This morning I bought a new position. It’s a misunderstood middle-market financial firm that most people misread as a thin-margin commodity trader. It books around +$100B of pass-through revenue, so it screens ugly, but the number that actually matters, its real top line, has compounded close to 20% a year for five years.

It earns more when markets get volatile, which makes it a rare thing: a hedge that also compounds. It just posted back-to-back record quarters with a return on equity north of 20%. It recently became the largest player of its kind in the US after a major acquisition. And it throws off FCF worth a mid-single-digit yield against, mostly retained and reinvested at a 20%-plus return. My DCF base case sits +50% above where I bought it this morning.

That’s the shape of it. A boring-looking business, a cash machine underneath, and a market that still files it under the wrong category.

The ticker, my exact entry, the trade ticket, the full thesis and my DCF target are below the line for paid subscribers.

Paid subscribers have ridden calls like DELL (+217%), Micron / MU (+213%), NGD (+86%, taken out in a buyout) and ODC (+57%). Not every pick works, and the full record with the misses is right here, but the winners have carried the book.

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The reason is simple. In April the board approved delisting the ADRs to concentrate trading in a single listing, the ordinary shares on Brazil's B3 exchange in São Paulo. Management's logic is that the ADRs make up just 2.5% of the shareholder base, so pulling them consolidates liquidity at home and lines up with the company's move to the Novo Mercado governance segment.

It's a disappointing way to exit. I picked AXIA in January…

… and the shares hit my target within three months.

Holders with Interactive Brokers or a Brazilian broker can ask for the ADRs to be cancelled and take delivery of the ordinary shares instead. I looked at it, but most of my subscribers can't trade on the Brazilian exchange, so I'm closing the position in the model portfolio to keep the tracking clean.

Hello fellow Sharks,

What a week. By Tuesday, the portfolio was up 4.3% against 0.4% for the S&P 500, and then Friday's jobs report turned the tide. We closed the week down 3.3% versus 2.6% for the index. If you want to skip straight to the numbers, jump to the Portfolio Update.

The S&P fell 2.7% on Friday alone. The jobs print came in strong, and the market is now pricing a rate hike by year-end. Tech took the brunt of it, which makes sense: most of the intrinsic value in a tech company sits in its terminal value, and that is the part a higher discount rate punishes most. I think the selloff is overblown. Mr. Market likes us and decided to hand us a discount, so I put some of the cash in a few client accounts to work in tech. I left this portfolio’s cash untouched, since I am saving it for the June stock pick.

That June pick has been slow going, and this week had plenty competing for my attention. We had a run of doctor appointments, blood work, and an ultrasound, because my wife is pregnant again 😊. I have also been refreshing my Chilean regulation knowledge for my license renewal. I think I know about 90% of the material; the trouble is the other 10% is new since I last sat the exam. So I vibe coded an exam simulator off the published material. It mimics the real structure and time limit, tracks every right and wrong answer, then tells me what to study next. I can even weight each new test toward the questions I have already missed. That felt smarter than rereading 500-plus pages to hunt down the missing 10%.

The passing score is 70%. I am borderline right now, so I will run more tests today to clear it.

The exam is Tuesday, so wish me luck.

On the June pick itself, I have been digging into a couple of financials. The setup is turning constructive for some of them, and I needed the change of scenery too. I have been reading about AI and data centers nonstop, and I want to keep this fun rather than burn out on the same story.

Speaking of that story, this week I walk through Dell’s Q1 FY2027 results and why I raised my target to $639 while the stock stays a buy in my book.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• Earnings Results

• Dell: The $51 Billion Backlog, and Why I’m Raising My Target to $639

• Portfolio Update

Earnings Results

One company reported this week. It beat both top and bottom line. Paid subscribers can see my thoughts on the results here.

Thought Of The Week

Dell: The $51 Billion Backlog, and Why I’m Raising My Target to $639

Since adding Dell to the portfolio in February, it is up 220%, the largest contributor to the YTD performance.

I bought at $123 the week before its Q4 print, watched that report carry the stock to $295, and then watched Q1 FY2027 push it past $460. It has retreated to $394 along with other tech names due to the job report on Friday.

This update asks one question: with the easy double already banked, is the second one still in front of us?

On 28 May, Dell reported a quarter that broke its own records and then raised the bar again. EPS up 282% y/y, and revenue up 88%.

The AI server backlog hit a record $51.3B. Management lifted full-year revenue guidance by about $27B to a $167B midpoint.

I first laid out the Dell thesis in my deep dive in February, 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 24 May after the Q4 record and walked the published target from $206 to a Monte Carlo base case of $486.

Q1 is the cleanest read yet on whether those pillars hold. They do, and one of them just grew a new leg. I also raised my bear case from $200 to $325, which changes the risk and reward math more than the higher target does.

TLDR

• The trigger: Q1 FY2027 was a record across revenue, EPS, and cash flow, and management raised the full-year guide by about $27B.

• Scorecard: of my five original thesis pillars, four are confirmed and one (AI-server margin) is still evolving, but it picked up a new growth leg in agentic compute.

• The backlog is the story: $24.4B of fresh AI orders, a record $51.3B backlog, a pipeline still described as multiples of it, and a customer list past 5,000. The constraint is now supply, not demand.

• Valuation: my DCF base case moves to $639 on assumptions at or below Dell’s own guide. At $394 that is a +62% upside.

• I raised my bear to $325. Risk and reward is now 1 to 3.5, and the reco stays BUY.

Contents

• Thesis scorecard after Q1 2027

• The quarter: a record, then a raise

• Guidance: then vs now

• The $51 billion backlog, in detail

• Valuation: from $486 to $639

• Risk register, updated

• Performance vs the field

• Verdict

Thesis scorecard after Q1 2027

Four pillars confirmed, one still evolving. The change worth your attention is inside Pillar #3, where a demand leg appeared that did not exist when I wrote the thesis.

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: In the May update I called this the load-bearing pillar and graded it stronger after Dell repriced its entire server book inside a single quarter when memory costs spiked.

What happened since last update: Operating expense fell 610 basis points y/y to 8.4% of revenue, the lowest in more than 20 years. ISG operating income was a record $3.1B at a 10.5% margin, up 80 basis points, even as AI servers grew almost 800%. The company is now repricing daily against DRAM, NAND, and CPU inflation and still expanded margin.

Assessment: This is the pillar that makes the rest of the thesis bankable, and it has widened. Holding a 20-year low on opex while revenue grows 88% is the operator’s edge made visible.

Pillar #2. The AI demand wave: Confirmed and strengthening.

Original thesis: Enterprise and cloud infrastructure spend is shifting toward AI clusters, and Dell sits where those orders land.

Evolution: At the deep dive I had an $18.4B backlog and $12.3B of quarterly orders. By the May update, that was a $43B backlog and $64B of trailing orders.

What happened since the last update: $24.4B of AI orders booked, $16.1B of AI revenue recognized, and a record $51.3B exit backlog. The customer count passed 5,000, up more than 50% in six months, and the forward pipeline is still multiples of the backlog and grew across neoclouds, sovereigns, and enterprise.

Assessment: Demand is no longer the question. The binding constraint is Dell’s ability to source memory and ship, which is a far better problem than the one the bears feared.

Pillar #3. AI today, attach later: Evolving, with a new leg.

Original thesis: Win the AI-server footprint first, then attach higher-margin storage, networking, and services as the estate matures.

Evolution: I graded this Evolving in May because AI-server margins were still mid-single-digit and the attach uplift was gradual, not a step change.

What happened since last update: AI-server profitability stayed in the mid-single-digit range, so the core of this pillar has not yet paid off. But two things moved. Dell-IP storage had its best demand quarter ever, with PowerStore posting its ninth straight quarter of double-digit demand growth, and storage was a key driver of the record ISG margin. And a new demand leg appeared: agentic AI is pulling traditional CPU server demand, because every agent that acts, rather than advises, needs a CPU to run its loop. Management flagged this as a market it did not know existed at its October analyst day.

Assessment: The margin payoff is still ahead, so this stays Evolving, not Confirmed. But the attach is now showing up in storage, and the agentic-CPU leg gives ISG a second growth engine the original thesis never counted on.

Pillar #4. The cash machine: Confirmed.

Original thesis: Negative working capital and deferred revenue keep invested capital low, so returns on capital stay high and fund the payouts.

Evolution: Confirmed at Q4, when the cash conversion cycle held deeply negative through the AI ramp.

What happened since last update: Record Q1 operating cash flow of $4.1B, $14.1B of cash and investments, and core leverage of 1.2x. Receivables and inventory both climbed on the AI build, but payables climbed faster, so the negative-working-capital engine kept turning.

Assessment: The balance sheet did exactly what the thesis needs while scaling the fastest revenue growth in Dell’s public history.

Pillar #5. The shareholder flywheel: Confirmed.

Original thesis: Dell returns 80%+ of adjusted free cash flow through buybacks and dividends, the share count shrinks, and per-share value compounds without hypergrowth.

Evolution: Confirmed and strengthening at Q4, after a 20% dividend raise and a $10B buyback expansion.

What happened since last update: $2.1B returned in the quarter, including 11 million shares repurchased at an average of $147. The diluted share count for the year is guided to about 648 million, down from more than 660 million a year ago.

Assessment: This is where the asymmetry shows. In February the setup was $123 against a $206 model, a near-3-to-1 with a deeply discounted entry. Today it is about $394 against a $639 model and a $325 bear, so the risk and reward is 1 to 3.5, still favourable but no longer the layup it was. The flywheel keeps compounding per-share value. I am simply paying up for it now.

The quarter: a record, then a raise

The headline beat was not close. GAAP EPS of $5.24 was up 282% y/y, the non-GAAP figure of $4.86 beat the Street by about $1.90, and revenue of $43.8B landed $8B above consensus, up 88%. This is the fastest growth Dell has achieved as a public company, and it was led by the segment the market still discounts.

ISG was the engine. Revenue of $29B (up 181%) split into AI-optimized servers at $16.1B, traditional servers and networking at $8.5B (up 92%), and storage at $4.3B (up 8%). The segment the market labels low-moat just grew 181% and expanded its margin to a record 10.5%.

The PC business everyone wrote off grew 17%. Commercial was up 18%, its seventh straight quarter of growth, and consumer was up 9%. CSG operating margin reached 8%, an analyst on the call called the best he had seen from a PC maker. This is the line that buried my own model’s old +1% assumption.

Gross margin fell to 18.1%, and that is the AI tax, not a wound. Margin dropped from 21.6% a year ago purely on AI-server mix, with AI revenue up almost nine times. Strip the mix shift and gross margin was up y/y. The operating leverage more than offset it: opex at a 20-year low carried operating income up 154%.

The cash machine kept its shape. Operating cash flow of $4.1B was a Q1 record, the balance sheet held $14.1B of cash and investments, and core leverage sat at 1.2x. The negative-working-capital model funded the growth rather than fighting it.

The most important sentence of the quarter was about supply, not demand. Management was blunt that the second-half guide is capped by Dell’s ability to get memory and ship, not by any softening in orders. That reframes the H2 outlook as conservative, because the governor is supply Dell is actively securing through multiyear agreements, not demand it is hoping shows up.

Guidance: then vs now

Management did not just beat the quarter; it raised the year hard. Three months after guiding $138B to $142B of FY2027 revenue, it now guides $165B to $169B.

On credibility: across the last four quarters, the pattern is guide conservatively, beat, and raise.

The Q4 guide proved roughly $25B too low one quarter later. The new full-year number is explicitly supply-constrained, which means the risk to it is whether Dell can secure memory, not whether customers keep ordering.

The $51 billion backlog, in detail

The single number that matters most is the backlog, so it is worth slowing down on it. Dell exited Q1 with $51.3B of AI server orders booked but not yet shipped, up from $43B at the end of January. It booked $24.4B of new orders in the quarter and shipped $16.1B. The backlog grew even after converting $24.4B into revenue, which only happens when new orders outrun shipments. That is the opposite of the digestion air pocket the bear case feared.

Behind the backlog sits a pipeline management describes as multiples of it, still growing sequentially and, in its words, never healthier. A backlog can be a one-time bulge. A pipeline that keeps refilling faster than it drains, across a five-quarter view and every vertical at once, is a more durable thing. That durability is what gave management the confidence to add $27B to the year on a single quarter’s read.

The customer base passed 5,000, up more than 50% in six months, across three buckets that de-risk each other. Neoclouds and tier-2 cloud providers take the largest, most GPU-dense systems. Sovereigns, roughly any country in the top 25 by GDP, are signing three-to-five-year supply agreements because access to memory and compute has become a national-security question, not a procurement one. And enterprises, the highest-margin bucket, are moving from pilots into production. The AI order book is no longer one or two hyperscalers, which is the concentration risk I flagged in May starting to ease.

The new wrinkle is that AI is now pulling traditional server demand too. Traditional servers and networking grew 92%, and part of that is agentic AI: every agent that does something, rather than just answers, needs a CPU to run its loop, manage memory, and make calls. Management framed this as a market that did not exist at its October analyst day. It gives the oldest, most boring part of ISG a fresh growth driver tied directly to the AI cycle.

Set against the industry backdrop, the scale is hard to overstate. Morgan Stanley pegs 2027 hyperscaler capex at roughly $1 trillion, up about 38%, and near $2 trillion cumulative across 2024 to 2027…

… with around 20 gigawatts of capacity coming online in 2027 alone, roughly triple 2025.

Dell’Oro now sees data-center capex passing $1 trillion in 2026 on the way to $1.7 trillion by 2030, and IDC puts AI infrastructure spending at $758 billion by 2029, with accelerated servers more than 95% of it. This is the pool Dell’s backlog feeds off, and it is still filling.

Dell sits at the front of that wave. It is the largest AI-server OEM, shipping close to a fifth of all AI-optimized servers, with a server and storage business about four times larger than any single competitor. The DOJ indictment of individuals tied to Super Micro over restricted server exports has handed enterprise and sovereign buyers one more reason to consolidate orders with a vendor they trust to deploy at scale and stand behind the install. The demand pool is enormous and growing, and Dell’s share of it is rising, not merely holding.

The honest read is that Dell’s FY2027 number is capped by supply, not demand. Memory is the binding constraint, DRAM and NAND first, then CPUs, then hard drives. DRAM contract prices rose 90% to 95% in Q1 and another 58% to 63% in Q2, with NAND up 70% to 75%, and new memory capacity takes about four years to build after an industry that under-invested through a brutal 2023. So the squeeze is structural into late 2027. A backlog Dell cannot fully ship in a year is multi-year revenue visibility that most hardware companies never get.

Valuation: from $486 to $639

My DCF base case moves to $639, up from the $486 I published in May and far above the original $206. At about $394 that is a +62% upside. The model still runs on assumptions at or below Dell’s own guide, so the target is conservative by construction, not aggressive.

View the updated Dell DCF Model here.

I made the changes Q1 forced, and only those. I hold FY2027 AI-optimized server revenue at about $60B, exactly the guide. I raised commercial PC growth from +1% to +9%, because I cannot keep an assumption the company has already tripled. Traditional servers move to +72% and storage to +6%, both at or below the Q1 run rate. I lowered ISG operating margin to 10.5%, matching the actual Q1 print and sitting below management’s own 11-to-14% framework, recovering toward 12.5% over the long run. CSG margin goes to 7%, below the 8% it just printed, to leave room for second-half normalization. Receivables and payables days come straight off the Q1 balance sheet, keeping the cash cycle near minus 22 days. The result is FY2027 revenue of about $167B and a 7.8% operating margin, both inside the guide, with WACC unchanged at 9% and tax held at 23%, above Dell’s actual mid-teens rate.

Now the part that matters most, what the price implies. At $394, the market values Dell at about 22.7x this year’s GAAP EPS guide of $17.31, or 22.0x the $17.90 non-GAAP number. For a business guiding revenue up 47% and EPS up about 75%, that is a price-to-growth ratio well under one. To justify a value of only $394, the model has to assume the backlog converts slowly and ISG margin never climbs off its current 10.5%. The $51B backlog, the supply-constrained guide, and management’s own 11-to-14% margin framework all argue the other way. The $245 gap between price and my base case is the market pricing a near-bear AI outcome that the Q1 print does not support.

That is also why I moved my bear. The old $200 assumed AI-server margins stay stuck while a digestion air pocket hits the backlog and the multiple compressions. After Q1, that floor is too low. A $51B backlog, a net-cash balance sheet, $4.1B of quarterly cash flow, and a PC and storage business throwing off real profit do not collapse to $200 short of a genuine AI recession. My new $325 bear is roughly Dell at 18x a haircut EPS with AI growth halved, the realistic bad case rather than the catastrophic one. The shape is a $639 base, a $325 bear, and a $394 price, so 1 to 3.5 on risk and reward.

Risk register, updated

The thesis is stronger, not bulletproof. Here is what could still break it, strongest risk first.

First, the memory super-cycle. DRAM contract prices rose 90% to 95% in Q1 and another 58% to 63% in Q2, NAND is up 70% to 75%, and the shortage is structural into late 2027 as the three makers divert capacity to high-bandwidth memory for AI accelerators. Dell is repricing daily and protecting gross margin outside the AI mix, but if component inflation outruns the pricing engine, or if customers finally balk at the prices, ISG and CSG margins compress while volume slows at the same time. Q1 already showed both edges: margin held, but management admitted it moved PC prices up early and tempered some transactional demand.

Second, AI-server margins that never improve. The whole attach thesis rests on storage, networking, and services lifting AI economics over time. Q1 showed real progress in storage, but the AI-server line itself is still mid-single-digit. If it stays there, Dell grows revenue without much incremental profit, and the multiple the market will pay falls toward a commodity assembler’s.

Third, an AI digestion air pocket. The backlog assumes hyperscalers, neoclouds, and sovereigns keep spending at this pace. A pause in any of them, or a large sovereign deal slipping a few quarters, makes the backlog convert lumpier even if the long-run demand is intact. Customer concentration cuts both ways: the same buyers driving the orders hold the bargaining power in a business with no pricing moat.

And then there is the price itself. At $394 and 22.7x earnings, Dell is no longer the obviously cheap operator it was at $123. The re-rating has done a lot of work, and from here the stock needs execution, not just a cheap multiple closing. The Q1 numbers answer the doubt about whether Dell can grow and earn through the AI build. They do not retire it.

Performance vs the field

The chart sorts the field cleanly. Dell is up 213% in 2026, the best of the group and the largest contributor to the portfolio this year. Lenovo, the other global server-and-PC maker riding the same wave, is up 153%. HPE, the credible number two in AI servers, is up 105%. Super Micro, the share donor, has managed only 42% under its DOJ cloud, its enterprise value down from more than $40B to roughly $11B. The two names with no AI-server engine, HP at 15% and Apple at 13%, barely moved. The split says it plainly: the market is paying for AI-server exposure, and Dell, with the largest backlog and the margin-and-attach leg still ahead, sits at the front of the names that have it.

Verdict

Conviction increased, asymmetry intact at a higher base. Dell just printed its fastest growth ever, raised the year by $27B, and grew the backlog while shipping a record quarter, and the only governor on the second half is supply it is actively locking up. At about $394 against a $639 base case and a $325 bear, the risk and reward is 1 to 3.5 and the reco stays BUY.

Portfolio Update

The market spent most of the week at fresh all-time highs, then Friday's jobs report pulled it back.

Portfolio Return

• Month-to-date: -3.3% vs. the S&P 500’s -2.6%.

• Year-to-date: +34.8% vs. the S&P 500’s +7.9%. That is a gap of 2,694 basis points.

• Since inception: +90.2% vs. the S&P 500’s +28.4%. That’s 3.2x the market.

Share

Contribution by Sector

Tech led the losses, partially offset by industrials.

Contribution by Position

(For the full breakdown plus commentary on earnings results and the big movers, see Weekly Stock Performance Tracker)

• +25 bps (Thesis)

• +13 bps (Thesis)

• +7 bps (Thesis)

• flat (Thesis)

• -4 bps (Thesis)

• -42 bps (TSX: CLS) (Thesis)

• -53 bps (Thesis)

• -60 bps (Thesis)

• -73 bps (Thesis)

That’s it for this week.

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

Further Sunday reading to help your investment process:

• Never Stop Asking Why, Using the “5 Whys” to Solve Problems and Pick Stocks

• The Rise and Fall of Moats: When Walls Built to Protect Become Traps

• Design Your Life Around Your Nature

• How I Earn $3,000-$7,000 a Month While Waiting to Buy Great Stocks Cheaper

• Cheat Codes for Life Monopoly

Hello fellow Sharks,

Another breathtaking week. The market reached a fresh all-time high, up 1.4%, but the portfolio expanded +7.2%. If you want to skip straight to the numbers, jump to the Portfolio Update.

Some of you asked how I learned the insurance industry when I never worked in one or covered the space at Moneda. I got into it through my brother. He started as an actuary at Zurich, moved into insurance consulting, joined a PE firm, and now runs his own PE shop with an insurance leg. Over the years I have worked on a few of his deals, and that hands-on exposure is how I carried private-market insurance lessons into picking insurance stocks.

Why am I mentioning this? He started writing his investment ideas in the space on Seeking Alpha. His first article was about MFC. You can check it out here. I would encourage you to follow him there if you want to learn the space from a practitioner.

Last week Dell reported strong results and since I added it to the portfolio in February, the position is up +241%.

But even if you bought the shares when I removed the paywall, you would be up +42%…in a week.

Today's Thought of the Week, though, is about MU. The stock is up 229% since I picked it as my 2026 stock...

…and up 187% in the portfolio (as I added to the position after my recommendation).

Today I take a look at my thesis and update my valuation.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• Earnings Results

• Micron Update: Why I’m Raising My Target to $1,120 After the Parabolic Run

• Portfolio Update

In Case You Missed It

This week, I sent 2 trade alerts to paid subscribers, closing two positions.

I have been refreshing valuation models these days (that's why you haven't heard much from me this week). As a result, these two positions no longer made sense in the portfolio, so I closed them, locking a +11.0% gain on one and a -3.2% loss on the other, and saved the cash for the June stock pick.

Share Beating The Tide: Stock Picks That Outperform

Earnings Results

Two companies reported this week. Both met or beat on EPS, and one missed revenue consensus.

I'll share my view on Dell's results, plus a refreshed valuation, next week.

Thought Of The Week

Micron Update: Why I'm Raising My Target to $1,120 After the Parabolic Run

On Dec 30, 2025 I published an article naming MU my stock pick for 2026.

Since then, I think I could say MU has been living up to expectations.

This week I was asked what I thought of Micron going parabolic.

My answer was that my 2026 stock pick going parabolic is great. Kidding aside, the stock has done exactly what I hoped, only faster and further than I anticipated. A combination of the hyperscaler capex super-cycle, the Iran war’s impact on helium supply, and a memory market that has quietly turned into the tightest it has been in a decade took Micron from $295 to $971 in less than half a year when I picked it as my stock for 2026.

The question now is whether we stay on this train or jump on a new one. It is a tough one. My immediate reaction after seeing wave after wave of positive news on MU, with the stock soaring, was to start trimming. The instinct to ring the register after a triple is healthy. But once I had sat down and had my morning coffee, I realized there is still upside. I updated my model, and the target moved to $1,120, around +15% above where the stock trades today.

And before anyone tells me +15% is not much to hold a stock that has already tripled, two things. First, I am happy owning a great business at fair value. I do not need a fat discount to keep a name that is compounding earnings this fast; a reasonable price on a franchise getting stronger is enough. Second, you have seen how I build models. I lean conservative and relax the assumptions as the evidence comes in, the same way I did on AGX and POWL, where my early targets looked modest and kept moving higher as the businesses delivered. I would rather underwrite Micron cautiously and be forced to raise the target again than chase a number I cannot defend today.

This update lays out why. It is less a quarterly recap and more an industry deep dive, because the Micron story right now is really a memory-industry story. I lean heavily on Micron’s own commentary at the JPM’s Annual Technology, Media and Communications Conference on May 20, on an industry bottom-up study of hyperscaler capex prepared by Morgan Stanley, and on what the live model says once you push the assumptions to where the evidence now points.

TLDR

• Trigger: the share price has run from $295 to $971 and pushed up against my old $934 target, forcing a fresh look at whether the thesis still has room.

• Thesis scorecard: of my five original pillars, four are confirmed and one (the cyclical-reversion discipline) is evolving in my favor. Nothing is challenged yet.

