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As most of you know I am a long-term partner in Kelly Partners Group. Given the recent stock declines linked to the impact of Artificial Intelligence (AI), I thought it’s time for an update.

The landscape of professional services is rapidly evolving. AI is reshaping industries, with accounting and taxation firms at the forefront of this transformation. Kelly Partners Group, an Australian-based network of owner-managed accounting practices, stands as a prime example of a company grappling with these changes. Founded in 2006, KPG operates a unique model that combines centralized support with local autonomy, serving mid-sized businesses and high-net-worth individuals across Australia, Hong Kong, and beyond. I have written multipe articles about KPG before.

AI’s Disruptive Force: Eroding Routine Revenue Streams

AI’s most immediate threat to firms like KPG lies in its ability to automate routine, repetitive tasks that form a significant portion of traditional accounting revenue. Specialists from academic and research institutions, such as those affiliated with the World Economic Forum and the U.S. Bureau of Labor Statistics, project that AI could handle 20-50% of such tasks by 2030, including data entry, basic compliance filings, reconciliations, and simple tax calculations. With the latest developments around AI and Claude this might even go a bit faster.

For KPG, whose network relies on volume-based services for small to medium enterprises (SMEs), this could translate to revenue erosion. Clerical roles like bookkeeping and payroll are among the most vulnerable, with projections indicating net job losses in these areas as clients increasingly adopt in-house AI tools or low-cost platforms.

Empirical studies underscore this shift. A 2025 report from the Thomson Reuters Institute found that AI adoption in audit firms led to a 4.3% increase in junior and mid-level positions, but this was offset by reductions in entry-level clerical work. In KPG’s context, where practices often handle multi-entity setups for private businesses, AI tools like generative models from Anthropic or OpenAI could commoditize basic compliance, potentially compressing margins on low-value services. If clients, many of whom are underserved and only access about 10% of potential accounting offerings, opt for AI-driven self-service, KPG might see a dip in billable hours for routine work.

But will AI really have a meaningful impact over the next five years? Regulatory bodies like the Australian Taxation Office (ATO) improving data matching and are shifting toward enforcement. These advancements could actually increase demand for professional guidance by emphasizing accurate reporting. However, if government AI tools reduce nuanced situations to simplistic checks, it might frustrate clients and drive more business to private firms for detailed handling.

Moreover, ethical and bias-related risks in AI add layers of complexity. Researchers highlight how AI systems can perpetuate human prejudices in audits or tax assessments, necessitating human oversight to mitigate issues under regulatory frameworks like those from the ATO. For KPG, slow adaptation could exacerbate these disruptions, especially amid broader market fears that have contributed to a 50% stock decline last year, mirroring sell-offs in peers like CBIZ.

Opportunities Arising: The Shift to High-Value Expert Services

Despite these challenges, AI specialists emphasize that the technology’s impact is not purely destructive. Rather, it catalyzes a pivot toward more lucrative, expert-driven services. Neutral forecasts from bodies like the Bureau of Labor Statistics predict 6% growth in accounting occupations by 2033, adding approximately 91,000 jobs, fueled by human-AI collaboration.

For KPG, this means routine revenue losses could be replaced, and surpassed, by expansions in strategic advisory, complex tax planning, risk management, and litigation support.

Data supports this optimism. Firms embracing AI report higher revenue per employee, thanks to productivity boosts that free professionals for high-margin work. AI enhances efficiency, reducing errors by up to 40% in financial statements and enabling real-time insights for clients. In KPG’s owner-managed model, where 9% of fees are reinvested into central IP and services, AI integration could streamline operations across its network, allowing practices to offer premium services like international tax strategies or advanced structuring for high-net-worth clients. More than ever, this is the time for Brett Kelly to show the flywheel is unique and creates a competitive advantage and show KPG is an insurgent.

The often-underestimated trust and accountability in client-accountant relationships further bolster this shift, AI can tackle grunt work but won’t replace these core elements. Centralizing AI functions might even improve bottom lines. Professional sentiment aligns: 68-71% of accountants are excited about AI, with 64% rejecting the notion that it will fully replace them. For KPG, targeting mid-sized firms ($2-10 million revenue), AI could unlock underserved needs, such as predictive analytics for risk or automated multi-entity reporting, potentially driving the company’s ambition to reach AUD 500 million in revenue and top-10 status in Australia. Recent acquisitions have already bolstered this trajectory, demonstrating resilience even as AI concerns loom.

KPG’s Strategic Positioning in an AI-Driven Future

KPG’s structure positions it well for adaptation. Unlike larger conglomerates, its decentralized yet supported network enables quick AI adoption at the practice level, potentially turning tools into efficiency enhancers rather than threats. Specialists stress that success hinges on balanced integration, using AI for decision support without over-reliance, to avoid opacity or biases.

While short-term volatility from AI fears may persist, KPG’s 2025 results confirmed my expectations of continued growth on revenue and NPATA to shareholders, suggesting underlying strength. I expect KPG will announce half year earnings next week. My estimates are a revenue of AUD 76.5M and NPATA to shareholders of AUD 5.8M. I also expect Kelly to announce a share buyback program because of the high undervaluation of the stock currently. If I use KPG’s own plan on NPATA for the next years and knowing cash conversion is close to 100%, then the DCF shows the current stock price is undervalued by 123.2%.

Back to the AI story and the current environment. Expanding regulations, such as those around superannuation taxes, personal services income provisions, trusts, fringe benefits, payday super, and anti-money laundering extensions to accountants, are making the field busier and countering AI automation by increasing complexity. On margins, dilutions often occur from acquiring lower-margin firms and front-loading investments in central resources to support future growth, addressing potential challenges in overseas expansion like replicating the model in markets such as the US. In my interview with Brett Kelly he mentioned he knows how to increase the margins from 15.5% towards 32.5% at a minimum.

In multi-entity environments common to KPG’s clients, AI’s shift from data entry to insightful analysis could boost profitability, as seen in studies where AI-adopting firms doubled profits and reduced working capital. However, laggards risk client loss to more tech-savvy competitors. KPG’s proactive reinvestment in IP indicates preparedness, but I am curious what Brett will say about their AI advancements in their earnings update. Also towards one of their most recent acquisitions , WrkPod, an outsourcing company. This is the type of company where I have doubt in the long-term whether it will be AI proof.

Conclusion: A Balanced Outlook for Sustained Growth

AI’s impact on Kelly Partners Group is dual-edged: it threatens routine revenue but amplifies opportunities in expert services, potentially leading to net growth. Unbiased expert analyses paint a picture of evolution rather than extinction, with human-led judgment and regulatory demands remaining essential amid automation.

For investors and stakeholders, KPG’s adaptability, evidenced by its growth strategy, resilient financials, and ability to leverage trends like enhanced enforcement, suggests a positive long-term trajectory, provided it embraces AI as a partner. As the sector matures, firms like KPG that navigate this balance could emerge stronger, turning technological disruption into a catalyst for innovation and expansion.

For those who aren’t a shareholder yet I think this is a great opportunity to have a look at the company as the stock price currently appears extremely undervalued. This isn’t investment adivce, it is a call to do your own due dilligence. Let me know your outcome!

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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Compound & Fire Community Portfolio

First of all: Happy New Year! As 2025 came to an end, Compound & Fire continued to grow, culminating in the launch of our Community Portfolio at year-end. Fifty members shared their top three picks for 2026, and from those, I curated a portfolio of the 12 most frequently chosen stocks:

While this was a fun competition, it’s fascinating to track the performance of a group focused on quality stocks. The weights reflect how often each company was selected.

