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

Read more

Hello fellow Sharks,

Until Thursday, we were comfortably beating the index, but momentum shifted on Friday, and we ended the week slightly trailing the market. If you want to skip straight to the numbers, jump to the Portfolio Update.

Last week STRT reported earnings.

Remember that I closed the position on Aug 17 at $81.56. The quarter itself was strong, STRT beat on both revenue and EPS, and the stock briefly spiked toward $89 on the print. Then it reversed hard as management called FY2027 challenging on lower vehicle production and FX headwinds, and it closed the week at $75, under our exit.

In the coming week, two portfolio companies report, including DELL.

This Weekly will be shorter than usual. As I mentioned last week, I would be traveling this week on short notice. Since Monday, all my time has been spent coordinating the trip so that I stay in Chile for the fewest days possible, as I need to be back so as not to miss my son’s birth.

As you would imagine, investing took a back seat this week. I barely turned on my computer; I think I saw some news about Iran but I’m not sure. I assumed my oil positions would do well and my tech ones would be hurt. You would say not checking the market every day is irresponsible for someone running an investing newsletter, but I have to eat my own cooking as well. Long-term investing means that short-term noise shouldn’t trigger me to change my positions. My portfolio is not a momentum-driven portfolio so I would be fine not having internet access and not following the news for ten years and then checking my positions. True, maybe some positions drew down from the peak in that time, but ultimately in 10 years my portfolio would be much higher than today.

To stay true to the spirit of the “Thought of the Week”, my piece this week won’t be about investing, as I didn’t think about investing this week. It is about something that preoccupied my mind instead … blockchain.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• I’m Flying 36 Hours to Sign One Piece of Paper

• Portfolio Update

Thought Of The Week

I’m Flying 36 Hours to Sign One Piece of Paper

I don’t run away from hard work or challenging jobs. But I do hate inefficiencies. One idea that stuck with me from Walter’s Elon Musk book is from when he was talking about SpaceX:

“the only rules that matter are the ones dictated by the laws of physics, everything else is a recommendation.”

And I totally agree with him (unless the rules are there to protect people). That is how bureaucracy works. I bet many rules were implemented because of one specific screw-up in the past, then got grandfathered, and if you ask regulators today what the point of the rule is, they don’t even know why it is there.

So most people would have hated to go on this short trip to Chile. From Canada to Chile, including the transit is 15-16 hours; include the time from home to the airport and then from the airport to my destination, and I would be traveling 36 hours round trip to stay just a few days in Chile.

I was okay with the trip, but what I hated was the reason I had to make it. I am selling one of my properties in Chile, and I have to go sign the final document for the transaction. But wait…I remember when I bought my place in Toronto, all the signing was done online. So that was the first thing I tried to do: I investigated if I could sign online, and I was told it has to be signed in person, in front of a notary chosen by the bank in Chile.

This clouded my head the entire week: how a so-called modernized country still had to use paper signatures. Then I thought about how these inefficiencies in the system are the reason that blockchain will be massively adopted.

You can use blockchain for anything where you need to confirm ownership. Cryptos were the first blockchain implementation to confirm ownership of a digital asset, and blockchain voting has been used to confirm a voter is who they say they are (West Virginia let soldiers deployed overseas vote through a blockchain app back in 2018). Governments are moving physical assets on-chain too: California’s DMV put all 42 million of its car titles on a blockchain in 2024, cutting a title transfer from two weeks at a counter to a few minutes.

But I think the next blockchain implementation with many low-hanging fruits is real estate transactions. Besides the ~5% commission for brokers/agents, there is the title lawyer, the financing cost, the title insurance, the appraisal, the land transfer tax, and the notary. All those are inefficiencies inserted in the system; brokers are an inefficiency blocking buyers from sellers (I expect many of you, especially brokers, to attack me on this. Unless the broker can sell an unsaleable property or bring the buyer his dream house that is not even on the market, I don’t think the 5% commission is justified…sorry but it is the fact).

Lawyers are an inefficiency to ensure that the person selling the property actually holds the title for that asset. And there are others: title insurers exist because the registry might be wrong, escrow agents exist because the buyer and the seller don’t trust each other, and the notary exists to confirm that I am me. All of them charge for the same product, trust, and trust is exactly what a blockchain automates.

So imagine, rather than me flying to Chile and both sides paying closing fees1, I could have logged into a system that has every property on a blockchain, with a smart contract that executes once the down payment is in escrow and the bank has settled the mortgage. One further step is to have the mortgage itself on a blockchain, financing peer-to-peer mortgages…a great idea in my opinion. The transaction would be recorded on the chain and my name replaced with the new owner’s.

And this is not science fiction; the plumbing already exists. Propy recorded the first blockchain property sale back in 2017 (TechCrunch’s founder bought a Kyiv apartment through an Ethereum smart contract), Sweden’s land registry has piloted blockchain title transfers, the country of Georgia registers land titles on one, and Dubai’s Land Department already issues blockchain title deeds. The technology is there; what is missing is the will to fire the middlemen.

However, I am not naive; there will always be a middleman. For example, even though you can transact cryptos directly, most transactions are done on platforms such as Coinbase [] that take a fee. And some middlemen earn their keep: forget your private key and your bitcoins are gone forever; forget your Coinbase password and you reset it and still have them.

You don’t want to be James Howells…

But the transaction cost, or friction (read my piece on friction), would be reduced.

So I think there will be two types of middlemen, new entrants and incumbents.

I expect the incumbents in some markets to disrupt themselves to stay in the loop, such as financial firms. Right now, when you transact stocks, settlement is T+1: your trade runs through a central clearinghouse that nets and guarantees every trade between brokers, a batch process designed decades ago, so the shares are officially yours one business day after you click buy (it was T+2 until May 2024).

On a blockchain it could settle almost immediately, at a fraction of the cost. Financial firms saw this kind of disruption coming before and disrupted themselves: some of you are too young, but there was a time when buying shares cost you $50 a trade, then came the discount brokers at $9.95, then $6.95, and now most brokers charge no commission at all (they sell your order flow to high-frequency market makers instead, check out Flash Boys by Michael Lewis).

There has also been a push toward T+0, same-day settlement, to bulletproof the system against exactly this kind of blockchain disruption. That is how incumbents disrupt themselves.

The new middlemen, I think, will show up in real estate transactions as I don’t see brokers/agents disrupting themselves for two reasons.

First, brokers are fragmented rather than concentrated like the financial firms above. Second, if a financial firm disrupts stock trading, it is jeopardizing one revenue line, but for many brokers the commission is their sole income, so going from a $25,000 commission to $25 would hit them very hard.

We have seen this movie before: travel agents did not build Expedia, and taxi owners did not build Uber, the disruption came from outside because the incumbents had everything to lose. Even the courts could not move the fee: the National Association of Realtors paid $418M to settle an antitrust case over commissions, the rules changed in August 2024, and buyer-agent commissions have not budged.

That was my short thought of the week. And here is the question I kept turning over: once a public ledger can prove who owns what, what exactly are we paying the middlemen 5% for… and which of them do you think gets fired first?

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Portfolio Update

The week came down to Friday. Through Thursday we were 65 bps ahead of the index for the week; Friday alone cost the portfolio almost two points, and we closed the week about a point behind the S&P 500.

Portfolio Return

• Month-to-date: +4.3% vs. the S&P 500’s +3.0%.

• Year-to-date: +40.5% vs. the S&P 500’s +12.7%. That is a gap of 2,783 basis points.

• Since inception: +98.3% vs. the S&P 500’s +34.1%. That’s 2.9x the market.

Contribution by Sector

Industrials and consumer cyclicals did the damage this week. My airport guess was only half right: the oil names did what I assumed they would, but tech, which I had assumed would be the casualty, was the top contributor thanks to DELL.

Contribution by Position

How to read the heat map? Click here.

• +31 bps DELL (Thesis)

• +9 bps CLS (Thesis)

• +4 bps CDE (Thesis)

• -2 bps RYAM (Thesis)

• -2 bps TSM (Thesis)

• -9 bps DXPE (Thesis)

• -14 bps POWL (Thesis)

• -24 bps MU (Thesis)

• -32 bps STRL (Thesis)

That’s it for this week.

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

Hello fellow Sharks,

We started the week strong on Monday, but the tech selloff that followed hit the portfolio. If you want to skip straight to the numbers, jump to the Portfolio Update.

Last week was a busy one, on Monday I sent the trade alert and deep dive for the August stock pick.

The debate on this company is a referendum on one reported ratio, while the line that actually decides who keeps the money is bigger, behaves differently, and gets almost no coverage. The business is growing at more than 40% in a market that is shrinking around it, and my DCF puts fair value 50% above where it trades.

Then on Wednesday, I published an update on a position that already returned 61%. It hit the target I set in the deep dive, so I refreshed the model against the Q2 results, raised fair value, and moved the position onto my trim list: the risk / reward profile is balanced now.

And finally on Thursday, I published a post-mortem on STRT, we closed the position at a +75.7% gain.

After Q2, I cut my target from $125 to $95, growth now waits on the 2029-model-year awards, and at the exit price the risk/reward had turned negatively skewed. I took the money and moved it into the August pick.

We are getting close to Weekly #100! Only four weeks away. I want to prepare a special Thought of the Week for it, and I want your input: leave a comment with what you would like me to cover, I will take everything into consideration.

Leave a comment

The following two weeks, expect fewer updates from me and a bit of a shorter Weekly. I am travelling to Chile on Thursday, August 28, to sign a paper (yes, ridiculous, but to sell a property in Chile you cannot sign online). I plan to return as soon as possible, but to take advantage of being there, I will close some other open items, including setting up the Latam leg of RankedStocks.com. As I mentioned a couple of times, my objective for RankedStocks.com is to become the financial hub where you find gems and run your research on equities (and ETFs) across the globe. I started covering the US and have expanded to Canada and the UK. The next leg is Chile, followed by the rest of Latam. After that, I will keep opening countries by the market cap of their exchanges. But if you have an interest in a specific region, please vote on the poll below!

As per the Thought of the Week: I try to stay away from macro and from just reporting the news (there are many outlets that already do that), but I am making an exception this week as it plays into my long-term view on the US and gold.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• A $4B Answer to a $40T Question

• Portfolio Update

Thought Of The Week

A $4B Answer to a $40T Question

Last Wednesday, while half of Wall Street was on a beach, the US Treasury announced it will at least double the buybacks of its own long-dated bonds. Yields fell within minutes…

… gold jumped through $4,500.

By Thursday, traders had already given the move a name: the Bessent Put.

Jumping to my conclusion: this is a liquidity patch, probably a necessary one, but it removes zero dollars of debt. It shifts the pressure from the bond market to the dollar, and the currency and gold markets understood that within 48 hours. I am not changing a single position because of it, though it does re-rank the tailwinds and risks inside the portfolio. First, I will explain what the Treasury did and how it pays for it. Then I’ll explain why it barely worked, what it did to the dollar and gold, and what it means for equity valuations in the short and the long run.

Finally, I will go through some of our positions.

I started my career on a credit desk, and old habits die hard: when a borrower starts buying back its own bonds, my first question is always what that tells me about the borrower. Companies repurchase their debt at a discount when they want to deleverage. The US is doing something different.

What the Treasury Did, and How It Pays for It

On August 19 the Treasury announced it will at least double its liquidity-support buybacks of long bonds, in the 10-to-20 year and 20-to-30 year buckets, from $2B to at least $4B per operation, running from September 9 through November 4. One day later, Secretary Bessent said the quiet part out loud: “it could be more than $4 billion per issue.” The targets are old, off-the-run bonds, paper issued years ago that barely trades anymore. The Treasury buys them from dealers and pays by selling more short-term bills.

So is this money printing? No, and the distinction matters. QE happens when the Federal Reserve creates new money and expands its balance sheet. The Fed printed nothing here, and it cut nothing either. Total debt outstanding stays exactly the same, only the maturity mix changes: less 30-year paper in the market, more short-term bills. Think of a homeowner with a 2.5% 30-year mortgage refinancing into a floating-rate loan because he does not like how the mortgage looks on his screen. The monthly payment goes UP, the screen looks better.

That homeowner detail is the part almost nobody mentioned last week. Those seasoned long bonds trade at deep discounts because they carry coupons locked in below 3% during another era, which makes them the cheapest funding the United States has ever secured. Retiring them and replacing them with bills priced at today’s short rates raises the actual cash interest bill. A company that retired its cheapest, longest debt to fund itself with commercial paper would get hard questions on its next earnings call. The United States got a one-day relief rally.

The US just retired its cheapest debt and refinanced it with more expensive debt. So why do it? Because the goal was never to save interest. The Treasury is buying duration risk out of the market: every old 30-year it retires is 30 years of rate risk nobody has to hold anymore, and that is what caps the long yield. The cost shows up later, in two forms. The cash interest bill rises immediately, because bills priced at today’s short rates replace coupons locked below 3% in another era. And the rollover risk rises with it, because bills come due every few months and have to be refinanced at whatever rate the market charges then. It is a bet that short rates fall before the extra cost compounds, made by a borrower that controls neither inflation nor the Fed.

Why Step In Now?

The backdrop is a debt stock that crossed $40 trillion this year, with close to $2T of new borrowing added every year on top. That is more than $5B of new debt every single day, weekends included. Someone has to buy all of it, and in the long maturities the buyers have been walking away. In mid-August the 30-year yield touched 5.33%, its highest level since 2007…

… and the 10-year pressed above 4.7%.

The technical name for what widened is the term premium, the extra yield the market demands just for the risk of holding a bond for 30 years instead of rolling short bills. In plain English, bondholders started charging the US extra for time. Part of the blame sits with the Fed as Warsh has abandoned forward guidance almost entirely; the market gets no signal about where policy is heading, and an unanchored long end drifts wherever fear takes it. With the Fed silent, the Treasury decided to anchor the curve itself.

And the fiscal arithmetic explains the urgency: net interest cost the government a whopping $963B in the first ten months of the fiscal year, inside a $1.8T deficit over the same stretch. Every basis point on the long end compounds into that number for decades.

Share Beating The Tide: Stock Picks That Outperform

Did the Bessent Put Work?

For a few hours, perfectly. The 30-year dropped to 5.178%...

… the 10-year fell six basis points to 4.633%...

… and stocks ticked up with the S&P 500 holding near its record.

By the next session the whole move had retraced, with the long bond back at 5.24%. After the initial reaction of Mr. Market, it sat down to do the math and realized that $4B per operation against a $40T debt stock is a rounding error.

History agrees with the math. The closest precedent is Operation Twist in 1961, when the Fed and the Treasury together bought long bonds and sold bills to flatten the curve. I found a study of that episode (download the PDF on the site, it has lots of info): the entire program moved long-term yields by 15 basis points.

The flows never matter as much as the signal.

But the signal is real, and that is why the market named it a put. The administration told the world it will not tolerate a disorderly long end, and it showed willingness to grow the tool. For anyone betting on a yield spike, that changes the game: shorting the long bond now means fighting an opponent with a bill-issuance machine and no position limit. Yields can stay high, but the melt-up scenario got harder.

The Dollar Pays, Gold Collects

Capping yields only changes where the pressure exits. If bondholders cannot get paid through the yield, the adjustment moves to the currency. The dollar index fell to 98.556, a three-month low.

Strategists started using the phrase every emerging-market analyst knows: soft yield curve control. Every country that has tried yield curve control eventually paid for it through the currency, Japan being the polite version.

Gold understood immediately. It jumped 3%. The official line from the Treasury is still a strong dollar policy. The market is pricing a strong gold policy.

So, will the dollar be forced to absorb the punishment of a $40T debt? Over the coming months, I think the answer is mostly yes. The government has told you it will not let its borrowing costs rise naturally, and it has not yet shown a plan that shrinks borrowing. Until that second part changes (Monday may be the first attempt), the dollar is the release valve, and hard assets are the other side of that trade.

What It Does to Equity Valuations

In the short run, the put is a gift to equity multiples. The long Treasury yield is the bedrock discount rate for every asset, and a ceiling on it is a floor under valuations. Corporate borrowing keys off the same curve: investment-grade paper yields 5.41% at a spread of 0.82% over Treasuries, BBB coupons sit between 4% and the mid-5s, and BB-rated bonds pay near 6%. Lending to companies at that spread over a government running a $1.8T ten-month deficit is a thin reward, the market is reaching for income and trusting the Treasury to manage the sovereign curve. As long as that trust holds, risk assets float.

The long-run bill has three line items. The smallest is the policy premium: if buyers start doubting the predictability of US issuance, they will charge extra for that uncertainty, which defeats the original purpose. The middle one is inflation: tariffs and supply chains already keep it sticky above 2%, and a softer dollar imports more of it. The one that matters most is the Fed. A Treasury pressing long yields down while inflation stays sticky forces Warsh to hold policy tighter for longer, and higher-for-longer rates are gravity for every multiple in the market (I wrote about that force in Weekly #91).

So the equity premium compression you enjoy today is borrowed from tomorrow.

Our Positions

Now to our portfolio. The impact is uneven.

Coeur Mining [] is the position this entire episode was built for. The thesis (Weekly #75) was that seven mines producing gold and silver would re-rate as the market started paying for protection against exactly this: a government managing its own borrowing costs while the debt keeps growing. Gold above $4,500 does more for CDE’s cash flow than anything management could announce this quarter, and silver rides the same bid with more leverage.

Having said that, let me steel-man the other side: if Monday’s fiscal plan is credible, gold gives back part of this run and CDE goes with it. I would welcome that. The thesis never needed $4,500 gold, and a government that fixes its budget is better for every other position we own.

The AI names (Micron [], TSMC [], Dell [], and Celestica []) connect to this story through the debt market’s plumbing. Hyperscalers now account for 40% of long-duration investment-grade issuance, and Alphabet and Meta have halved their liquid asset pools to fund datacenters. The AI buildout is being financed in exactly the maturities the Treasury is now supporting, so a ceiling on long yields is a quiet subsidy to our companies’ biggest customers. The risk cuts the same way: 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. The demand chain I laid out in Weekly #87 is intact, this is a financing watch item, no more than that... for now.

The grid and infrastructure names (Powell [], Sterling [], and the hidden infrastructure winner from the Q2 update) get two opposite pushes. Their projects are financed at long rates, so a ceiling helps backlogs convert into contracts. But Monday’s plan is expected to include a hard review of federal spending, and anything paid with government checks now carries a question mark. POWL and STRL live mostly on private datacenter and energy capex; the exposure sits with the civil work, and I will read the plan with that position in mind.