• The single biggest change: management is now guiding 81% gross margin for the May quarter and says tightness across HBM, DRAM and NAND continues well beyond calendar 2026. My model carried 65% near-term gross margin. That gap is the main reason the target moved.

• Updated verdict: I am raising the DCF target from $934 to $1,120 and keeping the position. I trim POWL and STRL long before I touch Micron.

Table of Contents:

• What sent Micron from $295 to $971

• Why does this cycle look structurally different

• Thesis scorecard, May 2026

• Valuation: what moved the target to $1,120

• Valuation in context: 16x forward earnings is not euphoria

• Risk register update

• Verdict

What sent Micron from $295 to $971

Three forces stacked on top of each other, and the order matters.

First, the hyperscaler capex super-cycle stopped being a forecast and became a purchase order. Aggregate hyperscaler data-centre spend is set to eclipse roughly $2 trillion across 2024 to 2027, with 2027 capex alone surpassing $1 trillion.

The four big builders are bringing on an incremental 14 gigawatts in 2026 and 20 gigawatts in 2027. For context, Morgan Stanley estimates AWS added only about 5 gigawatts over its first 18 years of existence. This is the demand wall memory sells into.

Second, the Iran war quietly squeezed a resource almost nobody models: helium. With the Strait of Hormuz effectively closed and a March strike on Qatar’s largest LNG facility damaging helium production lines, the world lost access to a big chunk of supply. Qatar is roughly one-third of global helium, and helium is an irreplaceable input in chip manufacturing, used in cooling and lithography. South Korean makers sourced about 55% of their helium from Gulf states in 2025, Taiwan about 69% in 2024. Spot helium prices have roughly doubled. The point for Micron is two-sided: it raises input costs across the industry, but it also constrains everyone’s ability to add output, which tightens an already tight memory market and hands pricing power to whoever can still ship. The disruption has been well documented (see Fortune and CNBC).

Third, and most durably, memory pricing went vertical. Per TrendForce, Q2 2026 DRAM contract prices are rising 58% to 63% q/q, the steepest jump in a decade, and HBM is changing hands in long-term agreements at around $21 per gigabyte.

At the JPM conference, Micron’s management opened by saying the outlook had “strengthened since our last earnings call,” that the balance sheet “has never been stronger” with upgrades from all three rating agencies this year, and that the company expects “tightness for HBM, DRAM and NAND to continue well beyond calendar year 2026”. I first laid out this setup and the updated price target in Weekly 74.

Why does this cycle look structurally different

Every memory bull eventually has to answer the same question: is this just another cycle that ends in tears, like 2019 and 2023? I think the honest answer is that the cycle has not been repealed, but its shape has genuinely changed. Here is the supply-and-demand picture that convinced me.

The supply side is structurally constrained, not temporarily tight

Start with the fundamentals, because the supply story only makes sense once you see how these two products are built. Standard DRAM, the DDR5 and LPDDR that goes into servers, PCs and phones, is a single die cut from a silicon wafer. High-bandwidth memory is not really a different chip; it is a way of packaging DRAM, stacking eight, twelve or sixteen DRAM dies on top of each other, drilling thousands of vertical connections (through-silicon vias) down through the stack, and bonding the whole thing onto a logic base die to feed an AI accelerator’s appetite for bandwidth. The catch is that HBM is brutally wafer-hungry: each gigabyte consumes roughly three times the wafer capacity of an equivalent gigabyte of DDR5, because the HBM die is larger, the stacking and thinning steps lose yield, and the finished part needs scarce advanced-packaging lines whose tools are not interchangeable with standard DRAM equipment (see Tom’s Hardware). That ratio gets worse with every generation, from HBM3E to HBM4 to HBM4E. The consequence is the single most important thing to understand about this market: every wafer redirected to HBM pulls roughly three wafers’ worth of commodity DRAM out of the world, so HBM acts as a permanent capacity sink, draining bits out of the rest of the DRAM market and tightening prices for ordinary server and PC memory at the very same time.

Two more structural constraints sit on top. The old engine of memory supply growth, shrinking the memory cell at each node transition to print more bits per wafer, now delivers less and less with every generation, so the industry can no longer shrink its way to abundance. That leaves greenfield fabs as the only real lever for more bits, and greenfield capacity needs entire new clean rooms rather than incremental tool drop-ins, which takes years to build and equip. The major producers are responding (MU alone has new fab capacity underway in Taiwan, Idaho, New York and Singapore), but clean-room space measured in years simply cannot answer a demand surge measured in quarters.

The helium squeeze sits right on top of this. When the binding constraint is already wafer capacity and clean-room build time, an input shortage that slows everyone’s output does not loosen the market, it tightens it.

The demand side is a new secular layer, not just a refresh

The demand story used to be PCs, phones and servers cycling up and down. AI added a layer that behaves differently. The market has shifted from human interaction toward agentic and machine-to-machine workloads, where inference is becoming the dominant share of the load, and memory capacity and bandwidth increasingly set the ceiling on how good a model can be across HBM, DDR and NAND. The Morgan Stanley work quantifies why memory rides this so directly: HBM capacity per accelerator is climbing fast, from 192GB on prior parts toward 288GB on Vera Rubin and up to 1,000GB on Rubin Ultra. Vera Rubin is the first NVIDIA generation built on HBM4, and Morgan Stanley attributes part of the next-gen Rubin price doubling directly to the HBM3E-to-HBM4 transition.

Memory is also a rising share of the data-centre bill, which means memory makers capture more of each incremental capex dollar. Morgan Stanley puts HBM at between 1% and 16% of cost per gigawatt and DRAM at 1% to 5%, and explicitly calls memory an “upside risk to the rack prices that hyperscalers pay”.

Two more demand signals reinforce the durability. Buyers can currently secure only 50% to two-thirds of their medium-term bit requirements, so the shortage is rationed, not satisfied. And suppliers have begun signing multi-year strategic customer agreements, including five-year deals that lock both volume and pricing, with more in progress. Those agreements are the mechanism that converts a spot-priced commodity into something closer to contracted revenue, which is exactly what dampens the amplitude of the next downturn.

Micron’s own franchise has also moved up the value stack. Data-centre SSD share went from 5% in 2022 to 15% exiting last year, making it the third-largest enterprise SSD player, and it is lead-qualified on NVIDIA’s STX platform. HBM4 is ramping twice as fast as HBM3E did, on the proven 1-beta node, and is already sold out for next year. This is no longer the perennial number-three memory maker apologizing for its margins.

Thesis scorecard, May 2026

Pillar #1. Memory is the underappreciated AI play: Confirmed.

Original thesis: the market priced MU as a commodity cyclical while AI was quietly turning memory into a strategic, capacity-constrained asset across HBM, server DRAM, LPDDR and graphics memory.

What happened since: pricing went vertical, HBM sold out, and management now frames memory as “equated with intelligence.”

Assessment: stronger than when I wrote it. The only thing that changed is that more people now agree with me.

Pillar #2. Full-stack memory position: Confirmed.

Original thesis: MU is positioned across the entire memory hierarchy, so it wins whether demand lands in HBM, high-capacity DDR5, LPDDR or NAND.

What happened since: the conference confirmed strength across all three (HBM, DRAM and NAND all tight), plus share gains in data-centre SSD and a Gen6 part on NVIDIA’s reference platform.

Assessment: confirmed. The breadth is now a planning advantage, letting MU steer wafers to the highest-value product.

Pillar #3. HBM leadership is real and improving: Confirmed.

Original thesis: MU had closed the HBM gap and could take share with a better-yielding, lower-power product.

What happened since: HBM4 is ramping twice as fast as HBM3E, yields are coming up faster, it is sold out for next year, and HBM4E ships in calendar 2027 on the 1-gamma node with a multi-year EUV supply agreement with ASML behind it.

Assessment: confirmed and strengthening. Execution risk on HBM has fallen, not risen.

Pillar #4. Supply discipline keeps margins structurally higher than the old cycle: Evolving.

Original thesis: a three-player DRAM oligopoly plus the HBM capacity sink would keep through-cycle margins above MU’s historical average.

What happened since: the trade-ratio mechanics and the multi-year SCAs are exactly the evidence I wanted. But 81% gross margins are also a powerful magnet for new capacity, and China’s CXMT has now arrived as a credible fourth player that I size up in the risk register.

Assessment: evolving in my favor, but this is the pillar I watch hardest, because it is also the one embedded in the terminal value.

Pillar #5. Undervalued on normalized earnings: Confirmed.

Original thesis: even on conservative through-cycle assumptions, the cash flows were worth more than the price.

What happened since: the price has tripled, yet the forward multiple has compressed because earnings power rose faster than the share price.

Assessment: confirmed, and the subject of the next two sections.

Valuation: what moved the target to $1,120

The target moved from $934 to $1,120, and almost all of the move comes from two assumption changes that the evidence now demands.

Change #1: near-term gross margin. The model used to carry a flat 65% gross margin from FY2026 through FY2031. Micron is currently guiding 81% gross margin for the May quarter, and says tightness runs well beyond calendar 2026. Holding 65% in the face of that was simply too conservative. The path now starts at 75% in FY2026, deliberately below the 81% guide to stay honest, and glides down to 65% by FY2031 before fading toward a normalized terminal. Because these are the highest-weighted years in the DCF, lifting them does most of the work on the target.

Change #2: the FY2027 to FY2030 revenue ramp. The old model decelerated growth to 25%, 24%, 23% and 22%. I raised that path to 35%, 31.5%, 28% and 24.5%. The justification is straightforward: the May-quarter run-rate of $33.5B already roughly matches what the old model assumed for the full FY2027 base, demand is rationed at 50% to two-thirds of requirements, and the five-year SCAs lock both volume and price. Growth still normalizes toward GDP-plus by FY2037; I simply pushed out the deceleration to match a market that cannot be supplied.

The gross-margin-to-40% question: is that the cycle reverting?

This is the right question to ask. Yes, the fade to a 40% terminal gross margin by FY2037 does embed a cyclical-reversion view. It treats today’s 75% to 81% as peak conditions and assumes the industry eventually normalizes.

But 40% is not a return to the bad old days. MU’s through-cycle gross margin has historically averaged closer to 24%.

So a 40% terminal already credits meaningful structural improvement. The real question is whether it should credit more, and there is a genuine case that it should. The supply side argues it directly: the HBM trade ratio is a permanent wafer sink, node productivity is fading, and greenfield capacity takes years, all of which dampen the supply whipsaw that used to crater margins. The industry is still, at the high-margin end, a disciplined oligopoly, with Samsung, SK Hynix and Micron together holding north of 90% of DRAM. AI is a new secular demand layer rather than a refresh. And the SCAs convert spot pricing into contracted revenue. Every one of those is a reason through-cycle margins are permanently higher than the history.

Where I draw the line is the terminal itself. It is the one assumption capitalized into perpetuity, and it is the single most dangerous place to be optimistic, because memory has burned every “this time is different” thesis before, and CXMT in China is precisely a terminal-decade risk. So my preferred way to express “AI changed the industry” is not to lift the 40% terminal to 50%, it is to extend the plateau, keeping margins elevated for longer before they normalize, which is exactly what the new 75%-gliding-to-65% path does. If I wanted to credit structure in the terminal, 42% to 45% is defensible; 50%-plus in perpetuity is where I push back on myself.

Valuation in context: 16x is not euphoria

I know $1,120 on a stock that was $295 in December looks stretched. But valuation is a relative game, and the forward multiple tells a calmer story than the chart. MU trades around 16x forward earnings…

… against roughly 34x for the semiconductor sector.

The reason the multiple compressed while the stock tripled is simple: earnings rose faster than price. That is the opposite of euphoria. Compare it to the genuinely euphoric multiples elsewhere in my book. Powell (POWL) sits at 52x, Celestica (CLS) at 37x, and Sterling (STRL) at 46x.

EPS has grown in those names too, just nowhere near as fast as the share price, and at Powell they have actually slipped, so multiple expansion is doing most of the work.

Micron at 16x forward, in the middle of the tightest memory market in a decade, seems heavily mispriced. As I have said before, I will be trimming POWL and STRL long before I trim MU. When I do ring the register in this portfolio, it starts with the worst risk:reward profiles, and MU is nowhere near the top of that list.

Risk register update

Cyclicality (unchanged, still the headline risk). Memory has never stopped being cyclical at the cell level. My defence is the structural-plateau argument above and a deliberately conservative 40% terminal margin, not a claim that the cycle is dead.

China / CXMT (rising, slow-burn). The oligopoly now has a fourth member. ChangXin Memory Technologies (CXMT), China’s largest DRAM maker, has gone from roughly 4% of DRAM revenue in mid-2025 to about 7.7% by Q4, ranking fourth globally, and holds an even larger share by wafer capacity (~11%, which Omdia sees reaching ~14% by 2027). It just cleared a roughly 29.5B yuan STAR Market IPO to fund expansion (Seoul Economic Daily, SCMP). For now CXMT is concentrated in commodity DDR4 and mainstream DDR5 rather than HBM, so it is not yet competing for the high-margin AI dollar, and today’s global shortage is absorbing everything it can make. The real danger is later in the decade: if CXMT keeps adding subsidized commodity capacity, it is the single most credible threat to the supply discipline that underpins my terminal margin, even if it never ships a competitive HBM part. This is the assumption I watch hardest.

Helium and input costs (new, two-sided). The Qatar and Hormuz disruption that doubled spot helium cuts both ways: it lifts input costs across the whole industry, but because it also caps everyone's ability to add output (it impacts MU less as I explained here), on balance it tightens the memory market and hands pricing power to whoever can keep shipping. So far it has been a net tailwind for memory pricing. The risk runs the other way: a fast resolution in the Gulf could ease helium supply just as new fab capacity arrives, and the same lever that tightened the market could loosen it.

Hyperscaler capex digestion (new). Morgan Stanley notes that Amazon, Microsoft and Meta are forward-buying, with 50%-plus of 2026 capex landing in 2027 and beyond. That is a hedge against air-pockets, but any pause in the $2 trillion build is the fastest way to turn memory tightness into a glut.

Peak-margin anchoring (faded but live). The risk that I was capitalizing peak margins is the reason I kept the terminal at 40% rather than chasing the guide. The glide path, not the endpoint, carries the optimism.

Verdict

Conviction increased. I am lifting the target from $934 to $1,120 and holding the full position, because the one assumption that moved the model, near-term gross margin, moved on hard guidance rather than hope. I trim POWL and STRL well before I touch MU. What would change the call: a hyperscaler capex pause, a credible CXMT supply ramp, or any sign management’s “well beyond 2026” tightness is rolling over.

Portfolio Update

The market continues to hit all-time highs. But the portfolio advances more than the S&P 500, widening the outperformance (+7.16% vs. +1.43%).

Portfolio Return

• Month-to-date: +9.8% vs. the S&P 500’s +5.2%.

• Year-to-date: +39.3% vs. the S&P 500’s +10.7%. That is a gap of 2,859 basis points.

• Since inception: +96.6% vs. the S&P 500’s +31.8%. That’s 3.0x the market.

Share

Contribution by Sector

Tech and industrials led the gains, partially offset by energy.

Contribution by Position

(For the full breakdown plus commentary on earnings results and the big movers, see Weekly Stock Performance Tracker)

• +280 bps (Thesis)

• +166 bps (Thesis)

• +96 bps (Thesis)

• +60 bps (TSX: CLS) (Thesis)

• +37 bps (Thesis)

• +21 bps (Thesis)

• +5 bps (Thesis)

• +4 bps (Thesis)

• +2 bps (Thesis)

That’s it for this week.

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

Further Sunday reading to help your investment process:

• Never Stop Asking Why, Using the “5 Whys” to Solve Problems and Pick Stocks

• The Rise and Fall of Moats: When Walls Built to Protect Become Traps

• Design Your Life Around Your Nature

• How I Earn $3,000-$7,000 a Month While Waiting to Buy Great Stocks Cheaper

• Cheat Codes for Life Monopoly

I just closed SKYW, locking a loss of 3.2%. These couple of days I have been updating many models, and SKYW’s target price went down from $155 → $105 which caused the risk: reward is not favourable anymore.

Read more

This is a quick note that I just closed out the ARQT position, locking a 25% gain.

I have been refreshing some valuation models and the ARQT risk-reward makes no sense anymore.

Read more

Hello fellow Sharks,

Ouch, this Weekly took me longer than I thought!

Well, this week the market hit a new all-time high again, but the portfolio still outperformed, widening the gap to the market. If you want to skip straight to the numbers, jump to the Portfolio Update.

In this Weekly, I decided to remove the paywall on the February Stock Pick. I added this stock to the portfolio at $123 on February 23rd and today it sits at $295 (a bit more than 3 months). So I reviewed the thesis and the valuation. In this Thought Of The Week, I go over whether this stock is still a buy, a hold or an exit.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• Dell: My February Pick Is Up 140%. Here’s What Changed.

• Portfolio Update

In Case You Missed It

On May 18, I sent my trade alert for the May Monthly pick.

On May 20, I followed up with the deep dive.

I closed ALL and trimmed STRL and recycled the cash into one of the most hated names in consumer staples, a business so unglamorous most people scroll right past it. It collects the waste almost nobody else wants, dead stock, used fryer oil, slaughterhouse leftovers, and turns it into proteins, fats, and renewable-fuel feedstock the economy quietly runs on.

The shares have roughly halved from their highs, a regulatory change just reset the earnings power in its favour, and a pending European deal could re-rate the highest-margin part of the business inside a year. I bought it around 40% below where my own DCF says it belongs. Boring, cash-generative, and mispriced.

The full thesis is in the deep dive above.

Share Beating The Tide: Stock Picks That Outperform

Thought Of The Week

Dell: My February Pick Is Up 140%. Here’s What Changed.

I like apples. My favourite type is a crunchy Granny Smith. But sometimes I feel adventurous and I go for a Red Delicious. I think apples are underrated as a fruit; many people would reach for strawberries over apples. But outside diet, apples are everywhere. An apple was the method the Evil Queen used to deliver her poison to Snow White.

Also remember what they say, “An apple a day, keeps the doctor away”.

Most importantly, we have to blame a damn apple for being kicked out of heaven.

Note that one of the most valuable and beloved companies in the world is Apple.

And if you bought the shares, you would have been more than happy.

But I am here to tell you that the apple is not always better. Maybe the cultural importance of the apple is so imprinted in our DNA that we stayed laser-focused on and forgot there are other companies in the space. The only catch is that they are boring, almost aggressively boring. For example, my February stock pick has outperformed Apple.

Can you guess which company it is?

It is Dell, yes, the boring laptop company. As you will see below and in the original thesis (for which I just removed the paywall), Dell has no moat, no proprietary technology, no captive audience, no material patents. Dell is an operator in a commodity space, and the reason it's attractive is that it is the best operator in that space. In hardware, where the product itself is undifferentiated, the edge is in how the business is run: a direct-to-customer model, supply-chain discipline that lets Dell reprice faster than rivals, and a negative working-capital cycle that funds growth with other people's cash. That is how thin box-selling margins turn into north of 20% ROIC. The rest of this Weekly is the story of how that edge held up once AI hit the order book.

Back on 23 February, I sent paid subscribers a trade alert: buy Dell at $123.

Four days later I followed with the deep dive.

Today I’m taking both of them public, because the investment has already done its first job, and the more interesting question is what to do from here.

Dell closed last week around $295. From the $123 entry that’s +140% in about three months.

On 26 February, Dell printed a record quarter…

… and handed out FY2027 guidance that ran well past the model I built the thesis on. So this update does three things: it grades the original thesis against the numbers, walks through a revised valuation, and asks whether the risk and reward still make sense after a double.

By the way, since adding Dell, it has 9x Apple’s performance.

TLDR

• The trigger: Q4 FY2026 (26 February) was a record across revenue, EPS, and cash, and FY2027 guidance came in well above my original model.

• Scorecard: of the five original thesis pillars, four are confirmed and one (AI-server margin) is evolving.

• Biggest change: AI is no longer a promise. $64.1B of FY2026 orders, a $43B exit backlog, and a guide to $50B of AI revenue in FY2027.

• Revised valuation: my DCF base case is $486, up from the original $206, on assumptions at or below Dell’s own FY2027 guidance. At $295 that is +65% upside. A 5,000-run Monte Carlo stress test is more cautious, with a $390 median and 26% of paths below today.

• Verdict: BUY, conviction intact. A $486 target is +65% upside against a $200 bear, about 2 to 1 risk/reward, essentially as asymmetric as February’s setup. DELL is still a buy

Thesis scorecard after Q4 2026

In February, I argued three compounding engines were working at once, on top of an operator edge and a cash machine that few people credit. Here’s how the five pillars hold up against the print.

Pillar #1. The operator edge: Confirmed

Original thesis: Dell has no product moat, but in commodity-like hardware the best operator wins. A direct model, supply-chain discipline, and a negative-working-capital machine drive +20% ROIC.

What happened since last update: ISG operating income hit a record $2.9B at a 14.8% margin, opex fell 320bps to 9.9% of revenue, and the cash conversion cycle stayed at minus 32 days even as AI shipments scaled. When DRAM costs spiked, Dell repriced the entire server book on 10 December and tens of thousands of open PC quotes on 6 January, and margins stabilized inside the quarter.

Assessment: This is the load-bearing pillar and it got stronger. The speed of repricing is the operator edge made visible. Confirmed.

Pillar #2. The AI demand wave: Confirmed and strengthening

Original thesis: Enterprise infrastructure spend is shifting toward AI clusters and Dell sits where those orders land. At the deep dive I had Q3 data: $12.3B of AI orders and an $18.4B backlog.

What happened since last update: Q4 alone booked $34.1B of AI orders. FY2026 orders reached $64.1B, shipments $25.2B, and the exit backlog a record $43B. The customer base passed 4,000, broadening across neoclouds, sovereigns, and enterprise, and the 5-quarter pipeline grew even after converting $34.1B. FY2027 guidance calls for $50B of AI revenue, roughly double.

Assessment: The demand wave I described as a thesis is now a backlog with a delivery schedule. Confirmed and strengthening.

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.

What happened since last update: Networking revenue was $5.9B (+27%), Dell IP storage demand grew double digits with PowerStore posting its eighth straight growth quarter, and management expects Dell IP to be a larger share of mix in FY2027. But AI-server margins are still mid-single-digit, and the attach uplift is gradual rather than a step-change.

Assessment: Directionally on track, but the margin payoff is still ahead, not here. Evolving.

Pillar #4. The cash machine: Confirmed

Original thesis: Negative working capital plus deferred revenue keeps invested capital low, so ROIC stays high and funds the returns.

What happened since last update: FY2026 generated over $11B of operating cash, the minus 32-day cash conversion cycle held through the AI ramp, and ROIC sits near 28% on the model. Inventory rose to position for $13B of Q1 AI shipments, but the cycle itself didn’t deteriorate.

Assessment: Confirmed. The balance sheet did exactly what the thesis needed it to.

Pillar #5. The shareholder flywheel: Confirmed and strengthening

Original thesis: Dell returns +80% of adjusted FCF through buybacks and dividends, the share count shrinks, and per-share value compounds without hypergrowth.

What happened since last update: FY2026 returned $7.5B and repurchased 54M shares, more than double FY2025.

For FY2027 the dividend was raised 20% to $2.52 and the board added $10B to the buyback authorization.

Assessment: Confirmed and strengthening. The flywheel is spinning faster.

Q4 FY2026 results review

The quarter was a clean beat on numbers that matter. Revenue and EPS both set records, and the cash flow that funds the flywheel came through.

ISG carried the quarter. Infrastructure revenue was a record $19.6B, up 73%, with AI server revenue of $9.0B and ISG operating income a record $2.9B at a 14.8% margin, up 240bps sequentially. AI revenue rose more than 4x y/y. This is the proof point the thesis needed: Dell can scale AI volume and still expand segment profit because storage mix and traditional-server profitability carry the margin.

CSG is where the operator chose growth over margin. Client revenue rose 14% to $13.5B and Dell took share, but operating margin sat at 4.7% because management deliberately delayed PC price increases to capture the buyer base before raising on 6 January. That’s a choice, not a problem, provided the margin normalizes, which management says began immediately after the January reset.

Guidance: then vs now

The single most important change since February is the forward guide. When I wrote the deep dive, my model assumed a far more modest FY2027. Management’s actual guidance is materially higher.

Management credibility: Dell has a pattern of guiding conservatively and beating, and the second-half FY2027 guide was described as deliberately prudent on supply.

