It’s been two years since we started Reveles. We could not have asked for jobs more suited to our personalities and curiosities. The past two years have been fun and filled with learning. Every morning, arriving at the office, we look through our list of companies and dig through a stack of 10Ks with the excitement of treasure-hunters. It’s both rewarding and intellectually stimulating.

We have been using this “financial journal” (sounds more premium than “blog”) as a way of not only documenting but also of clarifying our ideas—even to ourselves. We find it helps improve our process.

But building a portfolio takes time. And after two years, we’re only at the beginning. We are roughly 33% invested, with the remainder held in cash. As Buffett has said, investing — much like choosing a life partner — rewards patience. So for now, we are staying patient.

Our aim is to eventually hold a portfolio of ten companies, each of roughly equal size. This keeps things simple, and simplicity is often preferable to complexity.

Below is a summary of our overall return and of our key positions. We will follow up soon with a post about the fundamentals of each company.

In the chart above, the green line is our benchmark which is an ETF of the S&P 500. Since Q1 2024, its total cumulative return has been 35%.

Why do we benchmark against the S&P500, if the majority of our assets are currently in Europe? The convention sometimes, for international portfolios, is to benchmark against a global index (an easier comparison).

This makes sense if the portfolio has a global mandate, because then the managers are more constricted in their choice. They have to invest internationally, so performance should to be judged against an international standard.

But if managers are not thus constrained, why should a benchmark reflect where the assets happen to be located? It should judge the choices that were made—i.e. where the manager chose to allocate capital. It should reflect the opportunity cost of that capital.

The S&P 500 has historically been the safest, most liquid index. Therefore we consider it our most relevant hurdle rate.

As of March 27th, our performance over the same time span has been 34% — just shy of the benchmark. We are frankly disappointed with this return, as we aim to do better than the market.

Our performance is measured in dollars, using the True Time-Weighted Rate of Return as calculated by the Portfolio Performance software. TTWROR is standard for measuring whole portfolio performance. It’s a total return — realized gains, unrealized gains, dividends, and changes in FX. It does not include fees & taxes.

One notable observation is the inverse correlation of our portfolio to the benchmark. We have been up when the market was down and vice-versa. This is to be expected given our focus on value.

To better understand the drivers of overall portfolio performance, the returns of the individual holdings are shown below using a simple money-weighted return calculation.1

We calculate this as gains (realized, unrealized, dividends) over cost basis.

We hedged part of our euro and sterling exposure during the holding period using futures contracts, and this proved quite profitable. However, because this was a portfolio-level decision rather than one specific to individual holdings, we have excluded it from the figures below.

Holding periods differ for all securities, and do not affect this return calculation.

In the next post we’ll discuss the fundamentals of our current portfolio holdings.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

At the beginning of the year, we found ourselves wondering how the younger generation is preparing for the future. What skills are children being encouraged to pursue? What after-school programs are ambitious parents foisting on their kids?

Just a decade ago, based on conversations with friends and family, the surest path to success seemed to lie in “learning to code” and “speaking Mandarin.” The pages of The New York Times were filled with stories about how difficult it was to secure a spot in the best coding camps, or advice on finding a Russian math tutor.

With the advent of LLMs, are there even any “skills” left? Speaking another language or writing code is as easy as typing a prompt. And soon we will probably not even have to type. There is a sadness to this loss, as there is with the loss of any craft.

As the former CTO of Dropbox put it: “There’s something deeply disorienting about watching the pillars of your professional identity, what you built and how you built it, get reproduced in a weekend by a tool that doesn’t need to eat or sleep.”

We can’t imagine the impact this new technology is having, or will soon have, on so many professionals. But there is another way of looking at this too. We may no longer need to know how to do certain things because we have the power to do everything.

We can’t allow ourselves to be constrained by what we lost. There is too much excitement and joy in a world of abundance and new discoveries. And that led us to the conclusion: when skills themselves are no longer important, our willingness to change is what will set us apart.

The skill of tomorrow is pure adaptability.

We have spent the last month setting up an Open Claw agent for Reveles. For those unfamiliar, Open Claw is a platform for running AI agents: it uses LLMs like ChatGPT to carry out tasks. The simplest way to describe it is this: if ChatGPT is for thinking, Open Claw is for doing.

It has been an incredibly frustrating and time-consuming experience, punctuated by moments of exhilaration and the feeling of living in the future. Along the way, we had to learn what terms like grep, git, and repo mean. We got lost, we got discouraged, and we had to rebuild the system at least four times. But we also got it to do some really cool things.

As a small side project, we had it create “On This Day” short videos. Each morning, the agent would send us a list of twenty events from that date in history, each somehow connected to finance. Once we made our selection, it would move through a series of steps:

Drafting a three-beat script —> gathering historical evidence —> writing prompts for the AI video generator —> isolating the voice-over and recording it —> generating 26 shots per episode —> selecting the shots that best matched the narration —> editing —> publishing.

Every stage still required our approval and input. Over the course of two weeks, we made nine videos (all available on our youtube channel). At first, the process demanded a good deal of hand-holding and correction. Over time, the agent became more autonomous. By the last few videos, the daily workload had fallen to about an hour.

This still demanded more time than we were willing to devote to a small side project, so we’ve decided to pause it for now. Even so, it gave us a window into the process of building workflows with autonomous agents.

The biggest lesson we’ve learned so far is that you have to experiment with it to understand how it might fit into your life. It represents such a different paradigm that its possibilities are not immediately obvious. It feels like a new kind of operating system. And once you begin to let it into your life, you start to see new ways it could improve how you work and live.

Our next project is to build a proprietary knowledge library that Open Claw can draw on to generate research reports. That sounds simpler than it is, since what we take for granted as a single instruction (“Write me a research report”) is not at all obvious to a machine.

For the machine, that command must be broken down into a series of discrete steps, each made explicit. First, we had to build a system for collecting research online from a set of approved sources. That material is then organized, categorized, and converted into “embeddings” (numerical representations of the meaning of the text) so that the agent can search not just for keywords, but for ideas, themes, and related concepts.

Then there is a whole series of steps involved with the actual gathering of evidence, structuring arguments, and compiling reports. It’s a very long process, so we’ll save that for a future post.

For now, we’ll leave you with this great video on the evolution of technology over time:

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

Investor Michael Burry, best known for predicting the subprime mortgage collapse depicted in The Big Short, recently gave a rare interview in which he laid out the reasoning behind his latest short positions in Palantir and Nvidia.

One part of the discussion, focused on stock-based compensation (SBC), in particular caught our attention:

“And so, let me put it this way. There are, I think, five billionaires that came out of Palantir because they own Palantir stock, and the revenue was $4 billion or less… So the billionaires-to-revenue ratio was greater than one, and I’d never seen that before… How did they get five billionaires out of that group?”

The answer, of course, lies in the company’s compensation policy. Through lavish use of SBC, Palantir systematically transfers a large portion of the company’s economic value to insiders through equity grants.

It is commonly assumed that this form of compensation is preferable to cash payment since it aligns management with shareholders, on the theory that it encourages executives to pursue ever-higher stock prices.

But the theory is faulty. Managers do not bear the cost of those options, whereas owners do. Buffett has written extensively about this, and we won’t repeat his arguments here1. Suffice it to say that his crusade can be credited, in part at least, for the change in U.S. GAAP accounting in the mid-2000s.

The new requirement mandated that companies recognize compensation cost for share-based payment at fair value in the income statement. It is then added back to operating cash, since it’s considered a non-cash expense.

But Burry argues—and we are amazed that this is not more widely understood—that this accounting change, though better than before, still doesn’t fully reflect the true cost of options.

“What Wall Street generally does is they take the earnings per share, then they add back stock-based compensation because it’s non-cash... And I think, actually, the way GAAP accounts for stock-based compensation skews low versus what it actually costs. The real cost, you can look at how much the company is buying back to offset that dilution. And you can just take that amount and deduct it from cash flow. And so if you do that with Palantir, historically, they don’t make anything. So I basically looked at the company and said, you’re worth this much and you really don’t make anything.” [Edited for clarity]

In other words, the expense is based on grant-date estimates of fair value, which may bear little resemblance to the actual economic cost of issuing equity once the stock price appreciates (and dilutes existing shareholders). This is the cost that Buffet talks about.

To adjust for this, we can therefore do one of two things.

1. If share count has been mostly flat, we can assume the company’s share buybacks are offsetting the dilution and proceed as Burry suggests: take the amount spent on buybacks and deduct it from operating cash flow when calculating free cash flow. The same adjustment can be made to earnings by replacing SBC with buyback expense.

