Quarterly Newsletter: 3rd Quarter, 2025

We continue to follow the effects of US tariffs (and retaliatory tariffs) on inflation throughout the world. The potential for higher inflation has risen significantly over the past six months and is starting to show up in prices. As we mentioned in our last newsletter, tariffs are essentially an additional tax on consumers collected by a government. They add to the price of the goods and service we pay for, and the money goes directly to the government that charges them. Inflation acts like a ‘brake’ on economic activity when it rises too quickly as we’re able to buy less as costs increase. We’ll continue to update you as we learn more, but our expectation is for higher inflation for the next one to two years.

Investment Commentary

Often, when we have significant changes like the ones we see in the US today, this change increases investment risks while also providing an increasing number of opportunities. The companies we have approved for investment are leaders in their respective industries, and, regardless of how the current tariff / inflation situation plays out, their businesses should perform well. Their stock prices may go down temporarily with the overall stock market, but that doesn’t change the underlying performance of the businesses. As owners of a company’s stock, we are owners of the underlying business, and we ultimately make money as the company makes money (profit). The more money they make, the more money we make. Stock prices change with human emotion but will move upwards (often significantly) when investors focus on what matters – a company’s ability to make money.

This is an important theme that began to play out in the second half of 2024 and has continued so far in 2025. Companies that are selling at prices that are a significant discount to their underlying value (the amount of money they make and are likely to make), are getting noticed. This process is still in the early stages for many of the companies we own.

Often there is a catalyst that alerts investors to a turnaround in a company’s fortunes. This is what we keep an eye out for. Here are a few examples for some of our key investments:

Duluth Trading Company has been building out its capabilities so it can be a $1 billion (or more) revenue company (Currently it is a $600 million revenue company) for the past few years. That process is mostly complete now. In April, their former CEO, Stephanie Pugliese, rejoined the company as its new CEO. She helped the company go public back in 2015 to raise funding to grow the business significantly. The business did grow significantly. She helped grow Duluth’s women’s clothing business from zero to 50% of the business today. She is the right person to lead Duluth through its next stage of growth, and its stock price has reacted to acknowledge this.

United Natural Foods stock price was struggling because investors were concerned that its largest customer (Amazon) would start their own grocery delivery business. However, in May 2024, they were able to secure Amazon’s business and signed a contract for eight years. They have gone from strength to strength from that point, and its stock price has too. It is unlikely Amazon will compete because food delivery is both capital intensive (it costs a lot to set-up) and low profit margin.

With interest rates coming back down, Kennedy Wilson is getting noticed as a very cheap real estate investment. After interest rates rose significantly in 2022, real estate companies struggled as higher interest rates negatively impact their profitability. However, when interest rates started dropping this year, investors started to pay attention to Kennedy Wilson and its high-quality real estate holdings. Even with higher interest rates, the value of those holdings was substantially more than the value we could buy the company for. Now with lower interest rates they look even better, and their stock price is starting to show that too.

Cerence’s leadership in voice technology and AI for the car is being recognized more now that they have a high-profile CEO in place. The former CEO of Intel, Brian Krzanich, joined Cerence in October 2024. Cerence has a high potential for future growth, and its technology is used in over 50% of all cars. They have also learned important lessons through that business that will allow it to expand into other opportunities outside of the automotive industry. They had a non-compete with Microsoft that prevented them from exploring those opportunities, but that expired in October 2024 too. Cerence’s stock price has started to show a lot of investor interest since then.

We’re finding a lot of opportunities to invest at prices that make it highly likely we’ll receive excellent future returns. This includes our most recent investment in Green Brick Partners, a fast-growing home builder with high profit margins, which we may make a larger investment in soon. Connected to that, we’re considering a new investment in Dream Finders Homes. Dream Finders is bigger than Green Brick, growing at a similar rate, with lower (but still healthy) profit margins. They are cheaper to buy than Green Brick, which is why we’re considering the investment. Home builders should do well for the foreseeable future after two decades of underbuilding and a significant undersupply of new homes in the US.

Lastly, we’re also considering further investments in Target with the recent CEO change and an increased likelihood of ‘returning to their roots’ which relied heavily on diversity initiatives that were cut after Trump became president. That led to a large boycott of Target stores which is still largely in place. We think that may change soon, and Target is priced very cheaply because of their recent problems.

There’s a lot of positives we see, despite several headwinds in the global economy connected to tariffs and a move towards more isolationist economic policies which tend to be less efficient (think of what one person can do/produce versus a well-functioning team of people).

We own companies that can continue to perform well even during times of adversity (and often thrive). Their stock prices may go down with the rest of the market, but their core businesses remain strong.

Investment Strategy

We pay particular attention to the price we pay for investments because paying less means higher future returns. As a reminder, we intend to hold all investments for periods of at least five years and preferably much longer.

We seek to hold 15-20 individual stocks like those we’ve mentioned so far in this newsletter and those listed in the attached, separate PDF. Stocks that are significantly undervalued and offer a high probability of future outperformance versus market averages. We combine these individual stocks with other investment managers (mutual funds) to help further diversify your investments across stocks, bonds, and real estate/infrastructure. Our investment managers have similar processes that seek out and take advantage of overlooked and/or underappreciated investments with the goal of outperformance versus market averages.

We believe we are well-positioned for future success. While there will be periods when investment returns aren’t where we’d like them to be (lower than market averages or negative), our research process gives us confidence to maintain our commitment and allow our investments the time to reach our goal of long-term outperformance.

We will continue to monitor your portfolios and keep you informed on major global events that may impact our investments. If you’d like to set up a meeting, please reach out.