Financial markets are typically known to be fairly efficient machines when it comes to pricing assets (this could be considered their main job). The famous term known as “consensus” establishes that stock prices reflect a consolidated opinion from thousands of market participants about the public information available for any given asset. This is the theory, but reality is a bit more nuanced. While financial markets are indeed “almost perfect” in pricing assets over relatively long periods, misspricings can occur over shorter periods. These mispricings typically arise from diverging investment horizons and ultimately allow long-term investors to capture the spread between the current market perception and the true value of a given asset.

Now, the fact that the market CAN misprice assets at any given point in time doesn’t mean that it always DOES (even though some people seem to think that the market is “retarded”). This ultimately means that if we come across an asset that seems heavily mispriced we must think long and hard about the market’s variant perception (in some occasions there might not be one and the asset might simply be ignored for a host of reasons like liquidity or positioning). The above perfectly describes the company that you are going to read about today. Just to provide some context, today’s business has grown its revenue and operating profit at a 40% CAGR over the last 5 years, intends to do the same over the next 5, and yet trades at a 2026 EV/EBIT multiple of 11x. While it sounds too good to be true, management has already proven skeptics wrong once and benefited from it by remaining the largest shareholders in the business. While the market remains fixated on one side of the “equation,” management has clearly laid out that they moved to the other side of the equation long ago.

So, without further ado, let’s jump right into the business.

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You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (16 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

You’ll also get access to the 30+ page detailed report on the robotics industry.

The in-depth reports of Stevanato and Deere are also free to read to gauge the quality of the research. Other in-depth reports have been written about…

• Deere (DE)

• FRP Holdings (FRPH)

• Five Below (FIVE)

• Diageo (DEO)

• Hermès (HESAY)

• Atlas Copco (ATCO.B)

• Stevanato (STVN)

• Keysight (KEYS)

• Zoetis (ZTS)

• Judges Scientific (JDG.L)

• Medpace (MEDP)

• Trupanion (TRUP)

• AAON (AAON)

• BBB Foods (TBBB)

• Eurofins (EPA.ERF)

• Sabre (SABR)

• Rosebank Industries (ROSE.L)

• Undisclosed position

Join today:

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Both indices were slightly down this week with significant volatility. We had two interesting earnings reports as well as an interesting appearance by Druckenmiller who shared some thoughts around the AI trade. There were also several interesting company-specific news.

Without further ado, let’s get on with it.

Back in the Chit Chat Stocks podcast!

This week I was lucky enough to be able to attend the Chit Chat Stocks podcast with Ryan and Brett. We had a great time and discussed BBB Foods (TBBB) (in depth report available here) and my robotics report.

You can listen to it on Spotify:

Or YouTube:

What you can expect over the next few weeks

There were no articles this week as I continued advancing several companies through the pipeline. In the following week you can expect…

1. An in-depth article on a very interesting (and unknown) Japanese company growing at a 40% CAGR while trading at an 11x EV/EBIT multiple

2. An in-depth article on one of the most controversial companies one can currently find in financial markets. Yep, it’s Oracle (ORCL).

3. An in-depth article on an aerospace company that I believe is not yet well understood

So, plenty of things are coming to Best Anchor Stocks over the next few weeks.

Without further ado, let’s see what the markets did this week.

Market Overview

Both indices were down slightly this week, not without their fair share of volatility:

In yet another example of how unpredictable markets can be, both indices were significantly up on Friday despite inflation coming in hotter than expected. A lot of people thought indices would be considerably down because hotter-than-expected inflation gave the Fed more reasons to raise rates, but the markets did the exact opposite (I kid you not!).

We had a couple of interesting earnings this week. Adobe and Oracle both reported on Thursday, and once again, the first algo-driven move proved to be the “wrong” one. Adobe was initially down on earnings and Oracle was up, but the movements flipped throughout the day and Adobe ended up with Oracle down. I have been eyeing Oracle lately, and the main problem I see with the Oracle investment thesis is that I don’t think that bear concerns can be alleviated for a while:

Oracle claims that the unit economics on the Capex that is currently coming online are great, and while this is evidently true, the reality is that we are not currently in a normalized supply-demand environment. One is likely to see incredible economics when demand far exceeds supply, but this doesn’t mean that they are sustainable economics. The key here is to understand whether the different players (Oracle, the hyperscalers, or the neoclouds) have any competitive advantage to be able to charge a premium price for each GW of capacity once the supply normalizes. Some people argue that the normalization will take a long time to come (fair), but it nonetheless becomes a question of “when” not “if.” We’ll see.

Frankly, I believe the same is true for Adobe in terms of the market’s visibility into the bear cases. Despite many Adobe bulls claiming that the quarter was spectacular, RPO and ARR growth continue to decelerate. Management claims this is a self-inflicted wound as they push the freemium model through, but evidently a long-term concern has become whether they’ll be able to convert these users to long term Adobe paid customers. So, something that can’t be denied is that Adobe is growing faster today than it was a couple of quarters ago while enjoying a compressed reported valuation (both things are facts), but one can’t also not ignore that the leading indicators are not painting a rosy picture. Is this worrying? Well that’s where one needs to do more work, and frankly I don’t believe that a lot of people are focusing here.

In other (albeit related) news, Stanley Druckenmiller participated in a private conference this week. As one of the greatest investors of all time, I believe that paying attention to whatever he has to say is a must. Druckenmiller shared some thoughts around the AI trade and claimed that “there’s a good chance we’re in an earnings bubble because this AI build-out is going to end at some point, and let’s face it, banks are also on the AI trade. I mean, these guys are making hundreds of millions of dollars when they bring these companies public.”

I echo his thoughts in the sense that I believe there’s both a bull and a bear case to be made about the AI trade (there always is). The bull case is two-fold:

1. The technology is a revolution. I believe few people can claim the opposite at this point.

2. It remains far from being penetrated.

As for #2, I can only share my anecdotal evidence. It seems pretty obvious that X is a bubble in which people use AI much more than people do in the “real” world. I have coded agents to help me do things faster and improve my productivity, but in my close circle of people there’s not one single one of them who has ever coded (or uses) an agent. According to Jensen Huang (and this is something I went over in my robotics report), agentic AI requires around 10x the computing power of generative AI, with the robotics opportunity being yet another 10x of top on that. We seem to be extremely early in agentic, which means that the runway seems pretty long.

Now, the bear case to be made is that plenty of people believe there’s no limit to AI. I would be very careful thinking this because everything has a limit and we might encounter bottlenecks along the way that pretty much nobody expected. So I must say I’m torn between both, I do believe AI still has plenty of legs, but I also don’t think that a lot of the companies believed to be AI winners will be winners in the end and that there’s obviously a limit to the technology, probably driven by adoption/bottlenecks (pick your fighter). I mean it’s fine to make larger, larger, and better models, but maybe there will be a time when each incremental intelligence unit can’t be monetized economically because what we have is good enough for most tasks (just thinking out loud here).

The industry map was mixed this week, showing some very green pockets in semis, hardware, and communications equipment:

Source: Finviz

The fear and greed index retraced further into fear territory:

Source: CNN

Company-specific news

Read more

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (16 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

You’ll also get access to the 30+ page detailed report on the robotics industry.

The in-depth reports of Stevanato and Deere are also free to read to gauge the quality of the research. Other in-depth reports have been written about…

• Deere (DE)

• FRP Holdings (FRPH)

• Five Below (FIVE)

• Diageo (DEO)

• Hermès (HESAY)

• Atlas Copco (ATCO.B)

• Stevanato (STVN)

• Keysight (KEYS)

• Zoetis (ZTS)

• Judges Scientific (JDG.L)

• Medpace (MEDP)

• Trupanion (TRUP)

• AAON (AAON)

• BBB Foods (TBBB)

• Eurofins (EPA.ERF)

• Sabre (SABR)

• Rosebank Industries (ROSE.L)

• Undisclosed position

Join today:

Subscribe now

Both indices were slightly up this week and I found two concepts that I wanted to discuss in the brief market commentary. I also share the articles of the week and the news of the week, including some highlights from Rosebank’s (you can read an article about the company here) most recent earnings.

Without further ado, let’s get on with it.

I’m back and articles of the week

After a week of resting and recharging the batteries…I’m back! I published one article this week: the seventh edition of On The Radar.

I profile three very interesting businesses that I am currently looking further into:

1. An unknown engineering business with growth capped by supply rather than demand

2. An aerospace aftermarket business with a very interesting and controversial model

3. A very interesting set-up in a business with a balance sheet “problem”

If you are looking for some fresh ideas, you can check out all the seven editions of on the radar (22 companies profiled) here.

Without further ado, let’s see what the markets did this week.

Market Overview

Both indices were slightly up this week, with the SPY outpacing the gains of the QQQ:

I would like to briefly discuss two topics in today’s NOTW. The first one is the concept of the random walk. Something that has become abundantly clear to me over the past few years is that valuation doesn’t matter one bit over the short to medium term. When I looked at my portfolio at the beginning of 2026, I made an effort to try to guess which stocks would go on to perform better. I naturally went for those that enjoyed the most appealing valuation multiples, but here’s what happened.

My best performing stocks YTD have been (I’m only counting those that I have owned for since 01/01/2026)…

• Keysight Technologies +58%

• Deere & Company +49%

• ASML Holding +49%

• Texas Instruments +46%

• BBB Foods +45% (counting this one since I owned it since January)

Maybe with the exception of ASML, I wouldn’t in my wildest dreams would’ve thought these would be the companies carrying my portfolio. I know there’s a lot more to valuation than the reported multiple, but here’s the EV/EBITDA multiples these companies were trading at to start the year:

• Keysight Technologies 28x

• Deere & Company 16x

• ASML Holding 25x

• Texas Instruments 21x

• BBB Foods 65x

I could go on to explain why some of these multiples are not normalized, but the conclusion would hold: valuation multiples are a terrible leading indicator of performance over the next 12-24 months. My good friend WTCM shared the following on X this week:

I agree with it entirely and my view has been shaped by my experiences, which might be anecdotal, but they are experiences nonetheless. I would argue that valuation always matters over the long term, it’s just that one never knows when it’ll start to matter! If anything, momentum seems to be a much better leading indicator than valuation in the current market.

The other topic I wanted to talk about is a concept that I’ve decided to coin as “holding bias” (it 100% has another name, but I decided to coin it with that one). This week I published the following about Adobe’s CEO succession:

The post got many replies claiming that “I wouldn’t be saying this should the stock be at ATHs.” While I definitely agree with the notion that we are most likely inclined to overthink the bad news when a stock is doing poorly, I believe that these comments portray that some people get too emotionally attached to their holdings. It’s fine to hold something while not agreeing with everything management does or not believing that everything is perfect.

Adobe may well play out brilliantly as an investment over the long term, but the great performance will not be due to the great CEO succession the company has done, but rather IN SPITE of it. If one actually believes that Adobe has handled the CEO transition well…they should try to ask themselves whether maybe they are too emotionally attached to their position.

On the other side of the spectrum we have Constellation Software whose founder and president (Mark Leonard) had to retire due to health reasons. The company quickly appointed Mark Miller to the position, a 30-year CSI veteran who came on board with the company’s first acquisition and decided to take a $1 salary (just like Mark Leonard’s). The succession events of Adobe and Constellation are night and day, which doesn’t mean that it’ll be a relevant thing when looking at these businesses in 5-10 years. Now, we should call things by their name.

The industry map was mixed this week:

The fear and greed index retraced considerably and entered fear territory:

Company-specific news

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If you want to know what this series is about, I recommend reading the first issue. Let me save you the click with a short summary: the goal is to share interesting companies that I’ve looked at but have not researched in-depth yet (at least not to my standards). Therefore, the “On The Radar” series should be understood as a well-curated list of companies that fit my investment philosophy and that might (in the future) make it into the portfolio.

So far 2 out of the 19 companies I have profiled in this series have made it into the portfolio, with good (but still early) results: +17% and +5% (in not much more than two months). The average return of the companies profiled thus far is around 10%, albeit this series started not long ago.

Today’s issue brings yet another three companies (one for free and the remaining reserved for paid subscribers) that I’ve been looking into or that I plan to look into in the coming weeks/months. Some of these will most likely end up as in-depth reports:

1. An unknown engineering business with growth capped by supply rather than demand

2. An aerospace aftermarket business with a very interesting and controversial model

3. A very interesting set-up in a business with a balance sheet “problem”

Note that all of these businesses get included in the “On The Radar” tab of the Portfolio Management Tool with their respective price evolution since the issue.

As this is the seventh issue, free subscribers have had access to 7 companies (one for free per issue) whereas paid subscribers have had access to 22!

So, without further ado, let’s jump into today’s issue.

Friedrich Vorwerk (ETR:VH2)

Brief description of the business

In all honesty, I’d be very surprised if you’ve heard about Friedrich Vorwerk. This is not in any way criticising your knowledge about businesses because, for what it’s worth, Vorwerk is a small cap ($1.39 billion) German company that operated in a pretty boring industry. At its core, Vorwerk is an engineering services company specialized on energy infrastructure projects in Germany.

There are several things that make the company rather special/interesting. For example, Vorwerk is vertically integrated across specialized equipment and labor, two tasks that its peers generally choose to outsource. This helps the company earn higher margins than peers (albeit carrying higher capital requirements) while being able to manage projects in a more organized manner.

Even though the company specializes in services, we can also find several technologies at the core of its competitive advantages:

1. 5C Tech’s (a subsidiary) automatic welding system. This technology not only lowers the need for specialized welding labor but also carries lower defect rates

2. A specialization in Horizontal Directional Drilling, a key technology for laying underground pipes/cables

The company was historically exposed mainly to natural gas projects, but these have increasingly been “substituted” by “new energy” such as electricity, CO2 transportation, and (in the future) hydrogen. The way Vorwerk makes money is pretty straightforward: a new energy infrastructure project gets tendered, Vorwerk bids (and hopefully wins it) and gets paid throughout the project as they execute it. This revenue cycle must be repeated over and over again (i.e., there’s very little recurring revenue related to infrastructure maintenance, although there is some).

Why it caught my attention

The company caught my attention after looking into MBB SE, a German serial acquirer of industrial companies. MBB still holds a significant position in Vorwerk and the latter’s stock price evolution seemed pretty intriguing.

