Investment Pitches

Pitch Summary:
Netwealth provided a quarterly business update during April, with funds under administration (FUA) growing at an annualised 28.5% to $85 billion -- a healthy acceleration on the annualised 14.3% achieved at the same time last financial year. The quarterly change highlights the significant turnaround in net inflows, which were up 62.2% compared to the prior corresponding quarter last year. We remain comfortable with the structural growth of the business and are pleased to see stronger inflows returning after a slower, but still healthy, run last financial year. During the month, the founding Heine family reduced their collective Netwealth stake by 1.5 million shares, equivalent to 0.6% of the company, leaving them with a still sizeable 47.8% stake. As we've said before, we have no issue seeing the family progressively reducing their stake, particularly when you consider the company's market capitalisation of almost $5 billion has it sitting within ASX100 territory but will require further selling from the Heine family to meet the liquidity threshold.

BSD Analysis:
Lakehouse maintains a bullish stance on Netwealth, highlighting accelerating growth momentum with funds under administration expanding at 28.5% annually to $85 billion. The significant turnaround in net inflows, up 62% year-over-year, demonstrates the platform's competitive strength in capturing market share. The manager views the structural growth opportunity favorably, particularly as stronger inflows return after a period of slower but still healthy growth. Insider selling by the founding Heine family is viewed positively as a natural progression given the company's $5 billion market cap approaching ASX100 territory. The family's retained 47.8% stake provides continued alignment while progressive selling improves liquidity. Netwealth represents the fund's largest holding, reflecting high conviction in the wealth management platform's long-term prospects. The business model benefits from network effects and recurring revenue characteristics that align with the fund's investment philosophy.

Pitch Summary:
The company is a subsidiary of AIL. Extremely high number of allegations of kidnapping, assault and child grooming; fraudulent, dishonest and misleading sales tactics; unhealthy financials (high churn, cash flow issues). Update 5/10/24 - A report issued by the Insurance Department that an agent submitted thirteen fraudulent life insurance applications. Update 5/16/24 - The company is likely to be under SEC investigation. Update 6/7/24 - Follow-up: Agents continue to write fraudulent policies. Update 6/27 - The company is under SEC investigation. Update 7/31/24 - Follow-up report. Update 8/6/24 - Follow-up report.

BSD Analysis:
Global Atlantic Financial (subsidiary of KKR) focuses on life insurance and annuities. Shorts argue spread compression, rising hedging costs, and capital strain under higher rates create earnings risk. As an insurer, GL’s exposure to credit spreads, policyholder behavior, and asset-liability matching is key. Counterpoints: scale under KKR ownership provides diversification, but skeptics argue insurance equities often mask volatility until credit cycles turn. Catalysts/risk checks: statutory capital ratios, investment spread data, and reserve adequacy.

Pitch Summary:
We also established a small tactical position in Kyndryl Holdings the world's largest outsourced manager of mission-critical information systems for enterprise customers. We provide some detail on this investment in the Quarterly Letter, so I won't go into it here. But this one is really an opportunistic situation where we see a very high probability that the company's future earnings power will be a lot higher than it was in the past – and that this too remains underappreciated today.

BSD Analysis:
Montaka established a tactical position in Kyndryl Holdings, recognizing it as the world's largest outsourced manager of mission-critical information systems for enterprise customers. The fund views this as an opportunistic investment where they see high probability that future earnings power will significantly exceed historical performance. The investment thesis appears centered on a fundamental transformation in the company's earnings capacity that remains underappreciated by the market. As enterprises increasingly outsource critical IT infrastructure management, Kyndryl's scale and expertise position it to capture growing demand. The fund's confidence in substantially higher future earnings suggests they see structural improvements in the business model or market positioning. This appears to be a value-oriented play on enterprise IT services transformation. The tactical nature suggests they see near-term catalysts that could unlock this earnings potential.

Pitch Summary:
We re-established a small tactical position in AI chip designer, AMD, after learnings that the 'AI wave' that has commenced is already much larger than was previously anticipated – even by industry insiders. What's interesting about AMD is that their AI chip has only just been released in the last few weeks – meaning that any backward-looking analysis of company earnings includes nothing of the most important demand source for the company's future: AI chips. In October, the company forecast their AI chip revenue could be US$2 billion in 2024. Just 92 days later, this forecast had to be revised up to US$3.5 billion due to overwhelming customer demand. We see a high probability that future earnings forecasts for AMD will need to be revised up substantially further over time.

BSD Analysis:
Montaka re-established a position in AMD based on the accelerating AI chip demand that has exceeded even industry insider expectations. The fund highlights that AMD's AI chip was only recently released, meaning historical earnings analysis doesn't capture the most significant future revenue driver. The rapid revision of AI chip revenue forecasts from $2 billion to $3.5 billion in just 92 days demonstrates overwhelming customer demand. This 75% upward revision in such a short timeframe suggests strong momentum in the AI semiconductor market. The fund believes future earnings forecasts will require substantial further upward revisions as AI adoption accelerates. AMD appears positioned to benefit from the structural shift toward AI computing infrastructure. The timing of their AI chip release coincides with peak market demand for AI processing capabilities.

