A small cap with two businesses the market can’t price together: a 40-year-old industrial franchise that grew into a shrinking market, and a measurement-and-power platform that is 17% of revenue and half of gross profit. The short sellers got their 20% day. I think they got the wrong company.

On a Monday in mid-August a short seller published a report, the stock lost a fifth of its value in a day, and a ten-year contract that had been announced two weeks earlier was gone by the Tuesday. A couple of weeks later, management raised full-year guidance for the second time in five weeks.

You either believe the short report described the business, or you believe the guidance did. The two can’t both be right, and the price today sits closer to the short report.

This piece walks through why I think the guidance is the better description, what the measurement-and-power business is worth on its own, where the bear case is strong, and what my model says a share is worth.

Below is the scorecard of every pick I have published since launching this newsletter: 24 picks held longer than 30 days, an average gain of 40% each, and two out of three winners. Paid subscribers got each of those names on the day I bought them.

Table of Contents

• TLDR

• RankedStocks scorecard

• Two businesses the market can’t price together

• The legacy franchise and the contract underneath it

• The measurement and power platform, unit by unit

• The industry: three currents, one direction

• The supply chain, upstream and downstream

• Financials: what the numbers say and what they hide

• Returns on capital: eight years below the line

• Management, the controlling shareholder and governance

• The bear case, point by point

• What the market is missing

• Valuation

• Verdict

Read more

Hello fellow Sharks,

It was another disappointing week for the portfolio. Our YTD return of 23.4% is now less than half of the portfolio’s peak of 49.5% on August 17.

If you want to skip straight to the numbers, jump to the Portfolio Update.

The portfolio is still up for the year, but I have to admit it’s disappointing. I’ve been at this rodeo long enough to know this is a feature of participating in this market.

Still, the mind grabs every chance to play games with you. The should’ve, would’ve and could’ve pile up, and they never disappear. We have to learn to live with them and focus on the process, not the results.

I have been reading Vaclav Smil’s How the World Really Works. Great book, and this week’s Thought of the Week builds on it as the next part of the Physics of Investing series. In one section, Smil writes about our dependence on electricity, and as I reflected on it, I realized how much my livelihood depends on it. If we lost power for weeks, there would be pure chaos. I couldn’t access my bank or withdraw cash. Our shares would be worthless, because we couldn’t buy or sell them... do you keep a physical certificate for your shares???

Early last week, my internet went down, and the provider kept pushing back the fix until Friday night.

I used my hotspot to work, but it was inefficient. I couldn’t connect to my databases, RankedStocks.com was down, and I couldn’t even open my notes on the stock I’m analyzing for the October Stock Pick (by the way, the pick comes out early next week). I still downloaded and read the 10-Ks and had three channel check calls, but it made me reflect, again, on how fragile our modern system is.

That fragility runs through this week’s Thought of the Week. The tomato in your salad, the answer from your chatbot and every dollar of AI capex rest on energy you never see. I take five of Smil’s ideas about energy and turn them into an audit you can run on any company in the AI trade, from Meta’s $140 billion capex budget to the switchgear makers on the other side of that bill.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• The Physics of Investing, Part 5: Energy Never Disappears

• Portfolio Update

In Case You Missed It

TSM Q3 2026: Mr. Market Sold The Stock, TSMC Sold Out Its Fabs: TSMC grew revenue 41%, raised its 2026 growth guide for the fourth time this year to 44% and said demand is still above what it can supply. I raised my target to $582 and kept the BUY.

Thought Of The Week

The Physics of Investing, Part 5: Energy Never Disappears

This is the fifth installment of my physics of investing. The previous ones are:

The Pendulum Effect: sentiment never parks at one extreme. It swings back, so be wary of anyone who draws a straight line forever.

Understanding Friction: costs, taxes and your own behavior slow every portfolio down. No system runs without friction, so the job is to cut what you can and manage the rest.

Higher-Order Investing: the edge sits one level deeper than the consensus, so keep asking “so what?” until you reach what the market hasn’t priced.

Gravity Always Wins: valuation is the weakest force on any given day and the only one that never turns off.

One of my favorite fruits is the tomato (yes, it’s a fruit, not a vegetable). I like any salad with tomatoes, from tabbouleh (my favorite) to ensalada chilena. So when Smil started talking about tomatoes, I grabbed one (yes, I also eat them like apples) and kept reading.

Slice a medium tomato, the kind that comes wrapped in plastic from a greenhouse in Almería. Lay the slices on a white plate. Now pour five tablespoons of dark oil over them and look at the mess.

Smil totals the diesel, the natural gas behind the fertilizer, the plastic, the heating and the trucking that go into one greenhouse tomato and lands on 650 milliliters per kilogram, “more than five tablespoons” of diesel for a 125-gram tomato. He suggests you stage it at home with sesame oil because it has the right color (and you can still eat the tomato after the experiment 🙂). Seafood is worse, at close to a full wine bottle of diesel per kilogram on average.

That image won’t leave me alone. You eat the tomato. You never see the oil. The oil didn’t vanish, though. It turned into fertilizer, heat, motion and plastic, and the tomato is what was left on the plate.

I’ve been reading the book for the past few weeks and made a lot of progress last week while the internet was down.

This week, I realized that every answer you get from ChatGPT, Muse or Claude comes with its own five tablespoons of oil.

The week the AI capex bill showed up

On Thursday, the Nasdaq fell 2.6%, its worst day since June. Meta [] dropped 7% after it raised the bottom of its 2026 capex range to $135-145 billion. CoreWeave [] lost 10% on worries about its debt. IBM [] beat its numbers and still fell, and the CEO warned that companies are “getting worried if some of the AI spending is completely out of control with no real return.”

Then look at the totals. Oracle [], Amazon [], Alphabet [], Microsoft [] and Meta spent $97 billion on capex in 2020. They spent more than $400 billion in 2025, and the projection for 2026 is above $800 billion, more than their combined operating cash flow. An NBER paper puts a 1-gigawatt AI campus at $41 billion and a full US build-out at close to $9 trillion by 2032. At least $1.3 trillion of debt has already been committed. OpenAI’s own internal projections show $278 billion of negative FCF from 2026 through 2030.

So where did all that money go, and is it gone?

Smil’s book gave me a better way to answer it than any earnings call or webinar I sat through this month. It rests on five ideas about energy. Each one maps onto a rule about money, and together they work as an audit you can run on any company in the AI chain.

Rule 1: Energy is never lost. Neither is a dollar.

The first law of thermodynamics says no energy disappears during a conversion. Chemical to mechanical when you move a muscle, chemical to thermal when you burn gas, thermal to mechanical in a turbine, mechanical to electrical in a generator. The quantity stays the same. The form and the location change.

A dollar behaves the same way. It is stored work. Ontario’s minimum wage rose to $17.95 an hour on October 1, so one Canadian dollar holds 3.3 minutes of somebody’s labor. Smil quotes the physicist Robert Ayres, who describes the whole economy as “a system for extracting, processing and transforming energy as resources into energy embodied in products and services.” Smil’s shorter version: “energy is the only truly universal currency.”

Accountants figured this out first. Luca Pacioli published double-entry bookkeeping in 1494, more than 350 years before Helmholtz wrote down the conservation of energy. Every debit has a credit. Every dollar that leaves one income statement lands on another one.

When a dollar of revenue enters a business, it splits. Maybe 60 cents flow out to suppliers, employees and the government (taxes), and 40 cents stay inside as margin, reinvestment or cash. Nothing disappears. It changes form and address.

Now apply that to Meta’s $140 billion. That money did not evaporate. It turned into Nvidia [] revenue at some of the fattest gross margins in hardware, TSMC [] wafers, Micron [] memory, switchgear, transformers, concrete pads, fiber, electricians’ wages and a utility bill. The capex line on one company’s cash flow statement is the revenue line on a dozen others.

Over the last three years, the energy flowed downstream, so the companies downstream got rich first. In September 2025, I called the Nvidia, OpenAI and Oracle deals an “AI ouroboros of money”: Nvidia invests in OpenAI, OpenAI rents Oracle capacity, Oracle buys Nvidia chips.

Energy that circulates in a loop does little outside work. An engineer would call it heat sloshing around a closed system.

That gives you the first audit question. When the dollar leaves the company you own, where does it land, and does it come back? Charlie Munger said “show me the incentive and I’ll show you the outcome.” I would add: show me where the dollar lands and I’ll show you who wins.

Rule 2: The dollar keeps its size but loses its usefulness

The second law should worry you more. Smil writes that “all energy conversions eventually result in dissipated low-temperature heat: no energy has been lost, but its utility, its ability to perform useful work, is gone.”

Cash is high-grade energy. It can become anything: a dividend, a buyback, a factory, a salary. A GPU is low-grade by comparison. It can do one thing, and it does that thing for a limited number of years before a newer chip makes it look slow. Depreciation is the second law written in accounting language.

I put it this way last week:

A GPU is an expensive machine that only makes money while someone is renting it.

At $2.74 an hour of rent, a GPU pays for itself in three years. At $1.70 an hour, the payback stretches to five, which may be longer than the chip stays competitive. Michael Burry thinks the hyperscalers stretched server lives to flatter earnings and estimates $176 billion of understated depreciation from 2026 to 2028.

A data center turns electricity into heat. The question for you as a shareholder is whether the work it sells along the way is worth more than the cash it burned. Every dollar of capex starts a clock. You want to know how fast that clock runs.

Rule 3: A gigawatt is a promise

Smil spends pages on confusing power with energy, a mistake that sounds pedantic and turns out to be expensive. Power is a rate, watts. Energy is the rate multiplied by time, watt-hours. He points out that even engineering papers write about a “power station generating 1,000 MW,” which is impossible. A plant can have 1,000 megawatts of capacity. What it delivers depends on how many hours it runs.

Big nuclear reactors produce power 90-95% of the time. The best offshore wind turbines run 45% of the time, solar panels in sunny places 25%, and German solar 12%. Same nameplate, an eightfold difference in what you get.

The AI industry talks almost entirely in power. Ten gigawatts here, five gigawatts there. Those are rates of potential consumption. They are capacity, the same way annual recurring revenue is a rate and cash collected is the energy. OpenAI is a good example: the company is running at $50 billion of annualized revenue, while its own projection for 2026 revenue is $36 billion. The run rate is power. The bank deposit is energy.

The Brookings study behind this month’s headlines assumes that 227 gigawatts of the 509 gigawatts in the proposed pipeline never get built. Close to half of the announced power never turns into energy at all.

Convert every rate into a quantity before you believe it. When management quotes backlog, capacity, ARR or gigawatts, ask how many hours it runs, at what price, for how many years, and who pays.

Rule 4: Nothing lasts that eats more than it makes

Smil quotes the line that sums up this piece. In the 1970s, the ecologist Howard Odum wrote that “all progress is due to special power subsidies, and progress evaporates whenever and wherever they are removed.”

A system lasts when it produces more energy than it consumes. The ecologist Charles Hall, who coined the term energy return on investment, estimated that oil has to return at least three units of energy for every unit spent getting it out of the ground before it is useful to a society at all. Below that line, you are running in place and calling it progress.

Smil’s chicken complicates the rule. Producing chicken takes several times more energy than the edible meat contains. By the joule count, chicken farming is a loser. We do it anyway because the output is a higher-quality form of energy: digestible protein you cannot get from an equal amount of diesel. Some deficits are worth running because they buy something better.

That is the honest case for today’s AI spending. Tokens are subsidized, as I explained in Weekly #87.

The price you pay for an answer sits below what the answer costs to produce, and the gap gets filled by OpenAI’s backers, by hyperscaler shareholders and, more and more, by bondholders. They are betting that the cost of tokens falls by orders of magnitude (Meta’s CFO said on Wednesday that it expects to “improve compute cost efficiency by more than 10x over the next year”) and that more people start paying for AI, something that is slowly starting…

… and that users are willing to pay more for more compute. Menlo Ventures estimates that consumer AI spending tripled to $40 billion this year, and the 14% of payers who spend $100 or more a month account for 60% of it. Meta sees the same thing: the CEO said people who want the most advanced models or extra tokens “subscribe directly and pay.” I have discussed this before, and I did the same once I saw the efficiency gains.

As I noted last week, debt now funds 32% of hyperscaler capex, up from 9% in fiscal 2024. Subsidizing a new technology to test demand is normal. Amazon ran its retail business near zero profit for years to buy a position.

The finance version of this rule is the spread between return on invested capital (ROIC) and the cost of capital (WACC). I wrote a whole piece on it last year.

In the short run, ROIC can sit below WACC while a company tests something new. For the system to balance, ROIC has to reach WACC at a minimum, and to create value it has to beat it. says it in one line: “growth unaccompanied by excess returns creates no value.” Buffett said: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”

Many AI names have cleared that bar for years. Over the past 10 years, ROIC beat WACC in all 10 for NVDA, in 9 for Sterling Infrastructure [], in 7 for MU, in 7 for Dell [] and in 4 for Powell Industries []. You can check the spread for any stock on RankedStocks.com: open the Financials tab, then Profitability.

My AI holdings have been beating WACC for years. Not every stock in the AI space can say that.

Two things changed this fall, and both make the balance harder to reach. First, the hurdle moved. The 10-year Treasury yield touched 5.33% on October 14 and is still near 5%. I remember when you could finance at 1-2% during COVID, or 2-3% before it. Those days are gone.

Buffett compared interest rates to gravity, and I used the same image in Part 4 of this series: when rates rise, every future dollar weighs less. A higher WACC means the AI build-out has to earn more to justify itself, at the exact moment its returns are least proven.

Second, the size of the required return keeps growing. Back in 2024, David Cahn asked “AI’s $600 billion question”: how much revenue the industry needs to pay for the chips it was buying. Gartner’s newer math, which I cited last week, says covering the spend plus a 12% return would take $8.5 trillion of cumulative revenue, against no more than $3.6 trillion of AI data center revenue on its forecast. That gap is the subsidy.

On the bull side (I am bullish), when a resource gets cheaper, people use far more of it, as I explained in Weekly #87 when I revisited the DeepSeek scare. Economists call it the Jevons paradox. Smil would agree with the mechanism. He warns that relative efficiency gains “should not be mistaken for an absolute decoupling of output and input.” Cheaper tokens lead to more tokens, more chips and more power. Demand is real. The open question is whether the price per unit falls faster than the volume grows, because that ratio decides whether the system ever pays for itself.

Rule 5: Bits are fast. Atoms are slow.

Smil calls it a category mistake: assuming that because information moves at the speed of light, everything in an electronic world can move that fast. “Information and connections do so,” he writes, “but existential imperatives do not belong to the category of microprocessors and mobile phones.”

AI models are bits. The thing they run on is atoms. Most of the electricity in the world still comes from steam turbines, which Charles Parsons invented in 1884, and from gas turbines, the first of which went into commercial service in 1938. A data center needs steel, cement, copper, transformers, switchgear and a grid connection, and every one of those has a waiting list measured in years. You can replace a billion landlines with mobile phones in a generation, but you cannot replace terawatts of turbines in the same time.

This cuts two ways for you.

The first way favors the owners of the slow parts. When atoms are the bottleneck, the companies that make the atoms set the price. That is why so much of my portfolio has sat in power equipment, construction and the physical chain rather than in the companies that borrow to buy from them.

The second way warns you about forecasts. Smil sorts them into three categories. The first covers processes we understand well, like demographics, where a ten-year forecast lands in a narrow range. The second points in the right direction with a wide range of outcomes; his example is EVs, where forecasts made between 2014 and 2016 put the 2020 US market share at 8-11%…

… and the real number came in at 2.3%.

The third he calls “quantitative fables”: models full of numbers built on layered assumptions that will meet “very different real-world endings.”

Most AI revenue curves to 2030 sit in the second category at best and the third at worst. Underwrite category-one facts and nothing else: contracted backlog, cash in the bank, a delivered order. Size your positions for category-two uncertainty. Ignore category three, however many decimal places it has.

We have seen this movie, and the energy did not disappear then either

Smil’s chapter on failed predictions reads like a history of capex cycles.

Before 1980, leading scientists and large companies believed nuclear fission would displace every other form of electricity. In 1954, the chairman of the US Atomic Energy Commission promised power “too cheap to meter.” The faithful expected fast breeder reactors that would “produce (temporarily) more energy than they consumed,” the closest thing physics has to a free lunch. The US spent billions on a nuclear-powered airplane before abandoning it in 1961, and detonated nuclear bombs underground to try to free natural gas. Nuclear ended up useful and supplies 10% of the world’s electricity. It never became the magic its promoters promised.

The telecom bubble is the closer match. From 1996 to 2001, telecom companies poured more than $500 billion, most of it borrowed, into fiber. By mid-2001, 95% of it sat idle. Shareholders and bondholders of the builders lost most of their money.

This time the imbalance runs the other way. In 2001, supply ran far ahead of demand. Today, supply can’t keep up: TSMC said on October 15 that AI demand “is still far above our capability today to supply,” as I covered in my Q3 review.

Now apply the first law. That energy did not vanish in 2002. It changed owners. The fiber stayed in the ground, bought for pennies by the next owners, and it carried the streaming, cloud and smartphone decade that followed. As I wrote in 2025, “Bubbles burst, but sometimes they leave something useful.”

The value moved from the people who paid for the infrastructure to the people who used it.

Buffett made this point about the two great inventions of the 20th century. Cars and airplanes changed the world and destroyed most of the capital invested in making them. He joked that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” Carlota Perez describes the pattern in every technological revolution she studied: an installation period financed by speculative capital, a crash, then a long deployment period where the real gains show up, for someone other than the people who funded the build.

Stijn Van Nieuwerburgh, the Columbia economist behind the Brookings study, looked at today’s numbers and told Bisnow: “I don’t see why this one time is different.” John Templeton called “this time it’s different” the four most dangerous words in investing.

None of that means the build-out stops tomorrow. Van Nieuwerburgh himself sees five to eight more years of strong growth before oversupply bites. Thursday’s sell-off may turn out to be a wobble. The physics of who keeps the energy does not care about the timing. Somebody funds the subsidy. Somebody captures the output. Your job is to know which side of that transfer you own.

The energy audit

Here is the checklist for anything that touches the AI trade. It works on a bakery as well as on a hyperscaler.

1. Where does the dollar land? Follow it out of the company. If it lands on a supplier’s income statement, the supplier may be the better owner of the trend.

2. What form does it take, and how fast does it decay? Cash into a five-year asset is a different bet from cash into a twenty-year asset. Compare the useful life with the payback period.

3. Is that number power or energy? Gigawatts, capacity, backlog and ARR are rates. Ask how many hours, at what price, for how long.

4. Does it make more than it eats, and who pays the gap? ROIC against WACC, with WACC at today’s rates. If the gap is a subsidy, name the subsidizer and ask how long they can keep paying.

5. Bits or atoms, and which forecast category? Bits scale fast and compete fast. Atoms scale slow and price high. Never pay a category-one price for a category-three forecast.

Run Meta through it and you get a company turning first-rate cash flow into fast-decaying assets, priced on a rate rather than a delivery, with a return that has yet to clear a cost of capital that just rose. Run a switchgear maker through it and you get a company where the dollar lands, collected as cash, against an order book of atoms nobody can print faster. Neither answer tells you the share price next week. Both tell you where the mass is, and as I wrote in July, “you do not need to predict every path. You need to know where the mass is.”

The audit also tells you what not to do. In July, Situational Awareness lost 67% in a month at four times gross exposure, and I wrote that “being right about 2030 does nothing for you when your prime broker calls in July 2026.”

Leverage is borrowed energy. It lets you move faster than your own engine allows, and it gets recalled at the worst possible moment. If the build-out runs on debt, your portfolio should not.

And tell me in the comments: which company in your portfolio would fail the energy audit?

Leave a comment

Neither pessimist nor optimist

Smil ends his book with a line I have reread several times this week: “I am not a pessimist or an optimist, I am a scientist. There is no agenda in understanding how the world really works.”

The bulls tell you AI is a new industrial revolution, and we (I include myself in this group) may well be right. The bears tell you the spending is out of control, and on the numbers they have a point. Both camps argue about the destination. Physics asks about the path: where the energy goes, what form it takes, how fast it decays, and whether the system puts out more than it consumes.

The tomato on your plate carried five tablespoons of oil you never saw, and the AI answer on your phone carried a slice of an $800 billion capex budget, a chunk of a bond issue and a GPU that is already getting older.

Before you buy the next AI name, pour the oil on the plate. Look at what it took to make the thing, and ask who is paying for it.

Portfolio Update

By Wednesday, the market seemed to be recovering but on Thursday it continued its decline.

Portfolio Return

• Month-to-date: -12.9% vs. the S&P 500’s +0.4%.

• Year-to-date: +23.4% vs. the S&P 500’s +11.4%. That is a gap of 1,199 basis points.

• Since inception: +74.1% vs. the S&P 500’s +32.6%. That’s 2.3x the market.

Contribution by Sector

Technology cost 206 bps and industrials 163 bps, as Thursday’s sell-off hit the AI hardware and data center chain after Meta raised its capex guidance and IBM’s CEO questioned AI spending. Basic materials cost another 84 bps. Gold had its worst week since June and fell below $4,000, and silver dropped 6%, as oil above $110 raised the odds of a Fed rate hike. Education was the only sector that added to returns, at 8 bps.

Contribution by Position

How to read the heat map? Click here.

• +10 bps DELL 3.90%↑ (Thesis)

• +10 bps TSM 1.99%↑ (Thesis)

• flat MU 2.83%↑ (Thesis)

• -11 bps RYAM -3.71%↓ (Thesis)

• -14 bps POWL 1.10%↑ (Thesis)

• -44 bps DXPE 2.42%↑ (Thesis)

• -45 bps CDE 0.74%↑ (Thesis)

• -52 bps STRL 4.60%↑ (Thesis)

• -141 bps CLS 3.09%↑ (TSX: CLS) (Thesis)

That’s it for this week.

Stay calm. Stay focused. And remember to stay sharp, fellow Sharks!

TSMC’s shares have had quite a ride in the last 3 years.

Since adding TSM to the portfolio in March 2025, it is up 149%.

Last week was ugly. The Philadelphia Semiconductor Index fell for eight sessions in a row, its longest losing streak since 2008, and TSM fell 15% from its October 5 record close to $413 on Friday. In the middle of it, on Thursday, TSM reported its third quarter.

In Weekly #104 I argued that the crack showed up in the bond market rather than in AI demand.

CoreWeave []’s bonds traded at 79 cents on the dollar, the 10-year touched 5.33% and Mr. Market started treating every funding headline as a verdict on the whole AI trade. I also promised the TSM review this week, because TSM is the cleanest test of that argument. It sits at the far end of the chain from the borrowers. Its customers are chip designers who commit to capacity years ahead, and its order book tells us what the people who actually buy the silicon are planning.

Revenue grew 41% y/y and came in $0.9B above the top of guidance. Management raised the 2026 growth outlook for the fourth time this year, to 44%, guided Q4 revenue +58% y/y at the midpoint and said 2026-2028 capex will be “significantly higher” than the prior three years. The CEO put it plainly: “We did not see any sign of slowdown.”

So here is the update: what Q3 delivered, how each of my five original thesis pillars held up, what I changed in the model, and why my target goes from $565 to $582.

Table of Contents:

• TLDR

• How TSM ranks

• Thesis scorecard after Q3 2026

• Q3 2026 earnings: the numbers

• Guidance: the fourth raise of 2026

• What last week’s sell-off got wrong about TSM

• Valuation: target raised to $582

• Risk register

• Performance vs. peers

• Verdict

TLDR

• Trigger: Q3 2026 results on October 15. Revenue grew 41% y/y in dollars and 51% in NT dollars, net income grew 69% and beat consensus.

• Guidance: The 2026 revenue growth guide went to 44%, from “close to 30%” in January. Q4 implies +14% q/q and +58% y/y at the midpoint.

• Thesis: All five pillars hold. Pricing power is normalizing as N2 and the overseas fabs dilute margins, and the moat is getting more expensive to defend.

• Valuation: Target raised to $582 from $565. At $423, the stock prices FCF growth of 19% a year for a decade vs. 29% a year in my model through 2029.

• Rating: BUY maintained.

How TSM ranks

TSM scores in the Elite band, and the shape of the score is the investment case in one picture: everything is green except the price.

Valuation 30. The low score comes from the sales-based and asset-based multiples. EV/Sales, P/S, P/B and EV/IC all screen poorly, because a business earning a 51% net margin will always look expensive per dollar of revenue or per dollar of book. The earnings-based metrics tell a different story: PEG and forward P/E score near the middle of the peer group.

Growth 80. Revenue growth scores well on both trailing and forward numbers. The weak spots are the forward EBIT, EBITDA and EPS growth rows, which score in the 40s even though the growth rates themselves are strong. The peer group simply grows faster on those lines, because many of them are coming off a lower margin base. TSM’s margins are already near the top, so its earnings can only grow a little faster than revenue.

Profitability 96. This is the score that matters for a compounder. Margins, ROIC and the five-year average ROIC all score above 90. The one red line is capex to sales, which is the cost of staying ahead, and it is about to go higher.

The spread between returns and the cost of capital is what keeps that capex from destroying value. TSM has earned more than its cost of capital in every one of the last ten years, and the gap was the widest of the decade in FY2025.

Against its closest peers, TSM has the second-best profitability score behind MU (another position in our portfolio), while most of the group scores higher on growth and only ASX, AVGO and TSEM score lower on valuation. Where TSM stands apart is the combination: the third-highest forward EBIT margin in the group, behind MU and AVGO, and a faster forward revenue CAGR than NVDA, at more than $2T of market cap.

Thesis scorecard after Q3 2026

I laid out five pillars in the original deep dive in March 2025, and graded them after every print since, most recently in Weekly #78 in April and in Weekly #91 in July.

Pillar #1. Technical monopoly at the leading edge: Confirmed

Original thesis: TSM is the only foundry that can make 3nm and below at commercial volume and yield. The gap with Intel [] and Samsung is structural.

Evolution: Confirmed in every update. In April, N2 was on track and A14 got a firm 2028 date.

What happened since last update: N2 went from 3% of wafer revenue in Q2 to 8% in Q3 as its steep ramp began. N2-family capacity will more than double in 2027. A14 risk production is on track for 2027 with volume in 2028, and management now expects A14 to be a bigger node than N2, with more customers engaged than N2 had at the same stage. Advanced packaging is in production at 5x reticle size, with 9x and 14x in development.

