Today I will discuss a U.S. based microcap that has been consistently profitable, has paid a dividend every year for the last 10 years and is trading for less than liquidation value.

The current dividend yield for this company is 7.5%, and the market is currently valuing this company at only 2.5x EV/pre-tax earnings.

This company is debt free and has a net cash position that covers more than 80% of the entire market cap.

In addition, this company owns its headquarters, which is an industrial warehouse/office building in a desirable area that is likely valued at only 25 - 30% of fair market value on its balance sheet.

The closest comparable was sold in May 2025 for $225 per square foot, which would imply a value of $11.25 million for this company’s owned real estate. That’s worth nearly the entire market cap of this company.

Let’s take a look…

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About one year later in May 2026, NSTS Bancorp announced it was being acquired for $14.28 per share by Brookfield Bancshares. This was less than my projections, but investors still would have made roughly 23% in a year. NSTS Bancorp didn’t get as high of a multiple as many regional banks get because it was overly capitalized (high equity to assets ratio) and was unprofitable.

I wrote about mutual thrift conversions earlier this year and how they are still an overlooked corner of the market.

Today, I wanted to discuss two more regional banks that I believe are strong acquisition targets. My projected upside on both banks is 30 - 50% over the next 2 - 3 years.

Let’s take a look.

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Shoe Station has made some strategic mistakes over the past couple of years. Comparable sales have declined, an aggressive store conversion program failed to produce the expected results, the CEO departed, and the new management team has substantially reversed the previous strategy.

Yet the balance sheet remains exceptionally strong as Shoe Station has no debt and a robust cash position. Shoe Station has roughly $129.3 million in cash and investments ($4.76 per share), which equates to about 36% of the entire market cap. Moreover, Shoe Station expects to release another $50–65 million from inventory during the current fiscal year. Plus, the CFO (who has been with the company for nearly 30 years and recently returned) purchased $500K of stock in the open market back in April.

At approximately $13.38 per share and 27.2 million shares outstanding, the market capitalization is only about $363.2 million.

The company is also expected to earn $1.40–$1.60 per share this year despite significant inventory markdowns and restructuring activity. Meanwhile, shareholders collect a $0.68 annual dividend, representing a yield of roughly 5%. I believe the dividend is relatively safe because the payout ratio is only about 45% (2.2x coverage) even in a year of depressed earnings. Obviously, this could change but this is a company that has raised its annual dividend every year for the last 12 years.

I believe 2026 is a trough earnings year due to one-time, non-recurring expenses and inventory liquidation. For some historical context, Shoe Station’s average EPS over the last 10 years has been $2.50 per share. At current prices, Shoe Station is trading at roughly 3.5x cash adjusted price to average 10-year EPS. That’s an incredibly cheap multiple for a debt free company. Shoe Station also trades at a discount to working capital (current assets - current liabilities), which is about $16.29 per share.

What Has Gone Wrong?

Shoe Carnival acquired Shoe Station in 2021 when Shoe Station had just 21 locations. Shoe Station subsequently performed much better than the legacy Shoe Carnival banner. By fiscal 2025, Shoe Station sales had increased 2.7%, while Shoe Carnival sales declined 7.7%.

The company decided to pursue an aggressive strategy to convert Shoe Carnival locations into the Shoe Station format. It converted 101 stores during fiscal 2025 and initially planned to convert most of the chain over the next several years.

Management believed Shoe Station’s premium assortment, higher-income customer base and lower inventory requirements represented the future of the company. Shoe Station requires 25 – 30% less inventory than Shoe Carnival, according to management.

At one point, the plan called for more than 90% of the store fleet to eventually operate under the Shoe Station banner. Unfortunately, management’s plan to shift almost exclusively to the Shoe Station brand hasn’t gone according to plan.

Converted stores produced significant variability in sales performance. Some worked well, but others didn’t come close to meeting expectations.

Management assumed that putting the Shoe Station assortment into a former Shoe Carnival location would attract the Shoe Station customer. But many of these shopping centers were in markets where that customer simply didn’t exist in sufficient numbers.

It was an expensive mistake. Fiscal 2025 operating income was reduced by approximately $24 million from rebanner-related investments, while the company spent another $37 million of capital expenditures supporting the initiative.

A Strategic Change in Direction

The previous CEO Mark Worden departed in February, and former CEO Cliff Sifford returned on an interim basis.

Sifford’s strategic review resulted in an important conclusion: Shoe Carnival and Shoe Station should remain separate concepts.

Management now believes only a limited number of additional Shoe Carnival locations make sense for conversion. Instead, Shoe Station will grow primarily through new stores in areas where demographics already match its higher-income customer base.

Meanwhile, 12–14 underperforming stores are expected to close this year, followed by another 6–10 next year. I view this reversal favorably. I’d rather see management acknowledge that $60 million was poorly spent than spend another $100 million trying to prove the original strategy was right.

The turnaround has therefore become much simpler: fix the merchandise assortment, close unprofitable stores, reduce expenses, normalize inventory and selectively grow Shoe Station where the concept has already demonstrated that it works.

Early Signs of Improvement

There is at least some evidence that the changes are beginning to help.

Shoe Carnival’s sales declined only 2.2% during the first quarter, while comparable-store sales fell 1.7%. That’s a meaningful improvement from the mid-to-high-single-digit comparable-sales declines experienced throughout fiscal 2025.

Management believes part of Shoe Carnival’s deterioration was self-inflicted.

The merchandise assortment had drifted toward higher price points, leaving the company underserving the value-oriented families that historically formed its core customer base. Management is now restoring lower opening price points and a more traditional promotional strategy.

Shoe Station itself remains a question mark. Its first-quarter comparable sales declined approximately 2.9%.

Management discovered that converted locations were carrying essentially the same premium assortment as legacy Shoe Station stores even when local demographics were considerably different. The company is now tailoring merchandise at each converted location to its actual trade area. Whether this works should become clearer during the important back-to-school and fall selling periods.

The Inventory Opportunity

Shoe Station’s inventory stood at approximately $440 million at the end of fiscal 2025 and declined to $417 million during the first quarter. Management expects a total reduction of $50–65 million by fiscal year-end.

The inventory reduction temporarily pressures gross margins because excess merchandise is sold at a discount. But this inventory liquidation positively affects cash flow. Inventory sitting on a shelf represents cash already spent. Selling the merchandise without replacing all of it releases that working capital.

A $50–65 million inventory reduction is enormous relative to Shoe Station’s approximately $363.2 million market capitalization—equivalent to roughly 14–18% of the company’s equity value. This is one reason current EPS may somewhat understate the economics of the turnaround.

A Fortified Balance Sheet

For most retail turnaround situations, I would usually pass. Shoe Station is different because of its strong balance sheet. Shoe Station finished the first quarter with approximately $129 million in cash and marketable securities and no funded debt.

That’s roughly $4.75 per share of cash and securities against a $13.38 share price.

The balance sheet gives management considerable time to work through the turnaround without worrying about refinancing debt or raising capital.

It also supports the dividend.

The current annual dividend of $0.68 represents approximately a 5% yield and requires only about $18.5 million annually. Against management’s $1.40–$1.60 adjusted EPS guidance, the payout ratio is approximately 43–49%.

Management even increased the quarterly dividend 13% this year and repurchased roughly 390,000 shares during Q1.

The Shorts Are Piling In

The short interest is another interesting aspect to the Shoe Station story.

As of August 14, approximately 6.63 million shares were sold short, equivalent to roughly 37% of the 17.8 million-share float. That’s up from just 4.24 million shares a month earlier.

The shorts may ultimately be correct: perhaps Shoe Carnival is experiencing secular decline, Shoe Station can’t generate sustainable growth and today’s earnings aren’t a trough. But the high short interest creates an interesting catalyst if the turnaround begins working.

With insiders owning roughly one-third of the company and only around 18 million shares in the public float, 6.6 million shares represent an enormous future short covering requirement. A strong back-to-school quarter could therefore produce a disproportionately large market reaction.

Valuation

At $13.38, Shoe Station trades for roughly 5.7x cash-adjusted P/E, assuming the midpoint of FY2026 adjusted EPS guidance.

I think normalized earnings could eventually recover to around $2.00–$2.25 per share if management merely stabilizes sales, eliminates restructuring costs and restores some margin.

Put an average 10–12x multiple on those earnings and the shares could be worth approximately $20–27, which implies about 42 - 92% upside. A stronger turnaround producing $2.50 of EPS could support a value around $30.

I should emphasize that even though Shoe Station has a rock-solid balance sheet, there are still risks. Retail turnarounds frequently fail and it’s entirely possible that Shoe Station’s earnings slowly fade over time. Even if this were to happen, the downside should be mitigated somewhat. My rough liquidation analysis suggests the hard downside could be somewhere around the high-single-digits per share depending heavily on inventory recoveries and lease termination costs.

At current prices, investors are paying roughly $13.38 for a debt-free company with substantial liquidity, insider buying, a 5% dividend, inventory that is being converted into cash and several identifiable opportunities to improve profitability.

For paid subscribers, I walk through my estimate of Shoe Station’s normalized earnings, liquidation value, probability-weighted returns, position sizing, and why the unusually large short position could become an important catalyst if the turnaround gains traction.

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First, I’ll share an update on Seritage Growth Properties that I wrote up back in late April.

Since my writeup, Seritage was able to refinance a $50 million loan and reduce their overall debt load. Seritage also announced a sale of their Dallas property for $50.76 million.

What is now left is a portfolio of properties that I believe are worth much more than the market price with only about $15 million of debt based on my estimations. For the sake of being conservative, I will assume that all of Seritage Growth’s properties are valued at my initial bear case. Here are the property values I had assumed under a bear case.

Even under a bear case scenario and including deductions for the preferred shares and total cash burn plus liquidation costs, I still get an estimated liquidation value of about $3.62. This assumes full liquidation takes 3 years. $3.62 represents about 70% of book value and 74% upside from the current share price of $2.08. If the liquidation happens in 3 years, my base case IRR is about 20% from the current share price. I could obviously be wrong on timing and the ultimate liquidation value but there seems to be adequate balance sheet value to protect both the preferred and common stock.

Seritage’s preferred stock has a large margin of safety because the conservative net asset value less all liabilities covers the preferred more than 5 times over. The preferred shares currently trade at roughly $22 per share, are continuously callable at $25, and the current yield is roughly 7.9%.

Next, I’ll also take a look at SITE Centers (SITC), a retail REIT in the process of liquidating that appears to trade at a meaningful discount to my estimate of liquidation value.

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The company moves roughly 4 million vehicles annually and now has close to a 25% estimated market share after buying Hansen & Adkins. PAL serves 100% of the automotive OEMs in U.S. transport.

Since PAL is a newer company with a limited operating track record and limited analyst coverage, my goal is to provide a brief snapshot of PAL’s valuation and normalized earnings after their acquisition of Hansen & Adkins.

Overview

PAL is a relatively new public company. It completed its IPO in 2024 after being formed through the combination of five established auto-transport businesses. PAL’s strategy is to consolidate a fragmented vehicle-transportation industry and use greater scale, route density, and fleet utilization to improve the economics of the combined business.

The first two years as a public company have been rocky, with the shares down over 60%. PAL went public at approximately $15 per share, but weaker industry conditions, disappointing profitability, acquisition-related expenses, and concerns surrounding the company’s increasingly leveraged balance sheet have weighed heavily on the stock. Shares now trade around $5.30.

PAL recently acquired Hansen & Adkins, significantly expanding its fleet and making PAL the largest finished-vehicle transportation provider in North America, with an estimated 25% share of its addressable market.

At the current price, I believe investors may be placing too much emphasis on PAL’s depressed near-term earnings and not enough on the earnings power of the combined business. If management can successfully integrate Hansen & Adkins, improve fleet utilization, and capitalize on tightening industry capacity, PAL has the potential to generate substantially greater free cash flow than its recent results suggest. With the shares trading at what I estimate is a low-single-digit multiple of normalized free cash flow, I believe PAL is currently priced well below intrinsic value.

Recent Insider Buying and a CEO with a Successful Track Record

PAL’s CFO and COO along with a director have recently been buying stock in the company at the depressed prices, which is a good sign, and likely means they believe the shares to be undervalued.

As of the latest proxy filing, CEO Richard O’Dell owns roughly 3.6% of PAL shares. O’Dell was previously CEO of Saia, Inc. (NASDAQ: SAIA) from 2006 - 2020. Saia stock is up over 20x since 2006, so O’Dell has a successful track record of creating shareholder value and running a publicly traded freight and logistics company.

Recent M&A

Now that PAL has acquired Hansen & Adkins, PAL’s revenues are projected to be at least $800 million with roughly $61 million in EBITDA, or roughly a 7.3% EBITDA margin.

PAL is funding the Hansen & Adkins acquisition through a combination of cash on hand and additional debt financing. The $130 million upfront purchase price consists of approximately $75 million of assumed debt, $52 million of cash, and $3 million of PAL stock, implying a purchase multiple of roughly 4.8x H&A's trailing adjusted EBITDA, or approximately 3.9x including estimated synergies.

To fund the transaction and refinance existing obligations, PAL expanded its equipment financing capacity to as much as $120 million and increased its revolving credit facility to $50 million. The company also issued $75 million of 5.5% convertible notes, with approximately $65 million of the proceeds being used to repay existing indebtedness and another $10 million used to purchase a capped call designed to reduce potential shareholder dilution.

PAL expects pro forma senior secured leverage to be approximately 2.5x at closing. While the transaction increases the company's overall debt load, the relatively modest acquisition multiple and long-dated convertible financing make the capital structure manageable if the combined company can achieve management's expected earnings and synergy targets. An additional $22.1 million of contingent consideration could be paid if H&A reaches certain near-term EBITDA targets, although roughly $2 million of that amount would be paid in PAL stock.

At $5.30 per share, I believe the market is substantially undervaluing the earnings power of the combined business. Below, I estimate PAL’s normalized free cash flow, analyze its post-acquisition balance sheet, compare its valuation with publicly traded peers, and estimate the potential upside if management successfully integrates Hansen & Adkins.

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I wrote about the opportunity in QVC bonds here: QVC Bonds: Cheap Senior Secured Debt Trading at 45 Cents on the Dollar

Today I wanted to give readers an update on how this investment has played out.

In the writeup, I said,

“My base case is that QVC undertakes a balance-sheet restructuring within the next 12–18 months. This is not a worst-case outcome, and neither is it a certainty. Importantly, the investment thesis does not depend on avoiding Chapter 11; it depends on senior secured recoveries exceeding current prices across a range of plausible outcomes.”

Less than three months later, QVC did indeed file for Chapter 11 bankruptcy. A restructuring can accelerate the investment timeline, serving as a catalyst that unlocks value for distressed debt investors.

Assuming that the senior bonds are in an advantageous position in the debt stack and the investor has paid a substantial discount to estimated recovery value, distressed bondholders can often profit during a corporate restructuring. This is not the case for common and preferred shareholders, who often get completely wiped out.

The most important question for the distressed credit investor is:

What will I ultimately recover relative to the price I am paying today?

In QVC’s case, I believed the market price of the bonds offered a substantial discount to their probable recovery value. Bankruptcy was certainly a risk, but it was a risk I believed could be underwritten.

