Arista fits into the broader AI landscape. The company's growth is fueled by the increasing demand for scalable, low-latency networking solutions, particularly as enterprises and cloud providers expand their AI and machine learning capabilities. Arista's emphasis on software-driven networking, automation, and security positions it advantageously. While the CEO of Arista is not created as a founder but rather a founding executive, two of the original founders, Andy Bechtolsheim and Kenneth Duda, are still involved as the chairman/chief architect and CTO, respectively. Due to this, I consider the company founder led. Arista Networks' Ethernet and NVIDIA's InfiniBand represent two distinct approaches to AI data center networking, each with unique advantages, but the networking landscape is continually evolving. NVIDIA's InfiniBand offers ultra-low latency and high throughput, making it ideal for tightly coupled AI training workloads, but it is not necessary for general datacenter needs or running AI workloads post training. InfiniBand's architecture ensures synchronized data flow across GPUs, minimizing idle times during complex computations. This has led to InfiniBand's dominance in large-scale AI training clusters, with approximately 90% of such deployments utilizing this technology. Jenson Huang summarized this important point: "AI only cares about the last student to turn in their partial product." This means that high utilization and high accuracy are of utmost importance during AI training, which is where InfiniBand excels. While InfiniBand is more useful in AI training, Arista Ethernet focuses on scalability and cost-effectiveness. With advancements like RDMA over Converged Ethernet (RoCE), Arista's Ethernet solutions have significantly improved in performance over the years. Arista's Etherlink AI platform incorporates dynamic load balancing and congestion control, catering to the demands of AI workloads. While Ethernet may have slightly higher latency compared to InfiniBand, its widespread adoption and flexibility make it a compelling choice for many data centers. Arista is a major backer of the Ultra Ethernet Consortium, a group of companies including Broadcom, Cisco, Meta, and others. Ultra Ethernet is the next generation of Ethernet architecture, including new hardware and a full protocol stack, with the focus to "deliver an Ethernet-based open, interoperable, high-performance, full-communications stack architecture to meet the growing network demands of AI & HPC at scale." Ultra Ethernet is slated to be fully available and deployable in late 2025 and early 2026, which Arista is anticipating adopting. Spectrum-X, already available in the market, competes directly with Ultra Ethernet as both target the growing demand for AI data center networking. Built on technology acquired through NVIDIA's Mellanox acquisition, Spectrum-X is tightly integrated with NVIDIA's AI stack, offering performance tuned specifically for its ecosystem. However, this integration comes with trade-offs: it locks customers into NVIDIA's proprietary environment and tends to be more expensive. Despite the competitive pressure from NVIDIA, Arista continues to offer a more cost-effective solution that delivers comparable performance for most data center workloads, making it an attractive alternative for organizations seeking flexibility and lower total cost of ownership. On top of the open-source Ethernet architecture, Arista Networks employs its proprietary software, including their Extensible Operating System (EOS) and CloudVision platform, to deliver high-performance, scalable, and programmable networking solutions tailored for modern data centers and AI-driven infrastructures. EOS is a highly programmable modular networking operating system at the core of running a data center network. EOS is the software layer of the network architecture that is the sticky part of the stack. CloudVision sits on top of the EOS software layer as a multi-domain management platform that delivers a zero-touch network operations product to clients. This allows corporations, universities, and government agencies to run large, complex data centers easily and manage across multiple locations to deliver consistent experiences for their users. EOS and CloudVision are the core software components that differentiate the business, but the company also sells the hardware, including switches, routers, cabling, and other networking devices. Arista's services revenue is their higher-margin business, with gross margins around 80% versus around 60% for their product revenues. The services business has been growing at a +30% revenue growth rate, driven in part by AI enterprise data center growth but also due to new offerings like network automation, security, and analytics. From a competitive perspective, Arista is the relatively new company in the networking space. They compete with Cisco, HPE (via Aruba Networks), Juniper Networks, and Broadcom (via VMware), and most notably now Nvidia (via Mellanox). Nvidia competes with Arista mainly on the hyperscaler and AI networking front, while the others compete largely in traditional enterprise and campus sectors. Arista stands out from its competition due to its superior software architecture (EOS), its strategic focus on AI and hyperscale data centers, and its best-in-class hardware performance. Enterprises love Arista for their easy-to-deploy software and their deep technical engineering support. Overall, Arista has a very high net promoter score relative to their peers in almost every review website we checked online, including a 1st rank in every category on comparability.com. Arista Networks is run by CEO Jayshree Ullal, a founding executive, who continues to serve as president and CEO. Andy Bechtolsheim, Arista's co-founder and Chief Development Officer, remains heavily engaged in product innovation and technology strategy, helping the company stay at the forefront of networking advances. The management team has been very successful at staying at the forefront of networking while maintaining a conservative balance sheet and prudent capital allocation strategy. The company has made a few small acquisitions over the last 8 years but generally focused internally for growth, spending 15% of revenues on R&D over the last 12 months. In software and technology, I prefer this strategy, as large acquisitions can take years to digest at this size and scale. The company has no long-term debt, and it has an ongoing share repurchase program that bought back $480 million in shares in the last year. Management has stated that they plan to continue to buy back shares as the main form of capital allocation, as the business is now in a place where it will generate significant free cash flow going forward. Arista sits in a prominent position in the networking sector with many large tailwinds, including AI data center investment and the adoption of Ultra Ethernet. Their growth will be driven by the rapid expansion of AI-driven data centers and the increasing demand for high-performance networking solutions over the next 10 years. The global AI data center market is projected to reach $100 billion by 2030, growing at a compound annual growth rate (CAGR) of 30% over the next five years. In the United States alone, the AI data center market is expected to grow at a CAGR of 25.3% from 2025 to 2030, with services being the fastest-growing segment. Arista will not only benefit from the growing AI data center market but also by offering new and additional products to manage more complex data center environments. Arista's valuation has always been on the higher end of the companies that we follow. This is largely due to the growth and financial profile of the company (high gross margins, little need for reinvestment). Arista is currently trading at 24x NTM EBITDA and 31.4x NTM earnings. That seems expensive for even the best businesses, but with an 18% growth rate CAGR and a mid-20s ROIC, I believe over the next three years Arista will generate slightly above the rule of 40. Based on the current valuation, we project that over the next 3 years, Arista can generate an IRR of above 25% per annum.