Pitch Summary:
Glass House Brands (OTC: GLASF) and Goodness Growth (OTC: GDNSF) both jumped more than 70% and Grown Rogue went up by 50%. These companies have been under owned and ignored by cannabis investors for too long. And their demonstrated operational performance has been outpacing the industry and investors are now paying attention. It's also no coincidence that these three companies are also disclosing the most granular data on their operations and are actively trying to help investors understand their businesses.

BSD Analysis:
The manager highlights Goodness Growth as part of a trio of undervalued cannabis companies that delivered exceptional Q1 performance with 70%+ gains. The investment thesis centers on the company being historically underowned and ignored by cannabis investors despite demonstrating operational performance that outpaces industry peers. The manager emphasizes the company's commitment to operational transparency, providing granular data disclosure that helps investors understand the business fundamentals. This transparency differentiates Goodness Growth from many cannabis operators that provide limited operational metrics. The strong Q1 performance suggests investors are beginning to recognize the company's operational excellence and value proposition. The manager views this as part of a broader trend where quality cannabis operators with proven execution are gaining market recognition. The position appears to be part of a concentrated cannabis strategy focused on operationally superior companies trading at discounted valuations.

Pitch Summary:
Glass House Brands (OTC: GLASF) and Goodness Growth (OTC: GDNSF) both jumped more than 70% and Grown Rogue went up by 50%. These companies have been under owned and ignored by cannabis investors for too long. And their demonstrated operational performance has been outpacing the industry and investors are now paying attention. It's also no coincidence that these three companies are also disclosing the most granular data on their operations and are actively trying to help investors understand their businesses. For the past four years in cannabis, major building projects have generally taken too long, cost too much, struggled to operationalize and disappointed investors with the results. The complexity of cannabis, the different regulatory hoops to jump through and the relative inexperience of the industry are all reasons why so many capital projects have gone south. And then you have Glass House, which not only turned on its Ventura County, California state-of-the-art greenhouse on-time and under budget but has showed the country how it is possible to produce quality California greenhouse cannabis flower at a fraction of the cost of others. This past quarter, they announced that they again opened the new expansion greenhouse under budget and ahead of time again. I had the opportunity to tour the new greenhouse and see the rows and rows of flower that will hit the market in Q2. It was an impressive sight to see and a testament to the team for the quality of the flower now being produced by Glass House. The market has rewarded Glass House for its demonstrated competence and proven operational ability to do something special. And the market also loves companies that deliver not only growth, but growth in cash flow and free cash flow. Glass House is poised to do both in Q2 and Q3 of this year.

BSD Analysis:
The manager presents a compelling bull case for Glass House Brands based on exceptional operational execution and cost advantages in cannabis cultivation. The company has distinguished itself by consistently delivering greenhouse expansion projects on-time and under budget, a rare achievement in the cannabis industry where capital projects typically face delays and cost overruns. Glass House has demonstrated the ability to produce quality California greenhouse cannabis flower at significantly lower costs than competitors, creating a sustainable competitive advantage. The manager's personal tour of the facilities reinforced confidence in the quality of production and upcoming Q2 flower supply. The company is positioned for strong cash flow and free cash flow growth in Q2 and Q3, which should drive continued market recognition. The 70%+ stock performance in Q1 reflects growing investor appreciation for the company's operational competence and transparent reporting practices. Glass House represents a high-quality operator in a consolidating industry with significant barriers to entry.

Pitch Summary:
Another theme the strategy has been building exposure to over the last few quarters is Qatar's liquified natural gas (LNG) value chain, which received a boost from Qatar Energy's announcement in February of a capacity expansion plan that will add 16 million metric tons to annual capacity, taking it to 142 million tons by 2030. As the world's lowest-cost producer of natural gas, with a lifting cost of US$0.30 per MMBTU compared to a range of US$3.0 to US$5.0 globally, Qatar is well-positioned to capitalize on its reserves over the next decade. Emboldened by this cost advantage and the US government's decision to pause LNG export approvals until after the 2024 elections, Qatar seems intent on getting the most out of its reserves in the next decade. By keeping production high, Qatar will reinforce its position as the lowest-cost supplier to growing Asian markets and secure its role as a key player in the recalibration of energy supply chains that is taking place following the Russia-Ukraine war. Qatar Gas Transport Company Ltd. (QGTS), the owner and operator of the world's largest LNG shipping fleet, is a primary beneficiary of this theme. This was recently validated by the awarding of a contract for the addition of 25 conventional size LNG carriers (to an existing fleet of 74 vessels) by Qatar Energy following February's capacity expansion announcement.

BSD Analysis:
The manager presents a compelling bull case for QGTS based on Qatar's dominant position in the global LNG market and significant capacity expansion plans. Qatar's exceptional cost advantage with lifting costs of $0.30 per MMBTU versus $3.0-$5.0 globally provides a substantial competitive moat. The recent announcement of 16 million metric tons of additional annual capacity by 2030, bringing total capacity to 142 million tons, directly benefits QGTS as the world's largest LNG shipping fleet operator. The validation of this thesis came through Qatar Energy awarding QGTS a contract for 25 additional LNG carriers, expanding their fleet from 74 vessels by 33%. The geopolitical backdrop, including the US pause on LNG export approvals and energy supply chain recalibration post-Russia-Ukraine war, positions Qatar and QGTS favorably to capture growing Asian demand. The manager views this as a multi-quarter theme with strong fundamental tailwinds. QGTS appears well-positioned to benefit from both increased volumes and potential rate improvements in the LNG shipping market.