The stock got clobbered (down 77%) after IPOing at a decent valuation of 9x EBITDA, but recovered in spectacular fashion from the lows to deliver an almost 10-bagger at the peak:

What was the reason behind such obnoxious mispricing? This is what ultimately got me interested in Vorwerk. After a bit of reading, I found out that the “mispricing” was caused by inflation. 2022 and 2023 (as you know) were years of considerable inflation after the post-pandemic spending surge, and Vorwerk had not included inflation-escalation clauses in its contracts. This evidently led to significant margin contraction. However, things slowly but steadily turned into Vorwerk’s favor: these legacy contracts eventually ended and the company included inflation-linked clauses in new contracts. The war in Ukraine also made the German government worry deeply about energy independence, leading to a considerable pipeline of projects. So not only did margins rise considerably, but Vorwerk also saw a significant influx of new business. EBITDA inflected hard, rising from €32 million to more than €200 million only a couple of years later (so much for efficient markets!):

At €200 million in EBITDA and an EV of €995 million (the company has a considerable cash position), Vorwerk is currently valued at an EV/EBITDA of 5x. This seems low on three dimensions:

1. The path the company is in and the secular growth drivers it is exposed to

2. What the business has historically traded at (an average of 8x)

3. What peers trade at

To this we must add that it seems pretty obvious that the current limitation for growth is not demand but supply (mostly labor). My research into Vorwerk is a quest to answer the following question:

What I like

There are several things I like about Vorwerk:

• The company is exposed to significant long-term tailwinds as Germany rebuilds its energy infrastructure after the Russia “scare”. There doesn’t seem to be a shortage of energy project currently and many of these are long-term in nature

• There’s considerable skin in the game. The current CEO owns more than 18% of the shares outstanding and MBB owns around 40%

• The business is currently supply-capped, meaning that its fate is currently dependent on execution. Management has been executing well with labor supply growing at a 10%+ rate over the past few years

• The labor constraint discussed above acts as a significant entry barrier because potential disruptors can’t source labor. The largest players are increasingly making acquisitions to source labor and consolidating the market

• The company is relatively unknown and trades at an (apparently) low valuation multiple

• Management is not afraid to follow their own path and are not driven by industry standards (proprietary tech, vertical integration…)

• The cash on the balance sheet gives management considerable investment optionality, both organic and inorganic

• There’s also optionality in the company’s automatic welding technology, which has opened up international opportunities (mainly in Asia)

• I also believe there’s a miss-understanding about the company’s non-IFRS metrics such as backlog and orders. The large projects are mostly managed through JVs (Joint Ventures), but Vorwerk only includes in the backlog and orders the equipment and labor they “sell” to the JV. This is not necessarily representative of the money they’ll make through the JV, meaning that these metrics are not great leading indicators (very similar case to Medpace)

Now, despite Vorwerk having a lot of things to like, there are also several things that give me pause.

What gives me pause

The main thing that gives me pause is the overexposure to the following…

1. Germany

2. Underground projects

3. Natural gas, electricity, and hydrogen

#1 is straightforward to understand, but the second and third maybe less so. Even though laying underground infrastructure is 100% the safest and most efficient long-term bet, it’s not the cheapest. The German government has hinted at above ground infrastructure becoming a possibility to save on costs. If underground projects shift to above-ground projects, Vorwerk’s involvement in the infrastructure build-up will most likely decrease. Management believes this is a longer-term problem (if it ends up playing out) as the projects that are already in the pipeline last at least until 2035 and those will certainly be underground projects. The third point there is also interesting, because any kind of a return to nuclear energy (probability seems low), would also reduce the demand for Vorwerk’s expertise.

Lastly, another thing that somewhat worries me is a revenue cliff. Vorwerk has executed over the past few years a very sizable project called A-Nord. This project lasts until 2027 and will need to be replaced with new business, with management claiming that it will. The reality, though, is that revenue growth has decelerated significantly once the project has started to have a less significant participation in the company’s revenue.

What I am watching

I have been trying to speak with IR/management to clarify some doubts, with no success thus far. I will keep trying, but I don’t anticipate owning Vorwerk unless I’ve had a chance to speak with management and settle some doubts regarding the accounting of the JV pipeline.

Let’s now jump into the next company.

Read more

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (16 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

You’ll also get access to the 30+ page detailed report on the robotics industry.

The in-depth reports of Stevanato and Deere are also free to read to gauge the quality of the research. Other in-depth reports have been written about…

• Deere

• FRP Holdings

• Five Below

• Diageo

• Hermès

• Atlas Copco

• Stevanato

• Keysight

• Zoetis

• Judges Scientific

• Medpace

• Trupanion

• AAON

• BBB Foods

• Eurofins

• Sabre

• Rosebank Industries

• Undisclosed position

Join today:

Subscribe now

Both indices were down this week, although the Best Anchor Stocks portfolio performed pretty well. The reason was something that happened this week related to the healthcare sector, which comes with several important lessons for investors (discussed in the market commentary).

Without further ado, let’s get on with it.

Out of office next week

I’m taking a holiday next week so I’ll be away from my computer. There will be no articles and no NOTW, but I expect to bring an in-depth report during the first half of September and will continue to read about several companies I have in the pipeline.

Articles of the week

I published two articles this week. The first one was (as promised) an update on Tiendas 3B (TBBB).

The company reported spectacular earnings and continues to demonstrate it is taking the Mexican grocery industry by storm. You can also read my in-depth report here.

The second article of the week was Deere’s earnings digest.

The results were better than expected, but I believe there was one specific quote that got the stock moving. I explain what this is and why it might be relevant for the investment thesis.

Without further ado, let’s see what the markets did this week.

Market Overview

Both indices were down this week, with the Nasdaq falling more than 2%:

I read Crossroads Capital’s Q2 2026 letter this week (written by my good friend Ryan O’Connor) and liked the following quote (among other things):

If you’ve followed my work for a while you’ll know that my investment philosophy has been shaped through the years (and I don’t anticipate it’ll be static going forward). The most significant change has been that I used to despise cyclicality, but now I actually strive to find it. Everything began when my good friend John Rotonti interviewed Jerome Dodson (founder of Parnassus Investments). The following quote from that interview stuck with me and shaped my investment philosophy:

I believe that the two quotes above are intrinsically related. Ryan claims that clarity and the rally are the same event, and I agree with him because the good returns are found when there are clouds, not when the sky is clear. I believe this type of scenario is much easier to find in the type of situations that Jerome Dodson describes in his quote: cyclical but secular industries where many investors remain on the sidelines waiting for an inflection. In many cases, people will be simply waiting on the sidelines for things to start working, hoping to hop on to the momentum trade (a phenomenon that has been shaping markets for a while).

We got a pretty good example of the dynamics described above this week. If you are not living under a rock, you might have seen that Moderna (MRNA) and Merck (MRK) released some pretty relevant news this week. Both companies announced positive results from their INTerpath-001 Phase III trial (albeit they did not share the data as such, which is an important caveat). This was relevant because it’s as close as humanity has gotten to a “ personalized cancer vaccine.” Now, there are certain caveats worth pointing out here because it’s more of an adjuvant treatment than a cure, but it seems to stop (in some cases) the cancer from coming back once the tumor has been removed. However you want to spin it, this is great news, especially since it somewhat demonstrated that there’s a potential mRNA platform to achieve personalized cancer treatments. Moderna’s shares rose considerably (+177%) on the headline, but what’s most interesting about this event is how it shifted the sentiment in the healthcare sector.

I’ve been writing for a while that sentiment across the healthcare sector had not been the best, driven by a violent post-pandemic boom and bust that had left the top lines of many companies starved for growth. Many investors had been waiting on the sidelines for “healthcare to start working” but little did they know that what got the healthcare sentiment shift started (still too soon to know if it’ll be sustainable) was an “unexpected” event that doesn’t even impact the top lines of these businesses (at least not immediately). The XLV ended this week up 4.5%, a significant contrast against down markets:

So, what is the bottom line of all of this? My reading is that timing inflections is impossible, but they eventually do happen for those willing to wait. There are very few people willing to hold something that’s “not working” (especially since there will be a lot of things that are working at any given point in time) and herein lies one’s opportunity. Now, granted, I don’t know if this will sustain or not, but the lesson doesn’t change: inflections eventually happen, we just don’t know when. Seems like a good idea to buy those companies in which the inflection is not priced in even though it’s a sure thing that it’ll happen. You might not get the highest IRRs in these situations, but you sure will get attractive risk-adjusted returns (which is what any investor should strive to find).

Something interesting that typically happens in financial markets is that a small inflection shifts sentiment a bit, then sentiment drives price, and price continues to drive sentiment in a self-reinforcing loop. This has happened time and time again (both to the upside and downside) and I don’t expect it to change anytime soon.

The industry map portrayed what I discussed above: a somewhat red market but with healthcare pretty green:

The fear and greed index retraced a bit and is now in neutral territory:

Company-specific news

Read more

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Deere reported good earnings yesterday, providing the market with a beat-beat-raise quarter driven by C&F (Construction and Forestry) and SAT (Small Ag & Turf). PPA (Production and Precision Ag) remained somewhat weak BUT received very interesting forward-looking commentary which was most likely behind the stock’s good performance. I don’t tend to think this is possible, but I believe it was possible to understand exactly what quote drove the stock reaction (more on this later):

Let’s start with some of the headlines (and I’ll try to be quick here as I don’t want to make this digest “boring”). As has been the case over the past few quarters, Construction (+18% YoY) and Small Ag and Turf (+12% YoY) continued their good performance, with muted performance from PPA (-6% YoY).

The strength in Construction is being driven by large-scale projects (please I beg you not to look at Caterpillar’s stock price, albeit Caterpillar also enjoys “power” exposure) which included data centers. Construction also had good visibility into FY 2027 and management expects the strength to persist.

Rental might be yet another potential demand driver for Construction going into next year. Deere’s construction segment has historically been present in rental operations (it’s table stakes in the construction industry), but management believes that dealers want to increase their exposure to rental (i.e., potentially cutting middlemen like United Rentals):

It’s worth noting that despite bouncing along the trough in some of its markets, Deere has managed inventories carefully. This has not only helped with margins and cash conversion but also positions the company to benefit from a “double tailwind” when markets recover (demand + inventory build-up).

The strength in SAT was driven by high-value crops and discretionary retail, although management did caution that visibility for this segment is not precisely high. Deere’s diversification is helping the company navigate the trough of the PPA segment while experiencing growth (I don’t think this has ever happened before). Diversification is something that one naturally believes is stupid when everything is moving upwards (I do anticipate we might hate Deere’s diversification when PPA turns around) but something that saves you when your most important segment turns south (also applicable to companies like Danaher).

The weakness in PPA was driven by South America (which is pretty volatile and might turn around fast) and Europe, with North America remaining somewhat stable (good news). Add all this up and we get to Deere trending towards the bottom end of its PPA guide, expecting sales down 10% this year. The good news is that management is also expecting double digits operating margins (11-12%).

The truth is that Deere is raising its net income and operating cash flow guide at a time when it is downgrading its PPA guide (i.e., there’s more to Deere than PPA and we are grateful when PPA does not do well). The guide also seems locked in with the company experiencing “strong fourth quarter order books across all segments:”

This strength at this point in the cycle is pretty much unprecedented for Deere and demonstrates that the company’s underlying margins have moved up over time (part of the investment thesis as the mix shifts to more technology-based and recurring revenue). Speaking about technology, there was pretty good news on the adoption front in Construction…

And also in PPA…

And what’s most interesting about this distribution is that Deere is already eyeing AI deployments across its user base…

Deere’s tech/equipment operations experience interesting dynamics, because what’s making equipment operations “suffer” (high input prices like those of fertilizers) is likely also behind the strong technological adoption. Management claimed that “farmers are reacting and looking for alternatives” and one of said alternatives is definitely technology.

PPA also brought THE quote that likely caused the stock to rise considerably, related to the company’s early order programs. Management shared the following:

This basically means that this year’s uncompleted EOPs are up MSDs when compared to last year’s completed EOPs (so not apples to apples, which makes the growth more impressive). This is ahead of market expectations, but I believe there are certain caveats. First things first, this is very positive in the sense that it’s encouraging and supports that FY 2026 might indeed be the trough of the PPA cycle (hopefully this time it’s true). One caution I’d make is that even though MSD growth is “locked-in” for EOPs, it doesn’t necessarily mean that growth will accelerate as they close, as EOP demand might have been pulled forward this year. Nevertheless, it’s definitely great news.

So, all in all, pretty encouraging earnings from Deere even though we continue to wait for the inflection in PPA (which management believes will happen in FY 2027). With Deere sitting somewhat close to ATH’s, is the stock at a fair valuation?

Understanding Deere’s valuation

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Tiendas 3B reported spectacular Q2 earnings last week. Even though I was aware that the company had a history (even if short) of outperforming even the most optimistic of expectations, I was once again pleasantly surprised (good problem to have). The market had similar feelings; the stock rose considerably on the report. It now stands very close to all-time highs:

This begs the question:

Valuation is always a tricky topic with such fast-growing businesses, and I’ll go over the topic in more detail at the end of this article.

Let’s jump right into the numbers.

Tiendas 3B’s numbers

Tiendas 3B grew close to 39% in Q2 on a $1.5 billion quarterly base (wow), but what was most interesting about this growth were the drivers. Despite Tiendas 3B being in the “early” phases of its store expansion opportunity, more than half of this quarter’s growth was driven by same store sales growth! SSS grew 20% YoY against a comp of 18% YoY (Q2 2025). Simply phenomenal:

SSS growth requires some context, which doesn’t subtract from its impressiveness but actually amplifies it. At first sight one might think that SSS was aided by several tailwinds, the usual suspects of inflation in Mexico and a growing industry. The reality, though, is very different.

