Investment Pitches

Pitch Summary:
Shift, a Japanese technology company specializing in software testing, pulled back after a solid fourth quarter. The company saw quarterly revenue growth slow in the first quarter, and margins compressed over the period due to a supply/demand gap resulting from lost opportunities on upstream projects. The outsourced software testing market is vast, with an estimated 98% of the workload handled in-house today, even though companies like Shift can deliver this service materially cheaper and more efficiently. The company has a strong track record of hiring, training, and retaining talented engineers. We expect they will continue to deliver strong organic revenue growth for the foreseeable future.

BSD Analysis:
Polen Capital maintains a bullish long-term view on Shift despite near-term operational challenges, focusing on the massive market opportunity in outsourced software testing. The company operates in a highly underpenetrated market where 98% of testing work remains in-house, creating substantial runway for market share expansion as companies recognize the cost and efficiency benefits of outsourcing. Shift's competitive advantage lies in its ability to deliver testing services materially cheaper and more efficiently than in-house alternatives, providing clear value proposition to clients. The company's strong track record in talent acquisition, training, and retention is critical in a skilled labor-intensive business, ensuring quality service delivery and scalability. Current margin compression appears cyclical, driven by supply/demand imbalances and lost upstream project opportunities rather than structural issues. Polen's confidence in continued strong organic revenue growth reflects the secular trend toward software testing outsourcing and Shift's market-leading position in Japan. The combination of vast market opportunity, proven execution capabilities, and temporary valuation compression creates an attractive entry point for a high-quality growth company.

Pitch Summary:
Microsoft (Information Technology, Cloud Computing) outperformed in Q2, driven by a positive market reaction to strong earnings results. Importantly, results from its cloud computing arm Azure came in well ahead of expectations and there are indications of a re-acceleration of growth.

BSD Analysis:
The fund manager maintains a bullish stance on Microsoft, highlighting the company's strong Q2 performance driven by exceptional Azure cloud computing results. The Azure division significantly exceeded expectations, suggesting a re-acceleration in growth momentum within the cloud infrastructure segment. This outperformance indicates Microsoft's continued dominance in enterprise cloud services and its ability to capitalize on the ongoing digital transformation trends. The positive earnings surprise and Azure's strength reinforce Microsoft's position as a key beneficiary of AI infrastructure investments and enterprise cloud adoption. The fund views Microsoft as a core holding within their Information Technology allocation, representing 5.8% of the portfolio. The company's cloud computing capabilities align with the fund's focus on sustainable technology solutions and digital infrastructure enablers. Microsoft's consistent execution in the cloud space positions it well for continued growth in the AI-driven technology cycle.

Pitch Summary:
Lennar, one of the nation's largest homebuilders, was the biggest detractor for the quarter. Despite executing on previously identified catalysts, including shifting toward a capital-light business model (i.e., 79% of land controlled via options versus 21% owned, an improvement from 70/30 just one year ago), formal plans for a spinoff of $6 billion to $8 billion of land assets and monetizing non-core assets such as the recently announced sale of multifamily housing assets, Lennar's share price declined during the quarter. Management has called out affordability pressures (e.g., higher prices and mortgage rates) as challenges that have pressured gross margins and may continue to do so. Lennar has navigated affordability issues through more efficient operations (i.e., leveraging scale, as well as accelerating and matching production and sales volumes to lower construction costs) and increased incentives, the latter of which we view as unsustainable. As always, we are closely monitoring these cyclical dynamics with an eye to what is truly normal. Moreover, we take (some) comfort in Lennar's excess net-cash position and its potential to redeploy capital in the business and/or return cash to shareholders. Lastly, we remain sanguine on the U.S housing market, as well as Lennar's ability to manage through the inevitable housing cycles.

BSD Analysis:
The manager maintains a bullish stance on Lennar despite short-term headwinds, emphasizing the company's successful execution of strategic catalysts including a shift to a capital-light model with 79% of land controlled via options. The planned spinoff of $6-8 billion in land assets and monetization of non-core multifamily housing assets demonstrate management's focus on capital efficiency. While affordability pressures from higher prices and mortgage rates have compressed gross margins, the manager views Lennar's operational improvements through scale leverage and production optimization as sustainable competitive advantages. The company's excess net cash position provides financial flexibility for capital redeployment or shareholder returns. The manager's confidence in Lennar's cycle management capabilities and the broader U.S. housing market fundamentals supports their long-term investment thesis. Despite current cyclical challenges, the structural improvements in business model and balance sheet strength position Lennar favorably for future housing cycles.

Pitch Summary:
Like Globant, Endava is an IT services company, albeit UK-based, focused on payments, financial services, and TMT verticals. Unfortunately, financials and TMT have been among the weakest segments as companies cautiously pull back on investments, negatively impacting Endava's results over the past several quarters. Further, management issued 2024 guidance that came in well below expectations, further underscoring investor concerns around the timing of a reacceleration in growth. The over 40% earnings price decline is likely a result of investors extrapolating the worst-case scenario; however, we remain more positive on the long term and trust Endava's ability to play a critical role in facilitating digital transformation across various industries and end markets. The stock is now trading below 20x next year's earnings for a high-quality business, and recent acquisitions set the business up for continued future success.