Pitch Summary:
HEES – H&E Equipment Services, Inc. is one of the top equipment rental companies in the U.S., providing construction and industrial related equipment, parts, and services in 30 states to the commercial, industrial, infrastructure and residential construction markets. As the #4 player in a business geared towards local economics with a strong presence focused in the industrially active region of the Sun Belt in the US, the company has ample scale to demonstrate pricing power in markets that primarily operate based on local market share dynamics. The industry remains fragmented but is top-heavy, with the top four consolidating the industry and together now approaching 40% of market share. This industry structure provides scale benefits to HEES but also suggests small bolt-on acquisitions can move the needle on company financials. Here the company has a proven track record of entering new territories through tuck-in acquisition and expanding in tangential geographies organically, enjoying a post-pandemic branch CAGR of 10%. The largest company in the space, United Rentals International, Inc. (URI), is now approaching 1,500 branches in North America, nearly 11 times HEES' size, having pursued a successful bolt-on acquisition strategy dating back to Bradley Jacob's original founding of the company in 1997. Since then, the rental industry has achieved more sophistication than prior cycles as the largest players now have the size and technology to add pricing discipline to the industry. Equally importantly, the industry should enjoy secular growth tailwinds in the coming years. The Infrastructure Investment and Jobs Act (IIJA) allocates more than $1 trillion in funding over ten years for infrastructure projects, complementing the initiatives under the Inflation Reduction Act (IRA) and the CHIPS Act. In 2023, construction spending in the manufacturing sector reached $225 billion, more than doubling the previous peak in 2015. However, the combined expenditures of the IIJA and IRA represent a threefold increase in spending when adjusting for inflation, compared to the Federal-Aid Highway Act of 1956 and the post-World War II reconstruction efforts, illustrating the magnitude of investment soon to come. Today, HEES trades at a substantial discount to larger peers, despite a more attractive forward growth outlook and a greater margin expansion opportunity. It appears the market fails to appreciate the company's growth prospects but has also perhaps overlooked its somewhat recent transition to a high-margin pure play rental company after 2021 divestments of its crane distribution business. Pre-COVID HEES traded at or near parity with peers' 5-7x EBITDA multiple. Since the pandemic, HEES has traded at an average discount of two turns and today trades at a three-turn discount (5x EBITDA vs 8x). On a three-year view, we can envision the stock trading to $115-$140 with continued execution on its organic and tuck-in acquisition strategy and some multiple expansion towards peer levels.

BSD Analysis:
The manager presents H&E Equipment Services as a compelling infrastructure beneficiary trading at a significant valuation discount. As the #4 equipment rental company with strong Sun Belt presence, HEES benefits from local market dynamics and pricing power while maintaining acquisition optionality in a fragmented industry. The company has demonstrated consistent execution with 10% post-pandemic branch CAGR and successful geographic expansion. The investment thesis centers on massive infrastructure spending tailwinds from the IIJA ($1 trillion), IRA, and CHIPS Act, representing a threefold increase versus historical infrastructure cycles. Manufacturing construction spending doubled to $225 billion in 2023, indicating early cycle momentum. The company's 2021 transformation to a pure-play rental model following crane distribution divestiture improved margins and focus. HEES trades at 5x EBITDA versus 8x for peers despite superior growth prospects and margin expansion opportunities. The manager targets $115-$140 per share based on execution and multiple expansion to peer levels, implying significant upside from current valuation discount.

Pitch Summary:
PAR – Par Technology's Brink segment is getting bigger. When discussed in our last quarterly letter, the segment looked poised to grow to over $150M later this year in annual recurring revenue (ARR), from $20M four years ago, with announced deals in the pipeline further putting the segment on a path towards a $200M run rate next year. But now, after announcing acquisitions of Stuzo and TASK simultaneously in March, the company looks to be on a path for run-rate ARRs to approach $300M later this year, with substantial continued growth beyond as the company begins to penetrate new accounts and new geographies with an expanded menu of additive service offerings. Together, the two deals look like a masterstroke of capital allocation for CEO Savneet Singh, as both have strong strategic merit and impressive financial implications for the company's fundamentals. The Stuzo deal, which brings Par a loyalty platform software provider focused on C-stores and fuel retailers, will contribute nearly ~$50M in ARR by yearend at 40%+ EBITDA margins, and will also eliminate a competitor as the company was previously targeting this market with their Punnch offering. The TASK deal is equally exciting from a strategic perspective. As an Australia-based global foodservice transaction platform tailored for major global brands, it will also contribute ~$50M in ARR from its end-to-end transaction management platform with customers like Starbucks and McDonalds. This broadened reach opens a path to international geographies where Par had a limited ability to serve previously. The two deals plus other big recent customer wins like Wendy's and Burger King more than double the size of the ARR revenue base from a year ago and meaningfully improve the company's profitability profile. The deals were in part financed by a PIPE offering and came with just 20% shareholder dilution, partly aided by the expected sale of the company's Government business which looks increasingly likely. Contemplating further profitable expansion from here is no great stretch either, as the company now has relationships with multiple owners of multiple restaurant brands, who have shown a preference to use the same vendors where they can. Now, the company is truly positioned as a one stop shop of software unified commerce offerings, with far broader addressable markets to grow into internationally, within the convenience store space and with other adjacent product rollouts in payments, back office, loyalty, online ordering and drive-through that all connect to a restaurant's point-of-sale (POS) operating software. Today Par looks increasingly well-positioned to emerge as the winner-take-most with its mission-critical POS based software offering in the restaurant enterprise software space. Equally noteworthy, today the company also trades at a little more than half the multiple of ARR as most of its peers.