Food inflation in Mexico was 3-4% during the period, but inflation at Tiendas 3B was “minimal,” in management’s own words. This is something I discussed in my in-depth report. Due to Tiendas 3B’s hard discount model in which most efficiency gains are passed on to the consumer, inflation is unlikely to be a big tailwind for the business (in some instances the business model might lend itself to deflation!). Management said the following about the composition of SSS growth:

This is also an interesting topic (and very relevant for investors) because the value proposition within each store is simply getting better. A better value prop is not only driving consumers to buy more, but it’s also improving Tiendas 3B’s value capture. This has pretty relevant implications for returns, because the cost of opening a new store is growing much slower than the incremental value that Tiendas 3B is obtaining from each new store that is opened with an improved value proposition. This ultimately means that incremental returns are going up (something that was confirmed by management not long ago):

There’s also significant optionality in the stores, and these are likely to play out with minimal incremental needs of capital (i.e., therefore making their returns very attractive). As Tiendas 3B attracts more customers, the possibilities expand:

The second supposed “tailwind” (a growing industry) is even more interesting, because ANTAD SSS growth (what could be considered Tiendas 3B’s industry in Mexico) was actually down 0.1% in Q2 2026! This means Tiendas 3B won (once again) significant share from peers during the quarter. A trend that has been ongoing for a while:

This shouldn’t surprise anyone familiar with the hard discount model. The larger that Tiendas 3B gets, the more efficiencies it can pass on to its customers, therefore widening the gap with competitors. This is also not something an investor has to envision because it has played out like this in other countries with the likes of Lidl, ALDI, and BIM (Turkey). The gap above compounds materially because ANTAD is posting decreasing growth on pretty soft comps, whereas Tiendas 3B is posting accelerating growth on pretty tough comps. It doesn’t take a genius to understand that market share growth is accelerating.

The remaining variable in the growth algorithm pertains to store openings. Tiendas 3B opened 155 stores in Q2 and one new distribution center. Even though this is an okay store opening number (not the best, not the worst), it’s worth noting that Tiendas 3B is likely going to need to accelerate store openings if management wants to maintain growth at the current level. I believe this is very possible for reasons discussed in the in-depth report, but even when we zoom out we can see that Tiendas 3B store count growth remains very attractive: it has increased 20% since H1 2025. This is more than decent, although if my math is mathing, Tiendas 3B will need to accelerate its quarterly store openings to continue on this growth path (duh!). Will the company manage to do it? I believe so, and signs point to store growth potentially accelerating quite soon. Management shared the opening of 3 new distribution centers in Q3 (the company opened 1 in Q2). Just for context, this is the fastest DC opening growth in at least a year!

This would bring the distribution center total to 24, which at 173 stores per DC (more or less the average of the past few years) translates into the capacity to support at least 4,200 stores, a 16% increase from today’s numbers (and this is without assuming any more DC openings in future quarters).

Due to Tiendas 3B’s decentralized structure…

…the structure itself is unlikely to limit store count expansion. Management mentioned in the past that if there were to be one constraint, that would be the availability of real estate. Now, they claimed this quarter that opportunities were not precisely absent:

Margins were also a strong point and a pleasant surprise, as Tiendas 3B is tracking considerably ahead of my estimates (hopefully it continues to outpace my estimates for long). EBITDA excluding SBC rose 44% for a very decent 6.1% margin (would’ve been 6.2% excluding one-off costs related to the follow-on offering).

I know many people will claim that SBC is a real cost, and while I agree, I am already accounting for it in dilution and therefore including it here would be double counting:

The beauty of this model, however, is the negative working capital dynamic.

OCF/EBITDA conversion was 270% and Tiendas 3B generated 4.3 billion MXN in operating cash flow in Q2. This is around $253 million in OCF in a single quarter for a business with a current market cap under $6 billion and growing 40%. It’s evidently true that once growth slows down, the working capital benefit will shrink, but it’s key to enjoy it during the growth phase as it allows Tiendas 3B to self-finance its fast store expansion while having capital left over for shareholders (something I also went in detail during the in-depth report). There seemed to be some pretty strong tailwinds in working capital which I don’t know whether they’ll recur or not (I asked management and I’m waiting for a reply because the improvement was pretty spectacular).

Management also shared that, despite the margin upside limitations inherent in the hard discount model, they expect to continue to find operating leverage and therefore it’s unlikely that we’ll see the trend slowing down anytime soon (pretty bullish commentary to be honest).

The concerns and their counter-argument

Tiendas 3B faces three main “concerns.” The first one is evidently that the company is 100% based in Mexico. There’s little one can do about this besides being aware of it and managing the risk at the portfolio level.

The second “concern” is that the lock-up period expired this month (August 6th). This didn’t stop Tiendas 3B’s stock from climbing to ATHs, but management did mention that they’ll do whatever is in their hands to smooth any potential selling:

The thing is that, if Tiendas 3B continues to operate at a similar level, I don’t anticipate that the end of the lock-up period will cause any significant selling pressure down the line. Besides those mandated to sell their shares, who would be willing to front-load the selling of such an appealing asset?

The third concern is competition. Even though Tiendas 3B was early to the hard discount trend in Mexico (key to retain the leadership position), some investors are worried about copycats. Management said the following during the call:

I must say that the numbers that Tiendas 3B is reporting surely point to the gap between the company and competitors getting wider, not slimmer.

So, all in all, outstanding earnings from TBBB, but what about the valuation?

Is Tiendas 3B still a good deal?

As I mentioned at the beginning of the article, valuation for such fast-growing businesses can be somewhat tricky. The reason is price anchoring. When a stock rises considerably from our purchase price, we might naturally feel inclined to believe that it has become more expensive (as our purchase price was “fair value”), but the reality is that the valuation might be more appealing today than it was back then. Since I published my in-depth report (January 2026), Tiendas 3B’s stock has risen 38%, but it has not necessarily become 38% more expensive! Let’s understand whether this has been the case.

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Indices were up this week in what we could consider a relatively calm week (for once). I talk about the software industry this week as there was some “relevant” news for the entire industry. There was also some interesting company-specific news and I also made some movements in the portfolio.

Without further ado, let’s get on with it.

Articles of the week

I published three articles this week, all earnings digests. I thought my earnings season was finally coming to an end but just realized that two positions report next week!

The first article of the week was the earnings digest of the latest addition to the portfolio (paid subscribers can read the in-depth report here).

The company reported stronger-than-expected earnings and rose significantly, likely driven by somewhat of a short-squeeze. The stock eventually gave up a good chunk of these gains as the short squeeze faded and I decided to add to my position.

The second article of the week was Nintendo’s earnings digest.

The company reported okay numbers, but these are considerably better once one digs deeper and fully understands them. Touch wood, but the stock seems to be doing better lately and seems to have managed to break its correlation with the memory trade.

The third and final article of the week was Constellation’s earnings update.

Similarly to Nintendo, Constellation reported a “controversial” quarter in which the headline numbers left some doubts. I believe there was food for the bears and for the bulls, but maybe more for the latter (albeit I am biased).

Tiendas 3B (TBBB) also reported outstanding earnings this week, with the stock enjoying a significant pop.

I am working on an article that I will most likely publish on Monday. In the meantime you can refresh the investment thesis by reading the in-depth report. The stock is up considerably since I published it, but growth has been spectacular and therefore it hasn’t necessarily become more expensive (more on this on Monday’s article).

Without further ado, let’s see what the markets did this week.

Market Overview

Both indices were up this week, although the Nasdaq clearly outpaced the S&P 500:

We had a pretty calm week…maybe too much? Trump was silent, we got no incremental news from Hormuz…feels suspicious. Now, what we did get post-market close on Friday was a bunch of 13Fs fueling people’s confirmation bias. I will never not find it funny how much people directly and indirectly focus on 13Fs. These might be a good source of ideas, but that’s about it. One never knows…

• Why someone bought/sold their position

• If they continue to hold it at the 13F date

Still, a lot of people use the 13Fs to gain a false confidence in that they have made the right decision, which seems like something terrible to do. I’ve even seen newsletter writers (I am pretty sure some even mean it) claiming that “superinvestors” are reading their content and copying their ideas. While this might be true in some cases, I’d say that it’s definitely not true 99% of the time. Anyways, all this to say that the moment to mute the word “13F” has come!

In other relevant news…Silver Lake is supposedly in talks with Workday to make one of the largest tech buyouts in history. Workday’s shares rose almost 20% on the news and lifted the entire software industry with it. One might think that these news portray that software is not worth $0, but evidently the following day the IGV dropped more than 1% and most software companies lost what they had gained the day before. Is software more/less valuable due to the Silver Lake news? I believe not, but it might be great news for sentiment that the private markets are finding publicly traded companies appealing (i.e., there’s a safety net). What’s interesting about this time around is that it’s also going the other way: publicly traded software serial acquirers are also taking advantage of software valuations in private markets coming down to earth (finally):

This is great news for many companies, especially for those that don’t issue shares to acquire others as they would have to issue shares at depressed valuations.

The industry map was the definition of mixed this week:

The fear and greed index improved somewhat and remained in greed territory:

Some portfolio moves this week: one sell, two buys

I made some portfolio moves this week. I sold a third of one of my core holdings (as I added significantly during this year’s drawdown) and added to two other positions that I believe are poised to deliver >15% returns over the coming years. I have updated the Best Anchor Stock portfolio management tool (including the expected IRRs of all of the companies in the portfolio). This means you can see the updated matrix in the tool (available if you are a paid sub). Here are the transactions:

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Constellation reported good headline numbers in Q2. Revenue grew 17%, although margins contracted on the face of expenses growing 20%. This is nothing unusual in periods of very strong capital deployment. Management claimed that new acquisitions will eventually trend towards the normalized margin:

I should also note that (even if not extremely material to overall expenses) contingent consideration expenses grew considerably (+200% YoY) in Q2. This is a “good” expense to have because it demonstrates that the investment theses are playing out:

Contrary to many believing that revenue is a “clean” number, Constellation’s total revenue number also needs context. For starters, the company is deploying capital into opportunities that “entirely” bypass the consolidated revenue figure. I explained this in my most recent Topicus article, but Asseco is being reported through the equity method, meaning that it’s not consolidated in revenue but the company’s share of its profits comes included in “share in net (income) loss of equity investee.” What this ultimately means is that Asseco is indeed present in Constellation’s net income figure (after deducting Topicus’ non-controlling interests) but is not consolidated in the revenue line. Something similar happens with Sabre in the sense that revenue bypasses the revenue line. Sabre, however, is not accounted for in the same line as Asseco but rather in “finance (expense) income.”

Topicus deployed around €400 million in Asseco (around $500 million at current exchange rates) and Constellation deployed around $90 million in Sabre. This ultimately means that Constellation has deployed around $500 - $600 million into acquisitions that are entirely bypassing the company’s revenue and therefore not contributing to revenue growth (even though these are indeed having an impact down the income statement). There’s nothing wrong with this, but I believe it’s something important for people to consider as the relationship between capital deployment and revenue growth will not be perfectly linear if Constellation and its universe continue using these capital deployment options.

This quarter’s organic growth rate also requires some context. Constellation’s organic growth (both the total and maintenance and recurring FX adjusted) clearly decelerated in Q2:

Management attributed this deceleration to Altera, claiming that the company had enjoyed $17 million in non-recurring revenue benefits in Q2 2025 (the comparable period). So, in short, Constellation’s management attributed this deceleration to tough (and non-recurring) comps. They also shared that, without this impact, maintenance and recurring organic growth would’ve been 4%:

4% organic growth is not an outstanding figure either and is in the low-end of what Constellation has historically achieved in FX-adjusted maintenance organic growth, but it’s nonetheless acceptable. I don’t think there’s anything worrying going on with Altera (although I would’ve appreciated management flagging this in the Q2 2025 MD&A) and I believe that, regardless of organic growth, it’s proving to be a pretty good investment for Constellation.

Altera generated yet another $21 million in FCFA2S in Q2 2026. Constellation acquired Altera in Q2 2022 for an EV of $892 million and has already generated $400 million in FCFA2S from this asset. Note that Constellation’s equity in this acquisition was less than $400 million, meaning that the asset is virtually paid and any potential stabilization could be considered “free” for Constellation.

One could argue that organic growth is not looking great, but Altera’s performance/market share seems to be stabilizing when “ignoring” the quarterly volatility:

Management simply believes it’s a temporary issue caused by comps:

It was only not isolated to Altera, but there were a couple of other “issues,” none driven by AI:

Regardless of the discussions around organic growth, I believe the Altera example comes with several important lessons, with the most relevant one being that Constellation cares about IRR, not organic growth. Altera is not Constellation’s fastest-growing asset, but that’s fine so long as the IRR is great. Now, one can’t ignore the market’s current AI-SaaS narrative. Even though Constellation’s model is ideal to generate great returns for its shareholders, it doesn’t seem to be ideally positioned to fit the market’s narrative. I’m okay with this, but it’s definitely something to be aware of. This reminds me of a famous Puru Saxena post (“do you care about accounting numbers or do you want to make money?”). For Constellation this would translate into:

My friend succinctly put it in the following post (which I agree with even though I don’t know if it’ll fit well with the market’s narrative):

Now, all this said, management did address this during the call and argued that AI-driven organic growth will most likely come, just further down the road because they are currently in the phase where they understand customers needs to see what they want to develop:

Things get even murkier below the “expenses” line (are you not entertained?). Constellation’s P&L has several items which make net income misleading. The easy way forward might be to look at Free Cash Flow Available to Shareholders, but this metric is also misleading and the reason is the IRGA (which was revaluated downward in H1 2026 primarily due to foreign exchange gains). A downward revaluation is a tailwind to Constellation’s reported FCFA2S and I discussed extensively in this article what the IRGA is and why I think it’s an asset rather than a liability (albeit I understand why CSU treats it as a liability), but the bottom line is that it’s better to exclude it from the numbers when contextualizing FCFA2S. FCFA2S showed strong reported growth…

…but growth was more moderate (+18% in Q1 and +12% in H1) albeit acceptable when excluding the IRGA revaluation charges. OCF growth was also subdued, but after checking the financial statements (including those of Topicus), the lower cash conversion can be attributed to temporary items which will eventually resolve themselves (it’s not the first time that it happens).

The highlight of the quarter was definitely capital deployment. Constellation Software is off to the races and is going to report an outstanding (and record) capital deployment year. The company deployed…

• $809 million in Q1

• $893 million in Q2

• $818 million thus far in Q3 (half-way through)

This means the company has deployed $2.5 billion YTD, which is already close to matching the record year of 2023 (with a quarter and a half to go!). This is outstanding performance, and the best news is that Constellation remains lightly levered (net debt over LTM OCF of under 0.5x) and cash generative, meaning that there’s still significant leeway to continue pursuing acquisitions.

As discussed at the beginning of the article, I believe Constellation’s current quarter has food for the bulls and for the bears, although I believe there’s more food for the bulls (I’m definitely biased). The relatively weak organic growth is a way to fuel the bears’ “AI kills SaaS” narrative, but the record capital deployment is a way to demonstrate that Constellation can materially benefit from valuation dislocations and that the capital deployment runway remains long.