Rayonier Advanced Materials [] is my tariff watch. Part of the fiscal package is the reconstitution of the import duty programs the Supreme Court struck down, and that puts the 50% Section 338 scenario back on the table, the landmine I flagged in Weekly #95. Nothing has happened yet. If the revived program touches RYAM’s lanes, my numbers move down.

The June pick, the boring middleman that prints when markets panic, is quietly the purest winner here: rate volatility, FX swings, and a running gold market are its raw material. Nothing changes for , Stride [], or the July pick; those are domestic margin stories that do not care where the dollar index trades.

Why I Keep Diversifying Away From the US

Last week is one more data point in a view I have held for a while: I am bearish on the US over the long term. The debt is $40T and growing, the interest bill is approaching a trillion dollars a year, and the government just showed it will manage its own borrowing costs rather than shrink them. I still think the US hosts the best companies in the world. I just no longer want all my eggs in one currency and one political system.

So I have been diversifying geographically, gradually. The first tool was ADRs, and it has not been sufficient: the AXIA delisting forced me out of a position I liked because most subscribers could not follow the shares onto the local exchange. The next step is buying directly on local exchanges, as I discussed in Weekly #94.

The poll results made the case for me: half of you have already traded outside the US, and only 18% have no interest in doing so.

I will do it through Interactive Brokers, the best and cheapest platform I know. If you do not have an account and want one, use my referral code 🙂 (and earn up to $1000 of IBKR Stock for free).

Verdict

No trades from me on this. The buyback buys time, and time is all it buys: you cannot repurchase your way out of a deficit; you can only choose who pays, and this round the dollar paid. I am watching three dates: Monday, August 24, when Bessent and Russ Vought present the fiscal consolidation plan (the real event, everything above is prologue); September 9, when the first $4B operation runs; and November 4, when the program ends and we learn whether the Treasury extends it. Whatever those dates bring, they do not change the direction: the debt math above is exactly why I keep moving money out of the US.

Portfolio Update

The portfolio fell 4.35% last week against 1.43% for the S&P 500. We were up 1.23% on Monday while the index was down, then gave it all back through Thursday’s low, and Friday clawed back almost a full point.

Portfolio Return

• Month-to-date: +4.8% vs. the S&P 500’s +2.5%.

• Year-to-date: +41.2% vs. the S&P 500’s +12.1%. That is a gap of 2,913 basis points.

• Since inception: +99.3% vs. the S&P 500’s +33.4%. That’s 3.0x the market.

Contribution by Sector

Technology did most of the damage and industrials the rest, with energy a smaller drag. Basic materials was the only sector that added anything, and that is the gold bid at work through CDE.

Contribution by Position

How to read the heat map? Click here.

• +44 bps CDE (Thesis)

• +8 bps RYAM (Thesis)

• -1 bps LRN (Thesis)

• -2 bps MU (Thesis)

• -9 bps TSM (Thesis)

• -14 bps POWL (Thesis)

• -22 bps DXPE (Thesis)

• -41 bps STRL (Thesis)

• -99 bps DELL (Thesis)

• -114 bps CLS (TSX: CLS) (Thesis)

That’s it for this week.

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

I have a confession to make. One thing that I miss from my corporate strategy days was the ability to have a say in a company’s strategy. True, I could become an activist investor, but it would be a battle against management, and I see lots of headaches in that. Rather, I wanted to own a business and run it as I saw fit. That is when I partnered with my brother, looking for a company to buy. We got all the financing needed (a combination of silent investors, private debt, plus equity from us).

I thought we should focus on the near-shoring theme and started to look at Canadian companies that would benefit from the US plan of bringing back manufacturing. I saw the suppliers for the automotive sector in Canada as a clear winner and an easy roll-up story.

We travelled all over Ontario, saw companies, met management, did due diligence, channel checks, made offers…in many we were outbid, in some we made it to the second round, in a few we were the finalists, in one our offer was accepted.

It was an automation company in Windsor. We were about to close the deal, and then Trump opened his mouth: the 51st state…; the whole sector was in chaos, and we had an exit clause that we used.

We had fun in those two years searching for the ‘target’. But I realized that while I wanted to control my own company and apply my own strategy, the drawbacks were too many, so I gave up. The main drawback was that I would need to scale back on the time I spend on stock investing…which I really didn’t want to do, besides the opportunity cost (time & money) did not make that much sense.

Why am I mentioning this?

Over those two years, my know-how on everything automotive-related increased by 10x, and I already came from a high base. I had seen dozens of suppliers from the inside: their contracts, their cost structures, what a disciplined operator can squeeze out of a neglected plant. So when I stumbled into STRT, I recognized the setup immediately. It was an easy buy.

Table of contents

• TLDR

• How STRT ranks

• The investment, start to finish

• The scorecard

• Valuation: from $125 to $95

• Verdict

Since adding Strattec [], it returned 75.7%. On August 17, I closed the position and sent the trade alert the same day.

After the latest refresh on the company, the valuation decreased from $125 to $95, and the risk-reward profile became negatively skewed, with more downside than upside from here.

So I redeployed the capital into the August pick, a setup where the upside and the downside are asymmetrical.

TLDR

• I closed STRT on August 17 at a 75.7% gain.

• The margin thesis delivered: gross margin went from 12.2% in FY2024 to 16.8% through nine months of FY2026.

• The growth leg never arrived: Q3 FY2026 revenue fell 4.5% y/y and Q4 is guided down 3-4%.

• Fair value goes from $125 to $95 on a lower growth path and a slower margin timeline.

• At my exit price, the downside outweighs the 16% upside while my August pick offers a positivevly skewed risk-reward asymmetry. That is why the capital moved.

How STRT ranks

STRT leaves the portfolio scoring RS 77.

Valuation 77. Cheap on what it just earned, less cheap on what it is about to earn. Every trailing cash-flow multiple sits deep in the green, and the forward rows give part of it back.

Growth 52. The trailing rows all score; the forward rows drag, with consensus holding revenue near flat and EBITDA lower next year. The factor is pricing, exactly the problem that cut my target.

Profitability 79. The cash rows do the lifting. Operations turned a thin-margin book into real cash while gross margin still ranks near the bottom of the consumer discretionary peer set.

The investment, start to finish

In 2024, STRT was a vehicle-access supplier most screens skipped: keys, locks, latches, door handles and power access for GM [], Ford [] and Stellantis [], run from Milwaukee with plants in Mexico.

By the way, you can read my previous articles on GM and STLA, here and here.

Jennifer Slater had been CEO since July 2024. Gross margin had just done 12.2% in FY2024 against 8.6% the year before…

… the balance sheet held net cash…

… and the market cap was $168M.

My thesis was that a focused operator could reprice legacy contracts, cut the cost base and let a starved income statement catch up to its revenue. My fair value was $125.

The thesis had two legs:

The first was leg included: renegotiated customer pricing, restructuring in Milwaukee and Mexico, a portfolio review that stopped investment in the switch product line, and a cost structure sized to the business STRT actually has.

That leg delivered.

Gross margin reached 15.0% in FY2025 and 16.8% through nine months of FY2026; nine-month adjusted EPS is up 46%, adjusted EBITDA is up 23%, and cash grew from $84.6M at the end of FY2025 to $107M in three quarters, with no dividend pulling any of it out.

The second leg was growth.

My model had the top line expanding modestly while margins recovered, on content gains and new program awards. That leg failed. Revenue fell 4.5% y/y in Q3 FY2026, Q4 is guided down 3-4%, and customer EV program cancellations removed $9M of annual revenue. Ford and Hyundai Kia, two of the largest customers, were each down more than 10% in the quarter (per the Q3 FY2026 earnings call).

Q3 2026 earnings were when the two legs stopped covering for each other. The company missed revenue estimates…

… and also EPS estimates.

Gross margin expanded 50bp to 16.5% against a 170bp currency headwind, and adjusted EPS still fell 40% y/y, 21% below consensus, with a $0.16 hit from peso forward contracts alone. Margins improved and earnings still missed.

Mr. Market took the stock down to $62.45 the day after the print, then walked it back to the low $80s as the cash kept arriving.

The scorecard

What I got right

The margin lever was real. Gross margin went 8.6% in FY2023, 12.2% in FY2024, 15.0% in FY2025 and 16.8% through nine months of FY2026, and management now targets 18-20% over the next few years. The core of the thesis, that a disciplined operator could reprice and restructure a starved income statement, played out as I said.

The balance sheet compounded. Cash ended Q3 FY2026 at $107M, a third of today’s market cap.

The refinanced revolving credit facility even dropped the parent guarantee.

Earnings did most of the work rather than multiple expansion. STRT still trades near 6x trailing EBITDA as in 2024.

So the 75.7% came from earnings power and cash accumulation rather than multiple expansion.

What I got wrong

Miss #1. The growth leg. I modelled a company that could expand margins and grow. STRT expanded margins while revenue went backwards: cancelled EV programs, soft volumes on key platforms and a customer book where GM, Ford and Stellantis still drive 64% of sales. New platform awards pay from model year 2029 onwards, and I had that growth priced in years earlier.

Miss #2. The peso and the tariff drag on the timeline. The 18-20% gross margin target assumes the peso at its five-year average of 19.5. The actual peso cost 170bp of margin in Q3 FY2026 alone. This alone doesn’t break the margin thesis, but it pushes the arrival date, and the $125 target was a bet on the arrival date of the higher margins.

Valuation: from $125 to $95

My initial valuation reached $125 with both legs working: a recovering margin and a growing top line. The revision to $95 changes two assumptions and leaves the rest alone.

Growth cut. The revenue path now follows what the company is guiding rather than what I hoped for: FY2026 closes with two down quarters, the cancelled EV programs stay cancelled, and recovery waits on platform awards that start paying in model year 2029. Consensus has next year’s revenue near flat, and the model no longer argues with it.

Margin timeline pushed. The old path had gross margin reaching the 18-20% range quickly enough to compound against a growing revenue base. The new path holds the 16s in the near term and treats 18-20% as a multi-year destination gated by the peso and tariff recoveries.

The distance from my exit to fair value was 16%. Against it stands an auto supplier with two-thirds of revenue concentrated in three OEMs, a currency it does not control and a production cycle it does not set. In an ordinary auto downturn, the drawdown would run well past that: the 31% February-to-May slide happened without any downturn at all. The risk/reward is negatively skewed, more than a dollar of downside for every dollar of upside left.

Verdict

The position is closed at a 75.7% gain. STRT moves to the watchlist, where the Q4 FY2026 print on August 25 and any Mr. Market overreaction would get my attention again.

One thought to keep. Post-mortems on winners are where the process gets tested, because a 75.7% gain will happily hide a broken forecast. Mine had one: I was right about the margins and wrong about the size of the prize, and the investment still worked.

Eleven months ago I sent a trade alert for the September ’25 stock pick, and a week later, the full deep dive. The company was unloved for good reasons: a decade of write-downs, courtroom fights with its own customers, and a stock that had lost most of its value from the 2018 highs. I argued the business underneath had already changed and the market simply hadn’t looked again. It traded at a single-digit multiple of FCF while carrying a record backlog.

Two weeks ago it reported the best quarter in its history. Revenue, operating income and cash flow all set records, guidance went up again, the dividend was raised 50%, and the balance sheet now holds more cash than debt by a wide margin. The shares are up 60.8% since the alert. It already passed my initial target price. The refreshed target price gives us a further 27% upside.

So this update deals with the harder half of investing. Buying an unloved company is uncomfortable but simple; deciding what to do with a winner that got expensive is the difficult portion, but don’t worry…that’s why I am here 🙂.

I test each pillar of the thesis against Q2 numbers, walk through the updated model, and explain whether the stock is still a buy or a hold.

What’s inside:

• TLDR

• How it ranks

• The quarter: records everywhere

• Thesis scorecard after Q2 2026

• Guidance: raised, and still padded

• Valuation: the target moves from $92 to $124

• The risk register after Q2

• Verdict

Read more

Some of you will recall that last December I took my family to Chile, and we only made it back to Toronto in April. Besides avoiding the Canadian winter, we had a long list of things to sort out down there. One of them was my mom’s back surgery.

You might ask why she didn’t have the surgery in Canada. I am covered as a Canadian citizen, my mom isn’t, and there is no private hospital system here to fall back on. So for years I have been paying for a private health plan for her in Chile for exactly this kind of situation, and this was her third back surgery. On top of the private plan I carry a complementary policy for her as well. In a nutshell, on a $55,000 surgery at Chilean prices, I paid the $1,902 deductible and nothing else.

Why am I talking about this and how is it relevant to the August stock pick?

Between Chile, Canada and the years I spent in the US, I have dealt with health care systems that run from public to private to barely there. Health care touches all of us at some point in our lives, so why not our portfolios!

This company reported six weeks ago, beat on every headline metric, raised its full year profit guidance by a quarter of a billion dollars, and the shares fell 12% in a day. Mr. Market looked at the raise, looked at what management left unchanged, did the subtraction, and hated the answer. The stock price fully recovered and is actually higher than pre-earnings.

The argument the sell-side and other investors are having about this company is an argument about one line. Roughly a fifth of every premium dollar this business collects goes somewhere almost nobody writing about it has modelled. It is not claims and it is not overheads. And the perverse part is that the better this company executes its growth strategy, the bigger that payment gets.

That is the idea. Below the paywall I will explain the industry from scratch so you can follow this even if you have never looked at the space, walk through what the company is and how it got here, show you the line nobody models, ask the capital question nobody asks, and then take you through my model, the bear case at its strongest, and where I come out.

Table of Contents

• TLDR

• How the pick ranks

• From a whiteboard in 2012 to three million members

• How this industry actually makes money

• The market really is shrinking

• The line nobody models

• The capital question nobody asks

• Management and capital allocation

• Valuation

• Steel-manning the bear

• What Mr. Market is missing

• Verdict

Read more

I will be sending post-mortems for both positions in the near future. Also, the deep dive of the new position is coming out soon.

Trade alert:

Hello fellow Sharks,

Last week, the portfolio hit an all-time high. YTD, the portfolio is +47.7%, +108.4% since I started this newsletter and +5856% since 2012.

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

Also, I noticed that if I close 2026 in the green, it would be my longest positive streak, 4 years in a row.

Last week, two portfolio companies reported. Both beat on revenue, one beat on EPS, and Mr. Market took both well.

Next week brings no earnings, but two portfolio companies pay dividends.

Next week, I will be sending paid subscribers an update on a company that is already 61% up and has hit my target price. Also, expect the August Pick to come out later in the week.

The Thought Of The Week covers Q2 results for RYAM.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• A record price for the crown jewel, and a date for the review

• Portfolio Update

Thought Of The Week

RYAM Q2 2026: A Record Price For The Crown Jewel, And A Date For The Review

Adjusted EBITDA went from $8M to $40M in one quarter, Cellulose Specialties pricing hit a record $2,193 a tonne, and the new CEO put a Q4 deadline on the strategic review. My target stays at $14.90 and the Buy stands.

The setup

In July, I published an update on RYAM arguing there was a second leg left in the name after the 125% run from my original thesis.

In early August, RYAM reported earnings. Adjusted EBITDA was $40M vs. $8M in Q1 and $28M a year ago. Cellulose Specialties pricing rose for the sixth quarter in a row and hit a record. The new CEO opened by telling the market the strategic review concludes in Q4 2026 and that his arrival “does not alter, delay or narrow the process.”

So the operating story and the catalyst story both moved forward, and the stock price went from $8.90 to $8.42. I wouldn’t read too much into the ‘price action’ as this is a small-cap name and trading on low volume.

In this update, I will grade the five pillars of my original thesis, walk through what the analysts pushed management on in the Q&A, work out what the second half actually has to deliver, and explain why the target is not moving in either direction despite a 50% tariff that lands on Temiscaming this week.

TLDR

• Adjusted EBITDA grew 43% y/y and rose 5x vs Q1, recovering the ground lost in a dreadful Q1. Cellulose Specialties pricing grew 21% y/y and 8% sequentially, the sixth consecutive quarterly increase.

• Of my five thesis pillars, three are confirmed, and two are still evolving. Nothing is challenged, but Pillar #5 on cash generation is the one carrying the most weight.

• The trade wall around the crown jewel got taller. The Brazil tariff on dissolving wood pulp went from 25% to an aggregate 37.5%, Norway picked up 12.5% where it previously had none, and the antidumping cases sit on top and will be finalized later this year.

• The offset is severe, and it arrives on August 19. A 50% Section 338 tariff on Canadian goods threatens Temiscaming’s paperboard, where 75% of volume ships into the US. Full absorption is $72M a year against a segment already losing $10M a quarter.

• Target unchanged at $14.90, Buy maintained. The paperboard tariff is the one thing that could take it down, and it is too unresolved to cut a number on today.

How RYAM ranks

In July RYAM scored 73. Today it scores 58.

That fall is the trough arriving in the trailing window. Growth and Profitability both collapsed after the Q2 print, because the trailing twelve months now carry a fresh $13M impairment on high-yield pulp assets and a first-half net loss of $114M. A screen that looks backwards is going to hate a company at the exact moment its worst numbers roll into the calculation. Sentiment is the one factor that held, and that is the strategic review and the standing bid showing up in the data.

I made the same point in July and it still applies. A pure score would never have surfaced this position, because the value sits in a sum-of-the-parts gap, a rejected takeover bid, and a crown jewel masked by trough consolidated numbers. Only a detailed dig gets you there. What RankedStocks.com did do was power the DCF, the reverse DCF and the Monte Carlo behind this thesis.

The quarter: the crown jewel finally showed up

Net sales grew 11% y/y and 18% sequentially. Adjusted EBITDA went up 5x vs. Q1. The loss from continuing operations was $33M, an improvement from $81M in Q1, and it carried the $13M non-cash impairment. The loss came to $0.49 a share, and the quarter burned $21.2M of free cash against $62.0M a year ago.

RYAM earned $42M and $46M of adjusted EBITDA in Q3 and Q4 of 2025, then fell off a cliff to $8M in Q1. Q2 recovered the ground rather than breaking new ground. What makes it interesting is the composition, because the recovery came with pricing at a record instead of the volume-driven mix that carried the back half of last year.

High Purity Cellulose is the whole story. Segment EBITDA margin went back to 19% from 9% in Q1, and the driver was price plus operating rates plus lower wood and fixed costs.

Specialty volumes were 86,000 tonnes vs. 111,000 a year ago. Multiply price by volume and Cellulose Specialties revenue actually fell y/y, because a 21% price gain does not cover a 23% volume decline. Across the first half, the gap is wider, with specialty revenue down 15% on the same math. The consolidated top line held up because commodity volumes nearly doubled, and commodity tonnes earn a fraction of what specialty tonnes earn.

