Investment Pitches

Pitch Summary:
Another software holding, Adobe, also posted strong performance in June, with shares rising approx. 25% after the company delivered excellent Q2 results and raised full year guidance. This update helped to ease some concerns around AI competitive threats and the softer macro environment that has impacted some other software companies.

BSD Analysis:
Bell Asset Management maintains a positive view on Adobe following strong Q2 performance that addressed key investor concerns. The fund highlights Adobe's impressive 25% share price appreciation driven by excellent quarterly results and raised full-year guidance. Bell notes that these results effectively countered market worries about AI competitive threats to Adobe's core creative software business. The strong performance also demonstrated Adobe's resilience against broader macroeconomic headwinds that have pressured other software companies. While the commentary is brief, Bell's inclusion of Adobe as a positive contributor suggests confidence in the company's ability to navigate AI disruption while maintaining growth momentum. The fund appears to view Adobe's Q2 results as validation of the company's competitive positioning and execution capabilities. Bell's positive stance reflects Adobe's demonstrated ability to deliver results despite challenging market conditions and technological disruption concerns.

Pitch Summary:
At a stock level, one of the best performing stocks in the portfolio during June was Oracle, a leading provider of software and cloud computing solutions. Shares of Oracle rallied approx. 20% as investors cheered the upbeat growth outlook, particularly in the Infrastructure-as-a-Service division (IaaS), Oracle Cloud Infrastructure, OCI. In the most recent quarter, Oracle signed IaaS contracts totalling US$12.5 billion (43% YoY growth), with some being the largest sales contracts in its history. The company also announced partnerships with Google, Microsoft, and OpenAI in areas of database performance co-location and multi-cloud solutions. Driven by strong demand for AI large language model training and inferencing, management guided 50%+ OCI growth in FY25, well ahead of consensus expectations. We continue to like the investment case for Oracle given management's ability to capture strong organic growth and expand profitability (operating margin grew 300bps in FY24). We believe the stock can continue to advance on the back of industry structural tailwinds and robust execution.

BSD Analysis:
Bell Asset Management presents a compelling bull case for Oracle based on exceptional cloud infrastructure momentum and AI-driven demand. The fund highlights Oracle's remarkable 43% year-over-year growth in IaaS contracts totaling $12.5 billion, with some representing the largest deals in company history. Management's guidance of 50%+ OCI growth in FY25 significantly exceeds consensus expectations, demonstrating strong execution in capturing AI workload demand. The strategic partnerships with Google, Microsoft, and OpenAI position Oracle advantageously in the rapidly expanding AI infrastructure market. Bell emphasizes Oracle's operational excellence, noting 300 basis points of operating margin expansion in FY24, reflecting management's ability to scale profitably. The fund views Oracle as well-positioned to benefit from structural industry tailwinds in cloud computing and AI infrastructure. Bell's conviction stems from Oracle's proven ability to deliver organic growth while expanding profitability in a high-demand market environment.