BSD Analysis:
The manager presents Par Technology as a compelling software consolidation story with exceptional growth acceleration. The Brink segment has grown from $20M to an expected $300M ARR run-rate through strategic acquisitions and organic growth, representing 15x growth in four years. The simultaneous acquisitions of Stuzo and TASK demonstrate strategic capital allocation, adding $100M in combined ARR at attractive margins while expanding addressable markets. Stuzo brings 40%+ EBITDA margin loyalty platform capabilities and eliminates competition, while TASK provides international expansion through relationships with major brands like Starbucks and McDonald's. The company is transforming into a comprehensive restaurant technology platform with mission-critical POS software at its core. Major customer wins including Wendy's and Burger King validate the platform's competitive positioning. The deals were executed with only 20% dilution, aided by the pending government business divestiture. The stock trades at approximately half the ARR multiple of peers despite superior growth and expanding market opportunities, creating significant valuation upside potential.

Pitch Summary:
SHAK – As for Shake-Shack, targeted marketing has helped spur an increase in foot traffic. Aided by self-help initiatives like kiosks and efforts to optimize supply chain efficiencies, incremental sales are beginning to flow through at higher profit margins than many had previously thought. Incoming CEO Rob Lynch of Papa Johns looks to expand on the recent profitability progress as the young brand continues a shift towards a coming-of-age era marked by greater professionalization relative to its scrappy upstart days when the concept began as a hot dog stand in Central Park. For a company with ample white space in its growth plans, the emerging improvement in profitability levels has been impactful to valuation.

BSD Analysis:
The manager highlights Shake Shack's operational transformation and margin expansion story. Targeted marketing initiatives are successfully driving foot traffic growth, while technology investments in kiosks and supply chain optimization are improving operational efficiency. The key insight is that incremental sales are flowing through at higher margins than market expectations, indicating strong operational leverage. The appointment of Rob Lynch as CEO from Papa John's represents experienced leadership to drive professionalization and scale. The manager emphasizes the company's transition from a startup mentality to a mature growth company with significant expansion opportunities. The combination of improving unit economics, technology-driven efficiency gains, and substantial white space for growth creates a compelling investment case. The emerging profitability improvements are beginning to be reflected in valuation, suggesting the market is recognizing the operational progress.

Pitch Summary:
CROX – In the case of Croc's, the stock continues to trade at an attractive high-single-digit multiple of earnings. Importantly the company is making significant progress in turning the tide for HeyDude after sales of the brand hit an air pocket due to higher-than-wanted inventories in the wholesale channel last year. Inventory levels have improved, enabling average selling prices to move higher while the new HeyDude distribution center in Las Vegas has also now become operational. Along with an expansion of HeyDude-specific outlet stores, which are very high margin and drive nearly a third of Crocs' brand North American sales, it looks like the Croc's playbook is nearly fully in place. And just last week, the company announced Terence Reilly would return to the company as president of the brand. Bringing Reilly back into the fold seems a very promising move. He deserves a great deal of credit for Croc's resurgence which he described as taking it "from meme to dream" when he was previously with the company as head of marketing from 2013 to 2020. He clearly seems to have a knack for creating buzz around a brand, given his recent success at Stanley where he was CEO after driving sales of the famed "Stanley Cup" up ten-fold to $700M in just four years. It seems prospective marketing success can often be as hard to predict as it is important to a brand's vitality. But here, it looks like Reilly is a proven winner. Might he again be able to create a sensation around a brand like HeyDude, one that has high affinity amongst existing customers yet still low-brand awareness more broadly? Given recent operational improvements, the brand seems well positioned to again focus on playing offense and improved brand performance may be right around the corner.

BSD Analysis:
The manager presents a compelling turnaround thesis for Crocs centered on operational improvements and strategic leadership changes. The HeyDude brand appears to be recovering from inventory challenges, with improved wholesale channel dynamics and higher average selling prices indicating pricing power restoration. The new Las Vegas distribution center and expansion of high-margin outlet stores demonstrate operational scaling capabilities. The return of Terence Reilly as brand president represents a significant catalyst, given his proven track record of transforming Crocs from 2013-2020 and his recent success driving Stanley's revenue from $70M to $700M. The stock trades at an attractive high-single-digit earnings multiple despite these positive developments. The combination of operational improvements, proven marketing leadership, and low valuation creates an asymmetric risk-reward profile. The manager views the brand as well-positioned for offensive growth strategies with potential for significant brand performance improvement.