So the pricing power is proven, and the franchise is real. But RYAM is not yet selling more of the good stuff, it is selling the same good stuff for more money while shipping low-margin filler through the mills to keep operating rates up. That distinction matters for 2027, and I come back to it in the Q&A section.

There is a second wrinkle in that $2,193. It is a blended average across the whole specialty book, and the CFO named three drivers for it on the call: a greater proportion of higher-value grades, customer mix, and the negotiated price increases. Two of those three are mix. Shed 23% of your volume, give up the cheaper specialty grades first, and the average price rises even where no contract was repriced. RYAM does not disclose price by grade, so the split cannot be pinned down from outside, but the like-for-like gain is smaller than the 21% headline, and the volume decline flattering the price line is exactly what RBC was asking about.

Paperboard and High Yield Pulp went the other way.

Volumes rose on both product lines and the segment still lost $10M, worse than the $5M it lost in Q1 and the $2M it lost a year ago. Planned maintenance and market downtime take some of the blame, and paperboard pricing did tick up 3% sequentially on tighter industry operating rates. But this segment has now burned cash for six straight quarters while running at higher volumes, which tells you the problem is price and cost structure rather than utilization. The $13M impairment RYAM booked against high-yield pulp assets in the quarter is management marking that reality to the balance sheet. Look further down the income statement and it is starker. After depreciation and the impairment, Paperboard and High Yield Pulp lost $27M at the operating line in the quarter, against $29M of operating income from High Purity Cellulose. Temiscaming came within $2M of canceling out the crown jewel.

The balance sheet moved the wrong way

Net debt rose from $696M to $718M.

Total liquidity fell to $145M from $160M.

Cash is down to $57M.

The ratio improved even as the absolute number got worse, because covenant EBITDA is rising faster than the debt. Net secured leverage of 4.2x vs. a 4.75x covenant. Gross debt of $812M carries a blended rate near 10.4%, and the senior secured term loan is the expensive piece at SOFR plus 7.5%. $30M is due within a year, no material facility matures before the Canadian term loan in April 2028, and the two big facilities run to October and November 2029. The cost of that debt is the problem rather than the timing of it. Total debt to capital sits at 77%. Insiders hold 10% and institutions 74%, leaving a float of 60.5M shares, which is why the price moves so hard on light volume.

First-half operating cash flow was $37M against $9M a year ago, and adjusted FCF improved by $57M to negative $8M. Strip out the working capital and the picture is less flattering. Inventory came down $41M in six months, and receivables released another $13M. Most of the cash improvement came from the balance sheet rather than from earnings.

Thesis scorecard after Q2 2026

Pillar #1. HPC is a hidden specialty business worth more than the whole company: Confirmed

Original thesis: HPC is a quasi-duopoly specialty franchise with pricing power, mispriced as commodity pulp.

Where it stood in July: Confirmed and strengthening, on the $2,040 first-quarter print.

What happened since: Pricing went to $2,193, the sixth consecutive quarterly increase, on newly negotiated 2026 agreements and a richer product mix. Segment margin recovered to 19%. Management describes specialty supply and demand as tight.

Assessment: The pillar holds. What it has not yet done is convert into revenue growth, because volumes are still falling faster than price is rising. I am comfortable calling this confirmed on the economics and unproven on the volumes, and the 2027 contract round is where that gets settled. Part of that price gain is the mix effect of the same volume decline, which is why I do not treat 21% as a clean read on pricing power.

Pillar #2. New management sells the junk and focuses on the jewel: Confirmed

Original thesis: management would monetize or shut Temiscaming and run RYAM as a pure-play HPC business.

Where it stood in July: Confirmed, with the Temiscaming HPC line permanently closed and reporting collapsed into two segments.

What happened since: The $13M write-down of high-yield pulp assets is the same behavior extended to the next problem line. The CEO stated execution focus is to prioritize products and markets where RYAM has the strongest competitive position, which is corporate language for shrinking to the good part.

Assessment: Confirmed, and the new CEO has not deviated from it in his first quarter.

Pillar #3. The catalyst path is a sale, a break-up, or a buyout: Confirmed and now dated

Original thesis: value would be unlocked by asset sales or an outright buyout, the Tenneco template.

Where it stood in July: Confirmed and accelerating, with American Industrial Partners inside the process under a confidentiality agreement and standstill.

What happened since: The CEO led his first call with the review rather than the quarter, said it is “progressing with urgency and discipline”, said the company is “encouraged by the constructive engagement to date”, and committed to concluding it and communicating a path forward in Q4 2026. On the Q1 call the CFO had said the opposite, that “we have not set a timetable for completion of the review.”

Assessment: A date is not an outcome, but going from no timetable to a named quarter in three months is the most specific this board has ever been, and deadlines are what force bidders to move.

Pillar #4. Downside is limited by asset value: Evolving

Original thesis: the bear case sat close to the then-price, so downside was protected by HPC’s value.

Where it stood in July: Evolving, with the floor shifting from asset value to takeout support.

What happened since: Net debt rose $22M and liquidity fell $15M. The leverage ratio improved to 4.2x on better covenant EBITDA.

Assessment: Still evolving, and still resting on the AIP bid rather than the balance sheet. A buyer put $11-$12 in cash on the table and has parked 5% of the stock. That remains the most durable floor in the story, and it sits 31% to 43% above where the shares trade.

Pillar #5. FCF normalizes as the drag comes off: Evolving

Original thesis: strip out the loss-making segments and the corporate overhead and FCF normalizes to $45M or more.

Where it stood in July: Evolving and back-end loaded, after a first quarter that generated $8M of EBITDA.

What happened since: The overhead part is working. RYAM now guides Corporate and Other adjusted EBITDA to a $45M drag for 2026 against $72M in 2025, a $27M structural improvement. The cash part is not proven. Half-year adjusted free cash flow is still negative, and the improvement came mostly from inventory.

Assessment: This is the pillar that decides whether 2027 looks like my model. Management reiterated positive FCF for the full year, which means the second half has to produce more than $8M of adjusted FCF from earnings rather than from another working capital release.

What the analysts pushed on

Sidoti went straight at the new CEO. Why RYAM, and why now. The CEO separated why he was hired from why he joined, which was a careful answer. He was hired to maximize shareholder value by supporting the review and strengthening the business during it. He joined because of the spec’d-in position in Cellulose Specialties, where RYAM’s grades are written into the customer’s own product specifications, a list of tangible operational improvements he says he has already identified, and the byproduct upside in biomaterials. Thirty-five years running specialty chemicals and advanced materials businesses through transformation and portfolio change is the right CV for a company that is probably going to be sold or broken up.

Sidoti also asked the CFO what the second half implies for full-year FCF and for refinancing. He answered that second-half Cellulose Specialties volumes improve 10% to 15%. He then said the refinancing depends on operating performance, capital market conditions and the outcome of the review, and that the job is “driving our LTM EBITDA back to a level where we can access both public and private markets.” With debt costing 10.4%, a successful refinancing is worth real money to the equity.

RBC asked the best question of the call, and management gave the weakest answer. He asked about churn in the specialty book as RYAM enters the next contract year, and whether customers will go looking for alternative supply after two years of price increases. The CEO answered with relationships, breadth of product range, and the intent to sign longer-term agreements. What he did not do is put a number on retention or volume for 2027. Given specialty volumes are down 23% y/y, that is the open question in the entire thesis, and it stayed open.

RBC also got the tariff exposure out of management. 75% of paperboard volume ships into the US, and the Canadian tariffs have “the potential to materially impact the economics” of the segment. More on that below.

Water Tower Research surfaced the defense angle. He asked about nitrocellulose, and the CEO confirmed they are the sole remaining US supplier of dissolving wood pulp for nitrocellulose applications, feeding US and NATO defense supply chains. He called it “a mission-critical feedstock for defense and energetics applications” with exacting specifications for impurity and consistency. RYAM flagged nitration-grade cellulose as a leadership initiative back in Q1, so the product is not new. The sole-source framing and the NATO supply chain language are. It does not move my numbers, because no volume or margin was disclosed, but a sole-source position in a defense supply chain changes how a strategic buyer values the platform, and it is being said out loud while a strategic review is live.

The analyst also asked what has to happen for paperboard to stop losing money. The answer was commercializing freezer board, oil and grease resistant grades, and rolled softwood high-yield pulp, plus a bit of help from tightening industry utilization.

The strategic review, and why the Q4 date matters

As I mentioned in the July update, RYAM hired Morgan Stanley and Wachtell Lipton in April and put everything on the table. What changed in August is that the company attached a quarter to the finish line and the new CEO spent his opening remarks on it rather than on the numbers.

The CEO’s appointment in June, mid-process, led some holders to wonder whether the board had quietly chosen the standalone path and hired an operator to run it. He answered that directly, and the board’s mandate, as he described it, is to maximize value for shareholders rather than to build a five-year plan.

The four priorities on that slide are ordered, and concluding the review sits first. The fourth priority is the interesting one, because “greater financial flexibility entering 2027, including positioning the company to evaluate potential refinancing alternatives” is what a company says when it wants a credible standalone option to bid against.

One person has been in the room for all of it. Marcus Moeltner has been CFO through three CEOs, the strategic review and the Temiscaming closure, and he is the one who has to deliver the refinancing. With the term loan at SOFR plus 7.5% and the whole stack costing 10.4%, refinancing is the biggest lever management actually controls, whatever the review decides. It is also the one that gets easier the moment a buyer is named.

The trade wall got taller, and a new one went up

Trade policy is now the biggest swing factor in this thesis, and it cuts both ways.

On the crown jewel, the news is good. When I wrote in July, the US Trade Representative had just put a 25% Section 301 tariff on Brazilian imports and removed high-purity dissolving pulp from the exemption list, after testimony tied Brazilian production to illegal deforestation. During the third quarter, USTR finalized the action, and the aggregate tariff on Brazilian dissolving wood pulp is now 37.5%. Norway, which previously faced nothing under Section 301, now carries 12.5%.

Those sit on top of the antidumping and countervailing duty cases RYAM filed with the United Steelworkers. Commerce issued preliminary affirmative dumping determinations in May, Brazil at 7.20% and Norway at 6.54%, with countervailing duties preliminarily affirmative on Brazil. Final determinations are due later this year.

Stack the Section 301 action and the preliminary dumping duty and the landed cost of Brazilian dissolving pulp into the US rises 44.7%, before whatever the countervailing duty adds on top. RYAM is the sole US producer of high-purity dissolving pulp and Bracell is the import alternative. The outcome depends on whether downstream customers can use trade programs and other regulatory mechanisms to get around it. That caveat is a real one, because duty drawback and foreign trade zone treatment can blunt a tariff for a customer who exports the finished product. Even discounted for it, this is a materially better pricing environment for the 2027 contract round than the one I modeled in July.

On Temiscaming, the news is bad, and it lands this week. On July 20, Trump signed three proclamations under Section 338 of the Tariff Act of 1930, imposing an additional 50% ad valorem tariff on specified Canadian products in response to alleged Canadian discrimination in autos, alcohol and dairy. Paperboard is caught in the annexes. The tariffs take effect at 12:01 a.m. on August 19, and USMCA origination does not exempt anything.

Take Q2’s paperboard volume and price, annualize it, and take the 75% that ships into the US, and the exposure is $144M of revenue. A 50% tariff absorbed in full is $72M a year, against a segment that lost $10M last quarter. That is an existence problem for Temiscaming’s paperboard line rather than a margin problem.

Four things stop me from cutting the target on it today. Articles already subject to Section 232 duties are carved out, and specified wood products sit under Section 232, so the scope question for paperboard is genuinely unresolved, which is exactly why the CEO said RYAM is “actively working with the policymakers to assess the final scope.” This is the first time Section 338 has ever been used, and litigation in the Court of International Trade is expected. The statute ties the rate to the level of discrimination, so a negotiated climbdown on autos or provincial alcohol bans could reduce it. And RYAM already sells a quarter of its paperboard outside the US, with management claiming actionable mitigation plans.

This tariff hits the piece of RYAM that management, the activist and the private equity bidder all want gone, and it does not touch High Purity Cellulose. In my July sum-of-the-parts, everything outside HPC carried $205M of operating value, which is $3 a share. If Temiscaming’s paperboard becomes structurally unviable and that value goes to zero, my sum-of-the-parts base goes from $13.28 to $10.25, and the DCF moves less because it runs on the consolidated business. Painful. Not thesis-breaking, because the thesis was never about paperboard.

What the second half has to deliver

That chart is management grading its own homework, and it deserves credit. The curve is the recovery path RYAM published with Q4 2025 results. Both dots sit above it. Two quarters, two prints ahead of their own published bar, from a company Mill Pond Capital publicly criticized in June for rarely meeting guidance. That is the strongest evidence for taking the second-half guide seriously.

Now the arithmetic. H1 produced $48M of adjusted EBITDA. To reach the $160M I carried in my July model, H2 needs $112M.

The specialty volume guide of 10% to 15% improvement gets HPC most of the way. Hold Q2’s $57M pace and add the volume, and HPC delivers $115M-$125M across the two quarters. Paperboard should improve on product qualifications and firmer pricing, so call it a $6M loss across the half against the $15M it lost in the first.

The problem is corporate. Guided at a $45M drag for the full year with $18M spent in the first half, the second half carries $27M. Q2’s corporate line was flattered by FX and that reverses. Put it together and H2 lands nearer $82M-$92M, which puts the full year at $130M-$140M rather than $160M.

With $35M of capex left to spend and $85M of cash interest for the year, positive FCF for 2026 is achievable and it needs the earnings to show up rather than another inventory release.

Valuation: why $14.90 does not move

There is a case for raising the target. Specialty pricing is running 7.5% above the level my July model anchored on, the wall around the US market is far taller than the 25% I wrote about, and $27M of annual corporate cost is coming out of the structure permanently.

The case for cutting it is equally real. My 2026 EBITDA is tracking $20M-$30M light, and there is a 50% tariff arriving on August 19 that was not in the model at all.

Those two lists cancel, and the tariff is too unresolved to price today. The target stays at $14.90 and the Buy stands. If the Section 338 scope is confirmed to cover paperboard and survives the courts, I will cut to something near $12.

The DCF runs off mid-cycle earnings power, and 2026 was always the transition year. My base case calls for 2027 EBITDA near $200M. RYAM printed $222M in 2024 and $177M in 2022, so I am asking for a number the company has already beaten once this decade and in a year when specialty pricing was $1,750 a tonne rather than $2,193.

Now the reverse exercise, which I find more persuasive than the point estimate. At $8.42, with $755M of adjusted net debt and the minority interest, the enterprise value is $1,328M. Against my 2027 mid-cycle that is 6.6x. My $14.90 target puts the enterprise value at $1,761M, or 8.8x the same number. So the entire gap between the price and my target is 2.2x on an EBITDA figure both sides agree on.

Another way to see it. My sum-of-the-parts uses 7.5x for High Purity Cellulose, which is conservative against where specialty pulp assets change hands and below the 10x area Borregaard trades. Apply that generously to the whole enterprise, paperboard included, and today’s price is asking RYAM to reach $177M of sustainable EBITDA and then stop improving forever. Use a blended multiple that reflects the paperboard drag and the required number climbs higher still.

That is close to the bull case priced as a ceiling. It gives you nothing for biomaterials, nothing for the taller tariff wall flowing into 2027 specialty contracts, nothing for refinancing a 10.4% cost of debt, and nothing for the review producing a transaction. Meanwhile a buyer who once owned nearly $200M face of RYAM’s notes, and who now owns the largest global fluff pulp business, offered $11-$12 in cash nine months ago and has been sitting on 5% of the stock ever since. The market price today is below the bottom of that bid, before six quarters of specialty price increases and before the tariff wall went up.

Risk register update

The Canadian tariff is the new number one, and it is three days away. A 50% Section 338 duty on 75% of paperboard volume is $72M a year at full absorption. The scope question is unresolved, the statute has never been used before, and litigation is coming, so this could evaporate. It could also make Temiscaming’s paperboard line unviable inside a quarter. Worth $3 a share to my sum-of-the-parts if it sticks in full.

The leverage is still the thing that can kill it. Gross debt of $812M at 10.4% costs $85M of cash interest against a business that produced $48M of EBITDA in six months. Net secured leverage at 4.2x has room to 4.75x, and that room closes fast if the second half disappoints or if the paperboard tariff lands. My bear DCF prints zero for the equity, and that is not a modelling artifact, it is what $755M of net debt does to a stub if margins collapse and stay collapsed.

Specialty volume is the risk that grew. Down 23% y/y in the quarter and 29% across the first half. Management calls it deliberate value-based pricing and points to tight supply and demand. RBC asked the right question about churn into the 2027 contract round and did not get a numerical answer. If a meaningful slice of that volume has gone to a competitor rather than been traded away for price, the 2027 mid-cycle in my model is too high.

The review can still end with nothing. RYAM has said there is no assurance of a transaction. A Q4 date makes an anticlimax more visible rather than less likely. If the board picks standalone, you own a levered cyclical with a decent franchise and an expensive capital structure, and the AIP floor gets softer.

Environmental liabilities have not moved. $184M accrued with disclosure that up to $84M more is possible. Not in my DCF or my sum-of-the-parts, and any buyer will discount for it.

Faded: the fear that the CEO churn would derail the process. Three CEOs in seven months was a legitimate worry in July. The CEO used his first call to reaffirm the scope and the mandate, and then did what none of his predecessors had managed, which was to name the quarter it ends.

Verdict

Buy maintained, fair value $14.90.

The business recovered its run rate, the tariff wall around its most profitable product got taller, and the board finally attached a deadline to the process that unlocks the value. The stock is 5% lower than when I wrote all that up in July.

Portfolio Update

The portfolio gained 4.81% last week against 0.36% for the S&P 500. Almost all of it arrived on Wednesday, and the index spent the first three days of the week going backwards.

Portfolio Return

• Month-to-date: +9.6% vs. the S&P 500’s +4.0%.

• Year-to-date: +47.7% vs. the S&P 500’s +13.7%. That is a gap of 3,392 basis points.

• Since inception: +108.4% vs. the S&P 500’s +35.4%. That’s 3.1x the market.

Contribution by Sector

Technology and energy led the gains. Between them, they produced almost 4/5 of the week’s gain, and everything else barely moved. Education was the only sector in the red, by a rounding error.