BSD Analysis:
Deep Sail Capital presents a comprehensive bull case for Arista Networks, positioning it as a key beneficiary of the AI data center boom. The manager emphasizes Arista's strategic advantage in Ethernet-based networking solutions, which offer superior cost-effectiveness and flexibility compared to NVIDIA's proprietary InfiniBand architecture. The thesis centers on Arista's differentiated software stack, particularly the EOS operating system and CloudVision platform, which create sticky customer relationships and drive higher-margin services revenue growing at 30% annually. The fund highlights strong founder involvement with Andy Bechtolsheim remaining as chairman/chief architect, conservative capital allocation with no debt and active share buybacks of $480M annually, and positioning for the Ultra Ethernet transition in late 2025. With the AI data center market projected to reach $100B by 2030 (30% CAGR), the manager sees substantial long-term growth despite premium valuation metrics of 24x NTM EBITDA and 31.4x NTM earnings. The projected 25%+ annual IRR over three years reflects confidence in Arista's ability to maintain its competitive moat while capitalizing on AI infrastructure buildout.

Pitch Summary:
The Fund also continues to hold a position in Enzo Biochem (ENZ). At quarter end, it was trading for 40% of book value and a 50% discount to cash. The company announced the initiation of a strategic review in mid-April, after receiving multiple inquiries of interest. While the odds of us making a profit on this investment are low, I believe a swift transaction will allow us to recoup most of our losses. Fingers crossed.

BSD Analysis:
The manager maintains a cautious position in Enzo Biochem, acknowledging this as a potential loss while highlighting the defensive characteristics of the investment. Trading at 40% of book value and 50% discount to cash provides significant downside protection in a liquidation scenario. The strategic review announcement following multiple acquisition inquiries creates potential for value realization through a corporate transaction. However, the manager's candid assessment that profit odds are low demonstrates realistic expectations and disciplined risk management. The position appears sized appropriately as a low-conviction holding where asset backing limits downside while strategic alternatives provide modest upside optionality. This represents a classic net-net investment where balance sheet strength compensates for operational challenges.