My top 3 picks for the year are: Computer Modelling Group, Getbusy plc and Kelly Partners Group. I remain very bullish on Kelly Partners Group after my interview with CEO Brett Kelly, here is the link. For Computer Modelling Group I think this is the year where their strategy 4.0 will start gaining traction and their capital allocation strategy will result in a higher valuation for the company. Finally Getbusy plc might be a bit more speculative, but I have explained in this article why the company could return 2-4x in 3 years.

Throughout 2026, we’ll have a live tracker comparing the Community Portfolio against the Compound & Fire Portfolio and the iShares MSCI World ETF. Here is the link to Google Sheets. In the Discord Community app we have created a separate channel to discuss the Community portfolio.

Of the 12 stocks, three companies overlap with my Compound & Fire Portfolio: Kelly Partners Group, Constellation Software and Topicus. It’s exciting to see the variety and discover stocks on our investors’ radars, including lesser-known names like NameSilo Technologies Corp, Kitwave Group, and NowVertical Group.

Alongside regular updates on the Compound & Fire Portfolio, I’ll share ongoing performance insights for the Community Portfolio.

November and December update

In November and December, the Compound & Fire Portfolio erased all its gains from 2025. November saw a steep 6.5% decline, which is unusually large for this portfolio, followed by a 0.8% drop in December. Overall, the portfolio declined 3% for the year. Compared to global indices, this was an underperformance; the iShares MSCI World ETF gained 19.6% in USD. However, adjusting for my base currency (EUR) and the dollar’s significant weakening, the ETF’s return was just 4.7%. Still better, but a narrower gap.

Since I began sharing my portfolio publicly, it performed strongly through June 2025 before the downturn began. Am I worried? Not at all. I’m thrilled with my holdings, many of which I’d happily buy at current prices: Kelly Partners Group, Kinsale Capital, Dino Polska, Rightmove, Euronext, Computer Modelling Group, Judges Scientific, The Trade Desk, Topicus, Constellation and Getbusy Plc. In my opinion these companies are valued at very interesting levels at these prices.

My outlook for 2026 remains very positive.

In hindsight, would I change anything? I had reservations about Cogent Communications when I bought it. It fell short of my “don’t lose” strategy, with a Quick Scan score below my 80 threshold and substantial debt. I overlooked this because of potential upside from selling assets like data centers. In November the stock price declined 53.6% (!) after they announced they are pausing their dividend. This impacted my result for November significantly of course. Although my thesis actually didn’t change, it’s a lesson what can happen when you don’t follow your strategy and buy companies with a huge debt pile. That is why my main lesson for the year is: follow my strategy, don’t change paths and always buy with a margin of safety.

Here is my result for December:

The month in which I have sold M&A Research Institute and used the cash to add Kelly Partners Group at 7.85AUD. Watches of Switzerland was sold in November. Actually the main reason was I wanted to buy a position in Topicus Inc, which was almost 10CAD below my buy below price. Topicus is a great example of being patient. I liked the company a lot and if I didn’t have analyzed it like I did, I would probably have bought the company at a higher price.
I am very happy with the addition of Kelly Partners Group and the purchase of Topicus.

Portfolio holdings

The Compound & Fire portfolio remains well-diversified across quality compounders. See the full allocation breakdown below for details on current holdings.

After the addition Kelly Partners Group is my biggest allocation, followed by Nedap and Dino Polska. Euronext and Rightmove are two strong moat companies in my portfolio, but declined a lot in the second half of the year of 2025. These kind of companies will remain a corner stone in my portfolio and these temporary declines don’t worry me.

That’s it for now. Thank you for joining me on this journey and being part of this free community to discuss quality stocks at Compound & Fire. Let’s keep building wealth the smart way and share your thoughts, join our Discord, and subscribe to my Substack for free.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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Introduction

In the world of investing, quality compounders, those reliable businesses that steadily grow earnings over time through smart capital allocation, strong competitive advantages, and consistent execution, have long been favorites among long-term investors. Companies like Constellation Software, Topicus and Lumine, Dino Polska, Kinsale Capital Group, Brown & Brown, Copart, Rightmove, and Kelly Partners Group exemplify this breed. They operate in defensible niches, generate high returns on capital, and have histories of compounding shareholder value at impressive rates.

Yet, as we close out 2025, many of these names find themselves in what can only be described as a stock price recession. Hence, my portfolio this year as lagging behind. Share prices have pulled back significantly from recent highs, often by 10-20% or more over the year, despite the underlying businesses remaining fundamentally sound.

This decline isn’t isolated; it’s part of a broader market dynamic affecting growth-oriented stocks. One key driver has been the lingering effects of elevated interest rates. Even as the Federal Reserve began cutting rates in late 2024 and continued with measured reductions through 2025, bringing the federal funds rate down to around 3.5-4% by year-end, the shadow of higher rates from prior years continues to weigh on valuations.

Higher interest rates increase the discount rate used to value future cash flows, making long-term growth prospects appear less attractive today. For quality compounders, whose value often lies in earnings projected years down the line, this mathematical adjustment can lead to sharp price drops, even if the companies are hitting their operational targets.

But interest rates aren’t the only culprit. Broader economic pressures, including persistent inflation above 2%, slower-than-expected global growth, and sector-specific headwinds, have played a role.

For instance, insurance-related stocks like Kinsale Capital and Brown & Brown have faced multiple compression amid a softening market cycle and pricing pressures in commercial lines. And even tech-enabled acquirers like Constellation Software and Topicus have seen sentiment shift as investors question growth sustainability in a higher-cost capital environment and the impact of AI.

Healthy correction

In my view, this pullback represents a healthy correction rather than a sign of fundamental weakness. Valuations for many of these companies ballooned during the low-rate era of the last years, often trading at premiums that left little room for error.

The current environment is pruning those excesses, forcing investors to refocus on true business quality over hype. That said, corrections like this often overshoot, creating buying opportunities for patient investors. With rates now trending lower and economic growth expected to stabilize, I believe it’s time to lean in and buy selectively.

Quality compounders have a proven track record of navigating cycles and emerging stronger, think of how Constellation Software compounded through multiple market downturns since its IPO. The key is to target those with durable moats, aligned management, and clear paths to continued growth, while avoiding overpaying even at discounted prices.

Portfolio Adjustment

Speaking of selective buying, I’ve made a portfolio adjustment overnight to capitalize on one such opportunity. I’m exiting my position in M&A Research Institute Holdings, the Japanese firm specializing in AI-driven M&A advisory for small and medium enterprises. The decision stems from their recent downward revision to 2026 guidance, which came in well below my already conservative expectations.

I had anticipated an uptrend in volumes starting that year, driven by a rebound in Japan’s M&A market, but the update suggests otherwise. More concerning is the uncertainty around management’s priorities: Are they truly investing for long-term profitability, or are short-term market share gains taking precedence at the expense of margins?

My forecast for their operating profit for the brokerage business of 8.313M Yen appears too optimistic as management expects 5.993M Yen for 2026. This is lower than their 2025 operating profit. Management created additional management layers in order to change the declining situation for the brokerage business. However, this also could create additional complexity and the company is at risk moving from an insurgent to an incumbent.

Adding the new expected free cash flow of 3.950M in my model for 2026, the question is what the growth rate is for the free cash flow for the next years. With a declining brokerage business the consultancy business has to grow to offset a decline. It gets more difficult to forecast the growth. With a 5% growth the intrinsic value is 1224.5, not far from the current stock price. It could be they return to much faster growth, but as I can’t really predict and management doesn’t reply on questions I have send. So for me the investment thesis is broken and I have decided to exit my position at 1.111 Yen and to reallocate the capital elsewhere.