Contribution by Position

• +77 bps (Thesis)

• +64 bps (Thesis)

• +52 bps (Thesis)

• +29 bps (Thesis)

• +20 bps (Thesis)

• +17 bps (Thesis)

• +9 bps (Thesis)

• +2 bps (Thesis)

• +1 bps (Thesis)

• -21 bps (Thesis)

That’s it for this week.

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

The hardest position to hold is the one where the business keeps beating your model and the price keeps disagreeing with you.

A company I own reported last week. Net income doubled, and ROE comfortably cleared the 15% target they had set for themselves. TTM profit was a record. Book value per share grew 32%.

The stock sits 30% below its high and my position is 20% underwater.

The market fixed on one line in the release. Earnings fell 27% against the previous quarter, which had been the best in the company’s history, and that sequential dip got read as the end of the run. The multiple went from 21x forward earnings to under 14x. Over the same stretch, the company earned more in nine months than in any full year it has ever reported.

Two readings are available. Either the last year was a volatility windfall now unwinding, or a compounder is being priced off one soft comparison against its own record quarter. A single quarter doesn’t settle it, but it does show how much the business gives back when conditions calm, and that is the number the thesis turns on.

I rebuilt the model on the new figures and revised the target. The analysis, the valuation and what I’m doing with the position are below.

Table of Contents

• Where this stands against June

• The quarter the market misread

• Thesis scorecard

• Where the revenue actually came from

• The new acquisition: the plumbing is nearly done, the cross-sell is barely started

• Deeper Look Into One Segment

• The float and the rate question

• What got worse

• The model: what I changed and why

• What the price is assuming

• How it screens against its peers

• Verdict

Read more

Hello fellow Sharks,

Last week was a strong one for the portfolio, and we finished ahead of the S&P 500. DXPE was one of the biggest contributors, and it is also the subject of this week’s Thought of the Week. If you want to skip straight to the numbers, jump to the Portfolio Update.

The publication crossed a milestone. We are now a community of more than 2,000 members. 🥳

2,001 of you. That number was under 900 last August. To mark it I am opening 25 spots at 25% off the paid subscription, locked in for as long as you stay. The offer closes when the 25 spots go or on Saturday, August 15, whichever comes first.

Get 25% off forever

Last week I asked whether you have access to non-US stock exchanges. Half of you have already traded outside the US, and only 18% have no interest in doing so.

So I will start covering international names too. The August pick stays US-listed. I think I have found it, or at least narrowed it down to three candidates.

For the 27% that want access to non-US exchanges and are interested in Interactive Brokers, use my code and I will get a referral from IBKR 🙂.

Last week was also busy for earnings. 12 companies on my watchlist reported, ten beat on revenue and nine beat on EPS.

In case you missed it, I covered the STRL earnings on August 5th.

STRL printed the best quarter in its history, beat on both lines, raised full-year guidance for the second time this year, and the stock fell anyway. Mr. Market fixed on the E-Infrastructure operating margin dropping to 24.1% from 28.3% and read decay, when it is mix.

The acquired electrical business earns 11.4% compared to the upper 20s margin for site development. Every component margin improved and the consolidated adjusted EBITDA margin expanded 150bp, so my model goes to $1,030 against a $400 bear, risk reward of 1 to 3.5, and I upgraded STRL from HOLD to BUY.

This week’s Thought of the Week covers DXPE’s Q2 results.

This week I will keep working on the August pick and publish my view on the earnings results for a portfolio company. The company beat on both the top and bottom line, and the stock fell 8% on the print.

This coming week, three companies will be reporting earnings.

Enjoy the read, and have a great Sunday.

~George

Thought Of The Week

DXP Enterprises (DXPE) Q2 2026: Record Margins, Now A Trim

Table of contents

• TLDR

• How DXPE ranks

• The quarter that broke the ceiling

• Thesis scorecard after Q2 2026

• Valuation: from $210 to $225

• Steel-manning the bear case

• Verdict

Since adding DXPE to the portfolio, it is up 105.6%.

Last November I called the 20% post-earnings selloff an overreaction and told you the cost problems looked temporary. Four months later the Q4 print backed that up, and in Weekly #71 I raised fair value from $156 to $210.

I left one thread hanging in that piece. The energy-related backlog inside Innovative Pumping Solutions had fallen for two consecutive quarters, and I wrote that the next reading would be the data point to watch.

That thread is now tied off. Energy backlog rose in Q1 and rose again in Q2, up 7.3% sequentially. Strip out the large engineered projects DXPE has been converting into revenue and backlog sits 10% above where it ended Q1. The bucket refilled.

So the operating story is settled, and it is better than I modeled. Q2 was the first quarter in DXPE’s history above a 12% adjusted EBITDA margin, on the largest revenue base the company has ever reported.

Being right about a business and continuing to get paid for it are two different things. DXPE has doubled from my entry and is now 4.2% of the portfolio. My updated model says the shares are worth $225.

TLDR

• Revenue grew 15.6% y/y with organic growth of 11.1%, beating consensus by 6.2%. Diluted EPS grew 23% and beat by 10.7%. Adjusted EBITDA grew 22.8% and the margin reached 12.2%, a level DXPE has never printed before.

• Innovative Pumping Solutions grew 52.6% y/y and is now the profit story. DXP Water alone nearly doubled and now runs at close to 70% of the segment. Water and wastewater has stopped being a diversification talking point and started being the earnings engine.

• The energy backlog question I left open in March is answered. Two quarters of sequential growth, and management is converting large engineered projects into revenue while still adding bookings.

• I am raising fair value from $210 to $225 and keeping the rating at HOLD. The earnings base went up in all three segments. Offsetting that, I lifted the tax rate in the model from 21% to the 26% DXPE actually pays.

• The shares already discount a good outcome. To justify today’s price on my own framework, IPS has to grow at just under 3.5% in perpetuity rather than the 4.5% I carry. That is a narrow gap to argue over.

• DXPE joins my trim list. The upside and the downside are now the same size.

How DXPE ranks

DXPE scores 70 on RankedStocks, which puts it inside the top third of US-listed names and of its industrial peer group.

Sentiment 95. It reflects a share price that has run hard and a quant screen that likes momentum.

Profitability 72. Capital intensity is close to nothing, asset turnover is high against its industrial peer group, and returns on capital sit well above the cost of the capital funding them. DXPE earns its returns from working capital discipline and pricing, rather than from a plant.

Valuation 24. The screen is looking at two different companies. Trailing price to book and EV/IC score in the bottom quartile and PEG sits near the floor, while forward EV/EBIT and forward EV/EBITDA both score in the upper half. Trailing earnings still carry a Q1 that was DXPE’s weakest quarter in a year. The further out the screen looks, the better DXPE gets.

Outlook 32. The forward revenue line inside the screen sits below 2%. DXPE just grew organic sales 11.1% and total sales 15.6%, and it has beaten the revenue estimate in two thirds of its reported quarters.

Against the peer set, DXPE screens with the highest sentiment score and one of the lowest valuation scores. That is what a stock looks like after it doubles.

The quarter that broke the ceiling

Revenue grew 15.6% y/y and beat consensus by 6.2%. Diluted EPS beat by 10.7%. The two came from opposite ends of the income statement: volume at the top, operating leverage in the middle.

The margin ceiling finally broke. For eight straight quarters DXPE ran adjusted EBITDA margin inside a one-point band around 11%, and I had come to treat 11% as the structural number. Q2 cleared 12% for the first time.

The CFO was careful, saying he would not promise a repeat while adding that the business can get to 12% on a sustainable basis as mix shifts. I believe the second half of that sentence more than the first, because the mix shift causing it is not reversible in any short timeframe.

Diluted EPS also hit a new high.

Operating leverage is now measurable rather than promised. SG&A rose in absolute dollars and fell as a share of sales. That combination is the entire bull case for a distributor of this size, and it is what I was waiting on after the Q3 2025 cost spike. Adjusted EBITDA grew 22.8% on 15.6% revenue growth, which the CFO framed as 1.5x operating leverage. Operating income did much the same, growing 20.7%. Two years ago DXPE grew costs faster than sales for three quarters running. It no longer does.

IPS is no longer the small high-margin segment. Its share of segment profit now runs well ahead of its share of revenue, and it carries the highest margin of the three. Service Centers remains the larger business and the steadier one, and it did its job with growth across California, the Gulf Coast, the Southeast, North Texas, South Central and the South Rockies. But the incremental dollar of DXPE profit now comes disproportionately from pumps rather than from parts on a shelf.

The organic number is the one to watch, and it held up. Acquisitions contributed $49.8M of the revenue. Organic sales still grew 11.1%, and organic sales per business day grew at the same rate. Inside IPS, organic growth ran at 13.3% while the acquired businesses were adding revenue on top. DXPE is buying growth and generating it at the same time.

Cash conversion is the quietly transformed part of this business. H1 2026 FCF of $56M compares with negative $8.6M in H1 2025. Over the last four quarters DXPE has produced $118.7M of FCF and averaged $29M a quarter while still growing.

Two things drove it: profitability, and a capex line that fell back to normal after last year’s spending on software, facilities and the tooling DXPE uses to make its own private-label pumps. The CFO said maintenance capex is minimal, and the numbers support him.

Capital allocation stayed on script. Four acquisitions closed in H1 for $135.6M, three of them in water, and Mequipco closed on August 1 to give DXPE a Western Canada beachhead for the water platform. The ABL was upsized to $225M and extended to July 2031, and S&P lifted the issuer and first-lien ratings to B+ from B with a stable outlook on July 20. Secured leverage fell to 2.3x from 2.6x at the end of Q1, comfortably inside DXPE’s net leverage target.

Thesis scorecard after Q2 2026

Pillar #1. The acquisition engine compounds without straining the balance sheet: Confirmed

Original thesis: DXPE has been buying small, accretive, culturally similar businesses for close to four decades and can keep doing it without a step change in risk.

What happened since last update: Four deals in H1 2026 for $135.6M, and Mequipco on August 1 funded with cash and DXPE stock. Secured leverage fell over the period. The credit rating went up. Total liquidity stands at $374.5M.

Assessment: The engine is running faster than at any point I have covered the company, and it is doing so while the lenders and the rating agency get more comfortable rather than less. The risk in a serial acquirer is that the pace outruns the integration capacity, and I see no evidence of that yet. The number I would want to see break before I worried is organic growth, and organic growth accelerated.

Pillar #2. Water turns DXPE from an oil and gas proxy into an infrastructure business: Confirmed and strengthening

Original thesis: DXPE’s pump expertise transfers to municipal water and wastewater, a market with long-cycle demand driven by regulation and infrastructure spending rather than by the oil price.

What happened since last update: DXP Water booked $97.3M in Q2 and $175.5M in H1, up 85.6% y/y, and posted its fifteenth consecutive quarter of sequential sales growth. Water moved from 66% of IPS sales in Q1 to close to 70% in Q2, up from 46% for full-year 2024.

Assessment: In February 2025 I described water as one of three sector opportunities alongside oil and gas and food and beverage. It is now the primary driver of the company’s fastest-growing and highest-margin segment, and it is the reason the EBITDA ceiling broke.

Pillar #3. Scale converts into operating leverage: Confirmed

Original thesis: As acquisitions scale and SG&A normalizes, DXPE’s operating margin should expand faster than revenue.

What happened since last update: SG&A fell to 22.1% of sales from 22.4%. Adjusted EBITDA grew 22.8% against 15.6% revenue growth. ROIC has recovered from its Q3 2025 trough.

Assessment: In November 2025 I set a condition: if SG&A kept rising faster than sales for more than a couple of quarters, I would revisit the assumptions. It did rise faster in Q1, on seasonal payroll and insurance costs plus a handful of one-off legal, healthcare and fleet items. Q2 reversed it, and the reversal arrived with the best margin in the company’s history. Against that, ROIC is still below its Q4 2024 peak, because DXPE keeps adding invested capital through acquisitions faster than EBITDA.

Pillar #4. Supply Chain Services is a manageable drag rather than a structural break: Evolving

Original thesis: SCS is a small, low-margin, steady contributor whose weakness would not matter much.

What happened since last update: Sales grew 0.6% y/y after 2.7% in Q1, with new customer onboarding offset by lower activity at existing sites. Segment operating income improved on essentially flat sales, lifting the margin close to 10%.

Assessment: The margin improvement is genuine and the segment is growing again, which is progress. But two quarters of sub-3% growth after three years of drift falls short of a turn, and management has now told me for four consecutive updates that new customers will fix it. SCS is the smallest of the three segments on both revenue and profit, so being wrong here costs little. I keep it at Evolving rather than Confirmed, and I still carry 1.0% terminal growth for it.

Pillar #5. The market underpays for DXPE’s earnings power: Challenged

Original thesis: A misclassified oil and gas distributor trading at a discount to what its segments are individually worth.

What happened since last update: The share price has more than doubled from my cost basis and gained 48% between the original thesis and March 2026 alone. Sentiment now scores 95 on RankedStocks and valuation scores 24.

Assessment: This is the pillar that has broken, and it broke because it worked. The misclassification argument I made in February 2025 is gone: Mr. Market has repriced DXPE as an infrastructure compounder rather than an energy distributor, and it has done so with enthusiasm. The gap between price and my fair value is now 17%, against a bear case of similar size.

Valuation: from $210 to $225

I value DXPE the same way I have since the original thesis, by valuing each segment on its own economics and adding them up. Three inputs moved.

The earnings base went up in every segment. Q2 forced my 2026 forecasts higher across the board. Service Centers goes to 6.5% from 4.5%, which still implies a second half slower than the 8.3% Q2 delivered. IPS goes to 38% from 13.5%, which implies a second half at 32% and deliberately sits below the 45.4% H1 pace, because the comparatives get harder from here. Supply Chain Services goes to 1.5% for 2026 from 1.0%, while its terminal rate stays at 1.0%. On segment operating margins I took Service Centers to 14.6%, IPS to 18.8% and Supply Chain Services to 9.0%, and all three fade back towards today’s levels by the end of the forecast. The IPS figure sits a shade above what the segment earned in Q2, because water keeps taking share inside the segment and water carries the better margin of the two halves. Segment EBITDA for 2026 lands at $344.3M against $317.7M before.

The tax rate went up. The model carried 21%. The effective rate was 25.6% in FY2025 and 26.6% in H1 2026, and the CFO named a higher effective rate as one of the two things holding EPS growth back this quarter. Moving to 26% compresses every segment multiple and costs $18 per share.

Cash and debt are marked to June 30. DXPE put $112.9M of cash into acquisitions over the half against total consideration of $135.6M, with the balance in stock. Net debt rose by $73M across the six months, which is what buying four businesses looks like.

Net of all three, fair value is $225 against $210 in March. That is 17% above the current share price.

What the price already assumes. Run the model backwards. Hold everything else where it sits and ask what terminal growth rate for IPS makes the sum of parts equal today’s share price. The answer is just under 3.5%. My model carries 4.5%. So Mr. Market and I are not arguing about whether water is a good business, whether the acquisitions work, or whether the margins are real. We are arguing about one percentage point on a perpetuity, applied to the segment that carries a quarter of the revenue.

And the edge cuts both ways. Take IPS terminal growth to 4.0%, which is defensible given how much of the water growth was bought rather than grown, and fair value drops to $207. Take it to 3.0% and assume the second half fades back to the old run rate, and I get $159.

Steel-manning the bear case

First, the growth is bought and the price of buying it is rising. DXPE put $135.6M into four businesses in H1, and 92% of the capital it deployed this year went to acquisitions. A roll-up funded at 2.3x leverage, in a market where water assets have become the thing industrial distributors compete for, will eventually pay more for less. DXPE has bought well for a long time. Buying into a crowded market is how good acquirers overpay. The tell would be organic growth slowing while acquisition spend rises, and right now the opposite is happening.

Second, IPS revenue is lumpy in a way the multiple does not reflect. Management has said repeatedly that large engineered projects are being converted into revenue, and that excluding them backlog is up 10% from Q1. Read that in reverse and part of Q2’s record revenue was the drawdown of a backlog built in earlier periods. Long-cycle project businesses do not deliver smooth quarters, and a 22x multiple on IPS assumes something close to smooth. Consensus already has the next quarter’s revenue landing below Q2.

Third, the tariff risk I flagged in February 2025 has still not been tested. DXPE imports pumps, valves and bearings. Management describes tariffs, inflation and interest rates as background volatility rather than a live problem, and gross margin has held up. But a distributor’s defense against input cost inflation is pass-through, and pass-through works until a customer stops accepting it.

Fourth, Supply Chain Services could still be a slow leak. Three years of drift, and a Q2 improvement that came from margin rather than volume. If SCS is structurally shrinking rather than cyclically flat, DXPE loses the steadiest cash contributor it has, and the mix becomes more project-driven at exactly the point the multiple assumes stability.

The overhang I keep coming back to is a valuation one rather than an operational one. The same quarter that proves the business also removes the discount that made it an investment. DXPE has done nothing wrong. The reward for it being right is that the odds are now even.

Verdict

HOLD, fair value $225.

DXPE moves onto my trim list today. It keeps its place in the portfolio and it keeps the HOLD. What changes is where it ranks against everything else I could own. The risk and the reward are the same size now, and the upside that is left has stopped being attractive enough to defend a 4.2% weight against a fresh idea.

The thing I keep turning over is that DXPE has been a better business every single quarter I have owned it, and a worse investment with each one. Those two facts sit together comfortably, because compounding and repricing pull against each other once the discount closes. The hardest positions to manage are the ones that go right, quietly, until one day the only edge left is an argument about a decimal point in a perpetuity.

Portfolio Update

The portfolio beat the S&P 500 by 98bps last week. The gap opened on Tuesday, closed on Thursday when the portfolio briefly gave up the lead, and reopened on Friday.

Portfolio Return

• Month-to-date: +4.6% vs. the S&P 500’s +3.6%.

• Year-to-date: +40.9% vs. the S&P 500’s +13.3%. That is a gap of 2,757 basis points.

• Since inception: +98.8% vs. the S&P 500’s +34.9%. That’s 2.8x the market.

Contribution by Sector

Technology and industrials produced nearly all of the week’s gain, with basic materials adding the rest. Energy was the only meaningful drag, and financials the only other sector in the red.

Contribution by Position

How to read the heat map? Click here.

• +107 bps DELL 3.90%↑ (Thesis)

• +75 bps DXPE 2.42%↑ (Thesis)

• +52 bps CDE 0.74%↑ (Thesis)

• +40 bps MU 2.83%↑ (Thesis)

• +23 bps TSM 1.99%↑ (Thesis)

• +3 bps POWL 1.10%↑ (Thesis)

• +2 bps LRN 0.14%↑ (Thesis)

• +2 bps RYAM -3.71%↓ (Thesis)

• -36 bps STRL 4.60%↑ (Thesis)

• -37 bps CLS 3.09%↑ (TSX: CLS) (Thesis)

That’s it for this week.