Pitch Summary:
During the quarter, we purchased shares in Lithia Motors (LAD), the largest automotive dealership group in the United States. The dealership industry is not very popular amongst mainline investors. The businesses are perceived to be subject to discretionary volumes, levered to the health of the consumer, and exposed to the credit cycle. Additionally, under a GAAP (Generally Accepted Accounting Principles) basis, the businesses look over leveraged and unable to generate free cash flow. Investors also worry about the threat of disintermediation under the assumption that the model only exists due to regulatory frameworks. The cumulative result of all of these factors leads to the industry routinely having a high short interest that has persisted for decades despite strong returns from the group. From the perspective of a contrarian, this is not a truly accurate picture of the industry. The first thought that most have of dealerships is the act of being a dealer: selling cars and other vehicles. However, dealers make the majority of their gross profit from ongoing maintenance, parts, warranty, insurance and financing services. These sources of income are far less discretionary. The operational profile of dealerships has changed dramatically since the last significant recession in 2008, when 70% of gross profit could be attributed to vehicle sales versus just 35% in 2019. GAAP standards are additionally not kind to dealers from a balance sheet and cash flows perspective. When a dealer sources new inventory, they typically do so by using floor plan financing. Under GAAP, floor plan financing is treated as debt, however, it truly functions as any other short-term payable. Floor plan financing is typically non-recourse, secured by the inventory, and carries a negligible net interest cost after OEM benefits and subsidies. In fact, in some years, dealers are paid under their floor plan arrangements. Call it debt if you will, but it is likely one of the best lending arrangements to exist. So, why Lithia? Largely due to stringent franchise laws and local barriers to entry, each dealership group can earn excess returns on their invested capital. Some, however, seem much more apt to do so than others. Lithia's strategy for creating value is to acquire independent lots at an attractive price and improve their operations significantly. Over the last few years, Lithia has roughly doubled their footprint, meaning that 1) earnings will be higher due to a larger store base, and that 2) the level of earnings per store is currently depressed relative to a normalized basis stemming from the dilutive impact of the underearning acquisitions. Lithia is an acquirer of choice, benefitting from strong relationships with OEMs and a reputation for being an effective operator. I believe that Lithia's engine for value creation will continue to work for years to come. During the pandemic, the supply of new and used cars coming on to the market did not adequately meet consumer demand. As a result, used car prices inflated dramatically which increased gross dollars (but not gross margins as the trade-in values also escalated) and new cars were subject to a bidding war pushing retail prices well beyond MSRPs. Gross margins on new cars doubled despite volumes being lower. Investors and analysts are now pricing in a scenario in which operating profitability reverts to 2019 levels. I do not see this as being likely. The opportunity lies in margin retention in parts and service and improving selling costs. In the post pandemic world, the omnichannel dealership offering is gaining in popularity which sees lower sales costs due to a no-negotiating and no-contact model. Parts and service margins have increased over the course of the last four years, which is consistent with the historical trend as well. Additionally, total parts and service gross dollars have contributed a limited amount to the total gross profit mix which de-emphasizes their impact on gross profitability. Going forward, their proportion of the mix should be higher, which provides a fundamentally higher margin profile. Gross margins in parts and service have tended to be very sticky historically. It is my belief that the earnings power of Lithia has expanded dramatically, and I do not see significant downside beyond current estimates.

BSD Analysis:
The manager presents a contrarian bull case for Lithia Motors, arguing that the automotive dealership industry is fundamentally misunderstood by investors. The thesis centers on the transformation of dealership economics from vehicle sales-dependent to service-oriented revenue streams, with parts, maintenance, and financing now comprising 65% of gross profit versus 30% in 2008. The manager highlights that GAAP accounting distorts the true financial health of dealerships by treating floor plan financing as debt when it actually functions as favorable supplier financing with negligible net cost. Lithia's competitive advantage lies in its acquisition strategy of purchasing independent dealerships at attractive prices and improving operations through scale and expertise. The company has doubled its footprint recently, creating both immediate earnings growth and future margin expansion opportunities as acquired stores reach normalized profitability. The manager believes current market expectations of margin reversion to 2019 levels are overly pessimistic, citing structural improvements in parts/service margins and the adoption of omnichannel sales models that reduce selling costs. The investment appears attractively valued given the company's expanded earnings power and sustainable competitive moats from franchise laws and OEM relationships.

Pitch Summary:
Lastly, we initiated JFrog, a leader in binary management, which is a core technology in software deployment. We believe this leading position could allow the company to benefit from growth in software builds. Additionally, JFrog's continued shift from a single-solution to a platform provider could support growth over the long term.

BSD Analysis:
The fund initiated a position in JFrog, recognizing the company's dominant position in binary management technology, which is fundamental to modern software deployment processes. The investment thesis is built on two key pillars: JFrog's market leadership in a critical software infrastructure component and the company's strategic evolution toward a comprehensive platform model. The manager expects the company to benefit from the accelerating growth in software builds driven by digital transformation trends. The transition from single-solution to platform provider represents a significant strategic shift that should enhance customer stickiness and expand revenue opportunities. This business model evolution typically drives higher margins and more predictable recurring revenue streams. The timing suggests confidence in JFrog's ability to capitalize on the growing DevOps market. The investment reflects the fund's focus on technology companies with strong competitive moats and platform scalability.