Assessment: Confirmed. The one item I’m watching is High-NA EUV, which TSM will adopt in 2030, later than Intel. TSM’s position is that it adopts tools when the cost and maturity are right, and its track record on EUV supports that. The 12-inch photomask program with ASML [] announced in September is how it plans to make High-NA affordable when it arrives.

Pillar #2. Structural AI demand: Confirmed and strengthening

Original thesis: AI accelerator demand compounds for years, and TSM captures most of the wafer and packaging economics.

Evolution: HPC went from 55% of revenue in Q4 2025 to 61% in Q1 and 66% in Q2.

What happened since last update: HPC grew 22% q/q to 68% of revenue. Management said demand is still “far above” its capacity, that it is sending its own teams to check US data center construction and power supply, and that the mid-to-high-50s% AI accelerator revenue CAGR for 2024-2029 “probably will be higher.” Agentic AI is adding CPU and networking demand on top of the accelerators, and that demand sits outside the narrow AI definition.

Assessment: Stronger. The only caution in the print came from the other end of the business: consumer and price-sensitive segments, where memory and component inflation is squeezing demand going into 2027.

Pillar #3. Pricing power ahead of the cost curve: Confirmed, normalizing

Original thesis: TSM re-prices new nodes at premium ASPs, absorbs overseas cost dilution and holds gross margin in a 53-58% band through the cycle.

Evolution: Gross margin went from 59.9% in 2025 to 66.2% in Q1 and 67.7% in Q2. The original band became a floor.

What happened since last update: Gross margin fell 130 bps q/q to 66.4% as N2 started to dilute, and the Q4 guide of 65-67% includes more N2 plus the overseas fabs. Overseas dilution should come in closer to 2 points this year and widen to 3-4 points in the later years as more US fabs ramp. On the other side, Nikkei reported 5-10% price increases on advanced nodes from January 2027, with 10-15% more for HPC capacity above committed volumes.

Assessment: Q2 was probably the margin peak for this cycle, and I model 64.5% for 2027. That is still more than 8 points above the 56% “through the cycle” floor management has set for itself, and the CEO’s own framing is the right one: “there is no ceiling for TSMC’s profitability, but a dramatic increase will not happen overnight either.”

Pillar #4. Moat driven by scale, capex cadence and customer lock-in: Evolving

Original thesis: TSM can outspend everyone on capex and still earn mid-20s% ROE, which keeps the competitive set narrow.

Evolution: Confirmed in every prior update, with 2026 capex moving from $52-56B to $60-64B.

What happened since last update: ROE reached 45.5% in Q3 while TSM has nearly 20 fabs in progress: 13 leading-edge and packaging fabs in Taiwan and five to six overseas. It added another N3 fab in Tainan for 2028, pulled the second Arizona fab into Q3 2027, and confirmed it is evaluating Texas and talking to Tesla [] about its Terafab, with one condition: “the fab has to be run by TSMC.” It also signed GlobalFoundries [] to supply silicon interposers because back-end capacity is short.

Assessment: The moat is wider than it has ever been. What changed is the price of defending it. Tool inflation is “real,” in the CFO’s words, 2026-2028 capex will be “significantly higher” than the previous three years, and part of the US build is political rather than commercial. Returns are still far above the cost of capital, so this is no threat to the thesis today. It does mean the next leg of growth earns less per dollar of capex than the last one, which is why I grade this pillar Evolving.

Pillar #5. Mispricing relative to earnings power: Confirmed

Original thesis: TSM earns a software-like return on capital but trades on a cyclical semiconductor multiple.

Evolution: The target moved from $338 to $370 to $565 as each print widened the gap between the business and the price.

What happened since last update: Since the April update, revenue guidance went from “above 30%” to 44% and the stock gained 11%, less than the SOX.

Assessment: In April, the stock traded at $370 against my $565 target and I called anything below $260 a gift. Today it trades at $423 against a $582 target, with a $325 bear case.

Q3 2026 earnings: the numbers

Revenue grew 41.2% y/y in dollars and 50.9% in NT dollars, and beat the top of guidance by $0.9B. Net income grew 68.7% and beat the LSEG SmartEstimate by 2.3%, the sixth record quarter in a row.

Net income grew less than revenue on the quarter, and the reason is below the operating line. Operating income grew 14% q/q, in line with the margin step-down, but non-operating items fell to NT$35B from NT$96B in Q2. The operating business is where the quarter was made, and operating margin came in 70 bps above the top of the 56-58% guide.

Revenue landed at or above the top of the guide for the third quarter in a row, and EPS cleared the estimate again.

N2 is ramping steeply, and it shows in the mix. N2 reached 8% of wafer revenue and N3 grew to 33%. Advanced nodes (7nm and below) are 79% of wafer revenue.

For anyone new to how a foundry’s margin works: a new node is expensive in its first year for two reasons. The tools are depreciated from day one, while volume is still ramping, so each wafer carries a large share of fixed cost. And yields start lower, so more wafers are scrapped. As volume grows and yields improve, the same depreciation is spread over many more good chips and the node becomes accretive. N3 followed that path and crossed the corporate average this year. N2 is starting it now, which is why gross margin dipped while revenue jumped.

The revenue growth is mostly mix and price, with volume a smaller part. Wafer shipments grew 9.6% y/y while revenue in dollars grew 41%, so revenue per 12-inch-equivalent wafer rose 29%. Most of that is mix, as N3, N2 and advanced packaging take a larger share of the wafers. The like-for-like price increases come in 2027.

HPC carried the quarter, and smartphones held up better than the 2027 caution suggests. HPC grew 22% q/q and smartphone 10% q/q, helped by N2 launches. Management’s caution on 2027 applies to consumer and price-sensitive segments, and it was explicit that its customers are concentrated in high-end phones, where memory prices matter less.

FCF more than tripled y/y. Operating cash flow was NT$920B and capex NT$443B ($13.8B), leaving FCF of NT$477B ($14.9B), vs. NT$139B a year ago and NT$287B in Q2.

The balance sheet keeps getting stronger while the capex wave builds. Cash and marketable securities reached NT$4.0T ($126B) against NT$818B of long-term debt, so cash exceeds long-term debt by NT$3.2T. Inventory days fell to 82 from 87 as wafer shipments grew. That cash is what lets management promise a much bigger capex budget and a steadily rising dividend at the same time, after raising the quarterly dividend to NT$7.

Guidance: the fourth raise of 2026

Every quarter this year, TSM raised the full-year number, and the capex budget followed.

The Q4 guide is the strongest quarter TSM has ever guided: $52.3-54.3B of revenue, +14% q/q and +58% y/y at the midpoint, with gross margin of 65-67% and operating margin of 56.5-58.5%.

That guide puts 2026 revenue near $176B, up 44% from $122B. In January, the company was guiding to “close to 30%,” which would have meant $159B. The gap is $17B of revenue in a single year, delivered at a higher margin than anyone modeled in January.

The one soft spot is 2027 consumer demand. Management said it is “being prudent in our business planning going into 2027” because consumer and price-sensitive segments are being hit by rising component prices. Smartphones are 21% of revenue. I read it as a reason to model 2027 growth below 2026, which I already do. AI demand is a different matter: management called it “extremely robust” in the same breath.

Management credibility: this team guides low and delivers. In each of the last three quarters, revenue landed at or above the top of the guide, gross margin landed above the midpoint, and operating margin beat the top of the range.

The pattern matters for how to read the Q4 guide. Revenue has landed at or up to $0.9B above the top of the range, and margins above the midpoint. I treat the top end of the Q4 range as the base case, which would put 2026 growth closer to 45%.

What last week’s sell-off got wrong about TSM

In Weekly #104 I listed three numbers that would change my mind on the AI trade: GPU payback periods, the 10-year and AI credit spreads, and hyperscaler capex guidance. Two of the three moved against the bulls last week. Here is why TSM is the name in that chain where those moves matter least today, and where they could matter in 2028.

The financing stress sits two steps away from TSM. The neoclouds borrow to buy GPUs. Nvidia [], AMD [] and Broadcom [] sell them the chips. TSM makes the chips for all of them and gets paid regardless of which designer wins the socket or which cloud wins the customer. If a neocloud fails, its GPUs get resold or its capacity gets taken over, and NVDA has already agreed to buy CoreWeave’s unsold capacity through April 2032. The wafer demand moves to another customer of TSM.

The rate move is already in my discount rate. My model uses a 5% risk-free rate and a 5% long-term cost of debt, so the 10-year at 5.1-5.3% is already in the valuation. It matters more through the customers: higher rates raise the cost of every data center under construction.

The capex growth rate is the real 2028 question. FactSet has the five largest hyperscalers spending $691B in FY26, $892B in FY27 and $915B in FY28, growth of 82%, 29% and 3%. If that holds, AI wafer demand still grows in 2028 from a much higher base, but the growth slows. That is why my model fades revenue growth to 24% in 2028 and 20% in 2029, below the AI accelerator CAGR management keeps raising. Out-year consensus on hyperscaler capex has been too low this whole cycle, so I treat FY28 at +3% as a floor rather than a forecast.

TSM’s own planning tells us what it sees. A company that is building nearly 20 fabs, adding N3 capacity it historically would never add to a mature node, and asking GlobalFoundries for interposers is a company short of capacity. TSM sets its capex on customers’ multi-year roadmaps, which it sees two to three years in advance because of design lead times. The 2026-2028 capex step-up is the clearest read we have on what its customers have committed to.

Valuation: target raised to $582

I updated the model for the Q3 results, the Q4 guide and the 2027 outlook. These are the assumptions after the update.

The revenue path is the assumption that moved the most, and it is now built by platform in the topline model, with HPC industry growth of 49% in 2026, 36% in 2027 and 28% in 2028. 2026 goes to 44% from 30%, in line with guidance. 2027 goes to 30%, which assumes N2 capacity more than doubles as management said it will, the 2027 price increases stick, and consumer demand stays soft. I then fade growth to 24% in 2028 and 20% in 2029 as hyperscaler capex growth slows. Gross margin goes to 66.5% for 2026, steps down to 64.5% in 2027 on N2 and the US fabs, and settles at 63% in the long term. Capex intensity goes to 37% from 2027 to reflect the heavier 2026-2028 spending, against 33% in 2025.

The discount rate goes to 9.7% from 8.1%, while terminal growth stays at 3.5%. The increase is due to the increase in the long-term cost of debt goes up to be more inline with the 10-year US government bonds. And the target debt weight falls to 35%, because TSM runs a net cash balance sheet and has no reason to borrow. Cash, investments and debt now come from the September balance sheet.

What the price implies. At $423, TSM’s market value is $2.2T. Discounting at the same 9.7%, that price is consistent with FCF growing 19% a year for ten years from the $32B of 2025, and 3.5% after that. Put the other way, the price implies a 10% annual return on my cash flows. My model has FCF reaching $88B in 2029, a 29% annual growth rate, and FCF already reached $15B in Q3 alone. Mr. Market is pricing growth a third slower than mine for the next decade.

What $582 requires. The target is 29x my 2027 EPS of $20.06 per ADR and 20x my 2029 EPS of $29.33. It asks for revenue growth above 20% through 2029 and gross margin above 63%, the path that management’s guidance and capex plans point to. If AI wafer demand flattens in 2028 instead, the target is too high. At $423, the stock trades at 21x my 2027 EPS and 14x 2029.

The bear case is $325. Hyperscaler capex stops growing in 2028, TSM’s revenue growth slows to 15% in 2027, gross margin falls back to 60% as N2 and the US fabs dilute without full price increases to offset them, and the stock re-rates to 17x $19 of EPS. That is 23% below today’s price, against 38% upside to the target, a risk/reward of 1 to 1.6.

Share Beating The Tide: Stock Picks That Outperform

Risk register

Materialized: none. Overseas dilution and N2 dilution are showing up in the margins, but within guidance and as planned. Neither changes the thesis.

Faded:

• N3 margin drag. N3 crossed the corporate average gross margin this year, as management said it would in January.

• Middle East chemicals and gases, the new risk I flagged in April. It didn’t come up in the quarter or the call.

• N2 yield risk. N2 went from 3% to 8% of wafer revenue in one quarter with gross margin still at 66.4%. A node with a yield problem doesn’t ramp like that.

Unchanged:

• Taiwan. Still the largest risk, and still impossible to model (I add a 150 bps premium to the discount rate to account for this). The overseas fabs reduce it slowly, at the cost of the margin dilution above.

• Customer concentration. HPC is 68% of revenue and a handful of designers drive it. A single hyperscaler pausing would show up within two quarters.

• Currency. The NT dollar weakened to 32 from 30 a year ago, which flattered NT dollar growth. A reversal would cut reported NT dollar margins.

New:

• AI financing. The weakest buyers of AI compute are borrowing at 15% and their credit insurance prices a 63% chance of default over five years. TSM’s customers are not the borrowers, but if the neoclouds stop buying, its customers will order less. What would make it real: hyperscaler capex guidance cuts in the January prints.

• Capex growth deceleration in 2028. If FactSet’s +3% for FY28 turns out to be right, my 24% growth for 2028 is too high.

• The price of the moat. Tool inflation, US fabs at a 3-4 point margin dilution and political projects like Texas or Terafab lower the return on each new dollar of capex. TSM still earns a 45% ROE. The question is where incremental returns settle once 2026-2028 capex lands.

• Intel is back on the watch list. I moved Intel to the faded column in April after 18A stumbled. Since then, INTC has gained 31%, management was asked directly about an IDM customer insourcing more capacity, and Intel will use High-NA before TSM. TSM’s answer is that A14 is attracting more customers than N2. I want to see A14 customer counts hold through 2027.

Performance vs. peers

Year to date, TSM trails the SOXX and SMH semiconductor ETFs, ASML and Marvell [], and sits far behind MU and ASX, the memory and packaging names that rode the AI capacity shortage hardest. It is ahead of NVDA and AVGO. That is the pecking order of the AI trade this year: the bottlenecks around the chip re-rated first, and the biggest bottleneck of all re-rated least. In last week’s sell-off TSM fell in line with the group, so Mr. Market didn’t separate the foundry from the most financing-exposed names. That is the gap I want to own: TSM grew Q3 earnings 69% y/y, faster than all but two of these share prices moved this year.

Verdict

TSM stays a BUY, and I’m raising my target to $582 from $565.

The position stays unchanged. The sell-off didn’t change its role in the portfolio: TSM is the AI holding with the least financing risk and the most pricing power.

Last week Mr. Market sold every chip stock the same way, the lender-dependent ones and the one that every chip designer depends on. TSM answered with a fourth guidance raise in nine months and a plan to spend more in the next three years than in the last three. A company doesn’t commit that kind of capital to a cycle it expects to end.

If you are still curious how the boy outsmarts competition, here it is…

Hello fellow Sharks,

The portfolio fell 9.1% this week (ouch!) while the S&P 500 lost 2.0%, as the AI sell-off did most of its damage on Wednesday. If you want to skip straight to the numbers, jump to the Portfolio Update.

What a week!

Mr. Market definitely woke up on the wrong side of the bed. Someone started to question the sustainability of AI spending, and it hit the entire market. I find it hilarious how a headline can create or destroy billions (or trillions in this case) of dollars in the market. In times like this, I wish I had some more cash to invest. I have some cash sitting in Chile, so I am hoping the market stays where it is while I move it into my IBKR account next week.

Today I was going to talk about TSM’s latest earnings (they were good), but based on subscribers’ questions, I think it is better to focus this Thought of the Week on what is going on and publish the TSM earnings review sometime next week. In the Thought of the Week, I explain why I expected this kind of volatility, why the crack showed up in the bond market rather than in AI demand, and the three numbers that would change my mind.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• The AI Sell-Off Started in the Bond Market

• Portfolio Update

In Case You Missed It

Since last Sunday’s Weekly, I published two pieces:

• ECO: The Tanker I Wanted to Chase (and Why I Didn’t): why I passed on a surging tanker stock, and what could change my mind.

• A paid update on our September pick: a regulatory penalty, a soft quarter and a 40 bp jump in rates. I cut fair value, kept the BUY and raised the weight to 5%.

Thought Of The Week

The AI Sell-Off Started in the Bond Market

Why I expected this volatility, what actually broke last week, and the three numbers that would change my mind.

Last week felt like the whole AI trade was being unwound at once. The SOX fell for eight sessions in a row, its longest losing streak since October 2008, and lost 16% from its last up day on October 6. Over six sessions, chip stocks erased more than $1.6 trillion in market value.

Several punches landed in the same week. On Monday, the CEO of Broadcom [] said “a lot of investors have no clue what they are investing in” and that some “set very extreme expectations only to find out that it’s almost like they are in a casino”. That is one of the reasons I try to go into a lot of detail, so subscribers understand what they are holding and don’t panic in drawdowns like last week’s. Also, on Wednesday, September inflation came in hot, the 10-year Treasury yield touched 5.33%, and Barclays downgraded Dell [] to equal-weight. Dell fell 11.3% that day.

Barclays didn’t say AI demand was falling. Its analyst cut Dell to equal-weight and the target to $574 from $603, arguing that Dell’s growth “reflects how well the company has offset memory cost inflation by raising prices,” and that he expects “a meaningful deceleration in growth over the next two years” as memory prices normalize. He also flagged valuation: the seven enterprise hardware names he covers are up 140% this year on average and trade at 21x 2027 earnings, vs. a five-year average of 15x.

I moved DELL from BUY to HOLD in Weekly #98 back in September, at $524, for a different reason.

The number that changed my mind was cash: operating cash flow fell 13% in a quarter where net income grew 255%, and the gap was filled by DELL financing its own customers. Dell’s financing receivables reached $20.4 billion at the end of July, up from $14.3 billion in January, and Dell attributes the growth mainly to its AI servers. The charge-off rate is still low at 0.5%, but it was 0.1% a year earlier.

Barclays worried about memory prices. I worried about who pays for the servers, and when. Last week, the market started asking the second question. DELL closed Friday at $452, down 23% for the week and right at my $450 bear case.

And all week long, CoreWeave []’s bonds kept sliding…let’s dig into what happened here.

What actually broke

CoreWeave rents GPUs to the AI labs and the hyperscalers. Its April-issued bonds traded at 79 cents on the dollar, a 15% yield, and the cost of insuring its debt against default climbed to 1,000 basis points. That price implies a 63% chance of default within five years. This is a loss-making company carrying $35.6 billion of debt plus $16.3 billion of lease obligations, per its latest quarterly filing, and two customers made up 62% of its revenue last quarter.

The model itself is simple. CoreWeave signs a five-year contract with a customer like Microsoft, buys the GPUs from Nvidia, leases the data center and borrows against the contract. The customer’s payments cover power, interest and principal, and management has said a deal pays for everything within two and a half years.

The model works as long as two things hold: the customer keeps paying, and money stays affordable. Last week, nobody questioned the first one. The second one cracked.

When a business is financed as a spread over the risk-free rate, a jump in the 10-year squeezes it from both sides. The existing bonds still pay their original coupon, so the damage isn’t immediate. But the next round of financing costs more, margins on new contracts get thinner, default insurance gets pricier, and that pushes bond yields up again. It’s a loop, and it feeds on confidence.

Notice what the headlines were about: funding, not cancelled orders. Nvidia [] has agreed to buy any unsold CoreWeave capacity through April 2032.

What a GPU actually earns

To judge whether this build-out pays, you have to understand what the asset earns. I covered the basics in Weekly #61.

A GPU is a Swiss Army knife, thousands of small processors working in parallel, while a custom chip like Google’s TPU is a scalpel built for one job. For the economics, it is simpler than that. A GPU is an expensive machine that only makes money while someone is renting it.

In Weekly #87, I wrote that “the dominant cost of running a token is not electricity, it’s the amortized cost of the GPU, which means the price of the chip and how busy you keep it.”

Memory is a big part of that price. As I noted in my top pick for 2026, Epoch AI estimates that 45% of the cost of a B200 is HBM memory, while the GPU chips themselves are less than 15%. That is why MU sits in the same chain as DELL and CLS.

Scale it up and the numbers get big quickly. Jensen Huang has said a gigawatt of AI capacity costs $50 billion to $60 billion, $35 billion of which goes to Nvidia. A single GB300 NVL72 rack, with 72 GPUs, now costs just under $5 million.

Here is my back-of-the-envelope math for the H100, the chip at the center of last week’s fight:

• An 8-GPU H100 server costs $285,000, or $36,000 per GPU. On Huang’s numbers, chips are 60-70% of a data center’s cost, so the all-in cost with the building, power and networking is $55,000-60,000 per GPU.

• Rented at $2.74 an hour, where the Ornn H100 index closed on Friday, and busy 80% of the time, it earns $19,000 a year.

• Power barely moves the math. At 8 cents per kWh, it costs 10-15 cents an hour, under 5% of the rent.

• That is a payback of 3 years before staff, maintenance and interest. At $1.70 an hour, where one-year H100 contracts bottomed last October, it stretches to 5 years.

Three years against a six-year accounting life works. Five years leaves little room once the interest bill arrives. The whole debate comes down to two variables: the rent, and how long the chip keeps earning it.

The second variable is where the bears focus. Nvidia now launches a new generation every year, and Huang has told customers to “pace themselves” and build “on an annual rhythm.” Nvidia also says its GB300 racks deliver “35x lower cost per token” than Hopper. A GPU bought today on a six-year schedule will see several newer generations before it is fully depreciated.

Do old GPUs lose their value?

This matters because of an accounting choice. Over the last four years, the hyperscalers stretched the useful life of their servers, which spreads the cost over more years and lifts reported earnings:

• Microsoft [] moved servers from four to six years in fiscal 2023, adding $3.7 billion to operating income that year.

• Alphabet [] did the same in 2023, adding $3.0 billion to net income.

• Meta [] went to 5.5 years in 2025, cutting depreciation by $2.9 billion.

• Amazon [] went the other way. In 2025 it shortened some servers from six years to five, “due to the increased pace of technology development, particularly in the area of artificial intelligence and machine learning.”

Michael Burry called the longer lives “one of the more common frauds of the modern era” and estimated $176 billion of understated depreciation over 2026-2028.

So, are old GPUs holding their value? Partly.

The case for: CoreWeave re-contracted its first 10,000-plus H100s at a price within 5% of the original agreement, and said A100 pricing increased in 2025. A100s launched in 2020. In May, Nvidia said the price of renting an H100 had risen 20% this year, and that customers are “generating profitable revenue beyond the depreciable life of their GPUs.”

The case against: rents fell hard before they recovered. The median hyperscaler rate for an H100 dropped from $9.34 an hour in the second half of 2024 to $6.26 a year later. Someone who bought in 2023 lost most of the hourly yield within two years. Rents are still volatile: the Ornn index went from $3.21 on Wednesday to $2.74 on Friday. And the people telling us old chips hold their value are the ones selling and renting them. In August, CoreWeave’s CFO admitted that renewals are “a very limited part of our fleet.”

My read: old GPUs keep earning while compute is scarce, so six-year lives are defensible today. They are not a law of nature. If supply catches up, the rent on a 2023 chip falls first, and the write-downs follow. We should be watching the scarcity of GPUs.

This is the volatility I expected

I have said before that the AI names will go through bouts of volatility, because the money gets spent years before the returns show up. That is why, since March, I have focused my monthly stock picks on other sectors: the portfolio is ~35% exposed to the AI theme.

The five largest hyperscalers are on track to spend more than $690 billion on capex in FY26, up more than 80% in a year. FactSet expects their free cash flow to be close to zero or negative for all of them except Alphabet and Microsoft, and debt now funds 32% of their capex, up from 9% in FY24.

Look at the growth rates at the top of that chart: +82% this year, +29% next year and +3% in FY2028. The spending keeps rising, but the growth almost stops. For the suppliers, that matters more than the level. DELL, CLS and MU book revenue on the level of spending, but their growth, and the multiple the market pays for it, track the change. When capex growth falls from 82% to 3%, supplier growth slows with it, even if no hyperscaler cuts a dollar. That is the digestion year I flagged in Weekly #98, and it is the same deceleration Barclays now models.

So how do I square a 3% growth forecast with TSMC saying demand is above supply? First, out-year consensus has been wrong in one direction this whole cycle: analysts have raised their FY2027 capex estimates for these five companies by an average of 183%, vs. 33% in a typical year. I read that +3% as analysts not modeling beyond guidance. Second, the chart covers five companies. TSMC also sells to the neoclouds, the sovereigns and the AI labs building their own capacity. Third, more of each dollar goes to silicon, as memory per accelerator keeps rising. None of that makes 82% repeatable. Demand above supply describes the level of spending, and supplier growth depends on the change. I’m bullish on the first and cautious on the second, which is why DELL is a HOLD and why my recent picks came from other sectors.

The revenue arrives in installments. OpenAI reportedly told its backers that its annualized revenue is approaching $50 billion, $20 billion below a figure reported earlier. That report hit the tape the Thursday before this sell-off began. Until revenue catches up with spending, every headline about funding gets priced as a referendum on the whole trade.

I flagged this exact risk in Weekly #96.

Hyperscalers account for 40% of long-duration investment-grade issuance, and I wrote that “if yields break through the ceiling despite the buybacks, capex budgets are the first thing trimmed, and our names would feel it before the hyperscalers do.” I called it “a financing watch item, no more than that... for now.” Last week, the watch item moved.

Remember the Citrini Research piece, The 2028 Global Intelligence Crisis? It asked, “What if our AI bullishness continues to be right...and what if that’s actually bearish?” The authors called it “a scenario, not a prediction,” yet the Dow fell 1.7% the Monday after it went viral. A fictional memo helped move real money. Funnily enough, the fictional drawdown in that piece starts “from its October 2026 highs.” I don’t think they have a crystal ball, but the date made me smile.

Bubbles die from a lack of demand

In the five years after 1996, telecom companies poured more than $500 billion into fiber, switches and wireless networks. By 2002, no more than 2% of North American long-distance capacity was being used. Shareholders lost $2 trillion. Cisco went from $2 in 1995 to $80 at its March 2000 peak, more than 200 times earnings, and then fell below $9 in 2002. That bubble died because the capacity sat idle. Prices for bandwidth collapsed, and anyone who had borrowed to own that capacity was wiped out.

Today the problem runs the other way. On Thursday, TSMC [] reported Q3 revenue of $46.7 billion and now expects 2026 revenue to grow 44% (full analysis on the results sometime next week). The CEO said “We did not see any sign of slowdown,” and that demand “is still far above our capability today to supply”. Asked about the mid-to-high-50s% growth TSMC expects in AI accelerator revenue through 2029, he said it “probably will be higher.”