Kelly Partners Group

That “elsewhere” is Kelly Partners Group (KPG.AX), where I’m increasing my position. KPG, an Australian accounting network focused on owner-operated firms, fits the quality compounder mold perfectly: recurring revenues, high client retention, and their Partner-Owner-Driver model which is unique and has delivered consistent growth since its 2017 IPO. At their 2025 Annual General Meeting in November, management unveiled an ambitious yet grounded 5-year plan, projecting a ramp-up to global scale.

Starting from current levels, they aim for AU$500 million in revenue by FY31, with EBITDA reaching AU$175 million and NPATA to shareholders (net profit after tax and amortization) hitting AU$40 million. This builds on their historical 20.5% compound annual growth rate (CAGR) in revenue since IPO, transitioning through phases of foundation-building, acceleration, and global expansion. The plan emphasizes organic growth supplemented by strategic acquisitions, all while maintaining strong cash generation.

To quantify the opportunity, I ran a discounted cash flow (DCF) analysis based on KPG’s AGM projections. Usingfree cash flow estimates starting at AU$11 million in Year 1 and growing at varying rates (higher initially to reflect the ramp-up, then stabilizing around 18%), a 10% discount rate, and a 3% terminal growth rate, I arrive at an intrinsic value of approximately AU$13.90 per share. This assumes inputs aligned with their plan.

CEO Brett Kelly is known for his optimism, so it’s good to build in a buffer. When applying a 40% margin of safety, it reduces the intrinsic value to AU$8.31 per share. At current prices of AU$7.79, I am essentially buying into KPG’s well-articulated growth plan with more than 40% cushion baked in. For a proven compounder like this, trading at such a discount is rare and compelling. It underscores why, in this price recession for quality stocks, selective buying can set the stage for outsized returns over the next decade. My purchase price is AU$7.85 and my total position size for Kelly Partners Group after this buy is just below 14%.

Next week I will interview Brett Kelly and we will discuss how he used The Founder’s Mentality to structure his business. I am really looking forward to it. Subscribe so you won’t miss it!

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As always, this isn’t investment advice, do your own due diligence. But if history is any guide, betting on quality during downturns has paid off handsomely. Stay tuned for more updates, and if you’re new here, check out my previous pieces on compounders like these for deeper dives.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any mistakes or investment decision made by you. You are responsible for your own investment research and investment decisions.

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Introduction

After I had added Cogent Communications to my portfolio the share price sharply dropped and hence it is time to write an update. But Collective Fire Author Wayne, author of Dragon Field Investing (if you don’t follow him yet, I strongly adivce to do so!) was faster than I am. I read his article and I couldn’t have done it better and wouldn’t have done it differently. It shares my initial story and my current thoughts, so we are completely aligned!

My prior article on CCOI presented a compelling deep-value opportunity, with an underappreciated asset and catalysts for a significant rerating despite headline risks around debt and legacy telecom challenges. Cogent’s 180 data centers and 38 million IPv4 addresses are valued at $10.7 billion based on current market prices for legacy data centers and IPv4 addresses. After deducting the $2.4 billion net debt on the balance sheet, the net asset value (NAV) from just the two items is $8.3 billion, or 4.37x of the then $1.9 billion market cap. This is without consideration of Cogent’s ongoing and profitable business in internet access and transport services, which represent approximately 25% of all global internet traffic; a potential high-growth, valuable wavelength services network; and a monthly subsidy payment of ~$8.3 million from T-Mobile until October 2028. In other words, if we assign a zero value to Cogent’s ongoing business and its fiber network, Cogent was traded at a P/NAV of 0.23.

Well, that P/NAV of 0.23 was in the warm and cozy days of mid-September. As we enter the chilly days of late November, Cogent’s market cap has dropped to just $906 million, or a P/NAV of 0.11 if the asset valuation has not changed materially.

If Cogent was viewed as a misunderstood, “deep value with optionality” story in September, it is now being treated as a distressed asset play, but only by the equity investors. For example, CCOI’s June 2027 7%-coupon bonds are still trading at $100.4, indicating that bond investors don’t see a risk of Cogent failing to pay its interest on debt.

What had happened

Cogent reported its Q3 earnings before the market opened on November 6, and its stock took a swan dive, dropping 35% from the $38.3 closing price of the previous day to $24.95. In the following six trading sessions, it continued its daily decline to an intraday low of $15.96 on November 14, but staged a volatile intraday reversal and closed at $17.55. From the $38.3 pre-earnings closing to the intraday low of $15.96 on November 14, investors marked CCOI down by 58%. At the current price of $17.05 (November 21), CCOI is down 80% from its high of $85.18 about one year ago. What has spooked the investors and the Wall Street analysts?

Earnings Highlights and Misses

• Q3 2025 service revenue came in at $241.9 million, down 1.7% sequentially and 5.9% year-over-year, missing consensus estimates.​

• Despite the revenue drop, on-net revenue rose 2.2% quarter over quarter, and wavelength revenue surged 92.5% year over year to $10.2 million, demonstrating progress in strategic growth areas.​

• Adjusted EBITDA increased marginally to $73.8 million (margin 30.5%). In comparison, GAAP EBITDA grew to $48.8 million (margin 20.2%), both up on a quarterly and annual basis due to a higher-margin service mix and disciplined cost controls, but still failed to offset the negative topline shock.​

• CCOI posted a GAAP net loss of $0.87 per share, reinforcing market skepticism about near-term earnings power and sparking concerns about dividend sustainability.

• On the conference call, COOI stated that they have changed the IPv4 leasing structure. Currently, they have leased out only 13 million of the total 38 million addresses, and they are considering selling some of the idle addresses. However, due to the recent decline in quoted prices, they decided to allow the leasees to sublet their blocks. The company believes that this would result in a slightly lower unit price overall, but much higher utilization for the entire asset base. In Q3, revenue from IPv4 leasing was $17.5 million, implying an annual run rate of $70 million. Note that this is a 14.1% increase over Q2, and a 55.5% increase over the same quarter last year. Given the robust FCF generation capacity of these IPv4 assets and the potential for significant tax liability if they were sold (because they were carried on the books at zero cost), it makes no sense for CCOI to sell any of them.

• Shortly before the Q3 report, CCOI revealed that it had signed a Letter of Intent (LOI) to sell two of the twenty-four converted Sprint data centers for $144 million, validating Compound & Fire’s investment case estimate.

• The company suspends its quarterly dividend from $1.02 to $0.02 per share until the Debt/EBITDA ratio is brought back from the current 5.3x to below 4x.

Why Did Investors and Analysts Hate Cogent’s Q3 Report Card?

Major brokerages, including JPMorgan, RBC, Citi, and Goldman Sachs, all cut price targets by ~20% (to $23 and $25), and the consensus target is now $25.71, as analysts flagged near-term underperformance, continued legacy business drag, and operational execution risk.

However, the actual reason for the relentless selling from November 6 to 14 was that dividend investors were bailing out. Due to its high and consistent dividend yield since 2013, CCOI is included in many income and high-yield funds and ETFs. When the dividend yield dropped from +10% to near zero following the cut, these funds had no choice but to close out all their positions. Obviously, many dividend investors, even some professional fund managers, are mistaking the “income” from dividends for the income from fixed-income securities like government or high-quality corporate bonds. Nevertheless, to most dividend investors, it’s an irreparable sin for a corporation to cut dividends. Their mantra is, “Cut my divvy, I will kill you.”

What’s the Way Forward?

