Investment Pitches

Pitch Summary:
Charles Schwab Corp. (SCHW) – Large Cap/All Cap We last wrote about Charles Schwab a year ago in the midst of the banking crisis. At the time, the worst fears were a bank run and/or balance sheet impairment. Positively, these did not come to pass. As a refresh of our interest in the business, Charles Schwab is a leading discount broker. The business benefits from long run market appreciation and Schwab's better mousetrap has allowed it to gain share on top of market growth, which has driven long run revenue growth of 10%. The competitive advantage comes from shared economies of scale, whereby Schwab lowers costs to the customer, thereby attracting new assets which then lets them lower costs even more to the customer. The rapid rise in interest rates that precipitated the banking crisis contributed to a challenging last 18 months for Schwab, as clients moved bank cash to higher yielding instruments. This led to a significant, albeit short-term, earnings headwind. As we move into 2024, we believe the worst is behind them. We expect Schwab will experience strong earnings growth for the next few years, driven by accelerating revenue growth and renewed expense discipline. Despite this attractive outlook, Schwab trades for 21 times trough earnings and only 14 times our estimate of normalized earnings.

BSD Analysis:
FMI maintains conviction in Charles Schwab following the 2023 banking crisis, viewing recent challenges as temporary headwinds rather than structural issues. The manager highlights Schwab's competitive moat through economies of scale that enable continuous cost reduction, driving market share gains and historical 10% revenue growth. The interest rate shock that caused client cash migration to higher-yielding instruments created near-term earnings pressure but represents a cyclical rather than permanent impairment. FMI expects strong earnings recovery driven by accelerating revenue growth and expense discipline as rate pressures normalize. The valuation appears attractive at 21x trough earnings and 14x normalized earnings, suggesting significant upside as the business returns to normalized profitability. The investment thesis relies on Schwab's durable competitive advantages and cyclical recovery potential.

Pitch Summary:
The most significant detractor was Gerresheimer (-88bps) – which we expand upon below. Gerresheimer detracted heavily over the month, as it was reported that KKR withdrew from the consortium assessing whether to take the business private. This led to a -15% one-day decline in the shares. The past month has been a painful one for the stock and for us as shareholders. Despite that, we remain relatively sanguine. Q1 results (November year-end) were published during the month, and management reiterated guidance for the full year. The acquisition of Bormiloli is continuing to be integrated and steps are being taken to get the right legal structures in place for the separation of the Moulded Glass unit. We believe this is key to unlocking value, even if we understand the market's scepticism and frustration at management's execution and communication. The business will produce north of €5 per share of EPS in 2025 and we believe there are multiple steps that can be taken to help the market capitalise this at a much fairer multiple. We bought more shares over the month and own a little over 3.5% of the company (across our funds) and continue to engage with management.

BSD Analysis:
Despite a challenging month that saw Gerresheimer decline 15% in a single day following KKR's withdrawal from a potential take-private consortium, AVI maintains a constructive bull stance on the German pharmaceutical packaging company. The manager demonstrates conviction by adding to their position during the weakness, building their stake to over 3.5% across their funds. AVI highlights strong fundamental performance with management reiterating full-year guidance and Q1 results meeting expectations. The ongoing integration of the Bormiloli acquisition and planned separation of the Moulded Glass unit are viewed as key value creation catalysts. With projected earnings of over €5 per share in 2025, AVI believes the market is significantly undervaluing the business at current multiples. The fund acknowledges market frustration with management's execution and communication but remains confident in the underlying business quality. AVI continues active engagement with management to drive operational improvements and strategic value realization initiatives.

Pitch Summary:
Gates Industrial Corp. PLC (GTES) – Small Cap Gates manufactures highly engineered power transmission and fluid power solutions. The company is most well-known for its belts, which enable and control motion and are used in a broad range of applications. Blackstone took Gates public in early 2018 and remains the largest shareholder with a 27% ownership interest. Blackstone's ownership stake is an overhang on the stock as they will inevitably sell their remaining stake. Destocking and a more challenging end market have also weighed on results. These transitory pressures have provided us with an opportunity to own a high-quality, well-run industrial company with solid through-cycle growth prospects and re-rating potential. The company is a leader in its large and fragmented markets with a well-recognized brand known for quality and technological innovation. These markets are largely replacement driven, which helps to reduce cyclicality, and management is targeting a handful of growth opportunities including chain-to-belt conversions, personal mobility, and automotive aftermarket, to name a few, that should drive revenue growth at 2 times underlying industrial production growth. There is also a margin opportunity as management executes on internal initiatives to reduce costs and improve productivity. Finally, with Gates stock trading at around 12 times 2024 P/E, we believe there is an opportunity for Gates to re-rate more in-line with other high-quality industrial peers given its attractive EPS growth outlook and strong return profile.