In Weekly #87, I wrote down what would prove me wrong: the cost per token stops falling, demand saturates, and OpenAI turns out to have no pricing power, all at once. None of those three happened last week. What happened was a repricing of credit.

The bear case deserves a fair hearing

Rates are rising for reasons that have nothing to do with AI, and a higher 10-year raises the cost of every data center under construction. A company can have a full order book and still fail if it has to refinance at the wrong moment. The weakest borrowers in this chain are the neoclouds, and their customers are concentrated in a handful of names.

Prices can also turn. If supply catches up with demand, GPU rental rates could fall the way bandwidth did in 2001, and anyone who locked in financing against today’s prices would be upside down.

And the revenue side still has to deliver. OpenAI’s numbers came in $20 billion below what had been reported, and the market just showed how little patience it has for that kind of gap.

Gartner put a number on the worst case on Wednesday. It says more than $3.5 trillion of AI infrastructure spending could be exposed to impairment by 2030, because covering that spend, the financing and a 12% return would take $8.5 trillion of cumulative revenue, against no more than $3.6 trillion of AI data center revenue. It also expects more than 80% of neoclouds to stop operating independently by 2030.

Three numbers that would change my mind

1. Payback period. This is the North Star for the build-out. On my math above, an H100 pays for itself in 3 years at today’s rent, and CoreWeave’s management says its contracts pay back in two and a half. Against a six-year accounting life, the economics hold even with rising rates. If paybacks stretch because rental prices fall or customers walk away, the math breaks.

2. The 10-year yield and AI credit spreads. If financing costs rise faster than AI revenue, capex gets cut, and as I wrote in Weekly #96, our names would feel it before the hyperscalers do. CoreWeave’s bonds and default insurance are the canary.

3. Hyperscaler capex guidance. As long as TSMC says demand exceeds supply and the hyperscalers keep raising their budgets, the demand side is intact. Watch the growth rate, not just the level: consensus already has it falling from 82% this year to 3% in FY2028. A cut in capex guidance would be the signal that the cycle is turning.

Where our AI names sit in this chain

Not all of our AI exposure carries the same risk. Last week’s problem was financing, so here is how I map our names against it:

• DELL lends to its customers. That is the risk I flagged in Weekly #98, and the market priced it last week.

• CLS extends no vendor financing, and most of its compute programs are consigned: the customer supplies the silicon, so it never sits on Celestica’s balance sheet. Its AI exposure is the 800G and 1.6T networking that keeps the GPUs busy.

• MU sells memory under take-or-pay agreements with minimum prices. Its risk is the memory price cycle, the same thing Barclays is worried about at the server makers.

• TSM’s customers are chip designers like Nvidia, Apple and Broadcom, and it just told us demand is above its capacity.

• STRL and POWL build and power the data centers. If financing tightens, their risk shows up first as fewer new orders.

The further a company sits from the borrower, the less last week’s problem touches its numbers. The share prices didn’t make that distinction last week but I think that the financial statements will.

What I’m doing

My approach is the one I laid out in Weekly #103: a falling price is a reason to investigate. So far, I maintain:

• a BUY on CLS, STRL, MU and TSM

• a HOLD on POWL and DELL

Jensen Huang said on Friday that “All of this is going to pass”. He would say that, so I don’t take it as evidence. I take TSMC’s order book as evidence.

Share Beating The Tide: Stock Picks That Outperform

Portfolio Update

The portfolio lost 9.1% last week while the S&P 500 fell 2.0%. We were down 1.3% at Tuesday’s close, then Wednesday alone took us to a 6.0% loss, and Thursday and Friday added the rest.

Portfolio Return

• Month-to-date: -7.8% vs. the S&P 500’s +0.1%.

• Year-to-date: +30.6% vs. the S&P 500’s +11.9%. That is a gap of 1,872 basis points.

• Since inception: +84.3% vs. the S&P 500’s +33.2%. That’s 2.5x the market.

Contribution by Sector

Technology cost 686 bps and industrials 126 bps, while consumer cyclicals added 17 bps, the best of a weak group. Technology took the brunt of a chip sell-off that left the Philadelphia Semiconductor Index with eight straight losses, its longest streak since 2008, after a hot September CPI print and a Barclays downgrade of AI server makers on Wednesday. Industrials, home to our data center builders, accounted for most of the rest.

Contribution by Position

How to read the heat map? Click here.

• -1 bps RYAM -3.71%↓ (Thesis)

• -11 bps DXPE 2.42%↑ (Thesis)

• -25 bps POWL 1.10%↑ (Thesis)

• -33 bps CDE 0.74%↑ (Thesis)

• -58 bps TSM 1.99%↑ (Thesis)

• -63 bps STRL 4.60%↑ (Thesis)

• -105 bps MU 2.83%↑ (Thesis)

• -180 bps CLS 3.09%↑ (TSX: CLS) (Thesis)

• -222 bps DELL 3.90%↑ (Thesis)

That’s it for this week.

Stay calm. Stay focused. And remember to stay sharp, fellow Sharks!

Maybe I shouldn’t admit this… but here goes.

I hate banks.

I don’t mean I hate them as an investment; you’ve seen that I always have banks in the portfolio. In fact, I invest in them for the very reason I hate them.

Let me explain.

I bet most of you have had this happen when checking your monthly statement (if you don’t check yours, I suggest you do). Back when I was a student, I noticed a fee on my FREE student account. It was only $4.95, but I was so pissed that I called the bank. After a long wait and a maze of phone menus, I reached an agent who explained the charge came from some fine print. That was CIBC. A year later, the same thing happened with TD, and I still get those surprises every now and then.

There’s a reason people don’t like banks. Only 28% of Americans have a great deal or quite a lot of confidence in them.

Then came the 2008 financial crisis, caused partly by banks selling products to people who didn’t qualify for them. They didn’t even get a slap on the wrist. They got government help and paid themselves ridiculous bonuses.

We’ve seen this happen several times, and I bet we’ll see it again.

The reason they get away with it is simple… they’re too big to fail.

Four weeks ago I made a bank my September pick. The argument was that Mr. Market was using the wrong discount rate, and that the company’s own capital structure showed it.

This week the bank took three hits in two days: a regulatory penalty, a soft quarter and another leg up in bond yields. The stock had a rough two days. This morning I bought more.

Behind the paywall:

• What the penalty is and what it isn’t, tested against eleven bank enforcement cases and what each one did to the share price over a day, a month and a year

• The Q3 scorecard: which pillars held and which one I’m marking down

• How a 40bp move in the 10-year flows into fair value, and what the company’s own preferreds say about it

• The new fair value, what today’s price implies, and the position change I made this morning

Table of Contents

• TLDR

• The penalty, and what eleven precedents say about it

• Q3 2026 results

• Guidance: what changed

• The rate the thesis depends on

• Thesis scorecard after Q3 2026

• Valuation: what moved the target

• Risk register

• Performance vs. peers

• Verdict

Mr. Market handed me a cheaper entry yesterday and I took it.

Read more

ECO surfaced on my RankedStocks.com screen back in July while I was looking for October’s stock pick. I had started looking at Okeanis Eco Tankers Corp. [] in early August, when the shares were around $60. By October 8 they were near $93, more than 50% higher, after another 6% jump on Thursday (when I am writing this). I wanted to buy. I also knew exactly why: FOMO. So I watched the price go up, and up, and beyond. Buying because I can’t bear to watch a chart without me isn’t how I invest.

This felt familiar. In November 2025 I wrote my GSL deep dive after considering Global Ship Lease for December’s pick.

I admired its management and its contracts. I passed because I thought the container shipping cycle would eventually overwhelm even a well-run owner. GSL shares are up 29% since that piece. The move is understandable: GSL raised its dividend, kept renewing charters, and by June 2026 reported $3.2 billion of contracted revenue, with 100% of 2026 and 90% of 2027 covered. Geopolitical disruption has supported demand for flexible ships too. GSL’s November 2025 results and Q2 2026 results explain more of that strength than stock momentum alone.

I still don’t regret passing on GSL. My portfolio grew 51% over the same period. My portfolio’s gain doesn’t prove I was right about GSL, but it still shows me that I did not miss out.

The December energy pick that GSL would have displaced rose 95% from the comparison date…

… or 126% from selection.

ECO’s ships are newer than most and its current earnings are extraordinary. But 94% of its fleet is exposed to spot rates, so a change in the tanker market can reach earnings quickly. The big test comes as today’s long routes and disruptions meet a heavy wave of new ships in 2028-29. My view: this is an excellent tanker operator that I don’t want to buy at a price built on an exceptional rate environment.

Finally, before we dig deeper into ECO, I find it hilarious that ECO was the latest pick of the fully automated weekly stock picker at RankedStocks (you can sign up to get them for free, they come out every Tuesday https://www.rankedstocks.com/elite-weekly-picks)

Table of Contents

• TLDR

• What RankedStocks sees, and what a score cannot

• Tanker shipping in plain English

• Why ECO looks so good right now

• How long can today’s rates last?

• The 2028-29 supply risk

• Why the GSL analogy has limits

• What is ECO worth if rates cool?

• Three plausible paths from here

• My gut, my process, and what would change my mind

• Verdict

TLDR

ECO owns 18 modern crude tankers, and nearly all of them earn the going market rate for each voyage. That produced a record Q2 2026 and a $5.25 quarterly dividend.

The same spot exposure makes a dividend or earnings multiple based on that quarter a weak guide to long-term value. The global orderbook has grown to 33% of the VLCC fleet and 29.5% of the Suezmax fleet, with the largest scheduled deliveries in 2028-29.

What RankedStocks sees, and what a score cannot

RankedStocks.com gives ECO an overall score of 94. Profitability and sentiment score 99, outlook 90, growth 67, and valuation 53. The high scores reflect a business making exceptional money today. The middling valuation score is a useful warning that an apparently low earnings multiple doesn’t make every part of the company cheap.

A score of 94 tells me little about what these ships will earn when freight rates cool. The screen showed a 4.9x forward P/E and 3.9x forward EV/EBITDA, but also 4.1x book value and 80.8x trailing cash flow. Different denominators tell different stories in a capital-heavy business. Forward earnings are inflated by current tanker rates; book value is shaped by vessel accounting; cash flow is affected by working capital and fleet purchases.

Tanker shipping in plain English

A VLCC carries around two million barrels of crude; a Suezmax carries around one million (Suezmax are constructed specifically for the Suez Canal). ECO has eight VLCCs and ten Suezmaxes. Oil producers, traders, and refiners pay to move the barrels. If you own a tanker, what matters is how many days your ship is needed and what a charterer will pay for those days.

The crucial unit is not merely barrels of oil consumed. It is barrels multiplied by distance. If a refinery in Asia buys oil from a nearby Gulf exporter, a tanker may complete a voyage relatively quickly. If it instead buys from the Americas, the ship is tied up for much longer. The same volume of oil can therefore require more vessels. This is called tonne-mile demand. Delays, detours, slow sailing, and vessels removed from mainstream trade also reduce the number of ships effectively available.

By August, the number of VLCC cargo fixtures had recovered toward the start-of-year level, but Middle East Gulf cargoes made up a smaller share. Atlantic and Mediterranean routes filled the gap. Management calls the resulting route mix less efficient. I agree that longer routes support demand for ships, but I would not assume this is structural. It all depends on what Trump tweets and whether the Iran conflict resolves soon.

The oil price is not ECO’s fee. A high crude price can coincide with high freight rates when supply routes are disrupted, but expensive oil can also cut consumption. The IEA’s September report forecast demand falling 2.5M barrels/day in 2026 even as the remaining tanker routes became more valuable. More barrels at sea, longer trips, or longer waits can help ECO; weaker oil demand can work the other way. You have to follow both the barrels and the distance.

For a ship on a spot voyage, ECO negotiates a rate for that job. The freight bill is not the same as profit: the company pays voyage costs such as fuel and port charges, plus ongoing crew, maintenance, financing, and drydock costs. Tanker companies often report time-charter equivalent, or TCE, to translate voyage revenue after voyage expenses into a comparable daily rate. A time charter instead locks in a daily rental for a period. It gives up some upside but cushions a rate decline.

Falling spot rates and empty repositioning trips can hit earnings. One VLCC, Nissos Nikouria, was fixed in February 2026 for 12 months at $91,140 per day. The other 17 ships largely trade spot. ECO itself describes the 18-vessel fleet as 94% spot exposed. That makes this a direct bet on the price of a tanker day.

Why ECO looks so good right now

ECO’s fleet is young, fuel efficient, and fitted with exhaust scrubbers. In September, the company put its average age at 5.6 years. A scrubber lets a ship burn cheaper high-sulfur fuel while meeting emissions limits; an efficient hull uses less fuel in the first place. ECO estimates a combined daily benefit of $11,175 for a VLCC and $7,597 for a Suezmax under its stated fuel-price and sailing assumptions. The actual saving will move with fuel prices and operating days. It matters most when freight rates are ordinary. It cannot protect a $200,000/day spot rate from falling to $50,000.

In Q2 2026, revenue rose from $93.9M to $318.9M…

… profit from $26.9M to $230.3M…

… and EPS from $0.84 to $5.90.

Fleetwide TCE, including the fixed VLCC and a waiting vessel, was $181,200/day. The spot voyages alone earned $191,700/day; spot VLCCs earned $213,600 and Suezmaxes $174,900. The board declared a $5.25 dividend.

A war-zone premium alone doesn’t explain ECO’s Q2 earnings. A VLCC waiting inside the Strait of Hormuz earned a contracted demurrage rate of $74,000/day for 54 days, far below ECO’s spot VLCC average. Voyage positioning, little time spent sailing empty, Atlantic Suezmax demand, and 99% fleet utilization also contributed.

Fleetwide TCE jumped from $50,500/day in Q2 2025 to $181,200/day in Q2 2026, more than tripling in a year. Operating cash flow for the first six months rose from $49.3M to $298.9M. Fixed ship costs don’t rise in proportion to freight rates, so a rate spike drops a great deal of cash to the bottom line.

ECO also benefits from scarcity in the compliant fleet: ships acceptable to major oil companies, insurers, and ports. More than one-fifth of global crude tanker capacity is under sanctions. Many still serve less transparent trades. It means a mainstream charterer may have fewer suitable vessels to choose from. Stronger enforcement can tighten ECO’s market without a single ship being scrapped; looser enforcement could add effective capacity without a single newbuild. Conflict around Hormuz and the Red Sea has also lengthened some voyages and delayed others. The IEA’s September report documented Gulf export disruption and a 507M-barrel draw in global inventories since February. Restocking could support future cargo demand, but the timing and routes are uncertain.

Share Beating The Tide: Stock Picks That Outperform

How long can today’s rates last?

I won’t value ECO as though Q2’s spot rates are permanent. That doesn’t mean I expect an immediate crash. It means the current rate combines a normal transport service with an extraordinary scarcity premium. The scarcity can persist longer than skeptics think, but it can also fade for reasons unrelated to ECO’s execution.

A tanker market becomes very profitable when nearly every usable ship is busy. A charterer who urgently needs one of the last available ships will pay much more than the previous customer. A small change in effective supply can therefore move spot rates disproportionately. It works in reverse too: a few ships freed by shorter voyages, reopened routes, weaker crude exports, or fewer delays can sharply reduce the price of the next voyage. That is why a spot quote is a poor proxy for steady-state earnings.

Spot assessments had spiked dramatically, while the rates a customer would pay to charter a comparable eco-designed ship for three or five years remained far lower. The longer contracts were firm by historical standards, so the market was not calling for an immediate return to the 2021 trough. But customers were clearly unwilling to lock in today’s spot price for years. That is more useful evidence for sustainability than annualizing one record quarter.

The aging fleet could absorb some of the new supply. In its August 2026 results, Frontline counted 18.3% of VLCCs and 22% of Suezmaxes over 20 years old. Some older vessels may struggle to win premium cargoes or comply economically with efficiency rules. IMO’s EEXI and CII framework can encourage slower sailing or investment in efficiency. Longer Atlantic-to-Asia routes and eventual oil-inventory rebuilding could keep ships occupied even if the conflict eases.

Oil demand could also weaken. The IEA’s September 2026 outlook forecast global oil demand falling by 2.5M barrels per day in 2026 amid supply disruption and high fuel prices. The same conflict that boosts tanker scarcity can destroy oil consumption. If trade routes normalize, voyages can shorten. If sanctioned ships re-enter mainstream trade, compliant supply can rise. And a very profitable industry orders more vessels.

The 2028-29 supply risk

Tankers take years to build, so ships ordered during today’s boom will compete with ECO later. The orderbook at 33% of the existing VLCC fleet and 29.5% of Suezmaxes, the latter including 3.3% of shuttle tankers. Its delivery schedule shows VLCC additions equal to 10.5% of today’s fleet in 2028 and 9.7% in 2029; Suezmax additions are 9.8% and 7.8%. Frontline’s August filing counted 304 VLCCs and 182 Suezmaxes on order.

A ship ordered in 2026 doesn’t compete with ECO today. When many new vessels arrive in 2028 and 2029, they can compete for the same cargoes just as some of today’s disruptions may be unwinding. If oil volumes and voyage lengths fail to rise enough, the marginal charterer suddenly has choices. In a spot market, that is when rates can fall faster than a smooth spreadsheet forecast suggests.

On the same slide, management estimates that by 2028, before accounting for future scrapping, 29% of the VLCC fleet and 27% of Suezmaxes will be over 20 years old. Older ships may retire, move to non-mainstream trade, or sail more slowly under efficiency rules. The incoming ships could replace them rather than add the full orderbook to working capacity. But turning 20 is not the same as being scrapped. When rates are high, an old hull can keep earning money.

The 2028 risk is real, but that year is not a guaranteed crash date. Rates could remain strong if trade routes stay long, inventories rebuild, and older ships actually leave. They could normalize well before 2028 if war-related bottlenecks resolve. ECO’s share price and dividend could fall quickly if tanker rates turn.

Why the GSL analogy has limits

GSL and ECO both own expensive ships in cyclical markets, but their revenue resets on very different clocks. GSL charters containerships to liner companies for years; its June 2026 report showed 100% of 2026 and 90% of 2027 covered. A weaker container market can hurt the value of future renewals long before it shows up fully in reported earnings. ECO is closer to the market every time its spot ships fix a new voyage. Strong rates reach its income statement quickly; weak rates would too. GSL’s backlog can delay the pain. ECO’s spot exposure can magnify both the gain and the fall.

If I valued GSL using only cash from its existing charters, I could overpay for what its ships earn after those contracts expire. If I value ECO by annualizing Q2 2026’s spot earnings, I may overpay for the next rate cycle.

What is ECO worth if rates cool?

The slide below shows $334M of forward 12-month FCF with VLCC rates at $75,000/day and Suezmaxes at $60,000, rising to $444M at $100,000 and $80,000. The slide assumes 98% utilization, the then-current interest-rate curve, and some Q3 rate coverage already fixed.

As of today, the equity value is $3.44B. Those two cash-flow cases would imply 9.7% and 12.9% FCF yields at that price. Neither case tests a long stretch of $40,000-$50,000 VLCC rates, a weaker asset market, or a higher funding cost.

A tanker is a depreciating asset. You cannot simply take one year’s FCF yield and treat it like the yield of a business that owns its earning assets forever. ECO must eventually replace ships, service debt, and survive the lean part of the freight cycle. The right question is what cash an owner can take out over the vessels’ remaining lives after those costs, and what the ships can be sold for along the way. Mr. Market’s low P/E is not my answer to that question.

Three plausible paths from here

Path A: Rates stay unusually high

What would drive it: Long voyages, inventory rebuilding, sanctions, bottlenecks, and actual scrapping absorb new deliveries.

What it means for ECO: Spot exposure continues to generate large cash flows and potentially large variable dividends; passing may look too cautious.

Path B: Orderly normalization

What would drive it: Routes shorten and some vessels return, while new ships arrive gradually and older ships retire.

What it means for ECO: Earnings and dividends step down from Q2 highs; the stock’s valuation depends on whether the market has already priced that in.

Path C: Supply-led downturn

What would drive it: 2028-29 deliveries outpace tonne-mile demand and scrapping, just as temporary disruption fades.

What it means for ECO: The marginal spot fixture reprices sharply; profit, dividend capacity, and second-hand vessel values can all fall together.

My gut, my process, and what would change my mind

I don’t invest on emotion, but I have learned to listen when a pattern bothers me. One of my favorite books is Blink by Malcolm Gladwell. The book describes thin-slicing: rapid judgments that pick up a few important cues from a lot of experience. It also shows how those judgments can be fooled by bias and context. One interesting piece is that the conscious only process a small portion of all the data we absorb, and the rest is processed by the unconscious while we sleep, take a shower or just relax. Malcom doesn’t give a ratio for what the conscious and unconscious mind process, or claim that sleeping on a stock produces a price forecast. But my own impression sometimes becomes clearer after I have put the research away, slept, or taken a shower.

That is how I use a gut feeling: as a prompt to investigate. With GSL, I worried that strong contracted earnings could hide weaker future renewals. With ECO, my gut says the shares may keep climbing while ships are scarce, then fall sharply when effective supply returns and spot rates correct. I cannot tell you the turning date (or I would be a trillionaire along Musk by now) but the orderbook and the spot-heavy fleet give that feeling something concrete to test.

I would revisit ECO if the shares offered a clear margin of safety against normalized, not war-boosted, tanker rates; if newbuild deliveries were persistently delayed or offset by actual recycling; or if management fixed more of the fleet at attractive multi-year rates without sacrificing too much upside. I would also watch whether trade routes stay longer after any Middle East normalization, whether oil demand recovers, and what comparable modern vessels actually sell for. A low trailing P/E on exceptional earnings is not enough.

Verdict

ECO is a pass for my portfolio today. It is a strong operator with a young fleet, and I expect the stock could keep rising if tanker capacity stays scarce. If you can judge when the rate cycle will turn and act at the right time, ECO may be a buy. If you have that skill, start a Substack and I will subscribe. My portfolio is full of buy-and-forget stocks; this isn’t one of them. I would rather miss a rally than buy a variable peak-cycle dividend as if it were permanent income.

Hello fellow Sharks,

The portfolio fell 1.9% this week while the S&P 500 rose 1.2%, with Wednesday and Thursday doing most of the damage. If you want to skip straight to the numbers, jump to the Portfolio Update.

To be honest, when I received my Seeking Alpha mug I felt a spark of joy, a reminder that my thoughts were appreciated by the community. But many things changed since I received that mug and Seeking Alpha isn’t what it was years ago (maybe I will elaborate on this in a future Weekly). Below is the story how I got my Substack mug.

Last week, I was invited to the Substack GTA Bestseller Social. To be honest, at first I didn’t want to go because I have so much going on at home with the newborn, but my wife convinced me.

I am glad I did.

I got not only a $50 gift certificate to buy a book, but also a notebook and other swag, including a mug to replace my Seeking Alpha mug.

But I am more glad I went because I met some interesting people, and one of them helped me reframe how I looked at the role of my publication in my investment process.

What I realized from the get-go was that not everyone monetizes their content the same way. As you know, I am more than happy with our ‘exclusive’, 2.7k-member corner of the internet.

The chat group we have is insightful and, as some of you have done by now, I have been glad to jump on a video call to exchange ideas and go deep into some of the names.

As I consider the publication more of a way to make my ideas public and keep myself grounded and disciplined, I have kept the marketing part to a minimum to focus more on value-added activities such as research into companies (the most marketing effort I have made was creating an automated system to post insights from my previous Weeklies).

I approached this as writing about my current research on Substack and maybe monetizing it more, but that conversation showed me that I could use Substack to take my research to the next level.

By increasing my monetization, I could pay for more paid calls on GLG to get more insights into the industries I am researching (currently I do ~5 paid calls per company/indutry, which costs ~$1,500 USD). Also, this is a one-man show (I have a developer helping me with RankedStocks.com, but no help with this publication). While I do not envision recommending more than one pick per month, I think the turnover could be faster and the updates could be more timely if I had some help. With that extra revenue, I could hire a junior analyst (even someone from here, as some of you have shown the right skillset) to take work off my plate.

So I am thinking of the best way to promote this Substack more actively while keeping true to what I have been doing and what you are used to. If you have any ideas, or if this is your field of expertise, I would appreciate it if you DM me or leave a comment on this article.

Leave a comment

The second action, which I already take and will continue, is to keep my annual price increases on January 1 of each year for NEW PAID subscribers. That is, the price you paid when you signed up will be honored as long as you don’t cancel.

In a nutshell, don’t expect changes to my content, but I will start marketing the publication more to get it to the next level of its evolution.

In the Thought of the Week, I answer a question several of you asked: what do I do if my portfolio is down 30%?

I cover why I rarely hedge, how I use margin and options, how I size positions and when I sell.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• Your Portfolio Is Down 30%. What Do You Do?

• Portfolio Update

In Case You Missed It

Since last Sunday’s Weekly, I published a paid update on our December pick, which is up 126% since December.

It passed my old price target, and the piece explains why that target isn’t my sell signal.

Thought Of The Week

Your Portfolio Is Down 30%. What Do You Do?

A few subscribers asked whether I hedge the portfolio, which options strategies I find useful, and what I would do in a crash like 2000 or 2008.

One asked whether my approach means accepting a drawdown of more than 30% and sitting through it.

A drawdown of that size is possible, and the portfolio could fall further. I would keep reviewing the holdings and make changes as needed.

I rarely buy protection against market declines. I manage the businesses I own, the size of each investment, and my ability to hold them through a bad period.

I can be right about a business and still watch its share price fall substantially. If I cannot afford that financially or tolerate it emotionally, I need a different allocation before the crash arrives.

What I’ve lived through

I wasn’t investing during the dot-com crash. I was in the market in 2008, but I hadn’t developed the strategy I use today.

In February 2020, after hearing the early COVID news from China, I bought puts on the market. I still lost money on the hedge because I didn’t maintain it with the discipline the situation required.

I discussed that experience and the uses of options in the piece below.

Hedging requires decisions about cost, duration, size, and when to renew or close the position.

Give yourself the ability to stay invested

My first rule is that I do not invest money I expect to need within the next 12 months.

Could I meet my obligations if the portfolio fell sharply and stayed down much longer than I wanted?

I do use margin in limited situations, as I described in Weekly #21: temporarily bridging a purchase while I wait for another holding to sell, and occasionally borrowing against the account for a personal expense with a repayment plan.

I avoid borrowing heavily to increase my stock exposure or doubling down because I think a rebound is overdue. Even limited borrowing exposes me to collateral risk, including when I spend the money outside the portfolio.