Like a car involved in a head-on collision with an 18-wheeler on a highway, Cogent is now being crushed, towed, and dumped at a junkyard. Is there any hope that a professional dismantler would pay more than $0.11 to buy $1 of CCOI’s NAV to harvest the parts? If so, can he get $0.22 or $0.33 for each $1 NAV for the parts? Taking a more optimistic view, would a re-builder buy CCOI from the junkyard, clean it up, repair it, and then sell some or all of it for something like $0.77 or $ 0.88 per $1 of NAV? Ideally, for shareholders, the best outcome would be for Cogent’s legendary CEO, Dave Schaeffer, to execute his strategic plan to monetize non-core assets, lower leverage, accelerate growth in its core internet transport and emerging wavelength businesses, and restore the dividend and buybacks to return capital to shareholders. If so, buying CCOI at the current price is akin to spending $0.11 for a dollar bill or even $2. Plus if dividend back in place at $1 a quarter, that would mean 23% at current prices. Even if it’s half it’s very interesting.

If you are interested in CCOI, I encourage you to read my prior article. Another excellent resource for CCOI is Aaron Chan at Recurve Capital, who has written extensively about the company and conducted interviews with Cogent’s CEO. I don’t intend to write a deep dive into DCF modeling or COTP (sum-of-the-parts) analysis, because anything I produce would look superficial compared to theirs. However, I can offer to conduct an exercise to assess the marketability of their 24 non-core data centers with “For Sale” signs on. In my view, this is the most critical piece of the Cogent story. Suppose these data centers can be monetized over the next 1-2 years at a decent price. In that case, it will give Cogent many opportunities to unlock value from its other assets and develop its emerging wavelength business. If they can’t, Cogent would be in a bind, and the only options are a fire sale of other valuable core assets or issuing new shares, which would dilute existing shareholders.

7-Eleven for Edge AI

Unless you have been living in a cave in the Hamalaya Mountains meditating for the last three years, you are probably aware that an AI company with projected $13 billion revenue and $9 billion loss in 2025, has a plan to spend $1.3 trillion to build data centers by 2030. The company is not public yet, but the pre-IPO investors already valued it at north of $500 billion in the private market.

Of course, everybody knows that I am talking about OpenAI, the poster child of the ongoing raging AI revolution. Recently, there have been many doubts about where OpenAI will find the money to build the $1.3 trillion data centers, whether they can get the power to run them, and other concerns. But OpenAI says they must build these data centers to meet the customer demand. Upon hearing about the 24 Cogent “move-in ready” data centers for sale, you may think, “What are they waiting for?” Just make a deal between Cogent and OpenAI for a couple of billion dollars, which is less than pocket change for OpenAI, and problems at both companies will be solved. Cogent gets the money to lower its leverage, and OpenAI gets the mush of compute capacity it needs now.

AI Computing: Training vs Inference

Unfortunately, Cogent’s 24 for-sale data centers can’t handle any of OpenAI’s compute needs for the model training. For that task, it needs mega data centers with a power capacity of 40-120 kW (kilowatts) per rack, versus the 4-8kW per rack typical at the Cogent data centers. More importantly, running AI servers with the most advanced NVIDIA GPUs (H100/Blackwell) is like running a furnace. Without liquid cooling, you would melt the Cogent buildings in no time. All Cogent data centers are air-cooled, even after they spent over $100 million in the last two years renovating them. As shown in this table, there are many gaps in Cogent’s data centers if you want to run them as an “AI Factory” for model training.

However, Cogent’s data centers can handle AI inference compute with only some creative design. One workaround is to put only one AI server in each rack instead of 10, so you stay under the 5 kW limit and don’t need to rebuild the cooling system. The downside is that you are wasting a lot of floor space, which is uneconomic if you have expensive real estate for the data centers.

Another workaround is to use less powerful inference chips, such as NVIDIA L40S or older A100s, which run cooler than the training chips. This way, you can fit 2-4 of these servers in a rack and achieve a power density of ~15 kW. For the cooling issue, you can install “Rear Door Heat Exchangers” (RDHx). These are special doors that fit on the back of the rack with a radiator coil inside. They capture the heat before it enters the room. This allows legacy buildings to handle AI workloads without ripping up the floor for a liquid-cooling system.

There are also lower-power alternatives to the NVIDIA GPU for AI inference. For example, the ARM Ampere Altra CPU requires only 190W, compared to 700W for the NVIDIA H100 and 350W for the L40S. They are already being deployed for inference computing for high-volume small AI models. The Qualcomm AI100 Edge Accelerator, which requires only 75W, is perfect for computer vision and Edge AI.

Let’s use transportation as an analogy to illustrate the difference between AI model training and inference. For those of you who have traveled on China’s high-speed rail (HSR), you know it is cheap, fast, comfortable, and has 95%+ on-time reliability. If you are one of the 1,200 people who want to travel the 750 miles from Shanghai to Beijing, you will spend about $80, and it will take about 4.5 hours. For the same 1,200 passengers, if you use Uber or DiDi taxis, you will need 400 cars and 400 drivers, and it will take 12 hours to drive the distance, plus time to stop for meals, fuel, and biobreaks. AI training is like taking the HSR. China has invested heavily in building the rails and other infrastructure, and spends a significant amount each year operating them. But once built, the system’s capacity and unit economics are simply excellent. Of course, you need to make sure there is sufficient demand for the capacity; otherwise, you will lose a lot of money very quickly, as your revenue can’t cover OpEx and asset depreciation. The large AI training data centers work the same way: Very high upfront CapEx and long building cycles, significant on-going OpEx, but excellent unit economics if you have a high enough utilization.

Now imagine the 1,200 passengers are spread across different cities and villages in China, each with very distinct transportation needs. Some want to travel to remote provinces or even to foreign countries. Some want to visit a nearby city, within 50 to 150 miles. Still, some others only want to make a trip across the town, or 2 miles down the street to a grocery store. In this case, the 1,200 passengers will need many different modes of transportation, or combinations of them. Some will take the HSR, some will fly, some will drive a personal vehicle, or call an Uber. Some may choose to ride a bicycle or walk. This is not unlike AI inference computing. As AI is applied to more and more use cases, it will require a range of approaches to designing and building systems that achieve the best results at the lowest possible cost. This is where you don’t want the hyperscalers’ GW data centers. Instead, you want Cogent’s cheap, convenient data centers that are close to you and also offer the flexibility to design your customer AI inference computing systems.

Using another physical-world analogy, the large data centers of the hyperscalers are the big Costco warehouses that let hundreds of customers zoom around; the Cogent data centers are the small 7-Eleven stores that serve only small neighborhoods but are much quicker and more convenient for small purchases.

Hybrid Edge AI Economics

We can run an exercise to build a distributed grid (Edge AI for inference) that respects the limits of Cogent’s legacy assets, to assess the unit economics of this hybrid approach. The primary constraints are the 5kW-8kW rack limits and air-cooling, but we also need to deliver a high-value inference architecture for ad tech, recommendation engines, and voice agents. We can design this system using a two-tier architecture. The first tier is an “always-on” CPU using the 128-core ARM Ampere architecture to run lighter models (such as Llama-3-8B or Mistral) or vector database lookups. The target customers for this tier include high-volume, low-cost users, such as customer support bots and search indexing, to generate a low-margin but steady revenue stream.

For the second tier, we will install an NVIDIA L4 GPU on the same server as the “burst accelerator”, but it only kicks in for complex image-generation requests and for analyzing large PDF files, so it does not waste power when it’s not needed. Many customers would be willing to pay a premium for low latency, giving Cogent data centers a competitive advantage due to their proximity to customers and their excellent connectivity. This work can generate higher margin revenue for the operators.

One possible server configuration and its likely cost:

Assuming a per-rack power limit of 5 kW for the Cogent facilities and 14 servers per cabinet, the total cost for the servers is $113,400. Add $6,000 for the network switch and $2,500 for cabling and power distribution unit, and we can build a rack in a Cogent facility for about $122K, which is about one-third of the ~$350K for a typical single NVIDIA DGX H100 rack.