“Even if QVC files for Chapter 11 bankruptcy, the base case recovery estimates for the senior secured debt is 70 - 90%.”

Recovery Value

The recovery amount ended up being a little less than my initial estimates, but I still have realized a positive investment outcome on my QVC investment.

Six and a half months after my original writeup (as of last Thursday, August 6^th) QVC emerged from Chapter 11 bankruptcy. My $20,000 face-value position ultimately resulted in receiving:

• $2,189.58 in cash

• $5,243 face value of new 10% first-lien senior secured Takeback Notes

• 198 shares of the “new” reorganized QVC (currently valued @ ~$19.49 per share as of August 10^th, 2026) = $3,859

• plus, a $595 coupon payment I received in mid-March before the bankruptcy filing

Total recovery as of August 10, 2026, = $11,886.58 (~59% of par value)

I purchased $20,000 face value for roughly 45% of par, so my initial investment was not $20,000 but about $9,000. This was lower than my initial recovery estimates of about 70% but I’m still up on the position because my all-in cost was roughly 45% of par value.

The cash and Takeback Notes alone represented:

$2,189.58 + $5,243 = $7,432.58

In other words, before assigning any value to my 198 shares, I had recovered value equal to approximately 86.5% of my original purchase price through cash and new secured debt.

As of August 10th, 2026, the new QVC equity (QVCG) closed at $19.49, so the total value is $3,859.

That’s approximately a 32% return in roughly six and a half months and a roughly 60% annualized return based on valuing the Takeback Notes at par and the equity at Evercore’s midpoint enterprise valuation.

Distressed debt investing illustrates why price, capital structure and recovery value can matter far more than whether a company ultimately files for bankruptcy.

How I Found the Opportunity

Prior to its bankruptcy filing, QVC was dealing with a heavily leveraged balance sheet coupled with declining revenue and deteriorating television viewership. QVC is still a challenged retailer but now has reduced its debt by $5 billion, which should give the company some breathing room to focus on its turnaround plans.

The market tends to be overly pessimistic in situations like QVC and in the case of distressed debt there is an added discount for complexity/illiquidity and uncertainty of coupon payments and recovery values.

I look for investment opportunities where the market has underpriced the investment in relation to its intrinsic value. QVC’s 5.95% senior secured notes due 2043 were trading at roughly 45 cents on the dollar in late January 2026. In the case of QVC bonds, because the senior secured debt was at an advantageous position in the capital stack, it seemed very likely that investors would receive at least 50 – 60% of par value in a restructuring but the bonds were only trading for 45% of par.

Again, I should emphasize that QVC bonds I bought were senior secured claims at the op-co level.

In my previous writeup I wrote, “All three bonds are OpCo-level senior secured claims backed by inventory, receivables, and cash. At prices in the mid-40s, they are not bets on a business turnaround but claims on assets plus a viable going concern.

Recoveries are anchored by a liquidation floor (~40–50%) and capped by going-concern EV after DIP/admin (~60–80% in a base case). The key risk is process (DIP size/control), not asset absence.”

This is one of the attractive characteristics of distressed credit. By buying the QVC bonds at a steep discount, my ultimate recovery value didn’t need to approach par for the investment to work.

I needed to determine whether the underlying enterprise was worth enough to produce a recovery materially above the price I was paying.

That required thinking about QVC differently.

Instead of asking:

What is QVC’s stock worth?

I was asking:

What is QVC’s enterprise worth, where do the 2043 notes sit in the capital structure, and how much value would be left for this security in a restructuring?

That distinction becomes the foundation of the investment thesis for a distressed bond investor.

Chapter 11 proceedings can move surprisingly quickly because the process is highly structured and governed by a well-established framework under the U.S. Bankruptcy Code.

Chapter 11 restructurings are costly for companies and their creditors. Moreover, lenders, suppliers, employees, and any other claimants want to receive what they are owed. In order to maximize the proceeds available for the claimants, there is an incentive for most parties to expedite the restructuring proceedings.

The Evercore Valuation

One of the more important pieces of information came from Evercore’s valuation analyses during the restructuring proceedings.

Evercore estimated the net enterprise value of reorganized QVC at approximately:

$1.85 billion to $2.25 billion

with a midpoint of:

$2.05 billion.

After accounting for approximately $1.275 billion of pro forma funded debt and adding estimated emergence cash, Evercore estimated the value of the reorganized equity at approximately:

$998 million to $1.398 billion

with a midpoint of approximately:

$1.198 billion.

That provided an important anchor for estimating recovery.

The restructured QVC has about 50 million initial shares.

At Evercore’s midpoint valuation:

$1.198 billion ÷ 50 million shares ≈ $23.96 per share

That figure would later become useful for estimating the value of the equity portion of my recovery. The new QVC shares (QVCG) opened at $20 on the first day of trading.

Making the Takeback Notes Election

One unusual part of the restructuring was that eligible creditors could elect to receive Takeback Notes rather than the Takeback Term Loan.

I ended up selecting the Takeback Notes.

The new notes are:

10% First Lien Senior Secured Takeback Notes due 2032.

For an individual investor holding the securities through Schwab, I preferred the notes.

The Takeback Notes and term loan were quite similar. However, I believe the notes are likely to have more trading liquidity should I ever decide to exit the position.

The election process itself turned out to be more complicated than expected.

Schwab initially accepted my election, later cancelled it because of missing paperwork, and I ultimately had to work with Schwab to make sure the accredited-investor documentation and election were properly processed.

It was a good reminder of something that doesn’t show up in a spreadsheet:

Distressed investing can involve considerable administrative complexity.

Distress investing is a special situation, “event-driven” type of investment that can offer profitable investment opportunities for those investors willing to do some extra work. However, it’s not for everyone. Distressed bond investors have to be willing to deal with missed coupon payments, uncertain timelines, and holding an illiquid bond during the restructuring process.

Reading the restructuring documents is only part of the job. Elections, deadlines, certifications and brokerage procedures can directly affect what securities you receive.

In the next sections, I’ll review what I learned from this investment and what I think the new QVC equity could be worth.

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Copart receives most of its vehicles (about 80%) from insurance companies like State Farm, GEICO, Allstate and others - vehicles that are deemed to be a total loss. Sellers also include car dealers, individuals, car rental companies, banks, and fleet operators. Buyers include vehicle dismantlers, vehicle rebuilders, repair shops, used vehicle dealers, and individuals.

Copart operates in what is effectively a duopoly with Insurance Auto Auctions (IAA), which is owned by RB Global (RBA). It is estimated that Copart and IAA control 80 – 90% of the North American salvage auto auction market, with Copart controlling about 45 - 50% share and IAA 35 - 40%.

I have followed Copart for several years. The business has always impressed me, but the valuation always seemed a bit pricey. After the recent selloff, however, I believe investors have an opportunity to buy one of the highest-quality compounders in the public markets at a much more attractive price.

Copart’s Business Model

Most vehicles are sold on consignment, with Copart acting as an agent. Copart collects the auction proceeds from the buyer, deducts its fees, and then pays the remaining proceeds to the seller.

Roughly 85% of Copart’s revenues come from service fees where they collect fees on everything from memberships, financing, shipping, vehicle bidding, transaction, storage, titling, selling, and relisting. The other 15% of Copart’s business is vehicle sales, where they actually buy the cars and sell them for their own account.

On average, Copart might collect something like 5% - 15% of the sale price per vehicle sold. This can fee can be as low as 1% or as high as 20%+ depending on the vehicle and sale price.

What Has Caused the Selloff in Copart Stock?

I recently started buying Copart because it trades near a five-year low based on its stock price and near a 10 year low in terms of its price to earnings ratio.

Copart’s stock is trading down primarily because of a temporary slowdown in total-loss insurance claims along with a leadership transition, which is actually a positive as I’ll explain later.

Over the past several years, Copart has faced temporary headwinds as elevated inflation and sharply higher auto insurance premiums caused many consumers to reassess their insurance coverage.

Some policyholders increased deductibles, dropped comprehensive and collision coverage on older vehicles, or allowed policies to lapse altogether. As a result, fewer insured vehicles entered the total-loss claims process, reducing the number of salvage vehicles flowing through Copart’s auction platform. While this has pressured vehicle volumes in the near term, I view it as a cyclical rather than structural issue.

Insurance coverage is ultimately a necessity for most drivers, and as affordability improves and industry conditions normalize, I would expect salvage volumes to recover over time.

Incoming CEO Jay Adair had this to say on recent call with investors,

“On cyclical headwinds, we are experiencing the impact of cyclical and, in our view, unprecedented dislocation across the U.S. industry -- the U.S. insurance industry. The 2022 to 2024 inflationary cycle pushed carrier combined ratios out of balance, driving rate increases, which drove consumers to pull back their level of insurance coverage, which was observed through a shift toward higher deductibles and liability-only policies.

I believe that is now softening, and we are starting to see insurance companies become more aggressive again. And much of this is from 2020, COVID, the impact of that, the impact of insurers cutting dividends back and reducing insurance rates. And now we’ve seen kind of the flip side of that, as we have seen in the past year or two, and I think we’re now going to see things kind of normalize. We believe the consumer retrenchment is cyclical, not structural. So, I want to make that very clear.”

At roughly 18x earnings (near a 10-year low) and approximately 13x EV/EBIT after adjusting for its large net cash balance, I believe the market is overly pessimistic on the short-term cyclical headwinds and is underappreciating both the durability of the business and its long-term reinvestment opportunities. Nearly one-third of Copart’s market capitalization is represented by cash, investments and company-owned real estate carried at historical cost.

Cost Advantage Copart has Over IAA

Copart owns 90% of its salvage yards, while its primary competitor, IAA, leases the majority of its locations.

This difference in real estate strategy provides Copart with several long-term advantages. Because it owns most of its yards, Copart is less exposed to rising rents and lease-renewal risk. Ownership also gives management greater flexibility to expand existing locations, add storage capacity and respond quickly to catastrophe events. In addition, much of Copart’s land is carried on the balance sheet at historical cost, meaning its economic value is likely materially higher than its reported book value.

IAA’s leasing strategy may have appeared more capital-efficient in the short term, but it leaves the company more exposed to rent inflation and landlord negotiations. Copart, by contrast, has spent decades assembling a difficult-to-replicate network of strategically located industrial properties. As land values and replacement costs rise, this advantage becomes increasingly valuable.

The difference between the two companies is also evident in their financial performance. Although RB Global no longer separately discloses all of IAA’s historical profitability metrics, I estimate that IAA generated approximately a 15% return on invested capital in the years preceding its acquisition. Copart’s estimated median return on invested capital over the past five years has been closer to 30%.

The margin comparison is similarly striking. IAA’s pre-tax margins averaged approximately 19% during the three years before its acquisition by RB Global, while Copart has produced pre-tax margins of roughly 40% over its last three fiscal years, more than double that of IAA.

These differences cannot be attributed solely to real estate ownership. Copart also benefits from greater buyer liquidity, stronger recovery values, superior operating scale and earlier adoption of online auctions. However, its owned-yard strategy is an important contributor to its lower long-term occupancy costs, operating flexibility and durable competitive advantage.

What Reinforces the Long-Term Duopoly

Copart operates in an effective duopoly with IAA because very few companies possess the land, logistics infrastructure, buyer liquidity and operating capacity required to process salvage vehicles at national scale.

A smaller competitor may be able to serve a local market, but it would be difficult for that company to absorb a meaningful portion of a major insurer’s nationwide total-loss volume. Large insurers generally prefer maintaining relationships with both Copart and IAA, so they are not dependent on a single provider. That dynamic helps preserve two scaled competitors while making it extremely difficult for a third national player to emerge.

A new entrant would need to build substantial yard capacity and logistics infrastructure before insurers could safely award it meaningful volume. Yet without sufficient insurer volume, the entrant would struggle to attract enough buyers to generate competitive recovery values. This creates a classic chicken-and-egg problem that reinforces the existing duopoly.

Network Effects

Copart has built one of the largest and most liquid vehicle auction marketplaces in the world, connecting insurance companies, dealers, fleet operators and other sellers with millions of registered buyers across more than 170 countries.

As more buyers participate in Copart’s auctions, bidding becomes more competitive and recovery values improve. Better recovery values encourage more sellers to route vehicles through the platform, increasing inventory and attracting even more buyers.

This creates a self-reinforcing flywheel:

More buyers lead to better prices, better prices attract more sellers, and more inventory draws even more buyers.

Over time, this network effect strengthens Copart’s competitive position and makes the marketplace increasingly difficult to replicate.

Switching Costs

Copart also benefits from meaningful switching costs once it becomes embedded in an insurer’s operations.

Copart does far more than auction vehicles. It coordinates towing, storage, title processing, claims-system integration, payment collection, compliance and remarketing to a global buyer base.

Moving a large block of business to another provider could disrupt these workflows and, more importantly, risk producing lower salvage recoveries. For an insurer processing hundreds of thousands of total-loss vehicles, even a modest decline in recovery value could outweigh any potential savings from lower fees.

Efficient Scale, Real Estate and Intangible Assets

Replicating Copart’s network would require far more than building an auction website.

A potential competitor would first need to acquire thousands of acres of strategically located industrial land across the country. The challenge extends beyond capital. Salvage yards are difficult to permit because they often face environmental scrutiny, zoning restrictions and local opposition.

Even after assembling the physical network, a new entrant would still need to establish relationships with major insurers, build credibility as a reliable operating partner and attract enough buyers to create competitive auction liquidity.

The true barrier to entry is therefore not capital alone. It is time.

A well-funded competitor could spend years assembling land, obtaining permits, building logistics capabilities and developing customer relationships. During that period, Copart’s own network, buyer base and insurer relationships would likely continue to strengthen.

These advantages have resulted in excellent financial performance.

Over the past decade, Copart’s:

• Gross margins have increased from 43% to 45%.

• Operating margins have increased from 32% to 36.5%

• Net margins have expanded from about 21% to 33%.

• Copart’s revenue has grown about 15% over the last 10 years, and its EPS has grown by about 22% during the same time.

Growth along with increasing margins is a sign of a widening of the competitive moat. These are obviously the types of companies you want to own over the long term.

I estimate that Copart’s median return on invested capital (ROIC) and ROIIC has been about 30 - 35% over the last 10 years. Not only do they have high returns on capital, but I believe they still have a high reinvestment runway.

Stocks with high ROIC and large reinvestment runways can compound wealth for shareholders at a much greater clip than the market indexes.

Copart’s Management Team is Top Notch

Management is another reason I own the stock. Former CEO Jay Adair recently returned to lead the company after helping pioneer Copart’s online auction platform. Together with founder Willis Johnson, management maintains significant ownership and has consistently allocated capital with a long-term mindset.

Adair is chairman and founder Willis Johnson’s son in law. Together they own roughly 8% of Copart’s stock. Adair started working at Copart when he was 19 and learned the business from the ground up. He was instrumental in moving Copart’s auctions online and has track record of creating huge value for shareholders over time.

Opportunistic Share Repurchases

Copart’s management team is selective when repurchasing shares, only buying them back when they believe the stock is undervalued. This is in contrast to many companies that follow a uniform buyback cadence regardless of the stock value. From 2016 - 2025, Copart’s management team only bought back stock twice (once in 2016 and once in 2019) for a total of roughly $822.9 million. With the stock hovering near a decade low price to earnings multiples, Copart repurchased roughly $1.4 billion of stock just last quarter, which is more than 5% of the current market value.