Calling 20% “very safe” understated that risk. Prices can fall, I have to pay interest, and the broker can tighten its requirements. Firms can raise requirements and liquidate assets without first contacting the customer.

I want to avoid having debt dictate when I sell.

How I size positions

A good thesis can be wrong, and I have had plenty of those. That is why I generally size positions at 2% to 5% of the portfolio.

A 5% position that loses half its value costs the portfolio 2.5%, assuming everything else stays unchanged. Make it a 25% position and the same mistake costs 12.5%.

A 30% portfolio loss needs a 42.9% gain to recover. A 50% loss needs 100%. I went through this problem here.

Winners can grow beyond that 2% to 5% starting range. I keep reviewing how much each position could cost me if I am wrong.

I also look beyond the number of tickers. Ten companies dependent on the same spending cycle can behave like one large bet. I look at exposure to different businesses, customers, countries, and sources of cash flow.

During a panic, sound companies in different sectors can fall together as I discussed here.

Diversification can reduce the damage from a particular mistake, but the portfolio can still fall sharply.

What I did during the 2025 tariff sell-off

We started 2025 on a roll. By Feb 7, the portfolio was up 8.4% for the year…

… then Trump opened his mouth with threats of tariffs, and the portfolio reached its lowest point in the week of “Liberation Day”.

I reviewed the holdings and moved capital toward opportunities where I thought the revised risk/reward was better. In Weekly #25, I documented increasing TSM from 1.0% to 5.1% of Portfolio USA since March, while reducing its cost basis from $196 to $169.

The portfolio still ended with a +31% gain.

I kept the investment framework and changed the holdings as the opportunities changed.

A falling price is a reason to investigate

I try to think of a share as ownership of part of a business.

If I owned a private company, I would not automatically sell because it had a weak year. I would ask whether the business plan still made sense, whether it could fund itself, and whether its long-term economics had changed.

I ask the same questions about listed companies:

• Are customers delaying purchases, or leaving permanently?

• Is profitability under temporary pressure, or is the competitive advantage eroding?

• Can the company meet its obligations without depending on an accommodating lender?

• Does the valuation still compensate me for the risks?

Cash, debt maturities, refinancing needs, and the ability to generate cash can determine whether a company gets time to recover. I covered these in The Balance Sheet Primer.

Tariffs, recessions, or financing stress can reduce a company’s cash flows and the price a buyer should pay for them. In Anatomy of a Crisis, explains how a crisis can change both the operating outlook and the required return. I need to update the valuation to reflect those changes.

“Nothing changed” has to be a conclusion supported by fresh work. It cannot be an excuse to reuse an old price target.

When I sell

I may sell because the thesis broke, because the price no longer offers enough upside relative to risk, or because another investment offers a better use for the capital. I laid out that framework below:

A recent example was AGX.

I still liked the business. The remaining opportunity had become less attractive than my alternatives. I exited my position at $314. In the following months the stock increased a further 153% to $796 before correcting to $392, still 25% above my closing price. I am still satisfied with my exit because it was based on a rational decision rather than emotions.

My PayPal post-mortem explains why I sold after the evidence undermined the original thesis.

Waiting for the share price to get back to my purchase price would not have repaired the business. Since I closed the position, it has recovered to $55.53, but that is still 38% below my $89.76 trade alert price.

I do not use mechanical stop-losses in this strategy.

I explained why I distinguish a price move from a broken investment case. That approach suits how I invest. I have to keep reassessing the thesis.

Why I do not hedge every market scare

Before buying protection, I need to know which exposure I am protecting, for how long, what it costs, and how it interacts with the rest of the portfolio.

An index hedge may not move enough to offset losses in a collection of smaller or more volatile stocks. A hedge can also expire before the event I feared happens. I discussed apparent protection and concentrated exposures.

Believing that a market is expensive does not tell me when it will fall. In A Fairly Highly Valued Market, Damodaran examines the costs and risks of holding, changing allocations, and hedging. A valuation concern alone does not give me a workable timing strategy.

I can hold cash while researching an investment or waiting for an acceptable price. Selling everything to time the market would require me to get both the exit and the re-entry right. Interestingly, as I am writing this, Damodaran published a video explaining how he is keeping his current investments in the market but holding all new cash entering the account as cash. I guess Damodaran is unintentionally trying to time the market!

Selling puts is not crash protection

My most common options strategy is selling cash-secured puts on businesses I want to own at an acceptable price.

The premium pays me for agreeing to buy the shares. Selling puts does not protect my existing holdings against a crash. It is the opposite: a bullish trade. I treat the reserved cash as committed. I need to be able to fund all assignments, including several arriving together, without creating an oversized position or spending my emergency reserve.

Other options strategies worth understanding

I do not routinely use these strategies, but sometimes I do:

• Protective puts: buying a put against shares you own establishes a minimum sale price for those shares during the option’s life. The premium is a cost, and the strike and expiry determine the protection. While I like this strategy (it is like buying insurance), it eats into your returns. Although I do not routinely use it, I have known many people who use LEAP options (options with long-dated expiries) successfully, but they expect a lower return than my portfolio.

• Covered calls: selling a call against shares you own generates premium but can require selling the shares at the strike. The premium provides a small cushion; you still bear most of the stock’s downside and give up gains above the agreed price. Sometimes I have used this strategy when I decided to close a position. Instead of closing it outright, I sell a call, collect the premium and hope to get assigned. When I don’t get assigned, I either close the position then or sell another call.

What I would do if the next decline were worse

I would review liquidity and any borrowing first, reassess the businesses, update valuations, and then decide which positions to keep, add to, trim, or exit.

I would not automatically buy everything that had fallen. In Buy the Dip: The Appeal and Dangers, Damodaran warns that a lower price alone does not establish value. Confidence drawn from past US market recoveries can overlook failures elsewhere or in individual companies. Buying through a crisis requires both the financial ability to wait and a credible valuation.

If a 30% decline would force you to sell, you may need less equity exposure before the crash.

When I say “remove emotions,” I mean keep them from making the decision.

I separated the price move from the story we attach to it. I can observe that the stock fell. Predictions that “it will never recover” or “it must bounce tomorrow” need evidence before I act on them.

Portfolio Update

The portfolio lost 1.9% last week while the S&P 500 gained 1.2%. We were up 0.6% at Tuesday’s close, then slid to a 2.3% loss at Thursday’s close before Friday’s partial recovery.

Portfolio Return

• Month-to-date: +1.5% vs. the S&P 500’s +2.1%.

• Year-to-date: +43.7% vs. the S&P 500’s +14.1%. That is a gap of 2,962 basis points.

• Since inception: +102.9% vs. the S&P 500’s +35.8%. That’s 2.9x the market.

Contribution by Sector

Technology cost 93 bps, industrials 55 bps and energy 33 bps, while no sector added more than 7 bps. The Thursday pullback was led by technology stocks, with the Nasdaq down 1.3% that day. Industrials gave back 55 bps in a week when bond yields rose worldwide and the Russell 2000 fell 0.9%. Energy followed oil, with Brent topping $104 a barrel on Thursday after trading between $100 and $103 on Monday amid uncertainty over the war with Iran.

Contribution by Position

How to read the heat map? Click here.

• +37 bps DELL 3.90%↑ (Thesis)

• -3 bps RYAM -3.71%↓ (Thesis)

• -4 bps POWL 1.10%↑ (Thesis)

• -10 bps CDE 0.74%↑ (Thesis)

• -14 bps STRL 4.60%↑ (Thesis)

• -26 bps DXPE 2.42%↑ (Thesis)

• -27 bps TSM 1.99%↑ (Thesis)

• -32 bps MU 2.83%↑ (Thesis)

• -72 bps CLS 3.09%↑ (TSX: CLS) (Thesis)

That’s it for this week.

Stay calm. Stay focused. And remember to stay sharp, fellow Sharks!

A stock passes your target, keeps climbing, and more than doubles. Do you sell because it passed your target price?

Several subscribers have asked me that about the December energy pick.

It’s up 126%, and the price is well above my original target. If you have been following my picks for a while, by now you know that we encounter that question more than once a month…and should know my answer by now.

I’m keeping the BUY.

That doesn’t mean the opportunity is the same. I’ve raised the dollar target, but the remaining percentage upside is smaller. The business has delivered, the balance sheet has improved, and the war has pushed fuel markets far beyond the assumptions I used when we entered.

In this update, I revisit what I got right, what I missed, and how much of today’s profit belongs in a long-term valuation. I also explain why this position still has a job in the portfolio while the Iran war continues.

Table of contents

• TLDR

• How the stock ranks

• What I got right, what I missed, and what’s evolving

• The war changes the economics

• What the latest results actually prove

• The cash underneath the refining cycle

• From $60 to $108: what changed in the valuation

• What today’s price implies

• The bear case and the risks

• Verdict

Read more

Hello fellow Sharks,

The portfolio gained 0.2% this week while the S&P 500 slipped 0.3%. I also have a new $1,678 target on Micron stock after Q4. If you want to skip straight to the numbers, jump to the Portfolio Update.

My daughter is one year and seven months old. She started walking about two months ago, and now she wants to walk everywhere. Yesterday we went to Sugar Beach, and she walked all the way back home. She fell asleep soon after we got in. To my surprise, my newborn fell asleep after feeding too. For once, both kids were asleep at the same time.

That gave me a rare window of free time. I browsed Disney+ and watched Soulm8te. I won’t spoil it. Watch the trailer, and you’ll get the idea.

The film made me think of Dario Amodei’s warnings and others who worry that powerful AI could cause catastrophic harm. I think some of the “AI will kill us all” rhetoric is marketing. That doesn’t mean the underlying problem is imaginary. AI is still a machine, a very smart one, but a machine. But give it the wrong goal and too much freedom, and we could end up with too many paperclips.

To me, the problem in the movie starts when the programmer loosens the guardrails without accounting for what could follow. Give the system clear instructions, limit what it can access and do, and check its work. I know, I know…those controls get harder to design as AI gets smarter and faster.

That brings me to my own AI experiment, which started with a much less dramatic problem: optimizing my expensive token utilization.

I downloaded Muse because it looked like an alternative to OpenClaw. I wanted to save my expensive frontier-model tokens for the work that deserves them, such as improving RankedStocks.com. I had tried OpenClaw, but I never got it to do what I wanted consistently. Muse has taken some of that smaller workload off Claude.

I have moved from ChatGPT to Claude and back more than once. Last month I returned to ChatGPT, but I have been disappointed enough that I will head back to Claude soon. The switching taught me to keep my skills, memory and project notes in Notion. I showed Muse those projects, and it could pick up the thread without making me rebuild everything again.

For my workouts, Muse reads my cardio effort from Apple Health. I enter the treadmill speed and incline after a HIIT session; it fills my Notion tracker and suggests settings for the next one. Calorie tracking used to be on and off. Now I can snap a photo, get a daily summary in Notion and see what I could improve. I am also syncing my Notion tasks to Apple Reminders and trying to put reminders at sensible times around my calendar. That last one still needs work.

Muse now prepares my daily brief, creates a Notion page for the day and files company-specific news in the relevant stock pages for me to review later. I installed it on my Mac to help build a site that tracks followers, subscribers and posts. The work so far has been Opus quality and took no expensive tokens!

It also helped me work through the steps of incorporating a new business in Canada and keeps track of what is next. My mother’s visa renewal comes with a pile of forms and applications; Muse turned them into a plan I can actually follow.

I have done all that and used only 14% of my weekly limit. The offer may not stay this generous, so here is my code: 33MR1R. If you join Muse, enter it in Settings within 48 hours. We each get 1B tokens. If you try it, tell me what job you gave it first.

Leave a comment

In the Thought of the Week, I break down Micron’s record Q4, what its customer agreements really protect and why I raised my DCF target to $1,678 without assuming today’s margins last forever.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• Thought Of The Week: Micron Stock After Q4

• Portfolio Update

In Case You Missed It

Since last Sunday’s Weekly, I published a paid update on a portfolio holding. It had a record quarter, yet I lowered my target and kept it at HOLD.

The full piece explains why a record quarter still left me less optimistic about fair value.

Upgrade to paid to read the company name, the updated valuation and what would change my rating.

Thought Of The Week

Micron's Q4 Was Bigger Than the Beat. My New Target Is $1,678

Micron [], my top stock pick for 2026, is up 223% since I added it.

Q4 gave me a reason to update the valuation again; the new DCF target is $1,678.

MU closed fiscal 2026 with $54.23B of quarterly revenue, an 87% gross margin and $33.2B of adjusted FCF. The Q1 guide calls for $61.5B of revenue. I am keeping my Buy rating and raising my target from $1,630 to $1,678. The operating case has strengthened; the higher discount rate holds the target back. This update follows my original 2026 thesis and June review.

My June update argued that this memory cycle was becoming a different business. Q4 supplied the best evidence yet: 26 multi-year take-or-pay customer agreements, a minimum-price remaining performance obligation (RPO) of $150B on agreements with determined pricing, and management’s expectation of sequential revenue growth in every quarter of FY2027. Yet the new disclosure also forces more precision about contract coverage and pricing.

TLDR

• The trigger: Q4 revenue rose 31% q/q and 379% y/y to $54.23B, above the prior $50B guide. Gross margin reached 87%, and non-GAAP EPS reached $33.42.

• The forward signal: Q1 FY2027 revenue guidance is $61.5B ± $1.5B, with an 86.25% gross margin and $38.15 non-GAAP EPS. Management expects sequential revenue growth through FY2027.

• The structural signal: 26 take-or-pay agreements cover more than 35% of estimated revenue through 2030. Three quarters of that covered revenue uses defined pricing frameworks, and $150B of minimum-price RPO sits behind agreements with determined prices.

• The scorecard: Four of my five original pillars remain confirmed. Supply discipline and through-cycle margins remain the one evolving pillar.

• The verdict: Buy, with a $1,678 DCF target. I raised the long-term debt rate to 4.8% as rates rose, lifting WACC from 8.8% to 9.1%; that offsets part of the value created by higher revenue and cash flow.

What Q4 changed

In June I wrote that Q3 made a $50B Q4 possible. Micron delivered $54.23B. Revenue grew $12.77B in one quarter, while gross margin rose from 84.9% in Q3 to 87.0% in Q4. Non-GAAP operating income reached $44.64B. Adjusted FCF was $33.2B, almost twice Q3’s $18.3B and above management’s more than $30B indication. The full year produced $133.19B of revenue and $62.31B of adjusted FCF.

The segment mix explains the acceleration. DRAM delivered $39.77B, 73% of sales, up 27% q/q. Bit shipments rose by a mid-single-digit percentage while average selling prices rose in the high teens. NAND delivered $14.1B, up 42% q/q, with roughly 10% more bits and roughly 30% higher selling prices. Both products contributed volume, but pricing did most of the work. That is why this quarter mattered to valuation: an incremental sales dollar arrived with unusually high gross profit.

Cash conversion is the clearest reality check on an 87% margin. Q4 operating cash flow of $44B equaled 81% of revenue. Net capex was $10.8B, leaving $33.2B in adjusted FCF. At year end, Micron reported $38.4B in cash and equivalents, $5.1B in short-term investments and $30B in long-term marketable investments against $5.2B of debt. The resulting $68.3B net cash and marketable investment position gives it capacity to build fabs through the next supply cycle without leaning on the balance sheet.

Customer deposits deserve a separate line. Micron received $12.3B of customer deposits in Q4 and ended the year with about $12.7B. Those receipts appear in financing cash flow, so I do not count them as operating FCF. They still tell us customers are paying to reserve access to constrained supply. Deposits improve funding and validate demand; operating FCF shows the profit from shipments already made.

The Q1 guide resets the revenue base again. The midpoint of $61.5B is 13% above Q4, and the $38.15 EPS guide is about 14% above Q4’s non-GAAP $33.42. Management described Q1’s 86.25% gross margin as the floor for FY2027 and expects quarterly revenue to increase from there. This is the central input to my FY2027 forecast.

The market still needs to decide how much of this profit is durable. I do not capitalize an 87% gross margin forever. I forecast 87% in FY2027, 83% in FY2028, then fade toward a 40% terminal margin. That path gives the contracts and tight supply their due without treating today’s pricing as the permanent state of memory. The model’s FY2027 revenue is about $260B: the $61.5B Q1 midpoint plus the sequential growth management outlined. FY2028 grows another 25% in the model before the rate decelerates.

The charts below show how quickly the baseline changed. Their quarter labels follow report dates rather than Micron’s fiscal quarter names. The useful point in the charts is the steep sequence of revenue and EPS beats.

Management has earned more weight in the near-term forecast. It guided Q4 to $50B after Q3 and delivered $54.23B. It called for more than $30B of Q4 FCF and delivered $33.2B. Q1 guidance then stepped above that new base. These are observable forecast errors in the same direction; they support the FY2027 ramp.

Contracts, pricing and the supply window

In June I called the new strategic customer agreements the most important change in the business. That judgment stands, but I described their fixed-price reach too broadly. The Q4 disclosure is more specific: 26 multi-year take-or-pay SCAs represent more than 35% of estimated revenue through 2030. About 75% of that SCA revenue has defined pricing frameworks, most with bands that include floors and ceilings. The remaining 25% resets pricing periodically. Some agreements run through 2031. The $150B RPO is based on minimum prices for agreements with determined pricing, while Micron expects realized revenue above that minimum.

This is a stronger demand commitment than a spot order book, and a less absolute price lock than my June shorthand implied. Take-or-pay terms secure volume and customer commitment. Pricing bands support a floor; periodic repricing leaves part of the book exposed to the cycle. The right valuation consequence is higher near-term visibility and a better downside floor, followed by a long fade in margins. That is exactly how my DCF treats it.

The demand side remains broad. Cloud Memory revenue was $16.3B in Q4 and Core Data Center revenue was $18B. Together they were about 63% of company sales. Core Data Center grew 56% q/q, while Cloud Memory grew 18%. Data-center SSD revenue approached $10B, more than 10x the year-earlier level, and accounted for over two thirds of NAND sales. This is no longer a single HBM product story.

HBM still matters because it consumes scarce DRAM wafer capacity. Management said a majority of calendar 2027 HBM bit supply is contracted at prices above calendar 2026, and HBM gross margin is narrowing the gap with conventional DRAM. The product pipeline includes HBM4E and custom products for Nvidia. The broader effect is to tighten conventional DRAM supply as high-value HBM absorbs capacity. The company expects server units to grow at a high-teens rate in both calendar 2026 and 2027.

Management now expects memory and storage supply-demand conditions to be tighter in calendar 2027 and 2028 than in 2026. It sees no clear line of sight to a balanced DRAM and NAND market in those years. This is a meaningful extension of the window I used in the June update. It also explains the size of the capital program: FY2027 net capex is headed higher, with roughly $25B in the first half and an even larger second half. My model puts FY2027 net capex at about $54.5B, or 21% of sales. That is a higher absolute spend and a lower share of a much larger revenue base.

Supply eventually responds. Idaho begins contributing in the back half of calendar 2027, with another Idaho phase late in 2028. Japan starts in late 2028; New York’s first output comes around 2030. Taiwan and Singapore expand sooner in targeted products and packaging. These timelines are measured in years, which supports tightness through the next two calendars. They also tell me not to turn today’s shortage into a permanent terminal margin.

Thesis scorecard, October 2026

1. Memory is the underappreciated AI bottleneck: Confirmed. The original thesis was that AI compute could not scale without memory capacity and bandwidth. Q4’s $54.23B revenue, server growth outlook and data-center share make the point concrete. This is now widely understood by the market, so the opportunity comes from future cash flow versus price.

2. Full-stack memory breadth: Confirmed. DRAM drove $39.8B of quarterly sales, while NAND reached $14.1B and data-center SSD nearly $10B. Mobile and client still contributed $13.1B, and automotive and embedded $6.8B. Micron can direct technology and capacity across multiple demand pools.

3. HBM leadership and execution: Confirmed and strengthening. The HBM ramp is growing faster than company revenue, calendar 2027 bit supply is mostly contracted, and product work extends to HBM4E. The test now is yield, customer qualification and margin as the new generation scales.

4. Supply discipline and structurally higher through-cycle margins: Evolving. The 26 SCAs, pricing floors and multiyear capacity constraints are direct evidence in favor. The precise terms also show why I will not call this pillar complete: 25% of covered revenue reprices periodically, agreements cover more than 35% rather than all sales, and new global capacity is on its way. The 40% terminal gross margin is my way of reflecting this.

5. Undervalued on normalized cash flow: Confirmed. The target moves from the $1,630 target to $1,678 even after a higher WACC. The shares have risen substantially since my original $295 purchase thesis, but the earnings and cash-flow base has moved faster.

Valuation: stronger cash flow, higher WACC

The DCF now outputs $1,678. The new target adds $48. The small net increase understates how much the operating forecast rose because the cost of capital moved the other way.

The FY2027 revenue growth assumption is 95% ($260B of revenue). That follows Q1 guidance of $61.5B and management’s expected sequential growth each quarter. FY2028 revenue growth is 25%, then slows sharply. Gross margin is 87% in FY2027 and 83% in FY2028, declines to 55% in FY2032, and reaches 40% at the model horizon. The terminal growth rate remains 3%. These assumptions give the customer agreements a payoff during their stated term and then restore cyclical pressure beyond it.

Expense and investment matter just as much. FY2027 R&D and SG&A together equal about 4.1% of revenue, or $10.6B, consistent with management’s higher operating-expense outlook. FY2027 capex is 21% of sales, about $54.5B; FY2028 capex is 22%, about $71.4B. Capex then moderates toward 15% of sales at the horizon. The working-capital forecast reflects a larger business, high current receivables and the need to fund growth.

The discount rate is the offset. I increased the long-term debt rate assumption from 4.0% to 4.8% to reflect the rise in rates. That lifts WACC from 8.8% to 9.1%. Higher WACC reduces the present value of future cash flows, especially those in the later years and terminal value. I am locking the target at $1,678.

RankedStocks and peer context

RankedStocks gives MU an 88 overall score, in the 97th global percentile. Growth and profitability both score 99, sentiment 96, valuation 56 and outlook 60. That distribution captures the investment debate well: the business is delivering exceptional growth and profit, while the screen is no longer calling the shares uniformly cheap.

The chart shows how far the stock has traveled since the original thesis. A rising price can coexist with a rising fair value when the cash-flow base changes this fast; it also narrows the room for an execution mistake.

The valuation scorecard shows 13.9x trailing P/E and 14.0x forward P/E, but 8.7x forward EV/sales and 9.1x forward price/sales. Earnings multiples capture today’s extraordinary margin; sales multiples warn how much of it investors now capitalize on.

Profitability is no longer the lagging metric I described in June. The supplied screen now scores it 99, with an 80.7% trailing gross margin, 74.6% EBIT margin and $89.67B in operating cash flow. That is a real correction to the earlier read. It also reports 27.6% trailing capex/sales, reminding us that the cash machine still requires a vast fabrication budget.

The growth detail scores 99 too. Forward revenue growth of 248.4%. I prefer Micron’s $61.5B Q1 guide and the quarterly path in the DCF.

The peer table places MU near the top of its semiconductor comparison group on overall score, growth and profitability. Its outlook score of 60 sits well below its other operating factors. That gap is why management’s Q1 guide and contract disclosure were the decisive fresh evidence in this update.

The growth screens show two companies profiting from the same shortage at different points in their estimate cycles. MU’s trailing revenue growth is 256% vs. SK Hynix’s 145%, while the forward revenue estimates are 248% for MU and 269% for SK Hynix. Forward EBITDA growth is 467% for MU vs. 449% for SK Hynix. MU has the stronger trailing acceleration; SK Hynix’s revenue forecast has slightly more growth still ahead.

MU leads on current operating margins: 80.7% trailing gross margin vs. 76.2% at SK Hynix, 74.6% EBIT margin vs. 68.0%, and 81.7% EBITDA margin vs. 75.9%. SK Hynix leads on the cash measures in these screens, with a 48.2% levered FCF margin vs. MU’s 39.7% and capex at 19.1% of sales vs. MU’s 27.6%. MU has stronger reported pricing and operating profit; SK Hynix is converting more of its sales into FCF after a lighter capital burden. That is why I track MU’s FY2027-28 capex alongside its margins.

SK Hynix is cheaper on every forward multiple shown here: 7.4x earnings vs. 14.0x for MU, 5.0x EV/EBITDA vs. 10.8x, and 5.0x EV/sales vs. 8.7x. MU trades at nearly twice SK Hynix’s forward P/E even though the peer’s forward revenue growth is slightly faster. The MU premium rests on its specific cash-flow path and execution, not on being the cheapest memory stock.

Risk register and verdict

Pricing and contract coverage. The agreements cover more than 35% of estimated revenue through 2030, and only three quarters of covered revenue has defined pricing frameworks. The remaining book can still reset with the market. I will watch minimum-price RPO, the share of revenue under SCAs and realized margin together. A widening gap between headline RPO and actual pricing would weaken the structural thesis.

Capacity and margin. Every major producer has an incentive to add output at today’s margins. Micron’s fabs arrive over several years, and competitors are investing too. My model fades gross margin from 87% to 40%; a faster pricing decline would hurt the target. The related watch item is whether capex rises faster than contracted demand, especially after FY2028.

Customer concentration and AI spending. Data-center units now account for roughly 63% of Q4 sales. A pause in hyperscaler deployment or server purchases would reach Micron quickly. Take-or-pay contracts and deposits cushion this exposure; they do not make the rest of the business immune.

Rates and valuation. A 9.1% WACC already incorporates the higher 4.8% long-term debt rate. If the cost of capital rises again, the DCF target falls even with the same operating forecast. The rate change trims the value of the later forecast years and terminal cash flows.

I am keeping Buy and locking in $1,678. Q4 confirmed a larger, more cash-generative Micron than the one I valued in June; 26 customer agreements and the Q1 guide extend visibility into FY2027. I have corrected my earlier overstatement about fixed pricing, raised the discount rate as rates rose, and kept a 40% long-term gross-margin anchor. The question now is whether the industry can add capacity faster than customers can absorb it. The agreements and fab timelines say the answer is no through the next two years.

Share Beating The Tide: Stock Picks That Outperform

Portfolio Update

The portfolio gained 0.2% for September 28-October 2 while the S&P 500 fell 0.3%, a 0.5-point lead. We were down 3.2% at Wednesday’s close, then recovered through Friday to finish slightly ahead for the week.

Portfolio Return

• Month-to-date: +3.5% vs. the S&P 500’s +0.9%.

• Year-to-date: +46.5% vs. the S&P 500’s +12.8%. That is a gap of 3,371 basis points.