BSD Analysis:
Polen Capital demonstrates contrarian conviction in Endava, viewing the significant price decline as an overreaction to cyclical headwinds rather than structural deterioration. The company's specialization in payments, financial services, and TMT verticals positions it well for long-term digital transformation trends, despite current sector weakness. Management's conservative 2024 guidance, while disappointing to markets, likely reflects prudent planning during uncertain economic conditions and sets up potential for positive surprises as conditions normalize. The 40% stock decline has created an attractive valuation opportunity, with shares trading below 20x forward earnings for a high-quality technology services provider. Polen's emphasis on recent acquisitions suggests confidence in management's ability to expand capabilities and market reach during the downturn. The company's critical role in digital transformation across multiple industries provides defensive characteristics and long-term growth visibility. Trading at such compressed multiples for a business with proven execution capabilities and secular growth drivers presents compelling risk-adjusted returns for patient investors willing to look through the current cycle.

Pitch Summary:
Globant, a cloud-native IT services company specializing in digital technology, was one of the top detractors in the quarter. While Globant has been a strong contributor on a one-year and six-month basis, the stock reacted negatively to what we view as prudently cautious guidance from management in their fourth quarter 2023 earnings reports. Secular tailwinds support Globant as companies are compelled to spend on digital transformation and increasingly integrate AI effectively. We have maintained our confidence in the company's capability to deliver mid- to high-double-digit top-line growth for many years. Despite broad IT services headwinds, we have been very impressed with Globant's significantly above-industry growth.

BSD Analysis:
Despite recent underperformance, Polen Capital maintains strong conviction in Globant's long-term prospects, viewing the current weakness as a temporary setback rather than a fundamental deterioration. The company's cloud-native positioning and digital transformation expertise align perfectly with secular technology trends, particularly the accelerating adoption of AI solutions across enterprises. Management's conservative guidance approach, while pressuring near-term sentiment, demonstrates prudent capital allocation and sets up potential for positive surprises. Globant's ability to deliver significantly above-industry growth rates, even during broader IT services headwinds, highlights the company's competitive differentiation and market positioning. The sustained mid-to-high double-digit revenue growth capability reflects strong demand for specialized digital transformation services and the company's ability to capture market share. Polen's maintained confidence suggests the current valuation presents an attractive entry point for a high-quality growth company. The combination of secular tailwinds, proven execution, and conservative management creates a compelling risk-reward profile for patient investors.

Pitch Summary:
Revolve – Revolve was the only position in the portfolio that declined during the quarter, largely due to management's comments about a slowdown to mid-single-digit revenue growth in April—down from double digits the month prior—as well as initial guidance on tariff impacts. Since then, the company has indicated a return to double-digit growth and noted that cost headwinds are now more limited following a reduction in China-related tariffs. Despite this, the stock has remained under pressure. We've taken the opportunity to add to our position at what we believe are highly attractive valuations.

BSD Analysis:
The manager maintains a bullish stance on Revolve despite recent stock underperformance and temporary growth deceleration. The company experienced a slowdown to mid-single-digit revenue growth in April, down from double-digit growth previously, which concerned investors along with initial tariff impact guidance. However, management has since indicated a return to double-digit growth rates and noted that cost pressures have diminished following reductions in China-related tariffs. The manager views the persistent stock weakness as disconnected from the improving fundamental trajectory, creating an attractive buying opportunity. The decision to add to the position during the decline demonstrates strong conviction in the company's ability to return to historical growth rates. The manager believes current valuations are highly attractive relative to the company's long-term prospects, suggesting the market is overreacting to temporary headwinds. This contrarian positioning reflects confidence that Revolve's competitive advantages in online fashion retail remain intact despite near-term challenges.