Pitch Summary:
Third Harmonic Bio (THRD) came public in 2022, and its shares quickly came under pressure after the company reported that THB001, its primary drug, caused liver toxicity issues in trials. In February 2025, phase 1 data for another pipeline asset, THB335 ("335"), also disappointed investors. Concurrent to releasing the 335 results, THRD halted all non-335 research, fired 50% of its workforce, and initiated a strategic review, saying "we have to consider our responsibility to our shareholders and our ability to build value over a reasonable time horizon…given the recent market dynamics around our stock, we believe that solely relying on the progress of 335 to build value is an inefficient approach." On the same day, THRD guided to a 6/30/25 estimated net cash balance of >$5 per share with nearly no liabilities, at which point the Fund bought shares at $3.45. In mid-April the company announced it would dissolve itself and return all its cash to shareholders. We then exited at $5.

BSD Analysis:
This represents a successful liquidation arbitrage play where the manager capitalized on a biotech company's strategic pivot to shareholder value maximization. Third Harmonic Bio's decision to halt operations and return cash following pipeline failures created an immediate catalyst for value realization. The manager's entry at $3.45 against a guided cash value of over $5 per share provided a clear margin of safety with limited downside risk. The company's proactive approach to capital allocation, recognizing that continued drug development was value-destructive, demonstrated strong corporate governance. The 45% return upon liquidation announcement validates the manager's ability to identify special situations in distressed biotech names. This investment exemplifies the benefits of focusing on asset-backed positions rather than speculative drug development stories.

Pitch Summary:
Arvinas (ARVN), a clinical-stage biotech company developing targeted protein degraders, is down more than 90% from its 2021 highs due to investor disappointment with its trials. Pipeline struggles aside, ARVN has over $1 billion in cash and two significant license/collaboration agreements. With Pfizer, ARVN is eligible to receive up to $1.4 billion of payments upon the approval of ARV-471 and then share equally (50/50) in all profits and losses of the drug. With Novartis, ARVN is eligible to receive up to $1 billion upon the approval of ARV-766, with ongoing tiered royalites thereafter. Despite these assets, ARVN's market capitalization fell to $500 million in March 2025 upon a disappointing readout for ARV-471 (vepdegestrant). This valuation implies that the company will burn its cash, or that its pipeline will turn out to have minimal value. However, I believe it is unlikely that both will occur. The company's largest holder with a 15% stake, EcoR1, is an engaged and concentrated biotech specialist that has sufficient incentive to prevent further value destruction.

BSD Analysis:
The manager presents a compelling value play in Arvinas, a biotech company trading at a significant discount to its asset value. With over $1 billion in cash and potential milestone payments of up to $2.4 billion from partnerships with Pfizer and Novartis, the company's $500 million market cap appears deeply undervalued. The 90% decline from 2021 highs following trial disappointments has created an asymmetric risk-reward opportunity. The presence of EcoR1 as a 15% concentrated holder provides governance protection and alignment with shareholder value creation. The manager's thesis relies on asset-based valuation rather than pipeline execution, reducing scientific risk. This represents a classic distressed biotech investment where cash value and partnership optionality provide downside protection while maintaining upside potential from drug development success.

Pitch Summary:
Alas, not every investment works out as well as Sprouts, and we sold Fortrea during the quarter because management has been unable to deliver on the margin expansion they promised. Fortrea is a contract research organization that runs clinical trials for its biopharmaceutical customers. Following its spinout from Labcorp in June 2023, we anticipated the highly regarded CEO would improve margins towards the peer average over time, a thesis he himself laid out at the time of the spin. Instead, it's been one self-inflicted problem after another, culminating in 2025 guidance that implies margins are heading the wrong way, with the high teens margins we ultimately anticipated nowhere in sight. With the thesis well off track, we took a loss in March.