I treat the revenue guide as closer to a floor than a ceiling. The one place to stay honest is reported gross margin: as AI grows to 35% of revenue at mid-single-digit margins, the blended gross margin is pressured even as it rises excluding AI mix.

Valuation: from $206 to $486, and the assumptions behind it

My original base-case fair value was $206 per share, about +73% above the $123 entry, built on WACC of 8.6%, an unlevered beta of 1.31, and 2.5% terminal growth. I wrote it before Q4 and flagged it as likely conservative, because the FY2027 guide already looked stronger than my model. It was.

Last week, I rebuilt the DCF on the assumptions above, and it lands at a $486 base case, +65% above today.

The $486 base case is not a stretch. It falls out of the DCF on assumptions that sit at or just below what Dell guided for FY2027. The two tabs below are the build.

You can review the full model here: View DCF Model

On the segments tab I model FY2027 AI-server revenue up 95%, just under the company’s roughly 100% guide; traditional servers up 6% and storage up 5%, the mid-single-digit range management called for; and CSG up 1%, matching its guide. ISG operating margin sits at 11%, the low end of Dell’s 11 to 14% framework, exactly where management pointed on AI mix.

On the assumptions tab, gross margin steps down to 19.8% as the AI mix dilutes it, G&A falls to 9.8% of revenue for the operating leverage management promised, capex holds at 2.5%, and the dividend rises to $2.52. That builds to about $138B of FY2027 revenue, inside the $138B to $142B guide, discounted at an 8.5% WACC to a 2.5% terminal, and produces a fair value of $486. Every input is at or below Dell’s own guidance, which is why I treat $486 as probable rather than optimistic.

To pressure-test it, I also ran 5,000 Monte Carlo simulations inside the model, varying the five inputs that matter most. The distribution is more cautious than the point estimate: a median of $390, a mean of $418, and a wide range that reflects how much still rides on AI.

The five Monte Carlo inputs, and why I chose them

I’d rather show the full assumption set than hide behind a single point estimate.

The five stochastic drivers, each drawn 5,000 times:

• AI server revenue growth: 28% CAGR (2027-2032) mean, 3% standard deviation.

• ISG operating margin: 11.5% mean, 2% standard deviation, the lower end of Dell’s 11-14% framework.

• CSG operating margin: 6.0% mean, 1% standard deviation.

• WACC: 8.5% mean, 1% standard deviation.

• Capex intensity: 2.5% of revenue mean, 1% standard deviation.

Held fixed: traditional servers and storage growing 4% a year, CSG 1.5%, a 23% tax rate, 2.5% terminal growth, the negative-working-capital cash benefit Dell consistently delivers, 640M diluted shares, and net debt of roughly $19B. Corporate costs run at 2% of revenue.

Reading the distribution: the median sits at $390 and the mean at $418, higher than the median because the AI upside tail is fat, the 90th percentile is $646 and the 95th is $734. The downside is real too: the 5th percentile is $196, the 10th is $229, and about 26% of the 5,000 paths land below today’s $295. This is not a one-way bet.

Where the risk lives: the simulation’s sensitivity output is more useful than the point estimate. ISG operating margin drives about 48% of the variance in fair value, WACC another 40%, and the AI growth rate only 11%; CSG margin and capex are rounding errors. The valuation hinges far more on whether Dell holds its server margins, and on what rate you discount at, than on the exact AI number.

What the market is pricing

Here’s the part that keeps me holding. At $295, Dell trades near the 25th percentile of my simulation, where the 25th-percentile outcome is roughly $298. The market is underwriting a below-median AI and margin path. About three-quarters of the simulated outcomes still sit above today’s price, and the mean at $418 is +42% higher. You don’t need the bull case; you need the below-median case to be too pessimistic.

Risk and reward today

Has the run used up the asymmetry? Do the math and the answer is no. In February, at $123, the $206 target was +67% upside against a $75 bear, a -39% downside, about 1.7 to 1. Today, at $295, the $486 target is +65% upside against a $200 bear, a -32% downside, about 2 to 1. The upside percentage is almost identical, and because the bear floor has risen from $75 to $200 the downside percentage is actually smaller, so the setup is about as asymmetric as it was in February, arguably a touch better.

Risk register

The thesis can still be wrong. Here’s what would do the damage, strongest first.

First, AI-server margins stay mid-single-digit forever. The entire attach thesis (Pillar #3) rests on storage, networking, and services pulling blended margins up over time. If AI stays a low-margin pass-through and hyperscalers keep the pricing power, Dell grows revenue without growing economic profit, and the multiple compresses.

Second, an AI digestion air-pocket. Backlog is not revenue until it ships, and a hyperscaler capex pause or a sovereign deal slipping would make the $43B backlog convert slower and lumpier than the guide implies.

Third, a DRAM and NAND cost super-cycle. Spot DRAM is up 5.5x in six months (this helps our position). Dell reprices fast, but if component inflation outruns the pricing engine, ISG and CSG margins compress before the cost is passed through. This is the live risk into the FY2027 second half.

Fourth, PC and CSG weakness. Management guides CSG to roughly +1% with units down double digits. If the Windows refresh disappoints, even that modest growth is at risk, and CSG margin stays pinned near 5%.

Fifth, the valuation. At 34x earnings Dell trades close to the sector’s 35x, but that is double its own 5-year average of 16x.

The cheap operator the market mistook for a box-shifter has re-rated, and a multiple at twice its historical norm leaves little room for a stumble, so the stock now needs execution, not just a re-rating.

If Dell trades down meaningfully, the most likely cause is customer concentration: the neoclouds, sovereigns, and hyperscalers that drive the AI orders also hold the bargaining power, and a single large customer renegotiating terms can move a quarter. That’s the structural tension in being the best operator in a business with no pricing moat.

Performance vs peers

YTD Dell is up 134.5%, the best in its hardware peer group: Lenovo +69.5%, HPE [] +56.5%, and HP [] +13.3%. The whole AI-hardware complex re-rated, but Dell led it. The charts below explain why the market singled Dell out.

Here’s the twist. Dell didn’t win on growth. On trailing revenue Dell is up 17.9%, behind Lenovo’s 29.2% and HPE’s 28.8%; only HP shrank, at -9.8%.

It won on returns. Dell’s ROIC is 21.8%, second only to HP’s 24.6% and far ahead of Lenovo’s 17.0%, while HPE, the apparent margin leader at a 13.4% EBITDA margin, earns essentially nothing on capital at -0.3%.

Dell’s own EBITDA margin of 10.5% sits mid-pack, but it converts that margin into elite returns. That gap is the operator thesis in one place.

The re-rate shows up in the multiple. Dell now trades at 17.8x EV/EBITDA, the richest in the group, against HPE at 13.8x, HP at 6.6x, and Lenovo at 5.6x. In February Dell was the cheap operator the market mistook for a box-shifter. After the stock run, it is the premium name, and that multiple is the clearest sign the relative trade has played out: the market now credits the operator edge it ignored three months ago.

What to watch: Q1 FY2027

Dell reports Q1 FY2027 on 28 May.

I expect beats on both the top and the bottom line; the $43B AI backlog, strong server demand into the quarter, and the read-through from Lenovo all point that way. What I wouldn’t bet on is the kind of jump the stock had last week. That move came off Lenovo’s results, where blow-out AI-server and infrastructure growth lifted the entire hardware group, Dell included, on the read-through. A good chunk of the good news for Dell’s own quarter may already be in the price. A beat that merely meets the higher bar the market has now set is not the same as a beat that surprises it, so I’m positioned for a solid print and a muted reaction.

Verdict

BUY, conviction intact. At $295 against a $486 base case, Dell offers +65% upside with roughly 1 to 2 risk/reward, and the operator edge, the AI backlog, and the buyback flywheel keep compounding per-share value.

Portfolio Update

The market continues to hit all-time highs. But the portfolio advances more than the S&P 500, widening the outperformance (+1.84% vs. +0.88%).

Portfolio Return

• Month-to-date: +2.5% vs. the S&P 500’s +3.7%.

• Year-to-date: +30.0% vs. the S&P 500’s +9.2%. That is a gap of 2,085 basis points.

• Since inception: +83.5% vs. the S&P 500’s +29.9%. That’s 2.8x the market.

Share

Contribution by Sector

Tech led the gains, partially offset by industrials.

Contribution by Position

(For the full breakdown plus commentary on earnings results and the big movers, see Weekly Stock Performance Tracker)

• +125 bps (Thesis)

• +25 bps (TSX: CLS) (Thesis)

• +22 bps (Thesis)

• +1 bps (Thesis)

• +1 bps (Thesis)

• flat (Thesis)

• -6 bps (Thesis)

• -14 bps (Thesis)

• -112 bps (Thesis)

That’s it for this week.

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

Further Sunday reading to help your investment process:

• Never Stop Asking Why, Using the “5 Whys” to Solve Problems and Pick Stocks

• The Rise and Fall of Moats: When Walls Built to Protect Become Traps

• Design Your Life Around Your Nature

• How I Earn $3,000-$7,000 a Month While Waiting to Buy Great Stocks Cheaper

• Cheat Codes for Life Monopoly

Since my trade alert on Monday, the shares are down to $59, so the upside is now 74% with a risk-reward of 1 to 3.2. Even better!

My top three positions that have 5x to 8x1 are AI-related holdings, POWL and STRL, crossed +1,000% last week.

That kind of move is the privilege of buying right and sitting still, but it also concentrates the portfolio in one theme. Almost a fifth of the portfolio (6 companies out of a total of 31) are related to the AI-theme. All those positions have appreciated considerably. The one with the smallest gain is MU, which has gained 106% from the cost basis…

… or 136% since I recommended it the first time.

So while 19% of the positions are in the AI-theme on a count basis, 38.3% of the market value of the portfolio is in the theme.

So I’ve been hunting in sectors I actually understand, away from the AI complex. Energy first. In November, I flagged in the Weekly 58 that energy was the sector to watch on a 12-month view.

In December, I followed with my first energy pick…

… and in March, I added a second energy name in MENA oilfield services.

Utilities second. In February I picked up a utility name that slipped through my fingers in 2024 when valuation finally became sensible.

Defence third. My April defence pick sits on the +13.4% FY2026 budget signal and a multi-year spend cycle.

So far, 3 out of my 4 picks show a positive return. Defence shows a loss, but it hasn’t been more than a month yet.

So which space will be the fourth???

Food is the fourth, and the logic looks like defence: regulatory tailwinds doing the work, multiples compressed, and the operating story turning before the multiple does. Of every food name I’ve looked at over the past month, this one is the one I keep coming back to.

Why Food, Why Now

I’ve spent the past quarter looking at every credible food name with a circular-economy or biofuel angle. Adecoagro. Bunge. ADM. Bachoco. Pilgrim’s Pride (which I just exited).

Of all of them, this one has the most asymmetric setup right now because three things are converging at the same time.

1. A federal regulator finalized the largest renewable fuel mandate in the program’s history.

2. A pending European joint venture gives the high-margin specialty arm a 12-16x EBITDA re-rating catalyst inside the next 12 months.

3. And the operations team has spent two years cleaning up two big acquisitions, with the result showing up cleanly in Q1 2026’s gross margin print.

Each of those would be useful on its own. Together, they’re a regime change.

The market hasn’t repriced for this. The stock trades at 14.5x EV/EBITDA versus a 5-year average of 13.5x, slightly above on the surface, but the trough year compresses EBITDA artificially.

On the DCF-implied EV/EBITDA of 20.6x, the entry today is 40% below fair value. P/B at 2.2x versus the 5-year average of 2.1x looks slightly expensive only because book value is depressed.

This company is the unglamorous opposite of an AI compute story. The company picks up dead animals, used fryer oil, and slaughterhouse byproducts from hundreds of thousands of collection points and turns them into proteins, fats, collagen, gelatin, and renewable diesel feedstock. Every part of the supply chain is regulated. Every cent of the margin depends on commodity pricing. The stock has been cut in half from its 2022 highs and is one of the most hated names in consumer staples. It’s exactly the kind of business I want to own when the AI frenzy needs a counterweight.

Table of Contents:

• TLDR

• How Does The Company Rank?

• How Does It Actually Make Money

• The Pricing Dynamics That Run This Business

• The Long-Form Thesis

• Valuation

• Steel-Manning The Bear

• Variant Perception

• Verdict

Read more

The new name is the fourth bucket of the diversification I’ve been building this year, after energy, utilities, and defence. The pattern is the same one that worked on the April defence pick: regulatory tailwinds doing the work and the operating story turning before the multiple does.

The company is the unglamorous opposite of an AI compute story. It processes byproducts most people don’t want to think about and turns them into industrial ingredients. Every part of the supply chain is regulated. Every cent of the margin depends on commodity pricing. The stock has been cut roughly in half from its 2022 highs. My initial target price shows a +65% upside.

What just changed: a federal regulator finalized the largest mandate in the program’s history six weeks ago. The Q1 2026 print was the first clean read of the new regime. The market hasn’t repriced.

Read more

Hello fellow Sharks,

This week was a down week for the portfolio and we lagged the S&P 500. But it is all good as we are in this for the long term. If you want to skip straight to the numbers, jump to the Portfolio Update.

Some have been asking about the May Stock Pick, usually by now it would be out but I changed my pick halfway when I didn’t like what channel checks revealed. This one should be coming out next week!

As per the Thought Of The Week, I had a different piece queued for this week. Net leverage, and how it sinks cyclical companies. That one runs next week.

The reason I’m pulling it is that I had a strange week. Three separate conversations with people in their early twenties. A TD ad that told me I was ‘meant to trade,’ and a Bloomberg video on how scammers are feeding on the frustration of Gen Z.

All running on the same loop: the system is rigged, the job didn’t materialize, the rent is impossible, and the only way out is the trade that 10x’s by Friday.

So this week is for them.

The poll allows 5 options but if you’re from The Silent or The Greatest generations, please let me know!

Leave a comment

Based on email interactions and last year’s survey, I believe most of you reading this are Millennials and Gen X. Some Gen Z, but not many. So this Thought of the Week may not land for most of you directly, and that’s fine. I’d ask you to share it with the Gen Z people in your life anyway. We can sacrifice one Thought of the Week to help the generation coming up. They are struggling, and the light at the end of the tunnel is not even visible from where they’re standing. Jump to the letter here.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• Earnings Results

• Letter From an Older Brother (Who Also Started Broke)

• Portfolio Update

In Case You Missed It

STRL printed its biggest quarter yet, all comfortably above consensus. Four of my five thesis pillars are confirmed and strengthening; the fifth (valuation) is now the constraint. New DCF target lifts to $1,010 from $600, but with the stock at $851 the model now reads HOLD, not BUY. Risk/reward is essentially 1:1 from here. Conviction in the business is unchanged, what changed is how much room price has left to run.

Two days after I said POWL stays, I refreshed the DCF. Target lands at $329, slight discount to fair value, no longer above it. All four original thesis pillars are confirmed: data centre exposure jumped to $800M of forward revenue after the post-quarter +$400M NeoCloud win; utility revenue grew double digits; the balance sheet still carries zero debt and $545M cash. Position is +1,103% since entry, now the first candidate to trim when capital finds a clearer home.

Share Beating The Tide: Stock Picks That Outperform

Earnings Results

This week two companies reported earnings and both beat top and bottom line estimates. Both are up around 10% this week.

Paid subscribers can read my quick take on the earnings results here.

Thought Of The Week

Letter From an Older Brother (Who Also Started Broke)

Dear younger brother,

I’m not going to tell you the system isn’t rigged. It is. The cost of a degree, a house, a car, a Bobby the dog and a Garfield the cat is not what it was when I was your age. You are not making that up. My generation, and the ones before it, got greedy and didn’t think about you. I’m not here to apologize on behalf of anyone. I’m here to tell you what worked for me when I had nothing, because it might work for you.

In 2000, I got into the University of Toronto on a half scholarship. International tuition was $13K. My family had no money. I held three part-time jobs through college. Rent took $450 a month. Phone and internet cost $50. Books, clothes, the small emergencies that always show up, took another $200. That left $200 for food in a good month.

Here is what mattered. Before I paid rent, before I paid the phone bill, before I bought a single can of tuna, I paid myself 10%. On a $1,000 month, the first $100 went to me. Not to a fund manager. Not to a robo-advisor. To a paper savings booklet the bank actually printed. If you don’t know what that is, ask your parents. Later to GICs. Much later to stocks.

One month, I had a real emergency, and the math didn’t work. I paid myself anyway. That month, I ate pasta and peanut butter sandwiches on $50. I survived. The discipline survived, too, which is the part that actually compounded.

I am not telling you this because pasta builds character.

I am telling you because the loudest voices in your feed make money when you trade or buy their get-rich-quick program, not when you save and build wealth the slow and boring way.

I caught a TD ad on a podcast last week that said, more or less, “since you were a kid you knew what a baseball card was worth… you were meant to trade.” That is one of the more irresponsible things I’ve heard run and it wasn’t from Crypto.com, it was one of the largest Canadian banks. They were not telling you to invest. They were telling you to transact, because every transaction is a fee they earn. Also, not everyone is meant to trade.

The accounts on TikTok with 600,000 followers selling you daily setups are running the same playbook. They get rich when you click. You get poorer.

To be fair, not every voice on TikTok is selling smoke. For example, does real work and tries to educate Gen Z (however, I don’t agree with her allocation to crypto but that is a different topic). Note that the people doing real work explain money while the people running scams promise richness.

The ones running the scams are preying on your desperation. Remember who actually makes money out of a get-rich-quick scheme. It is the person selling you the system. Never the person buying it.

Here’s the math the system-sellers hide. You think a 1-in-50 options bet means 49 of you go broke and 1 of you wins. That is not how it works. I can almost guarantee that all 50 of you go broke. The one winner doesn’t post the loss that comes after.

r/WallStreetBets is the museum of this. Someone hits a six-figure win, posts the screenshot, says they are going to take the money and invest carefully into their future. That post is rarely the last post from that handle. The next one, three months later, is the same person admitting they lost the winnings, the original stake, and a loan from their parents on top.

Easy come, easy go.

That’s why I keep recommending the slow, disciplined, boring approach. You don’t need to make 30% a year. You need 12%. Deposit $100 a month from your 22nd birthday at 12% a year (earlier if you can). By 40 you have roughly $76,000. By 50, roughly $273,000. By 65, $1.7 million.

That’s $100 a month. Less than what some of you spend on DoorDash. The reason it works isn’t skill. It’s time. Time is the only ingredient compound interest needs, and it’s the one ingredient the 1-in-50 crowd burns first.

So yes, the approach is boring. Yes, it’s unsexy AND it works. This reminded me of Buckley’s advertising…

You have heard the latte version of this lecture and I know you’re tired of it. Forget the latte. Try this one.

The latest iPhone is $1,200. $1,200 of Apple stock at 22 has a wildly different ending than the phone. In three years, the phone is worth at most $400. The shares, on Apple’s average return, are closer to $2,094.

Or you could buy a $50,000 car or have invested the $50,000 in GM stock. After three years, the car cost you a couple of thousands to maintain and is worth $25,000, but if you had invested in GM stock, those shares would be worth $118,650.

Now here’s the part nobody says out loud. If everyone bought the shares and nobody bought the phone or car, the shares would be worthless. Capitalism needs both sides of that trade. Your job is to be more on the shares side than the phone side.

That is the K-shaped economy people keep writing about. Owners of stocks on the top of the K, owners of depreciated phones and cars at the bottom. You get to choose which side you want to be in.

In the short term, that’s the move. Pay yourself first, even when the month is bad. Cut what you can. Earn more where you can. It isn’t a complete answer. I know it.

In the long term, vote. I’m not telling you who for. I’m telling you to read the actual policy, not the clip your cousin posted, and pick the candidate who is thinking about you ten years out. If none of them are, demand new ones. If none can be demanded, build the movement that produces them. The French Revolution didn’t start with a campaign rally either.

That’s the whole letter.

Portfolio Update

The market hit all-time highs this week again while the portfolio was down for the week. But that is okay, we are here for the long term :)

Portfolio Return

• Month-to-date: +0.7% vs. the S&P 500’s +2.8%.

• Year-to-date: +27.7% vs. the S&P 500’s +8.2%. That is a gap of 1,945 basis points.

• Since inception: +80.2% vs. the S&P 500’s +28.8%. That’s 2.8x the market.

Share

Contribution by Sector

Tech and Industrials led the losses this week.

Contribution by Position

(For the full breakdown plus commentary on earnings results and the big movers, see Weekly Stock Performance Tracker)

• +4 bps (Thesis)

• flat (Thesis)

• -11 bps (Thesis)

• -17 bps (Thesis)

• -17 bps (Thesis)

• -21 bps (Thesis)

• -21 bps (Thesis)

• -52 bps (TSX: CLS) (Thesis)

That’s it for this week.

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

Further Sunday reading to help your investment process:

• Never Stop Asking Why, Using the “5 Whys” to Solve Problems and Pick Stocks

• The Rise and Fall of Moats: When Walls Built to Protect Become Traps

• Design Your Life Around Your Nature

• How I Earn $3,000-$7,000 a Month While Waiting to Buy Great Stocks Cheaper

• Cheat Codes for Life Monopoly

Since I added STRL to the portfolio at $76.68, the position has compounded to $851.35 today, a return of +1,010% at an 8.9% portfolio weight.

It is the position that anchored Weekly #81’s discussion of when not to sell a winner.

We are now three price targets and two earnings prints into my coverage, starting with the original deep dive in December 2025 at a $455 target.

This update walks through the Q1 2026 print, my new $1,010 DCF, and the uncomfortable fact that even with the model lifted twice, it now reads HOLD: the upside has compressed to +19% against a bear case at $700, with the model’s own R/R essentially symmetric at 1 to 1.0.

Table of Contents

• TLDR

• How Does STRL Rank?

• Thesis scorecard after Q1 2026

• The Q1 2026 print

• Guidance comparison: the second beat-and-raise in a row

• Valuation update: from $600 to $1,010

• Risk register: what is live, what faded, what is new

• Performance vs peers since the Dec 2025 deep dive

• Verdict

TLDR

• Q1 2026 was a record print: revenue $825.7M (+92% y/y), GAAP EPS $3.09 (+141%), adjusted EBITDA $166.6M (+107%), all of it well above consensus.

• Total visibility pool stepped up to roughly $6.5B, a $2B jump from year-end 2025, driven by $1.2B of CEC awards plus a new semiconductor fabrication campus initial-phase win.

• Of my five original thesis pillars, four are confirmed and strengthening, one (valuation) is evolving as the stock has run faster than the operating story.

• Updated DCF target: $1,010 (was $600 at the Q4 2025 update). Upside to target from $851.35 is +18.6%; bear case raised to $700 (was $330). Dollar risk/reward is essentially symmetric (1 to 1.05), the model now reads HOLD, not BUY.

• Conviction in the business is unchanged.

How Does STRL Rank?

The Ranked Stocks composite sits at 79/100 for STRL, placing it in the 80th percentile in the United States and the 80th percentile in its sector. That headline number reads top quintile, but it is the spread between the factor scores that tells the story.

Sentiment 99 and Outlook 100 are essentially as high as the framework prints. Analyst revisions are still rising into the Q1 beat, the Street is materially behind management’s raised guide, and the forward-looking narrative on hyperscaler capex is firmly tailwind. These two factors carry the composite.

Growth 78 lands where the operating story would lead: Q1 revenue +92% y/y, FY26 guide implying +51%, and the multi-year backlog ramp gives STRL one of the strongest growth profiles in industrials.

Valuation 4 and Profitability 9 are both red flags. Valuation 4 reflects the trailing P/E of 76x and EV/EBITDA of 45x, which are by any standard expensive. Profitability 9 is the noisier signal: STRL’s ROIC ran 25.9% in 2025 and I forecast to expand into the low-30s in 2026 as the asset base scales, so a 9 score does not match the operating reality.

The most likely explanation is the CEC acquisition’s intangible amortization ($22M in 2025, forecast to grow with the deal’s earn-out periods), dragging GAAP margins below where the cash economics sit. The factor reads on accounting profitability, not economic profitability, and on that basis the score is misleading.

The combination of Valuation 4 and Profitability 9 is what the model’s HOLD output is also telling you: the business is excellent on growth, sentiment, and outlook, but the entry multiple at $851 leaves little room.