Copart’s executive team operated and continues to operate with an “Outsider’s prospective.” See William Thorndike’s book: The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.

Copart has focused on long-term value creation for all its stakeholders and doesn’t necessarily care what Wall Street analysts think in the short-term. Here are some interesting comments that CEO Jay Adair made on a recent investor call,

“We’re just going to execute. We’re not going to talk about it. We’re not going to tell people what we’re about to do. And then when we do win, we’re not going to tell people that we won. We’re just going to do it. Let the results speak for themselves.

But at the end of the day, it’s because we’re going to focus on what it takes to win, and I don’t plan to put my playbook for winning out there publicly for my competitor to see. I believe -- I mean I know our customers personally, and I believe our customer relationships are stronger than ever.”

Copart clearly qualifies as an exceptional business. The more difficult question is whether the current valuation offers an adequate return. In the paid section below, I estimate five-year EPS, assign bear, base and bull terminal multiples, calculate probability-weighted intrinsic value, and determine the expected IRR from today’s price. I also cover Copart’s growth opportunities and why their future growth strategy is likely to look a little different than it has in the past.

Read more

Mobility has always been a great business hidden inside a much larger S&P Global (SPGI). Now that it’s been spun off, Mobility’s true intrinsic value can be realized as a standalone public company.

Spin-offs have historically been a fertile hunting ground for value investors because they often experience forced, non-fundamental selling immediately after separation. Many shareholders receive the new company involuntarily and sell regardless of valuation, while limited operating history as an independent company creates additional uncertainty. These temporary technical pressures can allow investors to purchase high-quality businesses at prices below intrinsic value.

Wide-moat businesses rarely trade at prices that offer attractive long-term returns. Following its spin-off from S&P Global, I believe Mobility Global may be one of those rare opportunities.

Mobility Global has two business segments – CARFAX and its B2B segment.

CARFAX (65% of Revenues)

CARFAX is the clear leader in the U.S. vehicle history report market, with an estimated 70–80% market share and what was effectively a near-monopoly for many years. Its primary competitor is Experian’s AutoCheck, which has gained traction through partnerships with companies such as Kelley Blue Book, Autotrader, CarMax, and major auto auctions.

While AutoCheck generally competes on price and includes a proprietary vehicle score along with strong auction data, CARFAX remains the preferred choice for many consumers because of its broader maintenance history, more detailed accident reporting, and unparalleled brand recognition. Independent automotive publications routinely describe CARFAX reports as more comprehensive and consumer-friendly, despite their higher cost.

Perhaps the strongest evidence of CARFAX’s competitive advantage is its pricing power. Industry estimates suggest that dealers pay more for a CARFAX subscription than for AutoCheck, yet many continue to choose CARFAX because consumers actively expect to see a CARFAX report when shopping for a used vehicle.

In many cases, the absence of a CARFAX report can itself become a negative signal, leading dealers to view the subscription as a necessary cost of doing business. That dynamic is remarkably difficult to replicate and illustrates how CARFAX’s consumer brand reinforces its dealer relationships, creating a self-reinforcing competitive moat.

CARFAX has established itself as the gold standard in the industry for vehicle history reports. CARFAX has 38 billion vehicle history records from more than 177,000 sources through data partnerships with automotive industry players including more than 92,000 dealers and service shops, 6,300 police agencies and 36 OEMs as of December 31, 2025.

“Show me the CARFAX” has been a phrase that is associated with making a good purchase and avoiding buying a lemon or a damaged car. CARFAX has more than 13 billion transaction records and approximately 832 million unique VINs tracked.

Consumers have come to rely upon CARFAX to make well-informed purchasing decisions. This is evidenced by the fact that CARFAX is the #1 most visited automotive website in the U.S. Mobility Global reports that they have 23 million monthly average unique visitors to the CARFAX U.S. website/apps and more than 28 million monthly average CARFAX vehicle history report views.

While CARFAX receives most of the attention, the B2B business transforms mobility from a consumer brand into critical infrastructure for the automotive ecosystem.

B2B (35% of Revenues)

Beyond CARFAX, Mobility’s B2B segment provides mission-critical software and data solutions to dealerships, automakers, suppliers, lenders, and insurers. Its flagship products include automotive Mastermind, a predictive analytics platform that helps dealers identify customers most likely to purchase a vehicle; Polk Auto Marketing Solutions, which enables targeted marketing using proprietary vehicle and ownership data; Market Scan Pricing Solutions, which powers real-time vehicle pricing and payment calculations; and Recall, which helps dealerships identify VIN-specific recalls and drive service revenue. Together, these products leverage Mobility’s proprietary automotive data and are deeply integrated into customer workflows, creating high switching costs and recurring revenue streams.

Mobility Global’s AI Opportunity

Artificial intelligence also represents a meaningful long-term growth opportunity for Mobility Global. Unlike many companies that are still searching for practical AI applications, Mobility already possesses the most important ingredient: proprietary data. With more than 38 billion vehicle history records, 177,000 data sources, and decades of automotive expertise, the company is uniquely positioned to use AI to enrich its existing products and create entirely new ones.

Management has outlined four primary AI initiatives: improving operating efficiency, extracting additional insights from increasingly complex data sources, embedding AI throughout its core products, and developing new AI-native products and predictive analytics.

Examples include AI-generated CARFAX vehicle history summaries, dealer valuation engines, enhanced behavior prediction models, and more sophisticated pricing and market response analytics for OEMs and dealerships. Rather than disrupting Mobility's business, I believe AI has the potential to increase the value of its proprietary data, strengthen customer workflows, improve operating leverage, and further widen the company's competitive moat over time.

Valuation

Because Mobility Global has grown through acquisitions, much of its balance sheet consists of goodwill and acquired intangible assets, including proprietary databases and customer relationships. The company is therefore required to record significant non-cash amortization expenses, which reduces reported EPS despite having no impact on cash flow. Mobility’s pro forma EPS for 2025 was roughly $0.47 per share.

For this reason, I believe free cash flow—or what Warren Buffett refers to as “owner’s earnings”—provides a much better measure of the company’s true earning power. Mobility Global generated $460 million in free cash flow in 2025, or $1.56 per share. That implies a roughly 7.8% free cash flow yield at current prices in the low 20’s.

After the first trading day, Mobility Global shares closed at $21.19. That implies roughly 13.5x price to free cash flow and about 12.5x EV/EBITDA.

Based on my discounted cash flow analysis, I estimate Mobility Global’s intrinsic value to be roughly $28–30 per share, implying meaningful upside from current price levels. This estimate is also supported by relative valuation. High-quality data service and analytics businesses such as Verisk Analytics (VRSK) and former parent company S&P Global (SPGI) trade at roughly 17× EV/EBITDA, well above Mobility’s current valuation. While I am not assuming Mobility deserves to trade at the same multiple today, I believe the current discount more than compensates investors for the uncertainty associated with a newly independent public company. More importantly, I believe Mobility has the ability to compound intrinsic value at 10%+ annually through a combination of organic growth, disciplined capital allocation, modest margin expansion, and ongoing share repurchases.

Management is targeting 7.5% - 10% organic revenue growth, 8% - 11% EBITDA growth, and a 20 - 25% payout ratio. Management is targeting to return 75% or more of annual free cash flow to shareholders.

The dividend is likely to be small (around 0.5% - 1% at current prices) but share buybacks could be meaningful if Mobility’s management is able to return 75% of free cash flow.

At current prices, I estimate shareholders have the potential to earn approximately 15–18% annualized returns over the next five years—a rare opportunity for a business with what I believe is a wide and durable competitive moat.

Mobility Global currently has $1.85 billion in net debt, so current net debt to EBITDA is 2.6x. Mobility has robust free cash flow margins, which have averaged roughly 25.7% over the last three years. Adjusted EBITDA margins have been roughly 40% for the last three years.

Risks

No investment is without risk, and Mobility Global is no exception. While the company’s recurring revenue and diversified customer base help reduce cyclicality, a prolonged slowdown in new and used vehicle markets could pressure growth.

Mobility Global is not as susceptible to the cyclical downturns in the auto market as OEM’s and dealers are. Roughly 80% of Mobility Global’s revenue is sticky, subscription-based revenue and Mobility’s organic growth has been very resilient even through the COVID supply disruptions of 2020 and the challenging market in 2022.

The company also faces competition from Experian’s AutoCheck and other automotive software providers, although CARFAX’s superior brand recognition, proprietary data estate, and embedded dealer relationships have historically allowed it to maintain premium pricing.

One notable strategic development in recent years was CARFAX’s expansion into online vehicle listings and other consumer-facing services. That move placed the company in more direct competition with Cox Automotive, which owns both Autotrader and Kelley Blue Book. In response, Cox ended its long-standing relationship with CARFAX on its vehicle display pages and switched to Experian’s AutoCheck. From Cox’s perspective, the decision was understandable—they no longer wanted to direct valuable consumer traffic to a company that had become an emerging competitor.

While losing such an important distribution partner was undoubtedly a setback, the episode also highlights the strength of the CARFAX brand. Despite Cox’s decision, CARFAX remains the most visited automotive website in the United States and hasn’t seen any declines to revenues or profits, suggesting that consumers actively seek out CARFAX reports rather than simply relying on whichever vehicle history report happens to appear on a listing.

In my view, the long-term impact of Cox ending their partnership with CARFAX is likely to be modest, as the company’s competitive advantage stems from its proprietary data, consumer brand, and deep integration across the automotive ecosystem rather than any single distribution partner.

Over the longer term, one of the biggest risks is data ownership. As vehicles become increasingly connected, automakers may seek to retain more proprietary vehicle data, potentially limiting the information available to third-party providers like CARFAX. Finally, as a newly independent public company, Mobility must demonstrate that management can continue executing its growth strategy, integrate acquisitions successfully, and allocate capital prudently without the support of S&P Global.

Takeaway

Mobility Global strikes me as one of the more compelling spin-offs to come public in recent years. The company combines many of the characteristics I look for in a long-term compounder: a dominant market position, a powerful consumer brand, recurring revenue, high switching costs, significant pricing power, and an unrivaled proprietary data asset that becomes more valuable as additional vehicles are bought, sold, financed, insured, and serviced. These qualities have enabled the business to generate consistently high margins, minimal capital requirements, and substantial free cash flow.

At approximately 13.5× price to free cash flow and 12.5× EV/EBITDA, I don’t believe the current valuation fully reflects the quality of the franchise. While the stock is unlikely to produce the 30%+ returns sometimes available in distressed or deep-value situations, I believe Mobility offers something that is arguably even harder to find: a high-quality, wide-moat business available at a reasonable price. My estimate of intrinsic value is approximately $28–30 per share, implying meaningful upside from current levels. Assuming the business compounds intrinsic value at roughly 9–10% annually through organic growth, disciplined capital allocation, and share repurchases, I believe shareholders have the potential to earn mid- to high-teens annualized returns over the next five years.

Wide-moat businesses rarely trade at valuations that offer attractive prospective returns. Whether Mobility ultimately proves to be one of those rare exceptions remains to be seen, but based on everything I’ve learned so far, it appears to be one of the more compelling combinations of quality and value that I’ve come across in quite some time.

*This article reflects my personal opinions and is intended for informational and educational purposes only. It is not investment advice or a recommendation to buy or sell any security. Investors should conduct their own due diligence, carefully evaluate their own financial circumstances and risk tolerance before making any investment decisions. I own shares in Mobility Global (MBGL).

Sources:

Mobility Global Form 10 Registration Statement (SEC)

Mobility Global Investor Day Presentation (May 12, 2026)

Writing on a public forum helps me clarify my investment theses and more importantly keeps me accountable for what I write about.

Every investment writeup is published in real time, and the results, whether good, bad, or ugly, remain part of the public record.

My hope is that this transparency allows readers to evaluate not only the outcomes, but also the quality of the underlying investment process.

Performance of Previous Stock Writeups

After more than 18 months of publishing stock writeups, I thought it would be worthwhile to review the results.

Here’s a snapshot.

*Current prices are as of market close on June 24, 2026. The more illiquid stocks were quoted at their last traded price. These figures do include dividends but do not include trading costs. Performance is based on publicly quoted market prices. Certain holdings are thinly traded, and actual transaction prices may differ from quoted prices.

Since launching the newsletter, I’ve published writeups on 30 different securities ranging from microcaps and over the counter (OTC) stocks to larger companies such as Adobe, PayPal, Charter Communications, and CarMax. I also wrote about one distressed debt investment. Most of the ideas, however, come from the neglected corners of the market where I spend most of my research time.

If an investor had hypothetically invested $10,000 into each stock on the day the writeup was published and held through today, the portfolio would have generated a total gain of approximately 26.2%, or $78,563.39 on $300,000 invested.

Because the ideas were published over different time periods, a more meaningful measure is the annualized return. Since inception, a hypothetical portfolio consisting of a $10,000 investment in each published idea on the date of publication has generated a 38.2% annualized money-weighted return (XIRR) through June 24, 2026.

While the overall return is encouraging, what I find more interesting is the composition of the results.

Here are the top 10 best performers:

Several ideas have more than doubled since publication. Perimeter Solutions has gained over 200%. IEH Corporation appreciated more than 120%. Silicom has increased roughly 150%. Mestek advanced more than 80%. Other ideas such as CarMax, Forge Group, RCM Technologies, and SiriusXM also produced solid gains.

Not every investment worked. Jack in the Box declined more than 60% from the publication date. Shutterstock, Saga Communications, Jewett-Cameron, and Adobe have also been disappointing so far. Investing is an exercise in probabilities, not certainties, and some losses are inevitable.

Here are the top 5 worst performers:

What stands out is that the winners have generally been much larger than the losers.

Across all published ideas, approximately 77% have been profitable – 23 have been profitable while 7 have shown a loss. The average winning investment generated a gain of roughly 42%, while the average losing investment declined by roughly 26%. In other words, the gains from successful investments have significantly outweighed the losses from unsuccessful ones.

How My Actual Portfolio Has Performed

While the equal-weight performance of the published writeups is one way to evaluate the idea generation process, the more important metric is how my actual portfolio has performed.

I invest in what I write about. However, my portfolio returns have not perfectly matched the performance of the published writeups. The primary reason is position sizing: not every idea receives the same allocation, and some of the biggest winners were not my largest positions.

In addition, I maintain cash reserves at times, selectively choose which ideas to invest in, and occasionally exit positions earlier than a hypothetical buy-and-hold portfolio would. As a result, the performance of the writeups and the performance of my actual portfolio should be viewed as related but distinct measures of investment success.

Over the last two years (since June 24, 2024), my IRA has generated a cumulative return of 63.2%, which equates to an annualized return of 27.8%.

Over the same period, the S&P 500 returned 17.6% annually, the Russell 2000 returned 22.9%, and the Nasdaq returned 21.08%.

In other words, the portfolio has outperformed each of the major indexes despite maintaining significant exposure to small/micro-caps, special situations, and areas of the market that are often considered less attractive than large-cap technology stocks.

