Investment Pitches

Pitch Summary:
The diverse mix of names that drove our portfolio's first quarter performance included drug maker Teva Pharmaceutical. Still trading at a double digit free cash flow yield, the stock advanced after 2024 guidance was above expectations. Teva develops, manufactures and markets generic drugs as well as specialty drugs focused on neurological and respiratory diseases. We believe management has positioned the company for renewed growth, driven by its most promising branded drug pipeline in years.

BSD Analysis:
Sound Shore maintains a bullish stance on Teva Pharmaceutical, highlighting the company's attractive valuation at a double-digit free cash flow yield. The stock gained momentum after management issued 2024 guidance that exceeded market expectations, signaling operational improvements. Teva operates in both generic and specialty pharmaceutical markets, with particular strength in neurological and respiratory therapeutic areas. The fund emphasizes management's strategic positioning for renewed growth, citing what they view as the company's most promising branded drug pipeline in years. This pipeline strength suggests potential for higher-margin specialty revenue growth beyond the traditional generic drug business. The combination of attractive valuation metrics and improving growth prospects from the branded pipeline makes Teva an appealing value investment in the healthcare sector.

Pitch Summary:
Two companies that led our best contributors list embody this resilience: independent power producers Vistra and Constellation Energy. Both stocks surged along with rising electricity prices reflecting an improving demand environment. However, this performance was years in the making as each company prepared their assets for a dynamic market while maintaining strong balance sheets in order to take advantage of the resulting volatility. Similarly, Midwest focused Constellation is the biggest producer of carbon-free electricity in the US with nuclear power plants representing the majority of its capacity. We added the name in January 2023 when the stock was trading at an attractive 15 times earnings with clear line of sight to improved earnings and cash flow. Our research identified an upside to earnings power from maturing hedges and regulatory changes, including the Inflation Reduction Act's nuclear credit. A spinout from Exelon Corp, we viewed the strength of Constellation's clean, reliable baseload power model as appealing for residential and commercial customers. Demand for electricity is growing and notably, load peaks are changing as well. As the country brings on more renewables and adjusts to greater demand later in the day due to increased use of electric heat pumps and electric car charging, reliable clean power is at a premium. Moreover, data center demand is also now becoming an important driver and the company's contract to supply Microsoft at premium power prices is evidence of the opportunity.

BSD Analysis:
Sound Shore initiated a position in Constellation Energy in January 2023 at an attractive 15x earnings multiple, identifying multiple catalysts for earnings growth. The fund recognized upside potential from maturing hedges and regulatory tailwinds, particularly the Inflation Reduction Act's nuclear credits. As the largest US producer of carbon-free electricity, Constellation benefits from structural demand shifts including electric vehicle charging, heat pump adoption, and data center growth. The company's nuclear-heavy generation portfolio provides reliable baseload power that commands premium pricing, evidenced by their Microsoft supply contract. Sound Shore views the Exelon spinoff as unlocking value in Constellation's clean energy model. The changing electricity demand profile, with peak usage shifting later in the day due to electrification trends, favors Constellation's reliable nuclear capacity over intermittent renewables.

Pitch Summary:
Two companies that led our best contributors list embody this resilience: independent power producers Vistra and Constellation Energy. Both stocks surged along with rising electricity prices reflecting an improving demand environment. However, this performance was years in the making as each company prepared their assets for a dynamic market while maintaining strong balance sheets in order to take advantage of the resulting volatility. In our 2023 year-end letter we detailed Vistra's strategic position to supply power to the company's markets.

BSD Analysis:
Sound Shore highlights Vistra as a top contributor that exemplifies operational resilience in the power generation sector. The fund emphasizes that Vistra's strong performance was not merely opportunistic but the result of years of strategic preparation for market volatility. The company positioned its assets strategically while maintaining balance sheet strength to capitalize on dynamic market conditions. Rising electricity prices and improving demand fundamentals drove the stock's surge, validating management's positioning strategy. The fund previously detailed Vistra's strategic market position in their 2023 year-end letter, suggesting ongoing conviction in the investment thesis. This performance demonstrates the value of companies that can adapt and execute effectively in evolving market landscapes.