BSD Analysis:
FMI presents a compelling value opportunity in Gates Industrial, a leading manufacturer of power transmission belts and fluid power solutions. The manager identifies temporary headwinds including Blackstone's ownership overhang and cyclical destocking that have created an attractive entry point. The investment thesis centers on Gates' market leadership position in large, fragmented markets with replacement-driven demand that reduces cyclicality. Management's growth initiatives targeting chain-to-belt conversions, personal mobility, and automotive aftermarket are expected to drive revenue growth at 2x underlying industrial production. The company trades at an attractive 12x 2024 P/E multiple, providing re-rating potential as margins expand through cost reduction initiatives and operational improvements. FMI views this as a high-quality industrial with solid through-cycle prospects trading at a discount to peers.

Pitch Summary:
Toyota Industries was the most significant contributor (+105bps) as it was announced that Akio Toyoda, grandson of Toyota's founder, is looking to take the business private in a $42bn deal. We believe this to be of seismic importance and write about it below. In the December 2023 newsletter we argued that 2023 was "a seminal moment in the long and winding road to unlocking the enormous value trapped in Japanese companies" and explained how we had (re) introduced Toyota Industries into the portfolio, with signs that the winds of change were even blowing at the gates of one of Japan's last holdouts of governance reform. Fast forward to April 2025, and it has been announced that Akio Toyoda, Chairman of Toyota Motor, is attempting to take Toyota Industries private, at an 40% reported premium to the undisturbed share price. For decades, Toyota has epitomised "Japaneseness"; group companies, cross-shareholdings, lifetime employment, consensus decision-making and keeping closed ranks. Corporate governance naysayers have argued that it's been these very qualities that have kept companies like Toyota strong, leading the company to be seen by some as an "emblem of resistance to corporate governance reform". Just as Ernest Hemingway described the process of how one goes bankrupt – "gradually, then suddenly" – so too is change in Japan, and the take-private offer should be seen as a culmination of many multi-year forces coming together. Foreign shareholders have been an increasing presence on their register, a fact not lost on Akio Toyoda himself. As Chairman of Toyota Motor, he has felt the increasing heat from corporate governance reform, with his approval rating at Toyota's last AGM in 2024 falling to 72% from 96% in 2022. External forces have also played a role, as even Toyota has not escaped the eye of the Tokyo Stock Exchange and METI. Cross-shareholdings have been a point of contention for group parent companies like Toyota, as have parent-child listed subsidiaries and persistently low valuations. METI's ongoing efforts to promote greater transparency and sophistication in takeover proposals also deserve commendation. Then, of course, there are the activists. Since 2015, we at AVI have been encouraging management to unwind their cross-shareholdings and investment securities, which made up almost half of Toyota Industries' balance sheet assets. At the same time, AVI (across our Japan dedicated mandates) was also invested in Aichi Corp (since 2019), which was majority owned by Toyota Industries. Working with both companies, we sought to catalyse change in their ownership structures as part of a broader set of recommendations. Our efforts with Aichi moved into the public sphere last year, when we launched a campaign entitled Taking Aichi Higher. In March of this year, Toyota Industries and Aichi announced a sale and buyback that would bring Toyota Industries' controlling stake of 52% in Aichi down to 20%. As we see it, the potential take-private transaction implicitly acknowledges, ratifies, and supports the mantra of both activists and Abenomics advocates. At the same time, the actions of Toyoda dissolve a symbolic bastion of resistance to the wave of corporate governance reform, opening the floodgates for that wave to spread its influence throughout the market. As such, we remain highly excited about the opportunity in Japan, with 24% of the portfolio invested there.

BSD Analysis:
AVI presents a compelling bull case for Toyota Industries centered on a transformative $42bn take-private proposal by Akio Toyoda at a 40% premium to the undisturbed share price. The manager views this as a seismic event that validates their long-held thesis about unlocking value trapped in Japanese companies through corporate governance reform. AVI has been actively engaged as an activist investor since 2015, pushing management to unwind cross-shareholdings that comprised nearly half of the company's balance sheet assets. The fund successfully catalyzed changes in Toyota Industries' ownership structure, including reducing their controlling stake in Aichi Corp from 52% to 20%. The manager argues this transaction represents a symbolic breakthrough that will accelerate corporate governance reform across Japan's market. With foreign shareholder pressure mounting and regulatory scrutiny from the Tokyo Stock Exchange and METI intensifying, AVI believes the take-private offer marks a tipping point for Japanese corporate transformation. The fund maintains significant exposure to Japan at 24% of the portfolio, positioning for broader market opportunities as governance reform spreads.