• Since inception: +106.8% vs. the S&P 500’s +34.3%. That’s 3.1x the market.

Contribution by Sector

Technology added 124 bps and industrials 44 bps. The late-week technology rally helped the broader market. Basic materials took away 86 bps as gold fell amid a stronger dollar and high Treasury yields; energy cost 67 bps while oil headed for a weekly decline.

Contribution by Position

How to read the heat map? Click here.

• +66 bps CLS 3.09%↑ (TSX: CLS) (Thesis)

• +31 bps TSM 1.99%↑ (Thesis)

• +15 bps STRL 4.60%↑ (Thesis)

• +6 bps POWL 1.10%↑ (Thesis)

• +4 bps DXPE 2.42%↑ (Thesis)

• 0 bps DELL 3.90%↑ (Thesis)

• -4 bps MU 2.83%↑ (Thesis)

• -31 bps CDE 0.74%↑ (Thesis)

• -49 bps RYAM -3.71%↓ (Thesis)

That’s it for this week.

Stay calm. Stay focused. And remember to stay sharp, fellow Sharks!

• Oct27’26: Closed position at $27.26, locking in a 23.7% capital gain.

A company in my portfolio just reported a record quarter, beat its own profit guide and showed that customers are still booking far into the future. The share price jumped on the news. The awkward part: the same quarter showed how quickly higher fuel can eat the benefit of better pricing.

The position is up +13.8% since inclusion the portfolio. I am pleased with the operating progress, but a good quarter doesn’t automatically make the next dollar invested a good bet. Since my June update, demand improved while the cash cost of running and refreshing the assets became harder to ignore. That pushes my target lower, even as the rating stays HOLD.

Table of contents

• TLDR

• Thesis scorecard after Q3 FY2026

• The quarter was better than the headline

• Demand is the strongest pillar

• Costs and cash decide the value

• What changed in my DCF: $36 to $31

• The balance sheet is healing

• The bear case and the risk/reward

• How the stock ranks

• Verdict

TLDR

• HOLD, target $31 from $36. I am reducing the target by while keeping the rating unchanged.

• Demand passed its Q3 test. Net yields beat guidance, customer deposits reached a Q3 record and 2027 is already half booked at record prices and occupancy.

• The cash conversion needs a tougher assumption. Fuel cost rose sharply, operating income declined y/y despite higher revenue, and ships and destinations still need capital.

• The balance sheet improved. Debt is below $24B and interest expense is falling, but customer deposits aren’t spare cash.

• At $25, the risk:reward is 1:1.2. The $31 target offers +23.5% price upside against -20.4% to my $20 bear case.

Carnival Corporation & plc [] is a 1.4% portfolio position.

In my June update I lowered the target from $45 to $36 and kept HOLD. At that point the worry was that Middle East disruption had slowed the yield path while fuel ran roughly 30% higher. Management’s forecast still called for a second-half rebound. Q3 lets us test that call against bookings, profit and cash, rather than just taking management’s word for it.

Thesis scorecard after Q3 FY2026

Pillar #1. Demand and pricing power: Confirmed

Thesis: A second-half booking rebound would show that the weaker yield guide reflected disruption rather than a lasting loss of appetite for cruises.

What happened: Q3 net yields rose +2.4% against the +1.2% June guide. Customer deposits were $7.6B, a Q3 record, and 2027 is half booked at higher prices and occupancy. The book for 2028 started ahead too.

Assessment: The rebound arrived. It doesn’t make every future sailing immune to a weaker consumer, but the evidence is stronger than it was in June.

Pillar #2. Better yields become better cash: Evolving

Thesis: Price and cost discipline would cover much of the fuel shock and allow CCL to keep producing cash after the fleet’s capital needs.

What happened: Ex-fuel unit costs beat guidance and nine-month cash from operations improved. Yet Q3 fuel expense rose $164M y/y and operating income fell while revenue rose.

Assessment: The operating team is doing its job. The fuel bill and continuing fleet investment make the old conversion of yields into lasting FCF too generous.

Pillar #3. Deleveraging restores flexibility: Confirmed

Thesis: Lower debt and interest would gradually improve the equity case and give management more room through the next downturn.

What happened: Total debt fell below $24B, interest expense declined y/y and CCL redeemed $500M of 7% notes. It also regained a second investment-grade rating and released the remaining secured collateral.

Assessment: Credit risk is lower than in June. It is still a debt-heavy business, and the $7.6B of customer deposits includes refundable money.

Pillar #4. A wide enough margin of safety: Challenged

Thesis: At $36, there was value above the share price, but the gain already banked and the risks argued against adding.

What happened: My revised target is $31, and the $20 downside case is realistic if yield growth cools and fuel stays costly.

Assessment: At 1 to 1.2 reward to risk, the price doesn’t give me a compelling reason to increase the position. This is the pillar that caps conviction despite a better booking record.

The quarter was better than the headline

CCL’s Q3 revenue was up +3.5% y/y, and GAAP diluted EPS 5.2% to $1.40. Adjusted EPS of $1.43 beat the $1.35 guide. Revenue beat the $8.4B estimate by about $45M.

The revenue surprise was modest, but the yield result matters more. Capacity was roughly flat over the next twelve months, so the booking gains point to customers paying more for the available cabins, rather than CCL simply adding berths to lift sales.

That $0.08 EPS beat was supported by both sales and cost control. Management’s bridge put about $0.05 on higher revenue, $0.02 on ex-fuel costs and the balance on lower fuel consumption. A lower volume of fuel burned is real operating progress; the market price paid for each unit of fuel is a separate problem.

Adjusted EBITDA reached about $3B, $110M above the June guide. Q1, Q2 and Q3 each came in ahead of the guidance in place for that quarter, so management’s near-term operating forecast deserves some credit. Its full-year EPS forecast still fell from the original $2.48 to $2.24 as fuel and disrupted itineraries changed the year.

The composition of the quarter is the more interesting result. Revenue rose $282M y/y, but operating income fell about $51M. Total operating expense therefore rose roughly $333M; $164M of that was fuel, leaving about $169M across the other expenses.

Demand is the strongest pillar

The strongest part of the update is what customers have already committed. At the end of Q3, CCL had $7.6B of customer deposits, up +7% y/y even though capacity over the next twelve months was roughly flat. A deposit is not guaranteed revenue, and some of it is refundable. It does show that the forward sales machine was still working after the June disruption.

The booking curve is more useful than the single-quarter revenue figure. Half of 2027 is already booked at record prices and occupancy, and the early 2028 book is ahead of last year’s pace. It gives CCL time to manage pricing rather than waiting for a last-minute scramble to fill cabins.

The CFO also flagged some lingering weakness in Q1 2027 from the Middle East disruption. I would watch that window closely. If bookings elsewhere stay strong while that one period remains soft, I would call the problem contained. If the weakness spreads, the record headline will have hidden an important change in the demand trend.

Only +0.5% capacity growth is planned for 2027. That is good discipline: revenue growth must come mainly from price, occupancy and what guests spend, rather than a wave of new cabins. On the Q3 call, management said onboard and other revenue rose +7% in the quarter and that more than half of revenue is prebooked. I take that as support for the booking thesis, with one qualification. Bundles move revenue between ticket and onboard categories, so total net yield is a better measure of pricing than either line alone.

Cruising has structural advantages that are easy to underestimate. A new entrant needs ships that take billions to build, shipyard slots, ports, trained crews and financing. CCL can spread those requirements across established brands and a large fleet. That scale does not make it invincible, but it gives CCL room to offer different price points without building the business from scratch.

CCL’s geographic mix matters here. The Caribbean and Europe together represented about two-thirds of 2026 capacity. That creates plenty of exposure to vacation spending in those markets, as well as to itinerary disruption or a weak season.

For 2027, the deck shows a slightly different balance, with both the Caribbean and Europe at 34%. It matters because regional demand and fuel routes can affect yield and cost differently even when the fleet’s total capacity barely grows.

CCL is also investing in destinations that may capture more guest spending. Celebration Key visitors are expected to rise from 2.7M in 2026 to 3.5M in 2027. Management expects visitors at two other destinations to rise from 1.9M to 2.8M. More guests at controlled destinations can improve the economics of the trip, but the attractions have to earn a return on their own construction and operating costs.

For a useful comparison of how owned destinations can affect pricing and onboard economics, read my Royal Caribbean deep dive.

RCL has made that strategy a central part of its proposition. CCL is moving in the same direction.

CCL Rewards launched on September 1. Early credit-card issuances more than tripled compared with pre-announcement levels. That is an encouraging sign of engagement, though a card issuance is not the same as an incremental cruise booking.

The programme also changes revenue timing. Management expects the accounting to reduce reported 2027 net-yield growth by about 0.4 percentage point, with the effect turning positive in 2028. I treat that as a timing headwind, not a matching cash loss. The real test is whether retention and guest spending rise enough to justify the programme over several years.

Costs and cash decide the value

Management lifted FY2026 reported net-yield guidance from +1.75% in June to +2.3% after Q3. It also improved ex-fuel unit-cost growth guidance from +2.4% to +2.2%. Yet adjusted EPS guidance moved just $0.02, from $2.22 to $2.24. Roughly $150M of better operations met another $150M of higher fuel expense. The original FY2026 EPS outlook had been $2.48, so the year is recovering from a lower base rather than returning to that first plan.

There is a second wrinkle in the yield guide. Management expects Q4 reported yield growth of about +1.7%, but about +2.3% after adjusting for the new rewards programme’s revenue deferral. For FY2027 it expects a further 0.4-point reported-yield headwind before the effect turns positive in 2028.

The operating-income line shows why I am more cautious on value than on demand. Fuel expense was $615M against $451M a year earlier. Revenue rose $282M, yet operating income slipped from $2.27B to $2.22B. Strong pricing helped, but fuel absorbed more than the increase in operating profit it should have delivered.

There is progress in cash. Nine-month cash from operations rose to $5.3B from $4.7B, while purchases of property and equipment were $2.1B in both periods. That leaves roughly $3.2B of cash after those purchases, up from $2.6B.

The company has a genuine operating offset to expensive fuel. Fuel consumed per available lower berth day has fallen 26% since 2019; at September guidance fuel prices, management puts the saving near $750M. Q3 consumption fell nearly 4% y/y. That work protects the margin, but CCL does not hedge its fuel price. The Q3 call made clear management prefers using less fuel to paying for financial hedges. In my downside case, I give it credit for the consumption gains and still let a higher market fuel price reach cash flow.

The fleet requires continual spending to stay attractive. The 2027 plan includes another ship, modernisations and a Queen Mary 2 refurbishment. None of that is optional if CCL wants to maintain pricing.

The CFO said FY2026 non-newbuild capex is $2.4B and should step up in 2027. Five Evolution ships are scheduled for dry dock next year, versus two this year. That is the most concrete reason to be less generous with the FCF conversion: even if the cabins sell at better prices, more cash must first go back into the existing asset base. Some destination and modernisation projects may earn high returns. Until those returns show up, I would rather include their spending than award the full benefit in advance.

What changed in my DCF: $36 to $31

The reduction is driven by a lower estimate of cash retained from each dollar of revenue. The bookings improved after June, so I am not writing a demand-collapse case. I am giving less value to the idea that strong yields flow almost untouched into FCF.

Revenue and yield path. Q3 net yields beat the reduced June guide, and the 2027 book is strong. I give CCL that recovery. I temper the early FY2027 contribution because Q1 still carries disrupted bookings, and I do not extend Q3’s +2.4% yield growth across every forecast year. With capacity rising only +0.5% in 2027, the upside has to come from price and guest spending, which makes the yield assumption important.

Fuel and operating margin. I carry a higher fuel burden into the near-term cash forecast. September’s FY2026 EPS bridge shows why: more than $150M of better operations was offset by about $150M of higher fuel prices. Consumption efficiency softens the blow, but I no longer assume fuel gives back the whole shock quickly. That produces a shallower margin expansion than the $36 case implied.

Reinvestment. I allow more cash for maintaining and upgrading ships and destinations. FY2026 non-newbuild capex of $2.4B and the planned step-up around five 2027 Evolution dry docks make a lower maintenance-capex line hard to defend. An attractive destination can raise yield and still consume cash before it earns its return.

What offsets the cut. Debt below $24B and lower interest expense improve equity cash flow. I do not add a lower discount rate or a higher terminal growth assumption.

The balance sheet is healing

CCL has reduced total debt from roughly $36B at its 2023 peak to $23.9B at August 31. Q3 interest expense fell to $285M from $317M y/y. Lower interest leaves more of the operating recovery for equity holders, and an investment-grade capital structure should make the next refinancing less painful.

Management redeemed $500M of 7% notes, bought back about $1.2B of shares through September 28 and reinstated a quarterly dividend of $0.15. I like the cheaper debt and a dividend that can be funded from the business. Repurchases require more judgment: the more CCL pays for its own shares, the less money remains to retire debt or prepare for a downturn.

ROIC has recovered after the pandemic collapse. That supports the case that the fleet can again earn more than its cost. It also reminds us how cyclical the asset base can be: the five-year average still carries the loss years.

The latest factor screen shows strong current margins and cash flow, but a weaker five-year ROIC. I care about that gap because a cruise ship is a long-lived asset bought before we know the demand conditions in every future sailing season.

Debt is lower, but it isn’t gone. It has $1.2B of cash against $23.9B of debt. The $7.6B customer-deposit balance includes refundable advance payments; it is evidence of demand, not spare capital. The company spent $929M on repurchases and $618M on dividends in the first nine months. I would keep debt reduction ahead of a larger payout while fuel and consumer demand can still turn quickly.

The bear case and the risk/reward

At $25, my $31 target offers a +24% upside. A $20 bear case is a -20% downside. Divide the reward by the risk and the result is 1 to 1.2.

The $20 case is about 9x management’s FY2026 adjusted EPS guidance of $2.24. It assumes the residual Q1 2027 booking disruption lasts longer, net-yield growth cools toward +1%, and fuel and maintenance costs stop operating profit from following revenue. Q3 already supplied a small version of that mechanism. A broader consumer slowdown would make the downside worse because ships cannot be parked and restarted as cheaply as a retailer can reduce inventory.

The risk register has moved since June.

• Fuel is materialised: the expense increase has already hit operating income.

• Booking disruption is partly faded: the forward book recovered, but Q1 2027 still needs watching.

• Leverage is fading: debt and interest expense are lower, though neither has vanished.

• Fleet spending is unchanged: CCL must keep reinvesting to defend pricing, and the 2027 dry-dock schedule raises the cash claim.

• Rewards accounting is new: reported yields will carry a temporary 2027 headwind.

The strongest case against my HOLD is that I am too cautious on conversion. If the 2027 book stays full at higher prices, onboard spending remains firm, fuel consumption keeps falling and destination spending earns its return, operating cash could rise fast enough to cover capex and retire debt. I would move toward that view if FY2027 guidance shows positive yield growth beyond the rewards accounting effect and if operating income starts rising with revenue. A higher booking curve alone isn’t enough after Q3’s operating-income result.

The growth screen forecasts stronger EBITDA growth than revenue growth. That gap is the bullish case in one image: more of each sales dollar must reach operating profit. I will pay for the improvement already visible in cash, but not for every projected point of margin expansion.

Holding the discount rate and other valuation inputs equal, a roughly 19% haircut to the present value of the forecast cash stream would close that gap. That is a useful way to think about the price. My base case needs demand to remain firm, fuel to stop swallowing the gains and spending to produce returns. The bear case says one or more of those fail.

How the stock ranks

RankedStocks.com gives CCL an overall score of 61, with profitability stronger than growth and outlook.

The supplied peer screen includes cruise operators and alongside hotels and online travel firms. It is useful for seeing where CCL’s factor profile sits, but the business mix is too broad for a clean cruise-only ranking. RCL scores higher overall on that screen.

CCL’s valuation factor is better than its outlook factor. On the screen, the shares trade around 10x earnings and 7.4x trailing EV/EBITDA. Cheap-looking multiples can be misleading when fuel is volatile and a fleet keeps demanding capital.

Verdict

CCL remains a HOLD and my target falls from $36 to $31. Bookings earned management more credit, but the cash after fuel and fleet spending earns the stock less. At 1 to 1.2 reward to risk, why add before the price gives us more room to be wrong?

Hello fellow Sharks,

The portfolio is up 46.2% YTD, and this week I’m looking back at the Synchrony Financial [] investment: what worked, what I missed, and why I sold after a 56.6% total return. If you want to skip straight to the numbers, jump to the Portfolio Update.

This week we hit an all time high passing the record from June.

As some of you know, my son was born this week. He and his mother are healthy, and we’re all very happy! Very tired, but very happy. Luckily, I worked on the Thought of the Week beforehand. I hope to return to my usual rhythm next week 🙂

CRDO recovered some ground this week after its sharp earlier this month. Earlier this month, one of our positions hard post-earnings selloff. In my Q1 FY2027 update, I explained why I kept the BUY on that stock after a record quarter and a raised full-year guidance. I reallocated some capital from DELL to this position which increased from 4% to 6%.

So far, the rebalancing looks like a great choice.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• Synchrony Financial: Why I Sold After +56.6%

• Portfolio Update

Thought Of The Week

Synchrony Financial: Why I Sold After +56.6%

On Sep 15, 2026, I closed SYF at $75.55 per share. The position had entered the portfolio at a $49.75 cost, so I locked in a 52% capital gain. Including $2.34 per share of dividends collected during the holding period, the total return was 56.6%.

That is a good result. It is also a good point to separate the investment outcome from the stock rating.

I sold the position to help fund the September stock pick. As I explained in the September pick, the move was about where the next dollar could work hardest: SYF had already rerated, while the new bank offered a valuation gap I could trace to an overlooked cost-of-equity assumption.

I also trimmed DELL to finance the remaining gap. The sale was a portfolio allocation decision: SYF had delivered much of the rerating I expected, while the new idea offered a more attractive combination of upside, downside protection and visible catalysts.

My rating on SYF remains HOLD. I expect the shares to move largely sideways because I don’t see a material catalyst that can force the market to close the remaining valuation gap. I am also reducing my target price from $130 to $100 and setting the downside scenario at $60.

Upgrade to paid to see the September stock pick that replaced it, including the company name, full thesis and valuation. The average return per pick has been +50%, more than paying for the annual subscription.

TLDR

• Rating: HOLD. I expect the stock to be roughly sideways because there is no material catalyst in front of it.

• Target: $100, down from $130. The target comes from my updated DCF, which now assumes slower medium-term receivable and earnings growth, less benefit from buybacks as capital normalizes, and a higher return requirement for the remaining credit and funding risk. It translates to about 10.7x the midpoint of 2026 EPS guidance and 2.4x Q2 tangible book value per share.

• Downside: $60. The downside DCF assumes weaker balance growth, higher credit costs and slower capital return. It translates to about 6.4x the midpoint of guidance and 1.4x tangible book value per share.

• The investment worked. I closed the position on Sep 15, 2026 after a 52% capital gain. Dividends increased the total return to 56.6%.

• The remaining setup is less attractive. Q2 purchase volume grew 8% and credit improved, but loan receivables grew only 2%, net earnings fell 8%, expenses increased 7%, the efficiency ratio deteriorated to 35.8%, and CET1 fell 100 bps y/y to 13.2%.

• Per-share growth is doing more work than operating growth. Diluted EPS rose to $2.59 because the diluted share count fell about 12% y/y. Buybacks are valuable at the right price, but they aren’t the same as a strengthening earnings engine.

What I believed

The original thesis wasn’t that SYF would suddenly become a high-growth company. It was that the market was pricing a normal credit-card cycle as if the earnings damage would be permanent.

The stock was cheap, the balance sheet could absorb credit normalization, and the retailer-share arrangement structure gave the company an unusual shock absorber. When program economics weaken, the amount shared with retail partners declines. When economics improve, partners participate in the recovery. That alignment doesn’t eliminate risk, but it prevents the full swing in credit costs from landing on shareholders.

I also believed management could use excess capital to buy back a large portion of the company while the valuation remained depressed. That mattered because a shrinking share count could turn modest earnings growth into much stronger per-share growth.

Finally, I expected credit to normalize rather than collapse. The 2022 and 2023 earnings calls showed delinquencies and losses moving back toward pre-pandemic behaviour as excess savings faded and payment rates moderated. Management tightened credit from mid-2023 through early 2024, accepting slower account and purchase-volume growth to improve the portfolio that would emerge on the other side.

Those beliefs were broadly right.

What worked

Belief #1. Credit normalization was manageable

Credit didn’t break and that was the most important part of the thesis.

In Q2 2026, the net charge-off rate declined 27 bps y/y to 5.43%. The 30+ delinquency rate fell to 4.16%, the 90+ rate was 2.01%, and the allowance coverage ratio declined to 10.09%. Management still expects full-year net charge-offs below 5.5%, near the long-term range it has discussed for years.

The path matters. In 2022 and 2023, management described a K-shaped normalization, with lower-credit borrowers weakening first. In 2024, SYF deliberately restricted credit and accepted weaker volumes. In 2025, those actions began to show up in lower delinquencies, lower charge-offs and reserve releases. By 2026, the company could reopen the growth engine without losing control of credit.

Belief #2. Capital return would drive per-share value

This also worked, although more aggressively than I expected.

SYF returned $950M to shareholders in Q2 alone, including $850M of repurchases and $100M of common dividends. The diluted share count fell from 379.1M to 334.1M y/y, a 12% reduction. That decline helped diluted EPS rise 3.6% to $2.59 even though net earnings fell 8% to $885M.

The company still had $5.7B of repurchase authorization at quarter-end. At the September exit price, that authorization equaled more than 20% of the market value. This remains the clearest support under the stock.

Belief #3. A cheap starting valuation left room for a rerating

The market didn’t need SYF to become a different company. It only needed the feared credit outcome not to arrive.

At my $49.75 cost, the shares were priced at a mid-single-digit earnings multiple. By the time I exited, credit had improved, the late-fee shock had been partly offset by product, pricing and policy changes, and management had proven willing to retire shares at scale. The stock could rerate while the business remained recognizably the same.

That is what happened. The position gained 52% before dividends even though receivable growth stayed modest and the market never awarded SYF a premium multiple.

What I missed

Miss #1. I gave too much credit to EPS growth

Q2 is the cleanest example. Diluted EPS increased from $2.50 to $2.59, but net earnings declined from $967M to $885M. The share count, not stronger aggregate profit, created the increase.

Buybacks at an attractive valuation create real value. Still, there is a limit to how long a company can use capital return as the main growth engine. Receivables grew only 2% despite purchase volume growing 8%. The payment rate was 17%, approximately 170 bps above the pre-pandemic Q2 average, which means customers are spending but paying balances down quickly. That is healthy for consumers and less helpful for a lender that earns on revolving balances.

Miss #2. The $130 target required a catalyst that wasn’t there

My July $130 target came from a DCF that gave SYF too much credit for sustained earnings growth and capital return. It assumed improving credit, lower funding costs and buybacks would compound into stronger shareholder cash flows for longer. Q2 showed that receivable growth, payment rates, expenses and capital constraints make that path less certain.

The business is improving, but several offsets keep the earnings story from becoming clean. Better credit reduces losses but also lowers late-fee income. Higher program profitability raises retailer-share arrangement expense. New accounts and promotional balances can lift volumes while initially carrying lower yields and higher payment rates. Technology spending continues, and operational losses have added noise. The result is a franchise that produces excellent returns without offering a simple path to faster aggregate profit growth.

The old target treated theoretical upside as if it were likely to be realized on a useful timetable. That was too optimistic.

What changed since the thesis

The company is safer than it was when I bought it, but the stock is also less mispriced.

Growth has returned, but it isn’t converting cleanly into balances. Q2 purchase volume increased 8% to $49.8B, co-brand volume increased 23%, and average active accounts turned positive. Ending receivables increased only 2% because payment rates remained elevated. Management expects mid-single-digit receivable growth by year-end, which requires acceleration in the second half.

Margin has less room to surprise. NIM increased 30 bps y/y to 15.08% as funding costs fell and the mix of receivables improved. Sequentially, however, NIM fell 42 bps. Lower late fees reduced the margin by approximately 31 bps sequentially, and higher liquidity ahead of expected growth reduced it by another 16 bps through mix.

Expenses are absorbing more of the benefit. Other expense increased 7% y/y to $1.3B. The efficiency ratio rose 170 bps to 35.8%, reflecting technology investment, operational losses and higher retailer-share arrangements. Management expects second-half expenses to be roughly in line with the first half, so there is no near-term cost reset in the guidance.

Capital return remains large, but it has a boundary. CET1 ended Q2 at 13.2%, down 100 bps y/y, after repurchases reduced the ratio by 360 bps and earnings rebuilt 350 bps. Management wants to move toward an 11% target, but loan growth, preferred dividends and regulatory capital all compete with buybacks for the same dollar.

Industry trends and outlook

The credit-card industry looks healthier than the bear case, but it doesn’t offer SYF an obvious rerating catalyst.

The New York Fed’s Q2 2026 Household Debt and Credit Report showed credit-card balances increasing $21B q/q to $1.26T. Credit-card transitions into early delinquency were largely steady, while aggregate delinquency across household debt improved slightly. Consumers are still using credit, but the data doesn’t point to a fresh wave of distress or a dramatic release of pent-up borrowing.

TransUnion’s Q2 2026 Credit Industry Insights Report tells a similar story. Bankcard balances increased 4.4% y/y to $1.14T and originations increased 11.8% to 20.6M. Borrower-level 90+ delinquency increased to 2.26% from 2.17%, driven largely by a larger subprime population, while balance-level delinquency was nearly flat at 1.98%. Lenders are reopening growth, but they are doing it with smaller lines and tighter risk controls.

The Federal Reserve’s July 2026 lending survey adds an important constraint. Banks tightened credit-card standards during Q2 while demand was basically unchanged. Standards also remained at the tighter end of their historical ranges, especially for subprime borrowers. That supports credit quality, but it limits how quickly the industry can convert stable demand into balance growth.

SYF’s own earnings calls show the same sequence:

• 2022-2023: payment rates normalized, receivables grew quickly and credit moved back toward pre-pandemic behavior.

• 2024: management tightened underwriting as charge-offs rose and the late-fee rule created uncertainty. Purchase volume and new-account growth slowed.

• 2025: credit actions worked. Delinquencies and charge-offs improved, reserve releases supported earnings, and retailer-share arrangements absorbed part of the benefit.

• 2026: account and purchase-volume growth reopened, but elevated payment rates, lower late-fee incidence, growth-related provisioning and technology investment muted the earnings conversion.