With this design, can do some “napkin math” to estimate the ROI and payback period for this system. For each of the 14 servers on the rack, we have two revenue streams:

Revenue Stream 1: The CPU Workhorse

• Use case: Rent out the 128-core ARM CPU as a high-performance web server or redistribution cache for content streamers

• Revenue: $6,048 per month (at $0.6/hour rate)

Revenue Stream 2: The GPU Burst Accelerator

• Use case: Llama-3 requests via APIs at $0.0002 per 1k tokens

• Utilization: 20% (4.8 hours/day of constant inference)

• Revenue: $8,400 per month (varies wildly based on demand)

Monthly Revenue & OpEx:

• Revenue: $14,448

• OpEx: $3,500 ($250 per server for colo overhead, power, and internet)

• Net Profit: $10,948

Payback Period

• $122,000 / $10,948 = 11 months

As you can see, if we use a single NVIDIA DGX H100 rack for this application, even if it can do the job as well as our hybrid cluster, and generate the same revenue, it will take almost 3 years to recover the CapEx.

This simple exercise is really my sanity check of Cogent’s decision to spend about $100 million in CapEx in the last two years to renovate the 45 Sprint legacy teleco data centers. This confirmed to me that Dave Schaeffer is not crazy when he stated in the Q3 conference, “Remaining facilities suited for lower density computing for inference.” In fact, the signed LOI for two of the 24 renovated data centers, valued at $144 million, is proof of the attractiveness of these assets.

What About the “AI Bubble”?

There have been a lot of debates recently about whether we are having an “AI Bubble” and whether it has burst. I have been listening to both sides of the discussion with great interest, but I don’t think I am qualified to give an opinion on this subject. One question I had about the CCOI investing case is, if we do have an AI bubble and when and if it bursts, how would it impact CCOI? After some digging and contemplating, my conclusion is that it might be a positive for Cogent, and here is my thought process:

1. The most ambitious AI lab, OpenAI, plans to build up to 250 gigawatts of computing capacity by 2033, a significant increase from the 10 to 17 gigawatt range set in early this year. Given the many industrial constraints, it is unlikely they will achieve this goal by 2033.

2. Even if they can build all these mega data centers for AI, I doubt they can get the electricity to power them. We already have evidence that even recently completed data centers can’t get the power they need, as illustrated by Amazon’s complaint to the Public Utility Commission of Oregon against Berkshire Hathaway-owned PacifiCorp for failing to provide adequate power for four new data centers in Oregon.

3. It is already ancient history that a small, unknown AI lab in China called DeepSeek dropped a bombshell in January, revealing that they had trained a pretty good AI model using a fraction of the computing power. Their ongoing inference costs are also very low, allowing them to charge significantly lower prices for their APIs. Since it was an open-source model, DeepSeek has inspired many other economic models with good enough performance. While the Western AI labs continue to add compute power, the Chinese continue to focus on more innovative architecture. Does this remind you of the different approaches taken by Japanese and South Korean automakers vs. the Detroit “Big Three” over the last 50 years? I think there is no debate which approach has won in the end. Why do we believe AI is any different?

4. In early October at the Italian Tech Week 2025, former Amazon CEO Jeff Bezos commented that “investors don’t usually give a team of six people a couple of billion dollars with no product, and that’s happening today.” You see, when the times are good, driving around in a Lambo is excellent, but in tough times, you also know perfectly well that the Toyota Prius can also get you from Point A to Point B. What do you think an AI startup CEO would do if he could only get $6 million in VC money for the next 12 months, instead of $2 billion? Would he try something like the “Hybrid Edge AI” as I discussed above?

In my view, if AI becomes truly revolutionary, as tech visionaries have predicted, demand for Cogent’s data center will increase. If AI is a bubble that will burst, even the existing mega AI data centers will be at a disadvantage in competing with Cogent. Remember my analogy of HSR vs Uber? It’s much easier to run a small UBER fleet with 22 Priuses versus a 750-mile rail line with 20 16-carriage trains.

A Market Validation

On the Cogent Q3 earnings call, one analyst asked about the specs of the two data centers with an LOI for $144 million. Dave Schaeffer cited competitive reasons for not revealing any of the information, as doing so might negatively impact negotiations for future sales. Schaeffer also stated that he hopes the other data centers would fetch a similar or even a better price.

If Cogent can obtain a similar price for the remaining 22 data centers as for the two with signed LOIs, Cogent would get $1.728 billion from the 24 for-sale assets ($72M x 24). It is probably too much to expect all of Cogent’s 180 data centers (core and non-core) to be sold for $72 million each. In my latest estimate of the NAV for all Cogent data centers, the $1.1-1.9 billion represents $6.1-10.6 million per facility, which is only 8.5-14.7% of the average price for these two assets. Therefore, I conclude that my NAV estimate from September is very reasonable and probably errs on the conservative side.

It is probably not unreasonable to assume that Cogent can sell the 24 facilities for something like $1.2 billion ($50 million each). If so, this action alone would cut Cogent’s net debt by half, thereby lowering the Net Debt to EBITDA ratio from the current 5.3x to 2.7x.

Another market validation, whether you believe it or not, is from the stock market. On Friday, November 14, after Cogent’s stock dropped 58% from the $38.3 pre-earnings to the intraday low of $15.96, a big money trader/investor paid $1.95 million premium to buy 10,000 contracts of CCOI April 17, 2026 $20/30 call spreads, betting CCOI price would rally nearly 40% to reach at least $21.95 in six months by contract expiration to break even. If the price goes to $30 or above, this trader/investor will make a net profit of $8.05 million. Obviously, someone with a very deep pocket also believes that CCOI stock has an asymmetrical risk/reward ratio and is willing to bet $1.95 million to make a kill.

Key Takeaways

1. CCOI stock was severely punished, down ~60%, for missing analysts’ revenue and EPS targets and for its tardiness in signing the promised 1,000 wavelength contracts. But more likely, it was punished for committing an irreparable sin: cutting its generous, reliable quarterly dividend from $1 to 2 cents. Dividend investors were mad as hell and hit the sell button with all ten figures. As a result, the highly compensated Wall Street analysts all cut their price targets in unison, from whatever their previous targets were to about ±$2 of the then-current trading price.

2. At the same time, Cogent’s internet access and transport services continue to generate an adjusted EBITDA of $74 million (at a margin of 30.5%), or $49 million GAAP EBITDA (at a margin of 20%).

3. Fourteen million of its 38 million IPv4 addresses on leasing generated a quarterly revenue of $17.5 million, an increase of 14% from Q2 and 55.5% from the same quarter in 2024. The company decided to change the lease terms, which is likely to increase asset utilization and, in turn, total revenue. It’s unclear whether investors realize that the net margin for this revenue stream is close to 100%, and that the book value of these assets was a big zero before their auditor forced an upward adjustment to reflect their more accurate economic value.

4. While the equity investors were in full panic mode, the bond investors seemed to be in a state of total equanimity, continuing to buy and sell the CCO, the 7%-coupon, June 2027 expiring bonds, at 100 cents on the dollar. One might wonder whether these bond investors even had internet access or read the news.

5. The signed $144 million LOI for two of the 24 for-sale data centers provided strong validation that their renovated data centers are indeed valuable assets. I wouldn’t be surprised if the NAV for the 180 data centers is significantly higher than Compound & Fire’s estimate.

6. Some BIG Money trader/investor spent $1.95 million and bought something that would be worthless if COOI’s stock does not trade above $21.95 by Friday, April 17, 2026. It’s unclear to me whether this person has profound insights into CCOI or is simply a crazy gambler.