Pitch Summary:
DraftKings Inc. is a dominant player in the domestic online sports betting industry, which is evolving towards a favorable duopoly market structure. Jason Robbins, the company's CEO and founder, built a culture of technological and marketing innovation to create a top sports betting product while competing against international peers with a large head start in the category. We believe the company is positioned to capitalize on the rapid growth of the U.S. sports betting market. We expect online betting to expand at a 15% to 17% same-state growth rate over the next several years. Approximately half the U.S. population does not have access to sports betting, and future legalization of large states (such as Texas or Florida) could extend the growth runway of the industry into the 2030s. DraftKings's financial model is inflecting positively because it has been operating in many states for more than three years. As a result of this maturation, the company has been able to rationalize its customer acquisition costs, which allows for high incremental margins to flow through its income statement. Promotions that are paid to acquire new customers have declined, and the company is recognizing economies of scale from national advertising campaigns. The stock has been under pressure because of concerns about potential state tax rate increases, macroeconomic uncertainty, and possibly unfavorable recent betting results. We believe investors have overestimated the impact of these factors. We expect the company to earn margins in line with management estimates under most tax scenarios. We expect a 30%-plus CAGR in FCF over the next several years as FCF margin expands from low single digits to over 20%. In addition, the company has an excellent balance sheet, and it has recently prioritized returning capital to shareholders through buybacks.

BSD Analysis:
The manager presents a compelling bull case for DraftKings based on its dominant position in the evolving U.S. sports betting duopoly and significant operational leverage as the business matures. The investment thesis hinges on the massive addressable market expansion, with approximately half the U.S. population lacking access to sports betting and potential legalization in large states like Texas and Florida extending growth into the 2030s. Key financial inflection points include rationalized customer acquisition costs after three years of state-level operations, declining promotional spending, and economies of scale from national advertising. The manager expects 15-17% same-state growth rates and projects 30%+ free cash flow CAGR as margins expand from low single digits to over 20%. Despite near-term headwinds from state tax concerns and macroeconomic uncertainty, the strong balance sheet and shareholder-friendly capital allocation through buybacks support the long-term value creation story.

Pitch Summary:
We took advantage of meaningful price weakness to initiate a position in Vertiv Holdings Co during the quarter. Vertiv is a global leader providing critical data infrastructure solutions for data centers, communication networks, and commercial and industrial businesses. The company's core competency is providing solutions to cool and power data centers. These tasks are technically complex and integral to the successful construction of data centers, and we expect building trends to remain robust because of the continued rapid adoption of AI. Vertiv has a portfolio of both air and liquid cooling solutions. The company's equipment is required as rack density in AI data centers is expected to increase from 5-10/kW per rack to potentially upwards of 900-1,000+/kW per rack over the next five years due to the adoption of advanced semiconductor chips. Higher energy density racks generate more heat and will require liquid cooling, as water has a heat carrying capacity 3,500 times higher than that of air. We think Vertiv is well positioned to maintain its leadership in this burgeoning market opportunity because of its technology, its strategic partnership with NVIDIA (the largest manufacturer of AI chips), its strong service network, and its ability to scale manufacturing quickly and reliably to meet its customers' global needs. At its most recent investor event in November 2024, Vertiv gave long-term revenue growth guidance that implies a 12% to 14% CAGR through 2029, and we think this figure could prove conservative. While data centers are approximately 80% of Vertiv's total revenue, McKinsey has estimated global data center demand to grow at a 20% CAGR in its base case scenario or potentially up to 30% CAGR through 2030 in its accelerated scenario. Given uncertainty regarding future tariff policy, we are reassured that a small percentage of the company's manufacturing inputs are sourced from China. With healthy revenue growth and continued margin expansion, we believe that Vertiv has the potential to grow its EBITDA at a mid to high teens rate into the foreseeable future.

BSD Analysis:
The manager initiated a new position in Vertiv, capitalizing on price weakness to gain exposure to the AI-driven data center infrastructure boom. The investment thesis centers on Vertiv's leadership in cooling and power solutions for data centers, which are becoming increasingly critical as AI adoption drives rack density from 5-10kW to potentially 900-1,000+kW per rack. This dramatic increase in energy density necessitates liquid cooling solutions, where Vertiv holds competitive advantages through its technology portfolio and strategic NVIDIA partnership. Management's 12-14% revenue CAGR guidance through 2029 appears conservative given McKinsey's estimates of 20-30% data center demand growth. The company benefits from limited China manufacturing exposure, reducing tariff risks. With 80% revenue exposure to the data center market and strong margin expansion potential, the manager expects mid-to-high teens EBITDA growth, making this an attractive secular growth play.

Pitch Summary:
Shares of Verisk Analytics, Inc., a leading data and analytics vendor, contributed to performance. The company reported solid quarterly results, including particularly strong organic revenue growth. CEO Lee Shavel also sounded upbeat about Verisk's growth potential in 2025. Verisk also benefited from the investor rotation into more defensive stocks driven by tariff-related uncertainty. We maintain conviction in the company's competitive positioning, long-term growth, margin expansion, and its ability to deploy capital accretively.