Pitch Summary:
Alphabet (GOOG), a longtime holding in our Fund, stirred up considerable controversy earlier this year when the company released their proprietary AI tool called Gemini to the public. Suffice it to say, the images generated were historically inaccurate and the extreme political leanings of its creators were not even remotely subtle. On the one hand, we decided to maintain our position and do not expect this event to negatively impact near-term results. On the other hand, we also believe this poses a serious risk to the incredible economic moat surrounding its core search business and early warning signs for the potential erosion of that moat are worth paying close attention to. Alphabet was quick to suspend the use of Gemini and went into full damage control mode after the botched rollout. In an effort to mitigate reputational damage, the company cited poor training models, apologized for its shortcomings, and admitted that they "definitely messed up." Despite the official theoretically plausible explanation, we suspect their artificial intelligence product is working as designed and the outputs generated were exactly as intended, reflecting a specific ideological agenda of Alphabet's employees. Last week, CEO Sundar Pichai, published a blog post titled Building for Our Future AI which outlined some internal operational and structural changes, and more broadly discussed his vision for artificial intelligence. Below are two excerpts from the last paragraph that particularly stood out to us (emphasis added): 1. We have a culture of vibrant, open discussion that enables us to create amazing products and turn great ideas into action. That's important to preserve. But ultimately we are a workplace and our policies and expectations are clear: this is a business, and not a place to act in a way that disrupts coworkers or makes them feel unsafe, to attempt to use the company as a personal platform, or to fight over disruptive issues or debate politics. This is too important a moment as a company for us to be distracted. 2. We have a duty to be an objective and trusted provider of information that serves all of our users globally. When we come to work, our goal is to organize the world's information and make it universally accessible and useful. That supersedes everything else and I expect us to act with a focus that reflects that. The first excerpt clearly addresses Alphabet's severe corporate culture issues. We are encouraged Sundar Pichai recognizes he is responsible for running a business and employees need to be mission-oriented at the office. However, extreme cultural issues are exceptionally difficult to fix. Presumably the organization has layers upon layers of middle management filled with individuals who share the same radical political beliefs. How do you force an overwhelming majority of activists to be more moderate? Disney is dealing with similar internal issues that have already had meaningful negative consequences to business performance. Elon Musk reportedly had to fire approximately 80% of employees after acquiring Twitter, partly due to inefficiencies and because the business was hemorrhaging cash, but also partly due to ideological incompatibilities. The point is, recognizing it is one thing but executing a turnaround is more challenging. The second excerpt addresses the inherent biases programmed into Gemini and perhaps other Alphabet products, including legacy search. We are again encouraged Sundar Pichai envisions the creation of an artificial intelligence solution that strives to provide objective and apolitical information to its end users or, at the very least, maintains the perception of doing so. Again, this is easier said than done, but this blog post gives investors some indication that the management team is aware of potential reputational damage and is focused on preserving the valuable moat the business has spent decades building.

BSD Analysis:
The manager maintains a cautious neutral stance on Alphabet despite the Gemini AI controversy, viewing it as both a near-term non-issue and a long-term moat risk. The fund recognizes Alphabet's dominant search business as having an "incredible economic moat" but expresses concern about potential erosion from AI-related reputational damage. The manager suspects the biased AI outputs were intentional rather than accidental, reflecting deeper corporate culture issues that could threaten business performance. While encouraged by CEO Sundar Pichai's acknowledgment of problems and commitment to objectivity, the manager draws parallels to Disney's similar struggles and Musk's Twitter overhaul, suggesting cultural transformation will be extremely challenging. The analysis reveals skepticism about management's ability to execute a successful turnaround given the entrenched ideological issues within the organization. The fund appears to be holding the position based on the strength of the core search business while monitoring for signs of competitive moat deterioration. The manager's perspective suggests they view AI bias as a potential existential threat to Alphabet's trusted information provider status.

Pitch Summary:
JDE Peet's is the second largest coffee business in the world. Jacobs Douwe Egberts (JDE) combined with Peet's to explore IPO opportunities and ultimately went public in 2020. The company is currently navigating several issues, including the effects of the war on its Russian business, the lingering impact of the pandemic that curtailed out-of-home demand, and having to fight massive inflation in coffee prices. While management has not navigated these challenges as well as we hoped, the controlling shareholder sees it similarly and has ousted the former CEO. While its turnaround remains a work in progress, its stock does appear inexpensive on both a relative and absolute basis at just 12.5x 2024's estimated earnings.

BSD Analysis:
The fund managers present a balanced view of JDE Peet's, acknowledging both the company's strong market position as the world's second-largest coffee business and its current operational challenges. The investment thesis centers on valuation attractiveness, with shares trading at 12.5x 2024 estimated earnings, which appears compelling on both relative and absolute metrics. The company faces multiple headwinds including geopolitical impacts from the Russia-Ukraine war, pandemic-related demand shifts in out-of-home consumption, and significant coffee commodity price inflation. Management execution has been disappointing, prompting the controlling shareholder to replace the CEO, suggesting potential for operational improvements. The managers view this as a turnaround situation with attractive entry valuation, though they acknowledge the recovery timeline remains uncertain. The combination of market-leading scale, reasonable valuation, and new leadership provides a foundation for potential value creation despite near-term challenges.