7. Whether AI is or is not a bubble, whether it will burst or not, or whether OpenAI can build its 250 gigawatts of data center by 2033 or not, as long as people are using AI to create 80-page Substack articles and I use AI to produce a short summary, and my kids are posting and watching TikTok videos, Cogent’s legacy centers will have more demand.

8. When dividend is back on the table, probably it will mean some data centers are sold. It also means that dividend doesn’t have to be lower versus the prior quarterly dividend of $1, which is a dividend yield north of 20%.

9. The last and least important: my napkin math confirmed that the ROI of Cogent Edge AI servers can be 3x that of the most powerful NVIDIA GPU for particular lightweight, low-latency AI inference applications.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any mistakes or investment decision made by you. You are responsible for your own investment research and investment decisions.

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October update

Welcome to the October 2025 update for the Compound & Fire portfolio. As we close the third quarter of the year, global markets grappled with mixed signals: U.S. equities extended their rally amid resilient earnings, while European property sectors faced headwinds from softening consumer sentiment and macroeconomic uncertainty. The luxury sector, however, rebounded sharply on China demand recovery.

The portfolio delivered a modest decline of -0.85% for the month, underperforming a flat MSCI World Index but holding steady through selective trims and opportunistic entries. Year-to-date, I am up 4.3%, reflecting the resilience of my focus on durable moats and compounding machines, but impacted by a low dollar versus the euro.

This month’s theme underscores my conviction in quality: core holdings like ASML and LVMH showcased the power of secular tailwinds in semiconductors and high-end consumer spending. I have trimmed Nedap on strength, added to M&A Research Institute, and initiated positions in Constellation Software and GetBusy, prioritizing businesses with sticky revenues and acquisition-driven growth. As always, my outlook remains patient: I am positioned for the long haul, with a keen eye on valuation discipline amid elevated multiples.

Here is the table with the results per position last month:

Key Holding Updates

I continue to monitor each position for alignment with long-term theses. October’s mixed results prompted a review of underlying factors, including macroeconomic pressures, company-specific news, and sector dynamics. Below, I outline the main differences per company, with bullet-point analysis of notable drops and gains:

• Nedap: I have trimmed a quarter of my position in early October at €97, locking in gains as the stake had grown outsized amid strong momentum. The remainder benefited from a further 10.2% surge by month-end, driven by an earnings update showcasing margin expansion and rising recurring revenue. With a robust outlook in all their business sectors, Nedap remains a core holding.

• Kelly Partners Group: The shares dipped 7.9% to A$9.55, presenting an attractive entry in my view, though I held steady given its already substantial allocation. Brett Kelly’s recent X commentary reaffirms buyback openness, signaling undervaluation, while finance approval for an upcoming acquisition and U.S. listing efforts underscore growth potential. At this level, KPG’s recurring revenue model and 20%+ ROIC continue to shine. Patience will reward.

• Kinsale Capital Group: Kinsale delivered a solid quarter with a combined ratio improvement (driven by loss ratio compression) and operating EPS up 24% to $5.21, yet the market shrugged it off with a 4.9% decline. True to form, this specialist insurer’s execution, underwriting discipline and 30%+ ROE, remains unappreciated. I view it as a classic Kinsale pullback; my conviction in its scalable model holds firm amid a softening P&C cycle.

• Rightmove: The portal fell 6.6% amid broader sector weakness, mirroring declines in peers like Sweden’s Hemnet. Rightmove’s autumn house price bounce was muted at just 0.3% YoY, lacking pent-up demand from prior months. As a high-moat duopoly player with 70%+ market share, I remain unfazed. Transaction volumes should rebound with rate cuts.

• Euronext: Shares slipped 2.7% following the announcement of a potential Greek stock exchange acquisition, partly paid by new equity. Despite this, Euronext’s pan-European franchise and 10%+ revenue CAGR from data/services provide a wide moat. Like Rightmove, it’s a “set and forget” name. I’ll hold through near-term noise for its compounding infrastructure play.

• Watches of Switzerland Group: A bright spot, up 6.4% as luxury rebounded. The sector’s first quarterly used-watch price gain in three years (led by Rolex/Patek) and reaffirmed FY2026 guidance (6-10% revenue growth) fueled the rally, amplified by strong LVMH/Kering results.

• Computer Modelling Group: The simulation software name plunged another 14%, extending its knife-edge fall without fresh catalysts. At these levels, valuation screams opportunity for its reservoir modeling moat in energy transition plays. CMG hiring a legal executive specialized in M&A will strengthen their M&A organization further.

• Judges Scientific: Down 9.2% in a quiet month, but the acquisition-focused consolidator paid its October dividend, underscoring shareholder friendliness. With no short-term triggers, I trust management’s track record and with 11 serial acquisitions since 2004 at 20%+ ROIC this smallcap remains a high-conviction compounder in a perfect storm.

• ASML: October’s standout, surging 10.6% on stellar Q3 results: €7.5B sales (up 15% YoY), €2.1B net income, and FY2025 guidance of 15% growth with 52% margins. Earnings upgrades reflect EUV dominance amid AI chip demand. ASML’s wide moat shines bright.

• The Trade Desk: Modest 4.1% gain in the month and appointing Anders Mortensen as Chief Revenue Officer, bolstering ad-tech leadership. TTD’s programmatic edge and 20%+ NRR continue to drive independent growth. Expect my position to benefit from CTV tailwinds.

• M&A Research Institute: I have tripled down at ¥1,142, and the bet paid off with an 10.7% rise post-earnings (up 11% on new shares). Japan’s M&A boom and this niche advisor’s 30%+ ROE make it a gem which was valued too low. My larger stake amplifies compounding potential.

• LVMH: The month’s hero, +17.8% on blowout Q3 earnings: 9% organic revenue growth, led by fashion/leather goods resilience amid China recovery. As the luxury bellwether, LVMH’s brand moat and 25%+ margins reaffirm its portfolio anchor status.

• Cogent Communications Holdings: Up 8.9% without headlines, likely riding telecom rebound and anticipation for Q3 earnings (November 6, 2025). The 52nd consecutive dividend hike ($1.015/share) and AI-wavelength demand underscore its 9.8% yield appeal, a steady performer in my high-yield sleeve.

• Constellation Software: My new October entry dipped -10% amid broader software volatility, but I am thrilled to own this serial acquirer (200+ tuck-ins since 2006, 25%+ CAGR). The stock was too expensive, still not very cheap, but the vertical market software moat justifies patience.

• GetBusy: Initiated mid-October at the ask price, ending -3.7% due to wide bid-ask spreads. This microcap workflow software play, with DocuSign-like features and recurring revenue ramp, fits my “discover hidden compounders” thesis. High asymmetric upside over 3 years as U.S. expansion scales and a potentiale sale of SmartVault which could be 2x-4x current market cap.

Portfolio return

Since April 2024, my Compound & Fire portfolio has achieved an 17.7% total return, with a 4.3% increase in 2025. A lower dollar versus euro had an impact on the total return of the portfolio. My strategy remains on high-ROIC businesses with durable moats, aiming to outpace inflation and build lasting wealth.

Portfolio holdings

The Compound & Fire portfolio remains well-diversified across quality compounders. See the full allocation breakdown below for details on current holdings. As we move forward, I’m excited to continue this journey with you all! Below the portfolio as per today.

Thank you for joining me on this journey at Compound & Fire. Let’s keep building wealth the smart way and share your thoughts, join our Discord, and subscribe to my Substack for free.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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September update

The Compound & Fire Portfolio concluded September 2025 with a modest decline of 1.5%, underperforming broader market indices for the month. This downturn was primarily driven by weakness in Euronext, Kinsale Capital, and Rightmove, which collectively weighed on returns. However, ASML delivered an exceptional +30% gain, underscoring the portfolio’s (limited) exposure to high-conviction growth opportunities in semiconductors and AI-related infrastructure.