Thesis scorecard after Q1 2026

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

Original thesis: STRL is the picks-and-shovels play on a multi-year hyperscaler buildout, with McKinsey and BCG framing $1.8T to $6.7T of data center capex globally through 2030.

Evolution: At Q4 2025 the case got stronger as top-5 hyperscaler 2026 capex was framed at $602B (+40% y/y), of which roughly 75% is AI-related (per the Q4 2025 earnings call).

What happened since last update: The Q1 print confirmed the demand picture has not slowed. Mission-critical projects (data centres, manufacturing, semiconductor) now represent over 90% of E-Infrastructure backlog at quarter end, up from 84% at year-end 2025 (per the Q1 2026 press release). STRL also disclosed an initial-phase award on a “large, multi-year semiconductor fabrication campus,” opening a new end-market that runs parallel to data centres rather than substituting for them.

Assessment: The shift toward +90% mission-critical work means STRL is winning the longest-duration, highest-quality contracts in the pipeline, not the leftover scraps. The semiconductor win matters because it diversifies STRL’s secular demand vector beyond hyperscalers, addressing one of my original concentration concerns at the margin. Pillar stronger than at Q4.

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

Original thesis: Selling the low-margin highway business and reinvesting into E-Infrastructure compounds consolidated margins because E-Infra carries roughly 2x the EBITDA margin of Transportation.

Evolution: At Q4 2025, E-Infra ended the year at 47% of FY revenue, up from 35% the year before, with Q4 alone hitting 69%.

What happened since last update: In Q1 2026, E-Infra was 72% of revenue, up from 51% in the prior-year quarter, with segment revenue +174% y/y. Stripping out CEC, the legacy E-Infra business grew +102% organically, and CEC standalone grew +78% versus the pre-acquisition Q1. E-Infra adjusted operating margin held at 23.5%, slightly above last year’s 23.2%, even as the segment more than doubled.

Assessment: Two things matter here. First, the mix is moving faster than I had pencilled in, my last update. It now has E-Infra reaching 89% of revenue by 2035, vs the original deep dive’s path that took longer to get there.

Second, margins held flat while doubling, that is the textbook signature of a business where unit economics are durable and scaling does not destroy them.

Pillar stronger than at Q4.

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

Original thesis: Buying CEC Facilities Group in 2025 lets STRL bid site development and mission-critical electrical as one integrated package, displacing two separate subcontractor bids and moving STRL “up the value chain.”

Evolution: The Q4 update flagged early integration but had limited disclosure on actual cross-sell wins.

What happened since last update: The Q1 call disclosed STRL is now “in active construction on two data center campuses where we are delivering site and electrical services in an integrated capacity” (per the Q1 2026 earnings call). CEC alone added $1.2B to combined backlog in the quarter, about 60% of the total backlog step-up from year-end. CEC standalone revenue grew +78% y/y versus the pre-acquisition Q1.

Assessment: The cross-sell theory has moved from slide-deck logic to two active projects. The fact that CEC is generating $1.2B of incremental backlog while STRL is integrating it is the strongest evidence yet that the acquisition is delivering the strategic value, not just the financial accretion. Pillar confirmed; I’m watching for the next datapoint, what percent of new E-Infra wins are integrated vs single-service.

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

Original thesis: STRL’s backlog gives multi-year revenue visibility that materially de-risks the forward model, with combined backlog (signed plus unsigned) growing faster than burn.

Evolution: Q4 2025 backlog was $3.01B (+78% y/y), combined backlog $3.31B (+81%), with a total visibility pool of $4.5B.

What happened since last update: Q1 signed backlog $3.80B (+78% y/y), combined backlog $5.15B (+131% y/y), and the future-phase pipeline now exceeds $1.3B. Total pool: roughly $6.5B, a $2B step-up from year-end 2025. Book-to-burn was 2.1x for signed backlog and 3.5x for combined, best quarter on record on the order intake side. The semiconductor fab win adds a new end-market.

Assessment: A 2x burn ratio on signed backlog and 3.5x on combined means STRL is filling 2026 capacity faster than it is consuming it, even at 92% revenue growth. The diversification into semis is the cleanest tell that the model’s outer-year revenue path is not single-customer or single-end-market dependent.

Pillar stronger than at Q4.

Pillar #5. Underpriced compounder: Evolving

Original thesis: The original deep dive ran the DCF to $455 against a market price near $334. The thesis was that mix shift plus backlog growth would re-rate the multiple as the market caught on.

Evolution: $455 was crossed in February 2026. At Q4 2025 I lifted to $600. Stock crossed $600 in late March. Through Q1, the model output stepped to $1,010 against a current price of $851.

What happened since last update: Two things moved the target. First, the outer-year revenue path in the model lifted as I extended the E-Infra growth runway, 80% in 2026, 35% in 2027, 30% in 2028, before tapering, which pushed 2030 revenue to roughly $8.2B. Second, the WACC dropped to 6.90% (unlevered beta 1.12 for the construction sector, long-term debt rate 4.50%, optimal debt-to-capital 45%, up from 40%), reflecting STRL’s deeper net-cash position that supports more debt capacity in the optimal capital structure.

Assessment: Conviction in the business is unchanged. Conviction in the position has spent its asymmetry: at $425, the implied upside to the prior $600 target was +41% with a bear at $330 so the R:R was 1 to 1.8; at $851 today against $1,010, it is +18.6% upside with a bear at $700, so downside of -17.8%. R:R is essentially symmetric at 1 to 1.05. The recommendation is HOLD, not BUY.

Pillar evolving, same business, the margin of safety is gone.

The Q1 2026 print

Revenue of $825.7M came in +92% y/y, a $216M beat versus consensus of $609.7M (+35.4% surprise). GAAP diluted EPS of $3.09 was +141% y/y and beat by $0.81. Adjusted diluted EPS of $3.59 was +120% y/y. Both lines crushed the Street.

Adjusted EBITDA of $166.6M was +107% y/y at a 20.2% margin, slightly below FY25’s 20.1% on a like-for-like basis but well above the consolidated trajectory implied by the model. Operating cash flow was $165.6M for the quarter, STRL converted close to 100% of EBITDA to cash, which is rare for a construction services business and a function of the contract liabilities build ($695.6M of contract liabilities at quarter-end). The cash balance grew to $511.9M from $390.7M at year-end, a $121M build in 90 days, while debt sat flat at $287.5M (net cash $224M).

Segment performance was the story of the print. E-Infra revenue $597.7M (+174% y/y, 72% of total) with adjusted operating margin 23.5%; Transportation revenue $132.9M (+10%, 16% of total) with adjusted operating margin 12.9%, up 160 bps; Building revenue $95.1M (+3%, 12% of total) with adjusted operating margin 8.7%, down 680 bps from 15.5%. The Building margin collapse is the one negative datapoint and confirms the affordability-driven softness management flagged at Q4.

Backlog was the second story. Combined backlog stepped from $5.15B (+131% y/y), with $1.88B contributed by CEC. Stripping CEC out, organic combined backlog still grew +46% y/y, which on a base that was already up sharply at year-end is uncommon. Future-phase work crossed $1.3B for the first time. Book-to-burn was 2.1x signed / 3.5x combined.

Buybacks were modest in the quarter at $12.3M (40,400 shares at an average price of $305.14), but I would note that the average buyback price for Q1 is now far below the May 12 close of $851.35, STRL repurchased shares at roughly 36% of today’s price during the quarter.

Guidance comparison: the second beat-and-raise in a row

E-Infrastructure segment guidance was lifted in tone if not in a specific dollar number: the team now expects E-Infra to grow “80% or higher” including CEC’s full-year contribution, with legacy site-development “approaching 60% or higher”, both up from the high-50s/60s range implied at Q4. Adjusted operating margins for E-Infra are guided in the “mid-20% range,” consistent with Q1’s 23.5% print.

Management credibility check: Both of the last two prints have been blowouts, Q4 beat consensus on revenue by $54M and EPS by $0.63, and Q1 just beat by $216M on revenue and $1.31 on adjusted EPS. The team has guided conservatively two quarters in a row and beaten by a wide margin on operations driven by hyperscaler intake. I would treat the new $3.70B-$3.80B revenue range as a floor, not a ceiling. The next plausible raise comes at Q2 (early August), and given the $5.15B combined backlog already in hand, a $4B+ revenue run rate is the realistic ceiling for the year.

Valuation update: from $600 to $1,010

The model target moved from $600 at Q4 to $1,010 through Q1. Three assumption changes did the work.

First, the outer-year revenue path was lifted. Q1’s mission-critical backlog of +90% and the $1.3B future-phase pipeline supports a higher trajectory than the Q4 model carried. The model now has 2026 revenue at $3.75B (in line with the raised guide midpoint), growing to $4.70B in 2027, $5.80B in 2028, and reaching $10.32B by 2032. E-Infra alone grows from $1.47B in FY25 to $11.6B by 2035, a path that requires the AI capex cycle to continue at scale, but the Q1 data does not contradict it.

Second, the EBITDA margin path was steepened. The consolidated EBITDA margin runs from 18.8% in 2026 to 22.4% by 2032 in the model, anchored by E-Infra segment EBITDA holding at 28.5% as it scales to ~89% of consolidated revenue by 2035. Q1’s 23.5% E-Infra adjusted operating margin (which corresponds to ~28-29% segment EBITDA after D&A add-back) supports that anchor. Implied 2026 EBITDA of $705M sits in the upper half of the $843M-$873M adjusted EBITDA guide range, and 2032 EBITDA reaches $2,042M.

Third, the cash bridge is richer. Net cash at Q1 quarter-end is $224M, plus a $121M investment in the unconsolidated RHB subsidiary that the model now picks up explicitly in the EV-to-equity bridge. Year-end 2025 cash of $390.7M flows to $511.9M at Q1, and the Q1 OCF of $165.6M implies the cash build accelerates through the year, the model’s discounted FCF stack reflects this.

Fourth, the WACC dropped from 7.20% to 6.90%. The optimal debt-to-capital lifted from 40% to 45% (with the long-term debt rate held at 4.50%, the unlevered beta held at 1.12), reflecting STRL’s net cash position of $224M giving the balance sheet room to carry more debt before the marginal cost of debt steps up. A 30 bp WACC compression adds roughly $90/share to the target on its own.

Bear case $700. The new bear at $700 is a multiple-compression case: 2026 and 2027 land roughly in line with the current model, but the market re-rates STRL to 14x EV/EBITDA on a 2027 base (versus the implicit 20x in the $1,010 target). The bear does not require a hyperscaler capex pullback; it only requires the market to pay 14-15x for 2027 EBITDA rather than 20x.

Risk register: what is live, what faded, what is new

Customer concentration (Original / Unchanged). The Dec 2025 deep dive flagged that four customers represented 35% of E-Infra revenue in 2022. STRL has not disclosed updated concentration figures in either the Q4 or Q1 prints; with CEC layered in and the customer base of mission-critical electrical now bolted on, the concentration may be lower, but I have no data to confirm. Still a live risk.

Project execution (Original / Faded). Q1 delivered clean execution across two integrated data-center campuses plus the broader portfolio. Operating margins expanded in Transportation, held in E-Infra, and the cash conversion ratio of close to 100% says the team is running the operations cleanly. Risk faded.

Macro/rates on Building (Original / Materialized). Building adjusted operating margin collapsed to 8.7% in Q1 from 15.5% in Q1 2025. Revenue was up 3% but profit fell 42%. Management explicitly flagged “affordability constraints” and said conditions “will remain challenging through 2026.” This risk has shown up in the numbers. The good news: Building is now only 12% of revenue and falling toward 8% in the model by 2030, so the segment’s drag on consolidated EBITDA is fading even as its margin compresses.

Hyperscaler capex pullback (Q4 added / Unchanged). The bear case still hinges on whether top-5 hyperscaler capex breaks downward in 2027 or 2028. Q1 data did not provide a catalyst, capex commentary from Microsoft, Meta, Google, Amazon at their April-May 2026 prints all held or raised. Still a live risk for outer years.

AI capex digestion (New). The market is increasingly debating whether 2025-2026 hyperscaler builds will be matched by AI revenue and usage in 2027-2028. If hyperscalers slow growth in 2027 to digest, STRL’s outer-year backlog flow could compress. STRL has insulation here via the semiconductor fab work and the geographic build-out.

Valuation/multiple compression (New, central). STRL trades at 76x trailing P/E and 45x EV/EBITDA, well above where the market was paying at the Q4 update.

Performance vs peers since the Dec 2025 deep dive

STRL is up +165% since the original deep dive in early December 2025, outpacing every comparable name in the construction services peer set. MTZ ran +98% in the same window on the same hyperscaler infrastructure theme, AGX +87% on the data-center-power adjacency, URI +19% reflecting broader equipment rental cyclicality, and PRIM -8% as project margin compression weighed on the name. The spread tells you the market has priced STRL as the cleanest E-Infrastructure exposure in the group, and it has. From here, the call is on operating execution, not relative re-rating.

Verdict

Conviction in the business is unchanged, Q1 confirmed every pillar I underwrote in the original deep dive and strengthened most. Conviction in the price is HOLD: target $1,010, bear $700.

Similar to POWL, I am holding here but STRL is a candidate for trimming (after POWL) if I need the capital for a new position).

Two days ago, I said POWL stays. The refreshed model targets $329, a 2% discount to today’s $322 close. Thesis intact. Holding and will trim only when capital finds a clearer home.

Since I added Powell Industries [] to the portfolio at $26.78 (adjusted for the 1 to 3 split), the stock has returned +1,103%.

As of today’s close at $322, that is the second unicorn in the BTT portfolio. The position stays.

Two days ago, in Weekly #81, I wrote that POWL stays and walked subscribers through the two-question test that kept it in the portfolio.

The thesis hadn’t broken. The mix shift from oil and gas to utility, transit and data centre power was working. Q1 bookings were the strongest in two years.

But after I refreshed the DCF, the model lands at $329 a share. That is a slight discount to today’s $322 close, not above it.

That setup is one I have seen before. In Crown Has Been Passed, my fair value was $545 and the stock was trading at $580, six percent above (remember the stock just split 3 to 1).

I called it a HOLD then. I wrote that I was comfortable holding a great business slightly above my fair value when the company keeps surprising to the upside, and that POWL would be the first candidate to trim only when I needed capital for a clearer setup. Lucky for me, I did not need the capital. The stock has run +79% since.

The setup today rhymes with that one, just inverted. The thesis is in better shape than it was in February. The valuation is no longer above my fair value; it is sitting just below. I am happy to pay fair value for a business that compounds the way POWL does. I am not buying more, but I am not closing either. POWL stays. I will trim only when I need the capital for a setup with a clearer upside.

Table of Contents:

• TLDR

• Q2 FY2026 Results: A Miss the Market Shrugged Off

• Thesis Scorecard: Four Pillars Confirmed, And That Is the Problem

• Valuation: The Case for $329 and Why Even Stretching Cannot Get Me Higher

• Why I Am Holding Despite the Upside Compression

• Risk Register Update

• Verdict

TLDR

• Q2 FY2026 print: revenue $297M (+6% y/y) and GAAP EPS $1.25 (-1% y/y) both missed consensus, but new orders surged +97% y/y to $490M and the post-quarter NeoCloud data centre award topped $400M, the largest order in POWL history.

• All four pillars of my January 2025 thesis are confirmed. The mix shift from oil and gas to utility and data centre is happening on schedule, gross margins held the upper-20s base, and the balance sheet still carries zero debt and $545M in cash.

• The refreshed DCF target lands at $329 with NeoCloud follow-on phases.

• Stock at $322 now sits at a slight discount to my fair value of $329. Holding is consistent with the Crown Has Been Passed precedent: pay fair value for a great business, trim only when capital finds a clearer home.

POWL stays at +1,103% capital return. First candidate to trim when capital finds a clearer home. Below: the Q2 print, the four-pillar scorecard, and the walk that pinned the ceiling at $329.

Q2 FY2026 Results: A Miss the Market Shrugged Off

Powell reported Q2 FY2026 on May 4. The headline numbers came in below the Street.

GAAP EPS of $1.25 missed by $0.11 and revenue of $296.6M missed by $2.5M. Sequentially, the print was strong at +18% versus Q1, but y/y the growth rate was a much more modest +6%. Net income actually declined 1% versus Q2 FY2025 because SG&A ran $4M higher and R&D climbed $1.5M as the company started funding the data centre and government-defence push the CEO walked through on the call.

The market reaction was the more interesting part. The stock jumped roughly +10% the day after the print, lifted entirely by the post-quarter announcement.

Orders carried the quarter, not revenue. New bookings of $490M were +97% y/y, the second-highest quarterly bookings in Powell’s history. Book-to-bill came in at 1.7x for both Q2 alone and the first half. Two mega-orders booked inside the quarter (a $75M+ utility generation award and a $75M+ data centre award), then on top of that, the company disclosed a single $400M+ NeoCloud data centre order won in early April, after the quarter closed. That award alone is roughly 22% of the entire backlog the company carried into Q3, and it is the largest single order Powell has ever signed.

The CEO described the project as a power-island for an on-site generation campus, not a straightforward switchgear bid. That is the high-complexity end of Powell’s TAM where the company says it has unique competitive position. The 2 to 2.5 year burn carries through fiscal 2028, which is part of why management said in the Q&A that visibility now extends “well into FY2028.”

Gross margin held the upper-20s. Q2 FY2026 GP came in at 29.6%, +120 bps versus Q1 FY2026’s 28.4% (the latest print on the chart below, which is from the Feb 2026 deck and predates Q2). Management called out roughly +90 bps of favourable project closeouts inside the quarter. Strip those out and the underlying margin sits at 28.7%, still inside the “upper-20s base” management has guided to since Q3 FY2025.

Balance sheet still pristine. Cash and short-term investments ended the quarter at $545M, up from $476M at September fiscal year-end. Zero debt. Operating cash flow in Q2 was a clean $51M. The buffer keeps growing even as the company funds Jacintoport, the Mosley fab equipment build, and the front-end engineering for a potential greenfield decision the board is sizing this summer.

Thesis Scorecard: Four Pillars Confirmed, And That Is the Problem

The original thesis from POWL Power-Up: From $80 to $250 and Still Charging Ahead (January 2025) rested on four pillars. I have updated this scorecard at every quarterly review since then, including the Q1 FY2026 update in February 2026 and the Crown thesis refresh in April. Today’s grades:

Pillar #1. AI and data centre electrification: Confirmed and strengthening

Original thesis: Powell would benefit as a pick-and-shovel supplier to the data centre buildout, moving from low-single-digit backlog exposure to a meaningful share over time.

Evolution: Through 2025, the data centre share of backlog climbed from 7% to 15%. By Q1 FY2026, it had reached 15%. By Q2 FY2026, with the segment now split out, data centre is in the low-20s of the 29% commercial-and-other-industrial bucket — call it 6-7% of the $1.8B Q2 backlog.

What happened since last update: The post-quarter +$400M NeoCloud order single-handedly takes data centre exposure to roughly $800M of forward revenue, including the prior backlog. That is more than Powell did in its entire FY2021 ($471M of revenue). The CEO confirmed the pipeline of similar behind-the-meter bids is widening, not narrowing.

Assessment: Stronger than I underwrote in January 2025. The thesis didn’t just play out, it accelerated.

Pillar #2. Utility grid modernization: Confirmed

Original thesis: Aging US grid plus electrification plus EV plus AI demand would force utilities into a multi-year capex super-cycle, and Powell’s switchgear and substation business would ride it.

Evolution: Utility revenue grew +35% y/y in Q1 FY2026 and +14% y/y in Q2. Utility share of backlog held at 30% in Q2 (up from 21% in FY2021). Powell booked its largest-ever utility generation award inside the quarter (+$75M).

What happened since last update: Management called out “unprecedented load growth” continuing into 2026 and pointed to the White House’s recent Section 303 designation of substations and switchgear as essential to national defence. That federal capital is real and starts deploying via the Department of Energy this fiscal year.

Assessment: Confirmed. The cycle is real, durable, and Powell is winning share inside it.

Pillar #3. LNG export buildout: Confirmed

Original thesis: US Gulf Coast LNG capacity would expand sharply post-2025 as Europe replaced Russian gas and Asia kept demand growing. Powell’s high-voltage gear into LNG terminals would be a multi-year tailwind.

Evolution: 2025 was the second-strongest year ever for LNG project FIDs globally, with US capacity at 80+ bcm of new sanctions. Powell booked a $100M+ LNG order in Q1 FY2026.

What happened since last update: Oil and gas (excluding petrochem) revenue grew +11% y/y in Q2. The CEO described the LNG outlook as “very solid” and noted “structural cost and competitive advantages” for US exporters that have been elevated by the risk of capacity impairments overseas.

Assessment: Confirmed. The wave has years to run, and Powell is the engineered-to-order supplier of choice in its backyard.

Pillar #4. Operational excellence and balance sheet discipline: Confirmed

Original thesis: Powell would compound book value through clean execution and a no-debt balance sheet, with capital available for bolt-on M&A and capacity adds.

Evolution: Cash grew from $358M at FY2024 year-end to $476M at FY2025 to $545M at the end of Q2 FY2026. The Remsdaq acquisition (UK SCADA business) closed and is contributing to bookings. The Jacintoport fab expansion is on schedule and Mosley fab equipment is going in.

What happened since last update: Management is sizing a potential greenfield facility ($70M to $100M of capex, decision in the next few quarters). That is the next leg of capacity adds. The balance sheet supports it without any external financing.

Assessment: Confirmed. The model is working operationally.

The four pillars I underwrote are all in better shape today than when I wrote the deep dive 16 months ago. That is not the problem. The problem is what the price now demands.

Valuation: The Case for $329 and Why Even Stretching Cannot Get Me Higher

I refreshed the DCF model after the Q2 print using the same Main Assumptions framework that has guided every quarterly update on POWL since the original deep dive.

The output lands at $329 a share. That is above where the stock traded all of last week.

First, NeoCloud follow-on phases at scale. Management said the $400M+ is the first phase of a multi-phase campus and that they are “anxious to see if that progresses over time.” That is honest but it is not committed. Modelling a second and third NeoCloud phase before either is signed is the kind of forward-pull that the disposition effect uses to justify holding.

Second, structural margin above 29.5%. The model already bakes in 29.5% gross margin through 2032, in line with management’s “upper-20s base” guide, then fades to 29.0% terminal. Pushing the path higher requires Brett’s price-and-efficiency commentary to convert from forward-looking statement to reported P&L. He said it would be “quantifiable” by Q4 FY2026 and into FY2027. Possible. Not yet visible in the print, where Q2 GM was 29.6% inclusive of +90 bps of project closeout help.

The model output of $329 sits 2% above the current price. There is no scenario I can defend that lands meaningfully higher without compounding the two levers above.

There is also the cash-bridge question. The model adds back the full $545M of cash to get to equity value. Slide 16 of the February 2026 investor deck explicitly says roughly half of that cash will deploy into working capital to support backlog conversion over the next 12 to 18 months.

Treating the full balance as a static add-back overstates equity value by $5 to $7 per share once you adjust for that planned working capital build.

Why I Am Holding Despite the Upside Compression

The thesis is in the strongest shape it has been in 16 months. Every pillar tracked. Several accelerated. The balance sheet is stronger. Backlog visibility is now well into FY2028.

The price has fully discounted that work. The model sees a 2% sliver of upside to $329. That is fair value, not undervalued. The two-question test from Weekly #81 gives me a mixed read:

Question 1: If I had cash today and didn’t already own POWL, would I open the position at $322? No. I would not start a new position at fair value. The risk-reward needs to be skewed for me to open new.

Question 2: If POWL fell 30% tomorrow to roughly $225, would I double the position? Yes. At $225 most of the margin of safety is back. I would back the truck up.

Question 1 is a no, Question 2 is a yes. That is not the test failing. That is the test telling me this is a fair-value hold, not a buy and not a sell. The exact same read I had on POWL in Crown Has Been Passed at a 6% premium. I held then and the stock ran +79%. I am holding now.

AGX was my 2025 top stock pick. I closed it in January at +166% when stretched assumptions could not get me above the price and the upside had compressed to 19%. The stock proceeded to climb another 130% in four months. AGX taught me that closing a great business at fair value can leave a lot on the table. The Crown article taught me the alternative: hold the great business at fair value, accept that I am not earning a margin of safety on it, and let the next dollar of capital decide when the position has to go.

If POWL keeps surprising to the upside, my model will keep moving with it and the position will keep working.