What I find particularly encouraging is that the results were not driven by a single position. Instead, performance has come from a collection of successful investments including Perimeter Solutions, IEH Corporation, Silicom, Mestek, CarMax, Forge Group, and several others. At the same time, there have been meaningful mistakes, including Jack in the Box, Shutterstock, and a few positions that have yet to play out as expected.

The portfolio has also experienced periods of underperformance. There were stretches when it lagged the broader market and times when individual positions appeared to be moving in the wrong direction. Those periods can be frustrating, but they are an unavoidable part of a concentrated value investing approach. The market rarely recognizes undervaluation immediately, and in many cases an investment thesis requires months—or occasionally years—to unfold.

Importantly, these returns were achieved without relying on leverage, options speculation, or frequent trading. The strategy remains focused on identifying securities trading at significant discounts to intrinsic value and allowing the gap between price and value to close over time.

A sample period of less than two years is far too short to draw definitive conclusions. However, the early results provide evidence that the process is working and that opportunities continue to exist for investors willing to look beyond the most widely followed companies and sectors.

Takeaways and Lessons Learned So Far

My experience with value investing and writing has reinforced several lessons.

First, opportunities still exist in small and overlooked companies. Many of the best-performing ideas were businesses that received little institutional attention and had minimal analyst coverage. The market remains remarkably efficient in some areas and surprisingly inefficient in others.

Second, valuation continues to matter. Nearly every major winner began as a company trading at a substantial discount to intrinsic value. While valuation alone is not enough, it remains one of the most reliable starting points for generating attractive long-term returns.

Third, patience is often the hardest part of investing. Some of the best-performing positions looked wrong for weeks or months before the market eventually recognized their value. In a world dominated by short-term news and price movements, maintaining a long-term perspective remains a competitive advantage.

Finally, this exercise reminded me that investing is a continual learning process. Some ideas worked for reasons I expected. Others worked for entirely different reasons. Likewise, several of the losers have provided valuable lessons that will likely improve future decision-making.

Going forward, I expect to continue focusing on the areas where I believe I have the greatest edge: special situations, microcaps, asset-based value investments, spinoffs, and companies trading at substantial discounts to intrinsic value.

One year is far too short a period to draw definitive conclusions. Markets are noisy, and luck always plays a role over shorter time horizons. Nevertheless, I am encouraged by the early results and remain optimistic that a disciplined value-oriented approach can continue to generate attractive returns over the long run.

One of the biggest lessons I’ve learned over the last few years is that finding investment opportunities is often easier than most people think. There are thousands of publicly traded companies, and if you’re willing to spend the time reading annual reports, industry publications, and regulatory filings, attractive opportunities regularly present themselves.

The more difficult challenge is understanding a business well enough to identify what could go wrong.

A stock can look statistically cheap, but if you don’t understand the industry dynamics, competitive threats, capital allocation risks, balance sheet risks, or management incentives, it’s easy to walk into a value trap. The downside is often far more important than the upside.

Even when you’ve identified a compelling opportunity, another challenge remains: position sizing. The difference between a good investment result and a great one is often not finding the idea itself but determining how much capital to allocate relative to the opportunity and the associated risks.

Every investment competes for scarce capital, and portfolio construction ultimately requires balancing conviction, valuation, downside protection, and diversification.

In my experience, investment success is less about finding a handful of hidden stocks and more about accurately assessing risk, avoiding permanent capital impairment, and allocating capital rationally when attractive opportunities arise.

As always, thank you for reading and following along.

Fewer investors understand stock buybacks and how they impact investment returns. Stock buybacks can be one of the most powerful forms of capital allocation available to management.

Dividends and buybacks are both methods of returning excess capital to shareholders.

However, unlike dividends, the value created by a buyback depends heavily on the price paid for the shares. Buybacks can be a more tax efficient way for companies to return capital to shareholders.

When executed at prices below intrinsic value, buybacks can create enormous shareholder wealth without requiring any growth in the underlying business. When management teams buy back stock at prices below intrinsic value, buybacks can create tremendous shareholder value.

Not all buybacks are equal, however.

Why Companies Buy Back Stock and Why Most Don’t Add a lot of Value

Many companies follow a set schedule of buying back stock regardless of whether the stock price is cheap or expensive.

Companies do this for a variety of reasons.

Some of the primary reasons include:

• · Offsetting the dilution that comes from stock-based compensation

• · A more tax efficient way to return capital to shareholders. Dividends are subject to double taxation – once at the corporate level and once at the individual shareholder’s level.

• · To boost earnings per share.

• · To try to signal to the market that their shares are undervalued

Buybacks executed at inflated valuations can destroy shareholder value, particularly when they are used primarily to offset stock-based compensation or are financed with excessive debt.

The Math Behind Value-Creating Buybacks

Suppose stock XYZ earns $5 per share and its stock trades at $50. Its price to earnings ratio is thus 10x. Now suppose all the companies in their industry trade at 20x P/E. Assuming stock XYZ is in good financial condition and performing in line with its industry, the stock should be valued at $100. Management teams can take advantage of this value discrepancy by buying back shares that are worth $100 for $50. In this case, repurchasing stock might be the best form of reinvestment for a company since it likely offers the highest IRR.

Management is effectively purchasing an asset worth $100 for $50. In other words, the company is buying a dollar for fifty cents. Few acquisitions or internal projects can offer that kind of potential return.

Unfortunately, many executive teams fail to capitalize on this opportunity and don’t increase repurchases when their shares are cheap. This can happen because the market sometimes views stock repurchases as a weakness and a sign that the company doesn’t have a lot of reinvestment opportunities. However, a management team should be repurchasing stock if it offers the highest return opportunities when compared to other available reinvestment options.

The companies that do increase repurchases when their shares are cheap can create huge amounts of shareholder value.

While this sounds obvious in theory, very few management teams behave this way in practice. One notable exception was Henry Singleton of Teledyne.

Henry Singleton and Teledyne

In the Outsiders, William Thorndike highlights the power of buybacks and explains how Henry Singleton created huge value for shareholders through opportunistic share repurchases – that is, buying back stock when Teledyne was undervalued.

Between 1972 and 1984, in eight separate tender offers, Singleton bought back an incredible 90% of Teledyne’s outstanding shares. Singleton believed that share repurchases were a far more tax-efficient way to return money to shareholders. Singleton was very selective with the repurchases and generated a 42% compounded annual rate of return for Teledyne through the repurchases.

From 1963 to 1990, Singleton delivered a remarkable 20.4% annual return for Teledyne shareholders, compared to 8% return for the S&P 500.

Adobe Case Study

Adobe provides a useful example of how buybacks can create enormous value when a company’s shares trade below intrinsic value.

Despite generating industry-leading margins, double-digit revenue growth, and billions of dollars in annual free cash flow, Adobe’s stock has fallen sharply as investors worry that artificial intelligence will disrupt its creative software franchise. Whether those fears ultimately prove justified remains to be seen, but the market’s current pricing implies a far more pessimistic future than the company’s operating results suggest.

At recent prices around $195 per share, Adobe trades at a valuation typically reserved for mature or declining businesses. Yet Adobe continues to generate approximately $10 billion of annual operating cash flow and recently authorized an additional $25 billion share repurchase program.

To put that into perspective, Adobe’s current market capitalization is roughly $77.5 billion. If the company can execute the full authorization at depressed prices, it could retire approximately 20% to 25% of its outstanding shares over the next several years, even after accounting for dilution from stock-based compensation.

This is where the power of buybacks becomes apparent.

Suppose Adobe’s business merely grows at a moderate rate over the next five years. Revenue growth doesn’t need to accelerate dramatically. Margins don’t need to expand. The combination of modest business growth and a significantly reduced share count could still result in substantial growth in earnings per share.

The market is currently focused on whether AI will disrupt Adobe. Management appears to be taking advantage of that uncertainty by repurchasing stock at what may prove to be a highly attractive valuation. Adobe repurchased 8.5 million shares in Q2 2026, putting the company on pace to take out roughly 8% of its shares in fiscal year 2026 if the stock price remains where it is today.

I believe Adobe’s intrinsic value is materially higher than today’s stock price. Thus, every dollar spent on repurchases creates value for remaining shareholders. In effect, management is buying a larger ownership interest in a high-quality business on behalf of investors.

The lower the stock price remains, the more powerful those buybacks become.

Takeaway

Investors often focus on revenue growth, earnings growth, and market share. While those metrics are important, they can sometimes overshadow an equally important driver of long-term returns: intelligent capital allocation.

When a company repurchases stock below intrinsic value, it is effectively investing in itself at an attractive rate of return. In many cases, it may be the highest return opportunity available to management.

The key insight is that buybacks are not inherently good or bad. Their value depends almost entirely on the price paid in relation to the underlying intrinsic value.

A company that repurchases stock at an inflated valuation may destroy shareholder value. A company that repurchases stock at a significant discount to intrinsic value can create enormous wealth for continuing shareholders.

This is one of the reasons Warren Buffett has often emphasized the importance of opportunistic repurchases. The mathematics are simple: buying a dollar’s worth of value for fifty cents benefits every remaining shareholder.

Investors should therefore spend less time looking at the size of a buyback authorization and more time asking a different question:

What is the company paying for its own stock?

The answer to that question often determines whether a buyback becomes a footnote in a company’s history—or one of the primary drivers of long-term shareholder returns.

“The No. 1 test of whether a repurchase program creates value is whether the stock is bought below intrinsic value.” – Warren Buffett

The first grows earnings at just 5% per year and is hated by investors.

The second grows earnings at 20% per year, dominates its industry, and is one of the most admired companies in the market.

Five years later, which investment produced the better return?

Most investors would choose the second company without hesitation.

Yet the answer might surprise you.

The reason comes down to one of the most important concepts in investing: valuation.

Being a value investor means being a contrarian. It requires going against the crowd and thinking independently. It isn’t easy to be among the few people buying a stock when everyone else is selling or selling stock when everyone else is buying.

It can feel like you're alone on a deserted island, looking wrong while the crowd looks right. That's often the psychological price value investors pay in exchange for the opportunity to earn above-average returns.

Whenever a stock trades at a “value multiple,” it’s usually because the market believes the company’s profits and cash flow are unsustainable and will decline over time.

The market rarely offers bargains without a reason. The value investor’s job is to determine whether those fears are justified by assessing the company’s competitive position, future growth prospects, balance sheet, and earning power.

Psychologically, it’s much easier to buy a stock that the market loves. The narrative is positive, the growth outlook appears bright, and investors are confident about the future. The market recognizes the company’s competitive advantages and, often, prices those advantages accordingly.

But as Warren Buffett has famously said, “you pay a very high price in the stock market for a cheery consensus.”

On the other hand, stocks trading at deeply discounted valuations are often ugly. Growth may have slowed, margins may be under pressure, management may be unpopular, or investors may simply have lost interest. It is far more difficult to buy a stock when the headlines are negative and the future appears uncertain.

But this leads to one of the most important principles in investing:

A great business can still produce a mediocre or even poor investment outcome if an investor pays too high a price for it.

Conversely, a mediocre business can produce an excellent investment outcome if purchased at a sufficiently attractive price.

Why?

It comes down to simple math.

What Drives Long-Term Stock Returns

Over the long run, your annual rate of return is largely determined by three factors:

Expected Return ≈ Earnings Yield + Reinvestment Return + Change in Valuation Multiple

Let’s start with earnings yield.

Earnings Yield

Traditionally defined, earnings yield is simply the inverse of the price-to-earnings ratio:

Earnings Yield = Earnings Per Share ÷ Stock Price

However, earnings per share can be influenced by accounting decisions and may not always reflect the true earning power of a business.

Free cash flow is often a better measure because it adds back non-cash expenses and deducts capital expenditures and is harder to manipulate. However, free cash flow can also be distorted by large year-to-year changes in working capital.

My preferred metric is owner’s earnings, a concept popularized by Warren Buffett. Owner’s earnings attempt to measure the cash that can be distributed to owners after deducting only the capital expenditures required to maintain the business.

For valuation, I prefer enterprise value rather than market capitalization because it incorporates leverage and reflects the effective price a buyer would pay to acquire the entire business.

Enterprise Value = Market Capitalization + Debt – Cash and Investments

As a result, my preferred valuation metric is:

Enterprise Value to Owner’s Earnings (EV/OE)

The corresponding earnings yield is simply:

Owner’s Earnings ÷ Enterprise Value

Free cash flow can be used as a rough approximation when owner’s earnings are difficult to estimate.

Most investors focus almost exclusively on the quality of the business. Far fewer focus on the price being paid for that quality.

The stock market doesn’t reward investors for buying great companies. It rewards investors for correctly assessing the difference between expectations and reality.

The best investments are often found where expectations are low, valuations are depressed, and the future turns out to be merely better than feared.

Valuation may not matter much over a few months or even a few years. But over long periods of time, valuation acts like gravity. Eventually, it exerts an enormous influence on investment returns.

Let’s look at two examples.

Unloved Value Stock vs. The Growth Stock Everyone Loves

Company A is the “Unloved Value Stock.” The headlines are ugly, all the analysts are downgrading the stock, and they just missed the earnings forecast and lowered guidance for the year. On top of that, the CFO just left and a talking head on CNBC just said that all stocks in their industry would struggle for the next year.

However, you tune out the noise and do a deep dive on the company. The company has a solid track record of profitability, a strong balance sheet, and has previously had a decent reputation in its industry. Company A’s stock is trading at 5x earnings and 50% of book value. Company A has historically traded at an average earnings multiple of 8x.

Company B is the “Growth Stock Everyone Loves.”

The company dominates its industry; beats earnings expectations quarter after quarter and is featured regularly on financial television as one of the best businesses in the market. Analysts are constantly raising price targets, management has a stellar reputation, and investors are convinced that the company’s growth runway extends for many years into the future. Every earnings call is met with enthusiasm, and any temporary weakness is viewed as a buying opportunity. The company has earned a 20% return on equity for years, revenue is growing rapidly, and management reinvests every dollar of earnings back into the business. As a result, investors are willing to pay 30 times earnings and six times book value for the stock. The long-term average earnings multiple for company B is 20x.

Most market participants would have no hesitation owning Company B and would likely consider it far less risky than Company A. Yet despite its superior business quality, much of that future success is already reflected in the stock price. The question is not whether Company B is a great business—it clearly is. The question is whether the future will be even better than the market already expects.

The chart below breaks down the math of investing in company A vs. company B and the resulting annual rates of return.

Notice that Company B grows earnings nearly five times faster than Company A (20% versus 5% annually), yet Company A produces more than double the shareholder return. The difference is not business performance—it is the valuation paid for that performance.

The results may seem counterintuitive at first. Company B is clearly the superior business. It earns twice the return on equity, reinvests 100% of its earnings, and grows profits at 20% annually compared to just 5% for Company A.

Over the five-year period, Company B’s earnings increase by 149%, while Company A’s earnings grow by only 28%.

Yet despite its slower growth and lower-quality economics, Company A generates a 27% annualized return for shareholders compared to just 11% for Company B.

The reason is starting valuation and the risks of multiple compression.

Investors purchasing Company A begin with a low 5x earnings multiple, (or 20% earnings yield) and benefit from the stock rerating from 5x earnings to 8x earnings. Investors purchasing Company B start with only a 3.3% earnings yield and suffer from multiple compression as the valuation declines from 30x earnings to 20x earnings.