I do get the point (and somewhat agree with it) that underlying organic growth ex-Altera is acceptable, but again I don’t think any of us (including myself) adjusted Constellation’s Q2 2025 organic growth downward (especially considering that the MD&A did not disclose it). So yes, adjusting it out makes sense, but as Hermes’ CEO said a couple of weeks ago:

I believe Constellation reported a solid quarter of exceptional capital deployment and “okayish” organic growth. This should lead to substantial revenue acceleration (although remember the relationship between capital deployment and revenue growth is not the same as it was in the past) and demonstrates that Constellation is still finding opportunities to deploy its capital across the VMS space.

Have a great day,

Leandro

Nintendo reported fine earnings last week, although these could be considered pretty strong once contextualized (you’ll understand what I mean after reading this article). The stock reacted favorably after having been “destroyed” on the face of rising memory costs and becoming an “inverse-memory” stock. Nintendo is now up 21% over the past month, which is honestly not reassuring considering that it’s up almost the same amount as the KOSPI is down from its ATHs (all time highs)! This means that Nintendo may well continue to be an “inverse memory” stock:

Let’s start with Nintendo’s headline numbers. Sales dropped 9.5% but profitability improved quite considerably, with operating profit rising 150% year over year:

We need to understand two things to contextualize the numbers above. The first one is that the comparable quarter (Q1 FY 2026) was the Switch 2 launch quarter. This is relevant because it impacts both sales and margins comparisons. With hardware still carrying the bulk of the sales, it’s normal to see sales down when compared to Nintendo’s record quarter in terms of hardware sales. Let’s not forget that Nintendo sold 5.82 million SW2 in Q1 FY 2026 (which was not even a holiday quarter). Comps were pretty tough to say the least.

Now, in terms of margins we have to consider two things. First, as software is slowly but steadily becoming…

1. A more important driver of revenue (later we’ll see that software sales have to be contextualized)

2. More digitally focused

…margins should naturally improve over time. It has always been this way (especially the first point) and it also seems that digital software sales have gotten to an inflection point (likely driven by Nintendo’s tiered pricing according to the software format).

The second very relevant event was that Nintendo received a $300 million refund from the US government related to the IEEPA tariffs. Even though many will claim (and rightly so) that this is a “non-recurring” benefit, the reality is that one could also argue that Nintendo’s profits in past periods were depressed and therefore this is simply a catch-up event. Some companies have been returning these refunds to customers, but Nintendo is unlikely to do so because the company bore the cost of said tariffs (not customers). This ultimately means that Nintendo just received $300 million of fresh cash, that in pure Japanese fashion they’ll most likely store in the balance sheet!

I believe there was quite a bit of controversy regarding the SW1 and SW2 hardware and software sales numbers. I’ve already helped contextualize the 34.4% drop in SW2 hardware sales (comps were tough due to the launch quarter), but how can one explain the fact that SW1 software sales were up 39% with SW2 software sales only up 9.2%?

I believe there are a couple of potential explanations here. The first and probably most straightforward one is also related to the launch quarter. The most popular product offering during the launch quarter were the bundles (most notably with Mario Kart World). These bundles considerably improved the tie ratio and made software comps pretty tough. Just for context, Nintendo sold 8.7 million software units on an installed base of 5.82 million SW2 in Q1 FY 2026. That’s a quarterly tie ratio of 1.5, which is extremely high for a single quarter and could be attributed to the bundling.

The second reason for the “poor” SW2 software sales could be attributed to the software lineup. As I have been discussing for a while, Nintendo’s hardware sales are very impressive because the company has not used most of its best-selling software. Selling 3.82 million SW2 in the system’s second year and with no strong software release is outstanding.

This said, the hardware numbers should also be taken with a “grain of salt” because there was a demand pull-forward caused by the price hike in Japan. Nintendo raised the price of the SW2 in Japan at the end of May, creating an unprecedented surge in SW2 demand. This likely boosted SW2 numbers in Q1 FY 2027, but it doesn’t make it less impressive. It’s worth noting that the SW2 sales in Japan have remained strong and have recently accelerated post-Splatoon Raiders launch (which we’ll see in Nintendo’s Q2), demonstrating that the new SW2 pricing is still attractive when software is there to justify it (and Splatoon Raiders is not precisely one of Nintendo’s heavy hitters):

Then we have Tomodachi Life, which sold almost 8 million units (Nintendo is by far the company with the most million-unit seller franchises in the entire industry). Tomodachi Life was not a SW2 exclusive and became a great success, so it stimulated SW1 software sales BUT (and this is pretty important when contextualizing the numbers) one must be aware that Nintendo counts its software sales according to the platform the game is made for, NOT where it’s played. This means that if Tomodachi Life also sold well across SW2 users, those sales are counted as SW1 software sales. So, ultimately, if there has been a strong SW1 release in any given quarter, it’s normal to see strong SW1 sales and “soft” SW2 sales in comparison even though actual SW2 sales might have been just fine.

So, for all that I have discussed above, I wouldn’t over-obsess with software sales and YoY comparisons this quarter. What’s great news is that digital sales as a proportion of total sales rose 220 bps:

This transition is great for margins and I expect it to continue going forward considering that Nintendo is taking steps to become a more digitally-focused software provider. The success of Tomodachi Life also played an important role in the higher proportion of 1P sales, BUT the SW2 might be the platform with the most 3P support that Nintendo has ever had.

Now, the other controversial topic was the guide. Despite reporting a very good Q1, Nintendo decided to leave the guide unchanged, both financially and in terms of hardware and software units. Let’s begin with the financial guide:

The fact that management decided to leave this guide unchanged even after receiving a $300 million refund from the US government can potentially mean a couple of things:

1. The memory situation got worse and Nintendo expects further headwinds in terms of profitability which the refunds helped offset (i.e., a neutral impact)

2. Nintendo assumed they would get the refunds when setting the guide

3. Management is being conservative because it’s still Q1

We’ll only know which one of these is the correct one in hindsight, but if I had to guess I’d say it’s likely a combination of the first and the third, and maybe more of the third. Nintendo’s management is characterized for their conservativeness, so it was unlikely they would change their guide in Q1 in such a turbulent year (at least in terms of memory costs). This conservativeness is more apparent in the hardware and software guide:

Management still believes they will sell 16.5 million SW2 units and 2 million SW1 units in FY 2027. This seems a tad conservative considering that the company has already sold 23% of the SW2 objective in Q1, which is (1) typically Nintendo’s worst-selling quarter and (2) not a quarter precisely characterized by strong software releases. To understand why (1) makes it conservative, we must try to understand how much this proportion was in the years prior. Across the SW1 lifecycle, Nintendo’s hardware Q1 sales were responsible (on average) for 17.7% of total annual sales:

Seeing 23% this quarter definitely makes it seems like it’s trending above average, which leaves two potential options on the table. Either it’s going to be an above-average year in terms of Q1 hardware sales or Nintendo will end up selling more than it anticipates and therefore it will be a normal year in terms of Q1 sales. Now, some people might argue that this is normal due to the demand pull forward in Japan, but what I would say is that (while true) there’s still a demand pull forward likely coming in the US and Europe when Nintendo raises prices on September 1st.

In terms of software, we must look at it in a combined manner (for the reason I discussed above). Nintendo’s forecast calls for 165 million software units sold this year across the SW1 and the SW2. The company sold 43.3 million (26% of the total) in Q1. This also seems above average, especially for a period with no outstanding blockbuster. Now, I do believe that we’ll have the really strong year in terms of hardware and software sales in FY 2028 (very strong releases coming), but there’s no denying that the guide looks conservative. If history is any guide, Nintendo tends to be optimistic with hardware sales and pessimistic with software sales, which tends to result in positive earnings surprises due to the software mix, but we’ll see.

Management does seem to believe on the long term success of the business as Nintendo will invest 121 billion yen (a whopping 760 million USD) in a new Technology Development Center:

While the industry continues to struggle and downsize teams, Nintendo continues to invest for the future.

I wanted to end the article talking about the stock. Even though the stock has recovered somewhat from the recent lows, I still believe that it’s at the mercy of the “memory trade.” Nintendo’s hardware and software KPIs are all performing better than many believed (the SW2 sales are 11% ahead of the SW1 sales at a similar point in the cycle) despite the company not really pushing into its software line-up. Many believe that Nintendo’s SW1 cycle can’t be improved, but early signs seem to point out that it can. Now, despite this better than expected performance, Nintendo’s stock has suffered due to higher memory prices. This is not completely unjustified and it makes sense, but…

1. The memory pricing issue will eventually resolve itself

2. Nintendo has increased prices with virtually no impact on demand so long as the software lineup is good

So, I am in the middle of two cross-roads. On one hand, I believe that over the long-term, the current issues don’t make much sense. On the other hand, I can understand why the stock has suffered.

The good news for shareholders is that, even despite the memory issue, the KPIs continue to trend in the right direction. Nintendo is currently trading at an EV of 7.34 trillion yen. With management expecting 370 billion yen in operating profit this year, this means that Nintendo is currently trading at an EV/EBIT of 19x with a long runway of revenue and margin expansion ahead (I don’t believe the current year is representative of the run rate). While many will claim that EV is not the best metric for Nintendo as the cash position does not “belong entirely” to shareholders, this EV/EBIT metric is calculated without considering the company’s hidden assets (like the stake in the Pokemon Company, the stake in the Seattle Mariners…). I believe Nintendo remains cheap.

Have a great day,

Leandro

Best Anchor Stocks

(NEW REPORT) Proprietary monopolistic data that matters

Over the years, five names have shown up in Best Anchor Stocks that had one thing in common: cyclicality taking hold of the narrative despite the business’ long-term secularity…

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2 months ago · 10 likes · 10 comments · Best Anchor Stocks

In it, I profiled a very interesting business that had been sold-off by the market for several reasons, some of which I deemed to be temporary and other which I deemed to be outright wrong. Here’s a short summary of the investment thesis:

• A 90%+ share of the single workflow its customers can’t operate without. This company exhibits monopoly-like characteristics on the thing that matters most in its industry.

• Regulators effectively confirmed the superiority by blocking an acquisition that, in hindsight, did not change the fate of the industry.

• Management’s own incentive plan is based on aggressive stock price targets. Boards don’t set stretch targets like that unless they genuinely believe the shares are cheap and the objectives are achievable.

• There’s roughly a 10x gap between current revenue and management’s own estimate of the total addressable market — and by management’s own admission, about 80% of the growth needed to close that gap can come from customers the company already has. That’s a very different growth profile than needing to win new logos in a crowded market.

• Buybacks have already cut shares outstanding by more than 20% and management continues to simplify the business. Shrinking to become better is almost always a great capital allocation sign.

The company recently reported its first earnings as a portfolio company and the stock enjoyed a mid-teens pop (probably aided by somewhat of a short-squeeze). I don’t know who in their right mind would short a company that’s…

• Accelerating its growth

• Expanding margins significantly

• Repurchasing its undervalued stock aggressively

…but I guess there’s a market for everything! Now, the most important takeaway from the earnings release was (in my view) that the company continues to slowly but steadily put to rest the market’s concerns and that the investment thesis is now playing out faster than previously anticipated.

Let’s take a look at the quarter.

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Both indices were up considerably this week, aided by lower tensions in the Middle East and improved sentiment around semiconductors and hyperscalers. I share a word or two about this in the market commentary together with what I consider to be my hard rules in portfolio management. There is also plenty of company-specific news this week.

Without further ado, let’s get on with it.

Articles of the week

I published four articles this week, all earnings digests. The first article was an Amazon’s earnings digest in which I go over the perennial debate for the hyperscalers: will AI ROIC be enough to justify the investment? You can read it here: You can’t sell the picks and doubt the miners.

The second one was Stevanato’s Q2: “The Tip of the Iceberg.”.

The company reported strong earnings but lowered its reported guide again due to a divestment. The call was the highlight of the release and honestly what long-term investors should focus on.

The third article of the week was Topicus’ earnings digest.

The company reported okay earnings at first glance, but they are significantly stronger when one is able to look underneath the surface.

The fourth article was Shift4’s earnings digest.

The company reported strong Q2 earnings but lowered the guide and the stock fell 24% in two days. I explain why this might have been the case.

What I’ve been looking at

As for an update of what I’ve been looking at…after looking through many companies I am currently looking closer into 2, both of which I believe have potential and are pretty unknown across the investor community (at least I have not seen them mentioned elsewhere). This evidently doesn’t make them better, but just to give you a glimpse…

1. One is a software business that has a lot of things in common with the most recent addition to the portfolio (which is off to a strong start), albeit it operates in a different vertical

2. The other one is an engineering business that I came across due to pure serendipity (one never knows where ideas might come from)

One of them looks cheap due to a narrative that I don’t believe makes sense and I have yet to figure out why the other looks cheap.

I will continue looking into these and I am fairly confident that one of the two might end up making it into the portfolio (maybe both), but all possibilities are on the table at this point.

Without further ado, let’s see what the markets did this week.

Market Overview

Both indices were up considerably this week:

Indices are at ATHs while many continue to claim that we are in a bubble. This might end up being true, but there’s no denying that earnings are growing faster than many expected last year. Now, earnings growth must be contextualized. For starters, it has been concentrated primarily around two groups of companies and the same theme: hyperscalers and semis:

The above is fuel to the bears which can claim that earnings growth is extremely concentrated across two sectors related to the same theme (AI), a theme that is in exuberance mode and that it’s not sustainable. This is a fair concern, which takes us to the second point: earnings and returns durability. Even though earnings are growing fast, many claim that the growth is not sustainable. The concerns are driven by the fact that hyperscalers will (supposedly) not generate an acceptable ROIC on their AI capex, which will eventually lead them to capex cuts that will impact the entire AI supply chain. While this is a fair concern, I believe the hyperscalers are slowly but steadily putting these concerns to rest and I explained why in my most recent Amazon article (in which I also discuss the caveats).

Another thing that popped into my mind this week (after experiencing a pretty volatile earnings season which somehow reminded me of this) was the topic of diversification. I published the following on X:

Even though most of the fortunes have been made through extreme concentration, the reality is that those are a small subset of the entire population. In short, there are many more people who have gotten liquidated or gone bankrupt through extreme concentration than those who made it (evidently, we only hear about the latter). The goal of investing is to compound capital over long periods (which is when compounding is most noticeable) and to do this one has to survive, and the way to survive is through diversification, why? Because we are going to be wrong even in high-conviction situations, so better accept it and try to isolate oneself against it. I’d say that my portfolio management has gotten polished over the past few years, which has resulted in the following “hard rules:”

• Never overconcentrate (even if very confident)

• It’s okay to sell being a LT investor

• Never leverage (it also stops compounding)

There are evidently more things I think about when thinking about the portfolio, but these three above are pretty important.