Pitch Summary:
Among our buys during the first quarter, we added Agilysys, Inc. (AGYS), which develops application software for point-of-sale, property-management, inventory and procurement applications. The company specializes in the hospitality and retail industries world-wide, and its solutions can be implemented on wireless and mobile devices. Agilysys recently modernized its software, which has proved fortuitous as post-pandemic consumer and business travel has accelerated. Late in 2022, the company announced an agreement to deploy its cloud-based property-management software across Marriott's luxury, premium and select service hotels in the United States and Canada. Beyond the incremental earnings and cash flows related to Marriott, the agreement should help Agilysys win new customers on an ongoing basis. In a recent report, Agilysys highlighted strong growth rates across several markets including hotels, cruise ships and non-gaming resorts.

BSD Analysis:
Wasatch initiated a new position in Agilysys, attracted by the company's specialized hospitality software solutions and strategic positioning in the post-pandemic travel recovery. The managers appreciate Agilysys's comprehensive software suite covering point-of-sale, property management, and procurement applications with mobile and wireless capabilities. The company's recent software modernization efforts proved well-timed as travel demand accelerated following pandemic restrictions. The landmark Marriott partnership represents a significant validation of Agilysys's cloud-based property management platform across luxury, premium, and select service hotels in North America. This agreement provides both immediate revenue visibility and a powerful reference for winning additional enterprise customers. The managers view the Marriott relationship as a catalyst for broader market penetration and sustained growth. Recent company reports highlighting strong growth across hotels, cruise ships, and non-gaming resorts demonstrate the breadth of Agilysys's market opportunity and execution capabilities. The combination of travel industry recovery, software modernization, and marquee customer wins positions Agilysys for sustained growth in the hospitality technology market.

Pitch Summary:
Another significant detractor was Five9, Inc. (FIVN), which offers cloud-based software to help contact centers more efficiently interact with customers and prospects. We own the company for its competitive advantages in a "remote" world where contact centers are strategically more important as the key points of customer engagement. Even with its growth rate slowing somewhat, Five9 has continued to generate strong operating results. We think the stock was down primarily on investor concerns that AI may pose a threat to the company. In fact, Five9 is already using AI to handle some interactions and the results have been positive. As part of our ongoing research, we're analyzing both sides of the AI debate and how our companies could be affected by AI over the long term.

BSD Analysis:
Wasatch maintains conviction in Five9 despite recent stock weakness driven by AI-related concerns. The managers value Five9's competitive positioning in cloud-based contact center software, particularly as remote work trends have elevated the strategic importance of contact centers as primary customer engagement points. While acknowledging some growth rate deceleration, they emphasize that Five9 continues delivering strong operating results, suggesting underlying business fundamentals remain solid. The managers view recent stock weakness as primarily driven by investor fears about AI disruption rather than fundamental deterioration. Importantly, they note that Five9 is already successfully implementing AI to enhance interactions, positioning the company as a beneficiary rather than victim of AI adoption. Their ongoing research into AI's long-term impact on portfolio companies demonstrates thorough risk assessment. Five9's established market position, strong operating performance, and early AI integration suggest the company is well-positioned to adapt to technological changes while maintaining its competitive advantages in the evolving contact center landscape.

Pitch Summary:
Clearwater Analytics Holdings, Inc. (CWAN) was also a major detractor. The company develops cloud-native software that allows clients to simplify their investment-accounting operations. Although management projected robust revenue growth of about 18% for the 2024 calendar year, analysts had been hoping for even better growth. As a result, the stock sold off. In our experience, Clearwater's management team tends to underpromise and then overdeliver. As a result, we bought more shares on the stock-price weakness. And we still expect annual revenue growth to exceed 20% for the next several years.

BSD Analysis:
Wasatch maintains strong conviction in Clearwater Analytics despite recent stock weakness following management's 2024 guidance. The managers appreciate the company's cloud-native investment accounting software platform that simplifies complex operations for institutional clients. While management's 18% revenue growth projection for 2024 disappointed analysts expecting higher growth, Wasatch views this as characteristic conservatism from a management team with a track record of underpromising and overdelivering. The managers used the stock price weakness as an opportunity to add to their position, demonstrating confidence in their fundamental analysis. Their expectation for annual revenue growth exceeding 20% over the next several years suggests they believe management's guidance is conservative and that the underlying business momentum remains strong. The SaaS model provides recurring revenue visibility, and the specialized nature of investment accounting software creates switching costs and competitive moats. Wasatch's contrarian approach of buying during temporary weakness reflects their conviction in Clearwater's long-term growth trajectory and management's execution capabilities.