2. If share count is rising or falling, we need to dig a little deeper. In the Statement of Shareholders’ Equity, identify net shares issued under employee compensation plans (often disclosed as “shares issued under employee plans”) and multiply that figure by the average market price over the current period.

It is a useful reminder that Wall Street often relies on shortcuts—and that careful investors like Burry actually think these things through.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

Allison ($ALSN) makes automatic transmissions primarily for medium-duty trucks, which are commercial vehicles like fire trucks, delivery trucks, cement-mixers, refuse haulers, buses, etc.

This category of trucks (Class 5-7 and Class 8 straight) are also known as vocational vehicles and demand for them depends mostly on infrastructure and construction activity and, to a lesser extent, on municipal budgets. Allison does not sell to long-haul tractors (Class 8 line-haul).

The reason for this is that vocational trucks make frequent stops and therefore need to shift gears constantly, whereas long-haul trucks do not. An automatic transmission uses a computer to handle these shifts and to smooth out power delivery, which makes driving easier and saves fuel in stop-and-go work.

Since long-haul trucks run mostly at steady speeds, there is not much advantage to having an automatic transmission. For them, manual transmissions cost less (both in upfront costs and over the vehicle’s life).

Allison sells primarily in the US where it has an 80% market share in transmissions. That is practically a monopoly. The company’s dominant position is reflected in its high margins and high returns on capital.

In its main categories (Class 6-7 and Class 8 Straight, which make up 80% of revenue), its market share has been growing significantly over the last decade.

The graph above depicts Allison’s market share in all transmission categories, not just automatics. Given these metrics, it’s fair to say that Allison is not your typical vehicle-parts supplier. But what makes it such an unusually strong player?

We believe the answer lies in the market’s wide range of vocations (emergency, delivery, construction, agriculture, refuse, defense, transportation, etc), where each application demands a transmission with its own software calibration.

Developing and maintaining these thousands of calibrations creates a big fixed-cost burden. A specialist like Allison spreads those costs across many OEMs and vocations, so each individual truck program carries only a fraction of the total expense.

Over the years there have been some attempts to challenge Allison’s position but they have mostly failed:

• Eaton in 2014 launched Procision to compete with automatics in medium‑duty applications; by 2019 it had discontinued the product.

• Caterpillar in 2011 launched its own line of vocational trucks with proprietary automatics; the program was canceled in 2016.

• ZF, which is Allison’s main competitor in Europe, markets PowerLine in the US as an automatic for medium‑duty trucks. Penetration to date is limited.

That said, vertical integration from OEMs is a possible risk. For example, as part of a refresh in 2016, Ford started equipping its medium-duty vocational trucks with in-house transmissions, which continues to this day. Given that the general trend has been in the other direction (towards third-party outsourcing), we believe the risk of a large scale reversal is low.

So, where have Allison’s gains in market share over the last decade come from?

Mainly at the expense of manual transmissions (and AMTs, a third category of transmission type). End-users have increasingly valued fuel efficiency and smoother shifting, which has supported a secular shift away from manuals/AMTs in the US.

Today, the market is concerned that there may be another secular shift underway, one which would undercut Allison’s business model: we’re talking of course about electrification. Let’s look at the numbers.

In 2024, zero-emission vehicles in the US accounted for 0.18% of medium-duty truck registrations, 0.40% of heavy-duty truck registrations, and 7.0% of bus registrations.

These are tiny numbers, especially in Allison’s core markets. And there is good reason to think that they will remain tiny (albeit growing) for a while.

We asked ChatGPT to help us estimate the cost differential for a business buying a truck with an internal combustion engine (ICE) versus an electric one (BEV). We’ll put the full calculations in a footnote1.

In summary, over the course of 10 years, the total cost of ownership (TCO) for the average Class 8 vocational truck is about 400k, assuming a purchase price of 200k, a residual value of 25%, and diesel at $4 / gallon.

For BEV, the TCO is 645k, which amounts to a 60% premium. This doesn’t include any government incentives, which can narrow that gap down to 20-25% (more common for municipal vehicles). Nevertheless, it’s a wide differential.

The reality is that trucks require very large batteries. Undoubtedly, market forces will one day bring down their cost sufficiently to make BEVs competitive, but it won’t happen any time soon. What’s more, higher electricity prices from heavy AI usage might prolong the transition.

So Allison may not face any near-term competition or threat, but are there any opportunities for growth in its future? Indeed there are…

In June of this year management announced a $2.7 billion deal to acquire Dana’s Off‑Highway business, a global operation that supplies axles, drivetrain components, and propulsion systems for construction, mining, agriculture and other off‑highway markets.

In general we are wary of large, transformative acquisitions; in this case, however, it seems to make a lot of sense. For starters, 90% of Dana’s Off-Highway products are not transmissions, meaning they mostly complement Allison’s portfolio.

Secondly, 70% of Dana’s sales are outside North America, while Allison’s are 70% within NA.

And thirdly, Dana’s customer base is mostly Off-Highway (construction, mining, agriculture), whereas Allison’s core business is in On-Highway (urban vocational).

Allison can therefore leverage Dana’s (1) complementary products; (2) complementary geography; and (3) complementary customer base & distribution channels, to cross-sell its own higher-value transmissions.

In some emerging markets, the acquisition could also help Allison push its automatics in places where manuals still dominate, and potentially repeat the success it achieved in the US.

More importantly—it bought all this for a very reasonable price of 10x P/E! Looks like Dana got itself into a bit of a pickle with debt and was in a hurry to sell off some assets…

Turning now to Allison’s valuation: what are we looking at? Using conservative assumptions, we struggle to come up with a fair value below $100/share. The stock is now trading around $82. That’s a good margin of safety. We wouldn’t be surprised to see this company trading at $150 in a couple of years.

A note on debt: Allison will be taking on more debt for the Dana acquisition. We estimate interest coverage post-closing will be 6x, which is depressed but not overly onerous.

Something we haven’t mentioned is Allison’s after-market parts franchise (20% of sales), which provides the company with a steady, high-margin, counter-cyclical stream of earnings that should support interest obligations even in a downturn. Given this, we are not concerned about the debt level as strong FCF should allow for quick de-leveraging.

Near-term risks to be aware of involve tariffs and new emissions standards:

• The EPA will tighten nitrogen‑oxides (NOx) limits for new heavy‑duty engines starting with model‑year 2027. Historically, fleets pull forward purchases ahead of big emissions regulations, so this could boost demand in 2026 and dampen it after that.

• In June 2025 Trump raised most Section 232 duties to 50% on covered steel and aluminum imports. Transmissions are metal‑intensive and so higher costs flow through the supply chain. Though Allison’s contracts are index‑linked (it passes through commodity inflation), general vehicle demand could be affected.

Allison is currently trading at a Fwd. P/E of 10x. At this price, we’re excited to make it a core position in our portfolio.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

1

Table with assumptions:

In his eye-opening book, The Great Rebalancing, Michael Pettis explains how trade and currency interventions never affect only one group of economic actors but rather stretch beyond borders in sometimes nuanced ways.

It’s a superb book: dense yet elegant. Almost poetic. Although it was written in 2013 it feels as relevant today as ever.

One of Pettis’ main points is that economies are more tightly bound than we assume: what initially might look like a measure that subsidizes the production of widgets in one country, for example, may end up driving a real estate boom in another.

To understand these shifts it’s necessary to understand that there are only ever three sources of demand in an economy: domestic consumption, domestic investment, and the trade surplus.

GDP = Consumption + Investment + Net Exports

In other words, resources that are produced in a country will either get consumed domestically, invested locally to produce more resources, or shipped out to satisfy foreign demand. By definition, those are the only three options.

At different moments, any one part of the equation can dominate and push the other parts to adjust, but how this happens is not always so clear. Because we have a tendency to moralize about which part is “good” or “bad” we often misinterpret the underlying mechanics.

“Confused moralizers love to praise high-savings countries (let us call them all “Germany”) for their hard work and thrift, and deride high-consuming countries (which we will call “Spain”) as lazy and too eager to spend more than they earn… [but] this is almost wholly nonsensical.”

His point here is that consumption rates are largely the consequence of trade or industrial policies, not so much of individual cultural preferences. After the adoption of the euro, for example, when countries with radically different compositions shared one currency and one ECB rate, policy became too tight for Germany and too loose for the periphery. The result was an undervalued euro for Germany—a significant price advantage for its exporters.

In other words, Germany’s trade surplus and Spain’s deficit had nothing to do with superior or inferior cultural norms and everything to do with trade and capital imbalances driven by policies that distorted their relationship.