The industry map was pretty much green this week as the strength was broadbased:

The fear and greed index improved markedly and jumped to greed territory:

Company-specific news

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What makes this merciless reaction interesting is that it seems to be isolated to Shift4. The company suffered by far the worst stock reaction despite payment companies lowering the guide across the board (some even due to some similar headwinds that Shift4 is experiencing!). Their reactions were very different in what many consider to be a “bombed out” sector (Shift4 said “hold my beer!”)

Earnings were definitely not perfect but had certain things that were very encouraging and that portray that the thesis is intact (or even trending better than expected). Let’s start with an overview of the quarter. The headline numbers were pretty good: strong beats across the board:

• Revenue of $1.3 billion beat estimates ($1.24 billion) by 5%

• Adjusted EPS of $1.32 beat estimates ($1.25) by 6%

• Adjusted EBITDA of $284 million beat estimates ($275 million) by 3.3%

• GRNLF of $624 million beat estimates ($614.34 million) by 16%

One would’ve (incorrectly) thought that these metrics would’ve been enough for a stock like Shift4 to do well, but the market thought otherwise. Granted this is only part of the story. Here’s the summary of Shift4’s quarter:

I believe several things are worth discussing about the numbers above. The first one (which likely played a role in the selloff) is cash flows. Even though all numbers appear to be trending in the right direction, cash flows seem to be doing the exact opposite (i.e., trending down significantly). Shift4 reported operating cash flow and free cash flow of $63 million and $21 million, respectively, in Q2. Both of these metrics were down a whopping 55% and 82% respectively (yikes?). Context is required. The cash flow seasonality of Global Blue (reported as TFS by Shift4) differs markedly from that of the rest of the business. Global Blue consumes significant capital in H1 and then “unleashes” significant cash in H2.

This effect is evident in the company’s full year guide. Despite having generated $109 million in Adjusted Free Cash Flow in H1, management is guiding for a midpoint of $470 million of Adjusted Free Cash Flow in FY 2026. This means that Shift4 will generate $361 million of Adjusted FCF in H2, or what’s the same, 77% of the year’s total FCF generation will take place in H2. This contrasts very sharply with the pre-Global Blue era when Adjusted Free Cash Flow generation was much more balanced across the year. For example, in 2024, Shift4 generated $399 million in Adjusted Free Cash Flow, with 40% being generated in H1 and the remaining in H2.

Now, there’s something to be said about cash conversion (and not good). Shift4 generated $399 million in Adjusted Free Cash Flow in 2024 on $677.4 million of Adjusted EBITDA for a 59% conversion. Management expects to generate $470 million in Adjusted FCF this year on $1.17 billion of Adjusted EBITDA for a conversion of 42%. So yes, the business is growing fine but the lower conversion is not helping translating this growth into Adjusted FCF. Part of it is definitely the higher leverage caused by the Global Blue deal, so we should see (over time) Adjusted Free Cash Flow conversion increase. Management mentioned that once the Term Loan refinancing and the impact from the Middle East are said and done, FCF conversion should improve considerably in 2027 (we’ll see).

Now, before claiming that the market is “retarded,” we should try thinking about what the market might be seeing here. The market is likely seeing significantly lower cash flows while net leverage remains close to ATHs:

There’s no denying that Adjusted Free Cash Flow will improve in H2, but the market likely thinks that Shift4 has a balance sheet problem and we know that it tends to be merciless with these (many times, rightly so). Even though I am not worried about this year’s cash generation, there’s no denying that Global Blue’s seasonality is impacting capital allocation decisions at Shift4, portraying that the margin of safety is not high.

For example, the “poor” FCF conversion in H1 had implications for the buyback, which disappointed many. Shift4 only repurchased around 650,000 shares, but at $38 which is close to the quarter lows. This is evidently not great, but management alluded to low cash conversion and the company being close to their 3.75x net leverage target as limitants to increased buybacks:

They plan to increase these in the coming quarters as cash generation improves, so after all it might not be the worse news that the stock was 20% down yesterday? (trying to remain positive here!). What seems pretty evident (at least for me) is that Shift4 would’ve reacted pretty differently to yesterday’s earnings if the balance sheet was not so levered and we were not in a “higher for longer” kind of situation regarding interest rates. I don’t think the current balance sheet is existential to Shift4, but there were clues this quarter that it reduces options for management, even if temporarily.

TFS (i.e., Global Blue) is an interesting business not only because it has totally shifted Shift4’s cash flow seasonality, but because it accelerated in the face of the Middle East disruption. Last quarter, management claimed they expected a $20 million headwind from the Middle East conflict on TFS. This impact ended up being slightly better than expected and other “corridors” helped offset it, allowing TFS to accelerate its growth from 4% in Q1 to 8% in Q2. What management said around organic growth was even more interesting.

Shift4 grew 11% organically in Q2 (pretty decent if you ask me) and also shared that Global Blue would contribute to organic growth starting next quarter. An analyst asked management what this meant for organic growth. It does seem “dilutive” in terms of organic growth when considering the Middle East impact (guided as $25 million in Q3) because 8% growth is less than 11% (duh), but management deems this impact temporary and believes that organic growth would mathematically land in the mid-teens ignoring this impact (meaning that Global Blue would be accretive to organic growth):

I’d say this is a pretty impressive organic growth rate for a business like Shift4 which many deemed “unable” to grow organically, but the reality is that organic growth will likely decelerate next Q if the Middle East impact falls around what management expects. Now, regardless of the cash flow timing issues and the Middle East impact, Global Blue seems to be a decent business. Not only is the business growing at a HSD clip despite the impact from the Middle East, but it’s also proving to be a good tool to gain larger retailers (note that the initial synergies were expected to be found primarily in SMBs):

It’s also having a very positive impact on other of Shift4’s offerings, for example on Shift4 One (Shift4’s unique 4-1 payment terminal). ShiftOne continues its international rollout and is trending ahead of schedule:

The international opportunity is a very interesting one for Shift4, not only because it brings a significantly larger TAM (enabled to an extent by Global Blue) but also because management believes that they are just scratching the surface:

Not only does the above imply that they are just getting started internationally, but also that current international investments are suppressing margins quite a bit. Management stated the goal to achieve 50% Adjusted EBITDA margins as the international segment scales.

Considering that they guided for 46.5% EBITDA margins for FY 2026, the margin expansion runway remains somewhat significant.

If one only reads the above, the stock drop might not make any sense if one thinks that Shift4 doesn’t have a balance sheet problem, but let’s take a look at the guide. Management lowered the guide by $40 million at the midpoint, which they divided between a $25 million impact from the Middle East and $20 million of further FX headwinds. This means that, on an FX-neutral basis, the guide was reduced by 100 basis points.

While not great, it doesn’t seem like anything thesis breaking when considering that the Middle East impact promises to be temporary and is consistent with what other businesses have reported. Now, there are sources of upside and downside to the guide and investors should have them in mind.

The main source of upside is that management seems to be being conservative, for two reasons. First, they also guided for a $20 million Middle East impact in Q2 which played largely as expected but were surprised with other pockets of strength within Global Blue. This may well repeat itself in Q3 (we’ll see). The fact that management lowered the full year guide on two stronger than expected quarters in Q1 and Q2 probably has the market concerned (and maybe rightly so). The second reason why they might be being conservative is that, despite positive trends in SSS (same-store-sales) growth in the US, they decided to leave their assumption for flat SSS unchanged:

This seems conservative but also tough to forecast. The main source of further downside is the Middle East. Management shared that they only guide for the following 60 days in terms of the Middle East impact, which ultimately means that there’s “nothing” baked in for Q4. Now, I hope they’ve been sharp enough to have considered further conservatism because yet another guidance cut would be pretty terrible for their credibility (and therefore the stock). So, it’s undeniable that seeing the guidance getting cut is not great, but does it justify a 20% drop? I think it’s a bit too much, especially considering that other payment peers are reporting similar issues with no apparent negative stock market reactions.

Now, as discussed above, it’s true that Shift4 is close to its leverage limits and the market might be worried about survival. This has likely created a fertile ground for shorts. While not great, we must not forget that buybacks are likely going to resume in H2 and therefore a temporarily lower stock price might not be the worse news (even though every shareholder wants to see the stock moving again).

Lastly and just to finish, I wanted to talk about a narrative violation. Recall that payment companies (Shift4 among them) had been historically considered “race to the bottom” stocks. The rationale was that spreads would be perennially compressing across the board as there were “no competitive advantages to be had” in payments. Well, Shift4’s blended spreads seem to have stabilized around 60 bps (a bit higher even) and management even sees upside to these as they onboard SMBs. Evidently we’ll have to wait and see what happens in the future, but quarter after quarter, Shift4 seems to be putting this narrative to rest.

So, just to summarize, I don’t think earnings were perfect, but I don’t think they deserved a 20% drop either. Management (imho) should be a bit careful with expectations management considering that they are currently categorized in the “losing” bucket by the market, a market that believes that Shift4 has a balance sheet problem. This said, with buybacks still to be done and free cash flow generation improving significantly in H2, one can’t deny that they might be able to turn this volatility in their favor.

I will continue to hold my shares.

Have a great day,

Leandro

Revenue grew 18% in Q2 and stood at +20% in H1 2026, with expenses growing slightly slower or in line with revenue:

Some people have asked me why revenue is not growing faster in 2026 considering that 2025 was a record capital deployment year for Topicus. Fair concern, but there’s an explanation. Topicus deployed around €700 million into acquisitions in 2025 BUT around €400 million of this amount was deployed into the purchase of Asseco shares. Topicus built a 24% stake in the Polish VMS giant in 2025, and this investment is accounted for as follows in Topicus’ accounts:

The above means in plain English that Asseco’s revenue is not consolidated in Topicus’ accounts but rather that Topicus reports the changes in the fair value of its Asseco investment using a line in the P&L called “share in net (income) loss of equity investee.” Topicus reported a €10 million gain this quarter and €20 million over the first six months of the year from its Asseco investment. The implications of this are ultimately that capital deployment doesn’t show in revenue growth but rather in income and in Free Cash Flow if the investee pays dividends (which they did!). This is not a problem once understood because what shareholders should ultimately care about is free cash flow.

Topicus’ Free Cash Flow Available to shareholders saw a significant improvement in Q2 driven by a €59 million dividend paid by Asseco:

Even though many people believe that this dividend should be “excluded” when thinking about Topicus’ normalized FCFA2S, I disagree and actually think it should be the opposite or else we would be understating the company’s cash flow. The rationale is that Topicus owns a significant stake in a business that pays out dividends, and the company can rightfully register said dividends as free cash flow. I am pretty sure that, if Topicus were consolidating Asseco’s entire Free Cash Flow in its financials (later diminishing it proportionally through the non-controlling interests), nobody would be claiming that it should be adjusted out.

I also believe this event somewhat reduces the risk of CSU’s “new” PEMs strategy. Recall that CSU and Topicus (which is already used to PEMs) have claimed that they would increasingly invest in stakes of publicly traded companies taking advantage of the SaaSpocalipse. While great for capital deployment, many people argued that this could result in poor FCF conversion because they would ultimately depend on the investee returning cash as dividends. This remains a risk and is likely to be one on a case-by-case basis, but at least here we see that FCF is making it into the company’s books. Let’s not forget that Topicus invested €413 million into Asseco last year and has already received a €60 million dividend (not a bad 1-year return). To this we must add that Topicus was able to buy its Asseco stake at 85 PLN, and Asseco’s shares are now worth 209 PLN.

Now, staying on the topic of capital deployment, one can’t deny that the capital deployed thus far in 2026 has been “meh.” Topicus deployed €40 million into acquisitions in Q2, bringing the H1 total to €62.5 million. If we add the “subsequent events” figure (i.e., what the company has deployed thus far in Q3) we get to YTD capital deployment of around €119 million. This trails considerably what Topicus deployed in 2025 (€700 million) but it needs some context.

For starters, assuming that Topicus will generate €262 million in FCFA2S this year (last year’s figure adding 20% growth), then the company has deployed around 45% of its (expected) 2026 FCFA2S while being 58% through the year. Not a perfect match, but nothing bad either when assuming that Topicus must reinvest 100% of its FCFA2S every year. We must also not forget that this metric (capital deployment over FCFA2S) was 222% in FY 2025.

Capital deployment (when it’s done how it should be done) is inherently lumpy. I remember that similar capital deployment concerns surfaced in 2024 when capital deployment was “only” €153 million for the full year. Topicus followed 2024 with a €700 million capital deployment year. So, there’s not really much that we can read into. Who knows, maybe Topicus deploys a lot of capital in Q3 and Q4 and capital deployment figures end up looking exceptional in 2026 as well.

The other interesting thing about all of this is that Topicus took advantage of its slower capital deployment to significantly improve its financial position. Cash stayed constant but Topicus repaid quite a bit of debt to bring the net debt position down to €144.4 million from €366 million:

This, added to the fact that there are no large payments of the term loans due until 2032, makes me optimistic in terms of go-forward capital deployment. The thing is that we’ll never know when Topicus will find opportunities to deploy capital, but we do know that the financial position (especially considering that Topicus’ management is not afraid of leverage) will allow the company to act on them when they present themselves.

The last thing I believe is worth discussing (before going into the valuation) is organic growth. The headline number came in at 4%, but we should look under the hood. Organic growth in maintenance revenue was 6% and has been above 6% for a very long time. In fact, Topicus has never reported a quarter of less than 6% organic growth in maintenance and recurring, although it would be nice to see it tick back up:

All in all, good report from Topicus in which the headline figures (as always) require context.

But, what about the valuation?

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• The weakness in engineering (Capex across the pharma industry is not undergoing its best period as the industry digests the pandemic overcapacity)

• Currency headwinds

Engineering does seem to be finally stabilizing (-2% YoY in Q2 but improving margins and “decent” commentary on the outlook) and management began to disclose (finally) an organic growth figure so investors could look through the currency noise. One would’ve thought we would finally get an explicit guidance raise (not an implicit one), right? Well, we got a third “aggressor” this quarter!