Pitch Summary:
The greatest detractor from strategy performance during the first quarter was YETI Holdings, Inc. (YETI), which designs, markets and distributes drinkware, coolers, and other outdoor and recreational gear. Although YETI's drinkware segment has performed reasonably well and its rollout of YETI-branded stores has shown promise, strong competitive threats have recently emerged in the drinkware space. So while YETI's stock price is attractive, we're maintaining a small position as we weigh whether the company can offset its slowing U.S. growth by successfully expanding internationally.

BSD Analysis:
Wasatch expresses cautious optimism about YETI while acknowledging significant competitive pressures in the drinkware market. The managers recognize positive developments including reasonable performance in the drinkware segment and promising early results from YETI-branded retail stores. However, they are concerned about intensifying competition in the core drinkware category, which represents a key growth driver for the company. The managers note slowing U.S. growth as a headwind that requires successful international expansion to offset domestic challenges. Their decision to maintain only a small position reflects uncertainty about YETI's ability to navigate competitive pressures while executing international growth strategies. The attractive stock price provides some downside protection, but the managers appear to be in a wait-and-see mode regarding the company's competitive positioning. YETI's brand strength and retail expansion provide potential catalysts, but execution risks around international growth and domestic market share defense create investment uncertainty that justifies the reduced position size.

Pitch Summary:
Another substantial contributor was HealthEquity, Inc. (HQY), the largest U.S. non-bank custodian for health savings accounts (HSAs). Along with its primary business of offering HSAs, the company facilitates employer-sponsored lifestyle and commuter benefits. The stock was down late last year because investors were expecting an environment of lower interest rates that would cause the company to earn less income from money held on deposit for customers. Our analysis gives us visibility into HealthEquity's long-term earnings-growth potential, which we believe will remain strong for years to come. This insight gave us confidence to add to our position when the stock price dropped. During the first quarter, the stock climbed based on strong revenue and earnings growth—and we think the company's annual growth rates will stay in the double digits for the next several years.

BSD Analysis:
Wasatch demonstrates strong conviction in HealthEquity's long-term growth prospects despite near-term interest rate headwinds. The managers recognize HealthEquity's dominant position as the largest U.S. non-bank HSA custodian and appreciate the company's diversified revenue streams including employer-sponsored benefits. Their contrarian approach was evident when they added to positions during late 2023 weakness, when investors feared lower interest rates would reduce deposit income. The managers' proprietary analysis provides visibility into HealthEquity's sustainable earnings growth drivers beyond interest rate sensitivity. The company's strong Q1 performance validated their thesis, with robust revenue and earnings growth supporting their conviction. Wasatch projects continued double-digit annual growth rates for several years, suggesting confidence in the structural growth of HSAs and HealthEquity's market leadership. The managers' willingness to add during temporary weakness while maintaining long-term growth expectations demonstrates their fundamental-driven investment approach and conviction in HealthEquity's competitive moat.

Pitch Summary:
Nova Ltd. (NVMI), a key provider of metrology equipment used in the production of semiconductor chips, was also a meaningful contributor. The company has benefited from surging global chip demand, which has partially resulted from needs related to AI. We own Nova based on our view that the company deploys research and capital wisely—and is well-positioned to introduce new equipment and increase market share over the next several years. This view isn't predicated on AI trends. So, with AI euphoria becoming heightened, we sold some shares of Nova as a risk-control measure. Because semiconductor producers and related equipment manufacturers typically face cyclical demand, our approach when investing in such companies is to trim our positions on excessive optimism related to the semiconductor cycle and add to our positions on excessive pessimism.

BSD Analysis:
Wasatch holds a constructive view on Nova while demonstrating disciplined risk management around semiconductor cyclicality. The managers appreciate Nova's strategic position in semiconductor metrology equipment and the company's prudent capital allocation and R&D investments. Their investment thesis centers on Nova's ability to introduce new equipment and gain market share over multiple years, independent of AI-driven demand spikes. While acknowledging the near-term benefits from AI-related chip demand, the managers took profits during the quarter as a risk control measure, recognizing the cyclical nature of semiconductor equipment demand. This approach reflects their understanding that semiconductor equipment companies experience volatile demand cycles, requiring tactical position sizing based on market sentiment. The managers' willingness to trim positions during excessive optimism while maintaining core conviction demonstrates sophisticated cycle management. Nova's strong competitive positioning in metrology equipment and management's wise capital deployment support the long-term investment case beyond current AI euphoria.