This example highlights one of the most important lessons in investing: a great business can be a poor investment if purchased at too high a price, while an average business can become an outstanding investment if purchased at a sufficiently large discount to intrinsic value.

Why is Charter so cheap?

This is the question that every value investor must ask when looking at a value investment opportunity. Is Charter a value trap or is the market overreacting to competitive threats from fiber and fixed wireless technology?

The goal of this article is to answer those questions and provide an overview of Charter and its competitive position.

In 2025, Charter generated about $22.7 billion of annual adjusted EBITDA and serves over 30 million broadband customers in the US. For some perspective, Charter’s current market cap is only $16.36 billion, or $129 per share.

Despite Charter’s strong and stable earnings power, the stock trades at valuation multiples more commonly associated with businesses in permanent decline. Investors appear increasingly concerned that fiber broadband and fixed wireless access will gradually erode Charter’s customer base and profitability over time. I believe these fears are overblown.

At first glance, those concerns appear reasonable. Broadband subscriber growth has stalled, competition has intensified, and Charter carries a significant debt load.

However, after spending considerable time studying the economics of broadband competition, I believe the market may be extrapolating the economics of the most competitive markets across Charter’s entire footprint.

The key question is not whether fiber is a superior technology. It almost certainly is. The more important question is whether fiber competition will permanently impair Charter’s ability to generate attractive returns on its network infrastructure and invested capital.

The Cox Acquisition

Charter and Cox Communications agreed to merge in May of last year.

The combined Charter/Cox company will possess greater scale, broader geographic reach, and meaningful cost synergy opportunities. Management has guided to substantial run-rate synergies ($500 - $800 million), and history suggests that large cable operators often realize benefits beyond initial estimates.

The transaction will increase leverage in the near term, but it may also strengthen Charter’s competitive position over the long term.

The FCC has already approved the merger, and it is expected to close in the next 1 - 3 months.

Why Charter Stock Is Cheap

Investors appear concerned about four primary issues:

1. Fiber overbuild competition.

2. Fixed wireless competition.

3. High financial leverage.

4. Broadband subscriber losses.

These concerns are legitimate and should not be dismissed. However, I believe the market may be overestimating the long-term impact of these competitive threats while underestimating the durability of Charter’s broadband franchise, the potential contribution from mobile, and the company’s future free cash flow generation.

Rather than viewing Charter as a declining broadband provider, I believe investors should view it as a mature infrastructure business with recurring revenues, substantial pricing power, and significant embedded operating leverage.

Understanding the Bear Case

The bear case is fairly straightforward. Fiber offers faster speeds, lower latency, and superior technology compared to traditional cable networks. Companies such as AT&T, Frontier, and Google Fiber continue expanding their fiber footprints, while fixed wireless offerings from Verizon and T-Mobile provide consumers with an additional alternative.

If consumers increasingly migrate to fiber networks, Charter could experience subscriber losses, pricing pressure, and declining profitability. Given the company’s leverage, even modest deterioration in operating performance could have an outsized impact on equity value.

The market appears to be pricing in some version of this outcome.

As you can see from the graphic below, Charter has lost broadband subs over the last two years in 2024 and 2025. However, broadband revenue is still growing because ARPU (average revenue per user) growth has remained positive. This would suggest that despite the recent losses in broadband subscribers, Charter still does have some pricing power.

This decline in broadband subscribers is not just affecting Charter. Comcast has experienced a similar trend, with broadband subscriber growth declining modestly in recent years while broadband revenue has remained relatively stable due to pricing power, customer mix improvements, and rising average revenue per user. This suggests that slowing subscriber growth does not necessarily translate into a proportional decline in earnings power.

Charter and Comcast are estimated to have a combined market share of roughly 65% of the US consumer fixed-broadband market.

What the Data Actually Shows

Rather than relying solely on management commentary, I wanted to understand what broadband competition looks like at the local level. Broadband economics are inherently local. A customer in Phoenix may face a very different competitive environment than a customer in Tampa or Charlotte.

Using FCC broadband maps and local market data, I examined several major Charter and Cox markets. What I found was more nuanced than the prevailing narrative.

Some markets, such as Tampa, face substantial fiber competition. However, many other markets look more like a duopoly between cable and a single fiber competitor. In Phoenix, one of Cox’s largest markets, numerous addresses showed little evidence of widespread fiber overbuild. In other markets such as Charlotte, Raleigh, and St. Louis, fiber availability was meaningful but far from universal.

AT&T has publicly disclosed that mature fiber markets achieve approximately 40% penetration, while management’s long-term target is approximately 50%. Frontier’s historical investor presentations suggest a similar range, with mature fiber markets reaching penetration levels in the low-to-mid 40% range.

This is an important distinction. Many investors appear to assume that fiber availability ultimately leads to fiber dominance. The actual evidence suggests something different: fiber often captures meaningful share without eliminating cable.

In other words, the likely end state may be a broadband duopoly rather than a winner-take-all market.

I think the market shares could look something like this in Charter’s major markets:

Charter/Cox = 40 - 45%

Fiber providers such as AT&T, Frontier, Google, and Quantum = 40 – 45%

Fixed wireless/satellite = 10 – 20%

The Hidden Value of Mobile

One aspect of the Charter story that receives less attention is Spectrum Mobile.

Charter has become one of the fastest-growing wireless providers in the United States. By leveraging its extensive Wi-Fi footprint and wholesale agreement with Verizon, the company has been able to offer attractive wireless plans while deepening customer relationships.

Charter’s mobile subscribers have grown at a compounded rate of roughly 37.7% annually over the last five years. Charter reported $3.762 billion in mobile revenue for 2025, up 22% compared to 2024.

Mobile service increases customer retention, creates cross-selling opportunities, and provides an additional avenue for growth. While broadband subscriber growth has slowed, wireless continues to gain momentum and could become a far more meaningful contributor to earnings over the next decade.

The Balance Sheet and Leverage

Charter does carry a substantial debt load with roughly $94 billion of debt, so I think of Charter as a leveraged compounder with the stock acting as a leveraged equity stub. That’s the main reason Charter is currently priced at less than 1x EBITDA.

Normally, I wouldn’t invest in a company with such a large debt load but given Charter’s market leading position (largest U.S broadband provider after Cox merger closes) and history of strong consistent earnings (average free cash flow of roughly $25 per share over the last 9 years), I am ok with the added leverage risk.

Following the Cox acquisition, I estimate net leverage will be approximately 4-4.2x EBITDA. While this is higher than I typically prefer, Charter maintains an investment-grade credit rating, generates highly recurring cash flows, and operates essential broadband infrastructure. Interest coverage remains manageable at roughly 2.6x, and management expects leverage to decline over time as EBITDA grows and capital expenditures normalize. Although the debt increases risk, I believe it is manageable given the stability of the underlying business. The debt cuts both ways. While leverage increases downside risk, it also increases the potential upside if Charter’s earnings prove more durable than the market expects. Because the equity represents a relatively small portion of the company’s overall enterprise value, even modest improvements in EBITDA, free cash flow, or valuation multiples could lead to a substantial rerating of the stock price.

The Capex Question

Another reason Charter appears inexpensive is that free cash flow is currently suppressed by elevated capital expenditures. Charter’s management team has stated many times that they believe capex will fall to around $8 billion (from ~$11.6 billion currently) after 2027. By my projection, this decrease in capex spend has the potential to add another $30 per share to Charter’s free cash flow, which would imply roughly $60 - $63 per share in free cash flow once capex returns to normal levels.

The company is investing heavily in network upgrades, rural expansion projects, and initiatives associated with DOCSIS 4.0. Management has indicated that capital expenditures should normalize over the next several years as these projects are completed.

If EBITDA remains relatively stable and capital expenditures fall as expected, free cash flow could increase significantly even without meaningful revenue growth.

Investors often focus on current earnings power while overlooking the potential impact of a lower capital intensity business several years from now.

Recent Insider Buying

One positive sign after the brutal selloff following Charter’s 1st quarter earnings report was the fact that CEO Christopher Winfrey bought roughly $1.2 million of stock in the open market. Three other Charter directors also bought roughly $2.5 million in stock after the 1st quarter earnings call. This makes me believe the insiders thought the market overreacted to the 1st quarter earnings print. It’s a good sign when insiders are buying after a negative market reaction to an earnings call.

Share Repurchases

Charter has been one the more aggressive repurchasers of its own stock over the last 10 years. Since 2016, the company has bought back nearly 60% of its shares and there appears no sign it will slow down the buybacks. If Charter’s shares stay this cheap and Charter continues its aggressive buybacks, it will likely add a lot of value for shareholders. Charter repurchased 1.4% of its shares in Q1 2026. To illustrate how cheap Charter shares currently are: if the share price stayed around $130 for the rest of the year, the company could buyback roughly 22% of its shares in 2026 alone, assuming they bought back $4 billion in shares over the next 4 quarters.

Next, I’ll review what Charter’s normalized EBITDA and free cash flows could look like in a few years after the merger with Cox and provide my thoughts on what could ultimately break the investment thesis.

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Many investors overcomplicate the process.

At its core, investing is relatively simple:

Stocks are ownership pieces of businesses.

That simple idea shapes almost everything about how I think about investing.

Think Like a Private Business Owner

When evaluating a stock, I try to think like a private market buyer would.

If you were buying an entire business outright, you probably wouldn’t care much about:

• short-term stock price fluctuations

• quarterly earnings “beats” or “misses”

• or what the stock market might do next week.

You would likely focus on:

• the competitive position of the business

• the cash flow it generates

• management quality

• and what rate of return you could reasonably expect on your investment.

That’s how I try to think about public equities.

The stock market often encourages short-term thinking, but in reality, buying a stock is simply purchasing a fractional ownership interest in a business.

How I Think About Valuation

My preferred valuation metrics are:

• EV/EBIT

• and EV/Owner’s Earnings.

Why?

One reason I prefer using enterprise value (EV) is that it provides a more complete picture of what an investor is actually paying for a business. Unlike a traditional price-to-earnings ratio (P/E), enterprise value accounts for both the cash and debt on a company’s balance sheet.

Two companies may appear similarly valued on a P/E basis, but one company may carry substantial net debt while another may have significant excess cash. That difference can materially impact both the risk profile and intrinsic value of the business.

Enterprise value adjusts for these balance sheet differences and therefore often provides a more accurate representation of the true economic value of a company. In many ways, enterprise value reflects what a private buyer would effectively have to pay to acquire the entire business, including assuming its debt and receiving its cash balances.

I prefer these metrics because they focus more on the actual earning power of the business rather than accounting earnings alone. Reported EPS numbers do not always provide investors with an accurate picture of a company’s true earning power because accounting earnings can be distorted by non-cash charges, capital structure differences, tax rates, and other accounting conventions. Two businesses with similar underlying economics can report very different EPS figures simply because they have different financing structures or tax rates.

EBIT is a useful starting point because it allows investors to evaluate the operating profitability of a business independent of capital structure and taxes.

Owner’s earnings, a concept popularized by Warren Buffett, attempts to estimate the true cash-generating power of a business after accounting for the capital expenditures necessary to maintain operations.

In many ways, owner’s earnings are similar to free cash flow, although I think owner’s earnings often provides a more useful framework because it attempts to separate maintenance capital expenditures from growth investments.

I generally focus more on cash flow than reported earnings because cash flow is often harder for management teams to manipulate over long periods of time.

Keep Valuation Simple

There are many sophisticated valuation models in investing, but I think many investors overcomplicate the process.

Small changes in growth and discount rates can dramatically alter the output of a valuation model.

As John Maynard Keynes famously said:

“It is better to be vaguely right than precisely wrong.”

I prefer simple valuation frameworks that rely on conservative assumptions.

For example, if an investor buys a business at:

• a 10% earnings yield (10x earnings)

• and the business can grow earnings by 2–3% annually,

then the long-term expected rate of return will likely be somewhere around 12–13% annually over time, assuming the valuation multiple remains relatively stable.

This isn’t a perfect formula, but over long periods, investment returns tend to roughly track:

• earnings yield

• plus growth

• plus capital returns through dividends and stock buybacks.

Why I Don’t Like Paying for Speculative Growth

As a value investor, I generally do not place a large premium on future growth prospects.

The reason is simple:

Predicting the future is extremely difficult.

Many companies trading at premium valuations today are priced as though years of strong growth are guaranteed. In reality, the future is uncertain and highly competitive industries can change quickly.

I would rather pay for:

• current earning power

• durable cash flows

• and reasonable valuations

than speculate on aggressive future growth projections.

If future growth materializes, that’s great. But I prefer to treat growth as upside optionality rather than something that must happen in order for the investment to work.

Why Most Investors Think About Selling the Wrong Way

Many investors anchor their sell decisions around stock price movements.

I try not to think about selling that way.

I don’t automatically sell simply because a stock has gone up, nor do I necessarily hold simply because a stock has gone down.

Instead, I focus on whether the intrinsic value of the underlying business has become stronger or weaker.

For example:

• I may add to a position that has appreciated if the business fundamentals and intrinsic value have improved materially.

• Conversely, I have no problem reducing or exiting a position (regardless of if I have a gain or loss on a position) if the original thesis breaks or intrinsic value is deteriorating.

Ultimately, the business performance matters far more than the recent stock chart.

Making Fewer Decisions Can Lead to Better Results

Modern investing encourages constant activity.

Investors are bombarded daily with:

• financial news

• hot stock tips

• macro predictions

• and the next “can’t miss” trend.

In many cases, overtrading and making too many investment decisions leads to worse outcomes.

I believe investing is often more about patience and selectivity than constant action.

Over time, I’ve found that there are:

• many mediocre businesses

• many mediocre investment ideas

• and many mediocre ideas disguised as good ones.

The goal is not to own a large number of investments.

The goal is to identify situations where:

• the odds are heavily in your favor

• downside is limited

• and long-term expected returns are attractive.

That’s one reason why I prefer running a relatively concentrated portfolio.

Why I Prefer Smaller Stocks

One advantage an individual investor possesses is flexibility.

Large institutional investors often cannot meaningfully invest in smaller companies because the positions are too small to impact portfolio performance.

An investor with a smaller portfolio can invest in:

• microcaps

• special situations

• spinoffs

• and illiquid securities

without moving the stock price significantly.

That creates opportunities that often do not exist for larger pools of capital.

Many smaller companies are also:

• less researched

• less efficiently priced

• and overlooked by institutions.

While smaller stocks can be more volatile, I believe they can also offer some of the best opportunities for long-term investors willing to do independent research.

Ignore Short-Term Price Fluctuations

This is easier said than done, but short-term stock price movements are often meaningless.

In many cases, volatility reflects:

• emotion

• liquidity

• headlines

• or temporary sentiment

rather than changes in long-term intrinsic value.

I try to focus more on:

• business performance

• capital allocation

• competitive positioning

• and normalized earning power

than short-term market fluctuations.

Over time, I believe intrinsic value and business performance matter far more than short-term volatility.

Index Funds Are a Great Option for Most Investors

While I enjoy researching and analyzing individual businesses, I also recognize that investing in individual securities is not appropriate for everyone.