BSD Analysis:
The manager's BGC Group thesis is executing perfectly with multiple catalysts materializing during Q1 2024. The electronic trading business Fenics delivered strong growth with 20% year-over-year revenue increases, led by exceptional performance in Rates (25% growth) and Credit trading (42.6% growth). The manager believes these segments are just beginning to normalize after a decade of zero interest rates, providing significant runway for continued growth. The long-awaited FMX Futures Exchange received CFTC approval and will launch in summer 2024, directly competing with CME's monopoly business. S&P 600 Small Cap index inclusion triggered 46 million shares of price-agnostic buying, validating the C-Corp conversion strategy. Despite the stock rising 11.5% in Q1 and nearly 50% over the past year, the manager maintains a $10+ fair value target, implying continued upside. The normalized earnings power should become apparent as higher-margin Fenics becomes a larger revenue component in an improving business environment.

Pitch Summary:
In Q1, we initiated a new position in Aercap (AER). We outlined the thesis in our Q4 2023 letter and discussed the thesis on Hustlehub. We will refer you to these resources for the thesis. We've added to the position several times and believe that even though the stock was up 20% in Q1, it has 40% near-term upside as the market continues to underappreciate the duration of the leasing hard market.

BSD Analysis:
The manager initiated a new position in AerCap during Q1 2024, demonstrating conviction by adding to the position multiple times despite the stock's 20% quarterly gain. The investment thesis centers on the aircraft leasing hard market dynamics, which the manager believes the market is underappreciating in terms of duration and sustainability. The manager sees significant near-term upside potential of 40% from current levels, suggesting the market has not fully recognized the favorable supply-demand dynamics in aircraft leasing. The reference to a "leasing hard market" indicates tight aircraft supply and strong pricing power for lessors like AerCap. This appears to be a cyclical recovery play in the aviation sector, with the manager betting on continued strength in lease rates and utilization. The position sizing through multiple additions suggests high conviction in the thesis. The manager's confidence in 40% near-term upside indicates expectations for multiple expansion as fundamentals improve.

Pitch Summary:
After discussing Graftech's (EAF) challenges throughout 2022 and 2023, Groundhog Day came early in 2024, with the stock declining 39% in January. The selloff likely stems from indiscriminate selling by Brookfield Asset Management and shares distributed by BAM due to the fund ending. We were again left wondering what we were doing in this business and stock. However, when things look bleakest, the sun rises. In February, Nilesh Undavia filed a 13D, signaling his intention to nominate himself and others to the board at the upcoming annual meeting. Graftech's business and stock have underperformed our expectations, with CEO changes, a plant closure, and other setbacks. A significant shareholder willing to step up and make his voice heard is welcomed. Though Mr. Undavia's regulatory filings were submitted in a lackadaisical manner, and lacks direct steel industry experience, he has significant skin in the company. His 5.7% stake, acquired with PERSONAL capital, speaks volumes about his commitment to the business and his outlook on the electric arc furnace and graphite electrode industry. Having a board member with substantial ownership is something we're open to, even if his background and filing process were imperfect. We held calls with both parties. One emphasized accountability, while the other offered excuses. As my father used to say, "losers make excuses." Graftech shareholders desperately need someone to hold management accountable. A complacent board requires a shake-up, where management owns only 0.15% (mainly through option grants). Management opposed Mr. Undavia and instead backed incumbents Debra Fine and Anthony Taccone. Arguments against Mr. Undavia included no relevant work experience, a disorganized filing process, and no new business ideas. Mr. Undavia's arguments included Graftech's loss of market share, CEO turnover indicating underlying issues, significant ownership, and willingness as an outsider to hold management accountable. When we met with management months ago, they seemed overconfident, like a wide receiver celebrating a touchdown when the team is down 30. As Sabres fans, we understand the importance of accountability. When asked about the rationale behind firing head coach Don Granato, Dylan Cozens said, "We want to be pushed harder and held to a higher standard." Granato was popular but couldn't lead the team from good to great. Similarly, Graftech's management and board need a new approach. WE RECOMMEND VOTING FOR NILESH UNDAVIA. WITHHOLD DEBRA FINE & ANTHONY TACCONE. We appreciate Mr. Undavia's efforts and capital investment in bringing about change at Graftech. We remain committed shareholders and optimistic the business cycle bottomed early in 2024. We anticipate electrode prices recovering throughout the year, and volumes improving in 2025.

BSD Analysis:
The manager maintains a bullish stance on Graftech despite significant underperformance, viewing the 39% January decline as temporary selling pressure from Brookfield's fund liquidation. The investment thesis centers on activist investor Nilesh Undavia's 5.7% stake and board nomination as a catalyst for management accountability and operational improvements. The manager criticizes current management's 0.15% ownership and complacent board oversight, supporting Undavia's proxy fight despite his lack of steel industry experience. The turnaround thesis relies on cyclical recovery expectations, with electrode prices anticipated to recover throughout 2024 and volumes improving in 2025. The manager views the current business cycle as having bottomed in early 2024, positioning for a multi-year recovery in the electric arc furnace and graphite electrode markets. The activist situation provides both governance improvements and potential operational catalysts. This represents a classic deep value play with activist catalyst overlay in a cyclical materials business.