Since inception, my portfolio’s performance remains strong, as detailed below. Join our Discord app for free for lively discussions, full portfolio transparency, watchlist insights, and stock ideas!

Here is the table with the results per position last month:

Key Holding Updates

I continue to monitor each position for alignment with long-term theses. September’s mixed results prompted a review of underlying factors, including macroeconomic pressures, company-specific news, and sector dynamics. Below, I outline the main differences per company, with bullet-point analysis of notable drops and gains:

• ASML (+31.0%): The standout performer, propelled by analyst upgrades and renewed optimism around AI infrastructure demand. ASML’s strategic positioning in advanced lithography equipment is unique and essential for chipmakers like those powering generative AI.

• Euronext (-9.7%): The company was promoted to the more prestigious and larger CAC 40 blue-chip index. This inclusion, effective as per September 22, enhances visibility, liquidity, and investor appeal, reflecting the company’s growth and market position since its IPO. The ongoing all-share acquisition of the Athens Stock Exchange (ATHEX), announced in late July with an exchange ratio of approximately 20 ATHEX shares for 1 Euronext share (valuing ATHEX at ~€413 million), may have contributed to dilution fears among investors, as issuing new shares could pressure near-term valuation. Euronext has a very strong track record in integrating other stock exchanges, so I am sure this acquisition would give long-term shareholder value.

• Kinsale Capital Group (-7.4%): Shares sank over the month, underperforming the finance sector despite solid Q2 earnings earlier in the year. Kinsale’s disciplined underwriting model continues to support attractive ROEs, but short-term pressures highlight the cyclical nature of insurance.

• Rightmove plc (-6.1%): Experienced downward pressure likely from UK housing market softness and analyst price target adjustments around recent earnings. With a net margin exceeding 50%, Rightmove’s portal dominance persists, but macroeconomic factors like interest rates and property transaction volumes tempered sentiment. I remain very confident on Rightmove and the strong moat they have. In the Discord app there has been a great discussion on a similar company in the Nordic, as Bollestad shared his “Learning to Grow” portfolio. Join the community and find out which stock it is!

Portfolio Transactions: Exiting Uncertainty, Adding Conviction

In September, I executed two key moves to refine the portfolio:

• Sold ZIGExN: Exited the position due to mounting uncertainty around its future business model and the disruptive potential of AI. ZIGExN’s reliance on aggregated and specialized media, alongside system development, faces risks from AI-driven automation in marketing and content aggregation. Recent M&A activity, such as the Alpha Staff acquisition, aims to diversify into resorts, but the pace of AI adoption could erode core competencies without clear adaptation strategies.

• Bought Cogent Communications (CCOI): Added this fiber-optic network provider in September, attracted by its robust business model in high-speed internet and data center connectivity. Cogent’s recurring revenue from enterprise and wholesale clients, potential growth in their wavelength business, combined with assets which are way more worth than the current market cap, made it an interesting company to add to the portfolio. Read more here.

On October 2nd, I initiated a position in Constellation Software (CSU.TO), announced exclusively to Discord community members (join here for real-time updates). I purchased at 2,365 EUR via Tradegate (as I’m with DeGiro), making it approximately 3% of the portfolio. With the recent drawdown, this felt like an opportune entry into one of the great capital allocators, providing indirect exposure to Lumine and Topicus, plus potential future spin-offs.

Constellation’s decentralized acquisition model of vertical market software (VMS) businesses has compounded returns over decades, making it a quintessential quality compounder. Despite a recent leadership transition, with founder Mark Leonard stepping back for health reasons, the new president vows continuity in strategy, emphasizing organic growth and bolt-on M&As.
This addition enhances diversification into software serial acquirers, with an attractive entry valuation near buy zones.

The Discord discussion around this buy was lively, sparking a debate on CSU versus Topicus (TOI.V). Community members like Steven highlighted Topicus’ strengths: historically higher organic growth (around 5% vs. CSU’s 2-3% long-term average), ROIC incentives fostering a balance between M&A and organic expansion, and a longer runway as a smaller entity (potentially sustaining 20%+ growth). They noted CSU’s heavy M&A focus (nearly 100% FCF reinvestment) might prioritize low multiples over post-acquisition quality, making it more dependent on cheap deals. Recent data shows both achieved 5% organic growth in Q2 2025, but Topicus’ emphasis on quality could yield better long-term efficiency.

That said, my preference leaned toward CSU for several reasons:

• Diversified exposure: Owning CSU provides indirect stakes in Topicus and Lumine, capturing upside from multiple high-quality VMS platforms without concentrating in one.

• Valuation edge: At a forward P/E around 25x, CSU offers better value than Topicus’ 35x, despite similar recent organic growth trends.

• Proven capital deployment: CSU’s track record of reinvesting nearly all FCF into M&A has delivered 20%+ CAGR for decades, with broader deal flow providing resilience.

Both are exceptional compounders, and Topicus remains high on my watchlist, potentially for addition if it dips further. For now, CSU feels like the smarter move to me. A more diversified bet, especially at these levels. The ZIGExN proceeds are now fully redeployed.

Reflections on Position Sizing: Letting Winners Run vs. Diversification

Nedap’s dominance at ~16.4% of the portfolio has been rewarding, with actual results surpassing expectations and validating my “let your winners run” philosophy.

As outlined in my prior article on position sizing in quality investing, concentrating in high-conviction names like Nedap, where management execution are evident, can amplify returns in a concentrated strategy. However, as it pulls ahead of the March 2027 timeline (see image below),

I’m contemplating modest redistribution to underweight holdings with superior runways, such as recent additions like Constellation Software. This balances risk: over-reliance on one position amplifies drawdown potential during sector corrections, while spreading to 10-15 quality names maintains upside without diluting focus. No immediate changes, but ongoing monitoring will guide adjustments to optimize for asymmetric returns.

Portfolio return

Since April 2024, my Compound & Fire portfolio has achieved an 18.7% total return, with a 2.0% increase in 2025. A lower dollar versus euro had an impact on the total return of the portfolio. My strategy remains on high-ROIC businesses with durable moats, aiming to outpace inflation and build lasting wealth.

Portfolio holdings

The Compound & Fire portfolio remains well-diversified across quality compounders. See the full allocation breakdown below for details on current holdings. As we move forward, I’m excited to continue this journey with you all! Below the portfolio as per today.

Thank you for joining me on this journey at Compound & Fire. Let’s keep building wealth the smart way and share your thoughts, join our Discord, and subscribe to my Substack for free.

Subscribe now

Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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Hidden Value: Building a Stake in Cogent Communications

As a self-proclaimed quality investor, someone who gravitates toward predictable cash cows with fortress balance sheets and pristine growth trajectories, Cogent Communications Holdings (NASDAQ: CCOI) initially struck me as the antithesis of everything I hold dear. But a US friend insisted me to look at it. Also my Discord quality investing friends and my Substack audience voted clearly Yes to look into this company. And with a reason!

At first glance, it's a textbook value trap: saddled with towering debt levels exceeding $2.3 billion, posting net losses amid a transitional phase, and topped off with the optics of its founder-CEO offloading the shares of his holdings. For purists like me, these are glaring red flags, signals of distress in a sector notorious for value destruction.