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

Since I added Sterling [] to the portfolio at $76.68, it is up 621%. It was 8.9% of the portfolio when I last wrote about it in May. It is 4.0% today, and I have not sold a share.

In my Q1 2026 update I moved STRL to HOLD at $851.35. Every pillar of the thesis was intact and the business was compounding faster than I had modelled, but the DCF said $1,010 against a bear at $700. Upside and downside were the same size. The asymmetry was spent.

The market spent the next twelve weeks agreeing. STRL trades at $552, 35% below when the last update was written.

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Then yesterday, STRL reported the best quarter in its history, beat consensus revenue by $145.2M, beat consensus EPS by $0.62, and raised full-year guidance for the second time this year. The stock fell again.

When that happens, either the market knows something I don’t, or it has fixed on one number. This time it is the second one, and the CEO named the number himself on the call.

Table of contents

• TLDR

• How does STRL rank?

• Thesis scorecard after Q2 2026

• The Q2 2026 print

• The margin the market misread

• Guidance: the second raise of the year

• Valuation update: from $1,010 to $1,030

• Risk register

• Performance versus peers since the Q1 update

• Verdict

TLDR

• The quarter. Revenue grew 90% y/y with organic growth near 50%, beating consensus. Adjusted diluted EPS grew 116% and beat by 12%. Adjusted EBITDA grew 104% and the adjusted EBITDA margin expanded 150bp to 22.0%.

• The guidance. FY2026 revenue guidance moved higher for all of revenue, EPS and EBITDA. At the midpoints that is a +64%/+84%/+79% growth for revenues, EPS and EBITDA, respectively.

• Why the stock fell. E-Infrastructure adjusted operating margin printed 24.1% (vs. 28.3% a year ago) and Mr. Market read decay. It is mix. Site development ran in the upper 20s, the acquired electrical business ran 11.4%, and the electrical business grew 140%. Sequentially the E-Infrastructure margin went up, from 23.5% in Q1 to 24.1%.

• The model. Target moves from $1,010 to $1,030. A lower blended E-Infrastructure margin and a proper charge for the JV minority interest take value out; the raised revenue guidance puts more back. Bear case $400.

• The setup. STRL trades at 14.9x my 2027 adjusted EBITDA, the multiple I wrote up as the bear case in May. Upside +91%, downside -26%, risk reward 1 to 3.5. Upgrading from HOLD to BUY.

How does STRL rank?

STRL comes out at 78 overall, the 86th percentile globally and the 88th percentile in the US.

Two of those five moved hard since May. Sentiment went from 99 to 74 and Outlook from 100 to 77. Neither is an operating signal, they fell because the share price fell.

Valuation 16. The drag comes from EV/IC at 15.4x, P/B at 12.2x, trailing EV/EBITDA at 22.9x and trailing EV/Sales at 4.8x. Every one of those denominators belongs to a company half the size of the one reporting today. Move to the forward column and the picture inverts: forward EV/EBITDA of 13.2x, forward EV/EBIT of 14.8x, and the PEG ratio of 0.7x. A business growing revenue 64% this year does not stay expensive on trailing numbers for long.

Growth 83. Revenue and EBIT growth score well, but those are trailing figures that still carry 2025. The two metrics dragging the composite are working capital growth and operating cash flow growth. Both are what it looks like when a contractor doubles revenue: receivables and contract assets went from $602.3M at year end to $927.0M at 30 June to fund the work. Operating cash flow for the first half was $328.0M against $170.3M a year ago, so the cash is arriving.

Profitability 93. The return metrics are the ones that tell you whether reinvestment creates value here, and they are close to the top of the peer set.

Thesis scorecard after Q2 2026

Five pillars, graded the same way as last quarter. Four were already confirmed. The one that was evolving in May is the one the market has now fixed for me.

Pillar #1. AI and hyperscaler capex supercycle: Confirmed and strengthening

Original thesis: STRL is the picks-and-shovels owner of a multi-year data centre buildout financed by the strongest balance sheets in the world, and the capital cycle runs for years rather than quarters.

Evolution: at Q4 2025 mission-critical work was 84% of E-Infrastructure backlog. At Q1 2026 it passed 90% and STRL won the first phase of a large semiconductor fabrication campus.

What happened since last update: mission-critical projects reached 92% of E-Infrastructure signed backlog. The total pool of visible work exceeded $7B, an increase of more than $2.5B since year end. Inside E-Infrastructure alone that pool is above $6B, up $2.7B in six months. STRL was awarded the initial scope on an EV plant outside Atlanta, and the Northeast semiconductor project is running ahead of schedule.

Assessment: the more useful disclosure was about what is not in those numbers. Management described customers buying adjacent land next to sites STRL is already working, and projects originally scoped at three years now being planned internally at five to twelve. None of that sits in backlog or in future phase work, because STRL only counts the acreage the customer has formally defined.Pillar stronger than at Q1.

Pillar #2. Mix shift to E-Infrastructure: Confirmed and accelerating

Original thesis: selling out of low-bid highway work and redeploying crews into E-Infrastructure compounds consolidated margins, because E-Infrastructure earns twice Transportation’s margin.

Evolution: E-Infrastructure was 59% of FY2025 revenue and 72% in Q1 2026.

What happened since last update: E-Infrastructure reached 78% of revenue against 51% in the year-ago quarter, on revenue growth of 192%. Excluding CEC Facilities Group and Stone Ridge, acquired this quarter, the segment still grew 111%. Transportation revenue fell 20% by design, and the Rocky Mountain operation generated more E-Infrastructure revenue than Transportation revenue for the first time. Texas low-bid heavy highway work is nearly wound down.

Assessment: the mix shift is now pulling in two directions at once, and this is the part Mr. Market got confused about. Inside Transportation, shrinking the segment raised its adjusted operating margin by more than 500bp to 19.5%, because what remains is the negotiated work rather than the low-bid work. Inside E-Infrastructure, growth is coming disproportionately from electrical services, which earns less per dollar than site development. Net of both, the consolidated adjusted EBITDA margin expanded 150bp to 22.0%. The mix shift is still working. It has simply become harder to read off a single segment line. Pillar stronger than at Q1.

Pillar #3. CEC cross-sell unlocks the integrated bid: Confirmed and strengthening

Original thesis: owning CEC lets STRL bid site development and mission-critical electrical as one package, displacing two subcontractor bids and moving the company up the value chain on the same acre of dirt.

Evolution: at Q1 2026 there were two campuses running integrated site and electrical scopes, and CEC had added $1.2B to combined backlog. I graded the pillar Confirmed and said the next thing to watch was what share of new wins came in integrated.

What happened since last update: CEC revenue grew 140% against its pre-acquisition second quarter, with margins up both y/y and sequentially. It added $1.7B to its combined backlog since year end and is now winning the second buildings on campuses where it delivered the first. Integrated projects went from two to three or four. Management had planned a year to fill CEC’s capacity and filled it in 90 days.

Assessment: the answer to my Q1 question is that integrated wins are not being limited by customer appetite. They are being limited by electricians. The CEO said that if STRL had a thousand or two thousand more electricians it would be growing the business faster, and it would add two or three more CECs in Texas today if the right targets appeared. A demand constraint would challenge this pillar. A supply constraint on a service customers are asking for confirms it, and it explains why the revolver went to $1.5B a month after quarter end. Pillar upgraded from Confirmed.

Pillar #4. Backlog visibility deepens and diversifies: Confirmed and strengthening

Original thesis: contracted backlog growing faster than revenue burn de-risks the outer years of the model, which is what allows a construction business to be valued as a compounder rather than a cyclical.

Evolution: signed backlog was $3.01B at year end 2025 and $3.80B at Q1 2026, with combined backlog of $5.15B.

What happened since last update: signed backlog reached $4.33B, up 116% y/y and up 50% organically. Combined backlog reached $5.62B, up 150% y/y and 36% organically. Book-to-burn was 1.4x on signed backlog and 1.3x on combined backlog excluding Stone Ridge, achieved in a quarter when revenue burn itself grew 90%.

E-Infrastructure signed backlog rose 80% in six months while Transportation’s shrank, which is the mix shift arriving in the order book rather than just in the income statement.

Assessment: management also pre-announced that third quarter awards could be lumpy and that backlog could decline sequentially on timing, with the catch-up landing in Q4 and early 2027. Telling the market about a soft print before it happens is the opposite of the behaviour that should worry a shareholder, and it is consistent with a company that has now guided low and beaten three quarters running. If Q4 does not deliver the catch-up, that is a different conversation. Pillar stronger than at Q1.

Pillar #5. Underpriced compounder: Confirmed

Original thesis: the December 2025 deep dive ran a DCF to $455 against a $334 share price on the argument that the mix shift and the backlog would re-rate the business.

Evolution: $455 was crossed in February. I raised the target to $600 at Q4 2025 with the stock at $425, a bear at $330 and risk reward of 1 to 1.8. That target was crossed in March. At Q1 the model stepped to $1,010 with the stock at $851, a bear at $700, and risk reward of 1 to 1.05. That is when the pillar went from Confirmed to Evolving and the rating went to HOLD.

What happened since last update: the price fell 40% and my target rose 2%.

Assessment: at $540 against a $1,030 target and a $400 bear, risk reward is 1 to 3.5. That is a better setup than the 1 to 1.8 I had at Q4 2025, when the stock was $425 and I was buying. On RankedStocks’ data STRL trades on 38.4x trailing earnings and 22.9x trailing EV/EBITDA, which sound expensive until you put them against 27.0x this year’s adjusted EPS guidance midpoint and 18.1x this year’s adjusted EBITDA guidance midpoint. On my 2027 numbers it is 14.9x. In May the upside and the downside were the same size, so I rated it HOLD. A 40% fall has restored the asymmetry. I am moving STRL from HOLD to BUY. Pillar back to Confirmed.

The Q2 2026 print

Adjusted diluted EPS of $5.80 beat consensus by $0.62, up 116% y/y. Revenue of $1,168.2M beat by $145.2M, up 90.1% y/y, of which acquisitions contributed $250.8M and organic growth was near 50%. On a GAAP basis diluted EPS was $5.00 and net income was $155.8M, up 116% and 120%.

Q2 2026 versus Q2 2025

The beat was in the same place it has been all year. STRL beat the consensus revenue and EPS estimates again, which is 6 and 14 quarters in a row, respectively.

Cash conversion held while the balance sheet absorbed the growth. Operating cash flow was $328M in the first half vs. $170.3M a year ago, funding $69.6M of capex and $140M of acquisitions. Cash ended the half at $464.5M against total debt of $283.9M, so STRL carries $181M of net cash, and on 2 July it extended and upsized its revolver to $1.5B out to July 2031 and repaid the term loan.

A $1.5B revolver on a business that already has net cash and $328M of half-year operating cash flow is a statement about how much capacity STRL thinks it needs to buy.

The margin the market misread

E-Infrastructure adjusted operating margin was 24.1% in the quarter against 28.3% in the year-ago quarter. That is the number that took the stock down.

STRL bought CEC in the second half of 2025. The 28.3% margin from Q2 2025 is a pure site development margin, because there was almost no electrical revenue in it. The 24.1% margin from Q2 2026 is a blend of a site development business that ran in the upper 20s and an electrical business that ran 11.4%. Acquisitions contributed $250.8M of the segment’s $905M of revenue. Weight those two margins by those revenues and you land within a rounding error of the reported blend. The entire y/y decline is the arithmetic of adding a lower-margin service line that grew 140%.

Two facts make the point harder to argue with. First, every component improved: site development margins expanded both y/y and sequentially, and CEC’s margins improved both y/y and sequentially. Second, the sequential segment margin went up, from 23.5% in Q1 to 24.1% in Q2, in a quarter where the electrical business grew faster than the site business. A deteriorating business does not do that.

And the consolidated number, which is the one that reaches a shareholder, expanded 150bp to 22.0%.

Here is the part that is a change to the thesis, and Mr. Market skipped it. Electrical services earned 11.4% in the quarter against site development in the upper 20s, and STRL expects electrical to keep growing faster. Management guides 300 to 500bp of CEC margin improvement over 12 to 18 months from exiting low-margin legacy end markets and from larger job sizes, and the CEO set an ambition of taking electrical from the 10% to 12% the sector earns toward 20% over three to five years. That ambition is stated on an EBITDA basis; the 11.4% above is an adjusted operating margin. He was equally clear that electrical will never reach site development’s peak margins.

So the blended E-Infrastructure margin is permanently lower than the number I was modelling, and it will keep looking soft in any quarter where the electrical business outgrows the site business. That is worth less per dollar of revenue, and I have taken it out of the model. Decay would look different. A business that has to keep explaining why a growing segment looks dilutive sits in a better place than one explaining why a shrinking segment looks accretive.

Share Beating The Tide: Stock Picks That Outperform

Guidance: the second raise of the year

STRL has raised 2026 guidance at both prints since the year began. The May raise took revenue to $3.70B-$3.80B. This one takes it to $4.00B-$4.15B.

One line in that table cuts the other way. Adjusted EBITDA guidance went up $46M in dollars while the implied adjusted EBITDA margin went down, from 22.9% at the midpoint in May to 22.2% now. That is the same mix effect showing up at the consolidated level. STRL is buying revenue growth with margin percentage, and on a business earning a 36% return on invested capital that is the correct trade, but it is a trade rather than a free lunch.

The capex raise is the most informative change in the guide. A $30M increase to $130M-$140M, on a business that spent $77.3M in all of 2025, is not maintenance. Management framed it as expanding and upsizing the fleet and building out electrical prefabrication capacity, and paired it with the acquisition commentary. STRL is spending to be able to say yes to work it can already see.

Valuation update: from $1,010 to $1,030

The target rises 2%. Three assumption changes did the work and all three come straight out of the quarter.

The E-Infrastructure margin costs $100 per share. The Q1 build held the segment at a 28.5% EBITDA margin flat to 2037. That is a pure site development margin and it is no longer what this segment is. The new build starts at 25.1% in 2026, which is the quarter’s reported segment operating margin plus segment depreciation, rises to 25.8% in 2027 as CEC’s guided improvement lands, and settles at 26.5% in the terminal year. That terminal number assumes electrical services reach the mid to high teens and take 40% of segment revenue against a quarter today. It credits part of what management is promising rather than all of it. If CEC reaches the 20% the CEO is aiming at, I am too low.

The revenue raise is the largest single item. 2026 goes from $3,747M to $4,000M, the bottom of the $4.00B-$4.15B guide, and 2027 from $4,700M to $4,755M. E-Infrastructure grows 108.6% this year against the 80% I had modelled, in line with management’s ‘over 100%’, then 25% in 2027 against the 35% I had. Sitting at the low end of the guide rather than the midpoint is the concession to Q3 award timing, which management has already flagged as lumpy.

Charging the JV minority interest costs $21 per share. The corporate line now carries the $40M of JV non-controlling interest expense guided for this year that the segment build was ignoring. Segment operating income is reported before minority interests, so the old model was crediting STRL with earnings it does not own. That item was $19.6M in 2025, and it grows with the joint ventures.

Transportation gets smaller and much better, and the two almost exactly cancel. Revenue growth goes from +10% to -10% in 2026, at the bottom of the guided decline, while the segment EBITDA margin goes from 13.0% to 17.0%. Cutting 10% off a segment’s revenue and being paid 400bp of margin for it is the entire argument for shrinking it.

The capex raise costs $2 and the lower Building margin another $1. It is the change that sounds most dramatic and moves the value least, because the extra spending buys fleet and prefabrication capacity for work that is already contracted.

WACC is unchanged at 6.90%, built from a 1.12 unlevered construction beta, a 4.50% long-term debt rate and a 45% optimal debt-to-capital weighting. Eventually I believe management will optimize the capital structure, but I think it is prudent of them to run a net cash position at the moment. Terminal NOPAT growth stays at 2.5%. Nothing in this quarter changed the risk profile of the business. The input I am least comfortable with is that 45% debt weighting, on a company that runs net cash and whose modelled debt-to-capital falls from 18% this year toward zero. Weighting it closer to the actual balance sheet raises the WACC and lowers the target.

The terminal value is 75% of enterprise value, which is what a long-duration compounder looks like inside a DCF and is the single biggest sensitivity in the model. And the exit multiple sitting inside that terminal value is 14.5x EV/EBITDA, which is a sober number for a business of this quality. The target looks expensive against near-term multiples because the model is paying for twelve years of compounding, not because it assumes a rich exit.

The bear case moves from $700 to $400. The May bear did not need a hyperscaler capex pullback. It only needed the market to pay 14x to 15x for 2027 EBITDA instead of 20x, and that has now happened. The new one slows 2027 revenue growth to the low teens instead of 19% as hyperscaler orders digest, holds the adjusted EBITDA margin flat at this year’s 22%, which puts 2027 adjusted EBITDA near $1.0B, and pays 12x for it. Add the net cash and the unconsolidated investment and you land at $400. That is 26% below today’s price, and it requires the growth to break rather than the multiple to drift.

Risk register

Risk #1. The E-Infrastructure margin mix is now structural. New this quarter, and central. Electrical will keep growing faster than site development, so the segment margin line will keep printing soft even when both halves improve. If CEC’s guided 300 to 500bp does not arrive, my 26.5% terminal margin is too high and the target comes down again.

Risk #2. Award timing and a possible Q3 backlog decline. New. Management has said third quarter awards may be light with the catch-up in Q4 and early 2027. A soft Q3 print is already telegraphed but not a soft Q4.

Risk #3. Capacity acquisitions. New. Management says it has to buy crews and electricians to keep up, has $1.5B of undrawn revolver, and is looking at smaller targets than it would prefer because the large ones do not exist. STRL has bought well before. Buying under pressure to add capacity is how good acquirers overpay.

Risk #4. AI capex digestion. Carried from Q1, unchanged. The 2027 and 2028 question is whether the 2025 and 2026 builds get matched by AI revenue. STRL’s insulation is that its work is contracted years ahead and diversifying into semiconductor, pharmaceutical and manufacturing campuses, but insulation is not immunity.

Risk #5. Customer concentration. Carried from the original deep dive, unchanged. The concentration figure I have is four customers at 35% of E-Infrastructure revenue, and the segment has more than doubled in size since. STRL does not disclose it quarterly, so this one stays live by default rather than by evidence.