Pitch Summary:
A direct example of the equity-yield curve in action is the utility company Hawaiian Electric. In a normal environment, the results of the business are relatively predictable. This is partly due to surrounding regulation, given the regional monopoly status utilities maintain. Both revenue and profits are governed by a performance-based regulation framework governed by the local public utility commission. This incorporates an annual revenue adjustment, and an earnings-sharing mechanism based on an established return on average common equity from regulatory capital. Any earnings that fall outside this range are shared between customers and utilities, so that both excess gains and diminished profits are limited. In other words, growth is limited, but so is risk (absent extraordinary circumstances), so investors treat utilities more like yield alternatives. A majority of the earnings are paid out via dividends—though in comparison to bond yields, they offer potential for some annual growth; same goes for book value. Hawaiian Electric is not unique in this regard. In fact, as a utility, perhaps its most unique attribute was its ownership of the American Savings Bank, through a 90.1% stake was sold on the last day of 2024 in a cash transaction, so HE is no longer subject to capital regulation as a bank. Now HE is a pure utility more in line with peers, with the added complexity of securing energy for a remote island. So what ties this investment to the equity yield curve? Hawaiian Electric hasn't paid a dividend since Q3 of 2023. Prior to that, dividends were paid on an uninterrupted basis since 1901. The shift came as HE faced extreme scrutiny and multiple lawsuits in the wake of the Maui fires that devastated the island in August 2023. HE chose to pause the dividend to shore up capital for any legal liabilities, and the stock dropped from $37.36 on August 8th to $9.66 on August 25th—a 74% decrease intramonth. As of April 2025, there is far more clarity as to the company's legal responsibility. A decision by the Hawaii Supreme Court has allowed the settlement agreement proposed by HE to continue. The remaining portion of the settlement agreement requires HE to pay about $1.92 billion over the next four years. The payments will be broken out into $479 million increments, with the first one expected in Q4 of 2025. The dividend is off the table for the foreseeable future, and the company has committed to not raise rates in response to the settlement agreement. So we currently have a pure play utility company with the following attributes: • No dividend yield • Looming capital raise/debt issuance • Limited ability to raise pricing or grow revenues • Earnings-sharing agreement on hold (to avoid any lower-profitability impact with customers). No wonder the stock trades at a small fraction of its pre-wildfire price. So why are we interested? We have visibility into the normalized dividends from the business. We have been notified of the necessary capital raise (more on which below). We are already aware that most utilities do not have significant earnings growth, which means this could never be a solution. The suspension of the earnings sharing agreement has been noted to only be "temporary," and Q4 2024 GAAP income from the utility segment was not much different than in Q4 2022 (46.4 million vs 48.6 million). Management believes the company's current liquidity, along with some other measures taken, have alleviated the going-concern risk the company faced previously. This is all information readily available for market participants. What the market lacks is patience. Core income from the electric utility segment was $180.7 million in 2024. The holding company portion detracted another $56.4 million, though some of these costs have likely already been mitigated due to interest/debt reduction and a simplification of the consolidated business. The core business can generate at least $150 million on an annual basis, likely more when considering the future tax benefits from prior losses. HE needs to raise $1.44 billion for the wildfire liabilities (the first payment is already covered). To keep this simple, let's say 100% of the normalized earnings over the next four years are contributed. That equates to $600 million in earnings, which reduces the capital needs to $840 million. Subtract another $380 million, using the net proceeds from the recent sale of American Savings Bank, and that leaves $457 million for a potential equity raise. At the current price, this assumes shareholders could be diluted to about 80% ownership of the business currently, though this would be the most expensive form of financing available to the company, and therefore a conservative outlook. The company announced that it has an additional $523MM available through an at-the-market equity program ($250 million), utility accounts receivable-backed credit facility ($239 million), and credit facility capacity ($34 million), so in reality there is a mix of liquidity options available to cover the remainder. After all is said and done, how will this company look in four years, when the dust settles and dividend payouts seem likely? Apply some reasonable assumptions and you have visibility into a company completely overlooked due to short-term limitations. Another way to view HE is just comparing valuations before and after the wildfires. Aside from potential dilution, is the company significantly different than it was prior to the settlement? If not, why would the valuation be so different post-settlement? The only difference is that the share price is one-quarter of the pre-crisis price or, put differently, the application of four years of a discount rate to achieve this valuation, which in the case of a regulated utility should not be very high.

BSD Analysis:
Horizon Kinetics presents Hawaiian Electric as a classic equity yield curve opportunity where temporary crisis conditions obscure the company's normalized earning power and eventual dividend restoration. The utility's 74% stock price decline following the Maui wildfires created a severe dislocation, with the company trading at one-quarter of its pre-crisis valuation despite maintaining core utility operations. The Hawaii Supreme Court's approval of the $1.92 billion settlement agreement provides clarity on the company's legal obligations, payable over four years in $479 million increments starting Q4 2025. The fund calculates that HE's core electric utility segment can generate at least $150 million annually, and after accounting for settlement payments, bank sale proceeds, and potential equity dilution, shareholders could retain approximately 80% ownership of a normalized utility business. The temporary suspension of dividend payments since Q3 2023 (ending a 122-year streak) and the earnings-sharing agreement creates artificial headwinds that mask the underlying business stability. With the company no longer subject to bank capital regulations following the American Savings Bank sale, HE emerges as a pure-play regulated utility with predictable cash flows and eventual dividend restoration potential. The investment offers asymmetric risk-reward characteristics typical of distressed utilities post-crisis, where patient capital can benefit from the eventual normalization of operations and valuation multiples.

Pitch Summary:
Core & Main is an industrial distributor specializing in waterworks and fire protection, providing an extensive range of over 200,000 products in the water infrastructure market. The company's fundamental business performance has been better than expected, and it continues to execute its disciplined M&A strategy very well. We view Core & Main as a high-quality business with numerous competitive advantages and reinvestment opportunities, supported by structural tailwinds given the need to repair and replace aging municipal water infrastructure.

BSD Analysis:
Polen Capital presents a compelling infrastructure play through Core & Main, capitalizing on the critical need for water infrastructure modernization across the United States. The company's extensive product portfolio of over 200,000 items creates significant barriers to entry and customer stickiness in a mission-critical market. Management's disciplined M&A approach enables market share expansion while maintaining quality standards, reflecting the fragmented nature of the distribution landscape. The structural tailwinds from aging municipal infrastructure create a multi-decade growth opportunity, supported by government spending initiatives and regulatory requirements. Core & Main's specialized focus on waterworks and fire protection provides defensive characteristics, as these are non-discretionary expenditures for municipalities and contractors. The combination of better-than-expected operational performance and successful acquisition integration demonstrates management's execution capabilities. Polen's emphasis on competitive advantages and reinvestment opportunities suggests confidence in the company's ability to compound returns through both organic growth and strategic acquisitions.