If something materially better than the price-to-value setup of POWL shows up on the watchlist, POWL is the first one I trim. That is a HOLD with a built-in trigger, not a CLOSE.

Risk Register Update

What materialized since the original deep dive:

• Competitive intensity rising. Management flagged on the Q2 call that “it has become much more competitive in the last couple of years,” with new entrants and PE-backed challengers building out adjacent models. Pricing is “stable,” not improving on most projects.

• Single-customer concentration risk emerging. The NeoCloud order is the largest in company history. If that customer’s project schedule slips or cancels, it materially affects FY2027-2028 revenue conversion.

What has faded:

• LNG permitting overhang. The 2024 regulatory pause has fully reversed. FIDs are flowing.

• Inventory and supply chain stress. Days inventory normalized through FY2025 and the company is comfortable taking on the Jacintoport scale-up.

New risk that emerged:

• Capacity decision execution. The board is sizing a $70M to $100M greenfield against a 2-year build window. If Powell over-builds into a near-cycle peak, FY2028-2029 ROIC compresses just as the data centre demand wave digests its first round of investment.

Verdict

POWL stays at +1,103% capital return. The thesis worked, the valuation has caught up, and the stock now trades at a slight discount to my $329 fair value. I am happy to pay fair value for a business that compounds like Powell does. The position is the first candidate to trim when capital finds a clearer home. Add zone: $200 to $225 on a normal-cycle pullback. Trim trigger: a clearer setup on the watchlist. Until either, the position holds.

Hello fellow Sharks,

What a week! At one point we were almost up +8% for the week. We settled at +3.5%, still outperforming the S&P 500. If you want to skip straight to the numbers, jump to the Portfolio Update.

This may sound like a random question, but have you seen any unicorns?

Silicon Valley calls $1B startups unicorns because they're rare. So whenever I lock in a 10x multibagger, I call it a unicorn.

Before this week, I’d only seen one unicorn: DQ. DQ stock returned +1,721%. LMB was close to crossing that unicorn line but fell short (+968%). You can track my best past picks here.

So I was glad when saw a unicorn this week crossing the street.

But then I was astounded when a second unicorn appeared from between the bushes.

Many of us, myself included, lean towards locking gains when this happens. It isn't always the right move. That is why this Thought of the Week is about the mistake of selling winners early.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• Earnings Results

• The Most Expensive Mistake In A Bull Year

• Portfolio Update

In Case You Missed It

On May 4, I reviewed Stride’s (LRN) Q3 FY2026 results.

Career Learning carried the quarter again. Adjusted operating income compounded faster than enrollments, and gross margin held the structural step-up I underwrote. The wobble was General Education, where enrollment slipped on tougher comps and a slower start to the back-to-school cohort. Management cut FY guidance to reflect the Gen Ed reset, which is why the target moved from $209 to $159. I rate the position as a hold.

Share Beating The Tide: Stock Picks That Outperform

Earnings Results

Fourteen portfolio companies reported this week. Eight missed EPS consensus, and five missed revenue consensus. That broke the trend that has held since I launched the newsletter: most portfolio companies meet or beat consensus most weeks.

I’m not worried, because I don’t change a position on one earnings result but on the trend over several quarters. However, with so many reporters this week, I'll cover the misses in the next couple of Weeklies.

Expect an email tomorrow with the analysis on POWL and refreshed valuation. I started with POWL because it is the one furthest from the target price.

Paid subscribers can read my quick take on the earnings results of some of the other holdings here.

Thought Of The Week

The Most Expensive Mistake In A Bull Year

A subscriber emailed me last week. I’ll paraphrase tightly so the line stays anonymous: “I’m scared of giving it all back. STRL is up triple digits in my account. Shouldn’t I just take half off?”

I got a version of that email almost three times a day last week. Not just one, but two of our positions crossed the 1,000% mark last week. A handful more are joining the 100% return club. The portfolio is sitting on its strongest YTD print I’ve shown subscribers, and the most natural human instinct in the world is to lock it in.

I want to talk about why that instinct is the single most expensive bias I’ve watched destroy returns over twenty years. It has a name. It has a price tag. And it has a counter-protocol that fits on a Post-it note.

The bias has a name

In 1985, Hersh Shefrin and Meir Statman published a paper in the Journal of Finance called “The Disposition to Sell Winners Too Early and Ride Losers Too Long.” The shorthand stuck: the disposition effect. The idea is simple. Most people sell winning positions far more readily than losing ones, even when the winner is the better business and the loser is the broken thesis.

For thirteen years, it was an elegant academic claim. Then Terrance Odean, working with the trading records of 10,000 retail brokerage accounts at a large discount broker between 1987 and 1993, finally put a number on it. The dataset: 162,948 trades. The finding: realized winners were sold at roughly 1.5x the rate of realized losers. And the punchline: across the full sample, the winners that retail investors sold went on to outperform the losers they kept by 3.4 percentage points over the next twelve months.

Read that sentence again. Most people aren’t just selling winners early. They’re selling the better stocks to keep the worse ones. Every time. By 3.4 points a year.

Even I fall victim to it from time to time. In January I closed my 2025 top stock pick, AGX, locking in a 166% gain.

The business hadn’t broken. The upside had simply shrunk to about 19% at $314 against my $374 target, and better risk-reward setups had shown up on the watchlist. Here’s where I exited:

Then in a couple of days it jumped another 24%...

…and it jumped an additional 77% as of today…

If I had held, instead of locking in a 166% gain, it would have been 486% as of today. In hindsight, the exit was still the right call on a risk-reward basis. Maybe I was being too conservative with my AGX assumptions. Who knows. Both can be true: the trade was sound by my process, and the stock had more to give than my model captured.

Why your brain insists on doing it

The disposition effect isn’t a stupidity tax. It’s a maths tax. Kahneman and Tversky’s prospect theory showed that the pain from losing $100 is roughly twice the pleasure of making $100. So when you stare at an unrealized gain, you feel a small reward and a large background fear of giving it back. The asymmetry pushes you to lock in. When you stare at an unrealized loss, the only thing more painful than holding it is the act of crystallizing it. So you don’t.

Mental accounting makes it worse. People treat each position as its own little casino, with its own little ledger. The cost basis becomes the reference point, not the current intrinsic value. The position “wants” to come back to even. The business itself becomes incidental.

It’s a perfectly rational survival heuristic. It’s a terrible portfolio heuristic. I touched on the wider machinery behind this in The Fast and Slow Investor, but the disposition effect is the specific bias that hurts the most when the portfolio is winning.

What 3.4% costs you over time

A drag of 3.4% a year doesn’t sound catastrophic until you compound it. Take a starting portfolio of $250K. Compounded at 10% for twenty years, you end with about $1.68M. Compounded at 6.6%, the same money becomes about $897K. The disposition effect doesn’t shave returns. It eats half your wealth.

The kicker, my old desk used to repeat: the losers you keep aren’t just dead capital. They’re an opportunity cost on the winners you wouldn’t size up because the wrong stocks were already taking the slot.

The quarterly two-question test

I look at every line in the portfolio every quarter. For each one, in this order, I ask:

1. If I had the cash today and didn’t already own this, would I open the position at the current price?

2. If it were down 30% tomorrow, would I double it?

If both answers are no, the position goes. Cost basis is irrelevant. Embedded gain is irrelevant. The fact that it has been “good to me” is irrelevant. The only question is whether this is the best home for the next dollar.

The order matters more than people realize. Question one filters out positions where the thesis has run its course at this price. Question two filters out positions where I’d never want more, even at a discount, which is the cleanest tell that conviction has quietly drained. Either failure means it’s a hold by inertia, not by analysis. And inertia is what turns a 1,000% winner into a round trip.

I’ve written about the operational version of this discipline before in Weekly #34: The Art of Knowing When to Sell a Stock (And When to Sit Tight) and in Weekly #79: Why I Cap Even My Best Calls at 5%. The two-question test is the sentry that sits in front of both.

Live workout: STRL, POWL, MU

POWL is the biggest of the two 1,000% names.

The Crown Has Been Passed To Powell Industries thesis is still tracking on every leg I underwrote. Q1 bookings were the strongest in two years and the mix is shifting from oil & gas dependence to utility, transit and data centre power. Both questions answer yes. POWL stays.

STRL is the other 1,000% name. I most recently re-underwrote it in Why I’m Still Bullish on STRL After a +337% Gain. Question one today: would I open Sterling at the current price? Yes. Question two: down 30%, would I double? Without hesitation. STRL stays.

MU is the most interesting one for this lesson. It’s up 153% from the day I recommended it.

But I added on the way up, so my gain is +121% from my cost basis. Both questions still answer yes. Memory cycle has runway, the inventory glut is gone, and HBM pricing is firming. I’m not trimming a position whose thesis is still strengthening because the embedded gain crossed a round number.

Verdict

The disposition effect is the only bias I know that punishes you for being right. AGX was my 2025 top pick. I locked +166% when the risk-reward shrank, and the stock kept climbing to +486%. That doesn’t make the sell wrong. It just makes the lesson cheap. MU is my 2026 top pick, already +153% from the call. Both questions still answer yes, the runway is intact, and the risk-reward is still attractive. So I’m not closing it. The cure isn’t sophisticated. Two questions and the willingness to ignore your own cost basis. Take chips off the broken theses. Let the working ones work.

Portfolio Update

The market hit all-time highs this week, … again. The portfolio is up more than the market, widening the outperformance.

Portfolio Return

• Month-to-date: +4.1% vs. the S&P 500’s +2.6%.

• Year-to-date: +32.0% vs. the S&P 500’s +8.1%. That is a gap of 2,392 basis points.

• Since inception: +86.3% vs. the S&P 500’s +28.7%. That’s 3.0x the market.

Share

Contribution by Sector

Industrials and tech led the gains, partially offset by financials and consumer cyclicals.

Contribution by Position

(For the full breakdown plus commentary on earnings results and the big movers, see Weekly Stock Performance Tracker)

• +326 bps (Thesis)

• +158 bps (Thesis)

• +35 bps (Thesis)

• +21 bps (Thesis)

• +20 bps (Thesis)

• -5 bps (Thesis)

• -25 bps (Thesis)

• -137 bps (TSX: CLS) (Thesis)

That’s it for this week.

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

Further Sunday reading to help your investment process:

• Never Stop Asking Why, Using the “5 Whys” to Solve Problems and Pick Stocks

• The Rise and Fall of Moats: When Walls Built to Protect Become Traps

• Design Your Life Around Your Nature

• How I Earn $3,000-$7,000 a Month While Waiting to Buy Great Stocks Cheaper

• Cheat Codes for Life Monopoly

I added LRN to the portfolio at sub-$90 last spring and doubled it at $75 in November. After the round trip, my position sits down almost 6% to my blended cost.

Up 90%, down 62%, back up 46%, now treading water near $91.

On April 28, Stride reported Q3 FY2026: adjusted EPS of $2.30 beat by $0.09, revenue of $629.9M was a 0.03% technical beat I treat as in line with consensus, and FY26 guidance was narrowed with a lower revenue midpoint.

The stock fell the next session, then traded back into the $91 zone. The print confirmed what management has been telegraphing all year: Career Learning is the engine, General Education is bleeding enrollments, and the company is intentionally backfilling rather than chasing growth this school year.

I wrote up Stride in my June 2025 deep dive at $143 (13x earnings, +$200M FCF, secular tailwinds).

I doubled the position in November after the platform-rollout fiasco took the stock to $66.

I revisited it in February when Q2 vindicated the doubling-down call and shares ripped 34% in a day.

Q3 doesn’t change the thesis architecture. It sharpens the divide inside it. Career Learning is now half a quarter from being the larger segment. General Education enrollment fell 5.0% y/y, the worst print of the cycle. Adult learning is in secular decline. Pennsylvania finally cut virtual school funding after 20 years of legislative attempts. A securities class action is pending. Q4 revenue will print below last year’s Q4 … the first y/y revenue decline of management’s tenure.

The market read this as a ‘hold your nose’ quarter and sold the stock down. Roughly right. The model now spits out $159 (down from $209) (about 1.7x today’s price) but the path there runs through a fall enrollment season that has to actually happen before I commit more capital.

Table of Contents:

• TLDR

• Thesis Scorecard

• Earnings results: the read-through

• Valuation: why $209 became $159

• Guidance: what changed

• Risk register update

• Performance vs. peers

• Verdict

TLDR

Trigger: Q3 FY2026 print on April 28. Adjusted EPS beat by $0.09; revenue in line; FY26 guidance narrowed with a lower revenue midpoint.

Thesis scorecard: Of 5 pillars: 1 strengthening (Career Learning), 2 normalizing (cheap valuation, capital allocation), 1 confirmed (secular tailwinds), 1 challenged (General Education).

Most important change: Q4 will print below last year’s Q4 on revenue… the first y/y decline in years. Mix shift, funding-true-up comp, and the deliberate ‘backfill, don’t grow’ stance are all at work.

Verdict: Hold. Target cut to $159 (from $209) on a lower gross margin path and a slower General Education recovery. Next major catalyst: Q1 FY2027 print in November.

Here is the full picture, pillar by pillar.

Thesis Scorecard

Pillar #1. Cheap with rising FCF: Confirmed, normalizing

Original thesis: At $143 in June 2025, LRN traded at 13x earnings with +$200M in annual FCF and a re-rating runway. The valuation alone was the entry pitch and secular tailwinds were the kicker.

Evolution: By November, the stock had collapsed to $66, taking the multiple to 7x trailing earnings. The classic panic dip on a quality compounder. I doubled the position. By February, it was back at $84. The re-rating happened, on schedule.

What happened since last update: Q3 LTM revenue $2.50B, adjusted EBITDA $626M, adjusted EPS roughly $8.60, FY2025 GAAP EPS $5.95. At $91, that’s 15x trailing GAAP earnings and 6.9x EV/EBITDA. Cheap for a 27% EBITDA-margin business on a recurring funding base, but no longer the gift it was at $66. FY2028 targets remain $2.70B-$3.30B revenue and $415M-$585M adjusted operating income.

Assessment: Confirmed, normalizing. The cheap-stock thesis has done its work; from here, valuation is supportive rather than a margin of safety.

Pillar #2. Career Learning becomes the engine: Confirmed and strengthening

Original thesis: Career Learning was the faster-growing, higher-margin half of the business and would eventually drive the company. In FY2024 it was 37% of revenue. The deep dive case argued it would compound at roughly 2x the General Education rate.

Evolution: In Q1 FY2026 the platform crisis actually obscured how strong Career Learning was. In Q2 the segment finally got its visibility moment: +17.6% enrollment, +29% revenue. That is what convinced me the platform issue was a transitory drag on a structurally accelerating segment.

What happened since last update: Q3 Career Learning middle/high school revenue grew +15.9% y/y to $260M; enrollment +11.6% to 110,100 students. Trailing nine-month Career Learning revenue is $820M (+17.6% y/y), now 44% of total revenue versus 40% a year ago. At current trajectories, Career Learning passes General Education as the larger segment within roughly two years.

Assessment: Confirmed and strengthening. Career Learning is accelerating into the slot the original thesis assumed it would occupy. The mix shift is the single most powerful mechanism inside the model.

Pillar #3. General Education stable funding base: Challenged

Original thesis: General Education was the cash cow. The larger, slower-growing half that produced the operating leverage to fund Career Learning’s growth. The deep dive treated it as a stable annuity built on per-pupil state funding contracts, with low single-digit organic growth and pricing tied to state budgets.

Evolution: The November platform fiasco cost General Education an estimated 10,000-15,000 students at the start of the school year. February’s Q2 print suggested that withdrawals had normalized and the back half would stabilize. That was the bull read at the time. It now looks too generous.

What happened since last update: Q3 General Education revenue fell -3.6% y/y to $357M; enrollment -5.0% to 134,400… an acceleration of the decline, not a stabilization. Management acknowledged ‘marginally higher’ attrition since the Q2 update and intentionally closed enrollment windows earlier this year, leaving ‘in the thousands’ of students on the table to focus on backfill rather than growth. Pennsylvania, after 20 years of pushing back virtual-funding-cut legislation, finally lost. The funding floor in a key historical state just dropped.

Assessment: Challenged. The model needs General Education to stabilize at roughly current levels and resume modest growth in FY2027. Whether it does depends on the platform working cleanly through fall, application volumes converting, and PA-style political risk staying contained. None of that is broken; none of it is comfortable.

Pillar #4. Secular tailwinds for school choice: Confirmed

Original thesis: The shift toward online and choice-based K-12 education is a multi-decade trend driven by parental dissatisfaction, demographic migration to Sun Belt states with friendlier school choice frameworks, and post-COVID acceptance of virtual learning as a legitimate format.

Evolution: Every update has reinforced this pillar. The November piece walked through Texas (+85k net residents), North Carolina (+82k), and the broader Sun Belt migration data. The February piece confirmed application volumes were strong even after the platform fiasco.

What happened since last update: Stride’s Q3 deck reported parental K-12 satisfaction at 35%… a record low, down 8% from 2025. 75% of parents considered a new school in 2025 (15% chose online); 81% want more K-12 flexibility. Application volumes remain ‘strong relative to historic levels’ per management, and the new business pipeline is ‘as strong or stronger than it’s been in the five years’ the CEO has been in the chair.

Assessment: Confirmed. None of what’s gone wrong this year is demand-side; it’s all execution and platform. That distinction matters.

Pillar #5. Operating leverage and capital allocation: Confirmed, normalizing

Original thesis: Stride was generating +$200M of FCF on $2B of revenue and could compound that as the mix shifted toward Career Learning, with optionality to deploy excess cash into share repurchases, M&A, or both.

Evolution: In November, the board authorized a $500M repurchase program. In Q2 FY26, the company put $88.6M of that to work. The capital allocation playbook has begun executing on the cheap-stock thesis.

What happened since last update: Q3 GAAP operating income $129M (20.5% margin) versus $131M last year. Adjusted operating income $140M, -0.9% y/y. Adjusted EBITDA grew +1.8% to $171M. FCF was $202M for the quarter (versus $37M in Q3 FY25), though most of the delta is working capital timing. Balance sheet ended at $856M of cash and securities against $420M of convertible notes due September 2027. The repurchase program has $411M of authorization remaining. The convertible notes have a $52.88 conversion price; capped calls lift effective dilution to $86.17, so at today’s price dilution is about 2.7M shares.

Assessment: Confirmed but normalizing. Profitability didn’t grow this quarter - gross margin compressed 380bps to 36.8% on platform-related investment costs. The cash generation engine is intact. The capital allocation discipline is exactly what I want from this team. But operating leverage paused in Q3, and the new model bakes that in.

Earnings results: the read-through

Headline numbers. GAAP diluted EPS of $1.93 missed consensus of $2.06. Adjusted EPS of $2.30 beat by $0.09. Revenue of $629.9M was technically a $0.21M beat (+0.03%) but I treat it as in line.

Margin compression. Gross margin of 36.8% was -380 basis points y/y. The CFO attributes this to platform-rollout investment and growth-state hiring; full-year gross margin is guided to 37%-37.4% (-70bps y/y). She said the wedge will ‘moderate’ into FY2027 - not fully reverse. SG&A discipline (-13.5% y/y) absorbed most of the gross margin hit; GAAP operating margin held at 20.5% versus 21.3% last year.

Cash generation. FCF of $202M in Q3 versus $37M last year is real, even if a chunk is working capital timing. The full-year FCF guide is ‘flattish to last year,’ which means Q4 prints meaningfully negative FCF as the company funds marketing for the next school year.

Capital allocation. Of the $500M repurchase authorization, $88.7M was deployed in Q2 and zero in Q3 despite the stock trading in the high $70s to low $80s. Management has said buyback timing is opportunistic, not programmatic. With $411M remaining, the question is whether they accelerate into further weakness. At today’s price, every $50M retires roughly 1.5% of shares.

Valuation: why $209 became $159

Two assumption changes did most of the work taking the model from $209 to $159. The framework is unchanged; the inputs softened.

Assumption #1. Gross margin path: 39% to 37%

The prior $209 model anchored gross margin at 39%, broadly in line with FY2025’s 39.2%. The new model anchors at 37% throughout the forecast. Q3 printed at 36.8% and full-year guidance is 37%-37.4%. The CFO said the platform-rollout investment and growth-state hiring costs would only “moderate” into FY2027, not fully reverse. A permanent 200bps margin reset on a $2.5B-to-$3.3B revenue base is roughly $50M-$66M of perpetual operating income, which compounds through the explicit forecast and the terminal value.

Assumption #2. General Education trajectory: flat-to-up to a 4% drop with a slower recovery

The prior model assumed General Education enrollment was flat to slightly up in FY2026, with a normal 2-3% growth thereafter. The new model marks Gen Ed enrollment at -4.0% in 2026 (real Q3 trajectory: -5.0%), recovers to +8.0% in 2027 as the platform stabilizes, then steps down through the forecast to 2.0% terminal growth. The slower 2026 base and longer tail leakage compound. Career Learning is unchanged in the model: 12% enrollment growth through 2031, then a step-down to 4-5% as the segment matures.

Smaller adjustments

Capex intensity rises to 3.3% of revenue in 2026 and steps down to 2.5% terminal. This matches management’s $75M-$80M FY26 capex guidance and reflects the platform investment cycle. WACC and terminal growth rate are unchanged. Revenue growth through 2031 is roughly aligned with management’s FY2028 targets. The model is now anchored at the lower end of management’s long-term ranges rather than the midpoint.

At $91, the new $159 target still implies 1.7x upside. The thesis is still right; the math is just less generous than it was at $66 and that’s the appropriate read on a business that has executed roughly through a fiasco but hasn’t yet shown the operating leverage I underwrote.

Guidance: what changed

Revenue midpoint moved down ~50 bps. High end cut by $35M; low end raised by $10M. Net midpoint $2,505M versus prior $2,518M. The CFO explicitly said the new range implies Q4 revenue below Q4 last year, citing ‘marginally higher attrition rates and tough comparisons associated with the timing of funding true-ups.’

Profitability midpoint held. Adjusted operating income midpoint stays at $495M. Management is preserving margin by absorbing the lower revenue through SG&A discipline rather than cutting profit guidance. Right move for the long-term thesis; caps near-term upside.

Management credibility. Mixed two-quarter run on the company’s own guidance. Q1 FY26 was well below trajectory because of the platform issue. Q2 substantially beat. Q3 was in line on profitability and slightly soft on revenue versus consensus. On adjusted operating income, the company has hit or beat its narrowed range every quarter despite the operational chaos. I weight this guide as credible on profitability and slightly conservative on revenue.

Risk register update

Materialized

General Education enrollment deceleration. Q3 enrollment was -5.0% versus -1.1% YTD: acceleration, not stabilization.

Pennsylvania virtual school funding cut. After 20 years of fending off similar legislation, Pennsylvania finally enacted virtual-school funding cuts. The funding floor in a meaningful historical state dropped.

Securities class action. Filed November 11, 2025 in the Eastern District of Virginia alleging false statements about the platform rollout. Stride moved to dismiss April 21, 2026. Even a moderate settlement is unlikely to be material given the company’s profitability, but it’s an overhang on management bandwidth.

Faded

Platform stability. The CEO’s tone has shifted from November’s crisis register to April’s ‘I’m comfortable with our progress.’ Support call volumes dropped 90% week-over-week after the patch. Attrition remains slightly elevated but management says it’s ‘not unexpected.’ Not fully resolved, but no longer trending toward catastrophe.

Adult Learning collapse. Q3 Adult revenue down -31% y/y to $13M of $630M total. The CEO: ‘if they disappear tomorrow I don’t think our shareholders would notice.’ Tech Elevator and Galvanize are in secular decline; MedCerts has had execution problems. Adult is no longer a swing factor in the model - clarifying.

New

Backfill stance carries opportunity cost. Management closed enrollment windows earlier this year, leaving ‘thousands’ of students on the table. The stance is correct but it caps in-year revenue growth at low single digits and risks pushing acquired families to competitors.

Marketing ramp into a skeptical fall. Marketing returns to ‘business as usual’ for fall. After a year in which platform issues were visible to families, the marketing dollar may need to work harder to convert applications into paid enrollments. The real test of the thesis.

Performance vs. peers

On the chart, LRN is the volatility outlier. The peer basket [, , , ] and the S&P 500 traced relatively orderly paths over the last 12 months. The relative-value gap to peers has closed as the panic discount has unwound. This is no longer a relative-value setup; it’s a fair-priced compounder going forward.