The industry outlook is therefore stable rather than exciting. Credit losses appear contained, funding costs are lower, and card balances are growing. At the same time, underwriting remains tight, payment rates are elevated, consumer demand isn’t accelerating, and issuers are competing for growth with rewards and higher acquisition costs.

For SYF, that mix probably produces decent earnings and ongoing buybacks. It doesn’t create the kind of surprise that forces investors to pay a much higher multiple.

Why the target is now $100

The updated DCF produces a $100 target, down from $130. The old valuation assumed a cleaner and longer compounding path than SYF’s current fundamentals support.

The biggest change is medium-term growth. I now assume receivables and aggregate earnings grow more slowly because payment rates remain elevated, underwriting stays tight and technology spending absorbs part of the credit and funding benefit.

I also assume less incremental value from buybacks as CET1 moves toward management’s 11% target and balance-sheet growth competes for capital. Together with a higher required return for the remaining credit, funding and execution risk, those changes reduce the DCF value to $100 per share.

A $100 target translates to about 10.7x the midpoint of management’s 2026 EPS guidance and 2.4x Q2 tangible book value per share. The $60 downside DCF assumes weaker loan growth, higher credit costs and slower capital return. It translates to about 6.4x guidance and 1.4x tangible book value.

At SYF’s September 25 closing price of $72.94, the $100 target implies about 37% upside and the $60 downside case implies about 18% downside. Those percentages look attractive in isolation. The problem is time and probability. Without a catalyst, the stock can remain cheap while the target drifts closer through book-value growth rather than price appreciation.

What would change my HOLD

I would reconsider if receivables grew at least mid-single digits without weaker credit, aggregate net earnings grew without relying primarily on buybacks, and CET1 stayed comfortably above the target.

I would turn cautious if charge-offs exceeded 6%, 30+ delinquencies accelerated beyond normal seasonality, reserve coverage rebuilt materially, or capital needs slowed repurchases.

Until one of those paths becomes visible, I expect the stock to trade around earnings reports and macro data without establishing a durable direction.

Verdict

SYF is an okay company. The stock is a HOLD.

The credit cycle stabilized, buybacks created value and the investment returned approximately 56.6% including dividends. From here, however, I expect the shares to move sideways because I don’t see a material catalyst.

I sold SYF to finance another financial company, the September stock pick, where I see a better combination of upside, downside protection and visible catalysts.

Portfolio Update

The portfolio finished the week ahead of the S&P 500. It gained about 2.2% for the week versus roughly 1.2% for the index. The YTD lead widened.

Portfolio Return

• Month-to-date: +4.3% vs. the S&P 500’s +0.8%.

• Year-to-date: +46.2% vs. the S&P 500’s +13.1%. That is a gap of 3,311 basis points.

• Since inception: +106.4% vs. the S&P 500’s +34.6%. That’s 3.1x the market.

Contribution by Sector

Technology did the heavy lifting. Energy and financials were the largest offsets. Across the market, AI hardware shares rebounded late in the week.

Contribution by Position

• +98 bps CLS (TSX: CLS) (Thesis)

• +46 bps MU (Thesis)

• +22 bps TSM (Thesis)

• +14 bps DXPE (Thesis)

• +8 bps RYAM (Thesis)

• +5 bps POWL (Thesis)

• -4 bps STRL (Thesis)

• -8 bps DELL (Thesis)

• -11 bps CDE (Thesis)

That’s it for this week.

Stay calm. Stay focused. And remember to stay sharp, fellow Sharks!

Hello,

As I mentioned, I will start sharing my investments in the Chilean market. This is a totally free section of the publication, as I won’t maintain a portfolio and rare follow ups. There will also be a Spanish version.

So today I bought Inversiones La Construcción S.A. [ILC].

TLDR

I bought ILC with a CLP 38,300 target, +50% from the reference price.

The market is focused on whether 1H26 profit is sustainable. The more important question is what happens to book value if only part of the improvement persists. ILC earned CLP 279,957M in 2025 and CLP 165,016M in 6M26. Banco Internacional is taking share, the pension businesses are growing across three countries, RedSalud is expanding organically and through Sanatorio Aleman, and Consalud is profitable again.

My target doesn’t require today’s 26.1% LTM ROAE to last. I assume about CLP 155,000M of profit in 2H26 and CLP 350,000M in 2027, less roughly CLP 100,000M of dividends. That takes attributable equity to about CLP 1.79T by end-2027, or CLP 18,200 per share. A 2.1x price-to-book multiple produces CLP 38,300. It corresponds to roughly 17% sustainable ROE using a 10.5% cost of equity and 4.5% growth.

Mr. Market treats the earnings reset as temporary. I think the portfolio has changed enough to make it structural.

The score is pointing in the right direction

Three independent parts of the screen agree: trailing earnings are inexpensive, momentum is broad and sentiment is strong. Profitability scores only 25, but industrial margins and conventional FCF don’t describe a group that consolidates a bank and insurers cleanly.

The P/E isn’t the thesis. The opportunity is book-value compounding. If equity reaches CLP 18,200 per share while sustainable ROE remains near 17%, today’s 1.81x book valuation is too low.

The longer history prevents overconfidence. ILC hasn’t produced a straight line of high returns. But today’s portfolio is different: Banco Internacional is larger, RedSalud has national scale, pensions are regional and Consalud is no longer producing the losses seen in 2022.

The low profitability score is not a reason to avoid the shares. ROE, solvency and distributable capital matter more for this mix than consolidated EBITDA margin.

The implied reversal creates the opportunity. Estimates assume normalization before ILC has shown that the new earnings base is fragile.

I don’t use the peer table to set fair value. It does show that ILC combines stronger growth and valuation than the selected names, with room for profitability estimates to rise.

A broader earnings base

Profit moved from CLP 182,618M in 2023 to CLP 148,244M in 2024, then CLP 279,957M in 2025. The 2024 result included a CLP 32,370M after-tax Consalud charge. Excluding it, profit was CLP 180,614M.

The 2025 increase wasn’t simply a rebound from a weak operating year. Bank growth, insurance investment returns, pension reserve performance and healthier healthcare economics all contributed. In 6M26, every major subsidiary improved and profit rose +44.7%.

I am not annualizing 1H26. My CLP 350,000M estimate for 2027 is below the pace implied by the latest period and within management’s CLP 350,000M-400,000M recurrent-profit ambition for 2030. The target asks ILC to reach the lower end early, then earn a lower ROE than it reports today.

Three engines Mr. Market underestimates

Banco Internacional grew loans 9.6% y/y in 6M26 while the industry grew 4.8%. Market share was only 1.8%, retail deposits rose 30.6%, capitalization reached 17% and first-half profit almost doubled to CLP 44,862M. The bank can grow faster than the system from a small base. My thesis assumes a mid-teens through-cycle ROE, below the 17.3% annualized ROAE reported in 6M26.

AFP Habitat earned CLP 88,024M in 6M26 and AAISA CLP 59,971M. The affiliate auctions can pressure fees, but reform also reduces the mandatory reserve from 1% of assets under management to 30% of annual commission revenue over time. That can release capital and increase distributable cash. Habitat has a higher-income customer base, regional scale and an opt-out mechanism that can support retention.

RedSalud grew revenue 22% in 6M26 and generated CLP 58,636M of EBITDA at an 11.9% margin. Excluding Sanatorio Aleman, hospital revenue rose 12.4%, outpatient activity 9.6% and dental revenue 5.9%. Sanatorio added more than 150 beds and contributed CLP 5,081M of first-half EBITDA after ILC paid CLP 33,688M for the equity. Higher-complexity care gives the network room to compound revenue and returns.

Consalud is the option. It moved from a CLP 49,488M loss in 2024 to CLP 15,007M profit in 2025 and CLP 18,947M in 6M26. The refund liability still blocks dividends, so I don’t assign it a premium valuation. The bull case only requires it to stop destroying value. Future distributions would be upside.

Valuation: CLP 38,300

Financial companies should be valued through equity returns and distributable cash, not EBITDA. I use an excess-return approach because most of ILC’s value sits in a bank, insurers and regulated savings businesses.

June 2026 attributable equity was CLP 1,380,775M. Adding CLP 155,000M of estimated 2H26 profit and CLP 350,000M for 2027, then deducting CLP 100,000M of dividends, produces about CLP 1.79T of end-2027 equity, or CLP 18,200 per share.

At 2.1x book, fair value is CLP 38,300. The multiple is supported by 17% sustainable ROE, a 10.5% cost of equity and 4.5% growth. The +50% target doesn’t require 26% ROE, a subsidiary sale or a speculative disappearance of the holding-company discount.

Model assumptions

I use ten explicit forecast years and nominal CLP inputs throughout. Mixing a US-dollar cost of equity with peso-denominated growth would make the valuation look more precise than it is. The 3.7% shown in the first screenshot is a dividend yield, not an earnings payout ratio, so it should not be entered as the payout assumption.

The bear case is deliberately higher than the 11.6% historical observation because ILC’s current portfolio is stronger and more diversified than the full-period average. Using 11.6% for all ten years would describe a thesis-break case, not my bear case.

Chile does impose a dividend floor. Article 79 of the Chilean Corporations Act requires an open corporation to distribute at least 30% of annual liquid profits unless shareholders unanimously agree otherwise. ILC’s 2025 policy was also framed between 30% of consolidated net income and 70% of distributable earnings. I therefore use a 30% payout ratio in every deterministic case. This is separate from cash upstreaming by regulated subsidiaries: capital can remain trapped inside Banco Internacional, Confuturo or Consalud even while ILC remains subject to its own shareholder-distribution rule.

These assumptions make CLP 18,800 the deterministic bear value—approximately projected end-2027 book value with no premium for sustained excess returns.

Monte Carlo

The Monte Carlo asks a more useful question than any single target: how often does a reasonable range of operating and valuation assumptions still produce upside?

Across 10,000 simulations, 92% of estimated fair values land above today’s CLP 25,549 share price. That is the strongest result in the exercise. The CLP 38,300 target is not dependent on one narrow combination of assumptions; most plausible paths still compensate investors from the current entry point.

The losing 8% matters too. Those outcomes combine weaker sustained ROE with a higher cost of equity and less favorable terminal economics. The simulation does not remove downside risk, but it shows favorable asymmetry: upside is far more common than a valuation below the current market price.

The distribution is centered well above the market price, supporting the base case without relying on the extreme upper tail.

The bear case

The strongest objection is that 2025 and 1H26 benefited from lower bank provisions, strong investment returns, pension reserve gains and Consalud’s recovery. If all four normalize together, profit could fall below CLP 300,000M.

Regulation can trap cash. Consalud can’t distribute while the refund obligation remains, Confuturo and Banco Internacional need capital to grow, and pension auctions can compress fees. Standalone net debt was CLP 434,829M in June 2026.

My bear value is CLP 18,800. It assumes 14% average ROE, the 30% statutory payout floor, an 11.5% cost of equity and 4.0% terminal growth. At that price ILC would trade at roughly projected end-2027 book value, so the valuation gives the group no credit for maintaining excess returns.

A value below CLP 18,800 belongs in the thesis-break case: normalized ROE remains below 14% for years, consumer growth creates a new bank credit cycle, or RedSalud consumes capital without adequate returns. Those risks are real. They are also materially more severe than ordinary normalization from the current 26.1% LTM ROAE.

Verdict

BUY, with a CLP 38,300 target. ILC doesn’t need peak returns to last; it needs the enlarged portfolio to compound book value near 17% while Mr. Market keeps treating the reset as temporary. If book value can reach CLP 18,200 per share, why should the stock remain at CLP 25,549?

Hello fellow Sharks,

One hundred Weeklies!

Thank you for reading, questioning my ideas and sharing your own. For this issue, I wanted to look at investment styles through the mistakes that changed mine. If you want to skip straight to the numbers, jump to the Portfolio Update.

In Weekly #96, I asked for ideas for Weekly #100, and I liked Ryan’s suggestion.

So this Thought Of The Week will be about different investment styles, why some edges disappear, and what I think remains useful after everyone knows the method.

Leave a comment

To celebrate Weekly #100, I’m offering 25% off a paid subscription for life. If this Weekly helps you think through your own process, the paid membership lets you follow how I put mine to work, with my stock research, portfolio and trade alerts. Thank you for being part of the first 100.

Get 25% off for life

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• Investment styles: from forex charts to the bookstore floor

• Portfolio Update

Thought Of The Week

Investment styles: from forex charts to the bookstore floor

Like many people starting today, my investment journey involved a lot of trial and error as a young man thrown into the Wild West of investing. First, I was introduced to the forex market in the early 2000s. I made lots of money using technicals (Elliott Waves, candlesticks, breakouts, support and resistance) and then I lost all of it and then some. Then I was introduced to stocks and applied the same technical analysis as in forex. There, it never worked for me.

Then, while browsing at the Chapters bookstore at the Eaton Centre, I found The Intelligent Investor. I still remember that sunny summer day. I started reading the inside cover; it intrigued me, so I sat on the floor in the aisle and started reading the first chapter. Before I noticed, a couple of hours had passed. I was hungry, actually starving. I was a bigger guy and never went two hours without food, but five hours had passed since my last meal. So I wrote down the page number and went to grab some food.

After lunch, I went to the public library near Yorkville, this time with my notebook. I looked for the book, found it and continued reading. I stayed until the library closed and was almost done with the book. I went back the next morning to finish it.

What was so captivating about the book was that it reframed how I should look at investing and stocks. Before, I looked at currencies, commodities or stocks as things with prices and volumes that you trade. You buy and sell; you try to buy low and sell high. But now I realized that way of looking at it did not fit my personality as well as what I read in the book. The book invited you to see a stock as partial ownership of an actual company. A company that buys inputs, be it raw materials or labor hours, converts them into products or services, and sells the output to customers. That formula made a lot of sense to my engineering mind.

Well, over the years I have refined my approach as I learn more about this art (yes, it is an art).

I continued my informal investment education. Although I saw the case for quality companies, I focused on micro- and small-cap stocks and looked for cigar butts. It was a very profitable venture, and I still do it (less and less over the years), but I found that it could be very volatile. I started incorporating other dimensions into my process: the profitability of the business, whether it was growing or shrinking, and management, to name a few. Price still mattered; I wanted a better understanding of what I was getting for it. That is how I came up with the principles behind the ranking at RankedStocks.com.

Over more than 20 years of investing, my style has evolved from technicals to pure value to good companies at a nice price. Below, I will go further back than my own experience and explain why I think the principles behind my current approach can last, even as the methods and opportunities change.

Why investment styles lose their edge

Before going through the styles, I think we need to separate three things: a sound investment principle, a way to put it into practice, and an actual advantage over the person taking the other side of the trade. They are related, but they are not interchangeable.

Buying a business for less than it is worth is a principle. Screening for a low price-to-book ratio is a method. Understanding why the reported book value understates what you can recover is a possible edge. The principle can remain useful long after that particular screen stops finding bargains.

Competition, changing conditions and the people trading in a market affect which strategies work. A method that succeeds with few competitors can become less profitable as more money pursues it. It can also become useful again when that money leaves. The Adaptive Markets Hypothesis framework is a better fit for that process than assuming markets are either perfectly efficient or permanently easy to beat.

There is evidence of this decay. The authors of the paper studied many published stock-return predictors. Returns were 26% lower outside the original sample and 58% lower after publication; they estimated that publication-informed trading accounted for a 32% decline relative to the original return. These are reductions in the strategies’ returns, not annual percentage-point losses. Their paper supports the crowding argument, while also showing why a great backtest deserves skepticism.

Technicals: who gets there before the signal?

Take a simple rule: buy when the price crosses its 50-day moving average. If enough people follow it, others can anticipate the buying and purchase before the crossing. By the time the signal arrives, part of the expected gain may already be in the price. Buyers can also crowd into the same level and leave together when the trade reverses.

That is why I don’t consider a fixed technical signal a durable edge. This is an illustration of how competition can weaken a rule, not proof that this particular moving average always fails. Changing it to 49 days does not solve the underlying problem: other people can make the same adjustment.

This AQR study is a serious counterexample to the claim that all technical approaches stop working once known. It is still a historical simulation, with uncertain cost estimates.

Momentum may persist because information is absorbed gradually, people follow others, or some market participants trade to hedge rather than maximize returns. It can also suffer reversals and repeated losses in directionless markets.

Cigar butts: cheap can still get cheaper

A cigar butt is a mediocre business bought so cheaply that one last recovery in value can produce a worthwhile return. A net-net is a more specific version: a company trading below its current assets after subtracting all liabilities, usually with an additional discount. Both demand more work than finding a low P/E.

I think the easy, obvious bargains are harder to find when more people can run the same screens. There are even Substack publications focused on net-nets. But competition is only part of the explanation. In his 2014 letter, Buffett emphasized that cigar butts had worked well with small sums and became unsuitable as his capital grew. He also wanted businesses that could generate profits for years.

A small portfolio can still consider an illiquid company that would barely register for a large fund. The danger is that the discount disappears through deterioration rather than a rising share price. Inventory can be obsolete, receivables uncollectible, and cash consumed while you wait. Management can also keep minority shareholders from receiving the value you thought was there.

This is why I still consider cigar butts but use them less. A low price can compensate for a weak business, provided the discount is large enough and there is a credible route to realizing it. A stock falling 40% does not establish either condition.

Ed Thorp: when a formula becomes common knowledge

Ed Thorp’s A Man for All Markets is a great book to read on this subject (I’m currently re-listening to the audiobook). He describes approaching markets as problems to solve, then testing whether the solution could make money in practice.

Thorp wrote that he had independently arrived at the Black-Scholes formula in late 1967 and used it to trade warrants. That was before Black and Scholes published their paper in 1973, the year the Chicago Board Options Exchange opened.

As pricing models spread and exchange trading improved transparency, the advantage of having a model that other traders lacked became harder to retain. Cboe’s history describes how the model and exchange developed together.

But it would be wrong to say that publication ended profitable options trading. Thorp kept improving his models. Future volatility, credit risk, hedging and execution still required judgment. Knowing a widely available formula is different from estimating its inputs better than the competition.

Value, growth and quality belong in the same calculation

My approach today considers valuation, growth and profitability together. These are different questions about the same business.

Valuation asks what I am paying relative to the cash the business can ultimately deliver. Profitability asks how efficiently it produces that cash and how much capital it needs. Growth asks how much larger that earning power can become, and what it will cost to get there.

Damodaran’s work on growth connects reinvestment with the return earned on that reinvestment. Growth is valuable when the return on new capital exceeds its cost. Expanding a business that earns less than its cost of capital can destroy value faster.

Here is a simplified example. Suppose two businesses each reinvest $100M. One earns an additional $20M a year after tax, the other $5M. If each requires a 10% return on that capital, the first earns more than its $10M annual capital charge, while the second earns less. Both companies grew but only one cleared that hurdle.

That is also why a high historical return on capital is not enough. I need to know what the next dollar will earn, how much the company can reinvest, and how long competition will let those returns last.

A business earning 20% on capital that costs 10% is an invitation to competitors. They add capacity, copy the product or cut prices. Over time, that pressure can pull the return on invested capital (ROIC) toward the weighted average cost of capital (WACC). A good moat can slow the process, but I do not want my valuation to depend on exceptional returns lasting forever.

That is why I added the ROIC-WACC spread to RankedStocks (go to any symbol → Financials → Profitability) . It shows whether a company is earning more than its capital costs. It also explains the three stages in my DCFs: an initial forecast, a transition as growth and excess returns fade, and a mature business. How quickly that fade happens is an assumption. I believe the wider the moat, the longer the company’s ROIC > WACC.

Quality matters, but it has a price. Quality Minus Junk research found historical support for combining profitability, growth and safety characteristics. It also found that the price paid for quality matters. Calling something a compounder does not make any purchase price reasonable.

A fast-growing business can be undervalued, and a low-multiple business can be expensive. Paying ten times earnings is not automatically cheap if those earnings are about to halve. Paying a higher multiple can make sense if the cash generation grows enough to justify it. The work is in defending those assumptions.

Damodaran, my viral note and the attention problem

I made a note about Damodaran on Substack this week.

I questioned why his publication had about 62k subscribers at the time while some AI slop newsletters had multiples of his.

The note went viral in our corner of Substack.

When I checked it for this issue, it had more than 229,000 impressions, 294 likes, 21 restacks and 48 comments.

I think it struck a nerve because many readers recognize the difference between content that makes you feel informed and work that improves how you make a decision. That is my reading of the reaction.

I have followed Professor for decades, and I still learn from him. His distinction between pricing and valuation is useful here. Comparing a stock’s multiple with other stocks tells you how the market prices similar businesses. Estimating cash flows, growth and risk asks what the business itself is worth.

His book Narrative and Numbers also inspired the Story tab in every DCF I build. Before putting a growth rate or margin assumption into the model, I want to explain what has to happen in the business to produce it.

Neither a large audience nor a detailed spreadsheet proves that someone has an edge. A model earns its place when it forces you to explain the business, expose your assumptions and change your view when the evidence changes.

The other approaches, and what keeps them working

There are other approaches worth discussing. Some overlap with what I do; others do not fit me at all. Here is how I think about them, including a few examples where I put my own money behind the idea.

Dividend and income strategies. The cash payment is real, but a high yield can reflect an expected dividend cut. What matters is whether cash generation supports the payout after reinvestment and debt obligations. Buybacks also return capital, but their value depends on the purchase price and whether new share issuance offsets them. Yield is a starting point, not a substitute for valuing the business.

SQM comes to mind. In June 2023, I wrote a bullish case for SQM.

Well, I was wrong about the dividend. Lithium prices collapsed, squeezing the earnings that supported the payout. SQM’s average realized lithium price fell about 64% in 2024, while a roughly $1.1B Chilean mining-tax charge added to the damage.

I broke even on the position. But that was hardly a victory: a 1.1% total return for SQM versus 74.0% for the S&P 500 over the same period. Getting my money back did not get back the opportunity I had missed.

Factor and systematic strategies. This is investing with a consistent set of rules. You might buy cheaper companies, profitable businesses, or stocks whose prices have been rising. Instead of studying each company as I do, you apply the same test across a basket of stocks. I can see the appeal: the rules make it harder to abandon the process because of a frightening headline. I still want to know why the rule should work and whether I could stick with it through several bad years.

Special situations and event-driven strategies. I like these. A spin-off can leave a fund holding a smaller company that no longer fits its mandate, forcing it to sell regardless of price. That gives me a concrete question: is the seller leaving because the business is bad, or because the fund is not allowed to own it? In my piece on spin-offs, split-offs and carve-outs, I explain why those details matter. I still need to read the filings and understand the debt, management incentives and business being separated. A corporate announcement alone does not make a bargain, and a merger can still fall apart.

Macro and tactical allocation. Ray Dalio and George Soros are good examples of investors who made their names here. Dalio built Bridgewater around understanding economies and markets; Soros’s bet against the pound in 1992 is a famous example of turning a macro view into a trade. But getting inflation or interest rates right is only the first step. You also need to know what is already priced in, which asset expresses the view, and whether you can survive being early. I do not think this is my strength. I am more of a bottom-up than a top-down guy. I find it easier to explain why a company is mispriced than why my view of the entire economy is better than everyone else’s.

Contrarian and mean-reversion strategies. Buying what everyone dislikes can work, but being unpopular is not enough. Stride is a good example of how I approached this. When the stock fell about 50% in 2025, I wrote about why I doubled my position.

Problems with its learning platform had hurt enrollments, and growth expectations came down. My thesis was that the problems could be fixed while the underlying demand for online education remained. That judgment, not the size of the drop, was the reason to buy. If the damage had been permanent, averaging down would only have made the mistake bigger.

Options strategies. I have written about this a couple of times, and I remain skeptical of using options to chase quick gains. As I explained in my piece on aiming for too much, getting the direction right is not enough.

Timing, the size of the move and the premium paid all matter. A stock can eventually do exactly what I expected after the option has expired worthless.

The use that makes most sense to me is selling cash-secured puts on shares I actually want to own.

My Celestica example shows both sides: I collected $144 for agreeing to buy 100 shares at $105, then the stock fell to about $67 and I was assigned. It later recovered, but the premium did not protect me from that drop. I need the cash ready and must be comfortable owning the shares at the agreed price. This is a way to enter a position, not free income.

ESG investing. This is one of the least convincing investment pitches to me, especially when it promises that doing good automatically means earning more. If I choose a company because it reflects my values, fine. But I should be honest about that preference instead of assuming it will improve my returns. Damodaran’s ESG paper explains several problems: ratings disagree, a profitable company may simply have more money to spend on ESG, and paying a higher price for a popular ESG name can reduce the return I earn from it. None of that means every ESG investment loses money. It means the label does not replace the valuation. I would rather separate the return I expect from the causes I want to support.

Passive indexing. This is a legitimate strategy, and its biggest attraction is how little it asks of you. Buy a diversified, low-cost index fund, keep adding to it, and let the businesses do the work. You still have to sit through market declines, but you do not have to read every earnings release. The trade-off is accepting the market’s return, less costs, rather than trying to beat it. My own returns of 30% annually since 2012 are why I am willing to do the work of active investing.

I choose active stock selection because it fits how I think and the work I am willing to do. Someone who does not want that work does, can do index investing and accept a expected annual return of ~10% or upgrade to paid and follow my investments.

Why fundamental opportunities can keep appearing

The obvious objection is that fundamental analysis is also widely known. If competition erodes an edge, why should my approach be exempt? It isn’t.

A public earnings number, a cheap-stock screen or a widely agreed valuation can be competed away just as easily as a technical signal. Reading a 10-K is necessary work for my process, but access to that 10-K is not an advantage. The issue is that plenty of people would rather trade on bite-sized headlines than read the filings. That is one reason I believe patient, detailed work can remain useful for decades. I still have to turn that work into better judgments.

The opportunities also keep changing because businesses change. A new segment can alter the economics before consolidated results make it obvious. A temporary expense can obscure earning power. A strong balance sheet can let a company invest while competitors retreat. The edge, if I have one, is in judging those developments more accurately than the price implies.

Cash generation also gives the thesis something beyond a future buyer’s enthusiasm to depend on. The business can distribute cash, repurchase shares, repay debt or reinvest profitably (read my primer on capital allocation here). None guarantees a quick rerating, and poor governance can prevent shareholders from benefiting. I still need to explain how the value reaches my shares.