Pitch Summary:
Wayfair – Wayfair reported results that were better than feared and has cited strong demand trends at recent investor conferences. After waiting more than two years for revenue growth to inflect, it now appears—based on both management commentary and recent results—that the tide is finally turning. One key unknown in the e-commerce landscape is the fallout from the de minimis loophole closure, which has negatively impacted Chinese players like Temu and Shein. While it's too early to know for sure, Wayfair could be one of the key beneficiaries of that disruption.

BSD Analysis:
The manager sees Wayfair at a potential inflection point after an extended period of revenue growth challenges. The company's recent results exceeded low expectations and management has indicated improving demand trends, suggesting the business may be emerging from its growth trough. After more than two years of waiting for revenue growth to recover, the manager believes the fundamental trajectory is finally improving based on both quantitative results and qualitative management commentary. A key potential catalyst is the closure of the de minimis loophole, which has disrupted Chinese e-commerce competitors like Temu and Shein. This regulatory change could create a competitive advantage for domestic players like Wayfair by reducing the cost advantage of Chinese imports. While the manager acknowledges uncertainty around this development, the potential for market share gains from disrupted competitors represents meaningful upside optionality. The combination of improving organic trends and potential competitive tailwinds positions Wayfair for a potential recovery in growth and profitability.

Pitch Summary:
A casual energy market observer could be forgiven for not knowing the water dynamics in energy production, or the prevalence of oil and gas produced in New Mexico. Despite the common coupling of Texas with the prolific Permian Basin, the formation stretches well into Lea and Eddy counties in the southeast corner of New Mexico. And, between 400 and 500 miles northwest of these counties—mostly in New Mexico and along the borders of Colorado, Utah, and Arizona—lies the San Juan Basin. This is a largely forgotten gas field with methane primarily produced from a coalbed formation. Speaking of unfavorable present and observable conditions for a stock, we present San Juan Basin Royalty Trust. As the name implies, the "company" is actually a trust that distributes a net profit interest (NPI) from certain properties in the area. It has no debt and no employees. It has a corporate Trustee, the compensation for which is limited by a schedule in the Trust Indenture. It begins at 1/20th of 1% of the first $100 million of annual gross revenues of the Trust, allows for hourly rates in excess of 300 hours a year, and establishes a minimum fee of $36,000 per year. In 2024, the Trustee fees totaled $120,108, although total general and administrative expenses were $2.1 million. Natural gas may be appreciated by a growing minority as a cleaner fuel source compared to coal, but it is widely loathed by investors due to perceived oversupply (and attendant price volatility) in the United States. The U.S. has an abundance of high-quality, low-cost natural gas reserves. This dynamic is exacerbated by a highly seasonal gas consumption pattern and limited storage/export potential relative to production levels. As a result, U.S. natural gas is a highly volatile market that has been responsible for many fortunes made and lost. This dynamic, however, is rapidly changing due to enormous incremental gas power demand (data centers, reshoring of industry, etc.) and a doubling of LNG export capacity in the next 18 months. While this will promote drilling at the margin, there are logistical pipeline constraints that make the market far less fluid than reserves data suggest. These factors could quickly shift the market from structural surplus to deficit. The thesis is not about gas pricing, but that contributes to unwarranted pessimism for the San Juan Basin Royalty Trust. The bigger headwind is that it currently distributes nothing to shareholders. This must be taken in the context of the Trust making a $0.41 monthly distribution per share in March of 2023. This annualized to approximately $4.10 per share, more than the stock price at the end of 2024 ($3.83). Welcome to the world of natural gas investing! However, this is no ordinary dividend cut. It is the result of the operator (Hilcorp) increasing capital expenditures in 2024 to $36 million, up from the 2023 level of $4.4 million. This eightfold increase in spending will result in considerable production growth, but given the terms of the NPI, the investment must be recouped via earnings prior to trust holder distributions being made. Thus, there have been no distributions since April of 2024. Hilcorp is privately held, so we must make informed estimates on the production profile going forward. However, based on disclosures from the Trust, we estimate close to a 70% production increase from the end of 2024 due to capital spending and increased drilling. Furthermore, it is reasonable to believe that the 2025 spending guidance of approximately $9 million can sustain this level of production. Finally, if we assume comparable lease operating expenses and severance tax costs going forward, we can estimate the date and amount of the distribution reinstatement (based on prevailing gas prices). For instance, if we assume that benchmark natural gas averages $3/mcf and apply a 10% discount to the local "basis," the run-rate production will result in a full paydown of the proportionate capital expenditure deficit in May/June of this year. Critically, this will be based on a monthly NPI to the Trust of approximately $3.6 million/month or $43 million/year, which equates to nearly a 17% yield based on the quarter-end share price. This exercise delivers a dynamic emergent return scenario, particularly with incrementally higher gas prices, but quite favorable even at $3 gas prices. Of course, these hypothetically higher gas prices might prompt Hilcorp to add even more drilling, hence growing the net asset value further. The Trust started the year with barely a $200 million market value, so we doubt many others are even running these figures. If by chance someone else is, few investors have the patience to wait for the inevitable resumption of the dividend. While the base case scenario (conservative gas pricing and discount rate/distribution yield assumptions) delivers a return scenario that may rival anything else in the market today, there is also the "option" value of gas price related to data center and industrial demand. Finally, it should be noted that the San Juan Basin is amongst the only regions with gas pipeline access to the Southern California market, which is prone to episodic disruptions to fuel supply, thus resulting in premium pricing for piped gas.