Pitch Summary:
To summarize our thesis on Cogent briefly, the company's acquisition of Sprint Wireline was transformational to Cogent's long-term value which created an opportunity for a high reward/low risk investment that was among the most compelling skews I've ever encountered. The key points are described below: 1. By repurposing the Sprint fiber network, Cogent can address a whole new end market (Wavelengths) which could become Cogent's largest and most profitable business. 2. The transaction also contributed significant valuable assets which: IPv4 addresses (worth $1.5-2 billion by my estimates), data centers (>$1 billion), dark fiber (>$1 billion), and cash from T-Mobile ($700 million). Our upside case depends on Cogent's efforts in Wavelengths to be reasonably successful, but we can make nice returns even if they are only moderately successful. Our downside case is protected by the robust portfolio of monetizable assets mentioned in the second point above. When we include the value of Cogent's core business, the breakup value of Cogent is significantly greater than the company's enterprise value. However, this is not a sum-of-the-parts thesis. We expect to generate performance from Cogent's future growth and free cash flow generation – not the value of its monetizable assets. When we assess the value of the growth we expect Cogent to generate, it is not hard to pencil out upside scenarios with equity value exceeding $10 billion (>$200 per share). On Cogent's Q4 2023 earnings call, Dave Schaeffer discussed the company's options for creating value from its IPv4 address portfolio: (a) selling some or all of them, (b) continuing to lease them (and raising prices), and/or (c) securitizing lease revenues. With a market value around $50 per address for its large address blocks, Cogent's ~38 million addresses are worth between $1.5-2 billion. Alternatively, it can monetize these assets through securitizations in the ABS market. As of the writing of this letter, the company has just priced its first securitization, raising $206 million of capital in the first-ever IPv4 lease securitization transaction in the market. The securitization is backed by the company's IP leasing business which currently consists of about 12 million lased addresses and generates ~$40 million of run-rate revenue which carries 95% margins. My favorite line from the company's roadshow materials was: 'The greatest cost is the cost of sending the customers their bills.' While we have limited historical disclosures, Schaeffer suggests that the business is growing >3% month-over-month and >40% y/y, and has only 0.8% annual churn. It is a very high-quality revenue stream, especially considering that Cogent's lease prices are about 30-50% below current wholesale market levels and are >90% below the prices AWS and Azure charge customers to lease their IPv4 addresses (Cogent charges $3.60/year vs. Amazon at ~$44 per year). Interestingly, Cogent's IPv4 leasing customers can bring those IP addresses into their AWS environments, providing an attractive arbitrage opportunity that can save cloud computing customers significant money. Recognizing its pricing was too low, Cogent raised prices for new customers by 50% as of March 1st and has seen no impact to its leasing momentum. The combination of healthy new volume growth, higher new lease pricing, and a gradual repricing of the existing customer base should drive significant growth in leasing revenues over the coming years.

BSD Analysis:
The manager presents Cogent as a transformational investment opportunity following the Sprint Wireline acquisition, creating multiple value drivers with asymmetric risk-reward characteristics. The core thesis centers on Cogent's ability to repurpose Sprint's fiber network to address the Wavelengths market, potentially becoming the company's largest business segment. The investment is protected by substantial asset value including $1.5-2 billion in IPv4 addresses, over $1 billion each in data centers and dark fiber, plus $700 million cash from T-Mobile. The IPv4 leasing business represents a particularly compelling opportunity, generating $40 million run-rate revenue at 95% margins with 40% year-over-year growth and minimal churn. Cogent's IPv4 lease pricing at $3.60 annually is significantly below market rates and AWS pricing of $44, providing substantial pricing power. The recent 50% price increase for new customers with no demand impact validates this thesis. The manager projects potential equity value exceeding $10 billion based on growth prospects rather than asset monetization alone.

Pitch Summary:
I trimmed AWI in early 2024 after it enjoyed an incredible burst of performance, +80%, from October 2023 (pre Q3 2023 earnings) to February 2024 (post Q4 2023 earnings). For a business that grew revenue +5% and EPS +15% in 2023, this was exceptionally strong short-term performance for the stock driven by multiple expansion. In October, AWI was trading at a low-teens multiple of near-term earnings and had a steady earnings growth algorithm comprised of (a) price increases above inflation, (b) modest volume growth, and (c) steady margin expansion. I highlighted the quality of the business and AWI's great long-term prospects in a late-2023 Insight. AWI is a fantastic business and the company already possesses dominant market share in the ceilings market while enjoying a stable duopoly-like market structure. This structure likely supports a better risk-adjusted outcome than one in which AWI is more disruptive in its market. It has ambitions to grow moderately faster than its market through product innovation and by continuing to expand into the specialty ceilings and walls businesses. However, as the dominant, non-disruptive player in a market that is not very dynamic, it is unlikely that AWI can move the needle enough on self-help growth initiatives to generate material and persistent outsized growth. That doesn't mean AWI doesn't have an attractive medium- and long-term earnings growth outlook, but it makes me more open to trimming our position if its valuation expands significantly in a short period of time. AWI traded at a low-teens multiple of the company's 2024 earnings as recently as late October, but now trades at around 20x. It isn't an unjustifiably expensive valuation by any means since it is such a high-quality business, but it is closer to fair value than before. With the valuation at these levels, I expect AWI's stock performance will correlate much closer to the company's CAGR of free cash flow per share than it has over the past year. If and when AWI comes back into our buy zone, I will be happy to revisit our position sizing.