Risk #6. Housing. Carried, materialized, and small. Building revenue fell 1% and adjusted operating margin fell to 9.9% from 11.0%. The segment is 9% of revenue and shrinking as a share of the whole.

Risk #7. Valuation. Carried from Q1 as the central risk, and now largely spent. The multiple was the thing I was most worried about in May, when STRL traded near 38x trailing EV/EBITDA. It is 22.9x today and 14.9x on my 2027 numbers. Multiple compression can always go further, but it is no longer the risk with the most left in it.

Risk #8. Data centre siting is becoming political. Some states will host very few of these assets whatever the demand, and permitting has started to attract political attention in others. STRL reports no schedule impact on anything it is working or bidding, and says Texas continues to move quickly. But the demand for these assets and the permission to build them are two different variables, and only one of them shows up in a backlog number.

Performance versus peers since the Q1 update

From 14 May, the date of my last update, to 4 August all peers except for URI [] are down.

This is not a STRL problem. Four of the five names are down and the three most exposed to data centre construction are the three that fell hardest, which says the market repriced the theme rather than the company. URI is the exception because equipment rental is a broader cyclical with a different customer base and no AI multiple to give back.

The useful detail is that STRL and MTZ [] are separated by one percentage point over a window in which STRL raised guidance again. When a name with better numbers falls the same distance as the group, the move is coming from the multiple rather than from the business, and that is the condition under which the next few years of earnings get bought cheaply.

Verdict

Moving from HOLD to BUY. Target $1,030, bear $400.

The thing I keep coming back to is that STRL now has to buy other companies in order to serve existing demand. Most construction businesses spend their lives looking for the next job. This one is turning work away, hiring more people and expanding a fleet ahead of contracts it has not signed because customers have told it what is coming. That is a very unusual place for a contractor to stand, and the market spent this quarter deciding what percentage sign to put next to it.

I said in May that the asymmetry was spent. It was. It came back the hard way. What matters now is that at $540 Mr. Market prices STRL’s 2027 earnings power at almost the multiple my own model uses to exit the business in 2037.

On 15 July I sent a trade alert on a business I described as a corpse that nobody had bothered to re-examine. The next day I published the deep dive for the company.

Ten years ago it had negative book equity, leverage above 5x and a share price down more than 70% from its listing. A decade of quiet repair later, it was earning records that the market was still refusing to price into the share price.

Two weeks after that alert, the company reported. The quarter was the best in its history on every measure that matters. Group profitability set an all-time record. Both of its two largest divisions set their own quarterly records at the same time, which had never happened before. Management raised full-year guidance for the second time in 2026, and the new range delivers the profit and cash flow targets it had promised for 2028, two full years ahead of schedule. Leverage fell again. It kept buying back its own shares. It repaid debt early.

The stock fell 6% on the earnings results, and it is now trading below where I bought it by 1.9%.

That gap between what the business did and what the share price did is the entire subject of this update. There is a real argument on the other side, and I take it seriously below: management’s own guidance implies a second half flat against last year, and part of this year’s profit is borrowed from a competitor’s misfortune.

Table of Contents

• The position, and the number that matters

• TLDR

• How the company ranks

• The quarter, decomposed

• The scorecard: what I got right, and what I got wrong

• Thesis scorecard after Q2 2026

• The guidance raise, and the second half nobody believes

• Valuation: what changed in the model

• Risk register update

• Where the company sits against its peers

• Verdict

Read more

Hello fellow Sharks,

Last week was a volatile one. The portfolio fell more than the S&P 500, but that is nothing next to the drawdowns others took, Situational Awareness above all (this week’s Thought of the Week). If you want to skip straight to the numbers, jump to the Portfolio Update.

Four portfolio companies reported this week. All met or beat revenue consensus, and only one missed on EPS.

On July 29 I sent my read on the earnings results for CLS.

Next week, I will send my notes on the rest to paid subscribers.

Eleven portfolio companies report next week. Eventually, I will send notes only on the ones that matter.

Looking for the August Stock Pick, I have noticed that the pool of potential investments is shrinking, and I have not been able to diversify away from the US as I have mentioned I would do earlier this year.

So I may start looking for opportunities in local markets instead of using ADRs. But first, I would like to know how many of you have access to international markets.

If you don’t have access to non-US exchanges, you could open an account with Interactive Brokers (if you use my code, I get a referral fee). I have used them for decades and have the cheapest pricing and most transparency of any broker I have tried.

In this week’s Thought of the Week, I finally reveal my secret in investing. Funny enough, for the longest time I thought I had none. It took starting this newsletter to work out what my superpower actually is.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• Revealing My Superpower

• Portfolio Update

Thought Of The Week

Revealing My Superpower

Many times throughout my career, people have asked me a version of the same question: so what is special about your strategy? For years I gave the same answer. Nothing. There is no superpower here. I went through the motions: read the filings, built the valuation models, did the channel checks. I meant it every time I said it.

Through the years, and especially since I started this newsletter, I changed my mind. I do have one. What makes it strange is that it isn’t a rare book I read, a dataset nobody else buys, or a model I built in a locked room. It is free, public, and repeated so often it has turned into wallpaper. Human nature is what stops almost everybody from holding on to it. I am as human as the next person, but my Asperger’s brain makes this particular skill easy to keep.

Before I tell you what it is, a bit of history. This newsletter did not start life as Beating The Tide. The first name was Shark Investing. I changed it later for reasons that were entirely about marketing, and the original name was the more honest one.

I picked the shark because of the way it hunts. A shark spends most of its life moving slowly and doing nothing that would make a good video. It does not chase everything that swims past. Then blood hits the water, and the animal that looked half asleep a second ago becomes the fastest thing in the ocean.

That is the whole job. Stay quiet, stay consistent, and be ready to move when the water changes. Last week handed us a textbook example of a shark doing exactly that, and it was not me. It was Ken Griffin. I will come back to him.

I am not the first person to write that you should let compounding work, let your winners run, cut your losers, buy quality, keep emotion out of the decision, avoid leverage, diversify, and buy when the crowd is scared. I have preached that list myself. Everybody preaches it. Then a week like the last one arrives, the tide goes out, and we find out who was swimming naked.

The week we found out who was swimming naked

Since I started the newsletter, I have followed a handful of publishers on Substack, partly to see what others are doing and partly for fun. Every morning I take a look at what the community is posting.

By Tuesday and Wednesday, my feed had filled up with posts that read like this:

I was wrong.

This time it truly is different.

I was right, but I wasn’t counting on X to happen.

I lost my last two years of returns, +200%, in two days.

I will not be linking to any of them. That isn’t the point of this piece, and I don’t like hitting people when they are down. I hope every one of them walks out of July with a better process than they walked in with. The point is the contrast, so let me tell you what happened on my side of the screen.

I can summarize my week in one word. Nothing.

The portfolio fell on Tuesday. It fell again on Wednesday. I made no trades. I sent no panic note to subscribers. I posted no admission that a thesis had broken. On Wednesday, with the stock falling, I published a bullish update on Celestica. Thursday we went up. Friday we went down. That was the whole of my week’s drama.

My superpower is boring, and that is the point

My superpower isn’t that I read filings better than the next analyst, or that I found the holy grail of investing, or that I can travel through time. (But if I could pick a superpower, I would take Hiro Nakamura’s from Heroes. I loved that show. Imagine it: buy bitcoin at one cent, win every WSOP tournament I enter, and warn Trump that the Iran war will backfire. Although I did not need a time machine for that last one.)

My superpower is consistency.

Yes, boring consistency.

Consistency stands on two legs:

The first leg is discipline. For most people, consistency holds right up until something interrupts the plan. A last-minute meeting. A chocolate cake sitting in front of you. A market correction.

For me, it works the other way around. Stepping outside the routine is the difficult part. Staying inside it costs me nothing, so a red Tuesday doesn’t drain me the way it drains someone who has to fight himself to sit still. Some people find that boring about me. I am how I am, and you shouldn’t fight your nature. I wrote a whole Weekly about exactly that.

The second leg is that I don’t care what people think of me. That sounds like a character flaw at a dinner party. In investing, it makes it easier to ignore the herd. I don’t window dress the portfolio before a quarter ends. I don’t defend a call I made two years ago that turned out to be wrong (check out my terrible calls: Seadrill, Tailored Brands and Amira Nature Foods).

I also don’t need the tape to agree with me this week, this month, or this quarter.

All of that frees up the only resource that compounds: attention.

That had a practical consequence last week. I never had to write an I was wrong post on Wednesday, because I had not made the kind of claim that needs defending on a Wednesday.

Then there is Leopold

Everyone is talking about Leopold Aschenbrenner and Situational Awareness. (In hindsight, the fund name was ill-fit 🙂).

A couple of months ago, a friend forwarded me an Instagram post about Leopold. Former OpenAI researcher on the Superalignment team, fired in April 2024 over an alleged information leak he disputes. Author of a 165-page essay called Situational Awareness arguing that scaling AI would demand an enormous build-out in chips, memory, compute and power. Then a hedge fund launched on the back of that essay, by a man who was 22 at the time and had never traded professionally.

My first reaction was that this had to be fake news. I had never heard the name. I googled it, and every part of it was real. Columbia valedictorian at 19, enrolled at 15. The fund launched in 2024 with $225M from Jane Street, Patrick and John Collison, Nat Friedman and Daniel Gross. By mid-2026 it was running north of $20B, with reports putting peak net asset value as high as $45B. I was impressed. Getting that kind of traction that young is not nothing.

My friend wanted me to follow his strategy: You should double down on your high-conviction bets, concentrate in AI, and stop diluting yourself with financials and the other stuff. Then he sent me the number that was supposed to end the argument. Leopold’s fund was up 439% net through June. Mine was one tenth of that at +44%.

I didn’t care. I was happy with my portfolio then, and I am happy with it now.

Then July arrived. The AI and semiconductor complex sold off hard. At the worst point in the month, my YTD came down to +27.6%...

… and we closed July at +34.8%.

Leopold’s?

Down 67% in the month. Yes, that is a negative.

He is not wiped out. The fund is still standing, still holds its private positions including an Anthropic stake valued at $5B, and because the gains before the fall were so large, it is still up 80% for the year. But on the morning of July 30, before the open, Situational Awareness sold its entire public book, longs and shorts together, in a single block trade to Ken Griffin’s Citadel. The Journal put the price at $10B. Fund assets, north of $20B a few weeks earlier, landed at $10B once it was done. The letter that went out to clients opened with the line we let you down this month.

What actually broke

There is no shortage of articles covering the collapse, and I won’t rewrite them here. I want the three things that matter for us, because all three are things you and I control in our own accounts.

Mistake #1. The leverage.

CNBC reported that the fund ran gross exposure as high as four times capital. At 4x, a 30% fall in your longs is a 120% hit to your equity before anything else happens. Core positions dropped between 27% and 54% in July, the Nasdaq 100 lost more than 5%...

… and Korea’s Kospi, home to his SK Hynix position, fell by 39% at its worst moment, but has since partially recovered.

With leverage on, once your equity burns down to the broker’s maintenance threshold, you stop being an investor and become a forced seller. Goldman Sachs, JPMorgan and Bank of America made those calls on his book.

Mistake #2. The concentration.

His Q1 13F showed $3.86B across 26 positions, with the top five at more than 76% of the disclosed long book. Bloom Energy 22.8%, SanDisk 18.8%, CoreWeave 14.4%, IREN 10.4%, Core Scientific 10.1%. He owned 8.2% of Core Scientific’s shares outstanding. For contrast, my top five positions are 35% of the portfolio.

Mistake #3. The hedges that weren’t hedges.

He was long the second derivative of AI (similar to our portfolio), meaning power, memory, GPU capacity and miners turned data centers, and short software names he expected AI to eat, with reported put exposure of $2.0B notional on the SMH semiconductor ETF and $1.6B on Nvidia.

On paper that reads as a balanced book. In practice, every leg leaned on the same factor. When the AI complex broke, the high beta longs fell two to four times harder than the large cap hedges, and the software shorts rallied at the same time. Long book down, short book up, on the same day. Call that what it was: a leveraged directional bet.

The part I want you to sit with: prices can be pushed

On July 27, Citadel Securities published a call that the Fed would deliver a surprise quarter-point hike that week. Their head of macro strategy argued a July hike would end the forward guidance era and warned that the market was underestimating how hawkish the Fed had become.

On July 28, Bloomberg reported record demand for hedges against a surprise hike, and CME FedWatch had the odds at 37.9%. A call that most bank economists rejected had become a live market risk in a day.

On July 29, the Fed held rates. Stocks fell anyway. The Dow gave up more than 840 points, and the 30-year Treasury yield hit its highest level since 2007.

On July 30, before the open, Situational Awareness sold its entire book to Citadel.

By the close that same day, the names in that book were up 20% to 27%. The equal-weight S&P 500 was flat on the day.

For four days, the price of Bloom Energy [] or CoreWeave [] had almost nothing to do with Bloom Energy or CoreWeave. It was set by a macro call, a hedging panic, three margin desks and one forced seller. Then it was reset the moment that seller was gone. Bloom Energy reported record Q2 results and rose 25.6%.

had no company news at all and rose 26.5%. When the name with the earnings beat and the name with no news move by the same amount, fundamentals are not driving the tape.

Something else is.

That is the lesson I want you to keep.

In the short term, big money can move prices. In the long term, fundamentals, cash flows and ROIC move them. Every rule I write in this newsletter exists to keep me living on the second timescale, because the first one is a casino (besides, I don’t have that big money to move the market…yet).

And notice who got paid. Citadel bought a $10B book from a seller with no choice, then watched it reprice more than 20% higher within hours.

That gap has a name.

It is the liquidation discount, and it is the price of being the one who has to sell. Leverage is the thing that decides whether you are ever that person.

The six-punch knockout. Everything Leopold got wrong, and where I wrote about it first

Last week Leopold got in the boxing ring with Mr. Market. Leopold got knocked out after six punches.

None of what follows is hindsight. Every item here has its own Weekly, with a date on it, and most of them are older than his fund.

Punch #1. He used leverage.

In Weekly #21 I set out the rule, and I used the exact number that ended up killing him.

At 4-to-1 margin, one tornado through your company’s plant takes your portfolio to -100%. Game over. In the same piece I published the arithmetic behind the rule.

Since 2012, I have had four losing years out of fourteen. Unlevered, that compounds beautifully.

Levered, it wipes you out, because leverage demands an impeccable record for thirty years with no margin of safety. My own margin has never gone above 20% of portfolio value, and I use it as a bridge between two trades rather than as a position.

Punch #2. He concentrated past the point of survival.

In Weekly #79 I explained why I cap even my highest conviction call at 5% of NAV, and why a 70% drawdown needs +233% just to get back to flat.

His top five positions were more than 76% of the disclosed book. In Weekly #46 I wrote that 20% of your stocks generate 80% of your returns.

And people sometimes read that as a case for concentration. It is the opposite. You need to own enough names to be holding the 20% when it finally runs.

Punch #3. He mistook correlation for diversification.

Six tickers driven by one factor is one position wearing six names. In Weekly #87 I laid out why I don’t think AI is a bubble.

And in the same piece, I published my own exposure to the theme: 7 companies out of 31 on a count basis, but 41.8% of portfolio market value. I think that is high, and that is why my last five monthly picks have been outside the AI space.

Punch #4. He had never been punched in the mouth.

Weekly #76 borrows its title from Tyson for a reason.

Leopold is 25 and had no trading experience before he launched the fund. He has read about 1998, 2008 and 2020. Reading about a drawdown and standing inside one are different skills, and only one of them is available in a book. There is nothing wrong with never having lived through a crisis (I was too young for the 2000 crisis and my portfolio was very small in 2008). What matters is being humble enough to admit it, and then building the portfolio around that gap instead of pretending it isn’t there.

Punch #5. He let the tape write his research.

Weekly #23 was about ignoring market noise…

… and Weekly #90 was about the voice in your head being Mr. Market rather than an analyst.

A 439% run through June is the loudest possible version of that voice, and it was telling him he was right. On July 24, with the book already bleeding, he wrote to his clients that the selloff was one of the best buying opportunities since early last year and invited fresh capital starting August 1. I think that he will turn out to be right about the AI build-out. That is the cruel part of the story. Being right about 2030 does nothing for you when your prime broker calls in July 2026.

Punch #6. He sized for the good case.

Weekly #13 made the case for investing like a professional poker player, and the core of that piece is that a good player with a winning hand still sizes the bet so that a bad river does not end the night.

Leopold had the best hand at the table for eighteen months. He sized as though the river could not come. I wrote the counterpart to that in Weekly #79, precisely so that being wrong stays survivable.

None of this is new

Smart people doing reckless things because success made them certain is one of the oldest stories in this market.

Long-Term Capital Management (another ill-fit fund name 🤔) had Myron Scholes and Robert Merton, who shared the 1997 Nobel in economics, among its principals. It had $4.8B of equity, more than $125B borrowed from banks and dealers, and over $1 trillion of notional derivatives exposure. In 1998 it lost $4.6B in under four months. The New York Fed had to put 14 banks in a room to fund a $3.6B rescue so the unwind would not take the global financial system with it.

Look at the shape of it next to July 2026. Brilliant people. A thesis that was defensible on its own terms. A model that worked until every correlation in it went to one at the same moment. And leverage sitting underneath, quietly converting a bad month into an existential one. The names change, the instruments change, the mechanism does not.

What was missing in both pictures had nothing to do with intelligence. It was an honest read of your own strengths and weaknesses. Leopold’s edge was real. He understood the physical layer of the AI build-out earlier and more deeply than the market did, and he was paid enormously for it. His weakness was that he had never been tested. Treating the first as permission to ignore the second is how the fall happens, and it is why LTCM’s PhDs and a 25-year-old with a Substack essay end up in the same paragraph.

The unglamorous conclusion

So that is my superpower, and it looks unimpressive written down. I did not out-analyze anybody last week. I did not call the top. I had no hedge on. I did nothing at all. The portfolio fell, I sat there, and by Friday we were at +34.8% for the year and 3x the market since inception.

Consistency doesn’t photograph well. Nobody makes an Instagram post out of a man not trading. My friend was never going to forward me a screenshot of someone sitting still.

That is exactly why it keeps working.

Which brings me back to the shark.

Griffin did the other half of the job last week. Blood hit the water on Thursday morning, and Citadel was standing there with a $10B bid and no need to negotiate. That is the strike, and it paid inside a single session.

The strike is the easy half. Anyone will bid for a dollar at eighty cents. The hard half is everything that comes before it: the months of moving slowly, staying liquid, staying unlevered, and letting the water come to you. Leopold skipped that half. He swam hard in one direction for eighteen months carrying four times his own weight, and when the water changed he was the blood rather than the shark.