The Limits of Arbitrage explains another obstacle to instant correction. Specialists managing other people’s money can face withdrawals or funding pressure while a mispricing worsens. Being right eventually is not enough if they cannot hold the position until then. This is one reason I have vetted clients since starting RedFox Capital. I know I could grow faster if I accepted money from everyone. But if a prospective client is not aligned with my investment approach, I turn them down. I have done that at least four times. I do not want pressure from a mismatched client to dictate my investment decisions.

A longer time horizon and capital that does not need to leave at the worst moment can therefore help. But patience only helps if the analysis is sound. Holding a deteriorating business for ten years does not turn a mistake into discipline.

What I mean by timeless

I think fundamental analysis is timeless as a way to frame the decision: I am buying part of a business, so its cash generation, growth, profitability and price matter. I do not mean that today’s screen, valuation multiple or portfolio will outperform forever.

Before buying, I want to answer five questions: What does the price assume? What do I believe will happen instead? Why might the gap exist? What evidence would prove me wrong? And how much can I lose if I am wrong or have to wait longer?

The practical tests apply to every style. Judge returns after costs and against a suitable benchmark. Separate taking more risk from having more skill. Consider position size, liquidity, debt and the conditions under which several holdings could fail together. Then ask whether the process suits your temperament well enough to survive a bad stretch.

That is how my approach has evolved from the forex charts to the bookstore floor and then to the businesses I own today. I still look for a good price, but I now spend more time asking what the company can earn on the capital it keeps.

If everyone could copy your investment process tomorrow, what would still give you a reason to expect a better result?

Leave a comment

Portfolio Update

We recovered much of the early-week decline, but finished down 1.0% vs. the S&P 500’s 0.1% decline. The portfolio’s cumulative loss had reached 4.0% on Tuesday before the recovery over the rest of the week.

Portfolio Return

• Month-to-date: +1.9% vs. the S&P 500’s -0.5%.

• Year-to-date: +43.0% vs. the S&P 500’s +11.8%. That is a gap of 3,125 basis points.

• Since inception: +101.8% vs. the S&P 500’s +33.0%. That’s 3.1x the market.

Contribution by Sector

Technology helped this week, while financials were the largest drag. Across the broader market, chip stocks recovered as earnings expectations and AI infrastructure spending outweighed early concerns about AI regulation.

Contribution by Position

How to read the heat map? Click here.

• +29 bps Micron [] (Thesis)

• +6 bps Sterling Infrastructure [] (Thesis)

• +4 bps Taiwan Semiconductor Manufacturing [] (Thesis)

• +2 bps Powell Industries [] (Thesis)

• -1 bps Dell Technologies [] (Thesis)

• -3 bps DXP Enterprises [] (Thesis)

• -5 bps Rayonier Advanced Materials [] (Thesis)

• -17 bps Coeur Mining [] (Thesis)

• -39 bps Celestica [] (Thesis)

That’s it for this week.

Stay calm. Stay focused. And remember to stay sharp, fellow Sharks!

The position is up +62% since I picked it in May 2025. My position has not changed, and neither has my $67 target.

If you missed the beginning, here is the original May 2025 pick.

The idea was straightforward: a customer service outsourcer was winning business, improving its delivery model, and using AI to make its offering more useful.

The latest earnings give that thesis more substance. Revenue hit another record, new client wins accelerated, and management expects another year of growth. But Q4 also exposed that more revenue did not translate into more operating profit.

Behind the paywall, I revisit the original thesis, walk through the presentation’s AI case studies, and explain why I still rate the shares BUY. I also separate the promising industry trends from the ways automation could hurt the economics.

In this update

• How the company ranks

• What Q4 changed

• Pillar #1. Client wins and healthier revenue mix: Confirmed

• Pillar #2. Offshore delivery and margin expansion: Challenged

• Pillar #3. AI as a source of business: Evolving

• The industry outlook: implementation work grows, routine work shrinks

• Pillar #4. Cash generation and capital allocation: Evolving

• Pillar #5. Valuation leaves room for growth: Confirmed, with less cushion

• The Monte Carlo: 10,000 illustrative runs

• What could change my mind

• Still a BUY

Read more

Usually I don’t go to networking events, and now even less than I used to. But in July I went to an informal CFA Toronto gathering for drinks. I had a nice time and ended up chatting with a portfolio manager focused on US financials.

I asked for his top pick; it was WFC. I asked him why, and he gave me his elevator pitch. In his pitch he was comparing all the US large-cap financials on the same metric, but I knew that one of those companies wasn’t really comparable because of what sits in its capital structure. I asked him about it, and he brushed off my question with an ambiguous non-answer that sounded smart.

Anyways, I kept thinking about it, as this company has been staring at me for months on my screener, so I took a deeper look and lo and behold…it became the September Stock Pick.

That capital structure question turned out to be the whole thesis. Every valuation has one input that does most of the work, and it is almost never the one people argue about.

I ran 100,000 simulations on this month’s pick, and then I looked at which assumption was actually moving the output. Nine of every ten dollars of dispersion came from a single number: the rate I use to discount the company’s future profits back to today. The earnings path, the payout, the growth rate, the terminal assumption, all of them together accounted for the rest.

So I went looking for who else was making this argument, and the answer is nobody. Mr. Market is valuing this bank on a multiple of next year’s earnings, on a chart, on a quant score. Where a discount rate does get named, it arrives asserted, with no beta, no build-up and no justification of any kind, and then the argument moves straight back to the earnings forecast.

I have been skeptical of the megabanks for years, for the reason McKinsey put plainly in this year’s Global Banking Annual Review: banking carries the lowest price-to-book and price-to-earnings ratios of any industry on earth, and it has for a very long time. Millions of people pricing an industry that low for that long is a verdict about required returns. The question I set out to answer this month is whether that verdict applies to this particular bank, and my answer is that it does not.

First I will explain what the business actually does and where the earnings come from. Then I will walk through the engine that I think the market is underrating, which is mechanical rather than cyclical and runs for five more years. Then we will do the real work on the discount rate, three different ways, and check it against what the company’s own capital stack is telling us. Finally I will put the whole thing through the model, steel-man the case against me, and give you the number.

So earlier today, I sent an email to paid subscribers with the trade alert.

I closed SYF and locked a 52% gain.

And financed the gap by trimming a bit more from DELL.

Later next week, I will be sending a post-mortem on SYF.

Contents

• The company

• TLDR

• How the stock ranks

• What this business actually is, in plain language

• The repricing engine: five years of contracted earnings growth

• The fee franchise, and the honest problem with it

• Operating leverage, and what 114 live AI applications are worth

• The number that moves everything: a real look at the cost of equity

• A note on the securities one rung up

• The model, the target, and what has to be true

• The Monte Carlo: 100,000 runs

• Steel-manning the case against me

• Verdict

Read more

Hello fellow Sharks,

Friday’s rebound put us back in the green after a rough Thursday. This week, I’m digging into CDE’s record cash flow and why it still belongs on my trim list. If you want to skip straight to the numbers, jump to the Portfolio Update.

Last week, a portfolio company reported earnings.

The position is up 64% since I picked it in May last year.

In the coming days, I’ll share my review of the results and what I plan to do next.

Next week, there are no portfolio earnings scheduled, just two dividend events. That gives me time to work on the September Stock Pick.

In the Thought of the Week, I go over CDE’s Q2 earnings results and what we should do with the position.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• CDE: record cash flow, still on my trim list

• Portfolio Update

Thought of the Week

CDE Q2 2026: Record Cash Flow, but HOLD Still Fits

Record cash flow supports HOLD, but the valuation puts CDE on my trim list.

Coeur Mining [] generated more cash in Q2 than at any other point in its history. It also cut its production and cash-flow outlook. Both deserve attention.

The first full quarter with New Afton and Rainy River showed what the enlarged portfolio can earn. It also exposed how much work remains before the Canadian mines deliver the expected production rates. My recommendation remains HOLD, but CDE enters my trim list.

TLDR

• Q2 FCF reached $388M, with $1.05B of cash and $347M of net cash at June 30. CDE can fund the operating improvements without an immediate financing problem.

• FY2026 FCF guidance fell from $2B to $1.5B. Lower assumed gold and silver prices explain part of the reduction; slower Canadian production and additional Rainy River spending explain the rest.

• New Afton’s cave ramp-up looks principally like a timing issue. Rainy River requires extra equipment, labour and infrastructure, which warrants more caution about future costs.

• My updated price target is $19.47, using $5,000 gold, $75 silver, $5 copper and a 5% discount rate for producing mines. NAV before the growth premium is $12.93. The target is about 5% below the market price of $20.58, leaving me at HOLD with CDE on my trim list.

What RankedStocks is picking up

CDE scores 62 on RankedStocks, with growth doing most of the lifting. The valuation and outlook scores give me reasons to remain selective.

The growth score of 91 reflects strong revenue, operating earnings and cash-flow growth.

A large acquisition makes those comparisons look impressive, however. We became CDE shareholders through our New Gold [NGD] holding when the acquisition closed in March. I had rotated from IAMGOLD [] into NGD in June 2025. Receiving newly issued CDE shares means the larger business needs to deliver better results per share.

Profitability is encouraging, particularly the operating margins and cash conversion.

Still, return measures can be distorted while the acquired earnings and the enlarged asset base enter the trailing calculation at different times. I would give the combined business several quarters before treating its current return-on-capital metrics as a settled operating record.

The valuation score of 42 gives me less comfort. CDE trades at 18.8x forward earnings and 12.3x forward EBITDA. The low PEG ratio benefits from a surge in acquisition-driven growth, which is unlikely to repeat indefinitely. The broader multiples suggest Mr. Market already expects a good deal of operating progress.

The outlook score of 11 in the factor panel below is another reason for caution. The Canadian production cuts show where expectations have weakened. The composite score does not establish which estimates changed or by how much, so I would not treat it as a forecast of the next earnings report.

The original thesis, tested against Q2

In my deep dive, the attraction was a larger North American portfolio emerging from a heavy investment period, with stronger cash generation and opportunities to extend mine lives. The position came through the New Gold acquisition.

Cash generation and financial strength: confirmed. CDE has demonstrated that the seven-mine portfolio can produce substantial cash while funding investment and returning capital. The size of the cash balance gives management room to address the operating gaps.

Production ramp-ups: challenged in the near term. The Canadian assets have fallen behind the inherited schedule. The economics may still be attractive, but delayed ounces arrive later and have a lower present value. Additional costs can reduce that value further.

Exploration and mine-life extension: progressing. K-Zone, Palmarejo’s Eastern District and Silvertip remain credible avenues for future growth. They still need drilling, studies and investment before they can be treated as producing assets.

Valuation: less comfortable. After converting the NGD cost basis to CDE, the position is up 82%.

Record cash flow, with an accounting complication

CDE reported $1.09B of revenue, $478M of adjusted EBITDA and $388M of FCF. The cash result was the strongest part of the release: FCF increased 45% from Q1 despite lower realized gold and silver prices.

The enlarged portfolio explains much of the revenue increase. Revenue rose 126% y/y, while GAAP EPS increased from $0.11 to $0.12. The weighted average diluted share count rose substantially after the acquisition.

Revenue growth by itself gives an incomplete picture of the benefit to each share.

Adjusted EPS of $0.12 also fell short of consensus.

Management identified $140M ($0.10 per share), of non-cash purchase-price accounting associated with acquired inventory. That expense remained in adjusted EBITDA, adjusted earnings and reported costs applicable to sales.

The inventory adjustment represents the fair-value uplift assigned to inventory when CDE bought NGD. As that inventory is sold, the uplift flows through expenses. It is not a fresh $140M cash operating outflow in Q2. Equally, adding it back to the $388M of FCF would count a benefit twice.

Management expected the remaining approximately $38M to run through Q3. Reported earnings should become easier to interpret after that.

Why the guidance cut matters

The updated gold guidance midpoint fell about 8%, while the copper midpoint fell about 22%. Silver guidance was largely unchanged, and the five legacy operations retained their production ranges. The reductions were concentrated in the two newly acquired Canadian mines.

The $500M reduction in FY2026 FCF cannot be attributed entirely to operating disappointments. Management also lowered its forecast gold and silver prices, while raising copper. On the call, the CFO explained that the revised cash-flow outlook incorporated $4,000 gold, $60 silver and $6 copper for the remaining forecast period.

CDE did not provide a complete dollar-by-dollar bridge separating price, volume, tax and cost effects. I would therefore avoid assigning an exact percentage of the FCF cut to any one factor.

The new guidance still requires a stronger second half. After $654M of H1 FCF, reaching $1.5B implies $846M in H2. That is about $423M per quarter, compared with $388M in Q2. It is achievable if production improves, but higher capital spending means the extra ounces must turn into cash.

New Afton: protecting the cave delays the higher grades

At New Afton, management is controlling how ore is drawn from different parts of the C-Zone cave. The aim is to let the cave develop evenly and preserve its long-term productivity.

The higher-grade areas are not all available at the same pace. Drawing more material from the north and west while limiting the higher-grade south and east reduces the near-term grade mix. That helps explain why simply increasing tonnes is insufficient to forecast the next quarter’s gold and copper output.

Mining rates averaged approximately 12,000 tonnes per day in Q2 and reached 14,000 in the final week of July. Management moved its 16,000-tonne target from the end of Q2 to early Q4.

The useful distinction is that New Afton’s overall operating-cost budget did not increase with this guidance revision. Producing fewer ounces and pounds over the same period raises the unit cost even when the total spending is unchanged. If the cave develops as planned, production and unit costs should improve together.

There is still a risk beyond this year. Asked whether the revised draw sequence might smooth the high grades previously expected in 2027 and 2028, management said it was rerunning the plans. It reported no sterilised ore, but did not confirm the old annual grade profile.

I therefore retain the longer-term production opportunity while using a more gradual ramp. The evidence supports patience; it does not yet justify treating the previous peak-year schedule as certain.

Rainy River: the cost reset deserves more attention

Rainy River’s open pit and mill performed well enough to generate $123M of Q2 FCF. The underground operation was the weak point.

Management identified gaps involving equipment, personnel and infrastructure as development advanced faster than the mining operation could follow. Underground production averaged roughly 2,300 tonnes per day in Q2, improving to 3,300 in July. The target is now 5,000 by year-end. That is an exit rate, rather than an average for Q4.

Unlike New Afton, Rainy River needs additional spending. Management expects about $30M in incremental operating costs this year and $25M for underground development, equipment, and infrastructure. Those amounts reflect a practical problem that must be fixed.

A further $45M moved from operating costs into capitalized stripping. That changes where the cash appears in the financial statements. It does not make the expenditure disappear from FCF.

The reported $3,788 per ounce Q2 CAS includes $2,036 of non-cash inventory uplift. Subtracting that item gives a useful view of the accounting distortion, but it does not create a clean life-of-mine cost forecast. Stockpile consumption, the open-pit mix, underground productivity, stream accounting and stripping treatment all matter.

My NAV now starts Rainy River at $2,050 per ounce of cash costs, with 3% annual escalation and a $150M starting annual capital allowance. This is a forward operating assumption, not reported CAS or a $2,050 life-of-mine average. The Q2 results put reported nine-month cost guidance at $2,700-$3,000, including $1,020 of non-cash inventory uplift and $155 for the stream. Removing those items gives $1,525-$1,825 before the stream, so $2,050 retains a cushion for the underground transition. The model deducts the stream separately and schedules 1.92M gold ounces across nine producing periods.

The upcoming budget will help determine how much of the cost increase persists. A July improvement is encouraging, but a full quarter at higher underground rates would provide better evidence.

The legacy mines give CDE some breathing room

Rochester crushed a record 6.8M tonnes in Q2, up 15% sequentially. Management also pointed to ore placed close to the liner on the new leach-pad section as a reason to expect stronger H2 production. Gold should arrive sooner; the larger silver response is weighted toward Q4.

The distinction between tonnes placed and recovered metal remains important. I want to see the improvement in silver sales and cash flow before treating the crusher record as the completed operating turnaround.

Las Chispas continues to provide a more stable contribution. It generated $107M of Q2 FCF, while Palmarejo contributed $56M despite weaker grades. Wharf’s repaired crusher reached full capacity in May, and the temporary contract-crushing units were subsequently removed.

These operations help CDE fund the Canadian work. They also face their own grade, recovery and cost risks. Management’s cost presentation shows why a North American portfolio still needs careful operating control.

Gold fundamentals remain supportive, with two-way price risk

Gold averaged approximately $4,506 in Q2, 37% above the year-earlier period but 8% below Q1. That comparison captures the situation for miners: margins can remain attractive while quarterly earnings weaken.

The World Gold Council’s Q2 demand report estimates 289 tonnes of central-bank purchases, alongside approximately 45 tonnes of ETF outflows. Jewellery volumes remained under pressure. Different buyers are responding to different incentives, so strong official-sector demand does not guarantee a rising price every quarter.

The Council’s August review then recorded a 13.3% monthly rally to $4,563, supported by investment flows and a weaker dollar. By September 11, Reuters reported spot gold near $4,352 during Asian trading, with interest-rate expectations again applying pressure.

An IMF working paper found an association between financial sanctions and a larger gold allocation in central-bank reserves. The research supports a structural diversification argument.

That backdrop supports my $5,000 gold assumption. It is about 11% above the Q2 average, so I am assuming official-sector buying and investment demand sustain a higher price over time. The World Gold Council evidence supports that argument, but the ETF outflows and recent volatility show why it remains a constructive assumption rather than an assured outcome.

Silver and copper add opportunity, with different constraints

The World Silver Survey 2026 projects a sixth consecutive annual silver deficit, approximately 46M ounces. Yet industrial demand is expected to decline about 3% this year. Photovoltaic manufacturers are reducing silver use and substituting materials as costs rise.

I use $75 silver because persistent deficits and pressure on available stocks support a higher price than the old cycle averages. The Silver Institute reported silver trading in the mid-$70s in early April after a sharp retreat from its January peak. My assumption does not require a return to that peak. It does require investment demand and supply constraints to outweigh further industrial thrifting, substitution and recycling. A deficit alone cannot establish a durable price.

Copper has a separate longer-term supply argument. The IEA’s 2026 Critical Minerals Outlook estimates a roughly 25% gap between expected mine supply from existing and announced projects and 2035 primary supply requirements under its stated-policy scenario. That gap has narrowed from the previous outlook as projects advanced.

It is a conditional project-pipeline assessment. Higher prices, substitution, recycling and new investment can change the outcome. For CDE, it supports the importance of New Afton and its extension opportunities; it does not remove the need to develop the cave successfully.

Exploration can extend the business, but it is not cash yet

The K-Zone resource sits near existing infrastructure, creating the possibility of extending New Afton beyond the current C-Zone schedule.

At Palmarejo, moving more production outside the Franco-Nevada stream could improve the cash retained from each ounce. Approximately half the mine’s Q2 gold sales went into the stream at $800 per ounce.

The nearer opportunity is at Independencia Sur, where management discussed a two-to-three-year development horizon. The more distant Eastern District targets require further drilling and decisions about processing and transport.

Las Chispas is also identifying new veins, while Wharf offers a historical example of exploration extending an acquired asset’s life. CDE’s exploration update identifies additional opportunities around Las Chispas and Palmarejo. These support the case for future reserve replacement, although the extensions already in today’s mine schedules are already counted in NAV.

This emphasis on existing districts is consistent with S&P Global’s 2026 gold exploration research. Gold exploration budgets increased 11% in 2025, while grassroots work fell to a record-low 19% share. Existing infrastructure can improve project economics, but the industry’s preference for nearby deposits does not make conversion automatic.

Silvertip advanced into a pre-feasibility study after the May board decision, with management aiming to complete the work in early 2027. I retain a discounted resource allowance, deduct the remaining FY2026 project-capital commitment, and include no operating production from it in the NAV.

Capital allocation is becoming a real part of the thesis

CDE repurchased $110M of shares during Q2, paid its $0.02 semiannual dividend and retired $39M of finance-lease debt. It still finished June with more than $1B of cash.

The $750M buyback authorization provides flexibility. Management said it would adjust purchases to valuation and was not under pressure to exhaust the programme by a particular date. That is the appropriate approach for a miner whose cash generation changes with commodity prices.

The competing demand for capital is substantial. Rainy River needs more investment, Rochester is developing additional leach-pad capacity, and the exploration projects require funding. I want management to preserve that flexibility rather than promise a fixed pace of repurchases.

From the mine values to a $19.47 target

My updated mine-by-mine model produces $12.93 per share of equity NAV before a growth premium. The assumptions are $5,000 gold, $75 silver, $5 copper and a 5% discount rate for producing mines. I hold the metal prices flat in nominal dollars over the remaining schedules and deduct the contractual streams. Applying 1.5x to the producing-mine NAV after streams, with the other assets and deductions carried once, gives a $19.47 price target.

For context, the World Bank’s April 2026 Commodity Markets Outlook forecasts $4,300 gold and $65 silver for 2027. My assumptions sit roughly 16% and 15% above those levels. Copper remains close to its $11,000-per-tonne forecast, or $4.99 per pound. The gold and silver cases draw support from the demand and supply evidence discussed above.

The lower discount rate gives more weight to later cash flows. I use 5% for established producing assets with operating infrastructure, while the mine schedules retain slower Canadian ramps and ongoing cost inflation. This is a nominal valuation assumption. Holding everything else constant, using 7% instead reduces the premium-inclusive target to $18.17.

The model retains 3% annual cash-cost escalation and 1% capital escalation. Flat nominal metals therefore produce progressively tighter margins, rather than an inflation-free cost base. Cash, debt and the share count come from June 30. The forward schedules begin on July 1, so I do not add already-earned H1 cash flow or forecast year-end cash on top of the same future mine cash flows.

Mine lives are finite, with no perpetual-growth terminal value. Recurring corporate G&A is $93M annually, within management’s $90M-$100M guidance. At 5% over ten years, with the existing 25% tax shield, that deducts $539M, or $0.52 per share. I separately retain $140.5M a year for expensed exploration and project support, a further $814M present-value deduction, or $0.79 per share. Moving those costs out of the discussion would make exploration look free.

The stream deductions follow annual production. Palmarejo retains a conservative 50% gold-stream assumption at $800 per ounce. Rainy River includes both gold and silver streams; I conservatively omit the benefit of the contractual delivery-threshold reductions.

The premium pays for possible future reserve replacement and mine-life extensions beyond the production already scheduled. Palmarejo’s exploration outside the stream boundary, new veins at Las Chispas and further near-mine drilling give that possibility substance. Existing infrastructure may help make additional deposits economic. Successful conversion, development funding and permitting still have to follow.

I apply a 50% premium only to the $13.06 per share of producing-mine NAV after streams. I remove the old $1.00-per-share generic resource allowance, which covered much of the same growth, and leave the separate exploration-spending multiple at zero. Silvertip and K-Zone keep their standalone allowances of $0.12 and $0.73 per share and receive no premium. Their potential is excluded from the premium argument. The current Wharf extension and Canadian ramps are already in the mine schedules and receive no separate uplift for the same ounces.

The resulting bridge is $13.06 of producing-mine NAV, plus $6.53 of premium, $0.85 for the two named options and $0.34 of net cash, less $0.52 of G&A and $0.79 of exploration and support. Using the unrounded values gives $19.47 per share.

The size of that premium deserves scrutiny. It adds $6.72B of equity value, equivalent to roughly $870M of additional annual after-tax cash flow for ten years at 5%. That is a valuation hurdle, not a forecast of incremental earnings. Drilling results support the possibility of extensions, but they do not independently establish a 50% uplift. I treat 1.5x as a constructive judgment and show 1.4x alongside it, which gives $18.16. The target needs both supportive metals and successful future conversion.

Keeping the operating schedules, 5% discount rate and 1.5x producing-mine multiple fixed shows how much the price assumptions matter:

• Lower metals: $3,500 gold, $45 silver and $4 copper give $4.89 NAV before premium and a $7.39 target.

• World Bank-like prices: $4,300 gold, $65 silver and $5 copper give $9.72 NAV before premium and a $14.65 target.

• Selected case: $5,000 gold, $75 silver and $5 copper give $12.93 NAV before premium and a $19.47 target.

• Strong metals: $5,500 gold, $100 silver and $6 copper give $17.28 NAV before premium and a $25.98 target.

Each case holds nominal prices flat over the remaining schedules. The premium stays fixed at 1.5x producing-mine NAV so the comparison isolates the metal deck. In a weaker market, the market could also apply a lower multiple, compounding the downside.

My March article used a $19.88 target. The new $19.47 target is about 2% lower, despite allowing a constructive metal deck and meaningful credit for future extensions. At the $20.58 reference price, downside to the target is approximately 5.4%, excluding dividends. The operating recovery can still create value, but the current price leaves little margin for disappointment.

Testing a wider range of outcomes

I reran 10,000 illustrative simulations around $5,000 gold, $75 silver and $5 copper. Metal prices moved together to varying degrees, while production, cash costs and the discount rate also varied. The chart separates NAV before the premium from the value obtained by holding the producing-mine multiple at 1.5x.

Median NAV before premium is $11.98, with the central 80% of results between $6.22 and $17.61. Including the fixed premium, the median value is $18.01 and the central 80% spans $9.38-$26.47. About 34% of premium-inclusive values exceed $20.58.

The exercise keeps the named option allowances fixed and production at or below the current scheduled volumes. Future extensions are represented only by the premium, with no extra ounces added to the operating schedules. A fixed 1.5x multiple does not capture the risk that disappointing exploration or weaker markets could also reduce the premium.

The risks that would change my view

Execution risk has materialized. Another delay at New Afton or Rainy River would weaken confidence in the inherited mine plans. The immediate tests are New Afton’s 16,000-tonne daily rate early in Q4 and Rainy River’s 5,000-tonne exit rate at year-end, followed by sustainable grades and cash costs.

Cost inflation remains active. Diesel, maintenance and labour can absorb some of the benefit from higher metal prices. At Rainy River, I also want to see whether the revised spending base persists into 2027.

Financing risk has faded. Net cash gives CDE more room to fund the work. It does not make every expansion worth pursuing.

Metal-price and reserve-conversion risks remain. A portfolio concentrated in North America still faces currency movements, permitting, taxes and operating disruption. The undeveloped projects must earn their place in the valuation through technical progress and credible economics.

My verdict

HOLD, with a $19.47 price target and $12.93 of equity NAV before the growth premium. CDE generates enough cash to fund the operating work and exploration, and the mine-life opportunities justify looking beyond the scheduled reserves. Even after allowing for that upside, the target remains about 5% below the reference price. CDE enters my trim list.

If I trim, I will most likely replace it with another gold position. I like to retain some exposure to gold, even if the position is small.