Pitch Summary:
We also initiated Atmus Filtration Technologies, a manufacturer of filtration systems for heavy-duty trucks and machines. We believe the company's strength in research and development, along with its expansive product portfolio, could allow it to capitalize on rising air standards.

BSD Analysis:
The fund established a new position in Atmus Filtration Technologies, attracted by the company's positioning in the industrial filtration market. The investment thesis focuses on the company's competitive advantages in research and development capabilities combined with a comprehensive product portfolio spanning heavy-duty trucks and industrial machinery. The manager identifies rising air quality standards as a key catalyst that should drive demand for advanced filtration solutions. This regulatory tailwind creates a favorable operating environment for companies with strong R&D capabilities and broad product offerings. The timing suggests the fund sees Atmus as well-positioned to benefit from increasingly stringent environmental regulations. The investment reflects confidence in the company's ability to innovate and capture market share in a growing addressable market. This position aligns with the fund's focus on quality industrial companies with secular growth drivers.

Pitch Summary:
In terms of activity, we initiated Corcept Therapeutics, a commercial-stage biopharmaceutical company specializing in drugs to treat Cushing's syndrome and other cortisol-related diseases. We believe the company's next-generation drug could allow for increased market penetration.

BSD Analysis:
The fund initiated a position in Corcept Therapeutics, viewing the company as an attractive opportunity in the specialized biopharmaceutical space. The manager's thesis centers on the company's next-generation drug pipeline targeting Cushing's syndrome and other cortisol-related diseases, which represents a niche but potentially lucrative therapeutic area. The investment rationale suggests confidence in the company's ability to expand market penetration through improved drug offerings. This positioning reflects a growth-oriented approach to biotech investing, focusing on companies with specialized therapeutic focus and pipeline advancement potential. The manager appears optimistic about the commercial prospects of Corcept's cortisol modulation platform. The timing of this initiation suggests the fund sees value in the current risk-reward profile. The investment aligns with the fund's small-cap strategy targeting companies with differentiated market positions.

Pitch Summary:
Another significant contributor was drug maker Teva Pharmaceuticals. Teva develops, manufactures and markets generic and specialty drugs focused on neurological and respiratory diseases. Following a period of poor capital allocation decisions by prior management teams, we were able to invest at a very attractive 4 times earnings and with a 20%+ free cash flow yield. We believe the new management team has positioned the company for renewed growth, driven by its most promising branded drug pipeline in years. The stock performed well thanks to solid financial results and positive pipeline data readouts.

BSD Analysis:
Sound Shore's Teva investment represents a classic turnaround opportunity, capitalizing on previous management missteps to acquire shares at deeply discounted valuations. The fund invested at an exceptionally attractive 4x earnings with over 20% free cash flow yield, reflecting market pessimism following poor capital allocation decisions by prior leadership. The investment thesis centers on new management's strategic repositioning and operational improvements that have restored growth prospects. Teva's focus on neurological and respiratory diseases provides specialized market positioning in high-value therapeutic areas. The company's branded drug pipeline represents its most promising development portfolio in years, offering significant upside potential beyond the generic drug business. Recent strong performance driven by solid financial results and positive pipeline data validates the turnaround thesis. The combination of attractive valuation, improved management execution, and promising pipeline developments positions Teva for sustained value creation as the transformation continues.

Pitch Summary:
Software maker Oracle, a long-term holding, was one of our best performers for the quarter. A company we have owned successfully in the past, we were able to purchase the stock again in October of 2019 when it was trading at just 14 times earnings with a 7% free cash flow yield. This "legacy" technology franchise is successfully competing amidst significant industry disruption as it leverages its dominant position in database software. Oracle surged after demonstrating gains in their cloud, infrastructure and applications end markets, which drove a long awaited increase in revenue and bookings growth. Looking ahead, our research indicates that the company's cloud and Artificial Intelligence (AI) efforts could more than double earnings per share over the next 5 years. Combined with management's commitment to returning cash to shareholders and Oracle's unrivalled installed customer base, we see continued value creation ahead.