BSD Analysis:
Penn Davis McFarland's exit from Fortrea represents a disciplined approach to cutting losses when investment theses fail to materialize as expected. The fund's original investment was predicated on margin expansion potential following the company's spinout from Labcorp in June 2023, with management promising to improve margins toward peer averages. The thesis appeared credible given the highly regarded CEO's track record and his explicit commitment to margin improvement at the time of the spin. However, Fortrea has consistently failed to execute on these promises, experiencing a series of self-inflicted operational problems that have prevented the anticipated margin expansion. The 2025 guidance particularly disappointed, indicating margins are moving in the wrong direction rather than toward the high-teens levels the fund had targeted. This deteriorating operational performance and management's inability to deliver on key promises led to the fund's decision to exit the position at a loss in March. The case demonstrates the importance of management execution in investment outcomes and the discipline required to exit positions when fundamental theses break down, regardless of the initial conviction level.

Pitch Summary:
Sprouts Farmers Market, the specialty grocery store chain focused on fresh produce and low cost better-for-you products, has been as outstanding performer. Our first purchase of SFM was made in the summer of 2019 at $17 and change. Several worries were weighing on the shares at the time, including the recent departure of the CEO, sluggish produce pricing and the competitive threat from Amazon's acquisition of Whole Foods, causing the multiple to contract to a reasonable 15x forward earnings. We saw plenty of room for expansion within the large and attractive natural and organic food segment of the grocery industry, and believed the depressed multiple offered an adequate margin of safety. A few weeks later, the company announced the appointment of Jack Sinclair as CEO, who had previously led Walmart's U.S. grocery business, where he drove big growth by pushing local products and fresh foods. Since that initial purchase, Sprouts has grown its store base from 320 stores to 440, and it plans to continue growing its store count by roughly 10% a year. It's ramped up its online offering, expanded the breadth of its private label products, started a loyalty program, and rolled out smaller, more productive new stores. Same store sales growth, a measure of the performance of a retailer's existing stores, hit 7.6% in 2024. With the shares up almost tenfold from our original purchase and trading at over 35x next year's earnings, we trimmed it twice during the quarter. Sprouts is, after all, a grocery store retailer and that's a multiple that would make a software company blush. We are maintaining a right-sized position as the company has substantial operating momentum, but we have taken some chips off the table as the remarkable execution seems priced in.

BSD Analysis:
Penn Davis McFarland presents a compelling case study of successful value investing with Sprouts Farmers Market, demonstrating exceptional returns from disciplined entry timing and thesis execution. The fund initially purchased SFM at $17 in summer 2019 when the stock traded at a reasonable 15x forward earnings amid CEO departure concerns and competitive pressures from Amazon's Whole Foods acquisition. The investment thesis centered on expansion opportunities within the attractive natural and organic food segment, supported by an adequate margin of safety from the depressed valuation. The appointment of Jack Sinclair as CEO, with his proven track record at Walmart's grocery division, validated the turnaround potential. Sprouts has delivered remarkable operational improvements, growing from 320 to 440 stores with plans for continued 10% annual store growth, while achieving 7.6% same-store sales growth in 2024 through enhanced online offerings, expanded private label products, and loyalty programs. However, with shares up nearly tenfold and trading at over 35x forward earnings—an elevated multiple for a grocery retailer—the fund prudently trimmed positions while maintaining exposure to capture continued operational momentum. The case exemplifies disciplined value investing with appropriate risk management as valuations reach stretched levels.

Pitch Summary:
A new position is Ratos. This Swedish holding company is loved by few, which we can understand. It has struggled over the last couple of years, with a lack of clear strategic direction. A couple of blow-ups in the portfolio have stolen all the attention, which means that the positive development in holdings such as HL Display has gone unnoticed.

BSD Analysis:
The manager initiated a new position in Ratos, acknowledging the Swedish holding company's unpopularity and recent struggles. The investment appears to be a contrarian play, recognizing that Ratos has faced challenges including a lack of clear strategic direction and several portfolio company disappointments that have dominated investor attention. However, the manager identifies an opportunity in the market's focus on the negatives while overlooking positive developments within the portfolio, specifically citing progress at HL Display as an example of unrecognized value creation. This suggests a classic value investing approach where negative sentiment has created an attractive entry point. As an investment holding company, Ratos's value should ultimately be driven by the performance of its underlying portfolio companies, and the manager appears to believe the market is overly pessimistic about the aggregate portfolio value. The contrarian nature of this investment aligns with the fund's approach of finding opportunities in unloved situations.