Most of this job is waiting. Make sure that when the water finally does change, you are the shark.

Portfolio Update

Last week, the AI space melted down on Tuesday and Wednesday, recovered on Thursday and slipped on Friday.

Portfolio Return

• Month-to-date: -6.5% vs. the S&P 500’s -0.1%.

• Year-to-date: +34.8% vs. the S&P 500’s +9.4%. That is a gap of 2,534 basis points.

• Since inception: +90.2% vs. the S&P 500’s +30.2%. That’s 3.0x the market.

Contribution by Sector

Industrials and tech led the losses, partially offset by consumer cyclicals and energy.

Contribution by Position

How to read the heat map? Click here.

• +84 bps CLS 3.09%↑ (TSX: CLS) (Thesis)

• +22 bps (Thesis)

• +3 bps TSM 1.99%↑ (Thesis)

• -4 bps CDE 0.74%↑ (Thesis)

• -7 bps LRN 0.14%↑ (Thesis)

• -22 bps POWL 1.10%↑ (Thesis)

• -26 bps DXPE 2.42%↑ (Thesis)

• -44 bps STRL 4.60%↑ (Thesis)

• -67 bps DELL 3.90%↑ (Thesis)

• -67 bps MU 2.83%↑ (Thesis)

That’s it for this week.

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

I wasn’t going to write this today. I was saving Celestica [] for the Weekly. Then Tuesday and Wednesday happened, and I decided the point was worth making as the entire AI space is melting.

Here is the point. The fundamentals of this business are strong, and they are getting stronger. What moved prices this week was sentiment. Feelings about China. Feelings about who is funding the AI build. Feelings about a memory-chip listing in Shanghai. None of it touched a single line of Celestica’s income statement, and yet it took 10.8% out of the Kospi and 15% out of SK hynix in a session. When feeling starts doing the work that thinking is supposed to do, Mr. Market becomes irrational.

Celestica’s Q2 continued the exact trend:

It beat on the top line (3rd quarter in a row)…

… beat on the bottom line (has beaten each consensus estimate since 2022)…

… and raised the year.

What it did not do was follow the script the market wrote in January and again in April. After Q4 2025 the shares fell 15%.

After Q1 2026 they fell 13.5%.

I wrote both of those up and called both reactions wrong. This time the shares went up. Up 8% on Tuesday…

…while almost everything else with an AI label attached to it was being taken apart on that day.

That is the first time in three quarters that the market has agreed with the print on the day. It happened on one of the ugliest days the memory space has seen this year. And as I am writing this on Wednesday, the market is continuing to melt.

I think that is worth twenty minutes of your time.

Table of Contents

• Position and disclosure

• TLDR

• How CLS ranks

• What the market was actually afraid of on Tuesday

• Q2 2026: what the print actually said

• Guidance: what changed in 90 days

• Thesis scorecard after Q2 2026

• Valuation: why the target stays at $575

• Risk register

• Verdict

Position and disclosure

I have held CLS since 2023.

And when I started this newsletter, it was the first position I added. And in April 2025, I published the deep dive calling it the most important AI stock most people had never heard of.

It is one of the largest positions in the portfolio at 8.3% weight, and one of the largest contributors to portfolio performance since inception.

The tracker screenshots show the TSX-listed line in Canadian dollars, which is where I hold it. All of the analysis below is in US dollars, where the stock trades at $342 against my $575 target. The difference between the two readings is the exchange rate.

TLDR

• Q2 revenue of $4.70B (+62% y/y) and adjusted EPS of $2.54 (+83% y/y) both came in above the high end of guidance. Adjusted operating margin printed 8.2%, another record.

• Management raised the 2026 outlook for the third time this year: revenue $19.0B to $20.5B, adjusted EPS $10.15 to $11.30, operating margin 8.1% to 8.4%, and FCF $500M to $600M. The FCF guide had been stuck at $500M since October and finally moved.

• The 2027 statement is the important one. Revenue growth in 2027 is now expected to accelerate past the 65% guided for 2026, with adjusted EPS growing faster than revenue. That translates to a 2027 revenue base north of $33B and adjusted EPS north of $18.65.

• The mystery digital-native customer is OpenAI. Celestica is building custom racks alongside Broadcom [] for OpenAI’s accelerator roadmap, with mass production in 2027. Add the AMD [] Helios scale-up switch, where Celestica sits on every rack programme, and there are two multi-billion-dollar 2027 opportunities that did not exist in the original thesis.

• Customer concentration improved for the first time in a year. The top three went from 35% / 15% / 15% to 32% / 17% / 14%. The largest customer came down 3 points.

• Five of six thesis pillars confirmed and strengthening. The sixth, capital returns, is still evolving as capex absorbs the cash.

• Keeping BUY. Target stays at $575. I explain below why holding the target flat after a guidance raise of this size is the conservative choice.

How CLS ranks

Before I get into the details, here is the quantitative read from RankedStocks.com.

CLS carries an RS score of 72, which puts it in the Strong band and in the 75th percentile globally (the universe is still small, the US, Canada and the UK which I just included), the 76th in the US, and the 74th within its sector. The factor breakdown tells you almost the entire story of this article in five bars.

Growth 90. No argument. Revenue +62%, EPS +83%, and a company guiding to 65% growth for the full year. This is as clean a 90 as the system produces.

Outlook 85. A raised guide, a 2027 that accelerates, and a demand pipeline the company describes as record.

Profitability 75. Record operating margin, adjusted ROIC of 55.5%, and 0.5x leverage. The score is held below the top band by the trailing history, because as recently as 2023 this was a 6% EBITDA-margin contract manufacturer and the trailing window still carries that. Give it four more quarters.

Sentiment 53. This is the score that matters this week. Sentiment sits in the neutral band while growth sits at 90. That gap is the opportunity. When a business scoring 90 on growth and 85 on outlook carries a 53 on sentiment, you are being handed something the market has not yet decided to love.

Valuation 20. CLS is not cheap on trailing numbers. At $342 the stock trades on 30x this year’s guided adjusted EPS. The valuation case rests entirely on 2027 and 2028 earnings power, which I walk through below. If you need a low trailing multiple to sleep at night, this is not your stock.

What the market was actually afraid of on Tuesday

Tuesday was a rout, and it had four distinct fears stacked on top of each other. Japan’s Nikkei 225 fell 3.95%. South Korea’s Kospi fell 10.84%. SK hynix dropped 15%, Samsung Electronics 13%, Kioxia 18.3%, Tokyo Electron 11%. In the US, , , , , , , , and fell more than 10%.

Celestica rose.

Let me take the four fears one at a time, because three of them do not transmit to this business the way Mr. Market assumes, and one of them genuinely does.

Fear #1: China is building its own DUV lithography

Reports that Chinese companies are developing domestic deep ultraviolet lithography systems reignited the worry that China is closing the equipment gap. That is why the equipment names were dragged down alongside the memory makers. The logic runs: domestic DUV means Chinese memory makers can expand capacity without Western tools, which means more DRAM supply, which means lower memory prices.

Counterpoint. The premise is weaker than the reaction to it. China has had access to DUV lithography for years. Building the machines domestically changes who makes the tool, not what a Chinese fab can print with it. The constraint that actually separates Micron [], Samsung and SK hynix from CXMT is EUV.

Lithography prints a chip’s pattern onto silicon using light, and the wavelength of that light sets how small the features can be. Deep ultraviolet works down to a point. Below that point you need extreme ultraviolet, a much shorter wavelength that resolves finer features. ASML is the only company on earth that builds EUV machines, and export controls keep them out of China. A Chinese fab can still make advanced memory on DUV, but it has to expose the same wafer several times to get there, and every extra pass costs money and yield. Domestic DUV does not close that gap. It means China buys the same class of machine at home instead of importing it.

Now bring it back to Celestica. CLS procures substantially all of the materials and components used in its products on behalf of its customers, which makes memory a cost line for this business rather than a revenue line. Cheaper DRAM shrinks the bill of materials Celestica has to fund and frees the working capital tied up in it. More than that, memory is one of the specific components the company has had to sign supply agreements to secure, and component availability has been the binding constraint on its own guidance all year. Management said in plain terms that demand exceeds the revenue figures being guided, and that the limiter is material. A world with more memory capacity is a world where Celestica converts more of its order book into revenue.

The tape sold the whole neighbourhood on news that relieves this company’s supply chain.

Fear #2: CXMT’s debut and DRAM oversupply

ChangXin Memory Technologies listed on Shanghai’s STAR Market on Monday, raised $8.6B, and the shares surged 466% on debut to a $489B valuation. The read-across was immediate: a well-capitalised Chinese DRAM champion means oversupply and weaker pricing across the memory industry.

Counterpoint. Two layers here. First, even the bearish desks conceded in the same breath that CXMT is a rising competitor in commodity DRAM and is likely years behind the Korean players in high-bandwidth memory, which is the part of memory that AI infrastructure actually consumes. Second, and more to the point for this thesis, Celestica’s AI exposure sits in 800G and 1.6T Ethernet switching, in co-packaged optics, and in rack-scale compute integration. Communications was 56% of Q2 revenue and Enterprise 25%. The obvious objection is that Enterprise is servers and storage, which is where the DRAM goes. The answer is that the vast majority of Celestica’s compute programmes are consigned, meaning the customer supplies the silicon and it never enters Celestica’s revenue or cost lines. On the networking side, the silicon is included, and it is switching ASICs and optics rather than memory.

There is a real second-order concern. On turnkey programmes, where Celestica buys the silicon and it flows through revenue, falling component prices mechanically reduce revenue dollars per unit shipped. It compresses the revenue line without touching the profit dollars, because Celestica earns a spread on value added rather than a margin on the bill of materials. If anything it improves the reported margin percentage.

On timing, which matters more than the headline. CXMT is running toward 350,000 DRAM wafer starts a month by the end of 2026, close to Micron’s roughly 375,000, then 420,000 in 2027 and 500,000 by the end of 2028. That would take it to something like 17% of global DRAM supply from 11% in 2025. Its Shanghai equipment installs run through the second half of 2026 with production starting in 2027. On HBM, the part of memory AI infrastructure actually consumes, its capacity is a fraction of Samsung’s and SK hynix’s and does not scale meaningfully until 2027 and 2028. There is also a distribution problem: CXMT’s output goes mostly into Chinese PCs and handsets, and selling it into Western data centres would invite protectionism and questions about how independent the intellectual property is.

That timeline cuts two ways for this portfolio. Cheaper memory helps Celestica. It does not help Micron, which I also own. But the pressure is in commodity DRAM and it is not what is happening today. Third-quarter DRAM contracts settled 20% to 30% higher this month. There is not enough memory in the world right now: Intel has said it cannot meet demand, and Apple has raised consumer prices because of the squeeze. None of that describes a market about to be flooded.

Fear #3: AI infrastructure financing and circular deals

Hyperscaler AI capex is approaching $700B and an increasing share is debt-funded. The top five hyperscalers are expected to move from $175B of annual bond issuance in 2026 toward $300B. Investor appetite is visibly thinning: cover ratios on those deals have fallen from nearly five times in February to below two times in July…

… and Amazon had to pay up to clear a $25B issue. The Bank for International Settlements named circular financing, where a chipmaker takes equity in an AI lab which then commits to buying that chipmaker’s silicon, as one of the three biggest risks to global financial stability. On Tuesday, AMD fell 10% on a data-centre capacity deal and Nvidia [] fell 2% on a $19.6B lease commitment. The market is repricing the financing.

Counterpoint. The question that matters for a Celestica holder is where it sits in the capital stack when the financing stretches too far. On the evidence of this quarter, the answer is unusually well protected.

• Celestica extends no vendor financing. Management was explicit that it will not fund customers’ growth, and the working capital arrangements run the other way: $481M of customer cash deposits sit on the balance sheet to absorb the cash impact of inventory purchases and the risk of obsolescence.

• The order book is contractually anchored. Customers have placed non-cancellable, non-refundable orders for long-lead silicon. In some cases, binding forecasts run 12 to 18 months out. Customers cover specialised equipment and certain non-recurring expenses, with Celestica covering the majority of the rest.

• The balance sheet carries little of the financing risk. Net debt of $204M against $536M of cash and $740M of term loans, leverage of 0.5x, and $2.3B of available liquidity. This is a company growing revenue 62% with almost no financial leverage, though the trade credit discussed below is a real dependency.

• The working capital build is funded by suppliers and customers rather than by shareholders. Days in payables extended from 54 a year ago to 73. Cash cycle days improved from 66 to 47.

The 19-day improvement is almost entirely payables extension. Days in receivables improved 7 and days in inventory were flat year on year, and six days worse sequentially. So the cash cycle is not proof that product is moving. It is proof that Celestica has the standing to make its suppliers wait, which is its own kind of evidence, because a company the supply chain is worried about does not get better terms. The case that the inventory is real rests on the awarded-programme disclosure and the customer deposits.

The honest version of this risk is a 2028 problem rather than a 2026 one. If hyperscaler financing genuinely seizes, orders eventually slow and Celestica’s revenue follows with a lag equal to the length of its book. The book currently runs into 2028.

Fear #4: Chinese competition in AI hardware

Chinese companies are climbing the technology stack and will compete away Western hardware margins.

Counterpoint. Celestica does not compete with Chinese firms and it does not sell to them, so a Chinese company climbing the technology stack only hurts Celestica if it can take Celestica’s customers. Its competitive set is Taiwanese and American: Wiwynn, Quanta, Foxconn, Jabil [] and Flex []. Its customers are US hyperscalers and OpenAI, plus AMD as a design partner whose racks are bought by third parties.

The reason a Chinese ODM cannot take those customers is the silicon. Every programme in this order book is built on export-controlled US parts: Broadcom Tomahawk switching, AMD accelerators, custom hyperscaler ASICs. A Chinese manufacturer cannot buy that silicon. And if the rules changed tomorrow, a US hyperscaler qualifying a new partner for a rack-scale AI programme is a multi-year exercise measured in design cycles rather than quarters. Chinese competition is a genuine threat to companies selling commodity hardware into open markets. Celestica sells engineering into closed ones.

What actually happened to Celestica’s competitive position this quarter is the opposite of the fear. Programmes that had been dual-sourced are being consolidated back to Celestica, because in a constrained supply environment customers value continuity and surety of supply. The company has the material already pipelined, which means it does not have to rejoin the queue. Its design engineering organisation reaches close to 2,000 engineers by the end of this year, from 1,350 in April. Design plus manufacturing under one roof is the reason share is moving toward them.

Q2 2026: what the print actually said

Revenue grew 62% and landed above the top of the guide. Adjusted EPS grew 83% and cleared the top of the guide as well. Adjusted operating margin of 8.2% set another record, up 80bps. GAAP EPS was $3.17 against $1.82. Adjusted ROIC reached 55.5%, twenty percentage points better than a year ago.

That is four consecutive quarters of clearing the high end of the company’s own EPS guidance. As I mentioned in a previous article, management is good at providing conservative estimates and then beating them.

The one soft number is adjusted gross margin at 11.5%, down 20bps y/y on CCS mix, with management expecting to hold the mid-11s through 2026. I am relaxed about this because the operating margin is where the leverage shows up, and it went the right way by 80bps. Celestica earns a spread.

Segments

CCS did the work and the mix kept improving. Revenue grew 84% and now represents 81% of the company, with segment margin up 40bps to 8.7% and segment income up 93%.

Inside CCS, both end markets beat their own outlook by wide margins. Communications grew 62% against a guide of 50%, driven by 800G switching with 400G proving more durable than expected. Enterprise grew 167% against a guide of approximately 130%, on an accelerating AI/ML compute ramp with a hyperscaler and better storage demand. Recall that in Q1 the Enterprise line was capped by a component shortage that management said was a supply issue rather than a demand issue. It has now caught up, exactly as they said it would.

HPS revenue was up 58%, and 41% of the company. This is the design-led business at the centre of the original thesis.

ATS is finally pulling its weight. Revenue grew 8% against a mid-single-digit guide, with every ATS business contributing, and segment margin of 6.3% is the highest in the segment’s history, up 100bps on operating leverage and richer engineering-driven mix. Capital equipment is the driver of the second-half acceleration, riding a wafer fab equipment upturn that management expects to run into 2027.

Cash, capex and the balance sheet

FCF was $147M in the quarter and $285M year to date. Capex stepped up to $264M, or 5.6% of revenue, against 1.1% a year ago. The full-year capex guide holds at approximately $1B, with $1.5B still the placeholder for 2027 and a firm number coming in October.

The capacity is going into Thailand, Japan, and two Texas sites at Richardson and Fort Worth. Customers are asking for an equal amount of growth in Asia and the US, which is a useful detail. This is demand-led capex tied to specific awarded programmes rather than a speculative build.

Inventory rose 27% sequentially and 77% y/y, which will trigger alarms for anyone reading it in isolation. Read it with the rest of the table instead. Days in payables went from 54 to 73. Customer cash deposits for inventory sit at $481M. Cash cycle days came down from 66 to 47, and from 55 last quarter. The inventory is pre-positioned for programmes that are already awarded, and it is being financed by the supply chain and the customers rather than by Celestica.

Net debt of $204M. Leverage of 0.5x, improved from 0.9x a year ago. Liquidity of $2.3B with nothing drawn on the revolver. No shares were repurchased in the quarter, which is the trade-off I flagged in April: capital is going into capacity rather than into the share count while the order book justifies it.

One thing belongs in the same paragraph as that 0.5x. Accounts payable went from $1.87B at the end of December to $3.82B at the end of June, and days in payables extended from 54 a year ago to 73. That is trade credit rather than debt. It carries no coupon and no covenant, and it is also a funding dependency that reverses quickly if supplier terms tighten.

Guidance: what changed in 90 days

Three raises in six months, against a plan first published in October. The 2026 revenue guide is 28% higher than the $16.0B it started at and the EPS guide is 38% higher. EPS is raised faster than revenue at every step, which is the operating leverage thesis.

In April I flagged FCF as the single pillar where the analytical picture had shifted, because the guide sat at $500M while the revenue plan kept moving up, which took FCF conversion down to 2.6% of revenue. Management has now raised FCF to $600M while holding capex at $1B and raising revenue again. Conversion of 2.9% is still thin, and it moved in the right direction for the first time this cycle.

Q3 guidance is revenue of $5.25B to $5.55B, up 69% at the midpoint, and adjusted EPS of $2.88 to $3.08, up 89%. Communications is guided to approximately 60% growth with the first 1.6T mass production ramps beginning, Enterprise to approximately 190%, and ATS to the mid-teens.