BSD Analysis:
Horizon Kinetics identifies San Juan Basin Royalty Trust as a compelling time arbitrage opportunity, where temporary dividend suspension masks significant underlying value creation. The trust's operator Hilcorp dramatically increased capital expenditures from $4.4 million in 2023 to $36 million in 2024, driving an estimated 70% production increase that must be recouped before distributions resume. The fund calculates that at $3/mcf natural gas prices with a 10% local basis discount, the capital deficit will be fully recovered by May/June 2025, enabling distribution resumption at approximately $3.6 million monthly or $43 million annually—representing a nearly 17% yield on the current share price. The trust's minimal overhead structure with no debt or employees and capped trustee compensation creates an efficient pass-through vehicle for natural gas royalties. The investment thesis is further supported by structural changes in natural gas markets, including surging data center demand and doubling LNG export capacity over 18 months, which could shift the market from surplus to deficit. The San Juan Basin's unique pipeline access to Southern California provides additional pricing optionality during supply disruptions. With a modest $200 million market capitalization and few investors willing to wait for the inevitable dividend resumption, the trust offers asymmetric risk-reward characteristics enhanced by potential natural gas price appreciation driven by AI and industrial demand.

Pitch Summary:
CTS Eventim, the European leader in ticketing and live entertainment event management, reported another set of strong quarterly results with profits ahead of expectations again. Revenues rose to 65% above pre-COVID levels, and net income was over double. Blockbuster tours from artists such as Taylor Swift and Coldplay have driven ticket sales. Despite the robust results, company management continues to maintain a conservative forward guidance, with U.S. expansion plans remaining challenged, given high competitive barriers and possible regulation. We believe the company can compound earnings close to 15% per annum given its dominant market position, secular trends of ticketing moving online, and increased consumer spending on experiences.

BSD Analysis:
Polen Capital maintains a strong bullish stance on CTS Eventim, highlighting the company's exceptional recovery and growth trajectory post-COVID. The 65% revenue increase above pre-pandemic levels and doubled net income demonstrate the resilience and growth potential of the live entertainment sector. Management's conservative guidance approach provides downside protection while creating potential for positive surprises, as evidenced by consistently beating expectations. The secular shift toward online ticketing and increased consumer preference for experiential spending creates sustainable tailwinds for the business model. Polen's 15% annual earnings growth projection reflects confidence in the company's dominant European market position and pricing power. While U.S. expansion faces regulatory and competitive challenges, the core European business appears well-positioned to capitalize on the experience economy trend. The combination of market leadership, secular growth drivers, and conservative management creates an attractive risk-adjusted return profile.

Pitch Summary:
Carvana – Carvana posted another exceptional quarter, growing retail units by 46%, revenue by 38%, and achieving an all-time high adjusted EBITDA (Earnings before interest, taxes, depreciation and amortization) margin of 11.5%. Management reiterated their outlook for continued rapid growth and margin expansion, and most notably, introduced a bold new long-term target: 3 million annual retail units at a 13.5% EBITDA margin within 5–10 years. Knowing this team, our bet is they're aiming for the low end of that range—which would imply over 40% annualized unit growth, more than 5% above our prior expectations. We remain very encouraged by Carvana's trajectory and continue to view it as a compelling 5-year investment opportunity.

BSD Analysis:
The manager is highly bullish on Carvana's exceptional operational performance and ambitious long-term targets. The company delivered impressive Q2 metrics with 46% unit growth, 38% revenue growth, and record 11.5% EBITDA margins, demonstrating strong execution across key performance indicators. Management's new long-term target of 3 million annual units at 13.5% EBITDA margins represents a significant scaling opportunity that exceeds the manager's previous expectations. The manager's confidence in management's ability to achieve the aggressive timeline suggests strong conviction in the team's execution capabilities. The implied 40% annualized unit growth trajectory positions Carvana for substantial market share gains in the used car market. The combination of rapid growth and margin expansion indicates the business model is achieving operational leverage and efficiency gains. The manager views this as a compelling multi-year investment opportunity with significant upside potential as the company scales toward its ambitious targets.