BSD Analysis:
The manager maintains a bullish stance on Verisk based on strong fundamental execution and defensive characteristics that appeal to investors during uncertain times. The company delivered solid quarterly results with particularly impressive organic revenue growth, suggesting healthy underlying demand for its data analytics services. CEO Lee Shavel's optimistic commentary about 2025 growth prospects indicates management confidence in the business trajectory. The manager emphasizes Verisk's competitive moat in data analytics, which provides pricing power and recurring revenue streams. Key investment merits include the company's ability to expand margins over time and deploy capital effectively through acquisitions or buybacks. The defensive nature of Verisk's business model makes it attractive during periods of tariff-related market volatility.

Pitch Summary:
Shares of P&C insurance software vendor Guidewire Software, Inc. contributed to performance in the quarter. After a multi-year period, we believe Guidewire's cloud transition is substantially complete, and cloud architecture will be the sole product path going forward. We expect its ARR to continue benefiting from new customer wins and migrations of the existing customer base to InsuranceSuite Cloud. We also expect the company to shift R&D resources to product development from infrastructure investment, which will help drive cross-sales into its sticky installed base and potentially accelerate ARR over time. We are also encouraged by Guidewire's subscription-based gross margin expansion, which improved by more than 1,000 basis points in its most recently reported quarter. We believe Guidewire will be the critical software vendor for the global P&C insurance industry, capturing 30% to 50% of its $15 billion to $30 billion total addressable market and generating margins above 40%.

BSD Analysis:
The manager presents a compelling bull case for Guidewire based on the successful completion of its cloud transition and strong margin expansion trajectory. The thesis centers on the company's dominant position in the P&C insurance software market, with management expecting to capture 30-50% of a $15-30 billion addressable market. Key catalysts include ongoing customer migrations to InsuranceSuite Cloud, which should drive recurring revenue growth, and a strategic shift in R&D spending from infrastructure to product development that could accelerate cross-selling opportunities. The 1,000+ basis point improvement in subscription-based gross margins demonstrates operational leverage, while the manager's target of 40%+ margins suggests significant profitability potential. The sticky nature of the installed customer base provides revenue visibility and pricing power in this mission-critical software category.

Pitch Summary:
Q2 provides secure, cloud-based digital banking software to regional and community financial institutions, offering retail and commercial digital banking, lending, and related solutions delivered as subscriptions. During the quarter, the company reported solid second-quarter results and raised its full-year outlook. However, shares detracted from performance as investors focused on several mixed signals: management noted higher-than-typical churn, a slight sequential dip in gross margin related to cloud-migration costs, and muted growth in discretionary services, all of which tempered enthusiasm around the otherwise strong subscription momentum and guidance raise. Further, we believe the stock experienced a valuation reset amid mixed sell-side signals and elevated headline valuation metrics, which added pressure late in the quarter. In our view, Q2's long-term fundamentals remain intact, as the company is well positioned to benefit from the continued digitization of banking and expanding relationships with larger institutions.

BSD Analysis:
The manager maintains a constructive long-term view on Q2 Holdings despite near-term stock underperformance and mixed quarterly signals. The investment thesis is anchored on Q2's strong positioning in the digital banking transformation trend, serving regional and community financial institutions with cloud-based software solutions. While the company delivered solid second-quarter results and raised full-year guidance, several concerning trends emerged including higher customer churn, margin pressure from cloud migration costs, and slower growth in discretionary services. The stock's underperformance appears driven by valuation concerns and mixed sell-side sentiment rather than fundamental deterioration. The manager emphasizes that Q2's long-term fundamentals remain strong, supported by the ongoing digitization of banking and expanding relationships with larger financial institutions. The subscription-based business model provides recurring revenue visibility and positions Q2 to benefit from continued digital transformation in the banking sector.