The 2027 statement

In April, management put a 2027 revenue floor of approximately $25.5B on the table against a $19.0B base for 2026. That was 34% growth, and I treated it as the single most important disclosure of that quarter.

This quarter they replaced it with something stronger and less specific. 2027 revenue growth is now expected to accelerate relative to the 65% growth guided for 2026, and adjusted EPS is expected to grow faster than revenue.

Do the arithmetic. 65% on a $20.5B base is $33.8B, and the company is telling you 2027 comes in above that. On EPS, faster than 65% growth on $11.30 puts 2027 adjusted EPS above $18.65. The full 2027 outlook lands in October.

Three drivers were named for the acceleration. 800G volumes keep scaling with 400G proving unexpectedly resilient. The 1.6T ramps surge, with 10 active programmes and more awards expected. And two rack-scale programmes that did not exist in the thesis a year ago start contributing.

The customer reveal

The digital-native customer Celestica has been building custom racks for is OpenAI. Celestica will work with OpenAI and Broadcom on their multi-generational custom accelerator roadmap, starting with an accelerator entering mass production in 2027 and extending into multi-gigawatt deployments. Sample deliveries begin this year.

On the AMD side, Celestica is the R&D design and manufacturing partner for the Helios scale-up networking switch, which is the interconnect backbone of the rack. Samples ship at the end of 2026 and the ramp begins in the first half of 2027. Several customers have placed orders, and Celestica is involved in every one of the Helios rack programmes.

Both are described as multi-billion-dollar 2027 opportunities. One accounting nuance to hold on to: the OpenAI programme will be consigned, meaning the material cost does not flow through Celestica’s revenue. That understates the revenue optics and flatters the margin percentage. It changes nothing about the profit dollars.

Thesis scorecard after Q2 2026

Pillar #1. From commodity EMS to AI-infrastructure design partner: confirmed and strengthening

HPS at 41% of revenue, growing 58%. The design engineering organisation reaches 2,000 people by year end, from 1,350 in April. Celestica is now the design and manufacturing partner on OpenAI’s rack and on AMD’s Helios switch, which puts it at the architecture table on two of the most consequential AI hardware roadmaps outside Nvidia. The transformation has stopped being a question and is now simply the business.

Pillar #2. Hyperscaler AI infrastructure spend is structural: confirmed and strengthening

Capacity conversations now run through 2028 and in some cases 2029. Lead times on some components run well beyond 52 weeks, which has forced customers to commit orders far earlier, and that is where the widening visibility comes from. Demand exceeds what the company is willing to guide.

Pillar #3. The 400G / 800G / 1.6T networking ramp: confirmed and strengthening

Communications grew 62% against a 50% guide. 1.6T mass production begins with two hyperscalers in Q3, with 10 active programmes and more awards expected in coming quarters. The co-packaged optics programme won in April has samples in the first half of 2027 and mass production in the second half, and work is already under way with that customer on the generation after. 400G, which everyone had modelled as declining, is described as remarkably resilient.

A fair question is whether 400G lasting longer means less 800G and 1.6T. It does not, because they are not competing for the same slot. The 800G and 1.6T ports go into the AI back-end fabric, the network that connects accelerators to one another, where bandwidth per port is the binding constraint. 400G lives in the front-end and general-purpose fabric, and a large share of it is now served by splitting an 800G port into two 400G links down to servers. So 400G volume rides on 800G deployment rather than competing with it. The market data says the same thing: 800G modules pass 40 million units in 2026 while 1.6T enters its first volume ramp year, and the AI transceiver market moves from $16.5B in 2025 to $26B in 2026. For Celestica, 400G durability means the older programmes keep paying while the new ones ramp.

Pillar #4. Inference-driven durability beyond 2026: confirmed and strengthening

This was the pillar where I said in April my model was most conservative. It got worse in the best way. The 2027 revenue implication moved from $25.5B to above $33B in a single quarter, and the two new rack programmes ramp into 2028.

Pillar #5. FCF machine and capital returns: confirmed, still evolving

YTD FCF of $285M, with the full-year guide raised to $600M. Capex holds at $1B for 2026 and $1.5B is still the 2027 placeholder. No buybacks in the quarter. Net debt of $204M and leverage of 0.5x, better than the 0.9x of a year ago and better than last quarter, so the balance sheet is strengthening while the capex runs.

This remains the honest soft spot. FCF conversion at 2.9% of revenue is thin, and shareholders are funding growth rather than receiving cash. My view is unchanged from April: at a 55.5% adjusted ROIC, capital reinvested into awarded programmes with contracted demand beats capital returned.

Where we were versus where we are: in January I set the $575 target with the stock at $280, which was 105% upside. Today the stock is $342 and the same target is 68% upside. The gap narrowed because the price rose through the spring, and it has widened again because the price fell 28% from the June high of $474 while the 2026 EPS guide rose 11%.

Pillar #6. Defensive moat via design complexity: confirmed and strengthening

The clearest evidence this quarter is competitive rather than technical. Customers are pulling programmes back from second sources and handing them to Celestica, because Celestica already has the material pipelined and can ramp reliably at scale. Design plus manufacturing under one roof is the stated reason. Moats show themselves under stress, and the industry is under stress now.

Five of six pillars strengthened this quarter. The sixth is unchanged in direction and evolving in shape.

Valuation: why the target stays at $575

I am keeping the target at $575. BUY, unchanged.

Holding a target flat after a guidance raise this size looks like inertia.

My DCF carries a 2026 revenue forecast of $17.0B and a 2027 forecast of $21.9B. Those numbers were set in January. Here is how they compare with what the company has since told the market.

The $575 target is produced by a model whose 2027 revenue line sits 35% below what management has effectively pre-announced. That is the conservatism. I am not raising the target today because I would rather see two more quarters delivered against the new 2027 framework. $575 is a conservative anchor.

Management credibility

Four consecutive quarters clearing the high end of their own adjusted EPS guide. Three full-year raises in six months, each one raising EPS faster than revenue. When this team calls something high confidence, the record says read it as a floor.

Risk register

Customer concentration: materialised, improving sequentially, still worse year on year. Three customers each accounted for 10% or more of revenue at 32%, 17% and 14%, for 63% in total. Last quarter it was 35% / 15% / 15% for 65%. On the reasonable assumption the ordering held, the largest customer came down 3 points. That sequential improvement is the first in over a year and it is genuinely good news.

Top 10 customers were 83% of revenue in Q2 2026 against 78% a year ago. A year ago only two customers cleared the 10% threshold; now there are three. So the quarter improved and the year got worse. This remains the single biggest structural vulnerability, because a pause at the 32% customer is still a very large event.

Component supply: constant, and now a moat. Supply remains tight and demand exceeds what the company will guide. The framing has changed though. Extended lead times are pulling customer commitments forward, in some cases 12 to 18 months, which is where the improved visibility comes from. Celestica performed better than it expected on supply this quarter and describes 2026 and 2027 as appropriately hedged. Tightness is now helping more than hurting.

Capex absorption: evolving. $1B this year, $1.5B placeholder for 2027, no buybacks. FCF conversion of 2.9% is thin for a company of this profitability. The offset is a 55.5% adjusted ROIC and a balance sheet that got stronger through the build. Watch the October capex number. If it goes well above $1.5B, that tells you 2028 demand is bigger than anyone is modelling, and it also tells you FCF stays compressed for another year.

AI capex financing: rising, and the one that could actually break the thesis. Hyperscaler bond issuance is heading toward $300B annually with visibly weakening investor appetite, and the BIS has flagged circular financing as a systemic risk. Celestica is well protected contractually and on the balance sheet, and no amount of contractual protection survives customers who cannot fund their build. This is a 2028 risk transmitted through the length of the order book, and it is now the top item on my watch list.

Valuation: elevated on trailing numbers. 30x guided 2026 EPS with a RankedStocks valuation score of 20. The case depends on 2027 and 2028 earnings power arriving. If the growth rate steps down before the earnings arrive, the multiple compresses and the stock falls hard.

Volatility: The stock has fallen 28% from its June high of $474 while the 2026 EPS guide rose 11%. In the last twelve months it has traded between $169 and $474. Anyone who cannot hold through that will sell at the wrong moment regardless of how the business performs.

Verdict

Keeping BUY, target unchanged at $575.

The thing I keep coming back to is what happened on Tuesday. Every proxy for the AI trade was taken apart on news about lithography tools, memory pricing and bond cover ratios. Celestica went up. It is as exposed to sentiment as anything else on that screen. It is simply very hard to sell a company that had just printed 62% revenue growth, cleared its own guide for the fourth straight quarter, raised the year for the third time, and told you 2027 gets faster, on a story about DRAM oversupply.

My model still thinks this company does $21.9B of revenue in 2027. Management thinks it does more than $33B. One of us is going to be wrong, and I have deliberately chosen to be the one whose error costs nothing.

Hello fellow Sharks,

While the S&P 500 retracted 0.6% last week, the portfolio advanced +2.9%. If you want to skip straight to the numbers, jump to the Portfolio Update.

Last week 2 companies reported earnings and 4 will be reporting next week. As per the Thought Of The Week, I am removing the paywall on the May 2025 pick and refreshing the thesis. The stock is already +110% up since it was picked. In the thesis I go over why I think there is still upside.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• Earnings Results

• RYAM: Up 111% Since It was Picked, Now What?

• Portfolio Update

Earnings Results

I have added a calendar function on RankedStocks.com. Now you can see the earnings calendar for your own portfolio.

Last week we had a stock split, a dividend from Dell, and two earnings results. Both beat EPS consensus and one came in light on revenue.

Next week we have four portfolio companies reporting every day except Tuesday, starting with CLS on Monday.

Thought Of The Week

RYAM: Up 111% Since It was Picked, Now What?

Back in May 2025 I sent paid subscribers a trade alert to buy Rayonier Advanced Materials [] at $3.96. I made the full deep dive open to free subscribers.

Since then the stock is up 111%.

I have been reviewing the thesis ever since the bid for the business was made, especially lately as the shares have come down from $12 to a bottom of $7 and now partially recovered to the high $8s.

I am keeping the position as an acquirer has already put $11 to $12 a share on the table for the entire company, my own sum‑of‑the‑parts work says the pieces are worth $13.28 in a base case, my DCF says $14.90, and the single most cash‑generative business RYAM owns just got a fresh boost from Washington. The easy money has been made. I think there is a second leg.

TLDR

• Rating: Strong Buy, maintained. Fair value $14.90. That is my FCFF DCF base case. My sum‑of‑the‑parts base case is $13.28, and the bull cases run to $22 to $41.

• The floor is real. American Industrial Partners (AIP), a $17B industrial PE, made an unsolicited $11 to $12 all‑cash bid in November 2025 (rejected), then bought about 5% of the stock and, on 15 July 2026, signed a confidentiality agreement and standstill to enter RYAM’s formal strategic review. A capitalized buyer has already marked the company well above today’s price.

• The crown jewel keeps getting better. Cellulose Specialties pricing rose to $2,040 per metric ton in Q1 2026, up 17% y/y, at 26% to 28% EBITDA margins. RYAM is the sole US producer of high‑purity dissolving pulp, and a new 25% tariff on Brazilian imports (on top of RYAM’s own antidumping case) tilts US pricing power its way.

• The mess is being cleaned up. The loss‑making Temiscaming dissolving‑pulp line is now permanently closed, the company is in a Morgan Stanley‑led strategic review, and an activist, Mill Pond Capital, is pushing for a sale.

• The risk. Leverage is still high at 4.3x net secured, Q1 2026 was a weak transition quarter, and the review could end with no deal. My bear case runs from break‑even to negative on the equity.

How RYAM ranks

Before I go any deeper, a quick word on where RYAM screens. I run every name through RankedStocks.com, my own scoring system that grades a company from 0 to 100 across five factors plus an overall score. RYAM lands at an overall 73, with a country rank of 51% and a sector rank of 52%.

A pure score would not have surfaced this gem on its own. The value here is buried, in a sum-of-the-parts gap, a rejected takeover bid, and a crown-jewel business masked by trough consolidated numbers, and only a detailed dig brings it out. What RankedStocks.com did do was power the research and the valuation work behind this thesis, the DCF, the reverse DCF, and the Monte Carlo you will see further down.

Look at the tension in the factors. Valuation scores 75 because the trailing numbers still carry the trough, so on a backward-looking screen RYAM looks expensive.

But Profitability scores 36 and Growth (10) and Sentiment (73) are firming as the strategic review plays out. That split is the entire setup. The screen is scoring what already happened. I am underwriting what happens next.

What’s in this update

• The story so far, in 60 seconds

• What has changed since I first wrote this up

• Thesis scorecard after Q1 2026

• The Brazil catalyst: a 25% gift to the crown jewel

• American Industrial Partners: who put a real bid on the table

• The DCF: $14.90, and what the market is actually pricing

• Sum‑of‑the‑parts: the jewel is worth more than the whole

• Biomaterials and BioNova: the free option

• Steel‑manning the bear case

• Verdict

The story so far, in 60 seconds

If you are new to the name, here is the original thesis.

RYAM is a specialty materials company built around one gem of a business: High Purity Cellulose (HPC). HPC is a super‑refined wood pulp that goes into things you touch every day such as LCD screens, pharmaceuticals, food thickeners, filters, paints, tire cords, and impact‑resistant plastics. It is sold on annual contracts, it is hard to substitute, and the top specialty grades earn EBITDA margins in the high‑twenties. HPC is roughly 80% of RYAM’s sales. Wrapped around it are two non‑core commodity businesses at the Temiscaming site in Quebec, a multi‑ply Paperboard mill and a High‑Yield Pulp mill, that the company has been trying to sell or shut.

My argument was simple. The market was pricing RYAM like a struggling commodity pulp maker at $4, yet the HPC business alone was worth more than the entire enterprise value. New management was doing the right things, selling the junk, shutting cash‑burning lines, and focusing on the jewel. On a sum‑of‑the‑parts basis, I saw $16 in a base case and $35 in a bull case, with a bear around $3. It reminded me of my Tenneco trade in 2022: a beaten‑up, over‑levered industrial that nobody wanted, until Apollo bought it for double the price a month after I wrote it up. RYAM had that same shape.

Fourteen months later, the stock has done the first part of the job. Now the question is whether the second leg, the one that gets you to the intrinsic value, is still there. I think it is, and the reasons are more concrete than they were in May 2025.

What has changed since I first wrote this up

A lot, and most of it moves the thesis forward.

Management churned, then landed a dealmaker. De Lyle Bloomquist, the CEO who started the clean‑up, retired on schedule in a transition announced in December 2025. His replacement, former Olin chief Scott Sutton, lasted about three and a half months and resigned on 20 April 2026, the same day the board announced a formal strategic review. On 22 June 2026 the board named Daniel Krawczyk as permanent CEO. He ran Huber Engineered Materials, a $1.3B specialty‑chemicals portfolio, and executed more than $2B of M&A and divestitures over the past decade. Three CEOs in seven months is messy, and I will not pretend otherwise, but the person now in the chair is an M&A operator, which is exactly the profile you want if the endgame is a sale or a break‑up.

The strategic review became formal. In April 2026 RYAM hired Morgan Stanley and Wachtell Lipton and put every option on the table: a standalone plan, a strategic investment, a merger, or a sale of part or all of the company. This is no longer me speculating about hidden value. The board has hired bankers to go find it.

A real buyer showed up. American Industrial Partners bid $11-$12 a share in cash last November, got rejected, bought about 5% of the stock, and has now signed into the process. I devote a whole section to AIP below because it is the single biggest change to the risk‑reward.

An activist is pushing. Mill Pond Capital, run by Daniel Farb, owns about 3% and went public on 17 June 2026 urging the board to complete the review and sell. His argument is blunt: a loss from continuing operations every year since 2019, guidance rarely met, and three CEOs cycled through. He is not wrong, and he is aligned with me on the outcome.

The junk is finally, permanently gone. In Q1 2026 RYAM decided to permanently cease dissolving‑pulp production at the idled Temiscaming HPC line, taking a $41M non‑cash charge. That closes the book on the highest‑cost, lowest‑margin part of the footprint.

Q1 2026 itself was weak. More on that in the scorecard, but the print was a transition quarter, not a turnaround quarter.

Thesis scorecard after Q1 2026

Pillar #1. HPC is a hidden specialty business worth more than the whole company: Confirmed and strengthening

Original thesis: HPC is a quasi‑duopoly specialty franchise with pricing power, mispriced as commodity pulp.

What happened since: Cellulose Specialties pricing climbed from about $1,750 per MT through 2024 to $1,875 by Q4 2025 and $2,040 in Q1 2026, up 17% y/y, negotiated on new value‑based contracts. Segment EBITDA margins held at 26% to 28%. The company deliberately traded some volume for price, and volumes fell as acetate and ethers demand stayed soft, but the pricing power is exactly what the thesis said it was.

Assessment: This is the pillar that matters most, and it got stronger. When a business can push price up 17% into a soft‑volume year and still earn high‑twenties margins, it is not a commodity.

Pillar #2. New management sells the junk and focuses on the jewel: Confirmed

Original thesis: management would monetize or shut Temiscaming and run RYAM as a pure‑play HPC business.

What happened since: the idled Temiscaming HPC line is now permanently closed, and RYAM has collapsed its reporting into two segments, HPC and a combined Paperboard & High‑Yield Pulp. The strategic review formalizes the intent to separate or sell the rest.

Assessment: direction confirmed, even through the CEO churn. The permanent closure is the cleanest signal yet that the company will stop feeding cash to the commodity lines.

Pillar #3. The catalyst path is a sale, a break‑up, or a buyout: Confirmed and accelerating

Original thesis: value would be unlocked by asset sales or, in the Tenneco template, an outright buyout.

What happened since: a formal Morgan Stanley review, a rejected $11-$12 cash bid from a disciplined PE firm now inside the process, and an activist publicly demanding a sale. Every one of those is a catalyst I flagged in theory. They are now real.

Assessment: this is the pillar that has changed the most, and entirely in my favor.

Pillar #4. Downside is limited by asset value: Evolving

Original thesis: even a bear case around $3 sat close to the then‑price, so downside was protected by HPC’s value.

What happened since: the stock has doubled from the alert, so the cushion is thinner. Leverage is still heavy at 4.3x net secured, and my bear sum‑of‑the‑parts is now negative because the debt sits ahead of a much smaller equity stub. The floor today is less about book value and more about the fact that a buyer has already offered $11 to $12.