Pitch Summary:
The top contributor to strategy performance during the first quarter was Medpace Holdings, Inc. (MEDP). The company is a contract research organization (CRO) supplying clinical development services to small biotechnology businesses. Medpace continues to post strong revenue and earnings growth as it provides critical services for its customers. The stock also benefited in the quarter from optimism that lower rates will help biotech companies more easily secure much-needed funding for future clinical development. Although Medpace isn't a traditional biotech company, we believe it gives us some exposure to the industry without the typically poor cash flows of biotech businesses. Moreover, Medpace has continued to defy the skeptics by generally maintaining strong growth (often in double digits) and healthy fundamentals for years on end—even during several periods when biotech businesses have struggled.

BSD Analysis:
Wasatch maintains a bullish stance on Medpace, highlighting the CRO's consistent ability to deliver strong revenue and earnings growth while serving small biotech clients. The managers appreciate Medpace's defensive positioning within the biotech ecosystem, providing exposure to the sector without the typical cash flow challenges of direct biotech investments. The company has demonstrated resilience by maintaining double-digit growth rates and healthy fundamentals even during periods of biotech sector stress. The recent quarter benefited from expectations of lower interest rates, which should improve biotech funding availability and drive demand for Medpace's clinical development services. The managers view Medpace as a quality compounder that has consistently exceeded skeptical expectations. This positioning allows the fund to participate in biotech upside while avoiding the binary risks associated with drug development companies. The sustained growth trajectory and defensive business model make Medpace an attractive long-term holding in their small-cap growth strategy.

Pitch Summary:
Another new investment beyond the largest EMs of China and India this quarter is Telkom Indonesia, an integrated telecommunications company that provides mobile, consumer fixed-line, enterprise, and wholesale telecommunication services. It is the largest mobile and fixed-line network operator in Indonesia with roughly 51% and 70% market share, respectively. Telkom's competitive advantage stems from this scale—it has the largest telecom network infrastructure in Indonesia—which leads to a lower cost structure compared to smaller competitors. Its superior network quality (it outranks its competitors in four out of five quality metrics) is an added source of attraction for customers and allows Telkom to charge a premium for its services. Telkom's largest and most profitable business segment is mobile, where the company operates under four brands. Its postpaid brand kartuHalo targets upper- and middle-income young professionals with premium mobile services. Two other brands (simPATI and Kartu AS) offer prepaid services targeting middle- and lower-income customers with highly customizable voice and data packages. Its fourth brand (LOOP) targets the youth segment with several attractive data and digital-services packages including mobile financial services, music, and video streaming. Although mobile-subscriber market penetration in Indonesia exceeds 100%, usage of mobile data and digital services is still low and should be an important source of earnings growth for the company. Currently average data consumption for Telkom customers is only 12 gigabytes (GB) per month per subscriber, compared to much higher consumption levels for regional peers like Thailand's Advanced Info Services and Malaysia's Maxis Bhd at 32 GB and 26 GB per month per subscriber, respectively.

BSD Analysis:
Harding Loevner initiated a position in Telkom Indonesia, Indonesia's dominant telecommunications operator with commanding market shares of 51% in mobile and 70% in fixed-line services. The manager's investment thesis centers on the company's scale advantages, including the largest telecom infrastructure in Indonesia, which creates a lower cost structure and superior network quality that outperforms competitors on four of five quality metrics. This competitive moat allows Telkom to charge premium pricing for its services. The company operates a diversified brand portfolio targeting different customer segments, from premium postpaid services (kartuHalo) for affluent professionals to prepaid offerings (simPATI, Kartu AS) for middle and lower-income users, plus a youth-focused brand (LOOP) with digital services. The key growth opportunity lies in Indonesia's underpenetrated data usage market, where Telkom customers currently consume only 12GB per month compared to 32GB and 26GB for peers in Thailand and Malaysia respectively. This significant usage gap, despite mobile penetration exceeding 100%, suggests substantial room for data consumption growth and digital services adoption. The manager highlights Telkom's strong financial profile with returns on equity exceeding 18% over five years and a sound balance sheet, positioning it as a high-quality play on Indonesia's telecommunications modernization and digital transformation.