He makes a similar argument with China and the United States. It’s definitely worth the read.

The main lesson we take from Pettis’ book is to always look beyond the narrative to the underlying mechanics. Today we might apply this same logic to the coverage surrounding the weakening of the dollar. Notice how several financial publications interpreted USD weakening after Liberation Day as follows:

Bloomberg: The Dollar Still Rules, But US Policy Is Making It Less Special

“Trump’s push to redesign the global economic order in favor of the US is shaking one of the foundations of its post-World War II supremacy: the dollar’s undisputed role as the world’s reserve currency… the haphazard rollout and rollback of Trump’s tariff campaign in April sparked a rare weakening…”

In the article, the author attempts to link the dollar’s weakness to a perceived loss of credibility. At first glance, this seems like a logical assumption to make: fear of policy uncertainty could weigh on the currency.

But this is not how trade works. Countries do not choose to hold dollars. They do so as a consequence of their trade imbalances with the US. China, for example, cannot decide from one day to the next to give up its dollar assets without rebalancing its whole economy away from exports.

And indeed, since Liberation day, the data show that there’s been no wholesale abandonment of the dollar. Firstly, trade itself seems relatively unaffected by the new tariff regime. The dip in Q1 shows a pull-forward in orders, which has since stabilized.1

And if there’s been little change in trade, then that means there’s been little change in foreign dollar reserves, since countries must sell their goods to the US in dollars. Capital flows and trade flows must balance out.

According to the IMF, dollar reserves held by central banks throughout the world has been stable. Therefore, both these figures suggest that, despite Trump’s tariffs, the world still wants to hold as many dollars as ever before. There is no loss of credibility.

The dollar weakness can be attributed to FX movements driven in part by foreigners hedging their assets. But hedging is a trade: if you sell a dollar, someone else is buying it on the other side. The hedge just reassigns who bears the risk rather than eliminating dollars from the system.

This is one reason why we think this year’s dollar weakness was a short-term liquidity event, exacerbated by a narrative that felt both politicized and emotional (anti-Trump feeling among foreigners, maybe) and that may just prove to be temporary.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

Currencies are notoriously hard to predict and we claim no special skill in this area. Still, given where things stand, we’ve decided to fully hedge our euro-denominated equities, which make up roughly 25% of our portfolio.

Euro/dollar is trading at 1.17, at the top of its 52‑week range. Much of our return this year has come from dollar weakening, but we now believe the dollar is squarely in the middle of its smile and risks are skewed towards dollar appreciation.

Either the US economy strengthens (read: remains strong), in which case the dollar would probably rise. Or the US economy weakens, in which case a global risk-off sentiment can lift the dollar anyway.

Then there is the potential for more geopolitical stress also supporting the dollar.

What are the scenarios in which the dollar could weaken relative to the euro? Is it possible the US economy could face a significant slowdown without a corresponding slowdown in Europe? Possible, sure. But less likely, in our opinion.

With uncertainty high, we prefer to lock in gains and protect the downside rather than chase more upside.

For those interested in how we’re implementing the hedge, we’re using IBKR to sell short futures contracts. The symbol is M6E with a March 2026 expiration. For more detailed explanations on hedging with futures, see here.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

This is a discussion about how companies choose to present themselves on their books, and how those choices shape real-world risk and value. We use MicroStrategy ($MSTR) as a case study because its decision to hold bitcoin challenges standard notions of accounting labels and capital structure…

In plain terms, assets are things a company controls that should bring in cash—now or later. Inventory, equipment, buildings.

Liabilities are what the company owes to others. Loans, leases, unpaid bills.

The two categories may appear clear-cut. After all, their distinction is a core principle of accounting. But telling them apart often relies on judgment—and judgment can be twisted to suit a need or desire.

In reality, assets can have liability-like qualities, and liabilities can have asset-like qualities. Seeing them as fluid labels helps us focus on how cash moves—in both good times and bad.

In 1936, Benjamin Graham wrote a satire called U.S. Steel Announces Sweeping Modernization Scheme. In it, a fictitious company “modernizes” not by upgrading mills but by renaming them. He asks: what if a factory is not so much an asset as a burden?

Consider the following: the moment a company builds a plant, it commits to paying property taxes, utilities, and repairs. If customer demand plunges, those costs remain. It can be argued that a factory behaves like debt with a variable coupon: maintenance and operating costs that must be paid whether or not demand is there. In downturns, cash outflows are sticky, while resale value may be negligible.

If a thing creates obligations and resists being turned back into cash, why call it an asset?

The case is intentionally exaggerated, of course, but that’s the point: with the right framing it can sound sensible—and for an illiquid business with high fixed costs, it can even be true. An “asset” can indeed look like a liability whenever it forces spending in the face of sputtering revenue. In those cases, the balance-sheet line item begins to behave like a claim on future cash.

Last year, for example, we took a position in a company called Clearwater Paper but sold out partly because it became clear that paper mill maintenance was too unpredictable—a couple of unplanned outages could have drained cash and pushed results into the red. In effect its assets were more liability-like than, say, the stores of a company like Greggs where maintenance spend is far more discretionary.

So the test of any asset for its “assetness” should be: how reliable are the cash inflows it produces, and how unavoidable are the cash outflows to keep it running?

Now consider the business model of companies like MicroStrategy ($MSTR). It issues shares or debt and uses the money to buy bitcoin, which it books as an asset.

Can we apply the same test here?

Yes, but it’s a little different. Bitcoin produces no cashflows. Its return depends solely on price appreciation. And its “maintenance” cost is dictated by how the position was financed: interest if bought with debt, or opportunity cost if funded with equity.

Nonetheless, we can ask the same question: how reliable is the price appreciation and how unavoidable the cost of financing? In our opinion the answers are, respectively, not dependable at all and very hard to avoid.

What happens when the price of bitcoin drops below the purchase price for an extended period? Soon you have a company that owns a zero-yield asset held at an unrealized loss, financed partly with interest-bearing liabilities.

The common “solution” to such a predicament would be to issue new shares precisely when the stock is cheap. That dilutes shareholders at the worst time, just to steady the balance sheet. That asset is now dictating cash choices—like a factory demanding upkeep in a slump.

Either way, the market price ends up steering capital decisions. And when an asset does that, it starts to look a lot like a liability.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

We first covered Valero in early 2024 and bought shares at an average of $120. Since then, the position is up 34% (31% from price gains, 3% from dividends), roughly in line with the S&P 500.

We’re selling now mainly because we built a larger position in Occidental earlier this year and already have significant exposure to hydrocarbons. That said, we remain relatively optimistic on U.S.-based refiners for several reasons:

• Geopolitical tensions: Attacks on refineries in Russia have already turned that country into a net buyer of refined products. This tightens global supply and makes Valero an attractive geopolitical hedge.

• Global refinery struggles: Apart from Russia, Europe faces high costs and regulation, China’s has aging capacity with no new builds, and Latin America lags in growth. These pressures strengthen the competitive position of U.S. refiners.

  

• Oil prices and OPEC: Trump has signaled determination to keep oil prices low, while OPEC is increasing supply. Both factors could widen crack spreads and boost refinery margins.

• Financial repression: The Fed will try to keep the economy running hot, with high inflation and strong wage growth. This supports demand for gasoline and diesel.

• EV adoption and electricity costs: Rising electricity demand from AI and data centers could push power prices higher. In turn, this may slow EV adoption and prolong demand for liquid fuels.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

Over the years, people have often asked Buffett what sets him apart from the typical investor. His reply never changes, and he always delivers it with his characteristic sense of humor. It’s not brilliance or cold logic, he insists—not ambition, nor timing. His edge is patience:

“No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”

Of course, one must be brilliant and logical in the first place to possess the confidence to be patient! But Buffett suggests it is the last element, above all others, that’s hardest to achieve.

And perhaps that’s also why it’s so rare today—patience has become a dwindling resource in a culture that prizes speed over reflection. A recent study found that the share of Americans who read for pleasure has fallen by 40% over the past two decades. No time for deeper thought; we want instant gratification!

Jack Bogle, founder of the Vanguard Group, noted that the average holding period for stocks has collapsed to less than 10 months, down from about 5 years in the 1970s. Without any great insight on our part, we can point to several likely culprits: persistently low rates, online retail trading, social media, among others.

The trouble is that these forces don’t just shorten horizons—they also feed into market behavior. Too-frequent trading leads to a distortion of prices, where securities are principally valued on momentum, not on fundamentals. It’s the mechanism by which expensive shares become even more expensive, and how investors end up over-paying for growth.