Analyzing businesses properly requires:

• time

• emotional discipline

• patience

• and a willingness to be wrong.

For most people, consistently investing in a low-cost index fund is likely the best approach.

Simple investing strategies often outperform more complicated approaches because they:

• reduce mistakes

• minimize fees

• and remove emotion from the process.

There is nothing wrong with acknowledging that indexing is a highly rational solution for many investors.

Final Thoughts

I don’t believe successful investing requires predicting the future with precision.

I think investing is primarily about:

• rationality

• discipline

• patience

• and capital allocation.

At its core, investing is simply the process of buying future cash flows at attractive prices while avoiding permanent capital impairment.

The market will always fluctuate. Headlines will always create fear and excitement. But over long periods of time, I believe investment outcomes are driven far more by:

• business quality

• valuation

• management

• and investor temperament

than short-term market noise.

The goal is not to make hundreds of brilliant decisions.

The goal is to make a small number of rational decisions consistently over long periods of time.

The company had announced the worst underwriting loss in its history — a staggering $190 million underwriting loss in 1975 — and had suspended its dividend. Angry shareholders stormed the annual meeting and were demanding answers. Ultimately, the board was forced to replace the management team.

Enter Jack Byrne.

Byrne had previously been instrumental in turning around Traveler’s home and auto insurance business and was summoned to become GEICO’s new CEO.

Jack Byrne, the turnaround CEO brought in to rescue GEICO during its 1976 crisis. Source: GEICO historical archives.

A plan had been devised to raise money and have other insurance companies reinsure GEICO’s claims. After State Farm and Traveler’s balked, Byrne was left scrambling to come up with other ways to save the company.

In May 1976, Byrne received a call from Washington Post CEO Kay Graham. Graham said she had someone she wanted him to meet.

In response, Byrne replied “Who’s Buffett?”

At the time, most investors assumed GEICO was finished. Warren Buffett, the contrarian value investor, saw something different.

What Led to GEICO’s Troubles

Today, GEICO stands as one of the most successful property and casualty insurers in the industry. But in 1976, GEICO was on life support. GEICO was dealing with reserve deficiencies, massive underwriting losses, regulatory scrutiny, lawsuits, and severe capital problems. GEICO grew far too aggressively and focused on growth at all costs.

GEICO’s net premiums earned grew from roughly $377.3 million in 1971 to $603.3 million in 1975, a nearly 60% increase. The problem with this rapid growth in premiums was that GEICO’s claims soared because the insurer had prioritized growth over underwriting discipline.

In 1971, GEICO realized $14 million in underwriting income. By 1975, it took a $190 million underwriting loss! GEICO’s combined ratio went from 95.4% in 1971 to 124.2% in 1975. A combined ratio under 100% means an insurer earns an underwriting profit.

Buffett later said:

“I looked again at GEICO and was startled by what I saw. It was clear in a sixty-second examination that the company was far under reserved [for claims] and the situation was getting worse.”

The numbers from the 1975 annual report were alarming.

GEICO generated:

• $603 million of earned premiums

• a $190.9 million underwriting loss

• and a net loss of $126.5 million for 1975.

The company had to strengthen reserves multiple times as inflation drove medical and auto repair costs sharply higher. At one point, regulators in several states threatened to suspend or revoke GEICO’s ability to write new business.

This was not a normal cyclical downturn. Investors genuinely believed GEICO might fail.

Yet Buffett became interested.

Why Buffett Invested

What Buffett recognized was that GEICO still possessed an important structural advantage despite the chaos. The company historically operated with underwriting expenses that were substantially less than the industry average because of its direct-to-consumer model.

The problem was not that GEICO lacked a competitive advantage. The problem was that management had abandoned underwriting discipline in pursuit of growth. GEICO had expanded too aggressively, underpriced risk, and failed to reserve adequately for future claims. Inflation then exposed those weaknesses all at once.

When Buffett finally got the meeting with Byrne and was waiting for GEICO’s CEO to arrive, he told Don Graham, “This is risky” and that “[GEICO] could go completely out of business.”

Buffett believed the core franchise still had value if the company could survive and restore underwriting discipline. Buffett also believed Byrne understood insurance underwriting extremely well and had both the analytical ability and personality needed to stabilize the business.

“…in insurance it’s very hard to get an edge, and they have an edge. If they got the right person in to run it, I think he could turn it around.”

Importantly, Buffett did not blindly buy the stock simply because it looked cheap.

He first wanted confidence that:

• the company could survive

• reserves were being addressed

• and management understood the severity of the problem.

Buffett initially invested about $4 million into GEICO’s common stock during the crisis.

Buffett told a lawyer friend,

“it’s pretty uncharacteristic of me, but today I bought some stock that really might be worthless tomorrow.”

At the time, the investment looked incredibly risky.

But Buffett understood something many investors missed:

GEICO did have an edge and if it ultimately survived, the upside was enormous relative to the price being paid. From 1971 - 1974, GEICO’s average EPS was $1.60. At the low point of $2 - $3 per share, GEICO shares were selling at 1.25 - 1.9x normalized price to earnings.

What Saved GEICO

GEICO ultimately slashed 40% of its customers, sold half of its profitable life insurance company to raise cash and withdrew from all but seven states plus Washington D.C.

Byrne also aggressively cut costs, increased rates, and re-underwrote GEICO entire book of business. Byrne was forced to fire more than half of GEICO’s employees, closed most of its offices, and exited states that would not grant rate increases.

Ultimately, John Gutfruend and Saloman agreed to underwrite a $76 million convertible stock offering. Buffett and Berkshire ended up getting a quarter of the stock offering.

As confidence slowly returned, GEICO’s stock recovered dramatically. Within weeks after the emergency financing came together and many reinsurers stepped in to cover GEICO’s claims; the stock quadrupled from around $2 to roughly $8 per share.

Byrne was able to get rate increases in New York and cancelled policies in New Jersey after the state commissioner was unwilling to grant a rate increase. In a later interview, Byrne said,

“…I was going to fight for the life of this company no matter what, including walking out of a state, which wasn’t done back then.”

Byrne was so successful that GEICO returned to profitability in just one year and recorded the highest surplus in its then 43-year history.

How the GEICO Investment Turned Out for Berkshire

Over the following decades, GEICO became one of Berkshire Hathaway’s crown jewels.

Below is a table showing Berkshire Hathaway’s equity holdings at the end of 1976.

By the end of 1976, GEICO made up over 30% of Berkshire’s equity holdings.

Five years later, Berkshire was up more than 4x on its GEICO investment.

Ten years later, it was up nearly 15x.

In 1994, right before Berkshire acquired all of GEICO, the investment had increased nearly 37x and Berkshire’s ownership stake had increased to roughly 50%, primarily due to share buybacks. It’s hard to estimate exactly, but Berkshire likely earned an annual rate of return of at least 20% on its GEICO investment.

Key Lessons

Even the best businesses can encounter severe but fixable problems.

GEICO had long been viewed as one of the strongest companies in the insurance industry, with a significant underwriting advantage and a stock that appreciated more than 500x between 1948 and 1973. Yet despite that success, the company became complacent and nearly collapsed in the mid-1970s. The episode is a reminder that even great businesses with strong competitive positions are still vulnerable to management mistakes, poor capital allocation, and industry downturns.

A good CEO/management team is often the most important factor in turnaround situations.

This case study also highlights the importance of management quality and capital allocation. CEO Jack Byrne was instrumental in GEICO’s turnaround and was willing to make difficult decisions that many executives likely would have avoided. Byrne had previously helped turn around Travelers’ insurance business, and Buffett viewed his operational and underwriting discipline as critical to GEICO’s survival. One of the lessons from this is the importance of backing management teams with a demonstrated track record of creating value and successfully navigating difficult situations.

Be wary of companies and management teams pursuing “growth at all costs” or empire building.

It’s more common than many investors realize, and in many cases, aggressive growth destroys shareholder value rather than creating it. Whether through overpaying for acquisitions, taking on excessive leverage, or issuing dilutive equity, expansion is difficult to execute successfully and can quickly lead to value destruction if not managed with discipline.

GEICO’s problems were largely self-inflicted through aggressive growth and poor underwriting discipline. When inflation accelerated, claim costs became far more expensive than GEICO had originally projected, contributing to severe underwriting losses and inadequate reserves. The turnaround only became possible once leadership changed and the focus shifted back toward disciplined underwriting and balance sheet repair.

You don’t get rewarded for feeling comfortable - Some of the biggest rewards come when things feel the worst

Buying GEICO in 1976 did not feel comfortable. The headlines were terrible, the financials looked disastrous, and bankruptcy risk appeared very real. Opportunities like this rarely feel obvious when they are happening. Yet that discomfort is often what creates the opportunity in the first place.

Even though Berkshire’s initial $4 million investment in GEICO common stock may have appeared highly speculative at the time, it still represented less than 6% of Berkshire’s overall portfolio. This was not a “bet-the-company” investment.

Buffett understood there was a meaningful possibility Berkshire could lose its entire initial investment in GEICO, which is why he initially kept the position in the common stock relatively small within Berkshire’s portfolio. Only after a major investment bank agreed to backstop the financing, reinsurers had stepped in to cover GEICO’s claims, and Buffett developed high conviction in Jack Byrne’s operational capabilities did Berkshire commit the bulk of its capital to the convertible preferred stock.

More importantly, while the probability of a total loss may have been significant, the potential upside was extraordinary. A rational investor could have viewed the situation as follows: if GEICO survived, the investment was being purchased at roughly a 50% - 80%+ earnings yield (1.25 - 2x price to average EPS from 71 - 74) with the possibility of a 5–10x return over time. If the company ultimately failed, the downside would be manageable because the position size was relatively small compared to the overall portfolio.

The GEICO investment illustrates an important principle in investing: occasionally, a great business encounters severe but temporary problems that create extraordinary opportunities for investors willing to think independently and focus on long-term intrinsic value.

*Much of the background information for this article comes from The Snowball by Alice Schroeder, as well as GEICO’s 1975 and 1974 annual reports and a case study from Wedgewood Partners, all of which provide fascinating insight into one of the most important investments of Buffett’s career.

GEICO: The “Growth Company” that made the “Value Investing” careers of both Benjamin Graham and Warren Buffett

Fewer know the story of Lou Simpson, the investor who ran GEICO’s investment portfolio for over 30 years, from 1979 to 2010.

Simpson joined GEICO in 1979, just a few years after Buffett made a $4 million investment in 1976, when the company was teetering on the verge of bankruptcy.

At the time, the economic environment was very difficult for insurers. High inflation and high interest rates in the 1970s led to significant losses in bond-heavy portfolios. Like most insurance companies, GEICO had traditionally invested the majority of its assets in fixed income securities.

Stocks were widely viewed as too risky.

Most insurers held 10% or less of their portfolios in stocks.

Simpson took a different approach.

A Different Way to Invest Insurance Float

While most property and casualty insurers limited equity exposure to 10–15%, GEICO under Simpson allocated 35–45% of its portfolio to stocks.

Not only that — the portfolio was highly concentrated.

In his 1982 letter, Buffett wrote:

“In Lou Simpson, GEICO has the best investment manager in the property-casualty business.”

At the time, GEICO’s equity portfolio was worth $280 million and held 33 stocks.

Simpson gradually reduced that number, concentrating capital into his best ideas.

Over time, the portfolio typically held 8–15 stocks.

By 1995, GEICO’s stock portfolio had grown to $1.1 billion — with just 10 holdings.

How Simpson Invested

Simpson’s approach was simple, but not easy to execute.

He focused on:

• high-quality businesses

• strong management teams

• attractive valuations

• and long-term holding periods

But what really stood out was his willingness to concentrate capital.

Some Investments that Simpson Made

The “Baby Bells”

Simpson invested in the regional telephone companies spun out of AT&T following the Department of Justice antitrust breakup.

These were often overlooked, misunderstood, and trading at attractive valuations — a recurring theme in his investing.

Freddie Mac

Simpson purchased shares of Federal Home Loan Mortgage Corporation when the stock was relatively illiquid and trading at just 3–4x earnings.

The investment ultimately generated 10–15x returns for GEICO.

Nike

One of Simpson’s more well-known positions was Nike.

At times, it became a very large holding — eventually reaching about 16% of the portfolio, largely due to appreciation.

Simpson initially purchased Nike at around an 8% free cash flow yield (~12.5x FCF).

His approach was disciplined:

• add to the position around ~13x earnings

• trim closer to ~20x

He also developed a relationship with founder Phil Knight and gained confidence in management.

Simpson viewed Nike as a conservatively run business and appreciated its restraint in avoiding value-destructive acquisitions.

Simpson’s Investment Performance

Simpson’s results speak for themselves.

Over roughly 25 years, he generated annual returns of 20.3%, compared to 13.5% for the S&P 500 — an outperformance of 6.8% per year.

While 6.8% annual outperformance may not sound dramatic, the long-term results were extraordinary.

$100,000 invested in GEICO’s portfolio in 1980 would have grown to roughly $10.15 million after 25 years, compared to about $2.37 million if invested in the S&P 500 over the same period.

That additional 6.8% annual return compounded into roughly $7.78 million of additional wealth over 25 years.

That level of sustained outperformance is extremely rare.

It should be noted that while Simpson spoke with Buffett frequently, Simpson had full autonomy over GEICO’s investment portfolio throughout his tenure at the firm.

Per the 2004 Berkshire letter, Buffett said this,

“I typically learn of Lou’s transactions about ten days after the end of each month. Sometimes, it should be added, I silently disagree with his decisions. But he’s usually right.”

One thing I found particularly interesting is that Simpson maintained an independent investment process despite having Warren Buffett as his boss.

Imagine having one of the world’s most well-known and successful investors looking over your shoulder yet still having the confidence to think for yourself and invest differently from the crowd. That level of independence and conviction is rare and likely played a major role in Simpson’s long-term success.

Simpson’s Investing Principles

Simpson’s framework was straightforward, but highly disciplined:

Think Independently

He was willing to deviate from industry norms — particularly in holding a much higher allocation to equities than other insurers.

Invest in High-Return Businesses Run for Shareholders

When evaluating management, he focused on:

• capital allocation track record

• integrity

• whether management acted like owners

Pay a Reasonable Price

• Even for great businesses, valuation mattered.

• Simpson often focused on price to free cash flow on a per-share basis.

Invest for the Long Term

• Turnover was low.

• Once he found a great idea, he was willing to hold it.

Avoid Over-Diversification

• Simpson believed concentration was essential to outperforming.

  • “Concentration may be the only way I can add value to the process.”

Be Thoughtful About Buybacks

• He looked for companies that repurchased stock when it was undervalued.

• At GEICO, more than 50% of shares outstanding were repurchased during his tenure.

Focus on What You Don’t Buy

Simpson once said:

“A record is built as much on what you don’t buy as what you do buy.”

Think More, Act Less

“We do a lot of thinking and not a lot of acting.
A lot of investors do a lot of acting and not a lot of thinking.”

Final Thoughts

Simpson’s approach wasn’t complicated.

But it required:

• patience

• discipline

• independent thinking

• and the willingness to concentrate capital

He didn’t need dozens of ideas.

One or two great opportunities per year were enough — if sized correctly.

In many ways, Simpson’s approach reinforces a simple idea:

Outperformance doesn’t come from doing more. It comes from doing less — but doing it better.