Pitch Summary:
Medical tourism is a growing field within the health-care industry. Many patients venture abroad to obtain medical procedures that are cheaper, higher quality, or not available in their home countries. Thailand has emerged as one of the top destinations for such medical tourism, and Bumrungrad Hospital is capitalizing on the trend; international patients account for about two thirds of its total revenue. With enviable returns on capital and a compelling growth narrative, the company is attractive for investors as well, which is why we bought a new holding in the stock in the first quarter. The company focuses on complex surgeries such as heart bypass or spinal fusion and does so with a superior level of service relative to other hospitals in Thailand as well as other countries from which Bumrungrad attracts international patients. Differentiating itself this way allows it to charge higher prices than any other hospital in the country. Yet its prices are still low compared to the developed world, as little as a fifth of what would be charged by a hospital in the US, for instance. We expect Bumrungrad's earnings growth over the next few years to be supported by expansion. The company is building a six-story annex close to its existing facility in Bangkok that will likely be a specialty women's and children's hospital, slated to start operations by the end of this year. In 2025, it will complete another project that should boost the number of beds in the hospital by 11%. The company is also working on a new project in the coastal city of Phuket for a 150-bed hospital, adding 29% more beds to its current capacity there. This new hospital is expected to open in early 2026 and is aimed at attracting both international and domestic patients.

BSD Analysis:
Harding Loevner initiated a position in Bumrungrad Hospital, capitalizing on the growing medical tourism trend in Thailand. The manager highlights the company's strong competitive position, with international patients comprising two-thirds of revenue and the hospital commanding premium pricing through superior service quality. Bumrungrad specializes in complex surgeries like heart bypass and spinal fusion, charging significantly higher prices than domestic competitors while still offering substantial cost savings compared to developed markets—up to 80% less than US hospitals. The investment thesis is supported by a compelling expansion pipeline that should drive earnings growth over the next few years. The company is building a six-story women's and children's specialty hospital in Bangkok, set to open by year-end, followed by an 11% bed capacity increase in 2025. Additionally, a new 150-bed facility in Phuket is planned for early 2026, representing a 29% expansion of capacity in that market. The manager emphasizes Bumrungrad's strong financial metrics, including enviable returns on capital exceeding 18% over the past five years and a sound balance sheet. This combination of market leadership in medical tourism, premium pricing power, and significant expansion opportunities positions Bumrungrad as an attractive growth investment in the healthcare sector.

Pitch Summary:
Another prime example of how alternative payment systems can boost a company's core offering is MercadoLibre, Latin America's largest online retailer, which we added to the portfolio during the quarter. Since we last wrote about the company four years ago, its management has done a great deal to further differentiate its offerings from those of rivals in a highly competitive industry, leading to market-share gains across the region. In the same way that the company built its own fulfillment infrastructure to improve the customer experience in areas where third-party delivery services were lacking, it has built its own payments and credit infrastructure to offer better shopping experiences to its customers and reduce barriers that have otherwise discouraged e-commerce adoption. MercadoLibre started its payments business, Mercado Pago, in 2003, only four years after launching its namesake e-commerce platform. It has since become the leading private payment provider in the region, accounting for 13% of all retail sales in Latin America, both online and offline, more than any single card issuer or private form of payment other than cash. Nearly three quarters of its payments now take place outside of MercadoLibre's online site. Mercado Pago comprises more than half of the company's total earnings and cash flow, which has helped to fund investments elsewhere—especially in logistics—that have served to reinforce its lead in e-commerce. Mercado Pago has been especially important to MercadoLibre's success in Mexico, the region's second-largest economy and MercadoLibre's third-largest market, accounting for more than 20% of its sales. With the largest unbanked population in Latin America, many online shoppers have had to pay cash on delivery, a sometimes cumbersome process that Mercado Pago was able to help resolve. For more than half of MercadoLibre's users, Mercado Pago was the first digital payment method available to them. In addition, more than half of the credit offered by Mercado Pago went to customers getting their first access to credit ever; half of them were women, who have been particularly underserved by banks. This access to digital payments and credit has strengthened the competitive position of MercadoLibre's e-commerce business, allowing it to capture more than 20% market share in Mexico, ahead of well-resourced rivals Amazon.com and Walmart de México and despite the entry of Asian competitors such as Alibaba's AliExpress, Sea's Shopee, and PDD Holdings' Temu. In Brazil, MercadoLibre's largest market, its share has risen to just under 40%, approaching the more than 50% share in its first market of Argentina. As its credit business grows, MercadoLibre will have to decide how to fund that growth more efficiently, while managing risks to its balance sheet. Banks will also fight back. On the other hand, regulators are likely aware of the lack of competition in the financial sector. When Mexico's antitrust commission expressed concern about MercadoLibre and Amazon.com's dominance of the online retail market, it chose to focus its recommendations on more transparency for merchants and on bundled services such as Amazon Prime's streaming videos, not Mercado Pago—likely in recognition of the even more dominant role of banks in the financial system. Regulations on lending practices are another inherent concern. There is a fine line between financial inclusion and usury, and where that line lies isn't always clear, especially in a region that typically faces high inflation rates. Companies that step over these lines risk both exacerbating social problems and inviting regulators to put a collar on their businesses. Mercado Pago's scale allows it to manage both of those risks better than its peers. For one thing, Mercado Pago's mainstream reach across its largest markets gives it a customer base that is far broader than those of the payday lenders or peer-to-peer lenders in the US and China that saw their industries largely wiped out by regulation. By covering a wide swath of the population, Mercado Pago has a higher chance of catching concerning changes in behavior before they snowball and trap the most vulnerable customers in debt.