When we launched this newsletter a year and a half ago, our goal was simple: identify 10 companies in which we had a strong conviction, hold them for three or more years, and spend that time deepening our understanding. We would then share what we learned with our readers—not necessarily as investment advice, but as case studies in how to sharpen one’s thinking about businesses.

Progress has been slow—and that’s as it should be. Stocks are expensive all over the world and it is getting harder and harder to find bargains. So far we have built up only four core positions: Verallia, Greggs, Aumann, and Occidental. The first three we’ve written about. The last one we haven’t (for obvious reasons—there’s plenty of analysis out there already—what more is there to say?). Collectively they make up just shy of half our portfolio.

We also own a smattering of smaller holdings (Lantheus, Valero, Nvidia, Meta, Amazon), which we will look to sell eventually because we want to concentrate into larger positions of between 8-12%. As Druckenmiller is reported to have said (quoting loosely from memory): “Put all your eggs in one basket and then watch that basket very carefully.”

Recently we’ve considered (and then dis-considered) adding to the basket: a pharma distributor in Japan, a mid-cap supermarket in the U.S., an exhibition organizer in Italy, a provider of infrastructure maintenance services in Australia, among many others. No matter, we’ll just keep looking. We’re in no rush. If nothing else, our search has given us greater confidence in those companies that we have chosen.

In the next year or two, we have absolutely no idea what will happen to the stock prices of Verallia, Greggs, Aumann, and Occidental. But in the longer-term we have a high level of conviction that the underlying business of those companies will do well and that (hopefully) stock prices should follow.

Which brings us back to the point about patience. If this newsletter is to be truly useful to anyone, we believe it’s just as important to write about our mistakes as our successes, if not more so. One recent mistake was a lapse in patience. After spending the past year developing our view on Verallia—knowing the company inside and out—it took only a single day for us to announce we were cutting the position in half.

Thankfully we did not end up cutting it in half. On August 26th, when Verallia issued a press release detailing how the majority of bondholders had chosen to redeem their bonds, we were caught off guard. In our haste, we wrote a quick post and sold 1% before the market close. Only after sleeping on it did we start to question whether we had succumbed to “short-termism.”

The reality is that we had originally valued Verallia on an ex-growth basis, leaving plenty of margin for error. This is a company that generates a ton of cash, and a 5% or 10% hit to earnings shouldn’t materially change the picture. What difference does it make if our dividend yield comes in at 6.5%, 6.2%, or even 6%? The fall in the stock price had already compensated us for that shortfall.

Of course, we could end up being wrong yet again! But if we are then we will be sure to write about it here.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

In our last post about Verallia we flagged financing costs as a key risk. In general, Verallia carries a meaningful amount of debt. Until now, this was not a cause for concern because the company operates in a fairly stable (non-cyclical) industry and because the cost of debt was low.

In 2021 Verallia issued €1.0bn in bonds with an average coupon of 1.75%. These matured in 2028 and 2031. However, the BWGI takeover triggered a change-of-control clause that let holders redeem early. Yesterday, Verallia announced that 830m of those bonds were redeemed—which is a higher share than we had forecast.

This pushes borrowing costs up. Debt that cost 1.7% will be refinanced at today’s market levels, which we expect to be at least 2× that rate, and possibly more. French government yields are roughly 300+ bps above 2021 levels and credit spreads are wider, reflecting ongoing and worsening fiscal concerns. As a result, we are revising our net-income outlook lower to reflect a higher interest bill.

We foresee the hit to net income being between 5% and 10%. For a low-growth company, this is significant. Therefore, we’ll be halving our position down to 8%. We currently have a 14% total return on our average cost basis (mostly from dividends and FX).

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

We last wrote about Verallia back in January. To recap: Verallia is a French maker of glass bottles and jars, serving mainly the wine and spirits industry, but also food and soft drinks. With 90% of its sales coming from Europe, it is the continent’s largest supplier and the world’s number-three producer of glass packaging.

Our attraction to this business has not changed. Glass is heavy, fragile, and costly to haul over long distances, so each region ends up with only a handful of furnaces; that scarcity means that competition is limited and the glass manufacturers generally have the upper hand over their customers (fragmented wineries, in this case).

Though total output as measured by volume might remain flat, prices can easily keep up with (even exceed) inflation. Across the cycle, we expect revenues to grow at a 3% rate—a comfortable though mediocre result. However, there are other tail-winds that will push earnings growth decidedly higher.

When valuing energy-intensive businesses (cement manufacturing, aluminum smelting, steel production, fertilizer plants, pulp & paper mills) any investor should first assess its cost structure. These industries rely heavily on different sources of fuel and a cost advantage/disadvantage can determine a company’s long-term profitability.

For glass manufacturers, natural gas is the main consideration: running a furnace accounts for roughly 30% of production costs. Ultimately this is the reason for our optimism. Over the next three years the US will unleash the biggest single wave of new LNG capacity Europe has ever seen. Three Gulf-Coast plants begin shipping cargoes from late-2025, a near-50% jump on today’s U.S. export capability.

[This capacity does not include the recently announced trade deal, which is at the moment no more than a vague commitment from the EU to buy as much as US $750 billion of American energy. Although, according to the Financial Times, “hours after Trump and Von der Leyen announced the trade deal, Venture Global, an US LNG exporter with multiple European contracts, said it was moving ahead with a $15bn project to produce 28mn tonnes of LNG a year — equivalent to almost half of Germany’s current gas demand.”]

Qatar follows close behind with its two-phase North Field East and South expansion, which will make it the EU’s second-largest non-Russian gas supplier after the US. There is also, of course, the possibility of a detente with Russia but we are not holding our breath for that.

Cheaper gas should feed straight into Verallia’s cost base and, so long as its pricing power remains intact (which we think it will), allow the company to keep at least part of those savings, boosting margins.

While on the topic of pricing power—there was news in March that France’s Competition Authority raided Verallia and peers on suspicion of price coordination—an unwelcome headline but, for us, confirmation that its pricing power is real.

Verallia’s press release notes that such inspections do not imply that the company has broken the law. No statement by the Authority has yet been issued. The regulator itself reminded the public that a verdict “can only be established following an investigation on the merits,” and trade-press coverage points out that cases of this type typically require years to progress and result in only a modest fee if anti-competitive behavior is indeed proven. We are not worried about such an outcome because we believe the favorable environment is readily explained by economics, not nefarious behavior.

Now for the big news: In February, BWGI—a Brazilian family office that has owned 28% of Verallia’s shares since 2019—filed a voluntary tender offer with the goal of becoming majority (and therefore controlling) shareholder. BWGI is offering €28.30 per share, essentially to anyone in the market who is willing to sell theirs.

By July 28th, enough shares had been tendered for BWGI to lift its stake to roughly 70%, handing it majority control of the glass-maker. Any remaining shareholders who wish to tender their shares have until August 13th to do so.

Importantly, BWGI pledges to leave the company listed without forcing an acquisition of un-tendered shares for at least three years (i.e. remaining shareholders will not be squeezed out). In addition, BWGI’s offer document states that it “does not intend to change the company’s dividend distribution policy” over that period.

Governance was one of our main worries when we initiated our position last year. It is a bad sign when managers of a cyclical company do not have a handle on the underlying business cycle. Verallia’s managers, misreading the post-pandemic boom in earnings as a structural shift in demand (which of course it was not), decided to buy Allied Glass in late 2022 for an eye-watering multiple (see table below) at the top of the cycle. High valuation on peak earnings. Ouch.

Now, with BWGI about to become the controlling shareholder, we have greater confidence that management will be forced to be more disciplined. Therefore, this development in our eyes is positive for all shareholders.

Risks remain. At the top of the list are financing costs. Due to the agreements with existing bondholders, a change in control of Verallia allows them to redeem their bonds. An independent expert who reviewed the deal estimates that the cost to refinance would be €0.40 per share in a worst-case scenario—i.e. all one-off fees that could hit Verallia if every bondholder, every bank, and every factoring counterparty demanded repayment.

Historically only a fraction of investment-grade bondholders tender on change-of-control clauses, so the cost would probably be far lower. In addition, banks have already agreed to not force a redemption so it’s just the publicly listed bonds that are currently uncertain.

Overall, in our view, the risk-reward has improved since January with what we expect will be a more disciplined owner. The BWGI tender offers shareholders a floor while we wait for the gas-cost story to play out over the coming years.