BSD Analysis:
Sound Shore's Oracle investment exemplifies successful long-term value investing, with the fund capitalizing on market skepticism toward legacy technology companies. The initial purchase in October 2019 at 14x earnings with a 7% free cash flow yield proved prescient as Oracle successfully navigated industry disruption. The company's dominant database software position provided a competitive moat that enabled effective transition to cloud computing. Recent strong performance reflects accelerating growth in cloud, infrastructure, and applications, driving long-awaited revenue and bookings expansion. The fund's research suggests significant upside potential, with cloud and AI initiatives potentially doubling earnings per share over five years. Oracle's unrivaled installed customer base provides recurring revenue stability and cross-selling opportunities. Management's shareholder-friendly capital allocation through cash returns enhances the investment appeal, positioning Oracle for continued value creation as digital transformation accelerates.

Pitch Summary:
Similarly, GE Healthcare Technologies Inc. fell back after a strong start to the year. The company was spun out of GE and is the largest global medical imaging company. With steady growth and improving margins, the stock is trading well below peer valuations at 13 times normalized earnings and a 5% free cash yield. More recently, investors expressed concern with the company's business in China, where demand has slowed along with the economy. We view this headwind as temporary and remain enthusiastic about the investment.

BSD Analysis:
Sound Shore maintains a bullish stance on GE Healthcare despite recent weakness, viewing the company as an attractive value opportunity in the medical technology space. As the largest global medical imaging company following its spinoff from GE, GEHC benefits from market leadership and scale advantages. The fund emphasizes the company's operational improvements, highlighting steady growth and expanding margins that demonstrate effective management execution. The valuation appears compelling at 13x normalized earnings with a 5% free cash flow yield, trading below peer multiples despite its market-leading position. While acknowledging investor concerns about China exposure amid economic slowdown, Sound Shore views this as a temporary headwind rather than a structural issue. The fund's enthusiasm reflects confidence in the company's long-term prospects and belief that current market concerns create an attractive entry point for a quality healthcare technology leader.

Pitch Summary:
This included specialty retailer of personal care products, Bath & Body Works, Inc. Despite announcing its seventh consecutive quarter of beating earnings expectations, as well as raising guidance, the stock gave back some of its prior year-to-date gains as the market continues to be skeptical about the company's growth prospects. Our research identified significant upside potential for the company as it expands into the men's, laundry, lip and hair care segments, which would nearly double its addressable market. We initiated our position when the stock was trading below 10 times earnings and an attractive 10% free cash flow yield. Moreover, by leveraging the company's efficient supply chain and fast inventory turnover, management is returning excess cash through share repurchases.

BSD Analysis:
Sound Shore presents a compelling value thesis on Bath & Body Works, emphasizing the market's skepticism despite consistent operational excellence. The fund highlights the company's impressive track record of seven consecutive quarters of earnings beats and raised guidance, suggesting strong execution capabilities. The investment thesis centers on significant market expansion opportunities through diversification into men's products, laundry care, lip care, and hair care segments, which could nearly double the addressable market. The valuation appears attractive at below 10x earnings with a 10% free cash flow yield at initiation. Management's capital allocation strategy of returning excess cash through share repurchases, supported by efficient supply chain operations and fast inventory turnover, reinforces the value proposition. The fund views current market skepticism as creating an opportunity to invest in a quality retailer with clear growth catalysts at an attractive valuation.

Pitch Summary:
Another significant detractor was Sprout Social, Inc. (SPT). An industry-wide slowdown in sales of new software impacted the company. Sprout provides customers with cloud-based tools for social-media management, communication, contact management, lead generation, reporting and analysis. The company delivered slower-than-expected revenue growth in its most recent quarter and cut its full-year guidance. Also appearing to weigh on the company's stock price was Sprout's announcement of a CEO change, as well as its decision to stop disclosing certain metrics about the performance of its business. After visiting the company, we believe our original reasons for owning it remain intact. Our long-term outlook for Sprout continues to be positive, and we expect our patience to be rewarded.