Pitch Summary:
Aris Water Solutions (ARIS) came to better appreciate the tremendous value of water infrastructure during our industry research. A conventional approach to sourcing investments: Identifying favorable conditions for capital appreciation. Reasonable as this approach may be, favorable conditions are often accompanied by robust valuations. There is little use in identifying favorable conditions if the market has fully priced in these fundamentals (and perhaps much more). If we invert this approach and consider pervasive unfavorable conditions that might obscure an otherwise excellent value proposition, we are left with much more interesting opportunity sets for undervaluation. And we can examine Aris Water Solutions as a particularly timely security to discuss. There is no shortage of unfavorable conditions impeding the market from recognizing its value. However, we appear to be at an inflection point where the longer-term growth and profitability potential of the company is readily apparent. Conventional investment approaches overlook Aris for several reasons. It is technically an oilfield service company (strike one), and it came public in 2021 as a small capitalization issuer (strike two) via several private equity market sponsors (strike three). It was an inauspicious IPO setup for the company, as the world was still grappling with energy demand concerns related to the pandemic, ESG considerations-dominated committee meetings, and profitless technology company valuations soaring with abundant capital flowing. It's a wonder that the investment bankers were even able to place Aris shares in the market. We followed the initial offering from the sidelines, cautious of the leverage ratio, and had similar energy water infrastructure exposure through our preferred capital-light land holdings. Aris predictably traded in a volatile but mostly flat range for the next three years. Aris piqued our interest after we participated in the LandBridge IPO in 2024, and came to better appreciate the tremendous value of water infrastructure during our industry research. Our firm is no stranger to the Permian Basin water industry, by virtue of our longstanding investment in TPL. Water is both a crucial input for fracking shale and a substantial well byproduct output. The input, or injected "source water," is very different from the formation "produced water" that comes out of the wells. The former is generally sourced from aquifers and injected into wells to stimulate oil production. This water must meet certain purity standards so it doesn't damage drilling casing and equipment or disrupt the natural flow of the hydrocarbon mixture. The produced water is a high-saline brine with various toxic compounds and high total dissolved solid content. Suffice it to say, this water is generally neither suitable for reinjection into wells, nor irrigation. In fact, it presents a major environmental liability, and must be transported from the well site—either to be cleaned for reuse in fracking, or disposed of via injection into saltwater disposal wells. In the Delaware Basin, there are approximately four barrels of produced water generated for every barrel of oil equivalent. This "water cut" only increases as deeper shale formations are targeted and existing wells age. Thus, the basin requires at least four times the amount of infrastructure for water as for hydrocarbons. This is a large and growing business—but many oil and gas companies want nothing to do with it. Let's explore why. Water management is an expense to oil and gas producers—the largest and fastest-growing part of lease operating expenses in the Delaware Basin—directly raising drilling break-even prices. The producers are focused on producing and, to a lesser extent, transporting their hydrocarbons, not managing the related bonded hydrogen and oxygen molecules. These companies generally don't want such activities on their balance sheets, as it would take capital away from drilling—and from shareholder returns. Firms increasingly appreciate that water is a highly specialized and technical business often better outsourced. In response, a concentrated group of specialty water infrastructure companies has emerged. Aris was built from the ground up by Solaris Energy Capital to manage wastewater from Permian oil and gas wells. This generally involved permanent and semi-permanent pipelines to transport water from the wellhead to a disposal well. Most pipelines and "handling facilities" are operated via land leases, rights of way, and/or royalty injection agreements with the landowners. To provide context, TPL and LandBridge are amongst the largest landowner lessors of land to third-party water management companies. The most prolific portion of the Delaware Basin spans the border between Texas and New Mexico. This is a critical aspect of water management due to differing regulations across state lines and varying private/state/federal lands. As a result, most of the Aris network is in New Mexico, and much of the economics are predicated on getting excess water into Texas, where it can be more easily disposed of. This setup presents an enormous competitive advantage to both the landowners (recipients of land lease and injection royalty revenues), but also incumbent operators with established infrastructure (such as Aris). Aris is paid to take barrels of water away from the well head, but it doesn't have to simply dispose of it as waste. As a result, the company has developed a complementary recycling business that filters the water to standards acceptable for reuse in fracking. To the extent that this can be done economically, the company can earn a second revenue stream on the same barrel of water that would otherwise be disposed of. Aris handled approximately 1.142 million barrels of water per day in the first quarter of 2022, at an average price of $0.68/barrel and an adjusted margin (on a cash operating basis) of $0.42/barrel, or 61.7%. The volume mix was approximately 70% produced water ($0.78/barrel) and 30% recycled water ($0.45/barrel). In the subsequent three years (through the fourth quarter of 2024), the company's total volumes rose by 14% per year and revenue per barrel rose to $0.75. Aris has maintained an adjusted margin of $0.44/barrel. This growth has been a product of both organic volumes within its existing pipeline network as well as capital investment. While the company operated at nearly a 60% adjusted margin per barrel in the fourth quarter of 2024, it's worth noting this was based on approximately 60% and 30% capacity utilization for, respectively, the produced water and recycled water systems. It would not be unreasonable to expect further margin expansion from higher capacity utilization. But this is only half the story. The Permian Basin does not have infinite space for wastewater to be injected, and many of the most cost-effective areas near major oil and gas activity are rapidly approaching capacity. This is a function of pressure and porosity, where there has been seismic activity related to water injections, as well as interference with drilling activity. As a result, regulators are limiting new injection permits, and water companies are developing long-haul pipes to remove water from the congested areas. This comes with a cost, and pricing leverage will belong to the landowners and incumbent infrastructure operators. If we revisit the unfavorable conditions previously faced by Aris, which were plainly visible in the moment, we can present the longer-term, more economically significant conditions that were developing: secular water volume growth, price inflation, and barriers to competitive entry. There is also nascent electric power and data center development in the Permian Basin—notably, being pursued by LandBridge. Thermal power generation (gas combined cycle) and data center liquid cooling are immensely water-intensive, and most of the Permian is a desert. It remains to be seen what, if any, revenue exposure the incumbent companies like Aris will have to this water market. Clearly, though, this "option" is not priced into the stock, which trades at approximately 8.5x estimated pre-tax cash flow for next year.