Pitch Summary:
We initiated a small position in Arcellx, Inc., a biotechnology company that together with Gilead Sciences, Inc. is developing a next-generation CAR-T cell therapy it calls "Anito-cel" for the treatment of multiple myeloma. While we generally do not invest in emerging biotechnology companies, we took a small position in Arcellx given that the market is large and proven (currently a $3.5 billion opportunity that could expand to $12 billion or more over time), and that we believe Arcellx has a safer CAR-T therapy than the currently approved solution. Moreover, the company has over $600 million of net cash on its balance sheet and a favorable manufacturing agreement with Gilead. We believe that this combination makes the company more than fully funded through profitability. Multiple myeloma is relatively common blood cancer, and a number of different therapies are used to treat it. CAR-Ts are a one-and-done customized genetically engineered t-cell therapy. With this type of therapy, the hospital collects a patient's blood, sends it off for the T-cells to be engineered to attack a certain antigen that appears on cancer cells, and then these engineered CAR-T cells are reinfused back into the patient to attack the cancer cells. CAR-Ts have started to transform treatment modalities and appear to be the most efficacious treatment for multiple myeloma. A competitive treatment called Carvykti (developed by a partnership of Legend Biotech Corporation and Johnson & Johnson) has been launching rapidly in the second line (2L+) setting. Carvykti already has $1 billion in sales worldwide in 2024 (up more than 100% year over year). The issue with Carvykti is that although it's very efficacious, it appears to cause delayed neurotoxicity (neurological damage) in 5% to 10% of patients and in rare cases (2% or potentially higher) Parkinsons-like symptoms, which is devastating and uncurable. The promise of Arcellx's Anito-cel process is that it appears to have similar efficacy to Carvykti while avoiding these neurotoxicity risks. Beyond the safety differentiation, Arcellx is also partnered with Gilead, which gives them access to state-of-the-art manufacturing with faster turnaround times and more reliable manufacturing success rates, as well as Gilead's existing sales infrastructure for Yescarta (a CAR-T used to treat a different type of blood cancer). Arcellx will present final data from its pivotal study in fourth line (4L+) multiple myeloma patients this year and we think this will be sufficient to file for FDA accelerated approval. It is also enrolling its phase 3 study in 2L+ multiple myeloma patients. We think a significant portion of the roughly 75,000 patients diagnosed with multiple myeloma each year in the U.S. and EU should receive a CAR-T over the course of their treatment, and that multiple myeloma CAR-Ts will ultimately be a $10 billion to $15 billion category. Based on our conversations with doctors, we think most doctors will seek out Arcellx's Anito-cel as the safer option for patients and we think Anito-cel will capture meaningful share of the market for multiple myeloma treatment.

BSD Analysis:
Baron initiated a small position in Arcellx despite typically avoiding early-stage biotech, attracted by the large proven market opportunity and superior safety profile of Anito-cel. The multiple myeloma CAR-T market represents a $3.5 billion current opportunity expanding to $12+ billion, with existing competitor Carvykti already generating $1 billion in sales despite significant neurotoxicity risks. Arcellx's key differentiation lies in Anito-cel's similar efficacy to Carvykti while avoiding the 5-10% delayed neurotoxicity and 2%+ Parkinson's-like symptoms. The Gilead partnership provides manufacturing advantages, faster turnaround times, and access to existing Yescarta sales infrastructure. With over $600 million in net cash and favorable manufacturing terms, Arcellx is fully funded through profitability. Baron expects doctors to prefer the safer Anito-cel option, positioning the company to capture meaningful share of the $10-15 billion ultimate market opportunity.

Pitch Summary:
Portillo's is a fast-casual restaurant chain best known for Chicago-style hot dogs and Italian beef sandwiches, operating company-owned locations across the United States. During the quarter, shares detracted from performance after the company reported weaker-than-expected fiscal second-quarter results. Management also reduced full-year guidance for same-restaurant sales, citing softer traffic and underperformance at some newer restaurants. In our view, concerns about slower same-store momentum, moderated development pace, and industry pricing/promotional pressure overshadowed the brand's longer-term expansion narrative.

BSD Analysis:
The manager expresses concerns about Portillo's near-term execution challenges despite the brand's long-term potential. The investment case has been undermined by weaker-than-expected second-quarter results and reduced full-year same-restaurant sales guidance. Key issues include softer traffic trends and underperformance at newer restaurant locations, suggesting potential challenges with site selection or market penetration strategies. The slower same-store sales momentum indicates pressure on the core business, while the moderated development pace suggests management is taking a more cautious approach to expansion. Industry-wide pricing and promotional pressures are creating additional headwinds for the restaurant sector. While the manager acknowledges Portillo's longer-term expansion narrative and brand strength, the near-term operational challenges and guidance reduction have overshadowed the growth story. The company's focus on Chicago-style cuisine provides differentiation but may limit broader market appeal.

Pitch Summary:
Karman Holdings Inc. is a leading proprietary space and defense solutions provider. We initiated a position in February 2025 when the company executed its IPO. Formed via four key acquisitions by Dallas-based private equity firm, Thrive Capital, in the early 2020s, Karman has a management team with a strong mix of executive experience and technical, engineering talent. Karman designs, tests, and manufactures mission-critical systems for existing and emerging missile and space programs, which are some of the growthiest and in-demand segments of the defense industry. Segments include Hypersonics & Strategic Missile Defense (33.2% of revenues), Space & Launch (33.3%), and Tactical Missile & Integrated Defense Systems (33.5%). Karman has become an outsourcer of choice for highly technical systems related to these programs. It has unique experience in complex/proprietary manufacturing methods, high end materials and composites, and system level design. Nearly 90% of Karman's sales are sole-sourced from the company, and 94% of its revenue is tied to proprietary IP-driven solutions (including patent protected technologies). The company's unique capabilities have allowed it to grow revenue organically at a low double-digit rate over time (with total growth including acquisitions at over 30%) with adjusted cash flow margins in excess of 30%. We believe Karman can continue to expand its solution set over time and that it is poised to grow nicely over the next five years as it targets the priorities that are emerging in the new defense budget.

