Giles Capital Weekly - Week 11
Welcome to another edition of Giles Capital Weekly. The market correction that many analysts have been anticipating is finally upon us, with Trump's aggressive tariff policies triggering a significant selloff. The S&P 500 is down nearly 8% from its February high and the Nasdaq Composite off by almost 14%, while sentiment indicators have plunged to "extreme fear" territory. Meanwhile, AI development continues despite market turbulence, and geopolitical tensions between China and India are reshaping global manufacturing. While short-term volatility remains concerning, the current situation presents attractive entry points for long-term investors with the discipline to invest when others are fearful.
My top picks for this week spotlight two exceptional companies with remarkable growth potential. From Compound & Fire, Kinsale Capital Group (KNSL) emerges as a specialty insurance powerhouse with an industry-leading 23.6% underwriting margin in the excess and surplus lines market. Their disciplined approach and impressive 29.2% return on equity demonstrate superior capital allocation efficiency. From Rijnberk InvestInsights, Broadcom (AVGO) stands at the forefront of the AI revolution with its best-in-class networking solutions powering hyperscaler infrastructure. Their exceptional 67.6% EBITDA margin showcases operational excellence, while their proprietary technology creates an unmatched competitive moat in AI networking. With management projecting a $60-90 billion addressable market by fiscal 2027, Broadcom presents compelling long-term value.
Americas
Rijnberk InvestInsights on Broadcom Inc. (🇺🇸AVGO US - $916.57 billion) Broadcom delivered fiscal Q1 results with record high $14.9 billion revenue up 25% YoY and 68% EBITDA margin, with management guiding for Q2 semiconductor revenue to grow 17% YoY driven by continued AI revenue growth.
Jimmy's Journal on Merck & Co. (🇺🇸MRK US - $240.32 billion) Analysis of Keytruda's 2028 patent expiration impact, with an expected 40% revenue decline in the base case scenario yielding a fair value of $107/share (14.4% upside), balanced against the company's $20.6 billion cash position.
Max Dividends on Caterpillar (🇺🇸CAT US - $124 billion) Reliable dividend payer with 92 consecutive years of dividends and 31 consecutive annual increases, generating $9.4 billion in free cash flow in 2024 while maintaining a manageable 24.5% payout ratio.
Stock Picker's Corner on MercadoLibre (🇺🇸MELI US - $100 billion) Latin American e-commerce and fintech powerhouse with operations in 18 countries, poised for 25-30% annual revenue growth over the next 5 years and a potential doubling of profits in 3 years.
Quality Stocks on PayPal (🇺🇸PYPL US - $68.20 billion) PayPal trades at a PE ratio of around 14x with a free cash flow yield close to 10%, offering a potential recovery opportunity at $67-70 despite struggling to maintain market share in an increasingly competitive landscape.
Hidden Market Gems on IDEXX Laboratories (🇺🇸IDXX US - $33.57 billion) Veterinary diagnostics leader with impressive 59.5% gross margins in 2023 and a 97/99 financial score, dominating companion animal diagnostics with an 80% global market share in in-clinic solutions.
Golden Bear Capital on CoreWeave (🇺🇸CRWV US - Pre-IPO valued at $35 billion) The largest private provider of Nvidia GPUs in North America with 250,000 units, generating $1.92 billion in revenue in 2024 (growing 737% year-over-year) with $7 billion in future contracts secured ahead of its 2025 IPO.
Compound & Fire on Kinsale Capital Group (🇺🇸KNSL US - $10.2 billion) Kinsale is a specialty insurer with best-in-class combined ratio of 76.4% and exceptional free cash flow margin of ~50%, offering potential 14% annual returns based on 15% projected earnings growth at a Price/Adjusted FCF ratio of 28.
Stock Picker's Corner on CBOE Global Markets (🇺🇸CBOE US - $4.5 billion) Leading operator of financial exchanges benefiting from market volatility with shares up 12% YTD while broader indices plummet, positioned for 13.4% annual earnings growth over the next five years.
Value Degen on New Fortress Energy (🇺🇸NFE US - $2.49 billion) NFE is positioned to grow from Jamaica to Puerto Rico, Nicaragua, and Brazil with management guiding toward $1 billion EBITDA for 2025, growing to $1.5 billion by 2027, making it significantly undervalued at current prices.