Stevanato announced the divestiture of its California-based subsidiary Balda C. Brewer, which comes with a €15 million headwind to the guided reported figures. The midpoint of the reported guide was lowered by €5 million (from €1.275 billion to €1.270 billion). If we make an apples-to-apples comparison (i.e., excluding the €15 million divestiture headwind from Balda) then Stevanato actually raised its reported guide from €1.26 billion to €1.27 billion, a marginal increase.

One thing that confused me quite a bit (management definitely has to work on their communication skills) was the following:

This seems like great news, but the numbers are “nowhere” to be found. The thing is that, when one compares the guide provided in Q2 to that provided in Q1, the organic growth guide was maintained at a midpoint of 9%, so either we are talking about decimals here or the better than anticipated currency translation is doing the heavy lifting of the raised guide. Management provided the answer in the call, arguing that there’s a €15 million headwind from the Balda divestiture and a €8 million favorable adjustment from currency. This leaves a €7 million overall headwind from both things, and with the guide being lowered €5 million, we then can triangulate that management expects a +€2 million organic growth tailwind, which is honestly not something to write home about.

Despite this and even though my expectations might have been higher than what we got, there’s no denying that earnings were fine. Stevanato grew its revenue 8% organically, with BDS growing 10% at constant currency (driven by 18% constant currency growth in HVS) and engineering starting to show signs of life. The profitability performance of both segments might have surprised everyone though: while engineering gross margins were up considerably, those of BDS were down 10 bps:

Now, the ongoing shift to HVS (together with the divestiture of Balda which was non-HVS) made margins look pretty good at the EBITDA and operating level. Note that the company incurred €12.2 million of non-recurring expenses due to the divestment of Balda (which seems pretty high for a subsidiary delivering €30 million in annual revenues), so this is adjusted out in adjusted figures. Adjusted Operating Profit margin increased 250 bps and Adjusted EBITDA grew 21% on 8% revenue growth.

The above is despite Latina and Fisher combined still being margin dilutive, albeit ramping up. This mix-shift is actually the core of the investment thesis. Not only is Stevanato growing its top-line at an appealing pace (HSD-LDD organic revenue growth) but it’s also expanding its margins significantly to achieve mid-teens/twenties organic growth in earnings. The run in Stevanato’s shares and the good earnings its peers have had might have raised expectations coming into Q2 significantly, but Q2 earnings were very good when considered in isolation and fine when considered within the reigning expectations. Even though the reported revenue guide was somewhat lowered due to the divestment of Balda, Stevanato marginally raised the midpoint of its Adjusted EBITDA guide (from €339.4 million to €340.1 million).

The main “lowlight” I’d say one could find here was in the communication which again left quite a bit to be desired. I believe this is pretty relevant because it’s an unforced error. It’s a pity that Stevanato is doing things well only to ruin it with how they are communicating things to the market (things improved quite materially in the call, which I will share later).

Engineering remains the wild card, but at least comments are getting incrementally more constructive:

Engineering revenue was 12% of Q2 total revenue so the risk/reward relationship from this segment seems to be improving in the sense that either…

1. It gets so small that it doesn’t matter

2. Any signs of life start to contribute to growth and are taken positively by the market

Now, all of the above said, I think the earnings call was great to understand the potential opportunity for Stevanato. Quarters here are pretty much baked in before they get reported (due to Stevanato’s visibility), so one can only wonder:

Let’s begin with the exposure that makes the headlines: GLP-1s. If you’ve read other articles I’ve written on Stevanato, you’ll know that GLP-1 has been a relevant growth driver for the company and also that the market has remained skeptical on the growth of oral therapies (concerns which seem to have somewhat diminished). Franco Stevanato believes that, even though GLP-1s are the main growth driver today, we are still just scratching the surface. We could understand the GLP-1 opportunity through 3 lenses:

• Higher penetration

• Biosimilars

• Integrated solutions

As for the first, management argued that GLP-1s are only 10% penetrated on a potential TAM of 1.5 billion people. To reach a higher penetration, prices will need to come down, and here’s where biosimilars come into play.

Biosimilars lower the entry barrier and therefore drive penetration, and biosimilars are using similar drug containment devices as the original drugs (so overall they are additive to Stevanato’s business).

Then we have Stevanato’s “new” integrated solution. Stevanato has been working on the Alina injector pen for a while to offer an integrated solution (cartridge + delivery device) and while the success had been limited, the company might have just reached the inflection point:

So, if we combine the fact that penetration is still in the early innings and that Stevanato is not only going to participate in the increased penetration but will also try to capture more of the value (containment solution + delivery device), management believes that GLP-1s can grow at a double digit clip for the next 5 to 10. This contrasts quite significantly with the market, which seems to believe that these companies have already enjoyed most of the growth to be had in GLP-1s:

Now, the story doesn’t end here, we also have to add the broader biologics opportunity. Non-GLP-1 biologics are still not a main growth driver for Stevanato (grew 6% in Q2 off a small base), but there’s a reason for this and that is that Stevanato is generating for the most part clinical (not commercial) revenue. As these assets advance through the pipeline and make it to commercial volumes, management believes that the opportunity is considerably larger than for GLP-1s:

So, management is not only saying that growth will be good this year aided by GLP-1s, but that growth is much more durable than many believe it will be. Good news, although this doesn’t mean that they don’t have to work on their communication skills. Do shares deserve to be up 20% on these numbers? Not at all, especially due to the not-so-encouraging communication, but I do believe that they should move higher considering the durability of growth and margin upside Stevanato will most likely experience over the next couple of years.

I will continue to hold my shares.

Have a great day,

Leandro

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On February 10th, I closed my Amazon Q4 earnings digest with the following quote:

I have not kept you posted because I ultimately did not do much about it, but maybe I should’ve taken my own advice. With the exception of Meta, the remaining hyperscalers have performed better than the S&P 500 since that article was published:

To add insult to injury, the best performer by a considerable margin has been Amazon, a company that I already owned (I profiled Amazon at $90 on November 2022).

Now, all the hyperscalers continue to face today a similar debate than they faced back then, although time is slowly but steadily reassuring investors on the path forward. Investors (or “the market”) remain skeptical on whether the ROIC (Return on Invested Capital) on the massive Capex investments these companies are undertaking will be worth it. The most interesting thing of all is that, simultaneously, this same market seems not afraid to bid up the entire data center supply chain (the so-called “bottlenecks”)! My hunch is that both things (poor hyperscaler ROIC and booming supply chain business) can’t be true simultaneously. One would think that, if ROIC is going to be subpar for the hyperscalers, they would eventually scale down capex and starve the whole supply chain.

It seems like Q2 earnings might have marked the inflection to the ROIC dilemma. Or better said: the stock reactions we have seen post-Q2 earnings might have shifted the narrative (always remember that stock prices drive the narratives, not the other way around).

Amazon reported very good earnings last week and, importantly, provided some context around ROIC. Let’s first take a look at the summary table:

Both revenue and operating profit were up substantially, but we need some context with which we can also contextualize the Q3 guide. Prime Day fell in Q3 last year (2025), but in Q2 this year (2026). This resulted in easy comps in Q2, but in tough comps in Q3 (with management guiding to a 400 bps headwind to Q3 from this Prime Day shift). The bottom line is that Amazon’s “normalized” top line growth is somewhere between the reported Q2 growth rate (+20% YoY) and the guided Q3 growth rate (9%-12%). The fact that Amazon is growing mid-teens at a +$700 billion revenue run rate is utterly impressive. Just in case you were wondering, growing 15% YoY on a $700 billion revenue run rate means adding $105 billion in revenue per year. I don’t think there are many companies in the world that generate $105 billion and there aren’t any that add this as incremental revenue!

The star in terms of growth was the usual suspect: AWS. The segment enjoyed its fifth consecutive quarter of acceleration and grew +37% YoY…

…which was literally its fastest growth rate since Q1 2022, with the non-minor difference that TTM AWS revenue is now more than double of what it was back then! Amazon has always prided itself on investing in capital intensive industries with “unlimited” runways ahead, and AWS seems to fit that profile to perfection.

The best thing about all of this is that the leading indicators do not portray that things are about to slow down: Amazon reported a $496 billion backlog, growing triple digits (read that again). I would, however, be careful with the interpretation of these metrics. Management can include pretty much anything in the backlog, which doesn’t mean that the likelihood of that backlog converting to revenue is high or that it’ll convert to revenue anytime soon. Management did, however, make some interesting comments around capacity, of which I would highlight two:

• Capacity for 2027 is pretty much sold out and they are already selling significant amounts of 2028 capacity

• They remain on track to double power capacity from 2025 to 2027

This last point is interesting because if we assume that the price per GW sold remained constant, the above implies that AWS revenue doubles from the 2025 base ($129 billion), potentially supporting $258 billion in revenue by 2027 (currently TTM revenue is $169 billion). This is evidently an oversimplification and there are many variables that can make the relationship between GW added and revenue move up/down. For example, Amazon might be selling more GWs of power, but if the price of every GW sold decreases as capacity in the industry comes online, then GWs sold will not translate 1:1 into revenue. There are plenty of things to consider when thinking about the price per GW sold. One of the most important ones is industry structure: will this capacity be sold primarily to the two large labs (Anthropic and OpenAI) or will the customer base be much less concentrated? Andy Jassy believes that it’ll be the latter because the era of open-source models is upon us:

A scenario like this would be ideal for the hyperscalers because it would significantly reduce the purchasing power of the large compute buyers and should result (all else equal) into a higher price per GW sold. Something that’s becoming strikingly clear is that there are few stakeholders in the AI-trade besides Anthropic and OpenAI who don’t want to see open-source models succeed.

There are other variables at play in terms of price per GW besides industry structure. For example, the cost per token is coming down fast, but the industry remains in a supply-demand imbalance and power is the constraint. This means that, currently, this “scarcity” premium might be helping hyperscalers counter the cost per token “headwinds” (you could also consider this a tailwind when thinking about Jevon’s Paradox). I am not trying to tell you what you should think, just laying out the variables that matter.

If we assume that the price per GW sold stays constant and Amazon sells all of its capacity in 2027 (this is pretty much a given), then that would mean that AWS revenue CAGRs at a 40% clip between 2025 and 2027. While this looks hefty considering what we know already (LTM AWS revenue growth rate is currently 28%), the leading indicators and the fact that a lot of Capex still has to come online surely makes it seem like a possibility. At a 35% EBIT margin, this would result in $90 billion of AWS EBIT in 2027, or what’s the same, that Amazon (in its entirety) is currently trading at a 33x 2027 AWS multiple. Even though I don’t think that the conversion from GW to revenue will be 1:1, management was not shy to claim that AWS could become a $1 trillion revenue run rate business at some point, so the opportunity ahead seems pretty large.

What makes this more so impressive is that this growth is not coming in the way of margin expansion. AWS margins expanded considerably in Q2 and are already at all-time highs despite the Capex “inefficiencies:”

This, imho, portrays two things:

• Amazon is selling its capacity at a very attractive price point. Management even claimed that margins on AWS’ AI business might be a tad higher than those of the core business

• The capacity is getting used as soon as it comes online (sort of confirmed by management even for 2027)

Margins are a good segue into the topic du jour: ROIC. There are a lot of things to discuss here, but probably the first thing should be management’s context around the ROIC of AWS Capex. They claimed that, in the early stages, a bunk of Capex goes into start-up costs, which we could basically consider the shell of the data center. Building this takes 2-3 years before it can be filled with chips/networking equipment, and as revenue in this business is generated when the chips/racks are in place, this ultimately means Amazon faces a good chunk of unproductive Capex during the early stages of the buildout. This matters dearly for the ROIC debate because Amazon is managing to put up these growth rates and margin expansion while a good chunk of its capacity remains “un-utilized.” Management believes the useful life of these shells is more than 30 years.

Now, the other side of the coin can be found in the chips and networking equipment. This is what ultimately generates the revenue and can only be installed once the shell (and all the relevant permits) are in place. Management believes that…

• The useful life of this equipment is 5-6 years. I would say that judging on what GPU rent costs have done over time, there’s a case to be made for longer useful lives, BUT we have also been in a supply/demand imbalance which should lend itself to larger useful lives

• They take 2-3 years to break-even on this investment, meaning that there are 2-3 years of pure profit making

For servers and networking equipment, on average, it takes a little less than 3 years to break even on that investment. The servers currently have a useful life of at least five to six years. That means we’re driving significant free cash flow on the servers and networking equipment in the 2 to 3 years after we break even.

Andy Jassy also claimed that chips and networking equipment have a considerably shorter lead time than the shells, meaning that Amazon already has significant visibility when ordering these. Considering this is the most expensive part of the buildout, it should calm investors’ overcapacity fears as the overbuilding risk is reduced with visibility.

With this data we can somewhat approximate the cash IRR ex-shell of Amazon’s investments (which should trend towards the “all-inclusive” IRR as the shells get toward the end of their useful lives). We get to somewhere around a 20%-45% cash IRR on these investments BUT there are two things worth considering:

1. There is currently a supply/demand imbalance which most likely overstates steady-state IRRs (i.e., hyperscalers are unlikely going to be able to charge the same once capacity and demand balance out)

2. The number above doesn’t include the initial shell buildout, which honestly becomes non-relevant when thinking about future chip generations (as they will be built into the same shells that have already been paid off)

What we ultimately get from the above is a very relevant insight: not only are the returns on these investments pretty appealing, but Capex can also be scaled back according to demand because the lead times of “what matters” (chips and networking equipment) are pretty short. Cash IRR should continue to improve as capacity comes online:

Another thing worth thinking about here is the implications of the above for the supply chain. I mean, the hyperscalers are spending hundreds of billions in Capex, but a good chunk of this is going into the shells and not the chips per se. Despite not being able to spend most of the Capex on chips, the chip companies (mainly Nvidia and custom silicon) are seeing their fundamentals improve at unprecedented rates. This (imho) means there’s still a significant runway for chips, and even for Amazon’s! Andy Jassy mentioned that Amazon’s chips business is already at a $25 billion run rate growing triple digits and didn’t rule out (as discussed last quarter) selling these to third parties (i.e., to instances outside of AWS).

Even though they’ve not been the most loved by the market, the best positioned companies in all this debate seem to be the hyperscalers. If demand eventually falters, they can stop spending on chips and probably will not take long to digest the “overcapacity.” In this scenario, they would most likely generate significant amounts of cash that they could use to repurchase shares at (maybe) depressed valuations.