BSD Analysis:
Despite recent operational setbacks, Wasatch maintains conviction in Sprout Social's long-term prospects following direct management engagement. The managers acknowledge industry-wide software sales headwinds that have pressured revenue growth and forced guidance reductions, reflecting broader SaaS market challenges rather than company-specific issues. Leadership transition and reduced business metric disclosure have created additional near-term uncertainty for investors. However, the fund's on-site company visit reinforced confidence in the underlying business fundamentals and competitive positioning in social media management software. The comprehensive platform offering spanning communication, lead generation, and analytics provides sticky customer relationships and cross-selling opportunities. Management's strategic direction remains aligned with long-term value creation despite near-term execution challenges. Current weakness may present an attractive entry point for patient investors focused on the company's market leadership position.

Pitch Summary:
SiteOne Landscape Supply, Inc. (SITE) was also a major detractor. The company is a one-stop shop primarily for professional landscapers. At Wasatch, we've owned SiteOne for several years. In 2020 and 2021, the company and its stock benefited from customers ramping up home improvements during the Covid-19 pandemic and the ensuing real-estate boom. Since the end of 2021, the stock has been up and down largely based on interest-rate and real-estate speculation. During the second quarter, the stock was hurt by slightly higher-than-expected expenses and news that Home Depot has become more active in targeting landscaping professionals. While we take this competitive threat seriously, we haven't seen any erosion in SiteOne's revenues.

BSD Analysis:
Wasatch expresses measured concern about SiteOne's evolving competitive landscape while maintaining a long-term perspective on the business fundamentals. The managers acknowledge the company's historical benefit from pandemic-driven home improvement trends and subsequent volatility tied to interest rate and real estate market speculation. Recent performance has been pressured by expense inflation and increased competitive intensity from Home Depot's push into the professional landscaping channel. However, the fund notes that revenue trends remain intact despite competitive pressures, suggesting SiteOne's market position retains some defensive characteristics. The company's role as a specialized distributor for professional landscapers provides certain competitive advantages, though these may be tested by large-format retail competition. Management's ability to maintain revenue growth while managing expense pressures will be critical for validating the long-term investment thesis.

Pitch Summary:
The greatest detractor from strategy performance during the second quarter was Five Below, Inc. (FIVE). A specialty value retailer, the company offers a variety of merchandise at discounted prices. Quarterly results at Five Below fell short of expectations as the company continued to grapple with high levels of customer theft at some of its stores. Management also noted that Five Below's base of lower-income customers were more discerning with their dollars as inflation crimped their ability to spend on nonessential items. We expect these headwinds to subside over the next few quarters. Additionally, we like the long-term positives including Five Below's talented management team, strong competitive position and headroom for continued growth. We also note that based on revenues and earnings, the stock is about as inexpensive as it's been since we've owned it.

BSD Analysis:
Despite near-term operational challenges, Wasatch maintains conviction in Five Below's long-term value proposition and competitive positioning. The managers acknowledge current headwinds including elevated shrinkage from customer theft and reduced discretionary spending among lower-income consumers due to inflationary pressures. However, they view these as temporary cyclical issues rather than structural problems with the business model. The fund emphasizes management quality and the company's strong competitive position in the value retail segment, suggesting confidence in leadership's ability to navigate current challenges. Significant growth runway remains for store expansion and market penetration. Current valuation levels present an attractive entry point, with the stock trading at historically low multiples relative to revenues and earnings. The combination of temporary headwinds and compelling valuation creates an opportunity for patient investors.

Pitch Summary:
Another substantial contributor was TransMedics Group, Inc. (TMDX), a medical-technology company providing transplant support services for end-stage organ-failure patients across multiple disease states. TransMedics developed the Organ Care System (OCS) to replace a decades-old standard of care that limited access to life-saving transplant therapy. The technology involved in the OCS replicates—outside of the human body—many aspects of an organ's natural living and functioning environment. Although we own TransMedics primarily for its long-term competitive advantages, the stock moved higher in the short term due to basic blocking and tackling with respect to logistics. Previously, investors had been nervous about the significant expense of the company's fleet of airplanes used to transport organs from donors to recipients. But during the past two quarters, TransMedics pleased investors by capturing additional market share and increasing both revenues and earnings.