Wolf of Oakville on Enghouse Systems (🇨🇦ENGH.TO - CAD$1.5 billion) Insurance and technology company with 2.9% revenue growth but concerning 24% jump in accounts receivable, strong cash position and 4.5% dividend yield but questionable organic growth, rating 3.5/5 stars.
Best Anchor Stocks on FRP Holdings (🇺🇸FRPH US - $550 million) Real estate company with substantial NOI growth across all segments (17-34%) forecasting a "transition year" in 2025, while investing $71 million in equity capital to develop properties expected to generate $14 million in NOI upon stabilization.
Europe, Middle East & Africa
Kroker Equity Research on Allianz SE (🇩🇪ALV DE - €134 billion) Allianz operates in three main business areas - insurance operations, asset management through PIMCO and Allianz Global Investors, and corporate activities - serving 128 million customers with a robust 79.1% gross margin and 66% operating margin.
Modern Value Investing on IWG & HelloFresh (🇬🇧IWG GB - £1.73 billion | 🇩🇪HFG DE - €1.22 billion) Analysis of two European businesses showing promising margin expansion: IWG generating $150 million free cash flow in 2024 (11.5x FCF multiple) with an EBITDA target of $1 billion, and HelloFresh guiding for €200-250 million EBIT in 2025 at a deeply discounted 5.4x EV/EBIT multiple.
Asia-Pacific
The Pareto Investor on JD.com (🇨🇳JD CN - $65.34 billion) E-commerce giant JD.com appears in multiple portfolio analyses as a high-quality Chinese tech company with strong return potential at current valuations despite regulatory and competitive headwinds in the Chinese market.
Coughlin Capital on Baidu (🇨🇳BIDU CN - HK$249.44 billion) A deeply mispriced AI leader trading at 5x EBITDA and 20% discount to NAV, with its legacy search business generating substantial cash for investment in AI and autonomous driving technologies.
Cristian on SE Holdings (🇯🇵9478 JP - ¥4.64 billion) Japanese publisher trading at just 7x earnings, ⅔ of net current asset value, and 53% of tangible book value, aggressively buying back 2.5% of shares quarterly with total share count reduced by 25% over the past five years. The report is concise but packed with the key metrics any value investor needs for a net-net opportunity.
StockOpine's Newsletter on Industry Overview (🇦🇺🇺🇸🇨🇦Various - $8.5 billion - $17 billion) Analysis of five SCM software companies, highlighting three compelling opportunities:
WiseTech Global: Australian logistics leader with best-in-class 39% EBIT margin and 23.2% revenue CAGR
Manhattan Associates: Top performer with exceptional 51% ROC and industry-leading asset efficiency
Descartes Systems: Solid 29% EBIT margin with comprehensive suite of logistics technology solutions
Silver Bulletin - Will Wall Street turn on Trump — and Elon? Nate Silver examines how the S&P 500's 9% decline from its peak relates to Trump's tariff policies and deteriorating global relationships, with US equities now underperforming most rivals since the election. A sobering analysis of how Wall Street's initial optimism about Trump may be shifting. (15 min)
Tipping Point Profits - Is This Our Best Buy Signal in Months? Matthew Carr makes a compelling case that the current market correction should be viewed as a buying opportunity, noting that in 10 of the last 11 Nasdaq corrections, the index was up an average of 21% twelve months later. A well-argued contrarian take worth considering as fear grips the market. (7 min)
Long-term Investing - Why are the US stock markets falling? Clear-eyed analysis of the current market correction, looking beyond headlines to examine structural issues like the twin deficits problem and shifts in Trump 2.0 priorities, with comparisons to Warren Buffett's record cash position. A timely perspective on navigating volatility. (4 minute read)
Noahpinion - Why America betrayed Europe Thought-provoking analysis of the factors behind America's changing stance toward Europe under Trump, exploring historical, cultural, and ideological reasons beyond simple conspiracy theories. A nuanced perspective that helps investors understand the geopolitical shifts affecting markets. (7 minute read)
Long-term Investing - A Turn in the South Fascinating analysis of Southern India's economic development relative to Northern regions, exploring how policy differences in education, politics and infrastructure have created stark disparities in wealth and opportunity. A unique perspective on regional economic development with lessons for global investors. (12 minute read)