We initially put in a 13% position which has since grown to 16% of our overall portfolio. Though the position is significantly overweight, we won’t be tendering our shares as we believe this is still one of the best investment opportunities we have found.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

Yesterday morning, Gregg’s issued a profit warning, saying H1 2025 operating profit will “modestly” undershoot last year’s performance. Lower than expected sales amplify the impact of front-loaded shop refurbishment costs, as fixed expenses are spread over a smaller revenue base.

The stock was down 15%. We took the opportunity to increase our position to 12% of our portfolio, as this is a company we continue to be very excited about.

However, given the state of the UK’s public finances, we also decided to fully hedge our sterling exposure. What the country currently owes in public debt is nearly as much as the entire economic output of one year (~95% of GDP).

More worryingly, the annual cost to service that debt is now rising faster than the pool of money available to pay it: while the government pays out about 4.5% interest on 10-year gilts, the economy (and with it, the tax base) is expected to grow only at about 4.2% in nominal terms.

That might seem like a small difference — just 0.3 percentage points — but there are significant risks that could widen the gap further.

At the top of the list is an oil price shock, which matters for the U.K. because the country is over-reliant on energy imports:

“The UK’s oil and gas production is in long-term decline, with a 68% drop between 2003 and 2023. Without an equivalent reduction in fossil fuel demand, UK exposure to import price shocks is set to increase… In total, the UK imports 40% of its energy supply.”

Every extra dollar spent on a barrel of oil means more pounds must be sold to buy foreign fuel, weakening the pound. Not only that, but higher oil prices push up inflation—and thus yields—while simultaneously squeezing growth.1

High debt levels and energy dependence seem to be long-term structural issues that we would like to hedge against. Below are a couple of ways to do that through IBKR (one is simpler but more expensive than the other).

1. IBKR’s “cash‑hedge”

To go this route, you essentially want to create a negative GBP cash balance inside your Interactive  Brokers account by selling £ against USD. The short‑GBP cash offsets the £ value of your Greggs shares.

The “carry cost” would be the differential between the rate you receive in USD vs what you owe in £, which is posted daily. Right now you pay about 5.2% to borrow pounds and earn about 3.8% on the dollar rate. The net carry therefore is 1.4%. That is your total cost.

The risk with this strategy is if UK rates increase while US rates decrease then the differential widens. Even a 3% spread is not extreme, but it does reduce the efficiency of the hedge for retail investors.

Because the cost of holding this hedge rises as the interest rate spread widens, this method is more suitable for hedging currency risk unrelated to interest rate movements. When the primary source of risk is the interest rate differential itself—as it is in this case—the strategy becomes less effective. This is why we prefer option #2, outlined below.

• Enable margin and forex trading permissions in settings

• Trade GBP.USD and sell the number of pounds you want to hedge (equal to the Greggs position size)

2. Short FX futures

A cheaper—and preferable—alternative is to use futures contracts. With a futures contract, you lock in today the exchange rate at which you will buy or sell the currency at a specified future date. In this case, because you are hedging against a decline in the pound, you would sell GBP/USD futures. This approach eliminates the uncertainty of future exchange rate movements.

Unlike the cash-based hedge, this method does not require you to borrow pounds or manage a negative cash balance. Instead, you simply post a small amount of margin—typically around 4% of the contract’s notional value—which functions as collateral.

The total cost of this hedge is minimal. You’ll pay a small transaction fee to the futures exchange (usually around 0.01%). Your only other cost is the opportunity cost of the collateral you’ve posted.

If we assume a 10% expected annual return on capital elsewhere, the implied cost of tying up 4% in margin is 10% × 4% = 0.4% per year.

• Enable futures trading permissions in settings

• Open a fresh order ticket → Order Ticket → Futures tab.

• Type M6B → Select Dec 2025 from the month drop-down.

• Enter your sell order

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

Help us grow our community! If you know anyone curious about value investing, please share this newsletter with them. We’ll be digging into the overlooked gems of the small-cap world (especially outside the US, where there are some great, cheaper companies) and would love for them to join us on the journey.

For US residents, if you are thinking about venturing beyond domestic markets, Interactive Brokers gives you access to dozens of international exchanges, making global investing pretty easy (not a sponsored message—we just like the platform). It’s also important to be mindful of currency risk. Some investors hedge against it; others don’t.

As always, none of what follows is investment advice. Doing your own research and coming to your own conclusions is, after all, part of the fun in digging for buried treasure…

Aumann is a German-based manufacturer of automated production lines. The ticker is $AAG. (It also trades over the counter in the U.S. as $AUUMF, but we don’t recommend that route due to limited liquidity.)

We’ve been following Aumann since January, when it was trading near its Net Current Asset Value (NCAV). NCAVs, or “net-nets”, are companies that are valued at (or usually less than) the cash or liquid assets they would have left over after paying off all liabilities, offering a margin of safety even in the event of liquidation.

In January, Aumann wasn’t strictly a net-net—but it got pretty close. We started buying at approximately €10.5 per share, roughly a 25% premium to its NCAV.

Shares now trade at around ~€12.5 which is a premium of 40%.1 While that’s less cheap than before, it’s still pretty cheap.

Investing in net-nets has long been a play in the value investor’s toolkit. First invented by Graham, it presents a clear and simple value proposition: you’re buying the company for what you’d conservatively expect to receive if it were liquidated and sold immediately. That concept provides a theoretical floor to the price.

However, realizing the company’s intrinsic value depends on a few key assumptions. We believe Aumann satisfies all of them.

But first, some background.

Aumann is a German engineering company that designs and builds specialized machinery for fully automated production lines. These production lines primarily turn out electric vehicle components like stators, rotors, inverters, battery modules, and fuel cell systems.

In simpler terms, what this means is that Aumann does not produce the components themselves but provides the manufacturing solutions to companies that do.

Historically rooted in winding technology for internal combustion engine components, Aumann has pivoted toward “e-mobility,” which now accounts for ~80% of its revenue. With global operations in Germany, China, and the U.S., the company serves major auto manufacturing regions and is also expanding into adjacent markets. Its acquisition of LACOM in late 2023 enhanced its offerings in electrode coating and membrane-electrode assemblies for batteries and fuel cells.

The company is majority-owned (51%) by MBB SE, a reputable German industrial holding company known for acquiring and growing technology-driven mid-sized firms. MBB has backed Aumann since 2015, guiding its IPO in 2017 and supporting its pivot toward e-mobility.2

In our view, Aumann’s CEO Sebastian Roll has emphasized a disciplined capital allocation strategy, focusing on profitable niches, measured growth, and selective M&A—especially targeting expansion in the U.S. rather than China. The LACOM acquisition from a bankruptcy estate illustrates his opportunistic but cautious approach.

Aumann’s legacy division was lately rebranded as “Next Automation,” to better target high-margin industries like aerospace and life sciences.

The first, and perhaps most important, requirement for any net-net candidate is that it must show durable profitability—even if only modestly so—over the long term. Value can quickly get destroyed in a money-losing venture.

The secular trend toward electric mobility speaks strongly in Aumann’s favor. Of all the new cars registered in Europe today (which we use as a proxy for sales), only 15% are battery electric vehicles, which provides a long runway for future growth.

Indeed, in the first four months of 2025, new EV registrations have returned to strong growth after a difficult 2024. Growth was 25% YTD over Jan-Apr ‘24 (these are registrations in Europe, not for export).

Reflecting this, Aumann’s order backlog and intake plummeted in 2024 but intake has recently turned upward and backlog is beginning to stabilize.

Beyond the short term, government policies (EU’s emissions regulations; investments in localized supply chains) will also support this trend and underpin robust demand for Aumann’s products.

The second requirement for safely investing in a net-net is that management must present a credible plan for putting surplus cash to work (via dividends, buybacks, M&A). Cash sitting on the balance sheet is no good to anyone.

In the last two years, share count has decreased by 6.5% through buybacks. An additional 10% of shares outstanding were bought back in April through a tender offer. We expect this trend to continue.

Aumann now has €120m left in cash. The company’s market cap is €160m.3

Management has stated that it’s actively looking at M&A opportunities in North America, which would diversify the company’s revenue base.

The third requirement is that stated net asset values should genuinely reflect what could be realized in the market. Holding an auction is pointless if nobody shows up to bid.

This brings us to the topic of Aumann’s recent share price drop which is linked, generally, to the current auto industry slowdown and also, more specifically, to the declining fortunes of its closest peer, Manz AG. Like Aumann, Manz produced equipment for lithium-ion battery cells, battery module, and pack assembly lines.