I may go back to IAG. I held it before rotating into NGD, which subsequently became our CDE holding. The comparison below puts IAG’s overall score at 76.7 and valuation at 72.4, against 62 and 42.2 for CDE.

IAG’s Q2 results give that investigation a concrete starting point. Côté commissioned its second cone crusher, replaced a conveyor belt and ran near full capacity in June. Management expects a stronger second half, while a Q4 technical report should outline a path toward 40,000 tonnes per day. Côté and Gosselin contain 20.3M ounces of measured and indicated resources, which still need to be distinguished from mineable reserves. IAG also ended Q2 with $52M of net cash excluding leases.

The attraction is better Côté production and lower unit costs. The questions are execution, capital requirements, IAG’s 70% Côté ownership and the risks attached to Essakane in Burkina Faso. I need further analysis of the assets and valuation before deciding whether IAG deserves another place in the portfolio.

Gold keeps its place in the portfolio. CDE has to justify how much of that place it occupies.

Portfolio Update

The portfolio gained 0.85% this week while the S&P 500 fell 0.80%, a lead of 165 basis points. By Thursday, both were down more than 1.6%. Friday’s rebound brought the portfolio back into positive territory, while the index finished the week in the red.

Portfolio Return

• Month-to-date: +3.0% vs. the S&P 500’s -0.4%.

• Year-to-date: +44.5% vs. the S&P 500’s +11.9%. That is a gap of 3,267 basis points.

• Since inception: +104.0% vs. the S&P 500’s +33.1%. That’s 3.1x the market.

Contribution by Sector

Technology carried the week, adding 147 basis points, with another 9 from industrials. Consumer cyclicals and basic materials were the main drags, subtracting 37 and 24 basis points. The remaining sectors were close to flat or slightly negative.

Contribution by Position

How to read the heat map? Click here.

• +102 bps CLS (TSX: CLS) (Thesis)

• +81 bps DELL (Thesis)

• +17 bps STRL (Thesis)

• +7 bps DXPE (Thesis)

• +6 bps TSM (Thesis)

• +1 bps POWL (Thesis)

• 0 bps RYAM (Thesis)

• -13 bps CDE (Thesis)

• -29 bps MU (Thesis)

That’s it for this week.

Stay calm. Stay focused. And remember to stay sharp, fellow Sharks!

Last week we saw a divergence between two positions. DELL was the top performer in the portfolio, while this other company was the worst performer.

On Sunday, I published my view on DELL, lowered the target price from $639 to $601, read as to why here.

Today I trimmed DELL from 11% to 8.5% and put the proceeds into the other position, taking it from 4% to 6%.

Since adding this position and before the rebalancing, it was up 127%. Three weeks ago it was up 276%.

Revenue more than doubled y/y, above the top of its own guidance range, a 48% operating margin, full-year growth guide raised. The stock fell the next day and dropped further the day after. From its peak to the bottom, there was a significant drawdown, on a quarter with nothing that would justify it in my opinion.

Behind the paywall: the Q1 FY2027 review and the two numbers that actually moved the stock, the guidance delta against June, the thesis scorecard pillar by pillar, the rebuilt DCF with every assumption on the table, 10,000 Monte Carlo runs across the model, a bear case that gets to 1 to 1.5, and the risk register.

Table of Contents

• How the stock ranks

• Q1 FY2027: a record quarter that got sold

• Guidance: what changed since June

• Thesis scorecard after Q1 FY2027

• Valuation: the $315 target, rebuilt

• The Monte Carlo: 10,000 runs

• Risk register after Q1 FY2027

• Verdict

Read more

Hello fellow Sharks,

We started the week lagging the market but by Friday the S&P 500 closed flat while the portfolio advanced +2.0%. If you want to skip straight to the numbers, jump to the Portfolio Update.

Last week, I published an update for paid subscribers on a position that is +72% in the five months since I added it to the portfolio.

I bought it in March while missiles were flying over the region, and the pushback in my inbox was immediate: who buys into an active war? The company answered with records on every line of the income statement, the first dividend in its history, and a target I raised by 13%, so there is still 34% upside left.

I flew back to Toronto on Thursday night and arrived Friday morning. Right before I hopped on the plane, I got an alert that RankedStocks.com was down: traffic had surged beyond my expectations, and there was a hardware error. The team proactively put a note on the site so visitors knew they were working on it.

However, the fix was more involved than expected, and it took them until Saturday to bring the site back up. It is working now; sorry for the inconvenience.

Last week, two companies reported.

As per the thought of the week, I go over DELL’s Q2 results: a second straight record quarter, $60.9B of AI orders in a single quarter, a $95B backlog, and a $25B raise to the full-year guide. The stock is up 325% since I added it in February, the best performer in the portfolio YTD, and the price now sits as far from my bear case as from my target. So I am moving DELL from BUY to HOLD and adding it to my trim list.

If you own it, read this one (and the two questions I ask before selling a winner) before you decide anything; if you are thinking of buying it at $524, read it twice.

Finally, you might have noticed a new section called Chilean Stocks. That is where I will post my trade ideas in the Chilean market. To be clear, this is NOT the international diversification I have been talking about for the BTT portfolio; it is a free extra covering my occasional trades in Chile. The section will be in English and Spanish.

You have been added to it automatically, so those emails will land in your inbox as they come out. If you are curious, stay on and tell me what you think. If Chile is not your thing, muting it takes three clicks (Substack’s guide is here):

1. go to substack.com/settings,

2. click Beating The Tide under Subscriptions, and

3. switch off the toggle next to Chilean Stocks .

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• DELL Q2 2027 Update: +325% Since February, And I Am Moving From BUY To HOLD

• Portfolio Update

Thought Of The Week

DELL Q2 2027 Update: +325% Since February, And I Am Moving From BUY To HOLD

As you know by now, last week was a hectic, non-investment-related week. I barely had enough time to do anything besides the task at hand. However, I got a message from one of you that DELL was down, so I quickly checked the press release and didn’t see why Mr. Market reacted that way.

Later the stock recovered and went on to a new high. Today it is sitting at an all-time high of $524. Here I go over the results, the refreshed valuation and why it goes to my trim list.

Table of Contents

• TLDR

• How DELL ranks

• Thesis scorecard after Q2 2027

• The quarter: records everywhere, and a margin I do not trust yet

• Guidance: then vs. now

• The bear case I am now weighting

• Valuation: from $639 to $601, and the bear from $325 to $450

• Risk register, updated

• Performance vs. the field

• Verdict

Since adding Dell Technologies [] to the portfolio in February, it is up +325%, the best performer in the portfolio.

I bought at $123 the week before the Q4 print, watched Q1 push it past $420, and this week watched Q2 push it to $524. In my June update I asked whether the second double was still in front of us.

Three months later the answer is that most of it arrived, and the question has changed: is there enough left to keep paying for it?

Last week DELL reported a quarter that beat its own raised bar for the second time in a row. Revenue grew 58% y/y and beat consensus by $2.1B…third revenue beat in a row.

GAAP EPS grew 273% and non-GAAP EPS beat by 43%...sixth EPS beat in a row.

AI orders were $60.9B in one quarter, the backlog almost doubled to $95B, and management raised the full-year revenue guide by $25B to $192B.

I first laid out the DELL thesis in my deep dive in February.

The thesis was built on five pillars: an operator edge, an AI demand wave, an attach-later margin story, a cash machine, and a shareholder flywheel. I updated it on May 24 after the Q4 record and again in June after Q1, when I raised the target to $639 and the bear to $325. This time four of the five pillars come out stronger, one comes out weaker, and the rating comes out lower. The last part is the one worth your time.

TLDR

• Q2 earnings were records on revenue, EPS and capital returned, and management raised the year by 15% to $192B, with AI-server revenue now guided to triple.

• Scorecard: of my five original pillars, three are confirmed and two are evolving. The cash machine drops a grade for the first time.

• The number that changed my mind is cash: operating cash flow fell 13% y/y in a quarter where net income grew 255%, and reported FCF was an eighth of adjusted FCF, with the gap filled by DELL financing its own customers.

• Valuation: the base case moves from $639 to $601 and the bear from $325 to $450. At $524 the upside and the downside are the same size.

• I am moving DELL from BUY to HOLD, and it joins my trim list.

How DELL ranks

DELL scores 75 on RankedStocks.com, a Strong rating rather than the Elite it carried through the spring, and the card tells the HOLD story in one picture: Growth, Profitability and Sentiment high, Valuation and Outlook low.

Valuation 24. Every trailing multiple sits in the middle of the pack and every forward one sits near the bottom, which is what a stock looks like after it triples in eight months and Mr. Market has already paid for the guidance raise. Only the dividend yield and the PEG score well, and PEG only because the trailing growth denominator is 200%.

Growth 84. Every forward growth metric scores around 40, because consensus already models the deceleration I describe below.

Profitability 77. The return metrics do the work, because the negative working capital machine keeps invested capital tiny. The margin metrics score poorly, and that is the business: an assembler’s gross margin, however well run.

Sentiment 99 and Outlook 37. Sentiment measures what the price has done. Outlook measures what the Street expects it to do next, and the Street’s average target sits 9% below the current price.

Thesis scorecard after Q2 2027

Three pillars confirmed, two evolving, and the one that dropped a grade is the cash machine.

Pillar #1. The operator edge: Confirmed.

Original thesis: DELL has no product moat, but in commodity-like hardware the best operator wins, on a direct model, supply-chain discipline, and a negative-working-capital machine that drives +20% ROIC.

Evolution: Graded stronger in May after DELL repriced its server book inside a quarter when memory costs spiked, and again in June when opex hit a 20-year low.

What happened since last update: Non-GAAP opex fell to 8.5% of revenue and the full-year guide of 8% is the lowest in the company’s 42-year history. Management gained more than ten points of traditional server share in two quarters. DELL was first to ship rack systems on the Nvidia [] Vera Rubin platform, and some engagements now require upwards of 50 unique designs per customer.

Assessment: The edge is real and it widened. It also has a ceiling: a 42-year low on opex is a base that only rises from here, and the CFO now attributes over 400 basis points of Q2’s ISG margin to scale, which is a gift that stops giving when growth slows.

Pillar #2. The AI demand wave: Confirmed and strengthening.

Original thesis: Enterprise and cloud infrastructure spend is shifting to AI clusters, and DELL sits where those orders land.

Evolution: An $18.4B backlog at the deep dive, $43B in May, $51.3B in June.

What happened since last update: $60.9B of AI orders in one quarter, more than the $51.3B backlog DELL started it with. The backlog exited at $95B, trailing twelve-month orders are $131.7B, and the five-quarter pipeline still grew sequentially and remains multiples of the backlog. The customer count passed 6,500, with 3,300 added in the last three quarters after it took eight quarters to reach the first 3,200.

Assessment: Demand is not the question and has not been since May. The question is how much of a $95B backlog is demand and how much is customers ordering further ahead because supply is scarce, which management confirmed they are doing.

Pillar #3. AI today, attach later: Evolving.

Original thesis: Win the AI-server footprint first, then attach higher-margin storage, networking and services as the estate matures.

Evolution: Evolving in May and June, because AI-server margins stayed mid-single-digit while storage started to show the attach.

What happened since last update: Storage grew 26%, its fastest growth in years, with Dell-IP demand above market for the sixth straight quarter and PowerStore up double digits for the ninth. Management named Dell-IP storage the biggest margin lever after scale. Traditional servers grew 122% on the 14G refresh and on CPU racks for agentic workloads, with 1.2M installed assets still 14G or older and the 18G shipping in October, replacing 12-14 legacy servers per new box.

Assessment: The attach is showing up in storage and in CPU servers, and enterprise customers buy more of both. AI-server margins themselves are still mid-single-digit, so the pillar stays Evolving. It is now the pillar that matters most for the valuation, because the bull case needs ISG to hold a 14% margin while the AI mix keeps rising, and the only way that happens is if this pillar converts.

Pillar #4. The cash machine: Evolving.

Original thesis: Negative working capital and deferred revenue keep invested capital low, so returns on capital stay high and fund the payouts.

Evolution: Confirmed in May and June, when the cash cycle held deeply negative through the AI ramp.

What happened since last update: Operating cash flow was $2.2B, down 13% y/y, in a quarter where net income grew 255% to $4.1B. Reported FCF was $986M, down 47%. Adjusted FCF was $8.1B, and the $7.2B difference is almost entirely the growth in financing receivables, which DELL adds back on the argument that lending to a customer is a choice rather than a cost.

DFS originations were $7.5B, up 213%, financing receivables reached $20.4B, and inventory doubled since January to $21.3B.

Assessment: I am downgrading this pillar from Confirmed to Evolving, and it is the grade that drives the rating. The balance sheet is fine: $14.2B of cash, core leverage of 0.8x, and positive rating actions from the agencies during the quarter. But the machine ran in reverse this quarter. A negative-working-capital model is supposed to fund growth for free, and in Q2 growth cost $6.7B of financing receivables plus a $6.2B inventory build, funded by $3.4B of net new debt. Management calls DFS selective and short-term. I believe them and I still count the receivables as capital at risk.

Pillar #5. The shareholder flywheel: Confirmed.

Original thesis: DELL returns +80% of adjusted FCF through buybacks and dividends, the share count shrinks, and per-share value compounds without hypergrowth.

Evolution: Confirmed at every update; the dividend rose 20% in February and the buyback authorization grew $10B.

What happened since last update: A record $4.3B returned in the quarter, 9.5M shares repurchased at an average of $401, and $6.3B returned in the first half. The diluted share count is 652M, down 5% y/y, and guided to 651M for Q3.

Assessment: The flywheel keeps turning, and this is where the asymmetry shows. In February the setup was $123 against a $206 model. In June it was $421 against $639 and a $325 bear, a risk and reward of 1 to 2.3. Today it is $524 against $601 and a $450 bear, so 1 to 1.

The quarter: records everywhere, and a margin I do not trust yet

Revenue grew 58% y/y and beat consensus by 5%. GAAP EPS grew 273% and non-GAAP EPS beat by 43%. Revenue, EPS, ISG, AI servers, traditional servers and commercial PCs all set records.

ISG did the work again, and this time the margin did too. ISG revenue grew 89% and operating income grew 225%, so the segment margin went from 8.8% a year ago and 10.5% in Q1 to 15.0%. AI-server revenue was almost flat sequentially, so the extra $1.7B of ISG profit came from the other two lines and from price. Storage carried the mix and scale carried the rest.

The CFO told you not to extrapolate it. His words on the call were that a number of factors came together and went the company’s way, and that not every benefit will continue at this level. The guide backs him up: Q3 ISG margin is guided up just over a point y/y, which is 13.5% against the 15.0% just printed, and CSG margin is guided down from 7.6% to 6%. Part of the Q2 margin is price discipline in a market where demand exceeds supply, and that condition has an expiry date.

AI orders were the headline; AI revenue was the quiet number. Orders of $60.9B against revenue of $16.4B means DELL booked 3.7 quarters of AI revenue in one quarter. Management is explicit that the constraint is supply: DRAM first, then NAND, then spotty CPU and disk shortages, and on down to substrates and optics. The Q3 AI guide of $19B says the constraint is loosening slowly.

Traditional servers grew faster than AI servers, and part of that is inflation. The 122% growth is real demand from the 14G refresh, from agentic workloads that need CPUs, and from security requirements such as post-quantum cryptography forcing old hardware out. It is also higher prices: a 17G server carries more cores, more DRAM and more storage than the box it replaces, and each of those costs more than it did two quarters ago. Management does not split units from price, so neither can I. I model traditional servers at +10% next year for that reason.

Storage is the pillar-three proof. Revenue grew 26% to a Q2 record and management expects more than $2.5B of incremental storage revenue this year, most of it Dell-IP at a higher margin than the partner products it replaces. Agents create logs, traces and files that have to be retained, and inference needs KV cache. This is the line that turns an AI-server sale into an AI-infrastructure relationship.

PCs grew 20% and are about to slow. Commercial grew 22%, its eighth straight quarter of growth, and CSG margin was 7.6%. Management said cost-sensitive customers are stretching their upgrade cycles, that units are likely down in the second half, and that it shifted memory allocation from PCs to infrastructure earlier this year because that is where the margin is. CSG is guided to grow 15% in Q3 at a 6% margin.

Guidance: then vs. now

Three months after raising the year by $27B, management raised it by another $25B. The full-year number has moved from $140B in February to $192B in September.

On credibility: three prints in a row of guide, beat by a wide margin, raise. The February guide was $52B too low for the year. Consensus went into Q2 expecting $18.92 of FY2027 EPS and came out with a guide of $25.50.

Management has earned the right to be believed on the year. The problem for the stock is the opposite one: the pattern is now so well established that Mr. Market prices the next raise before it happens, which is why the shares went from $425 to $524 in three sessions on a guide that was already supply-constrained.

The bear case I am now weighting

There is no moat, and the AI cycle has not created one. DELL’s edge is scale, brand, distribution, deployment and a supply chain nobody can copy quickly. None of those protect price. Servers and PCs use the same components from the same suppliers and are assembled by the same ODMs, so competition lands on price and service. In AI servers the value accrues to the chip designer and increasingly to the memory makers (that is one reason that is my top pick for 2026)…

… while the tier-one hyperscalers buy directly from the ODMs and skip the OEM entirely. DELL wins with neoclouds, sovereigns and enterprises because they need the engineering and the financing, and those are exactly the customers that pay for it least reliably. I wrote in February that the best operator wins in a commodity market. That is still true. It is a claim about returns on capital, and it says nothing about the multiple.

The margin you just saw is closer to a peak than a base. ISG went from 8.8% to 15.0% in four quarters. Over 400 basis points of that is scale, which reverses when growth does. Some of it is pricing power in a supply-constrained market, which reverses when supply catches up, and the first read of 2027 supply guidance has server DRAM bits growing 15-20%, a shortage easing rather than ending (TrendForce). Management’s own long-term framework tops out at 14% for ISG. The bull case needs the top of that range to hold while the AI mix, the lowest-margin line in the segment, keeps growing faster than everything else.

FY2028 is a digestion year until proven otherwise. AI-server revenue triples this year. The Street models FY2028 EPS down 4% and the most careful outside models I have read have FY2028 revenue flat to down. The $95B backlog covers next year’s AI number on paper. When supply loosens, the double ordering shows up as cancellations and slipped deliveries, and DELL has already lived that cycle once, in PCs in 2022.

The cash is arriving later than the earnings. Net income grew 255% and operating cash flow fell 13%. Over the last four quarters DELL generated $12.2B of operating cash flow and reported $18.1B of adjusted FCF, and the difference is receivables DELL owns and leases DELL carries. Adjusted FCF is a legitimate way to look at a captive finance business, and it is also the number that funds capital returns that ran at twice operating cash flow this quarter.

And then there is the PC business. Half of revenue two years ago, a third today, and structurally a low-single-digit grower once the Windows 11 refresh passes. If the AI cycle disappoints, this is the business the multiple falls back on, and it is a 6% margin business that management just told you is losing units.

Put those together and you get a company that is executing better than at any point in its history, in a market that is growing faster than any it has ever served, at a price that assumes both continue. I agree with every part of that sentence. Having said that, I now think the fair price for it is close to the current one.

Valuation: from $639 to $601, and the bear from $325 to $450

You can view the full model here.

My DCF base case moves to $601. At $524 that is +15% of upside. The bear moves to $450, or -14%. Risk and reward is 1 to 1.0.

The target fell even though the year went up. FY2027 in the model now sits at the guide: $191.8B of revenue, AI servers at $74B, traditional servers up 103%, storage up 16%, commercial PCs up 17%, and a 10.3% operating margin against the 10.7% the GAAP EPS guide implies. Every one of those inputs went up from June, and on their own they would have pushed the target up.

What went down is everything after FY2027. In June the model compounded revenue at 26% a year through FY2029 and reached $384B by FY2031. That was a model built on a demand wave with no digestion in it. The new path grows 13.5% in FY2028, with AI servers at +25% because the backlog already covers it, decelerates to 10% by FY2031 and 8% by FY2032, and fades to 2.5% by FY2038. FY2031 revenue is $299B rather than $384B, a five-year CAGR of 21% against 28% before. I also moved ISG margin up, to 13.5% this year and 14.0% after, the top of management’s framework, because the storage mix and the scale are real, and I hold the AI-server line at mid-single-digit margins inside that. CSG goes to 6%, where the CFO put it. The consolidated margin reaches 11% by FY2031. Less revenue at a higher margin nets out to $38 a share less than in June.

WACC stays at 9% and the tax rate stays at 23%, above the 18% DELL pays, so the target is conservative on the discount rate and the tax line and generous on margin. I think that is the right shape of conservatism for a business at this point in its cycle.

At $524 the market values DELL at 21x this year’s non-GAAP EPS guide and, because the Street has FY2028 EPS falling, 21x next year’s too. Run the model backwards and the current price discounts my cash flows at 8.6% instead of 9%, or, holding the discount rate, it needs FCF to compound at 13% a year for ten years from FY2026’s $8.6B. Both are achievable. Neither leaves a margin of safety, and in February the same exercise gave me a price that implied an AI slowdown that was not happening. That was the mispricing. It has closed.

That is also why the bear moved. My June bear of $325 assumed AI-server margins stuck while a digestion air pocket hit a $51B backlog. The backlog is now $95B, the balance sheet has $14.2B of cash at 0.8x leverage, and the company just earned $7.04 in a quarter. A $450 bear is 18x a FY2028 non-GAAP EPS of $25, which is the Street’s digestion case, and 18x is where the stock traded after hours on the night of the print. It is the realistic bad year rather than the catastrophic one. The shape is a $601 base, a $450 bear and a $524 price, so 1 to 1.0. In June it was 1 to 2.3.

Risk register, updated

Strongest risk first.

First, the cash conversion gap has moved from the footnotes to the top of the list. This is new. In June every risk was about margins or demand. Now the machine that funds the payouts is lending to its own customers at a $30B annual run rate, and capital returns are running at twice operating cash flow. If a large neocloud stumbles, DELL owns the receivable and the inventory behind it. Management says the book is short-term and selective. The number that would end this risk is a quarter where operating cash flow catches back up to net income.

Second, the memory super-cycle, unchanged and now guided into 2027. Server DRAM contract prices rose another 13-18% in Q3 and NAND 10-15%, and 2027 RDIMM bit supply is guided to grow only 15-20% against faster server unit growth (TrendForce).

Third, an AI digestion air pocket, unchanged but closer. After tripling, AI-server revenue has to grow off a $74B base. A pause at the neoclouds or a large sovereign deal slipping makes the backlog convert lumpier even if the long-run demand is intact, and the FY2028 guide in February is where it would show.

Fourth, AI-server margins that never improve, faded. Q2 showed ISG can print 15% with AI at half the segment. The attach in storage is real. This risk has not gone away, but it is smaller than it was, and I moved it down the list for the first time.

And then there is the price. At $524 DELL is no longer the obviously cheap operator it was at $123, or even at $421 in June. From here the stock needs the FY2028 guide, the ISG margin and the cash conversion all to come through.

Performance vs. the field

Over the last twelve months DELL has outrun every name it competes with by a wide margin. HPE, the credible number two in AI systems, is the only peer that kept any pace at all, on a networking-led story. HP Inc, the pure PC comparison, went nowhere, and Super Micro is down under a DOJ cloud, with DELL booking in one quarter the AI orders SMCI booked in its entire fiscal year. The relative performance says Mr. Market has fully found the AI-server story and has started paying for the storage and attach leg that was my edge in February. What is left to find is the FY2028 number, and the price already treats it as a coin flip.

Verdict

I am moving DELL from BUY to HOLD, with a $601 target and a $450 bear. The position stays in the portfolio at HOLD and it goes on my trim list: the risk and the reward are now the same size, and the upside that is left no longer defends the weight against a fresh idea.

In February I was paid to believe DELL could grow and earn through the AI build while Mr. Market doubted it. Today I am asked to believe DELL can keep growing and earning after the build, and Mr. Market has stopped doubting.

If you own it, hold it and let the FY2028 guide tell you what to do next.

Portfolio Update

We ended the week +2.1% vs. +0.1% for the S&P 500. Both spent Monday and Tuesday in the red, the portfolio deeper than the index, and the recovery started on Wednesday, the morning after DELL reported.

Portfolio Return

• Month-to-date: +2.1% vs. the S&P 500’s +0.4%.

• Year-to-date: +43.3% vs. the S&P 500’s +12.8%. That is a gap of 3,055 basis points.

• Since inception: +102.2% vs. the S&P 500’s +34.2%. That’s 3.0x the market.

Contribution by Sector

Technology did the heavy lifting this week and Financials chipped in, with Energy a distant third. Consumer Cyclicals and Education were the only sectors in the red, and neither cost more than a handful of basis points.

Contribution by Position

How to read the heat map? Click here.

• +147 bps DELL (Thesis)

• +59 bps MU (Thesis)

• +42 bps CLS (TSX: CLS) (Thesis)

• +16 bps TSM (Thesis)

• +11 bps STRL (Thesis)

• +3 bps CDE (Thesis)

• -1 bps POWL (Thesis)

• -3 bps RYAM (Thesis)

• -4 bps DXPE (Thesis)

That’s it for this week.

Stay calm. Stay focused. And remember to stay sharp, fellow Sharks!

Since adding my March pick to the portfolio, it is up 72% in five months.

Back on March 16, I sent a trade alert buying this company’s stock while missiles were flying over.

Four days later, I published the full deep dive.

The pushback in my inbox was immediate: who buys into an active war?

Since I moved to North America more than 25 years ago, I have realized one thing: people have the wrong impression of war…they think war consumes everything in your day-to-day, but as my cousin mentioned to me last weekend… one of the greatest attributes of humans is that we adapt to whatever situation we are presented with.

And he is right; I remember that, in the middle of bombing, people would still have weddings, baptize their kids and go finding food. The parallel here is great. People assume that the Iran-US/Israel war is all people worry about in the Middle East right now, but no, people are planning ahead and companies as well.

Last month the company answered. Records on every single line of the income statement, a revenue target set when the company was founded was reached ahead of the plan, and the first dividend in its history. The stock gapped to an all-time high when it announced its Q2 results.

In this article, I raise my target by 13%, so there is still 34% upside on this opportunity.

Table of Contents

• How the stock ranks

• Q2 2026: the quarter the thesis stopped being a projection

• Guidance: the floor moved up

• Thesis scorecard after Q2 2026

• Valuation: from $41.50 to $47

• Risk register after Q2

• Performance vs. peers

• Verdict