BSD Analysis:
Baron participated in Karman Holdings' February 2025 IPO, attracted to the company's leadership position in high-growth defense segments including hypersonics, space launch, and tactical missiles. The company's diversified revenue base across three key segments (each representing roughly one-third of sales) provides balanced exposure to the fastest-growing areas of defense spending. Karman's competitive moat is built on proprietary manufacturing capabilities, advanced materials expertise, and system-level design, with 90% of sales being sole-sourced and 94% tied to IP-driven solutions. The combination of organic low double-digit growth and 30%+ cash flow margins demonstrates strong operational execution. Baron believes Karman is well-positioned to capitalize on emerging defense budget priorities, with the company's unique technical capabilities and patent-protected technologies providing sustainable competitive advantages in mission-critical applications.

Pitch Summary:
Wingstop is a global restaurant brand best known for its cooked-to-order, hand-sauced chicken wings. The company operates just over 2,000 locations worldwide, with most in the United States. Wingstop delivered strong fiscal second-quarter results, exceeding expectations despite facing tough comparisons from prior years. Sales momentum was supported by several factors, including new menu offerings, increased marketing, and continued growth in digital ordering, all of which have boosted brand awareness and profitability. However, shares declined later in the quarter following reports of softer sales trends, as the restaurant industry has experienced a growth slowdown due to broad based consumer price aversion and a rotation towards food-at-home. Despite the near-term industry slowdown, we continue to view Wingstop favorably for its long-term growth potential and near-term catalysts, including the rollout of Smart Kitchen initiatives and an enhanced loyalty program.

BSD Analysis:
The manager maintains a constructive view on Wingstop despite near-term industry headwinds affecting restaurant stocks. The investment thesis is supported by strong second-quarter results that exceeded expectations, demonstrating the company's operational resilience. Key growth drivers include new menu offerings, increased marketing effectiveness, and continued digital ordering penetration, which have enhanced brand awareness and profitability. While acknowledging the broader restaurant industry slowdown due to consumer price sensitivity and food-at-home trends, the manager focuses on Wingstop's differentiated positioning and upcoming catalysts. The Smart Kitchen initiatives and enhanced loyalty program represent near-term drivers that could accelerate growth and improve operational efficiency. The manager's long-term bullish stance reflects confidence in Wingstop's brand strength and ability to navigate current industry challenges. The company's global footprint of over 2,000 locations provides a solid foundation for continued expansion.

Pitch Summary:
During the quarter we "invested in reverse" and initiated a position in Wingstop Inc. Wingstop shares have recently underperformed, as following two straight years of very strong same-store sales growth, trends have returned to normalized levels. We took advantage of this opportunity to own this high-quality company at a compelling valuation relative to its growth and margin prospects. Wingstop is a franchised limited-service restaurant company that serves cooked-to-order wings, tenders, and chicken sandwiches and is the leader within the popular chicken wing category. Wingstop restaurants operate on a relatively simple operating model of made to order chicken wings and sandwiches and the majority of its food is consumed off-premise, which allows for a smaller square footage store. The combination of a simple operating model and smaller stores provides an efficient model for franchisees with stores generating $2 million in revenue per store with restaurant level margins of around 25%. Additionally, new stores require a relatively modest initial investment of $500,000 which leads to best-in-class cash on cash returns in excess of 70% for franchisees. Wingstop ended 2024 with over 2,500 global locations and we expect the company to grow units at a 10% compounded annual growth rate over the long term. Eventually, we see a path to 10,000 units globally, supported by the company's leadership in the wing category and strong unit economics as described above. We also expect Wingstop to be able to grow same-store sales in the mid-single-digit range as it invests in brand awareness campaigns, improves digital efficiency and ordering times, and expands its menu offering. The combination of 10%-plus unit growth and mid-single-digit same-store sales should lead to mid-teens revenue growth and high teens profit growth over the foreseeable future. We are also attracted to Wingstop's high margin, free-cash flow generative, asset light franchise business model.

BSD Analysis:
Baron initiated a position in Wingstop using their "investing in reverse" strategy, capitalizing on normalized same-store sales growth after two exceptional years. The manager is attracted to Wingstop's leadership position in the chicken wing category and its efficient franchise model that generates $2 million per store with 25% restaurant-level margins. The modest $500,000 initial investment requirement delivers best-in-class 70%+ cash-on-cash returns for franchisees, supporting aggressive expansion. Baron expects 10% annual unit growth toward an eventual 10,000 global locations, combined with mid-single-digit same-store sales growth driven by brand awareness, digital improvements, and menu expansion. This should translate to mid-teens revenue growth and high-teens profit growth. The asset-light franchise model generates strong free cash flow, making it an attractive long-term compounder at current valuations.