Verdict

Hold. Target $159.

The model says $159. The business still works. The path from today to the target now runs through a fall enrollment season with no margin for execution error. The platform has to work cleanly, applications have to convert, and General Education has to stop bleeding. Reasonable, not in the bag. I’m not adding here, and I’m not trimming. Treat $159 as a 12-18 month destination, not a six-month sprint. Next catalyst: Q1 FY2027 print in November.

Hello fellow Sharks,

Another strong week for the portfolio. Yes, we lagged the market slightly but I think the market is trying to catch up to April’s strong performance. If you want to skip straight to the numbers, jump to the Portfolio Update.

Reading a non-invesment book got me thinking about stop-losses. Many people use them and swear by them, but I think they’re quietly limiting your gains, especially if you are following my volatile stock picks. This week I briefly explain as to why.

On a different note, last week I started refreshing my book “The Most Boring Stock Investment Book You'll Ever Read”. I think I have enough new material to justify a second edition. For example, the first edition focused on non-financials; the second will expand into the valuation of financials. ROIC and WACC aren't the right tools for a bank or insurer, you want ROE and cost of equity instead. I'll also scrap the appendix and refresh the examples. If you have feedback on what you'd like to see in the 2nd edition, let me know!

Leave a comment

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• Earnings Results

• Why I Don’t Use Stop-Losses (And What I Do Instead)

• Portfolio Update

In Case You Missed It

On April 28, I provided my view on CLS Q1 2026 earnings results.

In the review, I explained how Mr Market’s reaction was similar to its reaction to the Q4 2025’s earnings. If you bought the dip, you would have made 21% in just a couple of days.

Earnings Results

This week 5 portfolio companies reported earnings. All beat EPS consensus estimates, but 4 of them missed revenue estimates.

CLS Q1 2026: Read my earnings review here.

LRN Q3 2026: I will be publishing my view on the earnings results tomorrow, so expect an email tomorrow by the afternoon.

Paid subscribers can read my quick take on the rest of the earnings results here.

Thought Of The Week

Why I Don’t Use Stop-Losses (And What I Do Instead)

I’ve been listening to How to Stop Worrying and Start Living by Dale Carnegie on audiobook this week. Carnegie spent decades collecting practical rules for taming anxiety, and one of his sharpest moves is taking the investor's stop-loss and applying it to your worries. Decide in advance how much time, energy, and emotional rent you’re willing to pay any single problem, and when you hit that limit, you cut it off.

Here's the twist: Carnegie actually opens that chapter with the investment stop-loss as his anchor, not with worry. He points to how investors cap their losses with a fixed price rule and pivots from there into life. While stop-losses may work in life, they do not work in stock investing. That is a moment in the book where Carnegie wanders into a domain he didn't audit, and the rule that works for human worry breaks down completely when you apply it to securities prices.

I know this because I tried it. Early in my investing life, in my mid-twenties, someone walked me through stop-loss orders and I dutifully wired them into every position. The result was almost comic. Mr. Market would sneeze, my stop would trip, and three weeks later the stock would close above where I’d been kicked out. The cure was worse than the disease. After two years of bleeding small but consistent permanent losses while watching the recoveries from the sidelines, I deleted every stop-loss I had and never used one again.

Here’s why mechanical stops fail anyone holding a real business.

Stops confuse price action with thesis breakage. A share price tells you what someone, somewhere, agreed to transact at this morning. It does not tell you whether the company’s unit economics changed, whether management is still allocating capital well, or whether the moat narrowed. A stock can fall 25% on a macro tantrum, a fund redemption, an index rebalance, or a clumsy sell-side downgrade, and none of those moves touches the underlying business. A stop-loss treats every one of them as if it were a verdict…it isn’t.

Stops force you to be wrong twice. Once when you bought, because the price fell. Again when the stock bounces, because you’ve already sold and now have to decide whether to crawl back in at a higher price than you abandoned. The behavioural penalty is brutal. Most people don’t re-buy. They watch the recovery and rationalise it as luck. Then they repeat the loop on the next position.

Stops turn temporary losses into permanent ones. The whole point of being a long-term holder of cash-generative businesses is that you never have to convert one into the other unless the thesis actually breaks.

The cleanest way to see this is through a position where the thesis did break, and where the price-and-thesis sequence is the entire point.

I owned Qifu (QFIN) and FinVolution (FINV), two Chinese fintechs that I thought were among the cleanest credit machines I’d ever underwritten.

The stock fell hard six weeks after my trade alert.

A stop-loss would have evicted me on day one, on price alone. I held, because nothing in the underlying business had changed yet. Then, two quarters later, the cash flow conversion started deteriorating. FCF stopped tracking net income, working capital was telling a story management’s commentary wasn’t, and the off-balance-sheet structure looked stretched.

That was the signal.

I sold then, on the thesis, not on the chart.

A mechanical stop would have sold me out months earlier on noise that didn’t matter, and I would have learned exactly the wrong lesson, that stops “saved” me, when in reality they would have just exited a position I would have closed anyway, for a different and far better reason.

Now look at the inverse, positions where the price moved but the thesis stayed intact.

Celestica (CLS) drew down hard after Q4 2025 earnings in January, and a 10% trailing stop would have closed me out near the lows.

As I explained, the thesis didn’t change.

The stock more than recovered.

Then it happened again after Q1 2026, same drawdown…

…faster recovery.

DXP Enterprises (DXPE) sold off 12% on a Q3 2025 print that was, by any honest reading, a beat dressed in bad mood.

It took about a month for the stock to recover and now is up +95% up from the bottom.

Micron drew down on a tariff scare, then printed Q2 2026 with revenue up 196%.

But the stock dropped…

…and then more than recovered.

In every one of those cases, a stop-loss would have crystallised a real loss in exchange for protection from a temporary one.

What I use instead is what I’ll call the conviction stop. At least once a year, in writing, I re-underwrite every position from scratch. The question I ask isn’t “is the price down”. It’s “has the thesis broken”. Three checks do most of the work.

1. Are the unit economics still intact, or are margins, return on capital, and cash conversion deteriorating in ways that aren’t cyclical?

2. Is management still allocating capital the way they said they would?

3. Is the competitive position holding, narrowing, or widening?

If all three answers are clean, drawdowns are noise and sometimes a chance to add. If one answer is shaky, the position goes on a watchlist and gets a tighter quarterly check. If two are broken, I fully review the investment case right away. For the longer treatment of how I think about closing positions, see The Art of Knowing When to Sell a Stock.

The honest postscript is personal. I haven’t used a stop-loss on an investment in fourteen years. The only stop-loss I do use is in my relationships, where Carnegie’s original advice is exactly right and I’d recommend it to anyone. In my portfolio, the discipline that has compounded for me isn’t a price rule. It’s the willingness to do the quarterly homework, sit through the noise, and only act when the thesis actually changes.

Mr. Market is not your analyst. He’s your counter-party. Don’t let him decide when you’re wrong.

Portfolio Update

The market hit all time highs this week. The portfolio is up as well but slightly lagged the market.

Portfolio Return

• Month-to-date: +0.5% vs. the S&P 500’s +0.3%.

• Year-to-date: +27.5% vs. the S&P 500’s +5.6%. That is a gap of 2,190 basis points.

• Since inception: +80.0% vs. the S&P 500’s +25.7%. That’s 3.1x the market.

Share

Contribution by Sector

Industrials led the gains partially offset by gold.

Contribution by Position

(For the full breakdown plus commentary on earnings results and the big movers, see Weekly Stock Performance Tracker)

• +38 bps (Thesis)

• +36 bps (Thesis)

• +33 bps (TSX: CLS) (Thesis)

• +24 bps (Thesis)

• -1 bps (Thesis)

• -5 bps (Thesis)

• -7 bps (Thesis)

• -38 bps (Thesis)

That’s it for this week.

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

Further Sunday reading to help your investment process:

• Never Stop Asking Why, Using the “5 Whys” to Solve Problems and Pick Stocks

• The Rise and Fall of Moats: When Walls Built to Protect Become Traps

• Design Your Life Around Your Nature

• How I Earn $3,000-$7,000 a Month While Waiting to Buy Great Stocks Cheaper

• Cheat Codes for Life Monopoly

Has this happened to you?

You’re in a moment… a conversation, a place, a setting… and as it’s unfolding you’d swear you’ve lived it before. Same person, same words, same chair. I get them more often the older I get. One time I went down a rabbit hole trying to figure out what déjà vu actually is, and I think I read it’s a millisecond hiccup in the brain while it’s generating the sensation of memory (don’t hold me to that, it was a long time ago). The point is: it’s a feeling that something has happened before when it actually hasn’t.

Yesterday I was reading through CLS’s Q1 2026 earnings, and for a second I had that exact feeling. I was pretty sure I had already written an article about CLS dropping double digits the session after a beat. “Not again… déjà vu,” I thought. Then I pulled up my Q4 2025 piece and no, it wasn’t déjà vu. I really had written that article. The script was identical. Mr Market just likes to play with my head.

Since I called Celestica the most important AI stock you’ve probably never heard, the position has compounded into one of the largest contributors in the portfolio.

From the original $153 target to the $320 in September 2025 to $575 in January, the thesis has done more than its share of work. As of today, CLS sits at $355. Pre-earnings, it was over $420.

Subscribers who acted on my January 30 update (when shares were $295) were up +43% pre-earnings and +20% even after today’s pullback.

I told subscribers in last week’s Weekly that I expected CLS to beat both the top and bottom line.

It did…kinda.

Adjusted EPS came in at $2.16 against the $1.95–$2.15 guide, above the high end. Revenue of $4.05B landed at the midpoint of the $3.85B–$4.15B range and missed consensus by 0.02%… a rounding error. The 2026 outlook moved from $17B and $8.75 in adjusted EPS to $19.0B and $10.15, and the 2026 adjusted operating margin guide stepped up from 7.8% to 8.1%.

Then the stock fell 17% in pre-market.

If this feels like déjà vu, that’s because it is. Q4 2025 was a beat-and-raise on every line that mattered…

… and CLS dropped about 15% the next session.

I called that one an emotional overreaction in my Q4 2025 update. Three months later, the script is identical: print above guide, raise the year, lay out a stronger 2027, market sells. Same movie, sequel edition.

Table of Contents:

• TLDR

• Thesis scorecard

• Q1 2026 earnings: what the print actually said

• Guidance: what changed in 90 days

• Risk register: what bears actually have left to work with

• Verdict

TLDR

• Q1 2026 was a clean beat: adjusted EPS $2.16 vs. $1.95–$2.15 guide, revenue $4.05B at the midpoint (+53% y/y), 8.0% adjusted operating margin record.

• 2026 outlook raised: revenue $17.0B → $19.0B, adjusted EPS $8.75 → $10.15, operating margin 7.8% → 8.1%.

• Of 6 thesis pillars, 5 are confirmed and strengthening, 1 is evolving (FCF compression as 2027 capex steps to ~$1.5B).

• Customer concentration worsened to 65% from the top three (vs. 51% a year ago), the only risk worth an active update.

• Maintaining the $575 target. Today's drop is a sentiment unwind, not a thesis event. Conviction unchanged.

Thesis scorecard

Pillar #1. Transformation from commodity EMS to AI-infrastructure design partner: Confirmed and strengthening

Original thesis: When I wrote the original deep dive, the argument was that CLS had quietly remixed itself out of low-margin commodity manufacturing into a design-led HPS business that co-engineers networking and compute for the largest hyperscalers.

Evolution: In the Q4 2025 update, I noted HPS at $1.4B, or 38% of company revenue. CCS as a whole was 78% of the top line. The pillar was already strengthening then.

What happened since last update: HPS revenue in Q1 2026 was approximately $1.7B, +63% y/y, now 42% of total revenue. CCS overall hit $3.24B (+76% y/y) and is now 80% of the company. The CEO told the call that CLS just won “the first major production scale deployment of co-packaged optics, using Broadcom’s Tomahawk 6 Davisson module,” calling it a validation of a multi-year investment that pulled the company up the value stack. R&D headcount sits at roughly 1,350 design engineers, materially higher than a year ago.

Assessment: HPS at 42% of revenue, growing 63%, is structural. The CPO award puts CLS in front of the next networking node. Pillar strengthens.

Pillar #2. Hyperscaler AI infrastructure spend is structural, not a hype cycle: Confirmed and strengthening

Original thesis: AI capex is in a multi-year supercycle. Hyperscalers are tearing down and rebuilding data centres from scratch, and that build cycle has years to run.

Evolution: After Q4 2025, the question was whether the $1B 2026 capex plan was demand-pulled or speculative. Management said demand was “essentially already in hand.” Markets didn’t believe it.

What happened since last update: The CEO opened the Q1 call by saying "Our awarded backlog and the opportunity pipeline with both existing and new customers are the strongest they have ever been during my tenure as CEO." Q2 communications guidance is +50% y/y; enterprise +130% y/y. The CFO disclosed 10 active 1.6T networking programs ramping heavily in 2027 — a fact not in the previous outlook. Mass production on 1.6T begins with two hyperscalers in H2 2026, plus the new CPO program ramping in 2027, plus the AMD Helios scale-up partnership announced in March.

Assessment: Bookings are getting longer, not shorter. The CEO said CLS is now “dipping into 2028 and actually booking awards right now that ship into 2028.” That is the shape of a supercycle, not a hype cycle. Pillar strengthens.

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

Original thesis: Hyperscalers upgrading switches to handle AI workloads is a multi-year revenue engine, with each generation bigger than the last.

Evolution: By Q4 2025 the 800G ramp was driving the bulk of communications growth. The 1.6T story was emerging.

What happened since last update: Communications grew +69% in Q1, ahead of the low-60s percentage guide. The CFO said 800G is "accelerating materially." The CPO Ethernet switch program announced this morning is 1.6T silicon. Per the CEO: "This is not just another switch award. We actually believe it's the first major production scale deployment of co-packaged optics… we are now a sophisticated co-design partner for the most advanced hyperscalers… it also sets us up well for the 3.2T adoption."

Assessment: The runway just got longer. My original framing was that switches were the bottleneck for AI workloads. The market is now treating CLS as a designed-in supplier for the next two generations. Pillar strengthens.

Pillar #4. Inference-driven durability. Long runway beyond 2026: Confirmed and strengthening

Original thesis: Inference, unlike training, runs continuously. As workloads shift toward inference, the demand for hyperscaler infrastructure becomes structural rather than episodic.

Evolution: Q4 2025 had visibility “well into 2026.” That visibility was the cleanest argument for paying up.

What happened since last update: The CFO put a number on 2027 for the first time.

We’re growing by about six and a half billion this year, and we think we’re going to grow significantly more than that, which means the floor would be somewhere around $25.5 billion. We do see revenue higher than that.

Read that twice. The 2027 floor is now $25.5B against the freshly raised $19B for 2026. That’s +35% growth on top of +53% growth, with the company describing it as a floor. The CEO confirmed that customer-funded NCNR (non-cancellable, non-returnable) orders extend into 2028. On the digital-native rack-scale program, mass production starts late Q1 2027 with sample shipments this year.

Assessment: This is the pillar where my January target work was most conservative. A $25.5B 2027 floor wasn’t in my Jan 30 model. Pillar strengthens, materially.

Pillar #5. Free cash flow machine and capital returns: Confirmed, evolving

Original thesis: CLS converts net income to cash at high rates and uses the cash to retire shares, with leverage held below 1x.

Evolution: By Q4 2025 capex was guided to $1B in 2026 (5x prior year), with the company saying it would be funded entirely from operating cash flow. FCF for full-year 2025 came in at $458M. Guidance for 2026 FCF was set at $500M and it’s the only number that didn’t move higher today.

What happened since last update: Q1 2026 FCF was $138M against $94M in Q1 2025. Capex stepped up to $230M (5.7% of revenue) and full-year capex stays at $1B. The CFO put a placeholder on 2027 capex of around $1.5B. With 2026 FCF held at $500M while revenue and EPS guides moved up, the FCF margin compresses from 3.7% on the prior $17B revenue plan to 2.6% on the new $19B plan. Inventory rose $885M y/y to $2.67B, but accounts payable rose $2.0B y/y, so the working-capital build is being supplier-financed. Net debt finished Q1 at $341M, leverage at 0.6x (actually better than a year ago). The credit facility was upsized to $2.5B with the revolver moving from $750M to $1.75B. Buybacks were $20M in the quarter, modest by historical standard.

Assessment: Capital is being redirected from buybacks into capacity, which is rational given the order book. On valuation: my $575 target used the old $17B / $8.75 EPS base. At $355 against the new $10.15 EPS, CLS trades at roughly 35x forward — the same multiple the market paid 90 days ago when EPS was $8.75. The model has caught up to the price. Maintaining $575. The $25.5B 2027 floor at the same operating margin folds through to EPS in the $13–$14 range, putting CLS at roughly 26x 2027 numbers at today's price — not expensive for +35% growth with a designed-in position in the next two networking nodes.

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

Original thesis: CLS isn't just a contract assembler. The HPS business co-designs reference platforms with hyperscalers, single-sourced and difficult to displace once qualified.

Evolution: By Q4 2025 the moat argument hinged on whether Wiwynn, Quanta, and Inventec could replicate HPS. The DigiTimes scare suggested Google might shift orders. Management said no; Google was diversifying suppliers because it physically can't single-source the volumes.

What happened since last update: Three new commercial proof points.

1. The AMD Helios scale-up networking switch: a brand-new architecture for AI rack-scale designs, announced in March.

2. The 1.6T CPO program. Won not because CLS bid lowest, but because the existing customer had already given CLS "multiple 1.6T awards" and trusted the execution.

3. The CEO on Q&A: “In the land of very dynamic supply constraints, we do advanced planning very well, and typically, we gain share through that environment because we find that peers or competitors have a hard time executing through turbulent times.” Capacity tightness, in his read, is a moat-strengthener.

Assessment: Moats deepen when execution under stress separates leaders from the field. The industry is in exactly that regime now. Pillar strengthens.

Q1 2026 earnings: what the print actually said

The table speaks for itself, so two reads worth pulling out. The q/q GAAP softness (earnings from ops -$42M, gross margin -100 bps, EPS -$0.48) is mostly tax timing as the GAAP rate normalised from 11% in Q4 to 17% in Q1. On adjusted, every line moved the right way both sequentially and y/y, with margin expansion and ROIC the standout; adjusted ROIC of 49.8% (+1,830 bps y/y) is capital efficiency you don't see in EMS comps. The 2026 outlook moved with it: revenue $19.0B, adjusted EPS $10.15, operating margin 8.1%. The $500M FCF guide held flat to absorb the unchanged $1B capex plan.

Share Beating The Tide: Stock Picks That Outperform

Segment dynamics

CCS did the heavy lifting and the mix kept improving. CCS revenue of $3.24B (+76% y/y) was 80% of the company. CCS segment margin expanded 60 bps to 8.6%. Inside CCS, communications grew +69% (above the low-60s percentage guide) on 800G ramps. Enterprise grew +101%, slightly below the high-teens guide of the prior period because of a component-supply issue on an AI/ML compute program. The CEO said it “wasn’t a demand issue, it was actually a material supply issue. That has been resolved and will be catching up in subsequent quarters.”

ATS held flat with materially better margins. ATS revenue of $806M was approximately flat y/y but ahead of the company’s own low-single-digit decline guide. Segment margin moved up 100 bps to 6.0% on portfolio reshaping in the aerospace and defence business and stronger HealthTech. Capital Equipment, the soft spot, is now showing what the CFO described as “a very nice cycle where there is a very strong order book from our major customers.”

HPS is now the centre of gravity. HPS revenue of approximately $1.7B (+63% y/y) is 42% of total company revenue, up from 38% at the end of 2025. The CFO said HPS “is really underpinning the majority of the growth that we’re seeing.” Every new program announced from the AMD Helios switch, the 1.6T CPO program, the digital-native rack-scale system to the next-generation AI/ML compute program are HPS.

Capex stepped up exactly as planned. Q1 capex was $230M against $37M a year ago, or 5.7% of revenue. The full-year capex guide stays at $1B and the CFO put a placeholder on 2027 of around $1.5B to support the program ramps already booked. The CFO described the framework: “When we make our capacity decision, it’s tied to a business case, it’s tied to program-level specifics, it’s tied to programs that we are winning… The business cases are strong. Strong ROIs, strong paybacks.”

Working capital is being supplier-financed. Inventory of $2.67B is up $885M y/y. Accounts payable of $5.02B is up roughly $2.0B y/y. The cash conversion cycle improved to 55 days from 69 a year ago. This is the shape of a company building ahead of long-lead programs while pushing payment terms out… not a company stuffing the channel.

Guidance: what changed in 90 days

Two things stand out. The EPS guide moved faster than revenue (+16% vs. +12%), operating leverage thesis confirmed. And the $25.5B 2027 floor is the most important number disclosed today. It frames the entire valuation question.

Management credibility: three quarters of EPS beats in a row, two full-year raises in 90 days. When this team calls a number "high confidence," read it as a floor.

Risk register: what bears actually have left to work with

Customer concentration materialized, and worse. Three customers each over 10% of Q1 revenue, 35%, 15%, 15%, totalling 65%. A year ago the same three were 28%, 13%, 10%, totalling 51%. The single-largest moved from 28% to 35% in twelve months. CLS is more concentrated today than when I wrote the original thesis. The offset: the 35% customer is funding the AMD Helios and digital-native rack-scale builds, both under NCNR contracts. But concentration is concentration, and any single-customer pause is now a much bigger event.

Supply constraint: new and rising. Component shortages are "more constrained now than 90 days ago" per the CEO: custom silicon, memory, 40+ layer PCBs, power components, optical components. Q1 enterprise revenue was capped by exactly this dynamic. The new $19B guide already factors these constraints in, and lead-time extensions are giving CLS "unprecedented visibility from our customers' end-item demand." If supply loosens in 2H, there's upside; if it tightens further, the H2 ramp slips into 2027, which the demand backdrop can absorb.

Capex absorption evolving, not yet a problem. 2027 capex at ~$1.5B against an unchanged $500M FCF guide for 2026 means free cash compresses through this build-out. The balance sheet absorbs it. Net leverage is 0.6x and the upsized $2.5B credit facility was put in place yesterday but the buyback story slows. This is the trade I’m willing to make at this stage of the cycle, but it’s the trade.

AI capex normalization faded, monitored. Twelve months and two raises after the original bear case, hyperscaler capex is accelerating, and CLS is now booking awards that ship in 2028. Leaving this risk in the register because secular cycles do end, but the evidence has moved against it.

Verdict

CLS beat the guide, raised by $2B in revenue and $1.40 in EPS, disclosed a $25.5B 2027 floor, and the stock fell 17%. Maintaining $575. I'd rather be wrong on the 90-day path than the three-year compounding.

Hello fellow Sharks,

Another strong week for the portfolio. Yes, the market was up, but the portfolio gained more widening the gap. If you want to skip straight to the numbers, jump to the Portfolio Update.

Everyone is talking about Tim Cook’s replacement at Apple or Monday’s earnings results for CLS…not me. There are many news outlets covering the story and I am not going to aggregate the news and report it back. Remember, I am not in the business of reporting the news to you, I am in the business of making you a better investor. Yes, Apple’s CEO change (might be good to refresh the innovation cycle which lacked under Cook) and CLS’ earnings results (I think they will beat both top and bottom line…again) are relevant, but in the long-term view, they won’t affect our investment approach.

Instead, in the Thought Of The Week, I want to talk about the arithmetic of position sizing.

But first a quick poll…

It matters, especially now, as the secret to long-term success is not finding the next 100x multibagger, but minimising your portfolio drawdown, not wiping out your account (avoiding the Death Line as I explained here), and letting the portfolio compound over decades.

Enjoy the read, and have a great Sunday.

~George

Table of Contents:

• In Case You Missed It

• Earnings Results

• The Arithmetic That Punishes Conviction

• Portfolio Update

In Case You Missed It

#1

I posted my post-mortem on PPC. If we just look at the share price, we closed with a 15.7% capital loss, but when you include the special dividends we received, we are up +4.4%.

Still, that was a disappointing return, especially if you consider the holding period (more than a year). But I decided to close the position as the chicken cycle is turning.

True, now would be a good moment to buy if you have the patience, but I suspect the IRR for your investment wouldn’t be the best.

#2

I sent an update on a regional bank we have in the portfolio.