BSD Analysis:
Horizon Kinetics presents a compelling contrarian thesis on Aris Water Solutions, viewing the company's current unfavorable market perception as creating an attractive entry point. The fund highlights Aris's strategic positioning in the Permian Basin water management sector, where the company operates critical infrastructure for handling produced water from oil and gas operations. With water cuts of approximately four barrels per barrel of oil equivalent and growing as wells age, Aris benefits from secular volume growth in a specialized, capital-intensive business that oil producers increasingly prefer to outsource. The company's dual revenue model—disposal and recycling—generates attractive margins of around 60% while operating at only 60% capacity utilization, suggesting significant operating leverage potential. Regulatory constraints on new injection permits and capacity limitations in prime disposal areas create barriers to entry and pricing power for incumbent operators like Aris. The emerging data center opportunity in the Permian Basin represents additional upside optionality given the water-intensive nature of thermal power generation and data center cooling in a desert environment. At 8.5x estimated pre-tax cash flow, the valuation appears attractive for a company positioned to benefit from both traditional energy production growth and emerging AI/data center demand.

Pitch Summary:
Topicus.com is the European version of Constellation Software, a vertical market, mission-critical software provider. The company announced quarterly and full-year results that beat consensus estimates. Annual revenues grew 27%, free cash flow grew 36%, and net income increased 10% versus 2023. We think a highly talented management team leads the company, operates in an attractive and fragmented industry, and should continue to see attractive earnings growth over the coming years.

BSD Analysis:
Polen Capital presents a compelling bull case for Topicus.com, positioning it as the European counterpart to the successful Constellation Software model. The company demonstrated exceptional operational performance with 27% revenue growth and 36% free cash flow expansion, significantly outpacing net income growth of 10%, indicating improving cash conversion efficiency. The vertical market software approach provides mission-critical solutions with high switching costs and recurring revenue characteristics. Management's proven track record and the fragmented nature of their target markets create substantial runway for continued acquisitions and organic growth. The company's ability to consistently beat consensus estimates suggests conservative guidance and potential for continued positive surprises. Polen's confidence in sustained attractive earnings growth reflects the defensive nature of mission-critical software and the compounding benefits of the acquisition strategy. This pitch exemplifies Polen's focus on high-quality businesses with competitive moats and reinvestment opportunities.

Pitch Summary:
ThredUp – As we noted in our Q1 letter, ThredUp is undergoing a significant inflection point that's rapidly shifting investor perception of the business. The company delivered strong Q1 results, beating expectations and raising guidance for Q2 and the full year. While the stock has already had a strong run year-to-date, we continue to see meaningful upside over the coming years as ThredUp scales into its existing fulfillment center capacity.

BSD Analysis:
The manager views ThredUp as experiencing a significant business inflection that is reshaping investor sentiment. The company demonstrated strong operational execution by beating Q1 expectations and raising forward guidance, indicating accelerating momentum. The manager maintains a bullish outlook despite the stock's strong year-to-date performance, suggesting the current valuation doesn't fully reflect the company's potential. The key investment thesis centers on ThredUp's ability to scale efficiently into existing fulfillment infrastructure, which should drive margin expansion and profitability improvements. This operational leverage story appears to be in early stages, with the manager expecting meaningful upside as the company optimizes capacity utilization. The inflection point narrative suggests ThredUp has moved past earlier growth challenges and is now positioned for sustainable expansion. The manager's confidence in continued upside despite recent gains indicates strong conviction in the long-term value creation opportunity.

Pitch Summary:
Adient PLC (ADNT), domiciled in England (with corporate offices in Plymouth, MI; Milwaukee, WI; Burscheid, Germany; and Shanghai, China), is one the world's largest suppliers of seating systems and a leading components supplier for automotive interiors. Shares fell over the period alongside other names in the auto manufacturing space due to the potential of heightened tariffs on imports from Canada and Mexico. This is specifically problematic for ADNT given their sizeable manufacturing presence in Mexico. However, we believe issues from tariffs will be transient in nature. As such, we continue to believe ADNT is attractively valued for a company successfully right sizing their portfolio, buying back shares, and maintaining their balance sheet.

BSD Analysis:
The manager maintains conviction in Adient despite tariff-related headwinds that pressured automotive suppliers during the quarter. The investment thesis rests on the company's market-leading position as one of the world's largest automotive seating suppliers with a diversified global footprint. While the sizeable Mexican manufacturing presence creates near-term tariff exposure, the manager views these concerns as transitory policy issues rather than fundamental business challenges. The company's ongoing portfolio optimization efforts, including right-sizing operations, demonstrate management's focus on operational efficiency and margin improvement. Active share buyback programs indicate disciplined capital allocation and management confidence in the business outlook. The maintained balance sheet strength provides financial flexibility to navigate trade policy uncertainty while investing in growth opportunities. The manager believes current valuation levels fail to reflect the company's market position and operational improvements, creating an attractive risk-adjusted opportunity. The global automotive seating market's defensive characteristics and Adient's scale advantages should support long-term value creation despite near-term policy volatility.

Pitch Summary:
Fluor Corp. (FLR) is one of the largest contractors in the US. Fluor reported a disappointing 4Q24 with revenue and margins weak as the company deals with unusually low utilization driven by volatility in its businesses. Initial guidance for 2025 revenue and margin were also below consensus estimates driven by weakness at Energy Solutions partly offset by growth at Urban Solutions that is expected to be back-half weighted. Unlike many competitors that specialize in elements of project delivery, most of Fluor's revenue comes from projects where it provides full Engineering, Procurement, and Construction services. Fluor also has significant fabrication capabilities including a joint venture that operates the world's largest fabrication facility. In addition, Fluor also owns a substantial stake in NuScale (tk: SMR).