The scenario is strikingly different for the supply chain, which would see their revenue and profit contract significantly if hyperscalers were to cut capex. Interestingly enough, the market has decided to buy the latter, and sell the former!

Amazon “other” businesses

Despite AWS making the headlines and maybe singlehandedly carrying Amazon’s valuation at this point, there’s much more to Amazon’s business. Amazon might be the hyperscaler with the most optionality. Retail and ads (both can’t be understood independently) continued growing at a very decent clip.

The two things I would highlight about the retail business would be that Amazon continues to “put up a fight” against lower cost players like Temu…

…and continues to significantly expand its perishable business, with perishable customers up 50% YTD! Management also said some words about Supply Chain Services claiming that they had already won several large customers. While this is great and it makes all the sense in the world for Amazon to sell its supply chain as a service, let’s not forget that Buy With Prime was the company’s first stint at something similar and we have not gotten many relevant updates on the topic.

And then we have Amazon Leo. Amazon already has close to 400 satellites in orbit, which management deems enough to to begin internet service. Let’s not forget that, unlike other LEO providers, Amazon does seem to have a competitive advantage here. With enterprise and government customers they have the link to AWS, and with individuals they have the Prime membership (maybe LEO becomes just an additional offering in the Prime membership, who knows):

So, all in all, even though what’s booming right now in the business is AWS, the reality is that Amazon still continues to grow strong (and profitably) its retail business and there are additional businesses coming into the fold.

I would say that this was one of the cleanest quarters for Amazon in a while. You might have noticed that I have not spoken about Capex. Amazon raised its capex guide to $220 billion (+10% QoQ), driven primarily by higher input costs like memory. I believe this means that the Capex upward revisions have maybe gotten to an “end”, which is honestly not the best news for a supply chain in which the valuations of some companies relied on an ever-expanding Capex figure from the hyperscalers (time will tell).

Have a great day,

Leandro

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There was a pretty relevant event this week regarding the AI trade, one that has never happened before but which rhymes with other well-known events in financial markets (shocker). I discuss it in the market overview section and also share plenty of company-specific news at the end.

Without further ado, let’s get on with it.

Articles of the week (and the hectic week ahead)

I published two articles this week. The first one was Eurofins’ earnings digest.

The company reported good earnings marked by a very clear highlight, and a very clear lowlight.

The second article of the week was Danaher’s earnings analysis.

The company reported okay earnings last week, but the movement of the different segments did not particularly excite the markets. In an interesting turn of events, the stock reacted more positively to the earnings of competitors than to its own earnings.

Next week is a pretty hectic week for the Best Anchor Stocks portfolio; 5 companies are reporting (which may well account for more than 40% of my portfolio). The goal is to bring articles for all, but I’ll prioritize for next week those that I deem more important/relevant.

I have also begun reading about an interesting company that might potentially make it into the portfolio. I still have to do a tad more work but I’ll keep you posted.

Without further ado, let’s see what the markets did this week.

Market Overview

Both indices were up this week, and both by a similar amount:

I wanted to use this NOTW to write about a topic that has made the headlines this week. If you’ve kept up with financial markets, you might have heard that the Situational Awareness LP fund (aka. SALP) blew up this week. The backstory is actually quite interesting and should remind investors that there’s much more to this “game” than being occasionally right. We were once again reminded that “history doesn’t repeat but often rhymes”.

Let’s go back to June 2024, when Leopold Aschenbrenner published a 165-page “report” called Situational Awareness: The Decade Ahead. He had just been fired from OpenAI over what the company claimed to be “improper disclosure of internal information” and had had a stint at Sam Bankman-Fried’s FTX Future Fund Philanthropy. The red flags had started to appear, but there was nothing that could be considered too worrying. The essay is a very good read and I recommend reading it, but let me bring the conclusion here: AI would change the world and things were going to advance pretty fast, making AGI potentially possible by 2027. Leopold had high conviction that this would require an unprecedented AI buildout and, with the benefit of hindsight (and knowing that hyperscalers are tracking to invest more than a $1 trillion in Capex next year), we can say that he was right.

Driven by growing investor interest in the AI theme, he decided to capitalize on the essay by launching a fund. By July 2024 (barely a month after releasing the essay) Leopold had reportedly raised more than $225 million; Situational Awareness LP had just been born! Let’s not forget that he was doing this at 25 years old and with no prior trading/investment experience. Things did not look well on the surface (there were several “yikes”), but the reality is that Leopold began by proving naysayers wrong. He concentrated his book around AI-infrastructure names (duh) and was at one point generating more than 1,000% gains since inception (in just under two years). Before the drawdown that (spoiler alert) took the fund down, SALP had generated 400% returns thus far in 2026! Of course, hot returns acted like a gravitational force on AUM (Assets Under Management), helping the fund peak at $45 billion in AUM in July 2026. I don’t know if there’s ever been such a meteoric rise in such a short period of time, but in the stock market, meteoric rises tend to end (almost always) with meteoric falls. This time would be no different.

Leopold did a lot of things right. He was right on his fundamental thesis, he was successful in translating his conviction into AUM, and generated outstanding returns. BUT (there’s always a BUT), he made one crucial mistake (which also explains his outstanding returns to a great extent): he used too much leverage. July was not a great month for the “AI-trade,” and what’s not a good month on the surface for non-leveraged investors can quickly become a terrible month for leveraged degenerates. With SALP’s core positions dropping >35% during July, leverage forced SALP to liquidate its book, selling it pretty much entirely to Citadel.

Just after SALP blew up, what were its core positions all “sky-rocketted”, netting very nice gains for Citadel which reportedly started to unload the positions during the week. There’s a very important lesson in all of this: no matter how right you are on a thesis, you need to remain solvent to be able to actually capitalize on it. Leopold did something incredible, but he maximized short-term returns over durability, which led to a blow up, a tale as old as time on Wall Street. If you’ve not read the book “Long Term Capital Management” you should, because it clearly portrays that risk management is extremely important in this business.

Now, all this said, kudos to Leopold, he has probably made enough money to retire at age 27, but he did not make the money while adequately stewarding his shareholder’s capital. Be careful what heroes you choose in this business because a lot of them might be temporary, driven by the never-ending quest to become rich quickly. Oh, and it’s absolutely fine to dunk on people like this by the way, as they introduce very dangerous behaviour to financial markets and can do a lot of harm.

The industry map was mixed this week and characterized by the hyperscalers (GOOG, MSFT, and AMZN) getting some love. Meta continued to fall behind:

The fear and greed index improved slightly but remained in fear territory:

Company-specific news

Read more

Even though earnings were not bad at first glance, there were a couple of things that were not great (to say the least). Before going into these, let’s take a quick look at the numbers:

The summary table portrays that Danaher’s growth continues to be “meh” but that the execution on the margin front continues to be good. Reported margins expanded quite considerably because Danaher was up against easy comps after having incurred an impairment charge ($0.60 per share) in Q2 2025. This impairment charge was adjusted out in the non-GAAP figures, but these non-GAAP figures also portray that the underlying profitability of the business is improving as Danaher turns the corner.

Let’s understand what two things went “wrong” because both were evident in the numbers. The first one was the updated guide. At the beginning of the year, Danaher’s management claimed that the company would grow its top line somewhere between 3%-6% in FY 2026. I already explained in an article why everything seemed to be trending towards something better than the low end but that the high end would be pretty difficult to achieve unless all the stars aligned in Danaher’s favor. After some non-favorable events, management has decided to anchor to the low end; they now expect core revenue will grow 3-4% this year.

Even though this scenario was contemplated in the guide at the start of the year, there’s no denying that management implicitly lowered the guide (from a midpoint of 4.5% to 3.5%), which is not a great look in a market context in which many believed they were being quite conservative (myself included). Many shareholders have been waiting for Danaher’s growth inflection and seeing this inflection deferred once again is evidently not great news. Danaher’s core growth has evolved as follows over the past few years:

• 2024: -1.5%

• 2025: -2%

• 2026 (expected midpoint): 3.5%

So, while 2026 is expected to bring a 550 bps improvement to core organic revenue growth, the reality is that it’s still far from management’s expectations of HSD (high single digits) core revenue growth rate over the long term. Any additional hiccups in terms of the company’s growth rate only shed doubts on management’s credibility.

Now, what was really interesting about all of this was the “source” of the weakness. If you’ve been following Danaher for a while you’d know that, over the past few quarters, the different segments had moved pretty much always in a similar way: bioprocessing experiencing a strong recovery, respiratory (diagnostics) surprising to the upside, and lifesciences taking more than expected to return to growth. Well, in an incredible turn of events, we had pretty much the opposite this quarter: lifesciences surprised to the upside, whereas respiratory and bioprocessing surprised to the downside. Just when one thinks the other segments are going to stop “diluting” the growth in biotechnology, the opposite happens (are you not entertained?).

Management shared that “core revenue growth excluding respiratory” was 4.5% in Q2, which is an implicit 150 bps sequential acceleration compared to Q1. Even though this might seem like great news, I must say that it was disappointing to see management come up with a new metric. Management did not “invent” a new metric to strip out respiratory growth when it was accretive to core organic growth rate, but they are doing so now when it’s dilutive (heads I win, tails I win too!). Still, I can understand why they’d like to do this considering that they are trying to portray what the “recurring” business is growing at. Imho, investors should simply ignore this new metric.

Bioprocessing’s surprising weakness does matter for several reasons, though. The main one is that a lot of people likely own Danaher for the bioprocessing exposure, which means that weakness in this segment might have “broken” the thesis for some I totally understand why this might be the case, but the only thing I would tell these people is that you can get pure-play bioprocessing exposure through different companies (like Sartorius and Repligen). Who would’ve said that Life Sciences was going to “save” Danaher’s Q2? Definitely not me!

Anyways, the reason for the bioprocessing weakness is also interesting and has implications for next year’s growth rate (hopefully). Management claimed that the bioprocessing “issues” were isolated to project timing related to chromatography columns:

They also quantified the impact:

This ultimately means that, if these orders would’ve converted to revenue in Q2/Q3, not only would have Danaher delivered a more significant beat in the quarter, but the guide for the year would’ve been more “appealing.” Management did point out that the underlying trends in bioprocessing continue to be strong, with mid-teens growth in orders of both equipment and consumables.

Considering all of the above, this does seem more like a solvable, Danaher-specific issue than anything worrying in terms of the industry or Danaher’s competitiveness within it (this is why management was quick to point out that they’re spec’d into this program). What this does create is easy comps for next year in which we might see a better-than-expected growth rate despite Danaher managing to stay within its stated guide at the beginning of the year (3-6%). In short: is FY 2027 finally the inflection year? I highly doubt many still believe that it will be.

To all of the above we must also add that management still believes that a Capex “supercycle” is upon us:

Now, even though I’ve tried to spin the “bad” news in a positive way, the reality is that growth continues to disappoint and that there always seems to be an “excuse” for the lower-than-expected growth (something that doesn’t particularly excite me). I also wasn’t fond of management talking about Pall’s growth in semiconductors. Yes, there’s a filtration business within Danaher exposed to semis (and it’s growing double digits), but what does this matter when it’s not relevant for Danaher’s core business and growth rate? Seems like management was trying to hype people up. Anyways, let’s talk now about capital allocation.

Besides investing in its core business, Danaher has deployed shareholders’ capital in two ways lately: buybacks and M&A. The company spent $900 million repurchasing 5 million shares during the quarter. Danaher has historically rarely done buybacks (and they were historically considered as “high signal” events) but the reality is that a good chunk of the buybacks the company has done over the past few years were conducted at valuations considerably larger than today’s stock price (and with fundamental performance continuing to disappoint all throughout):

Management might indeed believe that the company is attractive today but they are not putting their own money behind their words. Insider buying has been “meh” although it’s true that insider selling has somewhat cooled down this year).

The other way (and probably main way) in which Danaher deploys capital is M&A. The company closed the significant Masimo acquisition in June (which I discussed in this article), and it seems to be doing well thus far: Masimo grew HSD during the quarter and management believes there’s upside to HSD growth. Let’s not forget that Masimo’s growth will eventually start to contribute to “core revenue growth” once Danaher anniversaries the acquisition.

Danaher has also conducted the acquisition of STAT Lab, which is expected to close by the end of 2026. STAT Lab complements Danaher’s Leica Biosystems business, has >85% recurring revenue, and is expected to grow HSD over the long term (like Danaher in theory should!). This business generated $250 million in revenue in FY 2025, so if it grows HSD next year it should generate around $270 million (i.e., it’s not that substantial for Danaher).

Now, even though I explained why I believe Masimo is a good asset, the reality is that we’ll only know if all this M&A makes sense in hindsight. I believe there are two things worth having in mind:

1. Danaher is not paying bargain prices for these assets (which doesn’t mean that they can’t or won’t generate decent returns over the long-term)

2. Both assets separate Danaher to a greater extent from becoming a pure-play bioprocessing business (which many investors want)

I don’t think any of these are necessarily bad, but there are what they are and we must take them into account.

I’ve also seen a couple of valuation headlines out there that seem pretty misleading/inaccurate.

Read more

Best Anchor Stocks

Eurofins (EPA:ERF)

Testing is important, it’s like having a fire detector…

Read more

4 months ago · 16 likes · Best Anchor Stocks

Eurofins reported mixed H1 2026 earnings last week. Even though the company displayed very strong EPS growth (+29% YoY), the reality is that organic growth (+2.7% YoY) continues to fall short of management’s expectations (MSD this year and 6.5% over the long term).

As most earnings releases, Eurofins’ earnings release had food for the bulls and the bears. Let’s begin with the “bad” news and leave the “good” news for later.

The “bad” news is that organic growth continues to fall short of management’s expectations. Even though management claimed that “organic revenue growth improved from Q1 to Q2,” the acceleration was not something to write home about (maybe not something to write about at all!). Organic revenue growth was 2.6% in Q1 and 2.7% in H1, meaning that Q2 organic growth must have been relatively close to that of Q1. They gave several explanations (or excuses, however you want to see it) for the weak organic growth, one of which I believe was somewhat worrying.