While the stock has barely moved since adding to the portfolio (+4.6%), I think the opportunity is there and the market will eventually catch up.

#3

Also, I sent an update on a Latam Utility we added 3 months ago, and it already hit the target price.

In the article, I go over the earnings results, refresh the valuation and decide whether we keep it in the portfolio.

Paid subscriber? Click here for the unredacted list.

Earnings Results

This week three companies reported. Only one missed revenues. Paid subscribers can read the details here.

Thought Of The Week

The Arithmetic That Punishes Conviction

A subscriber emailed me last week. He wanted to know why I size positions at 2% to 5%. “If you have conviction, you should go all in.” He is not the first to ask, and with the market sitting where it is in April 2026, he won’t be the last.

So this week’s note is about the brutal mathematics that keeps me sized small even when the analysis says go big. It is about why “all in” is the fastest way to vapourise a decade of compounding. And it is about what just happened in PayPal that proved the rule.

The casino has gotten loud

Today, I watched a video about how Polymarket and Kalshi are rigged.

I knew they were rigged. The Charles de Gaulle weather sensor manipulation, the US Army soldier insider-trading the Maduro raid for a 12x return, the senators trading their own legislation: those are not edge cases, those are the business model. Information asymmetry is what every counterparty on those platforms is hunting.

What the video reminded me is why this kind of gambling has become so popular. People feel locked out. Wages have not kept up with rents and groceries. The career ladder that used to compound into a house and a pension now compounds into student debt and a long commute.

Index investing for thirty years feels like a prescription for someone who already has the cushion to wait. So a lot of people go looking for the asymmetric payoff: $33,000 into $400,000 on a Polymarket bet, or one stock that takes the portfolio from $50K to $500K. The promise of skipping the ladder. The participants are not professionals. They are retail gamblers, people who think they have an edge because they followed a Twitter account or watched a debate. They are not sure. They are being routed against the people who actually are sure.

In Weekly #13 I defined gambling as:

Buying a lotto ticket is gambling. Betting on a Polymarket weather contract against a counterparty who has tampered with the sensor is gambling. Anything where the expected value is negative because the other side has an edge you don’t have is gambling. By that definition, prediction markets are not investing dressed up as finance. They are casinos with better marketing.

There is another form of gambling that doesn’t look like gambling. The kind that happens inside brokerage accounts run by serious-looking people. Going all in on one or two stocks because the conviction is high. That is the same impulse with a respectable wrapper. The asymmetry of recovery, which I will walk through below, makes it EV-negative far more often than people realise. The “all in” trade has a fat left tail that the “all in” advocate refuses to model.

That is what this Thought Of The Week is about. Why I size 2% to 5%, even on the calls I am sure of. And why the math, not the conviction, has to drive the size.

The math nobody runs

Most people size positions as if upside and downside are mirror images. They are not. The arithmetic of recovery is asymmetric in a way that punishes anyone who ignores it.

A 10% drawdown needs +11% to get back to flat. Easy. A 20% drawdown needs +25%. Still recoverable inside a normal year. A 50% drawdown needs +100%. That is a doubling. Most people don’t double their money in five years, let alone get the chance to do it just to stand still.

A 70% drawdown needs +233%. That is the number that should keep position sizers honest. To recover from a 70% loss you have to triple what is left and add a third on top.

The S&P 500 has not actually drawn down that far in 25 years (the GFC bottomed at -57%, COVID at -34%)…

…but the Nasdaq Composite did during the dot-com bust: down 78% from March 2000 to October 2002, and it didn’t make a new all-time high until April 2015.

Almost fifteen years of dead money. Single stocks blow up that hard all the time.

PYPL drew down 78% in one year from July 2021.

Meta drew down 77% in the same period.

Cisco just recovered earlier this year to its 2000 peak, twenty-six years later.

On the way down, it always feels like the world is ending. Sometimes it is. More often, it just takes time to get back.

The asymmetry doesn’t only apply at the index level. Single stocks blow up harder and recover slower. Often they don’t recover at all.

What PayPal taught me in real time

Last quarter I closed PYPL at a 52% capital loss.

Everything about that trade went wrong. The thesis on consumer spend held up, but the take-rate compression management pretended was temporary turned out to be structural, the new CEO inherited a Branded Checkout product that was bleeding share to Apple Pay and Shop Pay every month, and the buyback was funding a dilution treadmill rather than shrinking the float.

I wrote about all of this in the PayPal Post-Mortem and in the trade alert that closed the position. Read both if you haven’t.

But here is the part that matters for today’s discussion: PYPL was 1.7% of the portfolio. A 52% loss on a 1.7% position cost me 88 basis points.

Less than half a percent of NAV. In the week that I closed the position, the rest of the book had already covered the damage 7x over.

The portfolio kept compounding. The mistake stayed contained.

Now imagine the same trade at 10% of the portfolio, the size a “high-conviction” advocate would have chosen. A 52% loss on a 10% position is 5.2% of NAV gone. To recover from that single mistake, the rest of the book has to deliver +5.5% just to stand still. A full year of acceptable returns, vapourised by one wrong call.

At 25% of the portfolio (which I have been asked about more than once), the same mistake removes 13% of NAV. Recovery requires +15%. That is half a year of compounding lost to one trade. And PYPL was not even a catastrophic blow up. PYPL has, in its history, drawn down 83% during the inflation shock of 2022. Imagine sizing a name 25% with that kind of left tail in the distribution.

This is the asymmetry the “go all in” crowd never models.

CDE: the opposite lesson

Coeur Mining [] is the tenth best-performing position in the portfolio.

It is also one of the most volatile: silver moves 5% on a Tuesday, the equity moves 12%.

If I had gone “all in” at 25%, every silver tantrum would have had me down 3% on the portfolio in a session. By the third one I would have been managing my emotions instead of my analysis.

Instead I sized CDE at 4%1. The conviction was high, but the volatility was high too. So the position sized to what I could hold through a 40% peak-to-trough drawdown without flinching. CDE has had two of those since I bought it. I am still long.

The lesson cuts both ways. Sizing small didn’t cost me on CDE. The position has more than doubled and added meaningfully to portfolio returns. It just delivered those returns without forcing me to make a single emotional decision along the way. That is the trade-off most people get backwards: they think small position sizes mean small returns. What they actually mean is smaller emotions, which is what allows you to hold the winners for years instead of selling them in the next drawdown.

The rule I actually use

Where:

Conviction is a number between 0.5 and 1.0, reflecting how confident I am that the thesis is right.

Risk:Reward is a score I calculate and track in my watchlist for each name, weighting the upside path against the downside path. A higher number means a more attractive investment.

Pain budget is the maximum percentage of NAV I am willing to lose on a single name in the worst case. For me that is 3%.

Max plausible drawdown is the worst peak-to-trough loss I can imagine on the underlying equity. Not the average. Not the comfortable case. The 95th-percentile bad outcome. Monte Carlo simulations are useful here.

Run the numbers and the table is the table. For example, at a Risk:Reward of 80 and a 3% pain budget you get the below:

Note that in that table there are sizings above 5%, but that is just theoretical. If you find a name whose maximum plausable drawdown is just 20% to 30%, please let me know!

Leave a comment

A strong-conviction call (0.9) on a name with a plausible 50% drawdown sizes at 4.3%. The same conviction on a name that could draw down 70% sizes at 3.1%. A 0.7 conviction call on a 50% drawdowner sizes at 3.4%. Notice the punishment that drawdown depth inflicts on size: hold conviction constant and double the worst-case drop, and the position size more than halves. Even at maximum conviction, a name with a plausible 70% drawdown caps at 3.4%, around half of what the same conviction earns on a 40% drawdowner. That isn’t because I lack confidence in my work. It is because the asymmetry of recovery does not care how confident I am.

The rule also forces me to be honest about what “max plausible drawdown” means. PYPL’s was 78% in 2022. Anyone sizing PYPL today as if 30% is the worst case has not done the work. The drawdown number is where most people lie to themselves. Pull the 10-year chart, find the worst peak-to-trough, then add a third on top because the next bear market will be worse than the last one in some way you can’t predict.

Three layers of conviction

The other thing that separates a 5% position from a 2% position in my book is whether the thesis has three layers of conviction or only one.

Layer #1. The business.

Do the unit economics work in good times and bad? Is the moat real, or a temporary share advantage that competition will erode? Can I draw the income statement five years from now without squinting?

Layer #2. The valuation.

Is the price disconnected from a defensible estimate of intrinsic value, by enough margin to absorb being half-wrong on growth or margins? If the answer is “yes, if you assume management hits guidance,” then it is not a 5% name.

Layer #3. The capital allocator.

Will the people running the company compound shareholder value or extract it? Buyback discipline, M&A history, executive compensation structure, insider ownership. This is the layer most people skip.

If a name only has one of those three, it is a 2% position or it is a watch-list name. Two layers gets you 2% to 3%. All three layers, sized to the drawdown profile, is what gets you to 4% or 5%. Without all three, concentration is gambling dressed up as analysis.

This matters more in April 2026 than in most months. The market is richly priced. The 2025 winners are up multiples. The temptation to size up the names that worked is exactly when the math becomes least forgiving. A 25% position in a name that has run 4x in a year, sized for the next move up, is a portfolio-ending decision waiting for a catalyst. The catalyst will come. They always do.

Conviction is not a substitute for sizing. The arithmetic of recovery doesn’t care how confident I am, and neither does the next 40% drawdown that lands in a name I was sure of. Sizing 2% to 5% isn’t timidity. It is the only way I know to be wrong on three or four positions a year and still let the winners compound to the upside they deserve.

Share Beating The Tide: Stock Picks That Outperform

Portfolio Update

The market hit an all time high. The portfolio outperformed the market, expanding our lead.

Portfolio Return

• Month-to-date: +17.5% vs. the S&P 500’s +9.8%.

• Year-to-date: +26.8% vs. the S&P 500’s +4.7%. That is a gap of 2,215 basis points.

• Since inception: +79.0% vs. the S&P 500’s +24.6%. That’s 3.2x the market.

Share

Contribution by Sector

Tech led the gains.

Contribution by Position

(For the full breakdown plus commentary on earnings results and the big movers, see Weekly Stock Performance Tracker)

• +51 bps (Thesis)

• +48 bps (TSX: CLS) (Thesis)

• +36 bps (Thesis)

• +33 bps (Thesis)

• +24 bps (Thesis)

• +12 bps (Thesis)

• flat (Thesis)

• -25 bps (Thesis)

That’s it for this week.

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

Further Sunday reading to help your investment process:

• Never Stop Asking Why, Using the “5 Whys” to Solve Problems and Pick Stocks

• The Rise and Fall of Moats: When Walls Built to Protect Become Traps

• Design Your Life Around Your Nature

• How I Earn $3,000-$7,000 a Month While Waiting to Buy Great Stocks Cheaper

• Cheat Codes for Life Monopoly

Before I get to Pilgrim’s Pride, a story.

Years ago, back in my Moneda days in Santiago, I flew to Brazil for a site visit to a chicken plant. It wasn’t PPC. It was Marfrig, one of JBS’s biggest rivals at home. I put on the white coats and the hairnets and spent a morning watching an industrial poultry operation run flat out.

The plant ran halal. That meant a Muslim slaughterman stood at the head of the line saying a short prayer over each bird before cutting its throat, “Bismillah, Allahu Akbar,” in the name of Allah, Allah is the Greatest. The chickens came to him upside down, hanging by their feet from a steel hook on a mechanised chain that never stopped moving. They came at him so fast that I honestly didn’t understand how he was getting the full phrase out between birds. His lips barely paused.

From the kill floor we walked through the cutting room, where the birds were broken down into breasts, thighs, wings, and tenders by a wall of fast-moving blades and faster-moving workers. Then we got to the sausage line. I won’t ruin it for you here by describing what actually goes into a sausage, but I’ll tell you what the tour taught me. I didn’t touch a sausage for a month afterwards.

Then, like every analyst who tours a plant, I forgot the unsettling parts and went back to eating sausages. And I went back to owning chicken names, because the unit economics still worked on a spreadsheet even when they didn’t work on a factory floor. That’s the job. You see an industry up close, you file away what you saw, and you keep underwriting the businesses anyway. Sometimes that’s the right call. Sometimes it isn’t. This deep dive is a sometimes-it-isn’t.

Last week I sent a trade alert to paid subscribers closing my Pilgrim’s Pride (PPC) position at a 15.7% loss.

I bought at $41.59, watched the stock run to $57, and sold at $35.05 as the cycle rolled over. Factor in the $8.40 per share of special dividends PPC paid out during the holding period ($6.30 plus $2.10), and the realized position actually delivered a +4.4% total return (Total return : ($35.05 + $8.40 − $41.59) / $41.59 = +4.47%).

The chicken cycle giveth, and the chicken cycle taketh away. I’d argue the second part is louder than the first.

That trade alert was the capital-recycling call. This deep dive is the homework behind it. I’m publishing the full thesis now because I want subscribers to see how I walked myself out of a position that still shows 13% upside on my own DCF, and why, even with my target sitting at $38 versus a market price near $33, I think closing was the right call.

The short version: my DCF target is real, but it’s built on assumptions that sit near the optimistic end of what’s plausible for a commodity protein producer at the top of a margin cycle. When I stress-test those assumptions with a 5,000-path Monte Carlo simulation, 56% of the runs finish below today’s price. The expected upside is thin, the left tail is fat, and the capital has a better home.

Table of Contents:

• TLDR

• What Pilgrim’s Pride Actually Is

• How The Money Is Actually Made

• The Cycle Rolled Over In Q4

• No Moat, And That’s The Point

• Capital Allocation And The JBS Problem

• Valuation

• Steel-Manning The Bear

• What The Bulls Are Missing

• Post-Mortem: Why I Bought At $41.59 And What I Missed

• Why I’m Recycling Into The April Pick

• The Verdict

TLDR

• Pilgrim’s Pride [] is the second-largest US chicken producer, with Europe and Mexico rounding out a $18.5B revenue base. JBS [] owns more than 80% of the shares. It’s a commodity business with no brand moat, no pricing power, and a balance sheet now levered 1.2x net debt to EBITDA.

• FY2025 EBITDA margin hit 12.2%, near cycle peaks. The two prior years were 5.7% and 12.2%. The five-year average is under 8%. Q4 2025 already marked the turn: EBITDA margin of 9.2% was a 280bp compression y/y, and Mexico’s operating margin collapsed from 6.4% to 1.0%.

• My DCF spits out a $38 target using a 6.5% WACC, 1.5% terminal growth, and EBITDA margins fading from 12.2% to 7.6%. The assumptions aren’t aggressive in isolation, but a 0.9 beta on a business with ROIC swings between zero and 19% in five years is hard to defend.

• A 5,000-run Monte Carlo across revenue growth, gross margin, capex intensity, and WACC puts the median target at $30.9 and the 95% VaR at $5.2. 56% of simulations land below the $33 market price. The implied risk-reward is roughly 1 to 0.3 against.

• I closed at $35.05 for a 15.7% capital loss, though $8.40 of special dividends over the holding period flipped the realized position to a +4.4% total return. The capital has been redeployed into my April stock pick, where the Monte Carlo distribution, the cycle position, and the moat all favour staying long.

What Pilgrim’s Pride Actually Is

PPC is the second-largest chicken producer in the US and the second-largest poultry producer in Europe. It runs a vertically integrated model: feed mills feed hatcheries, hatcheries feed grow-out farms, farms feed processing plants, plants feed customers. That integration is the entire cost-advantage story. It doesn’t create pricing power on the way out, but it controls input costs on the way in.

The business is built from three reporting segments, and the segment mix tells you where the money is made and where the risk lives.

The US segment is the engine, and the engine just started misfiring. US operating margin for the full year was 12.1%, but the Q4 exit rate was 7.4%. That’s a four-percentage-point margin compression in a single quarter, driven by what management called y/y declines in commodity market pricing. Translation: the Big Bird business, which sells whole birds into foodservice channels, got repriced down as supply caught up with demand.

Europe is the defensive leg. It carries more prepared-foods exposure through the Moy Park and Pilgrim’s Food Masters brands, and margins expanded y/y in Q4. The catch is that prepared foods here are largely private-label, so brand equity belongs to the retailer, not to PPC. It’s better than fresh commodity chicken, but it isn’t the high-moat snack aisle.

Mexico is the one to watch. Operating margin dropped from 6.4% to 1.0% in Q4 on what the company described as supply-demand fundamentals driven by an increase in imported proteins. That’s a polite way of saying imported chicken crushed local pricing. Mexico has historically been PPC’s highest-returning geography, so the timing stings.

How The Money Is Actually Made

A chicken producer doesn’t have many levers. Revenue is a function of pounds produced times average price per pound. Gross margin is a function of the spread between that selling price and the feed, labour, and energy cost to produce the bird. Everything else (SG&A, D&A, interest) is a rounding error against those two drivers.

Feed is corn and soybean meal, and it’s the single biggest cost bucket. PPC discloses that a 10% move in feed prices is a first-order hit to gross margin. The company runs hedging programs to smooth that volatility, but hedges delay the impact, they don’t eliminate it. When corn and soy are cheap and chicken is scarce, margins look like FY2025. When they aren’t, margins look like FY2021, when EBITDA margin was 4.0%.

Average selling price is a function of the broiler cycle: when hatcheries ramp, supply lags by about 9 months, then overshoots, then prices fall, then producers pull back, then supply tightens, then prices climb again. PPC has lived inside that cycle for 40 years and will live inside it for the next 40.

Q4 2025 earnings signalled the down leg of the current cycle. US chicken prices have fallen roughly 20% since July 2025 as industry hatch rates caught up with the demand surge that was driven by expensive beef and pork during FY2024. That’s not a PPC-specific problem. It’s the cycle doing what the cycle always does.

The Cycle Rolled Over In Q4

Here’s the frame that most of the sell side is missing. FY2025 full-year numbers look strong in aggregate: revenue +3.5% y/y to $18.5B, adjusted EBITDA up 2.5% to $2.27B, margin holding at 12.2%. A casual reader would see those numbers and conclude chicken markets are stable. They aren’t.

Q4 2025 is where the cycle shows itself. Adjusted EBITDA fell 21% y/y to $415M. Adjusted EBITDA margin compressed 280bp to 9.2%. Operating income fell 33% y/y. Diluted EPS dropped to $0.37 from $0.99, a 63% decline. The full-year stamps were strong because Q1 through Q3 ran at cycle peaks. Q4 broke the streak.

This matters because cycles don’t end with a press release. They end with one quarter where margins compress faster than volume growth can offset, and the next quarter looks worse, and the one after that worse still. The Q4 print is consistent with the classic broiler-cycle top: prices fall, margins fall, volumes hold or grow, and reported earnings decline even as the topline looks fine.

The historical pattern is instructive. In FY2021, chicken markets rolled over and adjusted EBITDA margin dropped to 4.0%. In FY2023, another downcycle took margin to 5.7%. Those weren’t left-tail events. Those were the cycle running its normal course.

EBITDA Margin Cyclicality

The six-year average EBITDA margin is 8.0%. The current margin is 12.2%. If you believe margins mean-revert toward the historical average over the next three to five years, you’re underwriting a revenue base that grows at low single digits while EBITDA falls toward $1.5B. That’s not a catastrophe. But it isn’t the $2.3B run-rate the current price is anchored to either.

No Moat, And That’s The Point

I’ve written about moat businesses before. My Moats 101 guide is one of my most popular LinkedIn posts.

I've also written about how moats can trap you.

PPC isn't a moat business, and I knew that before I bought it. Most people think you should only own companies with moats. That isn't true. Take my February stock pick.

No moat. Best operator in the peer group. Shares up 72% in two months.

Start with pricing power.

Over the past decade, PPC’s realized prices have risen roughly 2.4% per year on average. Industry wholesale chicken prices have risen closer to 3% per year over the same period. A true brand producer raises prices faster than the industry. PPC doesn’t. It’s a price taker, the vast majority of contracts are indexed to commodity benchmarks, and the company’s ability to pass costs through depends on market structure in the quarter the price reset happens.

Continue with market share.

In US frozen processed poultry, Tyson holds roughly 36% share, Perdue holds about 5%, and PPC holds about 1%. In fresh chicken, PPC is the number-two producer, but fresh chicken is the commoditized end of the aisle. The Just Bare brand is the most promising value-added franchise in the US portfolio, but it’s small relative to the commodity base.

End with returns.

ROIC over the past decade has averaged 10.48%, which barely clears an honest cost of capital estimate for a commodity protein producer. The current reading of 15.31% looks moat-like on its own.

The dispersion around that average is what gives the moat story away. ROIC peaked near 20% in 2017, fell below 5% through 2020 and 2021, briefly recovered above 10% in 2022, plunged back toward zero in 2023, and has only climbed back into the mid-teens through 2024 and 2025. A business with a genuine competitive advantage doesn’t see ROIC collapse to zero twice in five years. It sees zero, or maybe one near-zero year, during a generational downturn. PPC earns excess returns at the top of the cycle and destroys capital at the bottom. That’s the definition of no moat.

Management is operationally competent. The European restructuring has lifted UK margins from 3.3% adjusted op margin in FY2024 to 5.6% in FY2025, and Q4 2025 Europe margin of 6.7% is a decade high. But operational excellence in a commodity business doesn’t create a moat. It creates a cost advantage that peers will eventually replicate. Sanderson Farms, before being acquired in 2022, ran a similar playbook and landed at around 6% operating margin mid-cycle. That’s the ceiling for this industry.

Capital Allocation And The JBS Problem

JBS S.A., the Brazilian meat giant, owns more than 80% of PPC’s shares outstanding. That ownership structure is the single most underappreciated feature of this stock.

In 2021, JBS attempted to buy out the remaining ~20% minority stake. An independent board committee blocked the offer, deeming it inadequate, and JBS retracted. That episode tells you two things: first, JBS views PPC as a strategic asset it would like to fully consolidate. Second, the independent directors are willing to block a parent-initiated buyout on valuation grounds. The governance is functional. But the overhang remains.

PPC’s board chairman is also the CEO of JBS.

Related-party transactions (Moy Park was acquired from JBS in 2017) pass through committee review, but the structural conflict exists. For the minority shareholder, this creates two forms of risk: first, a low-ball re-offer if PPC shares drop meaningfully; second, capital allocation decisions that serve JBS’s broader portfolio rather than PPC’s standalone intrinsic value.

On capital allocation itself, PPC has done fine, not great. The company paid out $6.30 per share in a special dividend in Q2 2025 and announced another $2.10 per share. Returning cash at the top of the cycle is the right call. It avoids the classic commodity-producer mistake of plowing peak-margin cash flow into capacity expansion right before the cycle turns. Share repurchases have generally been opportunistic rather than mechanical.

The M&A record is mixed. The 2017 Moy Park acquisition at 7.1x trailing EBITDA and the 2019 Tulip pork acquisition at undisclosed terms were reasonably priced, but neither materially upgraded the moat. The 2021 Kerry Consumer Foods deal at 8.5x EBITDA for the UK prepared-meals business made operational sense but added private-label exposure, which doesn’t scale into a brand franchise.

Valuation

This is the section where I argue against my own DCF. Bear with me.

My DCF model gives a fair share price of $38, which implies roughly 13% upside from the current $33 market price. The inputs are in the table below. They are not wildly aggressive in isolation. The problem is how they interact at the margin.

The terminal value is the tail wagging the valuation dog. About $7.1B of the $11.7B enterprise value sits in the terminal, which is standard for a DCF but worth flagging. A 50bp move in the WACC or the terminal growth rate flexes the target by more than my 13% upside. That’s not a bug in the model. That’s the commodity nature of the business.

Why Even My DCF Is Optimistic, Starting With The WACC

When I back-solved my own assumptions, the WACC is where I kept stopping. 6.5% is defensible on the surface and fragile underneath.

The build is 4.38% risk-free, plus a 4.23% equity risk premium, times a 0.9 levered beta, giving an 8.0% cost of equity. Cost of debt is 3.5% after tax. Target debt-to-capital of 35% blends the two into 6.5%.

The 0.9 beta is where the trouble starts. Beta is a backward-looking measure of stock-price volatility relative to the market. Over the past five years, PPC’s stock has moved with the market during risk-on phases and underperformed during cycle downturns, which averages out to something close to 0.9. But this is a business whose ROIC swings between zero and 19% in five years. Whose earnings per share went from $0.13 in FY2021 to $4.54 in FY2025. The economic volatility of the underlying business is far higher than the beta suggests.