Pitch Summary:
Tutor Perini Corporation is a leading construction company providing a broad range of general contracting, construction management, and design-build services to private and public-sector clients globally. Tutor Perini's offerings include comprehensive project management—from pre-construction planning to detailed scheduling of labor, equipment, materials, and subcontractors—as well as self-performed construction services such as site preparation, concrete forming and placement, steel erection, electrical work, mechanical systems, plumbing, HVAC (heating, ventilation, and air conditioning), and fire protection. Shares of Tutor Perini contributed positively during the quarter after the company reported strong second-quarter results and increased its full-year 2025 earnings guidance. Management also reiterated expectations for a meaningful step-up in earnings in 2026, reflecting a supportive infrastructure spending backdrop and continued improvement in project execution, which together bolstered investor confidence.

BSD Analysis:
The manager presents a positive outlook for Tutor Perini based on strong operational execution and favorable industry dynamics. The investment thesis centers on the company's comprehensive construction capabilities spanning general contracting, construction management, and design-build services across both private and public sectors. Tutor Perini's extensive self-performed construction services provide operational control and margin opportunities across the construction value chain. The strong second-quarter results and raised full-year 2025 guidance demonstrate improving project execution and financial performance. Management's expectation for meaningful earnings growth in 2026 is supported by a favorable infrastructure spending environment and continued operational improvements. The combination of enhanced project execution capabilities and supportive industry tailwinds positions Tutor Perini for sustained earnings growth. The positive stock performance during the quarter reflects growing investor confidence in the company's turnaround story.

Pitch Summary:
Montrose Environmental Group, Inc., a leading environmental solutions company, detracted from performance during the quarter. This was due to concerns that the Environmental Protection Agency (EPA) under the Trump administration will reduce enforcement of environmental regulations that require the type of consulting, testing, remediation and monitoring that Montrose provides. We believe these concerns are misguided, and that given its current high single-digit multiple of cash flow, Montrose is hugely underpriced. Montrose's business is driven by state regulations as well as contaminants that have a long-regulated history with bipartisan support (including from the current EPA Administrator). Montrose has successfully grown through both Democratic and Republican administrations (including the first Trump administration), and the company believes the Trump administration's initiatives on cost efficiency, U.S. manufacturing, and domestic energy production could create large new opportunities for the company.

BSD Analysis:
Baron views market concerns about Montrose Environmental as misguided, seeing the current weakness as a compelling buying opportunity. The manager argues that fears of reduced EPA enforcement under the Trump administration ignore the company's diversified regulatory drivers, including state-level regulations and bipartisan environmental priorities. Montrose's track record of growth through both Democratic and Republican administrations, including the previous Trump presidency, demonstrates the resilience of its business model. The company's exposure to cost efficiency, U.S. manufacturing, and domestic energy production initiatives could actually create new growth opportunities under the current administration. Trading at a high single-digit cash flow multiple, Baron believes Montrose is significantly undervalued relative to its stable, regulation-driven business model.

Pitch Summary:
Talen Energy is an independent power producer operating in the PJM market across the Mid-Atlantic and Midwest, where constrained supply and rising demand from data centers running AI workloads—particularly in northern Virginia—are supporting higher power prices and capacity. Talen also leverages its Cumulus digital infrastructure platform, which includes a hyperscale data center campus adjacent to its Susquehanna nuclear facility, providing carbon-free, low-cost energy directly from the plant and creating incremental revenue opportunities. While fiscal second-quarter operating results were modestly below estimates due to extended outages at Susquehanna, management reaffirmed full-year guidance, reinforcing visibility around future demand and grid revenues. The company also hosted an investor day in September, where management introduced its 2027 and 2028 outlook, which served as a positive catalyst for the stock.

BSD Analysis:
The manager's bull thesis for Talen Energy is built on favorable supply-demand dynamics in the PJM electricity market, particularly driven by AI data center demand in northern Virginia. The investment case is strengthened by Talen's unique positioning with its Cumulus digital infrastructure platform and adjacent hyperscale data center campus at the Susquehanna nuclear facility. This setup provides carbon-free, low-cost energy directly from the nuclear plant, creating differentiated revenue opportunities in the growing data center market. Despite modest second-quarter underperformance due to nuclear outages, management's reaffirmation of full-year guidance demonstrates confidence in the business outlook. The September investor day and introduction of 2027-2028 outlook provided positive catalysts and enhanced visibility into future earnings potential. The combination of constrained power supply, rising AI-driven demand, and Talen's strategic nuclear-powered data center assets positions the company well for sustained growth.