Gilles Martin talked several times about “easy comps” as a future tailwind for organic growth, which I believe is a rather terrible way of framing it and something that probably “scared” investors. The first thing that came to my mind after reading the “easy comps” explanation was that Eurofins is not a secularly growing business (because secularly growing businesses don’t need easy comps to grow at an acceptable rate). This explanation made it seem as if Eurofins needed easy comps to grow at its long-term objective, which means that the long-term objective is secularly unachievable. I believe this was a communication mistake by Gilles and that he actually doesn’t believe that Eurofins won’t secularly grow in the future, though.

The other “explanations” behind the weak organic growth made more sense, albeit some must be contextualized. The “Life” segment performed poorly in Q1 due to some weather related impacts and Gilles mentioned back then that it would improve throughout the year; it did. The Life segment is already back at the MSD objective after experiencing some catch-up during Q2 (+4.8% organic growth in H1 and +5.3% in Q2).

This ultimately means that the weakness in Q2 must have come from another place, and this was the usual suspect: Biopharma.

Biopharma worsened significantly (-0.1% organic growth in H1 and -1.1% in Q2) for several reasons (discussed below). Management explained that they expect the segment will have a better H2 when easy comps materialize and as several important contracts are reactivated. The first explanation (easy comps) actually doesn’t make much sense as H2 2026 seems to have significantly tougher comps than H1 2026. This is what management said in the H2 2025 earnings press release:

This was also the case for Biopharma as the segment saw its revenue growth accelerate in H2 2025. I might be missing something, but I actually don’t see the easy comps management is talking about. The only thing that might explain it is that management is already talking about easy comps for next year:

Let’s not forget that Biopharma is made up of a couple of subsegments, each with their different drivers and levels of lumpiness. We could summarize these subsegments and their performance as follows…

• Biopharma Product Testing (BPT): was softer in Europe than in previous periods because a couple of large contracts ended. Management believes this was the main driver behind the sequential worsening of the Biopharma segment (it’s also the largest sub-segment), but they believe the weakness is temporary

• Discovery (aka. the early phases of biopharma): still soft, but they see some green shoots related to biotech funding:

I’d say that the green shoots were somewhat confirmed by Medpace last week, as August Troendle claimed that biotech funding was picking up and that it was broad-based. I’d imagine that the impact of improved funding on Medpace is more immediate than it is for Eurofins (as customers are likely to fund first the programs that are closer to the commercial phase). This said, Eurofins should see a considerable pick-up here if/when AI starts to help in drug discovery (although there’s also a bear case to be made here as it might result in less early stage work)

• Central Lab & Bioanalysis (i.e., clinical): management claimed that this business is small relative to the size of the contracts. This means that it is lumpy and volatile (due to timing):

The CRO pipeline might be a good leading indicator of what’s to come here. It was evident in Medpace’s earnings that CRO RFPs are picking up. Eurofins already shared in Q4 2025 that they expect this segment to inflect in H2 2026: “On biopharma, yes, Central Lab and Bioanalysis, we have some fairly large contracts, and, our best guess now maybe would be H2 2026 for start of that”

• Development & Manufacturing (i.e., CDMO or the final part of the value chain): a lumpy business because a few large contracts make up most of the revenue.

All of the above resulted in Biopharma weakness that management deems temporary due to cyclicality:

We shouldn’t forget that this segment is poised to benefit from the potential inflection in the industry once funding solidifies and AI starts to fill the drug pipeline. When will this happen? No idea, but I am pretty sure it will. Biotech funding is already inflecting and there are signed contracts waiting to start (coherent with Medpace’s pipeline comments in the most recent earnings), so it all bodes well for a stronger H2 2026 and potentially 2027:

The restructuring programs/investments the company is undertaking are also negatively impacting organic growth:

So, all in all, not a great start to the year from an organic growth POV, something I believe only increases the pressure on management’s credibility. Even though Gilles said this…

…I highly doubt the market/investors are buying it at this point. After having grown considerably slower than MSD in H1, Eurofins needs its organic growth to pick up quite considerably in H2 to meet this year’s objective. It’s definitely possible, but the company is coming up against tougher comps and “when” those contracts ultimately make it into revenue is not 100% under management’s control. It seems pretty evident that management has been a tad more optimistic than they should in terms of the timing of the recovery (I don’t expect them to be good at this) but Gilles believes that, whether or whether not they achieve this is not important due to currently low valuation:

I don’t agree with his POV. Credibility is always important in financial markets and repeatedly falling short of guidance is ill-advised in terms of building credibility (something I discussed at length in the in-depth report). With this I am not saying that I believe this breaks the thesis, I actually believe Gilles and think that the timing is anyone’s guess. The good news is that the valuation does support waiting for this growth to return.

Now, even though management has lost credibility on the organic growth front, H1 2026 served them well to gain credibility on the margin/execution front. Let’s talk about the good news now.

The main highlight of the release could be found on the margin/cash conversion front. Eurofins reported very strong margin performance, significantly ahead of management’s mid-term expectations. Let’s not forget that management’s mid-term target (FY 2027) was 24% EBITDA margin (which they left unchanged). The first half EBITDA margin was 23.3% and, more interestingly, the mature scope EBITDA margin was 25.3%, already considerably above the mid-term objective. Gilles has mentioned a couple of times that the 24% guide should not be considered a ceiling, and we are starting to see why.

This together with better cash conversion and lower Capex (as investments ease) also resulted in a 46% YoY increase in Free Cash Flow to the Firm. Eurofins generated €403 million in FCFF in H1 2026 (this is before “acquisition of subsidiaries” which should end up trending towards 0) which it continued to reinvest into buybacks (Gilles has also continued buying shares in the open market). This takes us to a potentially ideal scenario for LT shareholders: one in which organic growth returns back to historical norms but does so with a lag as Eurofins’ cash generation ramps up.

So, all in all, I would categorize Eurofins’ earnings as a mixed-bag: great on the margin and cash conversion front, and relatively weak on the organic growth front. I don’t think the investment works as well as I outlined in the in-depth report if organic growth doesn’t return at least to a MSD level regardless of the execution in the margin front, but at the same time I see no reason yet to believe that the current headwinds are secular.

The company also announced a $400 million EV acquisition in July: the Life Sciences segment of Element Materials. They believe that they are a better owner for this asset than Element Materials and paid an EV/sales of 2.6x, which is again considerably higher than where Eurofins is trading at. Profitability of this asset is similar to the Eurofins average, which means that it will generate EBITDA of around €36 million in 2026 for an EV/EBITDA multiple of 11x. The interesting thing is that it generates profitability similar to the Eurofins’ average without access to Eurofins’ lab network, meaning that the post-synergy EBITDA is likely going to be considerably smaller.

2.6x sales is definitely not a bargain multiple (and there’s no multiple arbitrage as Eurofins is trading at 2x sales) but this is a significant acquisition and therefore Eurofins has had to pay a tad more. The company, however, tends to pay low multiples in its consolidation effort which do come with some multiple arbitrage (even when trading at the currently low valuation): in H1 2026 the company closed 17 acquisitions at an average of 1.7x sales! Again, I don’t think the investment works just purely due to consolidation, but if organic growth returns to normal, the multiple might re-rate on a significantly larger base that Eurofins has been building.

Have a great day,

Leandro

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

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Markets dropped this week as AI-trade stocks continued to disappoint “stock-performance” wise but not in terms of fundamentals. I explain what this might mean in the brief market commentary. There is also plenty of company-specific news this week.

Without further ado, let’s get on with it.

Articles of the week

I published two articles this week, both earnings digests. The first one was Texas Instruments’ Q2 Earnings digest: “The converging inflection.”

TI reported very strong earnings, but the stock has run up quite a bit over the last few months, so is it still a good buy? I go over this (and more) in the article.

The second article of the week was Medpace’s Q2 earnings digest: “Long live the buyback king.”

The company reported very solid earnings and portrayed two things:

1. A lot of people still don’t really understand the business’ dynamics

2. Excellent capital allocation (shocker)

I’ll leave a spoiler on the first point from my article:

Without further ado, let’s see what the markets did this week.

Market Overview

Both indices were down this week. The S&P 500 dropped 0.4% whereas the Nasdaq dropped 1.7%. When one sees this divergence across the indices one can be pretty much sure that the AI-trade did not do well:

One thing I found interesting (which I suffered with Texas Instruments’ and ASML’s earnings) is that several semiconductor stocks have begun showing “cracks”, and not precisely in their fundamental performance. Semi stocks (and the AI complex in general) continue blowing numbers out of the park, but the stock reactions have now started to disappoint. Let’s take a look at a couple of examples.

Texas Instruments and ASML beat by a wide margin what already seemed like pretty optimistic expectations, but their stocks did not do much post-earnings (in fact, they dropped):

Something similar can be said about Intel or Google. After Intel reported earnings considerably above market expectations, the stock rose 15% in AH (after hours) only to drop 8% during the day when markets opened their regular hours:

Maybe a better way of looking at this dynamic is looking at the performance of the SMH and the SOXX, the two most-followed semiconductor indices. Despite most of the companies included in them having reported outstanding earnings, both are down between 15% and 20% from their most recent highs:

You might have gotten to this point thinking that I am about to explain why this has happened and what’s going to happen from here on out, and I am sorry to disappoint you; it’s not happening although I wish! Now, I can share my POV. I believe that the market (most times) takes quite a while to catch up to great fundamental performance (i.e., it can be slow), but not only does it eventually catch up but most times ends up running ahead (this is called recency bias). If we zoom out we can see that both the SOXX and the SMH are up 118% and 95%, respectively, over the last year. The fact that some people believe that “nothing has been priced” into the AI complex is a tad worrying and portrays that we might be getting close to a short to medium term top. Can I be wrong? Not only I can, but I probably will.

In NOTW#93 (May 30) I shared what I believed were 10 signs of exuberance (some of which continue to be present today). Here they are with a small update (in bold) when applicable:

1. Hyper-concentrated portfolios around one theme: every time one starts to see that investors are concentrating their portfolios around one theme (crazy that some actually think that holding 20 names in the same factor is being diversified), watch out. I’ve also seen a considerable amount of one-stock portfolios, which is also a sign that risk management is nowhere to be seen. This continues to be the case, and the recent “drawdown” has portrayed why it’s dangerous. With indices barely below ATHs some people were experiencing 30%+ drawdowns and were clearly getting too emotional.

2. Leveraged thematic ETFs everywhere: several leveraged ETFs have appeared around topics like AI, memory chips, optics…This is never usually a sign that valuations are low, but who knows! This has gotten to a point in which regulators have started to intervene. South Korea has started to enforce stricter margin requirements to be able to hold one-stock levered ETFs.

3. Sell side upgrading companies based on 13Fs: the actions of a very prominent AI investor (who some people claim is the Cathie Wood of the current generation, although I don’t necessarily agree with this) are clearly influencing sell side price targets, which not only is a sign that things are hot, but also doesn’t say anything good about the professionalism of some sell-side analysts. Not much to comment on here.

4. YTD screenshots daily (and investors being “humble”): this might actually be one of the most solid indicators. We are seeing a constant flow of people sharing their YTD returns which in some cases are astronomical (upwards of 1,000%). This would be, in and of itself, a strong sign, but the best people are those who are up 30% YTD and say that “it could be better.” Return expectations are out of the charts, and this is also visible in the following “topping” signal. This actually surprised me because with the recent drawdown the screenshots flipped to people trying to portray what a strong drawdown they were experiencing. But nevertheless we don’t see many screenshots today. With the bounces some people share that their portfolios are up 20%+ in a day, which I don’t think is the flex they believe it is (i.e., portrays terrible risk management).

5. Stocks that are up 20% YTD categorized as “not moving“. Return expectations are so high that AI-stocks that are up 20%+ YTD are categorized as “stale” or a source of opportunity cost. People are in for a rough surprise when stocks eventually stop returning 100% every month! This continues to be the case.

6. 13Fs moving stocks double digits: when prominent AI investors reveal new AI positions in their 13Fs or other regulatory fillings, stocks are moving 10%+. This is not a sign of a healthy market. This is now not happening, and good news are not having the desired effect on stock performance (a signal of where expectations had gone)

7. People believe that under no circumstances can the AI trade falter: despite all these signs, some people believe that AI is unstoppable and that it can only go up. The reality is that, despite AI being very real, the AI trade can falter anytime and there are many ways that AI slows down that have little to do with the technology per se. Of course, this doesn’t mean it has to happen but it does show that many are not even considering the potential risks. Self explanatory because the AI trade is “faltering” despite strong fundamental performance

8. PTs based on “vibes”: Price targets are being updated based on questionable 2030 multiples. The only thing you need to enjoy such optimistic multiples from the sell-side is being categorized a “bottleneck.”

9. Luxury car dealerships in Korea are full: memory chips are doing so well that Korea is experiencing an incredible wealth effect. This in and of itself is not a sign of anything, but definitely not a sign of a bottom! I guess they are not full anymore considering that a lot of South Korean “investors” were levered and a good chunk of them have gotten margin calls.

10. All the AI/space companies considering an IPO: this is always a strong indicator that things have run ahead of themselves. Post the SpaceX IPO the shares of space companies dropped considerably, including that of SpaceX.

Both the SMH and SOXX are down since I published these signs of exuberance and regardless of what this means (probably nothing), I believe one can simultaneously believe two things:

1. That AI is real

2. That some stocks run considerably ahead of their fundamentals

If you join complacency together with leverage you get disastrous (and sometimes even comical?) scenarios. I read this week about a guy that went from a $10 million portfolio to -$500k and just began posting bible verses. Absolutely incredible, but we still see a lot of people who own 1-stock portfolios in the name of “conviction.” A 1-stock portfolio (imho) doesn’t portray conviction but rather terrible risk management (and don’t get me started about what these 1-stocks are!). With this I don’t want to portray that I am an AI permabear, I’m not and still hold AI-related stocks in the portfolio. The only thing I am trying to portray here is that in investing not only the fundamentals matter but also the implied expectations priced into the stocks. I believe this is pretty obvious to everyone but it’s sometimes forgotten when investors become complacent. Oh, and the same applies the other way around: those sectors that have seen their multiples destroyed now have “easy comps” in terms of expectations, so it might not take much for them to turn around.

The industry map was mixed this week, with hyperscalers continuing to sell off on the expectations of higher future Capex. It’s interesting because the market seems to simultaneously believe that hyperscalers won’t earn a decent ROIC on their AI investments but that the supply chain of said investments is going to continue generating outsized returns (I can assure you that both are not happening):

The fear and greed index improved slightly but remained in fear territory:

Company-specific news

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