BSD Analysis:
Harding Loevner initiated a position in MercadoLibre, highlighting the company's successful transformation from a pure e-commerce player into a dominant fintech ecosystem. The manager emphasizes how Mercado Pago, the company's payments platform, has become the leading private payment provider in Latin America, capturing 13% of all retail sales and generating over half of total earnings. The investment thesis centers on MercadoLibre's ability to address financial inclusion gaps, particularly in Mexico where it serves the largest unbanked population in the region. The company's integrated approach of combining e-commerce, payments, and credit has created competitive advantages, allowing it to gain market share against well-funded rivals like Amazon and Walmart. The manager notes regulatory risks around lending practices but believes MercadoLibre's scale and broad customer base provide better risk management capabilities than smaller fintech competitors. The company's success in providing first-time digital payment access to over half its users, particularly underserved women, demonstrates its market opportunity. With market shares of 20% in Mexico and approaching 40% in Brazil, MercadoLibre appears well-positioned to benefit from continued e-commerce and financial services adoption across Latin America.

Pitch Summary:
With data breaches on the rise—ransomware attacks were up 70% in 2023—our Israeli holding Cyberark has built a strong position in the fast-growing niche of protecting "privileged accounts." This term refers to the users or applications that have access to sensitive areas of a business's computer systems. If a firewall is breached, Cyberark's tools create a digital vault inside the enterprise that securely stores these credentials, alerts the customer's IT professionals, and monitors and records the movement of the hacker inside the network. Several years ago, Cyberark decided to shift from selling its technology as a one-time purchase to a cloud-based subscription model. Cloud-based solutions allow for more seamless updates, thus better protecting customers from ever-evolving risks. But because upfront revenue from new customers is lower in a subscription model, this strategic shift reduced margins and cash flows for a time, leading some investors to doubt the company's growth outlook. But like other companies that have transitioned to a subscription model, such as Microsoft, revenue has now rebounded. Revenue is expected to grow 24% this year, with subscription fees accounting for an increasing majority. Adjusted cash flows are also climbing back above their 2021 level. A key feature of the cybersecurity wave is the growing array of non-human digital identities that must be protected from hackers. Typically, we think of login credentials and permissions as being tied to humans such as IT administrators. But for every human identity there are now 45 machine identities—such as software applications, servers, and other devices connected to a business's network. This has expanded Cyberark's addressable market. In a recent meeting, management estimated that only about 50% of the privileged users—human and machine—in its customers' organizations are secure, presenting a large opportunity to expand Cyberark's relationships with these companies. Furthermore, in December, the US Securities and Exchange Commission said all US-listed companies will be required to report "material" cybersecurity events within four days, which helps incentivize businesses to prioritize cybersecurity investments. Providers of cybersecurity insurance are also requiring customers to have privileged-access-management capabilities. Another promising development is Cyberark's new Secure Cloud Access offering, a small but growing source of revenue. Security has not kept pace with the rapid adoption of cloud-based services and the growing number of developers who use these services. Secure Cloud Access aims to address this problem by providing a way to limit users' permissions based on what they need access to and when.