Simpson’s investment process remains highly relevant today because the core principles of investing have not changed.

Markets still periodically misprice high-quality businesses, and investors still struggle with overreaction, short-term thinking, and excessive diversification.

Simpson’s record is a reminder that disciplined capital allocation, patience, and concentration in a small number of well-understood ideas can still be a powerful formula for long-term outperformance.

What I Take from This

What stands out to me about Simpson’s approach is how simple it was in principle, but how disciplined it was in execution.

He didn’t try to do everything. He focused on:

• a small number of high-quality ideas

• understanding downside risk

• and sizing positions appropriately

He also recognized that:

a few good decisions per year are enough — if you allocate capital correctly

That’s something I’ve found to be true in my own investing as well.

Most of the work is filtering — going through a large number of ideas and rejecting almost all of them. The goal isn’t to find a lot of investments, but to identify the few that clearly stand out and then size them accordingly.

Simpson’s record reinforces a simple but important idea:

Outperformance doesn’t come from activity — it comes from discipline, selectivity, and capital allocation

*Much of the information for this article comes from Concentrated Investing: Strategies of the World's Greatest Concentrated Value Investors, which covers several successful investors and is worth reading for anyone interested in concentrated value investing.

Over the last four years, the former REIT has sold off ~160 properties and paid off most of its debt.

What’s left now is a simplified real estate portfolio with minimal debt. Seritage now has a property portfolio that is likely worth somewhere between $400 - $600+ million. This while only having roughly $61 million in total liabilities. The company’s real estate is valued at roughly $310 million on its books and Seritage is currently priced at 45% of book value.

This has left an interesting setup where shareholders could realize a solid IRR through the continued liquidation of the property portfolio. Moreover, at current price levels there appears to be a large margin of safety because even a very conservative, bear case sum of the parts valuation suggests mitigated downside risks.

Seritage Properties currently trades around $2.60 per share, while a base case sum-of-the-parts analysis suggests a materially higher liquidation value.

As previously mentioned, the company has spent the last several years selling assets, paying down debt, and simplifying its portfolio. Today, what remains is a smaller collection of higher-quality properties, including a handful of large redevelopment sites.

This is not a simple arbitrage between price and value. It’s a time-dependent liquidation with execution risk, where returns are driven as much by when assets are monetized as by what they’re worth. The market seems to be fearing that a liquidation will drag on for years, which would reduce returns.

Next, I’ll take a look at two of the larger properties in Seritage’s portfolio and do a brief overview of the remaining seven properties.

The Current Property Portfolio

The most important is the Redmond, WA site near Microsoft’s campus:

• ~14.8 acres

• Fully entitled with development agreement approved

• Infrastructure largely complete

This is not raw land—it’s shovel-ready institutional development land in a top-tier tech corridor.

A reasonable estimate:

• $130M – $170M+ value

This single asset likely represents ~$2.50 – 3.00+ per share of value on its own.

Seritage currently has this property listed for sale and the deadline for investor proposals was March 27th, 2026.

Westfield Shopping Mall – San Diego, CA

The Westfield property is a high value; Class A mixed use asset located in San Diego and Seritage owns 50% of this property through a joint venture with Invesco. According to Seritage’s most recent annual report, Amazon is the main tenant and leases 98.9% of the GLA.

Using the UTC / 4575 La Jolla Village Dr JV financials, the property generates about $8.4M of NOI, which on an estimated ~210,100 sq ft footprint implies roughly $40 per square foot in rent—very reasonable for a San Diego asset with an Amazon tenant.

Applying a 5.25%–6.25% cap rate yields a value of approximately $140M–$160M (about $660–$760 per sq ft), putting SRG’s 50% stake at roughly $70M–$80M, or about $1.33 per share at the midpoint of $75M.

If we assume a midpoint value of $2.75 per share for the Redmond property and $1.33 for the San Diego property, that equals $4.08 per share. Seritage has roughly $62M in cash. Adding back the cash leaves a value of $5.18 per share.

Assuming we deduct Seritage’s total liabilities of $61 million and preferred stock of $70 million (total of $131 million, or $2.33 per share), were left with an implied equity value for the common stock of roughly $2.85 just for the Redmond and San Diego properties!

At the current price around $2.60, you’re basically getting Seritage’s other seven properties thrown in for free with an extra $0.25 left over. There’s a reason for this as I’ll explain later - the market seems to be assuming that the burn and liquidation costs will be higher than people suspect and will eat into the equity value over time. This could happen but at the current prices, it seems that investors will be more than compensated for these timing/cost risks.

The Remaining Properties

For the sake of brevity, I’m not going to go through a deep dive on each of the remaining seven properties. Instead, below is a summary of all of Seritage’s properties, including ownership percentages and my estimated value ranges under both a bear and base case.

*These are rough estimates and I am by no means a commercial real estate expert. These are probable valuation ranges based on widely published real estate market data, and the values could be more or less.

As shown, I estimate the total value of Seritage’s property portfolio to be roughly $368M to $587M. I realize that’s a fairly wide range, but it reflects different potential outcomes across varying economic environments.

The key takeaway, in my view, is that even under more conservative assumptions—higher interest rates and continued pressure in commercial real estate—I still arrive at a portfolio value in the $350M to $400M range.

For reference, Seritage currently carries these properties on its books at approximately $311M, which provides a useful baseline for comparison.

A Reasonable Valuation Range

After adjusting for:

• Ownership percentages

• Preferred equity (~$70M)

• Remaining liabilities

• Liquidation costs

• Multi-year cash burn

A realistic estimate for total equity value is:

• $5.00 – $7.00 per share (base case)

At ~$2.60, that implies:

• ~92-169% upside

• A mid-teens to low-20s IRR depending on timing

The Real Variable: Time

The biggest mistake you can make analyzing Seritage is to treat it like a static NAV discount.

A realistic timeline looks like:

• Years 1–2: Smaller assets sold

• Years 2–4: Mid-tier properties monetized

• Years 3–6: Large development sites (Redmond, Dallas)

The key implication:

• $6.00 in 3 years → ~32% IRR

• $6.00 in 5 years → ~18% IRR

• $6.00 in 7 years → ~13% IRR

These IRR projections assume the payout is received at the end of the period. The IRRs would be higher if more of the distributions are received earlier.

The value shareholders are likely to receive from here is a stream of lumpy special dividends as the company sells off properties and continues its liquidation.

Cash Burn and Friction

Another major factor is ongoing cash burn.

Even with a simplified structure, Seritage still incurs:

• General and admin expenses

• Property carrying costs

• Legal and advisory fees

A reasonable estimate:

• ~$120M – $150M total cash burn over the liquidation period

This is the “leak” in the system—value that never reaches shareholders.

It also explains why the stock trades at a discount. The market is not ignoring asset value. It is discounting time and friction. Put another way, I think the market is pessimistic on the timing of the payouts and assumes the liquidation will take longer than expected and the costs may be higher than expected.

The Financing Overhang

One of the more recent developments is the company’s acknowledgment that:

• The ~$50M term loan maturing in 2026

• Cannot be repaid with current cash + signed asset sales

This creates “substantial doubt” language in filings.

In practice, there are three likely outcomes:

1. Extension or amendment (most likely)

2. Additional asset sales to cover the gap

3. A low-probability Chapter 11 restructuring

Importantly, even in a Chapter 11 scenario, this is likely a liquidity issue, not a solvency issue.

With asset values well above liabilities, equity would likely retain meaningful value, though:

• Timing could extend

• Costs could increase

• Returns could compress

Why Does This Opportunity Exist?

Seritage sits in an uncomfortable middle ground:

• Too complex for most investors

• Too slow for arbitrage funds

• Too uncertain for income-focused REIT buyers

It also carries baggage:

• Legacy ties to Sears

• Perceived governance risk with Edward Lampert (who owns ~24% of the shares)

• No current dividend

As a result, it lacks a natural buyer base.

The Short Thesis

Short sellers are not arguing that Seritage is worthless.

They are arguing:

• Liquidation will take longer than expected

• Costs will be higher

• Asset values are slightly overstated

In other words:

“You’re right on value, but wrong on IRR and liquidation payouts”

That’s a reasonable argument—and one worth taking seriously.

Next, I’ll review projected returns on this investment, the expected value of Seritage (after deducting all liquidation costs and cash burn), and how much I am allocating to my current portfolio.

Read more

The harder question is:

When do you commit capital — and how much of your portfolio should you put into the idea?

Over time, I’ve found that the difference between a good investment idea and a good outcome comes down to discipline — following a strategy that fits your temperament and allows you to stay invested through volatility. This means proper position sizing is a lot more important than most investors realize.

Below is the general framework I use before putting real money into an idea.

Step 1 — The Idea Enters the Funnel

Most of my ideas come from systematically working through a broad universe of stocks or using targeted screeners. I also monitor spinoffs and other special situations, such as mutual thrift conversions.

I generally look for low EV/EBIT, low price to book, a low price to earnings/free cash flow ratio or a combination of these. Many of my best ideas are in underfollowed microcaps and special situations.

When I am doing my initial screening, I’m not trying to get too excited about anything. I’m basically just asking myself: Is this worth spending more time on?

The reality is most ideas get filtered out quickly. I may have to look through thousands of securities before coming up with one or two good ideas.

Step 2 — Quick Kill Criteria

I’ve learned it’s better to reject ideas early than to try to convince yourself that something will work.

Here are some factors that will cause me to pass on an investment opportunity:

• I don’t understand how the business really makes money

• The balance sheet looks fragile – i.e. high debt levels, low interest coverage ratios, etc.

• Earnings are not sustainable or very volatile and are driven by one-time factors

• Management incentives don’t align with shareholders – I avoid companies that have issued large amounts of stock, have made bad acquisitions, have salaries that are too high and/or own a little amount of stock in the company

• The industry is in structural decline

None of these automatically disqualify an investment, but if several show up at once, I usually move on.

There are too many opportunities to force something.

Step 3 — Can the Business Survive a Downturn?

Before thinking about upside, I want to understand the downside.

This is where I spend a lot of time.

I look at:

• debt levels

• liquidity

• cyclicality

• how the business performed in past downturns

The key question is:

Is this a temporary problem or a permanent impairment?

A cheap stock with a weak balance sheet is very different from a cheap stock with a strong one.

I’ve learned that the hard way.

Step 4 — What are “Real” Normalized Earnings?

Reported earnings can be misleading. A company can have large one-time expenses/income or large non-cash charges that can cause headline “GAAP” earnings to be distorted and differ greatly from the true earning power.

I try to get to something closer to normalized earnings:

• What does the business actually generate over time?

• What portion is recurring?

• What needs to be reinvested just to maintain the business?

I typically look back and get an average of earnings over the last 5 – 10 years. Finding an average or “normalized earnings” will show an investor where the company is currently at in relation to their peak and trough level of earnings.

Cyclical companies such as auto manufacturers or homebuilders will often show low price to earnings at the peak of the cycle right before a downturn. Conversely, these companies will often show a high price to earnings ratio at the trough of a cycle right before an upturn. Thus, it becomes very important to know where the company is at in the cycle and where current earnings are in relation to prior earnings.

This usually means:

• normalizing margins

• adjusting for one-time items

I’m less interested in what the business did last year and more interested in what it can reasonably earn over time.

Step 5 — Is it Actually Cheap?

Once I’ve completed steps 1 – 4, I’ll begin to think about valuation.

I’m typically looking for:

• low multiples on normalized earnings

• a meaningful margin of safety

• a path to a 15%-20%+ IRR under conservative assumptions

Importantly, I’m not relying on aggressive growth.

If the investment only works with optimistic assumptions, I’m probably not interested.

I’d rather find situations where:

Even mediocre outcomes still produce acceptable returns.

Step 6 — What Could Go Wrong?

This is one of the most important steps.

For every investment, I try to identify:

• what assumptions I might be wrong about

• what would cause the thesis to break

• what a downside scenario actually looks like

Sometimes the conclusion is:

If this goes wrong, it goes really wrong.

In those cases, even if it looks cheap, I’ll either pass or size it very small.

Step 7 — Position Sizing (Where It Actually Matters)

This is where most of the decision is made.

I don’t think in terms of “buy or don’t buy.”

I think in terms of:

How much capital should this idea get?

Roughly speaking:

• 15–30% positions → rare, highest conviction

• 5–15% positions → strong ideas

• 1–5% positions → lower confidence or higher uncertainty

Sizing depends on:

• downside risk

• balance sheet strength

• confidence in earnings

• overall portfolio exposure

I could be wrong on any individual investment.

Sizing is how I manage that.

Step 8 — The Final Decision

At the end of this process, most ideas still don’t make it into the portfolio.

That’s intentional.

I’m not trying to own a lot of stocks.

I’m trying to: allocate capital where the odds are clearly in my favor

Sometimes that means doing nothing.

Two Recent Examples

Two of my larger positions in 2025 followed this general pattern.

IEH Corp. (up 122% since my first writeup) and Perimeter Solutions (up 131% since my initial writeup):

• Both IEH and Perimeter were under the radar and trading at a low multiple of normalized earnings

• Both companies had strong barriers to entry in niche, underfollowed industries (Perimeter operates as a virtual monopoly selling fire retardant to the US Forest Service, IEH has only one meaningful competitor)

• IEH and Perimeter’s balance sheets had limited downside risk (IEH was trading for less than book value and just above net current asset value at the time I bought it around $9. It also traded at roughly 2.6x EV/normalized EBIT at the time I bought it.)

• The market was offering up these companies at value multiples, and I believed the intrinsic value (or private market value) was worth much more than their stock price at the time I wrote about them

Both IEH and Perimeter Solutions were underfollowed and trading at a low multiple of normalized earnings. The balance sheet limited downside, and the market seemed to be pricing in overly pessimistic assumptions.

I sized it as a meaningful position based on:

• downside protection

• reasonable confidence in earnings

• attractive expected return

As the business continued to perform and expectations improved, the stock re-rated and contributed meaningfully to returns.

Not every investment works this way.

But that’s the type of setup I’m generally looking for.

Final Thoughts

Investing is not about finding ideas.

There are always ideas.

It’s about:

• filtering aggressively

• thinking clearly about risk

• and allocating capital efficiently when the opportunity is there and the odds are in your favor

Over time, I’ve found that discipline in this process matters far more than any individual stock.

The idea I’m going to talk about today is mispriced primarily because it is small and under the radar of most investors.

MachTen, Inc. (OTC: MACT) is a small telecom company that owns Michigan Broadband. Michigan Broadband’s subsidiaries include Upper Peninsula Telephone Company, Michigan Central Broadband Company, and Alpha Enterprises Ltd. MachTen primarily serves the upper peninsula of Michigan.

MachTen was spun out from LICT a few years ago and is quietly undertaking a $100 million investment (mostly subsidized by government grants) in fiber infrastructure for Northern Michigan.

MachTen, Inc. recently closed on the acquisition of AT&T’s wireline assets in Michigan’s Upper Peninsula, significantly expanding its network footprint and customer base.

This transaction adds thousands of miles of infrastructure and positions the company to accelerate its fiber upgrade strategy across a much larger service area.

As a result, MachTen now has a substantially greater opportunity to drive subscriber growth, improve margins, and scale its broadband platform over time.