BSD Analysis:
Wasatch views TransMedics as a transformative medical technology company with substantial long-term competitive advantages in organ transplantation. The Organ Care System represents a paradigm shift from decades-old preservation methods, potentially expanding access to life-saving transplant therapy through superior organ preservation technology. The managers emphasize the company's ability to replicate natural organ environments outside the human body, highlighting significant technological differentiation. Recent operational improvements have addressed investor concerns about the costly airplane fleet logistics, with management demonstrating effective execution through market share gains and accelerating financial performance. The combination of revolutionary technology, expanding market penetration, and improving operational efficiency positions TransMedics for sustained growth in the critical organ transplant market. Strong revenue and earnings momentum validates the long-term investment thesis.

Pitch Summary:
Boot Barn Holdings, Inc. (BOOT) was also a meaningful contributor. The company sells Western and work-related clothing and accessories such as cowboy boots, hats and belts. The need to try on apparel like boots before buying partially insulates the company from online competition. In late 2023, we added to our position in Boot Barn because we anticipated healthy business fundamentals. Since then, we've been rewarded with a rising stock price as the company has added new stores, reported higher sales at existing locations, and grown overall revenues and earnings faster than anticipated. During the height of the Covid-19 pandemic, consumers tended to spend more of their discretionary cash on goods instead of services. That tendency benefited Boot Barn. As a result, we've been on alert for a possible post-Covid reversal. But to the company's credit, we've seen no sign of deteriorating business fundamentals. Although we've trimmed our position on strength, we continue to like Boot Barn for its healthy balance sheet, high-quality management team and ability to self-fund expansion with no debt.

BSD Analysis:
Wasatch expresses strong conviction in Boot Barn's business model and execution capabilities. The managers identify a key competitive advantage in the try-before-buy nature of western footwear, which provides natural protection against e-commerce disruption. The fund's decision to add shares in late 2023 has been validated by accelerating same-store sales growth and new store expansion exceeding expectations. Management's ability to maintain momentum beyond the pandemic-driven goods consumption boom demonstrates operational excellence and market positioning strength. The company's debt-free balance sheet and self-funding growth model provide financial flexibility and reduce execution risk. While acknowledging potential post-COVID normalization concerns, the managers see no fundamental deterioration and maintain confidence in the management team's strategic direction. Position trimming reflects profit-taking discipline rather than thesis deterioration.

Pitch Summary:
The top contributor to strategy performance during the second quarter was Nova Ltd. (NVMI), which benefited as the rapidly expanding field of AI continued to transform the semiconductor industry. The company sells metrology and process control systems used in semiconductor manufacturing. Nova has profited from the increased levels of inspection necessary to produce highly complex chips used in AI applications. We think Nova deploys research and capital wisely—and is well-positioned to introduce new equipment and increase market share over the next several years. With AI euphoria heightened, we sold some shares of Nova as a risk-control measure. Because semiconductor producers and related equipment manufacturers typically face cyclical demand, our approach when investing in such companies is to trim positions on excessive optimism and add to positions on excessive pessimism.

BSD Analysis:
Wasatch maintains a bullish stance on Nova Ltd., viewing it as a key beneficiary of the AI semiconductor revolution. The managers highlight Nova's strategic positioning in metrology and process control systems, which are essential for manufacturing the complex chips required for AI applications. They praise management's capital allocation discipline and research capabilities, positioning the company to capture market share through new equipment introductions. The fund's decision to trim shares reflects prudent risk management given AI-related euphoria rather than fundamental concerns. Nova's exposure to cyclical semiconductor demand patterns is acknowledged, with the managers employing a contrarian approach of selling strength and buying weakness. The company's ability to profit from increased inspection requirements for AI chips demonstrates its competitive moat in a rapidly growing market segment.

Pitch Summary:
The second was a position in ESAB Corporation (ESAB), which is a global welding company with high brand loyalty and attractive growth opportunities in emerging markets.

BSD Analysis:
Fenimore established a position in ESAB Corporation, a global welding equipment manufacturer with strong competitive positioning. The manager highlights the company's high brand loyalty, which creates pricing power and customer retention in the industrial welding market. ESAB's global footprint provides exposure to emerging market growth opportunities, where infrastructure development and industrialization drive demand for welding solutions. The company benefits from its established reputation and technical expertise in welding technology, creating barriers to entry for competitors. Brand loyalty in industrial applications typically translates to recurring revenue through consumables and service contracts. The emerging markets exposure offers attractive long-term growth potential as developing economies invest in manufacturing capacity and infrastructure projects. ESAB's diversified end-market exposure across construction, energy, and manufacturing provides revenue stability.