A more honest cost of equity for a commodity protein producer sits closer to 9-10%. Sell-side peers use 8.5%-9% regularly. At a 9.5% cost of equity and the same 3.5% after-tax cost of debt and 35% debt-to-capital, the WACC moves to roughly 7.4%. At 10% cost of equity, you’re at 7.7%.

That 90bp to 130bp increase in the WACC is worth a lot. The DCF model shows an implicit WACC of 7.0% at the current $33 market price, which means the market is already using a more realistic discount rate. The gap between my $38 target and the current $33 price is, to a first approximation, a disagreement about WACC, not about business fundamentals.

Second, the EBITDA margin path. My model fades margin from 12.2% at FY2025 to 8.3% in year 5, 7.7% in year 10, and 7.6% in the terminal. While the six-year historical average is 8.0%, the long-term average is 7.3%.

My fade path sits above the historical reality for the entire forecast period. A flatter path, taking terminal margin to 7.3%, would cut the target by several more dollars.

None of these is egregious individually. Together, they mean the $38 target is closer to the bull case than the base case. And that’s before I stress-test any of it.

Monte Carlo: The Stress Test That Closed The Trade

I run Monte Carlo simulations on every DCF I build. The point isn’t to produce a single target price. It’s to map the distribution of outcomes and understand how much of that distribution sits above the current market price.

For PPC, I simulated 5,000 paths, varying four inputs independently: revenue growth, gross margin, capex intensity, and WACC. Each input was sampled from a distribution calibrated to the last five years of realized data plus a forward view. The simulation pulls values from those distributions, re-runs the DCF, and logs the resulting target price. Five thousand runs gives a tight distribution.

The results are the reason I’m writing this article with a loss instead of holding for 13% upside.

Monte Carlo Distribution Statistics

Sit with that middle block for a moment. My point-estimate DCF says $38. The mean of 5,000 Monte Carlo simulations says $32.5, which is below the current $33 market price. The median is $30.9. And 56% of all simulations finish below today’s closing price.

That last figure is the number I care about most. A thesis that implies 13% upside on the point estimate but fails to clear the current price in more than half of plausible paths is not an asymmetric setup. It’s a coin flip with a fat left tail. The 95% CVaR, which is the average outcome across the worst 5% of runs, is -$0.9. That means in a real downside scenario, PPC isn’t just down 30%; it’s worth effectively nothing to the equity.

The sensitivity analysis confirms where the risk lives. WACC explains 44.5% of the variance in the output. Gross margin explains another 34.3%. Capex intensity adds 17.3%. Revenue growth is almost irrelevant at 3.9%. That ranking makes intuitive sense: this is a cyclical commodity producer where the two things that matter are the cost of capital and the margin the market happens to be paying in any given year.

The bear case scenario in my model pins the target at $15, which represents a 55% drawdown from here. The R/R on a point-estimate basis is 1 to 0.3 against: $5 of expected upside ($38 minus $33) versus $18 of expected downside ($33 minus $15). For a business that has spent four of the last ten years earning below its cost of capital, that risk-reward profile doesn’t warrant holding through the cycle turn.

Share Beating The Tide: Stock Picks That Outperform

Steel-Manning The Bear

The bear case is straightforward enough to write in a paragraph, but each clause matters.

First, margin mean reversion.

US chicken prices are already down roughly 20% since July 2025 as industry hatch rates caught up with peak demand.

Q4 2025 US adjusted operating margin dropped to 7.4% from 11.5% y/y. Q1 2026 and the rest of the year are likely to print well below FY2025. The question isn’t whether margins revert. It’s how fast and how deep.

Second, Mexico.

The 540bp margin collapse in Q4 2025 wasn’t a weather event. It was imported protein flooding the market as US producers redirected supply south. If US tariff policy tightens or peso weakness intensifies, the import dynamic reverses. If it persists, Mexico becomes a structural margin drag rather than a cyclical one.

Third, feed input inversion.

Corn and soybean prices are at multi-year lows on strong global harvests, which has helped margins in FY2024 and FY2025.

A single weather year in the US midwest, a renewed China-US trade disruption on soybeans, or an Argentina or Brazil harvest failure takes the feed cost tailwind away immediately. PPC’s hedges smooth this over 6-9 months, but they don’t eliminate it.

Fourth, avian flu.

HPAI has hit the US egg and turkey markets harder than broilers so far, but outbreaks in broiler houses remain a live tail risk. A flock cull event at one of PPC’s large integrated complexes could take a full quarter’s volume off the books. Insurance doesn’t fully cover it.

Fifth, legal overhang.

PPC pleaded guilty in 2021 to price-fixing charges and paid $110M. Civil litigation continues. Litigation settlements added $163M to the FY2025 P&L adjustment, which is why GAAP and adjusted numbers diverge materially. Another meaningful settlement is possible but not quantifiable from the outside.

If PPC shares trade down meaningfully on cycle weakness, JBS could return with a low-ball buyout offer. The independent committee blocked the 2021 attempt, but a 30-40% share price decline changes the calculus. That’s not a left-tail event for the business; it’s a left-tail event for the minority holder.

Any one of these risks is manageable. Two at the same time pushes the thesis underwater. The Monte Carlo distribution already embeds these in the fat left tail.

What The Bulls Are Missing

The bull case on PPC, which I held as recently as October 2025, rests on three pillars: chicken is the fastest-growing protein, operational excellence is creating structural margin expansion, and the balance sheet finally cleaned up enough to support capital returns.

Each of those is true. None of them changes the Monte Carlo distribution.

On chicken growth: the USDA’s projection calls for US chicken consumption to grow about 1% per year through 2032. That’s a volume story, not a margin story. If PPC captures its share of that growth, revenue compounds at 1-2% per year. That’s already baked into my DCF. It doesn’t push the distribution higher.

On operational excellence: the European restructuring did work. Europe margin went from 3.3% in FY2024 to 5.6% in FY2025 and is trending toward 6% in Q4. But operational improvements in commodity businesses get competed away over time. Every large integrator (Tyson, Perdue, Wayne-Sanderson, Koch Foods) is running the same playbook. At mid-cycle, the industry lands at 5-6% operating margin. That ceiling isn’t moving.

On capital returns: the $6.30 special dividend and the $2.10 announced follow-up are right-sized and well-timed. They return peak-cycle cash to owners instead of getting recycled into capacity expansion. This is exactly what I want to see, and it’s partly why PPC ran to $54 in mid-2025. But special dividends don’t create a moat. They confirm the absence of one: if there were high-return reinvestment opportunities inside the business, the company would reinvest.

The variant perception in my original thesis was that the market was underpricing the durability of the margin expansion. The Q4 2025 print disabused me of that view. Margins didn’t just plateau. They rolled. The durability case collapsed in one quarter, which is exactly what you’d expect for a business with no moat and high operating leverage into commodity prices.

Post-Mortem: Why I Bought At $41.59 And What I Missed

The entry was anchored in three beliefs, and each looked reasonable at the time. Two of the three turned out right. The one that mattered most was wrong.

Belief #1. The US chicken cycle was mid-innings, not late.

By Q2 2025, PPC had posted four consecutive quarters of double-digit adjusted EBITDA margins, with Q2 printing 14.4%. US foodservice demand was strong, beef was expensive because the US cattle herd was at multi-decade lows, and consumers were rotating into cheaper protein. The hatch-to-slaughter data I was tracking suggested supply was growing in line with demand, not ahead of it. That combination called for the cycle to run another four to six quarters, with more special dividends and buybacks waiting on the way out. This belief was right, for one more quarter. Then it wasn’t.

Belief #2. European margins had a real runway.

The Moy Park and Pilgrim’s Food Masters restructuring was lifting adjusted operating margin from 3.3% in FY2024 to 5.6% in FY2025 full year, with the Q4 2025 exit rate at 6.7%. That’s a +300bp improvement in roughly 18 months. Management was guiding to continued expansion through FY2026 on cost savings and network optimisation. I viewed this line as uncorrelated with US chicken pricing, which made it a natural diversifier inside the same ticker. This belief was right. Europe is doing what I thought it would. It’s just not enough to offset the US and Mexico together.

Belief #3. The margin structure had stepped up durably.

This was the thesis-definer. My view was that PPC’s cost position had stepped up meaningfully versus prior cycles because of the European restructuring, better US feed hedging, and operational discipline after the 2021 price-fixing resolution. I underwrote a mid-cycle EBITDA margin of 9-10%, above the 8% historical average. On $19B of revenue and a 10% mid-cycle margin, normalised EBITDA was $1.9B, and at a 7x multiple the equity was worth $45 per share. That was my buy-level anchor. This belief was wrong. Q4 2025 disabused me of it in a single quarter.

What I missed, specifically.

Miss #1. Hatch data.

Industry hatch rates started climbing sharply in spring 2025. By August, broiler egg sets and chicks placed were running 3-4% ahead of the prior year, which historically is the level that triggers price compression within two quarters. I saw the data but discounted it because the demand side was still absorbing the supply, right up until it wasn’t. The signal was there in the weekly USDA broiler reports. I let the strong Q1 and Q2 margin prints override it.

Miss #2. Mexico.

A 1.0% operating margin in Q4 2025 wasn’t on my risk register. I had Mexico flagged as PPC’s highest-margin geography, not as a risk. Imported proteins flooded that market faster than I expected. Tariff uncertainty and peso weakness amplified the effect. This was a failure of specificity in the bear case: I had Mexico listed as “stable” when I should have had it listed as “structurally exposed to US supply redirection.”

The lessons I’m taking forward.

First, commodity margin narratives compound the wrong way. A thesis that assumes “margins have stepped up durably” for a commodity producer is a bet against mean reversion in a business where mean reversion is the base rate.

Second, the weekly industry data matters more than the quarterly company data at cycle turns. Hatch sets, cold storage inventories, and wholesale spot prices lead the reported margin by two or three quarters.

Why I’m Recycling Into The April Pick

The capital has a better home. Last week’s April 2026 stock pick sits in the aerospace and defence complex, where the setup is the inverse of PPC: structural tailwinds on revenue, a moat grounded in qualification barriers and switching costs, a multi-year backlog visibility, and a Monte Carlo distribution where the mass sits above the current price rather than below it.

I won’t re-underwrite that thesis here; the trade alert and the accompanying deep dive cover it. The point is that capital is finite and time is expensive. Every dollar tied up in a 1-to-0.3 risk-reward is a dollar not working in something better.

The 15.7% capital loss on PPC stings less once I add back the $8.40 of special dividends that flipped the realized position to a +4.4% total return. It's still the correct recognition of a thesis that failed. My original underwrite assumed margins had structurally stepped up. Q4 2025 said otherwise. Waiting for a dead-cat bounce to break even is how investors hold commodity producers through full cycle downturns. I'm not doing that.

The Verdict

When my own DCF target shows 13% upside and I’m still selling, the reason is simple: the target is the optimistic tail of a distribution, not the centre of it. A thesis that needs my assumptions to hold up to survive the cycle turn isn’t a thesis. It’s a hope. Recycled capital beats hope every time.

Hello fellow Sharks,

Here is the latest update on one of the positions in the portfolio.

Short version: results were great, execution is exactly what the thesis called for, and the stock is up a mere +4.6% since I added it to the portfolio.

That mismatch, between what the business is doing and what the market is paying, is the entire trade.

This quarter delivered a double-digit EPS beat versus consensus, double-digit revenue growth, another consecutive quarter of zero provision for credit losses, a meaningfully stronger capital position, and a management team that, for the first time in years, put buybacks back on the table.

And yet, the stock still trades at single-digit forward earnings and roughly 1.6x tangible book for a business earning 20% on tangible equity with zero debt at the holding company.

Read more

Back in January, I published a deep dive on a Latin American utility offering 40% upside.

Three months later, it touched my target price. The rerating played out faster than I expected.

The stock has since pulled back a bit, Q4 results just dropped, and I’ve refreshed the model. The new target is 30% higher. But my rating has changed too, and probably not in the direction you’d expect.

Table of Contents:

• TLDR

• Thesis Scorecard

• FY2025 Earnings Review: Noisy Numbers, Clean Trend

• Guidance Comparison

• Valuation Update

• Risk Register Update

• Relative Performance vs. Comps

• Verdict

TLDR

• Trigger: AXIA hit our original $13.40 target, retraced to $13.15, and Q4 FY2025 results provide a natural checkpoint to update the thesis.

• Thesis scorecard: Of my 5 original thesis pillars, 4 are confirmed, and 1 is evolving. The decotization story, efficiency gains, governance improvement, and transmission stability are all tracking. The demand/data centre pillar is evolving as the timeline has stretched.

• Verdict: HOLD with an updated target of $17.45 (up from $13.40). The thesis is working, but the easy money has been made. Risk:reward at $13.15 is balanced, not compelling enough for a BUY.

Let me walk through what happened, what changed in the model, and why I’m staying patient.

Thesis Scorecard

In the original deep dive, I built the bull case around five pillars. Here’s where each one stands after Q4 FY2025.

Pillar #1. Decotization Unlocks Free Market Pricing – Confirmed

Original thesis: Legacy quota contracts were phasing out, freeing 29–43% of Axia’s capacity to sell at market prices instead of cost-based rates. By 2027, quota exposure drops to zero.

What happened: This is playing out exactly as expected. In Q4 FY2025, Axia’s generation margin rose to R$101/MWh, up from R$78/MWh a year earlier. That’s a 29% improvement driven directly by the shift from quota pricing to free market contracts. The company’s ACL (free contracting environment) volumes continue to grow as quota volumes decline. Management confirmed on the Q4 call that the remaining quota exposure is on track to expire on schedule.

Assessment: This pillar is the engine of the entire thesis, and it’s firing. The margin expansion from decotization is showing up in the numbers, not just in the projections.

Pillar #2. Surging Power Demand / Data Centre Boom – Evolving

Original thesis: Brazil’s data centre demand jumped 330% in a single year, with total demand projected to reach 13.2 GW by 2035. Axia, as the only generator with massive uncontracted capacity, was positioned to be the go-to supplier.

What happened: The demand story hasn’t weakened, but the timeline has stretched. Brazil’s data centre buildout is proceeding, with Microsoft, AWS, and Google all expanding campuses. But hyperscale construction timelines are measured in years, not quarters. Axia’s plan to build a data centre adjacent to its Xingó hydro plant in Sergipe is still in early stages. In Q4 FY2025, Axia won 4 lots in a transmission auction (R$1.63 billion in capex, R$140M RAP), which strengthens the infrastructure side but doesn’t directly monetise the data centre angle yet.

Assessment: The structural demand thesis is intact, but the near-term earnings impact is still a 2027+ story. I’m not downgrading this pillar to “challenged” because the direction is right, but I’m flagging that the market may be patient only for so long.

Pillar #3. Post-Privatization Efficiency Gains – Confirmed

Original thesis: Operating expenses had been cut 18%, headcount reduced 17%, and non-core assets divested since privatization. The new management was running Axia like a business, not a bureaucracy.

What happened: PMSO (personnel, materials, services, and other expenses) fell 12.8% y/y to R$6.7B in FY2025. That’s on top of the cuts already made. Axia also completed the disposal of its nuclear subsidiary stake and continued shedding legacy assets like the Cepel research centre. Investments jumped 28% y/y to R$3.9B in Q4, showing that the efficiency gains aren’t just about cutting but about redirecting capital to higher-return projects.

Assessment: The cost discipline is holding. Management isn’t just coasting on early privatization wins. They’re still finding ways to trim while reinvesting.

Pillar #4. Governance Transformation – Confirmed

Original thesis: The Supreme Court settlement confirmed the 10% voting cap, the government gets 3 of 10 board seats, and Axia was on a path to Novo Mercado listing (one share, one vote).

What happened: The governance framework is stable. The Novo Mercado migration remains in progress. More importantly, Axia paid a record R$8.3B in dividends for FY2025, including extraordinary dividends. A company still under government thumb doesn’t pay out R$8.3B to shareholders. This is a tangible signal that capital allocation is driven by returns, not politics.

Assessment: The governance overhang that haunted Eletrobras for years has largely faded. This pillar is confirmed and doesn’t need much monitoring.

Pillar #5. Transmission as Stable Ballast – Confirmed

Original thesis: Axia operates 37% of Brazil’s transmission grid, providing regulated, inflation-adjusted returns that balance the volatility of the generation business.

What happened: Transmission revenue grew 4.3% in FY2025. The segment continues to deliver stable, predictable cash flows. Axia won additional transmission lots in the April 2025 auction, adding R$140M in annual permitted revenue (RAP). However, ANEEL’s reduction in RBSE (Existing Basic Network) revenue is a headwind worth noting. The regulator adjusted the remuneration base downward, which creates some drag on transmission earnings going forward.

Assessment: The ballast is holding. The RBSE reduction is a modest negative, but transmission remains the steady anchor it was meant to be.

FY2025 Earnings Review: Noisy Numbers, Clean Trend

Let me get the headline numbers out of the way: FY2025 reported EBITDA was R$8.5B, down 67.5% y/y. Net income was R$6.6B, down 36.8%. These numbers look terrible on the surface.

They’re misleading.

The EBITDA collapse is almost entirely explained by a swing in regulatory remeasurements. In FY2024, Axia booked R$6.1B in positive remeasurements related to transmission contract revaluations. In FY2025, that line flipped to negative R$4.1B. That’s a R$10.2B swing in a single non-cash accounting line. Add in R$7.2B in losses from the nuclear subsidiary disposal, and you have your EBITDA headline.

Strip those out, and the underlying business looks different.

Net revenue rose 2.7% to R$41.3B. PMSO fell 12.8%. The generation margin jumped from R$78/MWh to R$101/MWh in Q4 alone. These are the metrics that matter for the thesis.

Q4 FY2025 specifically was stronger than it looked. Adjusted regulatory EBITDA came in at R$6.4B when you exclude the R$250M wind reimbursement, R$225M transmission pass-through, R$108M incentive programmes, and R$60M rebranding costs. Net income for the quarter was R$1.25B, up 141% y/y on an adjusted basis.

One unusual item: Axia recognised R$12.6B in deferred tax assets during Q4. This reflects management’s confidence in future taxable income (you can only book a deferred tax asset if you expect to use it), but it also inflated the balance sheet in ways that don’t reflect cash generation.

On the balance sheet, net debt rose 23.4% to R$46.5B. Gross debt stood at R$74.3B. Net Debt/EBITDA hit 5.5x on a reported basis, though that ratio is distorted by the same EBITDA noise. On an adjusted basis, the ratio is more like 2.5–3.0x, which is manageable for a utility with contracted cash flows.

Guidance Comparison

Management hasn’t issued formal forward revenue or EBITDA guidance in the traditional sense. But we can compare the operational targets and strategic commitments from the original deep dive to where they stand now.

Management credibility check: Over the past year, management has delivered on every operational metric they’ve guided to. PMSO came in below target. The nuclear divestiture was completed. Dividend policy was more aggressive than expected. The one area where they haven’t been transparent is leverage, where the reported 5.5x number looks alarming until you adjust for the accounting noise. I’d rate management credibility as solid, with a caveat that they need to provide cleaner adjusted figures going forward.

Valuation Update

DCF Assumption Changes

Here’s what changed in the model, and why.

The EBIT margin trajectory now climbs to 50.9% by the end of the forecast period, up from 41.7% in the original model. This reflects the compounding effect of decotization: as more capacity moves from quota pricing to free market pricing, each megawatt-hour generates a fatter margin.

I actually revised down revenue growth in 2026 from 12.7% to 9.1%. I’m being more conservative on the pace of ACL contract wins than the original model assumed. But that conservatism is more than offset by the margin expansion and lower discount rate.

Implied Expectations Analysis

This is where the HOLD thesis crystallizes.

At $13.15, the market is pricing in roughly 4%–5% revenue growth and EBIT margins in the high 30s through the medium term. My updated model assumes 7%–9% revenue growth in the near term (decelerating to 4.4%) and margins climbing above 45%. The gap between the market-implied scenario and my model represents the upside, and it’s real. But it’s not as wide as it was in January.

In January, at $9.46, the market was pricing in essentially flat revenue and stagnant margins. The implied WACC was north of 14%. The stock was being valued as if decotization didn’t exist. That mispricing was obvious and actionable.

Today, the market has corrected most of that gap. The implied WACC at $13.15 is closer to 12%, which is still above my 10.9% assumption, but the delta is smaller. The market now acknowledges that Axia is a different company post-privatization. It just hasn’t fully priced in the margin trajectory.

That remaining gap, from $13.15 to $17.45, is a 33% upside. Decent for a utility. But to capture it, you need the margin story to unfold over 2–3 years, and you need Brazil’s macro backdrop to cooperate. The risk-to-reward profile has shifted from “mispriced and obvious” to “fair value with upside if execution continues.”

Risk Register Update

Faded: Political Re-Nationalization Risk

This was the biggest fear when I wrote the deep dive. The Lula government was testing the waters, and the Supreme Court settlement was fresh. Since then, the government has accepted its 3-of-10 board seats, Axia paid R$8.3B in dividends (the government got its share), and the political noise has quieted. This risk hasn’t disappeared, but it’s faded from a headline concern to background noise.

Unchanged: BRL/USD Currency Risk

The model uses a fixed R$5.00/USD rate. The real has been volatile, trading between R$4.80 and R$5.80 over the past year.

For a USD-denominated investor in the ADR, currency moves can easily eat 5–10% of returns in either direction. This remains a live risk that the model doesn’t fully capture.

Unchanged: Hydrology / Power Price Volatility

Brazil’s power grid is hydro-dependent. A dry year can cause spot prices to spike (good for Axia’s uncontracted capacity) or force curtailments (bad). A wet year lowers prices. The 2025 hydrological year was relatively normal, but climate patterns are unpredictable. This is structural and won’t go away.

Evolving: Leverage Concerns

Net Debt/EBITDA at 5.5x reported looks uncomfortable. The adjusted figure (stripping out the remeasurement noise) is more like 2.5–3.0x, which is fine. But gross debt at R$74.3B is substantial, and with Brazilian interest rates still elevated (Selic at 15.00%), refinancing costs matter. If EBITDA normalises in FY2026 as I expect, the reported ratio will look much better.

New Risk: RBSE Revenue Reduction

ANEEL reduced the RBSE (Existing Basic Network) remuneration base. This creates a drag on transmission revenue going forward. It’s not thesis-breaking, but it wasn’t in the original risk register and deserves monitoring. Transmission was supposed to be the boring, predictable segment. Regulatory adjustments to the remuneration base remind you that “regulated” doesn’t mean “guaranteed.”

New Risk: EBITDA Noise Masking True Performance

The R$10.2B swing in regulatory remeasurements between FY2024 and FY2025 makes it harder for the market to assess underlying profitability. If Axia can’t present clean adjusted figures that gain market trust, the stock may trade at a wider discount than the fundamentals warrant. This is partly a communication risk.

Relative Performance vs. Comps

Since the original deep dive in January, AXIA is up 37.2% from the entry, making it the top performer in the peer group. Engie Brasil came close at 34.4%, but the rest of the field lagged: the S&P 500 Utilities sector returned 11.2%, Enel Chile managed 7.1%, and Pampa Energia was essentially flat at -0.8%.

On a valuation basis, the picture is more nuanced. AXIA’s forward EV/EBITDA has re-rated to 6.7x, sitting in the middle of the comp set. Enel Chile trades at 7.6x, which makes sense for a stable Chilean utility with lower country risk. Pampa Energia is at 4.3x, but Argentina is Argentina.

The key takeaway: AXIA has re-rated on price performance but the multiple hasn’t stretched to expensive levels. At 6.7x forward EBITDA, it’s still below Enel Chile and roughly in line with where Brazilian utilities trade. The stock isn’t cheap anymore, but it isn’t pricing in the full margin expansion story either. In January, AXIA was a clear relative value play. Today, it’s a hold-and-watch. The multiple gap has narrowed, and further re-rating from here depends on the earnings proving out, not just the narrative.

Verdict: Hold – The Thesis Is Working, the Price Has Caught Up

Axia did exactly what I expected it to do: the market re-rated the stock as decotization showed up in the margins, and now the easy money from that mispricing has been captured. The remaining 33% upside to $17.45 is real, but at $13.15 the risk:reward is balanced, not compelling. I’m holding my position and watching for a catalyst that accelerates the margin story.