But Manz’s weakness was in project concentration. It had fewer customers and larger orders (gigafactory deployments) which put it in direct competition with Asian equipment makers like Wuxi Lead and Yinghe.

When European battery plant projects were delayed or canceled in 2023-24, Manz’s incoming orders in the Mobility & Battery segment dried up dramatically. Unlike Aumann, the company 1) had no cash cushion to weather the storm, and 2) was thinly capitalized and relied on too much debt.

By the summer of 2024 the company was in crisis mode, overhauling management and implementing cost-cutting measures. But it was too little, too late. With only €2.7 m new orders in Q3, the viability of the business became questionable.

By mid-December, the situation reached a breaking point and Manz announced it was filing for insolvency proceedings due to “illiquidity… and over-indebtedness.” In an ad-hoc disclosure, the company revealed that creditors refused to provide further funding and an advanced-stage discussion with a new investor fell apart.

Though the market has penalized Aumann’s share price on fears that it might suffer a similar fate to Manz, we see that sell-off as misplaced—and a good opportunity for long-term investors.

The two companies are worlds apart. With the exception of 2020/21, Aumann turned a nice profit every year since 2013. Margins are healthy and stable. It sits on ample cash to ride out a protracted slump and carries virtually no debt. Management is shrewd and agile.

Manz, on the other hand, has been unprofitable every year since 2013 (except, ironically, in 2020), with poor cash conversion. It carried too much debt and chased multiple niche categories (batteries for gigafactories, displays, etc.) that put it into direct competition with Chinese suppliers.

But the important piece of information for us here is that the insolvency proceedings proved that Manz’s assets were still attractive to many buyers. By April 2025, three major parts of Manz’s business were sold off to different parties.

Tesla agreed to purchase its core assets, including the Reutlingen headquarters and production site (in southwest Germany), in order to absorb Manz’s automation engineering capabilities.

Though the price was undisclosed, it’s fair to assume Tesla paid the administrator’s fair-value estimate for the Reutlingen plant, very likely at or slightly below the impaired book value of the assets transferred.

Given than Aumann holds 75% of its market cap in cash, the chance that Aumann would even enter German insolvency proceedings is remote; banks and suppliers would still be paid.

Even if things did go horribly wrong (unlikely—but let’s game it out), a solvent sale deal is far more likely than an insolvency fire-sale. Any real-world deal would be struck before insolvency and would, by necessity, involve MBB negotiating around that hard cash backing, with an added customary 20–30% control premium on top of it.

In short: Manz’s 2025 distressed asset sales demonstrate that even in a fire-sale there is strategic appetite for German automation know-how (from OEMs, tier-1 or Private Equity)—but Aumann’s vastly stronger balance-sheet means a solvent transaction is overwhelmingly more likely, making NCAV a credible floor.

We have so much more to say about this company, but we’ve touched on the most salient points. We’ll be writing more about Aumann in the near future. In the meantime, we have built up a 6% position of our portfolio and hope to bring that up to 8% before its next earnings release in August.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

Vinci is a great, well-managed company.

Nonetheless, we’re growing confident that we can find better returns elsewhere. The stock is now much closer to fairly valued. It was bought at an average of €100 last year (now €125), so we have made a 25% gain on the price, 5% gain on dividends, and about 5% in currency appreciation.

We try to keep portfolio turnover to a minimum—but at this point we want to raise cash for other (better) ideas that we are considering.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

This is a second article in a series on $GRG. For the first, click here.

This weekend, on the plane back from seeing Buffett retire from running Berkshire, I was listening to a podcast about Inditex, the parent of Zara, which told the story of how the company became the leader in fast fashion by building a business model that turns speed into a structural advantage.

Zara famously relies on tight vertical integration, controlling design, manufacturing, and logistics—meaning new clothing designs can move from idea to store shelves in a matter of days. This structural advantage limits inventory risk, reduces markdowns, and improves working capital.

It reminded me of something I’d read recently, and the thought sent me off looking for the passage: Earnings call. FY 2019. Greggs. The outgoing CEO had articulated a similar principle:

“The fact we’ve invested to centralize production means we can… move more quickly to reformulate products and achieve both new products and sustainability objectives.”

In the same exchange he highlighted that the business is “vertically integrated unlike many others,” a point repeated at the October 2021 Analyst Day when management noted that supply-chain capacity must grow “because we’re vertically integrated— not many people are.”

And that’s when I realized Greggs is trying to be the Zara of food.

Greggs owns nearly every major step between sourcing of raw ingredients and sale of finished products in stores. Unlike most other quick-service food chains1, it operates its own production facilities, logistics hubs, and distribution fleet. Vertical integration on this scale enables Greggs to respond to shifting consumer tastes by introducing new menu items, faster. It also reduces reliance on third-party suppliers, improving cost efficiency and inventory management2.

The market tends to view Greggs primarily as a mature bakery chain, but we wonder if this perspective might not be underestimating how adaptable the company’s integrated structure really is. A higher menu refresh rate may keep customers continuously coming in, and leave competitors behind.

Here’s a recent timeline of Greggs’ menu innovation (2019-2025).

• January 2019 – Nationwide launch of the vegan sausage roll following earlier success with a vegan Mexican bean wrap, signalling the start of Greggs’ plant-based programme.

• January 2020 – Roll-out of the vegan steak bake and the first vegan doughnut; vegan hot-cross buns added in March.

• August 2021 (H1 2021 call) – New vegan Ham & Cheeze Baguette, a vegan breakfast sausage and the Vegan Sausage, Bean & Cheeze Melt.

• March 2023 (FY 2022 results) – Evening-focused six-slice pizza box goes nationwide; “Hot Yum Yums” with dipping sauces debut; two rice-salad meal boxes introduced, including the vegan Sweet Potato Bhaji option.

• August 2023 (H1 2023 call) – Launch of a healthy flatbread range, vegan Mexican chicken-free bake, hot wraps and the first trials of over-ice drinks; management notes “customers are loving them.”

• July 2024 (H1 2024 call) – Over-ice drinks available in 500 shops (target 700 by year-end); introduction of a smaller four-slice pizza box, expansion of salads and flatbreads, and pilots of fish-finger wraps and sandwiches alongside made-to-order hot chicken wraps (>200 shops).

• March 2025 (FY 2024 pre-recorded call) – Over-ice drinks range now in 1,175 shops with more flavors planned; ready-to-drink canned lattes launched; made-to-order chicken and fish-finger wraps rolled out to >200 shops; evening menu broadened with a BBQ Chicken & Bacon pizza, four-slice pizza box, and the first hot Mac-and-Cheese meal solution.

This sequence shows the steady cadence (and breadth of offerings) supported by Greggs’ in-house manufacturing and daily frozen distribution. Recognizing such a structural advantage increases our confidence in the company’s long-term growth prospects (putting international expansion perhaps a little less out of reach).

The comparison to Zara is, of course, not a perfect one—customer tastes in fashion are decidedly more fickle than in food. But there are certainly similarities that we are starting to appreciate.

Below we take a closer look at some basic metrics for Zara ($ITX), Greggs ($GRG), and Domino’s UK ($DOM).

1. Gross Margins

Greggs’ margin is highest because cheap ingredients, daily sell-through and full ownership of production leave little cost inside “cost of sales.” Inditex earns a still-healthy but lower margin because fabrics, sewing labour and fashion markdowns are inherently costlier. Domino’s sits lowest because, on the group P&L, it functions as an ingredient supplier whose revenues embed far less mark-up over raw commodity costs.

2. EBIT Margins

Domino’s posts the highest EBIT margin because it has outsourced the expensive parts of retailing to franchisees while keeping the royalty and logistics mark-up on its own books. Inditex earns a solid mid-teens-to-20 % margin thanks to fast-fashion pricing power, but full store ownership means a heavier SG&A load than Domino’s. Greggs converts the richest gross margin of the trio into the lowest EBIT margin because its value positioning relies on high in-house labour, distribution and depreciation, all of which sit below the gross-profit line and weigh on operating profit.

3. Fixed Asset Turnover

Domino’s converts the most revenue per pound of fixed assets because franchisees, not the group, own the expensive retail equipment. Inditex sits in the middle: big sales, but it carries billions of store leases on its own balance sheet after IFRS 16. Greggs turns assets the slowest because its model deliberately holds factories, lorries and leases to keep unit costs low—capital intensity is the flip side of that vertical-integration advantage.

As these charts illustrate, Greggs’ business model appears to have more in common with Inditex than with Domino’s.

We’ll be writing more about Greggs soon… 5/5/25

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

Investing can sometimes feel like tracking prey through dense jungle—following patiently at a distance, waiting for the right moment to emerge from the bush and pounce.