Pitch Summary:
We initiated two new positions during the quarter. The first was a position in OneSpaWorld Holdings (OSW), the largest cruise spa operator in the world with more than 90% market share.

BSD Analysis:
Fenimore initiated a position in OneSpaWorld Holdings, recognizing the company's dominant market position in the cruise spa industry. With over 90% market share, OSW operates as a near-monopoly in providing health and wellness services aboard cruise ships. This market leadership provides significant competitive moats through exclusive partnerships with major cruise lines and high barriers to entry for competitors. The business model benefits from the captive audience nature of cruise passengers, creating predictable revenue streams during voyages. As the cruise industry continues to recover and expand post-pandemic, OSW is positioned to benefit from increased passenger volumes and higher onboard spending. The company's scale advantages and established relationships with cruise operators make it difficult for new entrants to compete effectively.

Pitch Summary:
We purchased one new name: Houlihan Lokey (HLI). HLI is a boutique, mid-market M&A investment bank. This industry has parallels to insurance brokerage. It's a people business where the industry-specific managing directors are focused on making connections and bringing in deals. M&A activity can be very cyclical, but HLI has an established restructuring business that creates a nice counter-cyclical revenue stream, muting some of the M&A cyclicality. HLI has strong cash generation that supports a dividend growth policy.

BSD Analysis:
Fenimore initiated a new position in Houlihan Lokey, a boutique mid-market M&A investment bank. The manager views this as a people-driven business model similar to insurance brokerage, where relationship-focused managing directors generate deal flow. The key investment thesis centers on HLI's diversified revenue streams that provide cyclical protection. While M&A activity is inherently cyclical, the company's established restructuring business creates counter-cyclical revenue that helps smooth earnings volatility. The manager appreciates HLI's strong cash generation capabilities, which support a sustainable dividend growth policy. This defensive characteristic aligns with Fenimore's dividend-focused investment strategy. The boutique positioning in the mid-market segment provides competitive advantages through specialized expertise and client relationships.