Combined with LICT’s broader history of successful telecom spin-offs and value creation, this suggests MachTen is being led by a management team with proven experience in acquiring, upgrading, and monetizing rural telecom assets.

MachTen’s management team has a successful track record of investing in undervalued telecom companies then selling them at a large premium.

MachTen’s CEO Dan Miller was previously CEO of ICTC Group, a small regional telco in North Dakota. He led the company until it was acquired by BEK Communications in 2018. The acquisition price was at a 300% premium to the share price at the inception of Mr. Miller’s tenure.

What the Market May Be Overlooking

I think the market has mispriced MachTen for a few reasons.

1. It’s an illiquid microcap and it’s hard for larger investors to build a meaningful position.

2. MachTen doesn’t pay a dividend, and many telecom investors expect dividend payouts.

3. The company has negative free cash flow - as I will explain later this shouldn’t be too much of a concern for investors given the company is undertaking a large investment in upgrading to fiber infrastructure.

4. MachTen’s financials in 2025 have looked relatively weak compared to 2023 and 2024 given the large increase in capital investment to upgrade their network to fiber infrastructure.

Moreover, MachTen’s revenues have been largely flat, and earnings have declined meaningfully year-over-year. For the most recent nine-month period, operating income fell from $4.7 million to $3.5 million, while net income declined by nearly 50%.

But that surface-level view misses what is happening underneath: a capital-intensive transition from legacy copper networks to high-margin fiber infrastructure—funded in large part by government programs like the Universal Service Fund and ReConnect grants.

Depreciation has increased as new fiber assets are placed into service, general and administrative expenses are up as the organization scales, and interest expense has risen as the company funds its network buildout and acquisitions.

The result is a business that appears optically weak today but could generate $10 - 12 million in EBITDA in a few years, which would be a 20 - 50% increase from MachTen’s current EBITDA levels.

In other words, MachTen is spending today to build a significantly more valuable asset base tomorrow. This dynamic—where earnings temporarily compress before improving—is common in infrastructure transitions, but it often leads to mispricing when investors focus on near-term results.

MachTen’s current market cap is roughly $18 million.

MachTen has averaged roughly $8.3 million in EBITDA and ~$1.30 in EPS over the last few years and currently trades at an EV/EBITDA multiple of ~4x, and price to normalized earnings of roughly 3.9x.

Transitioning from Copper to Fiber

MachTen’s core strategy is simple:

1. Acquire under-earning rural telecom assets

2. Upgrade them from copper/DSL to fiber

3. Increase revenue per customer while lowering long-term costs

This is not a growth story in the traditional sense—it’s an asset transformation story.

A typical legacy copper customer might generate $50–70 per month in revenue with relatively high maintenance costs.

A fiber customer, by contrast, can generate $80–120 per month with significantly higher margins and far lower ongoing maintenance.

The result is a dramatic improvement in unit economics:

• Revenue per user increases meaningfully

• EBITDA per subscriber increases

• Maintenance capex declines after the buildout phase

This is why MACT’s current financials are misleading. The company is spending heavily today (~$100 million over several years) not to sustain the business, but to upgrade it into a much more valuable asset.

Government Subsidies Mitigate Some of the Risks with Fiber Buildout

One of the most misunderstood aspects of MACT is its reliance on government support.

Roughly 75% of MACT’s revenue is tied to “network access revenue,” which includes subsidies from programs administered by the Federal Communications Commission. These programs are designed to ensure rural broadband access and include mechanisms like A-CAM (Alternative Connect America Model).

Importantly:

• MACT receives ~$9–10 million annually in relatively stable support

• These payments extend for 10–15+ years

• Additional fiber buildouts are partially funded through grants

For example, one recent ReConnect award covers up to $85 million in project cost, with MACT contributing only ~$16 million. In other words, the government is effectively funding ~80% of the infrastructure build.

This creates a unique setup:

MACT is using subsidized capital to build long-duration, high-return infrastructure.

In the following sections, I show what MachTen’s normalized financials could look like post-buildout, analyze MachTen’s balance sheet strength, provide potential return projections and highlight what MachTen could be worth in an acquisition.

What Are Assets Like MachTen Actually Worth? A Look at Recent Telecom Acquisitions

One of the most important questions in analyzing MachTen, Inc. is simple:

What would a rational buyer actually pay for these assets?

Read more

The last thing I want Clayton Capital Insights to be is a generic stock pitch service that focuses on quantity over quality.

My goal is to provide readers and subscribers with quality value investment ideas and more importantly share my thoughts for how I’m constructing my portfolio to compound at high rates of return over the long-haul while mitigating downside risk.

My main objective is to construct a portfolio that can compound at ~20–25%+ annually over time, while avoiding permanent capital loss.

For Q1, my portfolio was up 0.37%. This might not look like much, but I think it was a good quarter considering the NASDAQ, S&P 500 and Dow were down roughly 7%, 4% and 3%, respectively.

More importantly than my returns, I’m focused on whether the underlying businesses are progressing as expected.

Here is a breakdown of my previous writeups and how they have performed:

I currently have roughly 2/3 of my portfolio in my top seven positions. These positions include PayPal, Heritage Global, IEH Corp., Versant Media, Forge Group, QEP, and Unit Corp.

My Strategy

For those who don’t know, I am a concentrated value investor. I prefer investing in small/micro-cap companies that are under-the-radar of Wall Street analysts.

Here’s a brief background about my strategy: Start Here: Welcome to Clayton Capital Insights.

I believe my edge comes from focusing on underfollowed securities where institutional capital either can’t or won’t go—small caps, special situations, and misunderstood balance sheets. I also am willing to concentrate in my best ideas, often only holding 7 - 12 stocks in my portfolio.

The bottom line is simple: the more stocks you own, the harder it becomes to meaningfully outperform the market.

In A Value Investor's Portfolio Construction Playbook, I highlighted the optimal number of stocks an investor should own if their goal is to outperform the market indexes over time.

How are you supposed to know how much of your portfolio to allocate to one stock? The Kelly Criterion can help with this. In How to Properly Size Investment Positions, I cover the Kelly Criterion in more detail which can help a lot when trying to decide how much of your portfolio you should put into one stock.

I tend to focus on lower beta, idiosyncratic stocks. That is, stocks that will have little correlation to the overall stock market indexes. In Why I’m Shifting a Portion of My Portfolio Toward Event-Driven Returns, I discussed the importance of thinking about beta in overall portfolio construction. I don’t view a higher-beta stock as inherently “riskier” simply because it’s more volatile. Instead, I think of beta as a measure of how closely an investment’s outcomes are tied to the broader market.

This means that I am probably more comfortable owning less liquid microcap stocks than the average investor might be. If that’s not your style or you’re not comfortable with that, that is ok. It all depends on an investor’s preferences and risk tolerance.

When analyzing investments, I tend to think more about the downside risks than how much I can make. I find that when I do that, I am more comfortable owning larger positions and that the upside tends to take care of itself.

I prefer owning stocks with strong balance sheets. i.e. companies with little to no debt and ample cash balances. I also prefer to own stocks where the management team owns a large percentage of the stock.

Typically, when I look at a stock - I like to see a past track record of profitability and prefer paying no more than 5x Enterprise value/owner’s earnings. Owner’s earnings is a rough proxy for free cash flow (with a few adjustments) and is equal to net income + depreciation & amortization - maintenance capital expenditures (CapEx) +/- changes in working capital.

Some Lessons Learned

Ultimately, investors must learn from their mistakes, or they risk being forced out of the game. One of the biggest risks in value investing is investing in a “value trap.”

When initially analyzing an investment, it’s not always easy to tell whether there’s just a temporary mispricing or the market is correctly pricing permanent impairment and long-term secular decline.

That being said, valuation alone is not enough. A low multiple can just as easily signal a deteriorating business as it can a genuine opportunity. Investors need to look beyond the numbers and evaluate the durability of the underlying business—its future prospects, industry structure, and whether it possesses any real competitive advantage.

This means asking tougher questions: Does the company have pricing power? Are its returns on capital sustainable or already in decline? Is management allocating capital intelligently? And just as important—what could erode this business over time?

A cheap stock without a moat often stays cheap, or worse, becomes cheaper. The real opportunity comes when you find a business that is both undervalued and competitively advantaged—one that can sustain or grow its earnings power over time. That’s where multiple expansion and earnings growth can work together, which is ultimately what drives outsized returns.

Watering the Flowers and Cutting the Weeds

One concept I’ve come to appreciate more over time is the idea of adding to winners. Many investors are quick to trim or sell a stock simply because the price has gone up.

But price alone obviously doesn’t determine value. If the underlying business is performing better than expected and your conviction has increased, it can make sense to add to the position—even at a higher price.

In many cases, the highest returning investments are the ones where the thesis continues to strengthen over time. Letting winners run is important, but selectively adding to them when the fundamentals improve can be just as powerful.

At the same time, discipline on the downside is equally important. If the original investment thesis breaks—whether due to deteriorating fundamentals, poor capital allocation, or a structural change in the industry—it’s critical to reassess quickly and act accordingly.

Cutting losses early can be one of the most important drivers of long-term compounding, as it prevents capital from being tied up in situations where the probability of success has materially declined.

Ultimately, portfolio management is a constant process of updating probabilities. When the odds improve, I believe it’s prudent to add to your position. When they deteriorate, it’s better to cut your losses and move to a better idea. This dynamic approach—adding to strength and cutting weakness—is a key part of maximizing long-term, risk-adjusted returns.

Wrapping Things Up

At the end of the day, successful investing isn’t about finding one perfect stock—it’s about consistently applying a sound process over time. That means focusing on downside protection, being selective with position sizing, and staying disciplined when new information emerges.

There will always be mistakes and periods of underperformance, but what matters most is how you respond to them and whether your overall approach is improving.

My goal with Clayton Capital Insights is not just to share investment ideas, but to provide a transparent look into how I think about portfolio construction and capital allocation in real time. If I can continue refining this process while compounding capital at attractive rates over the long haul, I believe the results will take care of themselves.

• Concentrated value investor

• Focus on margin of safety and capital allocation

• Typically hold 7–15 positions

• 41% return in 2025

• Long-term goal is 20% annual returns

Welcome

I created Clayton Capital Insights as a place to document not just what I invest in but also how I think about investing.

Like many investors, my journey began with the classic value investing texts from Warren Buffett, Benjamin Graham, The Intelligent Investor, and Security Analysis among others. Early on, I believed investing was relatively simple. Find undervalued stocks, buy them, and wait.

Over time, I learned that while the value investing principles are straightforward, executing them with real money on the line is not as easy. Thus, I set out on my journey to document not only what I was investing in but also to write about my thought process and my overall investment performance.

Investing real capital introduces uncertainty, emotion, and imperfect information. It forces you to make decisions without knowing whether you’re right — and to live with those decisions over time. That experience shaped how I think about risk, valuation, and capital allocation far more than any textbook.

In 2025, I generated a 41% return, reinforcing my belief that a focused, disciplined approach — grounded in valuation, balance sheet strength, and position sizing — can produce strong results when applied consistently. While one year doesn’t mean much (I believe 5 years is the minimum with which to judge investing performance), I think it does show concentrated value investing can work.

How I Think About Investing

I focus on situations where the downside is limited and the upside might be 2 - 3x or more.

This often leads me toward underfollowed, small companies where fewer investors are paying close attention.

I look for businesses that are understandable, have strong balance sheets, and are trading at a meaningful discount to a conservative estimate of intrinsic value.

Over time, I’ve come to believe that valuation alone is not enough.

• It’s important for a company to have a strong balance sheet that can withstand downturns

• Management decisions and capital allocation can have a bigger impact on investment returns than most investors realize

• And most importantly:

How much you invest in an idea matters just as much as the idea itself

My edge comes from combining deep value analysis with disciplined position sizing and a focus on capital structure — areas often overlooked by traditional equity investors.

My Investment Framework

While every investment looks a little different, I consistently return to a few core principles:

• Understandable business model

  • Easy to understand exactly how the company makes money

  • Within my circle of competence

• Aligned management

  • Insider ownership

  • Rational capital allocation

• Normalized earning power

  • Focus on owner’s earnings

  • Ensure the business has had a consistent track record of profitability

  • Evaluate performance across cycles

• Strong balance sheet

  • Ability to withstand adverse conditions

  • Limited risk of permanent capital loss

  • Prefer companies with high cash balances and little to no debt

• Attractive valuation

  • Typically, less than 8 - 10x owner’s earnings

  • 15 - 20%+ expected IRR under conservative assumptions

  • I prefer EV/owner’s earnings over price to earnings ratios

These principles don’t guarantee success — but they help avoid obvious mistakes.

On Concentration & Position Sizing

Most investors focus on what to buy.

I focus equally on how much to buy.

In practice:

• 20–30% positions → highest conviction (rare)

• 5–15% positions → strong ideas

• 1–5% positions → lower conviction or higher uncertainty

I believe:

• A few great ideas drive most returns

• Over-diversification dilutes performance

• Cash is a strategic asset

Two Recent Investments

To illustrate the types of stocks I like, two of my top-performing investments - IEH Corp. (up 108% since my initial writeup) and Perimeter Solutions (up 84%) - both followed a familiar pattern:

• Both IEH and Perimeter were under the radar and trading at a low multiple of normalized earnings

• Both of these companies had strong barriers to entry in niche, underfollowed industries

• Their balance sheets had limited downside risk

• The market was offering up these companies at value multiples, and I believed the intrinsic value (or private market value) was worth much more than their stock price at the time I wrote about them

The market has slowly started to recognize the underlying value of both IEH and Perimeter and the stocks have re-rated and contributed meaningfully to my overall returns.

Both IEH and Perimeter reflect the type of opportunities I focus on - mispriced assets with much more upside than downside.

What I’ve Learned

Over time, I’ve made many of the same mistakes most investors make:

• Buying statistically cheap stocks without really understanding the economics of the business

• Overestimating my edge in widely covered large cap companies

• Underestimating the role of how my emotions could affect my investment returns

Some lessons stand out:

• Just buying undervalued stocks is not enough

• Balance sheets and earning power matter more than narratives

• Patience and a willingness to look wrong in the short-term is often a big edge

• Position sizing makes a big difference in whether or not an investor can substantially outperform the market indexes over the long-term

Who This Is For

This publication is for:

• Investors focused on risk-adjusted returns, not just investment opportunities with the most upside

• Those interested in concentrated portfolios

• Readers who value process and discipline

• Long-term investors seeking to compound capital at above average rates of return

It is likely not for:

• Short-term traders

• Those looking for frequent stock picks

• Momentum-driven strategies

How to Approach This Publication

I don’t publish on a fixed schedule.

I write when I have:

• a high-conviction investment idea

• a meaningful framework

• or a lesson worth sharing

The goal is quality over quantity.

Start Here

If you’re new, I’d recommend:

• A Value Investor's Portfolio Construction Playbook

• Why Cheap Quality Companies Stay Cheap

• How to Properly Size Investment Positions

Final Thought

My goal is not simply to find undervalued stocks.

Rather, my ultimate goal is to allocate capital in a way that compounds over time while minimizing the risk of permanent loss.

If that approach resonates with you, consider subscribing to follow along.