Panda Perspectives - China Weekly Wrap A detailed analysis of Chinese market performance showing a divergence between mainland indices (Shanghai Composite +1.39%, CSI 300 +1.59%) and Hong Kong markets (Hang Seng -1.12%), with insights on monetary policy concerns, AI-related revenue growth, and the contrasting sector performance between technology, financials, and commodities. (8 min read)
Global Technology Research - China AI: Deepseek, Manus, and Impact on NVIDIA Demand Detailed technical breakdown of how Chinese AI companies are simultaneously both threatening and boosting NVIDIA's GPU demand, with Deepseek's optimization reducing hardware needs by 75% while Manus's agent applications could increase requirements by 1000%. A nuanced look at the complex dynamics shaping the future of AI computing infrastructure. (8 minute read)
Investment Ideas by Antonio - Meta is Leading the AI Revolution Compelling analysis of how Meta has transformed its core business into an AI-powered growth engine, with Family of Apps revenue growing 55% year-over-year and Advantage+ generating $20 billion annually. Offers valuable perspective on how Meta's early AI investments are yielding dividends while positioning the company for the next wave of personalized AI assistants and AI engineering tools. (5 minute read)
Rock & Turner Investment Analysis - The Fiction of Bitcoin Yield A critical examination of MicroStrategy's Bitcoin strategy, revealing how it functions less as a software company and more as a quasi-ETF trading at significant premiums to its Bitcoin holdings, with concerning Ponzi-like mechanics in its financial approach. (5 min read)
Kingswell - The Last Lecture of Benjamin Graham A fascinating look at value investing pioneer Benjamin Graham's final recorded thoughts from 1976, including his timeless wisdom about the market's emotional cycles and his shift toward simpler investment approaches. Essential reading for any serious investor seeking perspective beyond the day's headlines. (5 minute read)
Capitalist Letters - How To Find Exceptional Businesses? Insightful framework for identifying exceptional businesses through observation rather than just financial metrics, breaking down eight distinct business models that create enduring competitive advantages. A masterclass in qualitative analysis that complements traditional valuation approaches. (10 minute read)
Quality Investing with René Sellmann - Some Thoughts on Taking Calculated Risks Early in Your Investing Journey Compelling case for higher risk concentration in early investment portfolios, especially for young investors with steady future cash flows, along with a strategic approach to holding cash in anticipation of market corrections. A balanced perspective on risk that goes beyond conventional wisdom. (6 minute read)
A Letter a Day - Letter #268: Tom Purcell and Doug Dillard (2017) Transcript of a conversation between Viking Global's former CIO and Standard Pacific Capital's Co-Managing Partner discussing trends in the hedge fund industry, passive investing's impact, and how to navigate market cycles. A rare glimpse into the thinking of successful fund managers. (15 minute read)
Investment Talk - 9 Things I am Thinking About Refreshingly honest reflections on career development, mentorship, and professional growth that provide valuable insights for investors thinking about their own development and leadership approach. An excellent break from market noise that reminds us investing is fundamentally a human endeavor. (8 minute read)
Continuing to review previous fund letters, as a running theme so far, fund managers highlighted the growing disconnect between these trillion-dollar titans and the broader market, warning of potential risks from passive fund flows while identifying attractive opportunities in overlooked smaller companies trading at historically wide valuation discounts.
Bronte Capital: Struggled against market headwinds with FY25 YTD returns of -6.9%. Management focused on fixing false positive issues in their short book after identifying both trading and analytical mistakes that led to poor performance. Historically successful strategy seeing challenges in current environment where questionable companies can easily raise capital. Letter discusses:
Spirax Engineering (🇬🇧SPX - £5 billion) - Existing Position: High-quality steam processing and peristaltic pump business with historical 20%+ margins and mid-20s ROE, currently trading at 3.3x sales.