Pitch Summary:
A blue-haired shark girl, a time-traveling detective, and a rapping reaper walk into a bar. This isn't the setup for a joke – it's a glimpse into the world of VTubers managed by COVER Corporation. In just five years, COVER has grown from A$1 million to A$300 million in revenue through this innovative entertainment concept. VTubers, or Virtual YouTubers, are content creators who use digital avatars to livestream content, and COVER has become one of the most prominent agencies in this space. To understand COVER Corp's business model, think of it as a blend of K-pop talent management and WWE character creation. Like K-pop agencies, COVER Corp (under the brand Hololive) will scout, train, and manage digital stars. Like WWE's approach, each VTuber is developed with a distinct backstory, personality, and visual design, creating a diverse roster of digital entertainers. This commitment to character depth, akin to wrestling's concept of 'kayfabe', enhances each VTuber's brand appeal and merchandising potential. The economics of talent-based businesses hinge on a crucial factor: the ability to add value to the talent they represent. This principle applies across various industries, from funds management to entertainment, where organisations must demonstrate their worth to both attract and retain top performers. The decision for talent to align with an organisation rather than remain independent is predicated on the belief that the whole will be greater than the sum of its parts. When analysing talent-based businesses like COVER Corp, it's essential to scrutinise how the company enhances its talent's potential. Central to this value proposition is the management team, whose vision and approach can make or break a talent-based enterprise. COVER Corp exemplifies this principle through CEO Motoaki "Yagoo" Tanigo, a critical factor in the company's meteoric rise. In an industry where executives often become lightning rods for controversy, Yagoo has become a beloved figure among both talent and fans. His leadership style, which prioritises respect for creators and balances corporate interests with artistic freedom, has resulted in exceptional talent retention and growth. At the recent Anime Expo in Los Angeles, Yagoo's appearance sparked fan frenzy typically reserved for the talent themselves – a stark contrast to how executives in traditional media companies are often perceived. This leadership approach is driving COVER Corp's ability to attract and rapidly grow new talent. The recent launch of COVER Corp's new HoloJustice group provides a compelling example. One performer saw her YouTube subscriber count grow from 12,000 under a different agency to 240,000 under Hololive in just a few days. This significant audience growth demonstrates the company's ability to create and promote digital talent effectively. As a result, COVER Corp has become highly attractive to aspiring VTubers, fielding thousands of applications from independent creators each year. While some may view VTubing as a passing trend, it's worth considering the trajectory of game streaming. A decade ago, watching others play video games online seemed niche to many. Today, Twitch boasts 240 million monthly active users. VTubing appears to be following a similar path to wider acceptance. The avatar is simply a medium; the real draw is the entertainer's ability to engage an audience for extended periods, much like any successful streamer. The appeal of VTubing for the talent goes beyond novelty. It's making content creation more accessible in intriguing ways. For female streamers who often face unwarranted focus on their appearance, virtual avatars shift attention to personality and content. Additionally, the digital anonymity offers protection against some of the internet's less savoury elements. This growing acceptance is evident in COVER Corp's global expansion. While VTubing originated in Japan, it's rapidly gaining traction worldwide. The recent launch of HoloJustice, COVER Corp's first majority-European group with three European members and one American, showcases their commitment to expanding beyond their Asian stronghold. This strategic move into Western markets demonstrates COVER Corp's ambition to become a truly global entertainment company, positioning them to capture a larger share of the growing VTuber audience across diverse regions and cultures. This global expansion is just one facet of COVER Corp's multi-dimensional growth strategy. The company's value proposition extends far beyond initial talent acquisition and audience growth, as evidenced by the dramatic increase in revenue per VTuber from A$400,000 in March 2020 to A$3.5 million in March 2024. This impressive growth stems from successful diversification beyond streaming, which now accounts for only 25% of revenue, down from 40%. Concerts (19%), merchandising (41%), and licensing (15%) have become significant revenue drivers. Take Mori Calliope, the rapping reaper VTuber, as an example of this diversification. While she engages in traditional streaming activities like playing Red Dead Redemption 2, her success extends far beyond that. Mori has achieved billboard-charting albums and recently provided the end credits song for Warner Bros' new anime, Suicide Squad Isekai. These accomplishments showcase how COVER Corp develops talent across multiple revenue streams. Notably, although the talent behind Mori also performs under her own name, she has found greater commercial success with her Hololive persona, underscoring the value COVER Corp can add to its VTubers' careers. We believe COVER Corp's growth story has more chapters to unfold. The company is guiding to 22% net profit growth this year (to March 2025), but we believe this will prove conservative. Trading at a forward P/E of 23x, the stock appears attractively priced given its growth profile and market position. The world of VTubing might seem unconventional at first glance, but then again, so did the idea of social media or streaming video games not too long ago. With its strong management, innovative business model, and position at the forefront of a growing trend, we believe COVER Corp represents a compelling investment opportunity in the future of digital entertainment. To bolster our conviction, we've enhanced Taurient to monitor engagement metrics across COVER Corp's entire VTuber roster. This capability provides us with data-driven insights that go beyond traditional financial reporting, allowing us to accurately assess the company's growth trajectory and the success of their talent development strategies in real-time.

BSD Analysis:
Minotaur identifies COVER Corporation as a unique play on the emerging VTuber entertainment segment, drawing parallels to the evolution of game streaming from niche to mainstream with Twitch's 240 million monthly users. The fund emphasizes COVER's exceptional talent management capabilities, highlighted by CEO Yagoo's beloved status among both creators and fans, resulting in superior talent retention and rapid audience growth for new recruits. The company has demonstrated remarkable revenue diversification, with streaming now representing only 25% of revenue compared to 40% previously, while merchandising (41%), concerts (19%), and licensing (15%) drive growth. Revenue per VTuber has increased dramatically from A$400,000 to A$3.5 million between March 2020 and 2024, showcasing the platform's value creation. COVER's global expansion strategy, including the launch of HoloJustice targeting Western markets, positions the company to capture international growth beyond its Japanese origins. Trading at 23x forward P/E with 22% guided profit growth, the manager believes the valuation is attractive given the company's growth profile and market-leading position in the expanding digital entertainment space.