We’ve been tracking Greggs (LSE:$GRG1) for some months now. It appears to be one of those rare, prized elks: a great franchise at a reasonable price. Yet, lately, its stock price has been stumbling and limping along for reasons that seem disconnected from fundamentals.

Greggs is a leading UK food-on-the-go retailer with a vertically integrated supply chain and a growing nationwide footprint. It operates ~2,500 shops, including franchised locations (which now account for 20% of the overall “estate”).

Greggs serves affordable bakery products such as sausage rolls, pastries, sandwiches, salads, and beverages, appealing broadly across demographic segments due to convenience, brand recognition, and above all, value.

The fact that the company owns its production bakeries and distribution centers allows it to deliver consistent quality and to control costs more efficiently than peers who have to rely on external suppliers. With its emphasis on everyday low pricing, Greggs has established itself as a value leader—a strategy that proved especially effective during the recent cost-of-living crisis. This positioning may once again prove advantageous should the UK slide decisively into recession (which for now does appear to be the direction the country is headed in).

Greggs is led by CEO Roisin Currie (since 2022) and CFO Richard Hutton, who oversee a clear growth strategy centered on expanding the number of UK stores beyond 3,000 by 2026. The recent surge in Capex includes buildout of new production and distribution capacity to handle this future store growth.

So far, management’s strategy has been working. Since 2016, revenue has grown at a CAGR of 11%, making Greggs now one of the largest foodservice chains in the country by outlet count. For context:

The company’s format spans high streets, travel hubs, petrol forecourts, retail parks, and even drive-thrus and supermarkets, following a strategy of being accessible in both traditional and non-traditional locations.

This kind of reach has turned Greggs into the UK’s leading breakfast destination, now capturing 19.6% of all food‑to‑go breakfast visits and unseating McDonald’s from the top spot (keeping in mind that Greggs has many more locations than McDonald’s). It also ranks among the country’s largest coffee sellers—recently cited as #3 by volume, ahead of Starbucks.

Scale, however, brings the eventual risk of UK market saturation. We don’t think Greggs is there yet, especially with management pushing new growth levers by keeping shops open for evening meals and scaling up digital and delivery channels—and early results suggest these initiatives are working.

There’s also another possible tailwind for profit margins and ROA: Because franchise units account for roughly 1/5 of Greggs’ current estate but around 1/3 of all new openings, the store mix is shifting toward a capital‑light model. Franchise partners fund the build-out, pay staff and rent, while Greggs books high‑margin wholesale sales and royalty income with minimal operating expenses.

While international expansion could be a future avenue for growth (providing a huge runway if they ever crack a model for Europe or elsewhere; yet prove costly if it misfires), there’s no indication it’s anywhere on the roadmap, so the growth story for now is firmly UK-centric.

In terms of valuation, the company is trading at a 13x Fwd P/E multiple, 0.8x P/Sales, and 3x P/Book. Like-for-like sales growth has cooled sharply, which may explain part of the discount, but we see it as a reversion to a more normal rate—not a sign of serious underlying weakness in the business.

For the next 5 years, we estimate a sustainable revenue growth rate of 7-8%, which includes 2% from same-store sales growth (driven by price realization, expansion into evening hours, and delivery), 1% same-store growth from franchises2, and 5% from new stores3.

A Buffett-style back-of-the-envelope “DCF” gives us a 55% upside from here.

At this valuation, Greggs’ long‑run cash‑flow outlook looks very compelling on a risk‑adjusted basis. While we’re still evaluating our options to reduce FX exposure with futures (we’ll write another post on that soon), we’ll be initiating a 5% portfolio position tomorrow.

All materials produced by Reveles Research, LLC—whether posted on this site or distributed elsewhere—are supplied solely for information and education. Nothing herein constitutes, or should be construed as, investment, legal, or any other professional advice. You should carry out your own analysis and due diligence before acting. Every investment decision ought to reflect your unique financial circumstances, objectives, and tolerance for risk.

I wrote a tweet about an article and it got some attention, so I decided to write a wonky post about it.

The article I read was this:

Anyone watching the news, or reading headlines like this, might be inclined to understand that investments into the U.S. are good and that they “erase” trade deficits. That is far from the truth.

When the U.S. runs a trade deficit, it means the country is importing more than it exports—so, more dollars are going out to other countries (e.g., paying for goods from China, oil from the UAE, etc.).

But those dollars don’t just disappear. Foreign countries that receive U.S. dollars from selling goods to Americans often reinvest those dollars back into the U.S. This can be through buying U.S. Treasury bonds, real estate, companies, or other investments—like the $1.4 trillion investment from the UAE mentioned.1

So, when Trump (or anyone) celebrates foreign investment, they’re essentially celebrating the return of dollars that originally flowed out due to trade deficits. It’s a closed loop: the more dollars that flow out for goods and services, the more that flow back in as investment.

The key economic principle:

Capital account surplus = current account (trade) deficit.

You can’t have one without the other in a country like the U.S. that has a floating currency. If you want to eliminate deficits you have to suppress foreign investment, and vice versa. They are quite literally two sides of the same coin.

At first glance, the influx of foreign capital—whether funneled into U.S. businesses, Treasury bonds, or prime real estate—looks like a good thing but in practice it shifts wealth abroad as overseas investors steadily claim a larger share of America’s productive assets, property, and future income streams.

We, at Reveles, have differing opinions on the effectiveness of tariffs (Patrick is less sanguine) but we do agree that for them to work, foreign investment into the U.S. in all its forms needs to be suppressed.

I read an analogy from someone on X trying to illustrate the benefits of free trade:

“I have a 100% trade deficit with the lady that irons my suits. She offers something way more efficiently and at a much better price than I can do myself. And in exchange, I spend the time I would otherwise be wasting on pressing my suits offering financial services at 1,000x the hourly GDP rate as I paid her to afford me this time. Am I getting ripped off by her? Should I start steaming my own suits instead of offering financial services? Would that make me better off? Would I be richer because of it?”

The analogy is great—but it doesn’t go far enough.

What is really happening is that with every payment you're giving her, she's simultaneously purchasing a claim on your future earnings-like buying a share of your future productivity. You're not just exchanging money for ironing services; you're implicitly promising a future return-either by borrowing (Treasuries) or allowing her to invest in your future success (US equity market, real estate).

It’s not unlike a company that, say, wants to undertake a large capex project—such as building a new factory. It can either self-fund, maintaining full control and ownership, or raise external funding through debt or equity. Borrowing means committing future earnings to repay investors, while selling equity means giving away partial ownership and future profits.

Over time, servicing these obligations can become so burdensome—consuming significant cash flow—that it reduces the company’s ability to reinvest in its own growth and innovation. This creates a downward spiral: the more the company depends on external investors, the heavier its future payments become, further limiting internal investment and growth opportunities.

Similarly, countries running persistent trade deficits exchange future economic prosperity for immediate funding. Over time, they risk becoming overly reliant on external capital, effectively handing over increasing claims on their economic future to the rest of the world.

In sum: deficits are a wealth transfer abroad—they are detrimental to the country’s future prosperity if left unchecked for too long.2

We track our overall performance in two ways.

The first—and most conservative—method compares each stock’s price appreciation from the day we published our recommendation against the performance of the S&P 500 or European stock index (depending on where the company is based), for the duration of the time we recommended it.

For example, we first recommended Hershey on February 26, 2024, when its price was $188.61, and the S&P 500 was at $505.99. By December 9, 2024, when we exited the position, Hershey had gained 4%, while the S&P 500 had gained 19.7%. This resulted in a relative underperformance for that stock of -16%.

We then calculate an equally weighted average of these relative performances. We use equal weighting because we did not specify position sizes at the time of our initial recommendations, and adjusting these retroactively seems inappropriate.

By this measure, our newsletter portfolio has gained by 8.8% vs the benchmark at 7.1%, which is a decent outperformance. We are not counting dividends in this calculation, which would further boost our gains.

The second method measures our actual performance. For stocks where we had a high level of conviction, we increased our positions as prices declined, reducing our average cost basis. We then weighted each stock’s return according to its position size and applied the same weighting method to the corresponding benchmark. The yellow columns indicate our cost basis and weights.

By this measure, our performance was 12.1% vs the benchmark at 5.2%—more than twice the market gains1. Again, this doesn’t include the benefit or any dividends received.

We’re currently satisfied with all our positions. Lantheus has shown particularly strong momentum over the past month, and Vinci and Verallia have also started to gain traction as investors turn more positive on European equities.