BSD Analysis:
The manager executed a disciplined trim of Armstrong World Industries following an 80% price appreciation that expanded valuation multiples beyond attractive levels. The investment thesis recognizes AWI as a high-quality business with dominant market share in ceiling systems operating within a stable duopoly structure. The company's growth algorithm includes pricing power above inflation, modest volume growth, and steady margin expansion, generating consistent earnings growth. However, the manager notes limited growth acceleration potential given AWI's non-disruptive position in a relatively static market. The valuation expanded from low-teens to 20x earnings multiples, moving closer to fair value despite the business quality. The manager demonstrates portfolio management discipline by trimming when valuations become stretched, while remaining open to re-establishing the position at more attractive entry points. The trim also enabled reallocation to more compelling opportunities in cruise lines with superior risk-adjusted returns.

Pitch Summary:
Carvana is the market-leading, pure-play e-commerce used auto retailer, but it only commands 1% market share in a large and stable used car market. We think it has significant future growth ahead. Our position in Carvana became material in May 2022, at which time I wrote and shared an investment memo on it. The stock continued to fall throughout 2022, ending the year very near its lows, as it suffered from significant changes across the business. In particular, it was negatively affected by: 1. Higher financial leverage and higher cost of debt capital, particularly when financing its acquisition of ADESA. 2. Lower customer demand due to rapidly rising rates and significant used car price inflation. 3. Lower unit economics from the combination of (1) and especially (2) above, leaving the company overbuilt on infrastructure with a suboptimal level of inventory, all of which created significant negative operating leverage. 4. Materially lower (and negative) earnings and free cash flow. Stocks don't often drop -99% and recover to become stable, growing businesses. I can think of only a handful of cases, such as American Tower and SiriusXM. It's possible for a good business to fall -99% when it has high operating leverage and high financial leverage and it is hit by a double-whammy of a demand slowdown and credit tightening at the wrong time in its growth phase. I held onto our shares in Carvana (and bought more) because I believed the double-whammy clearly hurt the business in the short-term, but it did not permanently impair its ability to operate and exploit its superior business model in its end market – and because I believed the company had sufficient liquidity to adjust its operations as needed to get through the downturn. In fact, I believe the company's improved operating discipline, catalyzed by the environment which caused the drawdown, has increased its earnings power at every level of unit volumes compared to my prior expectations. Despite increasing our ownership of the company significantly, Carvana ended 2022 as a 1.4% position due to its dramatic decline. Throughout 2023, Carvana righted the ship operationally. It showed massive improvements in unit economics, profitability, and operating efficiency while intentionally keeping unit volumes relatively stable. Doing so enabled it to deploy more efficient and scalable infrastructure and processes which will allow the company to scale faster and more efficiently than before. In Q1, third-party data suggest that Carvana grew its volumes roughly 15% y/y and about 20% q/q, despite not yet pursuing many growth-oriented efforts, which would be observable in inventory levels, which ended Q1 very tight. The company is on the cusp of resuming its long-term growth story. Carvana has a long runway to gain market share in the auto market by delivering faster/better/cheaper used auto transactions to consumers. It has under-utilized fixed infrastructure that it can leverage and grow into with the addition of more labor over the coming years. It can further expand its production footprint to over 3 million units per year. Even then, those 3 million units would represent only about 7.5% market share in the used auto market (although closer to a 15-20% share of its target market). Carvana has significant embedded advantages across multiple dimensions because of its large-scale vertical production and logistics infrastructure, allowing it to differentiate at scale on quality, convenience, selection, and value to buyers and sellers of cars. Its advantages grow with scale. I expect it to be the most efficient and the most profitable auto retailer in the US. It's not hard to pencil out some eye-popping valuation scenarios for Carvana. 3 million retail sales units x $2,500 EBITDA per unit = $7.5 billion of EBITDA, plus additional contribution from its wholesale businesses which, at that scale, likely would contribute another $1 billion or more of EBITDA. The free cash flow conversion on a business of that size would be tremendous, especially because of the commensurate transformation to its balance sheet over the ensuing years. Most likely, Carvana would continue to grow because scale begets more scale – especially when the consumer value proposition of faster/better/cheaper improves as Carvana builds more capacity and capabilities. At large scale, Carvana could have one of the most differentiated customer experiences among all e-commerce companies. I have let Carvana run in the portfolio, despite its large size, because I believe the company has earnings power over $10/share medium-term and over $30 longer-term on the current asset footprint. Even at $75 per share, it trades at a single-digit multiple of my medium-term expectations. It has reasonable line-of-sight (i.e. it does not need significant new, unknown capex) to become a $100-150 billion company, with potential to continue scaling significantly from there.

BSD Analysis:
The manager presents a compelling turnaround thesis for Carvana, emphasizing the company's recovery from near-bankruptcy to operational excellence. The investment case centers on Carvana's dominant position in e-commerce used car retail with only 1% market share, providing substantial runway for growth. The manager highlights the company's improved unit economics and operational efficiency following the 2022 downturn, positioning it to scale more effectively than before. Key valuation metrics include potential earnings power of $10+ per share medium-term and $30+ longer-term, with the stock trading at single-digit multiples of these expectations at $75. The thesis projects Carvana could achieve 3 million annual unit sales generating $7.5 billion EBITDA, supporting a $100-150 billion market cap. The manager emphasizes the company's scalable infrastructure advantages and network effects that strengthen with growth. Risk factors include execution on the growth strategy and maintaining operational discipline during expansion.