Emeth Value Capital: Value-oriented fund capitalizing on contrarian opportunities and special situations. Delivered impressive 28.5% return in 2024, outperforming MSCI ACWI by 12.1%. Since inception in 2015, has achieved 20.9% annualized returns compared to benchmark's 10.7%. Letter discusses:
Vivid Seats (🇺🇸SEAT - $578.57 million) - Existing Position: Secondary ticketing marketplace with $4B annual transaction volume, multiple business segments (B2C, B2B, Vegas.com, Wavedash), trading at just 5.1x EBITDA.
Horos Funds: Value manager highlighting extreme market concentration and trend-following investor behavior. Delivered 11.8% return in 2024 for international fund and 5.1% for Iberian strategy. Management team has delivered 11.5% annualized returns internationally and 9.9% for Iberian strategy over 12+ years. Letter discusses:
Zegona Communications (🇬🇧ZEG - £4.40 billion) - New Position: UK holding company that acquired Vodafone Spain, with valuable network infrastructure partnerships and strategic management incentives.
Kinsman Oak Equity Fund: Focused on value opportunities outside concentrated mega-caps. Concerned about market concentration, with top 10 stocks now representing ~37% of S&P 500 market cap. Views trend-following and passive flows as creating significant structural risk. Letter discusses opportunities in SMID caps with sustainable business models. No specific stock ideas presented.
Mar Vista Global Quality Fund: Quality-focused fund seeing challenges from market concentration in mega-caps. Fund returned 15% in 2024, underperforming S&P 500's 25% gain. Long-term 10-year returns of 11.6% slightly below benchmark's 13.1%. Letter discusses:
Broadcom (🇺🇸AVGO - $927.35 billion) - Existing Position: Exceeded expectations with strong AI semiconductor demand and VMware integration ahead of plan.
ASML (🇳🇱ASML - €252.15 billion) - New Position: Dominant semiconductor lithography equipment manufacturer with monopoly-like position and high-teens expected intrinsic value growth.
Mar Vista U.S. Quality Fund: Quality-focused U.S. equity fund challenged by mega-cap dominance. Fund returned 15% in 2024, underperforming S&P 500's 25% gain. Long-term 10-year returns of 11.6% slightly below benchmark's 13.1%. Letter discusses:
Salesforce (🇺🇸CRM - $268.57 billion) - Existing Position: Returned to double-digit growth for Sales and Service Clouds, with growing enthusiasm for new Agentforce generative AI product.
Equifax (🇺🇸EFX - $28.94 billion) - New Position: Added due to data-intensive business model with high barriers to entry, strong operating leverage, and expanding Workforce Solutions segment.
Mar Vista U.S. Quality Select Fund: Concentrated quality strategy navigating challenging mega-cap environment. Returned 13.6% in 2024, significantly trailing S&P 500's 25% gain. Has maintained slightly better 10-year returns of 12.2% vs benchmark's 13.1%. Letter discusses:
Amazon (🇺🇸AMZN - $2.12 trillion) - Existing Position: Record operating margins in AWS and International Retail with exceptional Q4 forecast projecting up to $20 billion operating income and 11% margins.
Disney (🇺🇸DIS - $176.54 billion) - Exited Position: Sold after stock closed gap to intrinsic value and amid concerns about intensifying competition from platform giants like Netflix and Amazon.
NZS Capital: Growth-focused strategy with both resilient and optionality holdings. Returned 21.3% in 2024 despite Q4 decline of 1.1%. Celebrating five-year track record with ~$3B AUM. Letter discusses:
Fiserv (🇺🇸FI - $120.58 billion) - Existing Position: On track for 39th consecutive year of double-digit earnings growth, benefiting from fintech subsidiaries like Clover and Carat.
ANSYS (🇺🇸ANSS - $28.05 billion) - New Position: Reacquired position in engineering simulation software company.
Snowflake (🇺🇸SNOW - $50.67 billion) - New Position: Added as an optionality position in cloud data platform.
Thanks to Letters & Reviews (lettersandreviews.blogspot.com) for compiling investment letters, which is where I sourced these letters.
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Disclaimer: This newsletter is for informational purposes only and does not constitute investment advice. All opinions expressed are those of the quoted authors and do not necessarily reflect the views of the newsletter creator. Always do your own research before making investment decisions.