BSD Analysis:
Harding Loevner presents a comprehensive bull case for CyberArk, highlighting the company's leadership position in privileged access management amid surging cybersecurity threats. The manager emphasizes the successful transition from perpetual licensing to a subscription model, with revenue growth accelerating to 24% and cash flows recovering to 2021 levels. The investment thesis centers on the massive expansion of CyberArk's addressable market, driven by the proliferation of machine identities (45 per human identity) that require protection. With only 50% of privileged users currently secured at existing customers, significant expansion opportunities exist within the installed base. Regulatory tailwinds include new SEC requirements for cybersecurity incident reporting and insurance mandates for privileged access management. The manager views CyberArk's new Secure Cloud Access offering as a promising growth driver, addressing security gaps in cloud adoption. The combination of strong market positioning, regulatory support, and expanding addressable market creates a compelling long-term growth trajectory in the cybersecurity wave.

Pitch Summary:
Pfeiffer Vacuum is a German manufacturer of advanced pumps that create near-perfect vacuums, a critical tool for maintaining the "clean rooms" where semiconductors are manufactured. Clean rooms are sterile environments that must be devoid of dust and other airborne particles. When making semiconductors, the smallest contamination can adversely affect their precision and functionality, which reduces a manufacturer's yield of non-defective chips. As semiconductors become more sophisticated, they also require more material deposition—a process in which thin layers of material are deposited onto the wafer—as well as more processing. The smaller the transistor, the more sensitive it is to impurities in the air. With this increasing complexity, not only are more vacuum pumps needed, but also more powerful pumps. An attractive feature of this niche is its consolidated industry structure: Two suppliers, Pfeiffer Vacuum and Atlas Copco, control about 95% of the global market for clean room vacuum pumps. And nearly half of Pfeiffer Vacuum's overall sales are to semiconductor customers. The company's competitive advantage is underpinned by a strong brand and high switching costs—characteristics that we think are likely to endure. Pfeiffer Vacuum has recently experienced a slowdown in orders, but we expect capital spending by chipmakers to ebb and flow over the short run, and for long-term demand to remain strong.

BSD Analysis:
Harding Loevner presents a compelling investment thesis for Pfeiffer Vacuum, positioning the company as a key beneficiary of the semiconductor manufacturing wave driven by AI demand. The manager emphasizes the critical nature of Pfeiffer's vacuum pumps in maintaining ultra-clean semiconductor fabrication environments, where even microscopic contamination can destroy chip yields. The investment case centers on the increasing complexity of semiconductor manufacturing, which requires more sophisticated and powerful vacuum systems as transistors shrink. The duopoly market structure with Atlas Copco provides significant competitive protection, controlling 95% of the clean room vacuum pump market. With nearly half of revenues tied to semiconductor customers, Pfeiffer is well-positioned to benefit from the expected surge in chip manufacturing investment, despite near-term order volatility. The manager's confidence in the company's strong brand equity and high customer switching costs suggests sustainable competitive advantages in this specialized industrial niche.

Pitch Summary:
Deere & Company is a leading manufacturer of agricultural equipment with dominant market share positions in North America and Brazil. Despite its brand strength, technological capabilities and distribution advantages, the company's stock price has recently come under pressure due to investor fears of a trough in the current agriculture business cycle. Longer term, world population and food demand are expected to increase annually with land and labor devoted to agriculture set to decline each year. As a technological leader, we believe Deere is well-positioned to benefit from this dynamic as farms will need to become more productive. We also like that the company's management team has a strong track record of growing the business organically through cycles, continuously improving returns on invested capital and returning capital to shareholders. We were able to purchase shares in the company at a discount to our estimate of intrinsic value and to other high-quality industrials.

BSD Analysis:
Harris Associates initiated a position in Deere & Company, viewing the agricultural equipment leader as attractively valued amid cyclical concerns. The firm recognizes Deere's dominant market positions in North America and Brazil, supported by strong brand recognition, technological leadership, and distribution advantages. Despite near-term agricultural cycle headwinds, Harris sees compelling long-term demographics driving demand for farm productivity solutions. The investment thesis centers on increasing global food demand while agricultural land and labor decline, necessitating technological advancement. Management's proven track record of organic growth, capital allocation discipline, and ROIC improvement through cycles provides confidence. The firm was able to acquire shares at a discount to intrinsic value and relative to other high-quality industrial companies. Harris views Deere as well-positioned to benefit from the structural need for agricultural productivity gains.

Pitch Summary:
Phillips 66 was a contributor during the quarter. The U.S.-headquartered energy company's stock price rose following the release of good fourth-quarter results, in our view, with earnings metrics besting consensus expectations, mainly due to outperformance in both the refinery and midstream businesses. We continue to believe Phillips 66 offers attractive upside.