Here’s hoping the rest of the year is as fruitful…

The content provided by Reveles Research, LLC, including all materials on this website and in any other communication from its author, is strictly for informational and educational purposes. It is not intended to be, and should not be interpreted as, investment, legal, or any other type of advice. Readers are encouraged to conduct their own research and due diligence. It's important to remember that investment decisions should be tailored to an individual's specific financial situation, goals, and risk tolerance.

At the start of 2024, we thought inflation might bite harder than it did. Instead, the world simply learned to live with elevated price changes. Still, we’re holding to our outlook.

In the US, a CPI of 3-3.5% isn’t a crisis, but it does tie the Fed’s hands. Rate cuts become harder. Yields could spike, especially if “bond vigilantes” make a comeback. A debt scare in the U.S. (or emerging markets) is not out of the question.

On the other hand, we also imagine Trump likely favors striking a deal with China / Europe before bringing the full force of his threatened 60% / 20% tariffs to bear. We imagine China and Europe want that too. A relief rally could follow a reconciliation, probably into risk assets. Valuations would get even more stretched, and rates would drop.

We believe investor sentiment will see-saw between these two themes throughout the year. The first seems more urgent and longer-lasting.

At the moment, we see very few opportunities for fairly priced companies in the US market. Europe offers a bit more value, and government debt levels there also hover at more sustainable levels (excluding France and Italy—which nevertheless enjoy the protection of the union). So, that’s where we’re focusing our attention.

Below is a quick round-up of our thoughts about the companies we recommended last year.

Valero has a top-notch management team with a strong commitment to returning cash to shareholders, mostly through dividends & buybacks. Current FCF yield stands at around 8-10% (with likely no growth), which is fine but nothing to write home about.

Fears around the future use of diesel in the transportation (trucking) industry seem overblown. Electric vehicle trucks, and their enormous batteries, are still prohibitively expensive. And the uncertainty around that might even perhaps work in our favor by depressing industry-wide capex on refineries, constraining supply, and putting upward pressure on future diesel prices.

What Valero mainly offers in our portfolio is a hedge against rampant inflation and/or geopolitical events. We should have recognized this and sold it when it soared to ~$180 following Ukraine’s attacks on Russian refineries.

Conversely, a short-term risk for the stock is a peace deal in Ukraine. We’d be happy for that outcome for the world, but would probably refrain from adding to our position on weakness; we will more likely sell on strength. It currently makes up 2.5% of our portfolio, bought at an avg. price of $120.

Hershey was our biggest mistake last year. The stock looked deceptively cheap on a P/E basis, since earnings quality had been slipping. The company spent too much on acquisitions that delivered little in return.

We also failed to acknowledge the threat to its core business. We’ve come around to the view that private label brands do in fact pose a legitimate challenge to Reese’s, since customers don’t seem to mind paying a dollar more for higher-quality chocolate (and often are not given a choice at supermarkets).

What makes the demand for candy resilient against inflation-driven price increases (it constitutes a small part of a shopper’s overall basket and is therefore regarded as an affordable indulgence), also opens the door to competition and fragmentation.

We got out of the position and booked a small profit.

Vinci is an interesting beast. The fundamental story remains generally intact: in the next decade governments will need to spend on infrastructure and will increasingly opt for public-private partnerships due to concerns over public debt.

At first glance it looks like the company delivers a predictable 8% FCF yield with >10% growth p.a. However, it’s important to observe that FCF-based metrics favor acquisitive companies like Vinci, since the capex line tends to exclude other types of investments for growth which is rather expressed through cash acquisitions or purchase of intangibles. When we adjust for this it’s more like a 6% FCF and 9% growth, and a fair bit lumpier.

In our analysis last year, we focused too much on what the stronger dollar might mean for Vinci’s revenues (more Americans flying and using Vinci’s airports) and not enough on its implications for the Central Bank, which remains cautious about lowering rates for fear of importing inflation, should the Euro weaken further.

What do France’s debt and political problems mean for Vinci? In the event of severe panic, the ECB would likely step in to stabilize the situation. However, even without a full-blown crisis, these challenges could trigger a credit slowdown in France.

Fortunately, the majority of Vinci’s EBITDA comes from outside France (~60%), which helps cushion the impact. So, the French situation might have more of an impact on the price rather than on business fundamentals. We do not expect the price to recover any time soon. It currently makes up 3.5% of our portfolio, bought at an avg. of €100. We’ll probably just hold at this level and collect the 4.5% dividend.

Verallia was our favorite pick of last year. It’s great company with a strong moat, operating in a rational and oligopolistic industry. The predictability of its business (outside of unusual times like these) allows it to safely sustain a higher debt-to-equity ratio, juicing profits on the upside.

Over the past year, it’s faced continued headwinds as customers worked through excess inventory and ordered fewer glass bottles. The media, with usual intensity, has fixated on declining alcohol demand and prints daily headlines proclaiming the end of drinking as we know it. We don’t buy it.

People will still be drinking many years from now, in our view.

Depressed earnings from temporary weak demand combined with a low valuation (and negative sentiment) serves as a decent entry point, and we are prepared to withstand possible further downside from here in order to gain long-term exposure to the name.

Looking to 2025, Verallia can:

• pay down a portion of debt

• keep its dividend

• keep the same level of capex

It can do one of those things, possibly two, but not all three. So something will have to give. We expect cash flow to trend closer to $200mm in 2025, which gives us a 4% yield, but eventually revert back to $350mm, which would be closer to 7%. We estimate FCF growth at around 7% p.a.

Verallia currently makes up 12% of our portfolio, bought at an avg. price of € 25.87. It’s a hefty amount so we don’t expect to add any more. One concern is the management team which has a very European, income-first mindset [NB: By this we mean that their approach of issuing dividends while simultaneously taking on debt seems value-destructive and too focused on short-term shareholder rewards].

Lantheus is our bet on a “growthier” stock, currently trading at a 6% FCF yield. We believe we’re buying exposure to a reasonably-priced leader in the radiopharmaceutical industry (an industry that has strong growth prospects), and a rich pipeline of radiopharmaceutical diagnostics and therapies.

Our main concern for Lantheus is emerging competition in its flagship product, PYLARIFY, which is a radio-diagnostic agent for prostate cancer, and contributes almost 70% of the company’s total revenue. Several competing agents have entered the market since PYLARIFY was first launched in 2021, and increased competition is already hurting pricing for PYLARIFY.

Even so, a growing market can support multiple players. Today, Lantheus announced the acquisition of Life Molecular Imaging for $350 million. Life Molecular has a diagnostic on the market for detecting the accumulation of proteins in the brain that may cause Alzheimer’s Disease. Lantheus makes up 4% of our portfolio.

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The content provided by Reveles Research, LLC, including all materials on this website and in any other communication from its author, is strictly for informational and educational purposes. It is not intended to be, and should not be interpreted as, investment, legal, or any other type of advice. Readers are encouraged to conduct their own research and due diligence. It's important to remember that investment decisions should be tailored to an individual's specific financial situation, goals, and risk tolerance.

It’s notoriously difficult to analyze biotech companies. Most of them operate with a long-term perspective, where the success of future drugs can be highly uncertain and difficult to predict.

To value such a company requires specialized knowledge that the non-scientist does not normally possess. We therefore look for companies whose (low) valuation is only justified by conservative estimates of the cash-flow generated by existing, proven drugs on the market.

The goal is to eliminate as much as possible any “guesswork” about the company’s future performance. We want the company’s pipeline as an option, for free. If the pipeline fails our downside is limited since the investment was based on tangible cash flows. If it succeeds, we capture the upside without paying much of a premium for it.

Heads I win; Tails I don’t lose much.1

This is how we think about $LNTH.

The company is currently trading at a compelling valuation of 14.6x 2025E EPS, per our estimates. We believe these are conservative estimates since we forecast zero growth for the drug PYLARIFY in 2025, per management’s comments, in addition to no growth attributed to DEFINITY.

We also maintain the same amount of revenue for Strategic Partnerships between 2024 and 2025. Therefore, this does not include any additional revenue that will come from FLYRCADO, when it begins sales in 2025.

Full report below.

Lantheus Reveles Report Pdf

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The content provided by Reveles Research, LLC, including all materials on this website and in any other communication from its author, is strictly for informational and educational purposes. It is not intended to be, and should not be interpreted as, investment, legal, or any other type of advice. Readers are encouraged to conduct their own research and due diligence. It's important to remember that investment decisions should be tailored to an individual's specific financial situation, goals, and risk tolerance.