BSD Analysis:
The manager maintains a position in Fluor despite near-term operational challenges, suggesting confidence in the company's long-term competitive positioning and asset value. While 4Q24 results were disappointing with weak revenue and margins due to low utilization, the manager appears to view this as cyclical rather than structural. The full-service EPC model differentiates Fluor from competitors who focus on specialized project elements, potentially providing higher margins and customer stickiness once utilization normalizes. The company's significant fabrication capabilities, including a joint venture operating the world's largest fabrication facility, represent substantial fixed assets and competitive moats. The substantial stake in NuScale provides exposure to the emerging small modular reactor market, offering potential upside from the nuclear renaissance. Urban Solutions growth expected in the back half of 2025 suggests improving project mix and utilization trends. The manager likely views current weakness as creating an attractive entry point for a company with differentiated capabilities and valuable assets trading below intrinsic value.

Pitch Summary:
Kosmos Energy Ltd. (KOS) is an independent exploration and production company focused offshore. In addition to its existing production, KOS has liquified natural gas (LNG) assets that are set to begin production in 2024 and a platform to acquire and operate additional offshore resources. Shares fell over the quarter after Organization of the Petroleum Exporting Countries (OPEC+) delegates announced that the group would move forward with plans to restart previously halted oil production. We believe these short-term issues are significantly outweighed by the long-term value of the company's existing production, which the current stock price does not fully reflect.

BSD Analysis:
The manager maintains conviction in Kosmos Energy despite near-term headwinds from OPEC+ production decisions that pressured the stock during the quarter. The investment thesis centers on the company's diversified offshore production profile and upcoming LNG assets scheduled to begin production in 2024, providing significant growth catalysts. The manager views the OPEC+ announcement as a temporary market concern that has created an attractive entry point rather than a fundamental threat to the company's long-term value proposition. Kosmos's platform for acquiring and operating additional offshore resources suggests potential for inorganic growth and portfolio optimization. The manager believes the current stock price fails to reflect the intrinsic value of existing production assets, indicating a classic value opportunity. The offshore focus provides exposure to potentially higher-margin production while the LNG development offers diversification beyond traditional oil production. This contrarian positioning reflects confidence in the company's asset quality despite broader energy market volatility.

Pitch Summary:
We modestly trimmed our position in MercadoLibre (MELI) during the quarter. The business has been performing well since our purchase in mid-2021, with the company's earnings per share increasing more than 10x in 2.5 years. We believe MELI's competitive advantages are significant and growing, but our analysis indicates that its 2024 revenue growth profile and profit margin progress could normalize from elevated levels seen recently. Market share gains should continue but could be at a lower rate than last year when some of MELI's competitors were dealing with significant issues. Margin gains have been substantial, perhaps exceeding management expectations. We would not be surprised to see new investment initiatives, which are wise for long-term positioning, set margin progress back in 2024. With all these points in mind, we felt a trim was warranted. We continue to believe MELI is an excellent business and could increase our weighting in the future.

BSD Analysis:
Polen Capital remains fundamentally bullish on MercadoLibre despite trimming the position due to valuation and normalization concerns. The company's exceptional performance since mid-2021, with earnings per share increasing more than 10x in 2.5 years, demonstrates the power of MELI's business model and execution. Polen acknowledges that MELI's competitive advantages are significant and growing, reflecting the company's dominant position in Latin American e-commerce and fintech. The trim appears to be a prudent portfolio management decision as growth rates and margins normalize from elevated levels. The expectation that market share gains will continue, albeit at a slower pace, suggests MELI's competitive position remains strong. Management's potential new investment initiatives, while potentially pressuring near-term margins, are viewed positively for long-term positioning. Polen's willingness to increase the weighting in the future indicates continued conviction in the long-term investment thesis. The company's integrated e-commerce and payments ecosystem in Latin America provides multiple growth vectors and defensive characteristics in a large, underpenetrated market.

Pitch Summary:
F5 (FFIV) sells application networking and security software, as well as data center appliances. F5 reported a strong quarter that benefited from an improving IT spending environment, the beginning of a hardware refresh cycle, and better than expected software renewals, expansions and net new customer acquisition. Management raised guidance for FY25 and described the new guide as "prudent" given the strong trends they are seeing on hardware refresh and software growth metrics. F5 has no debt, trades at an attractive valuation, and is benefiting from an improving gross margin and lower operating expenses.

BSD Analysis:
The manager presents a compelling bull case for F5 based on multiple operational and financial catalysts converging simultaneously. The company is benefiting from an improving IT spending environment and the early stages of a hardware refresh cycle, providing both near-term revenue visibility and longer-term growth potential. Strong software metrics including renewals, expansions, and new customer acquisition demonstrate the stickiness and growth potential of F5's recurring revenue base. Management's guidance raise and characterization of it as "prudent" suggests conservative forecasting with potential for upside surprises. The debt-free balance sheet provides financial flexibility and reduces execution risk during this growth phase. Improving gross margins and lower operating expenses indicate operational leverage as the business scales. The manager views the current valuation as attractive relative to these improving fundamentals and growth prospects in the application networking and security markets.