BSD Analysis:
Harris Associates maintains a bullish outlook on Phillips 66 following strong Q4 results that exceeded consensus expectations. The company delivered outperformance across both its refinery and midstream business segments, demonstrating the strength of its diversified energy platform. The positive earnings surprise drove stock price appreciation during the quarter, contributing to portfolio performance. Phillips 66's integrated model appears to be generating strong cash flows and operational efficiency. The firm's confidence in continued attractive upside suggests they view current valuations as compelling relative to the company's earnings power. The outperformance in key business segments indicates effective operational execution and favorable market conditions. Harris Associates sees the investment thesis intact with further value creation potential.

Pitch Summary:
KKR was a contributor during the quarter. The U.S.-headquartered financials firm's stock price rose following the release of fourth-quarter results. Notably, private markets fundraising, carried interest revenue and capital markets fee generation saw their best results since mid-2022. We modestly increased our estimate of intrinsic value following the company's fourth-quarter results and management's commentary regarding the outlook and we look forward to investor day in April.

BSD Analysis:
Harris Associates expresses confidence in KKR following strong Q4 performance that drove positive stock price movement during the quarter. The firm highlights KKR's best private markets fundraising, carried interest revenue, and capital markets fee generation since mid-2022, indicating a recovery in alternative asset management conditions. Management's positive outlook commentary prompted Harris to modestly increase their intrinsic value estimate for the company. The upcoming investor day in April represents a potential catalyst for further value recognition. KKR's diversified alternative asset platform appears to be benefiting from improved market conditions and investor appetite for private markets. The strong fundraising activity suggests sustained demand for KKR's investment strategies. Harris Associates views the current positioning as attractive for continued upside.

Pitch Summary:
Capital One Financial was a contributor during the quarter. The U.S.-headquartered financials firm's stock price rose following fourth-quarter results that mainly focused on an optimistic outlook on stabilizing credit card and continued elevated marketing costs. Notably, in February, the company announced it would acquire Discover Financial in a $35 billion all-stock deal. We believe the acquisition could be value accretive to shareholders and the potential synergies are significant as it will open Capital One Financial to Discover Financial's network. If approved, it is expected to be completed in late 2024 or early 2025. We continue to think Capital One Financial offers attractive upside.

BSD Analysis:
Harris Associates maintains a bullish stance on Capital One Financial following strong Q4 results and the announcement of the $35 billion Discover Financial acquisition. The managers view the all-stock deal as potentially value accretive, highlighting significant synergies from accessing Discover's payment network. The firm sees stabilizing credit card trends as a positive catalyst, despite continued elevated marketing investments. The acquisition, expected to close in late 2024 or early 2025, represents a strategic expansion that could enhance Capital One's competitive positioning in the financial services sector. Management's optimistic outlook on credit normalization supports the investment thesis. The position contributed positively to portfolio performance during Q1 2024. Harris Associates continues to see attractive upside potential in the stock.

Pitch Summary:
Corporativo Fragua, founded in 1942, operates over 2,400 pharmacies under the Farmacias Guadalajara brand. The company has a stellar track record of growth and profitability, increasing revenues at 14% annually and profits at 17% annually for the last decade. Corporativo Fragua is bigger company than our typical investment, valued at $4.3 billion in US Dollar terms, but it trades like an obscure micro-cap thanks to the low liquidity of its shares. Corporativo Fragua maintains net balance sheet cash and continues to open new drugstores at a rapid pace. Shares are up considerably since our first purchases, but the company remains a value at 16x 2023 earnings.

BSD Analysis:
The manager identifies Corporativo Fragua as a compelling Mexican pharmacy chain with exceptional long-term growth metrics, having delivered 14% annual revenue growth and 17% annual profit growth over the past decade. With over 2,400 Farmacias Guadalajara locations, the company benefits from Mexico's demographic tailwinds and expanding healthcare access as the middle class grows. Despite its $4.3 billion market capitalization, illiquid shares create a valuation opportunity, allowing the company to trade at 16x earnings like a micro-cap despite its scale and quality. The net cash balance sheet provides financial flexibility for continued rapid store expansion, while the defensive pharmacy business model offers recession resilience. The investment thesis combines Mexico's structural growth story with a proven management team's execution track record in a fragmented retail pharmacy market. Low share liquidity creates an inefficiency that allows quality-focused investors to access this growth story at attractive valuations.