Pitch Summary:
Indie Semiconductor, Inc. designs automotive semiconductors for advanced driver assistance (ADAS), in-cabin features, and other applications. Shares fell during the quarter on a miss in forward revenue guidance due to an inventory correction in the broader automotive semiconductor industry that was exacerbated by continued automotive macroeconomic uncertainty. We retain conviction. Revenue growth continued to outperform peers, and the company is winning new sockets in future platforms. Indie remains well positioned over the medium and long term, supported by its $7.1 billion strategic backlog and its radar, vision, and other programs that will ramp through 2025 and more meaningfully into 2026. We believe indie will return to outsized growth by the end of 2025 and will significantly outpace the broader industry on its path to $1 billion in revenue by the end of this decade supported by contract visibility. As its product mix shifts to ADAS, its margins should meaningfully improve as well.

BSD Analysis:
Baron remains confident in indie Semiconductor despite recent guidance disappointment, viewing current weakness as cyclical rather than structural. The manager emphasizes that indie continues to outperform peers in revenue growth and is securing new design wins in future automotive platforms. The company's $7.1 billion strategic backlog provides strong revenue visibility, with key programs in radar and vision expected to ramp significantly in 2026. Baron expects a return to outsized growth by late 2025, driven by the automotive industry's recovery and indie's competitive positioning. The shift toward higher-margin ADAS products should drive meaningful margin expansion. The manager sees a clear path to $1 billion in revenue by decade-end, supported by contract visibility and the secular growth in automotive semiconductors.

Pitch Summary:
Nebius is a leading provider of AI infrastructure and cloud-based solutions, delivering specialized GPU computing capabilities designed to support large-scale AI workloads for enterprise and research clients globally. We find Nebius compelling due to its impressive growth trajectory and expanding deployment of advanced Nvidia GPU technology within data centers across Europe and North America, positioning it as a key beneficiary of accelerating AI adoption. During the period, shares contributed positively, aided by continued demand for AI compute and a landmark multi-year agreement with Microsoft. Under this deal, Nebius will supply dedicated GPU infrastructure to power Microsoft's AI services, marking Nebius's first long-term contract with a major cloud service provider. We believe this partnership not only validates Nebius's technology and execution capabilities but also provides a significant revenue anchor, reinforcing its role as a critical player in the global AI infrastructure ecosystem.

BSD Analysis:
The manager presents a compelling bull case for Nebius based on its strategic positioning in the rapidly growing AI infrastructure market. The investment thesis centers on Nebius's specialized GPU computing capabilities and expanding deployment of advanced Nvidia technology across European and North American data centers. The landmark multi-year agreement with Microsoft represents a significant validation of the company's technology and provides crucial revenue visibility. This partnership marks Nebius's first long-term contract with a major cloud service provider, establishing it as a credible player in the global AI infrastructure ecosystem. The manager views Nebius as well-positioned to benefit from accelerating AI adoption trends. The positive stock performance during the quarter reinforces the investment thesis. The focus on specialized AI workloads for enterprise and research clients suggests a differentiated market position in the competitive cloud infrastructure space.

Pitch Summary:
Exact Sciences Corporation is a cancer diagnostics company. Its flagship product is Cologuard, a stool-based screening test for colorectal cancer (CRC). Shares detracted from performance in the quarter due to fears of competitive blood-based CRC tests which may launch in 2025. While these tests cost more than Cologuard, they are somewhat more convenient for patients. However, blood-based tests do not have the same level of pre-cancer sensitivity as Cologuard, and Cologuard is significantly better at detecting pre-cancerous growths called Advanced Adenoma. Moreover, Exact Sciences is developing its own blood-based tests that we anticipate will be as accurate as competitor tests but will cost significantly less than those tests as it uses a different type of analytics to get its results. So, either way, we believe Exact Sciences will win. It also has a huge channel presence in CRC which will enable it to be successful in both fecal and blood-based CRC testing. In addition, with 60 million Americans not receiving any CRC screening at all, there is ample opportunity for multiple players to win.

BSD Analysis:
Baron maintains a bullish stance on Exact Sciences despite recent competitive concerns around blood-based colorectal cancer tests. The manager's thesis centers on Cologuard's superior pre-cancer detection capabilities, particularly for Advanced Adenoma, which blood-based alternatives cannot match. Exact Sciences is developing its own blood-based tests using different analytics that should be cost-competitive while maintaining accuracy. The company's established channel presence in CRC screening provides a significant distribution advantage for both existing and future products. With 60 million Americans currently not receiving any CRC screening, the addressable market remains vast enough to support multiple players. The manager views current weakness as temporary, driven by competitive fears rather than fundamental deterioration.