Yet, after peeling back the layers, I have bought a stake at $37.80 today. What emerges isn't a flawed relic of the telecom bust, but a coiled spring of underappreciated assets and catalysts poised to propel it toward a rerating. This is a classic deep-value setup, where the market fixates on near-term warts while overlooking the transformative potential beneath. Compounding the appeal is a powerful tax shield: Under the impacts of the H.R. 1 tax bill, Cogent anticipates zero federal income tax liability for at least the next five years (through 2030). This isn't a temporary quirk, it's rooted in carried-forward net operating losses from the Sprint integration and legacy operations, preserving every dollar of EBITDA for reinvestment, debt paydown, dividends, or buybacks. In a high-interest environment, this cash retention acts as a stealthy multiplier for shareholder returns, effectively boosting free cash flow yields by 25–30% versus taxable peers.

The Sprint Deal: A $1 Bargain with a $700 Million Kicker

The pivot point for Cogent's story traces back to its audacious 2024 acquisition of Sprint's wireline assets from T-Mobile, a move that, on paper, looks like financial wizardry dressed in legacy telecom drag. The rationale was straightforward: scoop up a dormant, underutilized infrastructure empire at rock-bottom cost to fuel Cogent's pivot into high-margin optical transport and data center plays, while offloading the baggage of a shrinking enterprise unit.

What did Cogent actually buy? For a nominal $1, it inherited Sprint's crown jewels: 19,000 route miles of intercity fiber (laid along railroad rights-of-way between 1985 and 1992 at a $20.5 billion historical capex), 1,200 miles of metro fiber, and 482 central office buildings totaling 1.9 million square feet with 230 MW of inbound power. This wasn't just pipes and bricks; it was a ready-made backbone for modern bandwidth-hungry applications, mothballed since 2015 after Sprint's voice-era heyday. Bundled in was Sprint's Global Mobile Group (GMG) enterprise business, serving multinational giants with dedicated internet access and MPLS VPNs, but that came with a twist: T-Mobile effectively paid Cogent $700 million over 54 months as a subsidy to assume the troubled unit, which had been losing ground at a 10.6% annual rate prior to the acquisition.

As of Q2 2025, the net present value (NPV) of the remaining T-Mobile subsidy stands at $244 million, with monthly payments locked in through October 2028. This figure comes straight from Cogent's disclosures: It's the discounted value (at Cogent's ~8% cost of capital) of the outstanding ~$333 million in gross payments (averaging ~$8.3 million/month, or ~$25 million/quarter equivalent) over the next 40 months. These aren't fluffy projections, they're ironclad contractual obligations, providing predictable, non-dilutive cash that management treats as a balance sheet receivable for leverage calculations. By 2028, the tail end could contribute another ~$100 million in annual inflows (prorated for the partial year), acting as a reliable buffer during the wavelength ramp.

The Debt Dilemma: Integration Costs, Not Reckless Overreach

If the Sprint assets were a steal, why the debt explosion? Total borrowings ballooned to $2.34 billion by mid-2025, pushing net leverage to a eye-watering ~10x trailing EBITDA.

Critics point fingers at overleveraged folly, but dig deeper: this isn't profligate spending, it's the price of unlocking value from a fire-sale acquisition.

Post-close, Cogent poured capital into reactivation. Over 18 months, it reconfigured the fiber for wavelength delivery (point-to-point optics at 10/100/400 Gbps) and gutted the buildings—ripping out 23,500 bays of obsolete phone switches configured for -48V DC power—to convert them into data centers. This added 125 facilities to its footprint, swelling total square footage to 2 million and AC power capacity to 212 MW (from a pre-deal 55 sites). Capex spiked accordingly: LTM spend hit $219.6 million through Q2 2025, largely on these buildouts and network grooming. CEO Dave Schaeffer has guided that outlays peaked at ~$225 million in 2024 (driven by Sprint integration) but will taper to $150 million annually as the heavy lifting wraps, freeing up ~$75 million in yearly cash flow for deleveraging or returns.

Recent refinancings underscore discipline: A $600 million 6.5% secured note issuance in June 2025 extended maturities out to 2032 (from 2026) and added $100 million in liquidity, while a $174 million IPv4-backed securitization in April trimmed blended rates to 6.6%. Far from a debt spiral, this is tactical refinancing amid asset monetization, setting the stage for meaningful relief, especially with the tax benefits supercharging cash generation and the T-Mobile payments providing steady deleveraging support.

Buried Treasure: Data Centers and IPv4 as Untapped Goldmines

Here's where the value thesis ignites: Cogent's balance sheet, at historical cost under GAAP, masks a treasure trove. Property, plant, and equipment sits at a modest $1.725 billion net book value as of Q2 2025, essentially the low acquisition basis spread over decades of depreciation. But fair market? A different story.

Start with the data centers: Of the 180 facilities, 24 non-core sites (1 million sq ft, 109 MW) are ready for divestiture, with Cogent already receiving multiple letters of intent (LOIs) for these or similar assets, signaling strong buyer interest. Comps suggest $1.1–$1.9 billion in proceeds at $10–$17 million per MW. At a midpoint $1.5 billion sale (implying a ~6.7x book multiple), this alone shaves ~64% off total debt, dropping it to ~$840 million. Interest expense? Currently ~$150 million annually at blended ~6.5% rates; post-sale, it plummets to ~$55 million, a $95 million annual tailwind to the bottom line.

Layer in IPv4 addresses: Cogent holds 38 million (13.2 million leased), carried at $458 million book but worth $760 million–$1.14 billion at $20–$30 apiece amid ongoing scarcity. The leased block alone yields $60 million annualized revenue (up 40% YoY), and further securitizations (like the recent $174 million tranche) could unlock $300–$700 million more without outright sales. These aren't speculative; they're liquid digital real estate, with average lease pricing up 22% YoY to $0.39 per address.

Combined, partial monetization could inject $1.8–$2.6 billion in liquidity, enough to erase net debt entirely and ignite a balance sheet renaissance.

The Growth Inflection: Wavelengths Lead, Legacy Stabilizes

With the Sprint purge nearing completion (unprofitable contracts expiring), revenue troughs behind: Q2 2025 service revenue dipped 0.3% QoQ to $246 million, but sequential declines halved to $0.8 million, signaling mid-Q3 positivity. On-net revenue (high-margin, direct-connect) grew 2.1% QoQ to $132 million, while off-net revenue (partner-dependent) fell 4.8% to $102 million—trending toward stabilization at low-single-digit declines. Non-core legacy (acquired voice relics) shrinks ~$2.7 million quarterly, a drag that's fading.

The accelerator? Wavelength services, a startup within Cogent exploding from $3.6 million in Q2 2024 to $9.1 million last quarter (150% YoY). Targeting a $2 billion TAM, management eyes 25% share by 2028 (~$500 million run-rate) via four unbeatable edges:

1. Endpoint reach into 938 sites

2. 90% unique routes for diversity

3. Aggressive pricing off the $1 Sprint acquisition basis (20% discount to competition)

4. Superior fiber reliability

The 30 day provisioning speed mentioned by Schaeffer as a USP is fast, but not a clear differentiator. Competitors Lumen's 20 days and Zayo's 24 hours (on-demand) show the competition is catching up or leading in speed for select routes. Cogent's edge may lie more in its unique routes and pricing rather than pure velocity.

AI data center interconnects are the turbocharger, with a 4,687-unit funnel and connections up 95% YoY. Overall revenue? 6–8% long-term CAGR to ~$1.5 billion by 2028.

Margins follow: Adjusted EBITDA hit 29.8% in Q2 (up 200 bps QoQ to $73.5 million), with guidance for another ~200 bps annual expansion, potentially for a decade (!), as on-net product mix rises and wavelengths (near-90% gross margins) scale. The tax shield amplifies this: Zero federal taxes mean full EBITDA flow-through to cash, turbocharging FCF without Uncle Sam's cut.

The CEO Sell-Off: Distress, Not Desertion

No discussion is complete without addressing Schaeffer's share dumps, over 2.66 million liquidated in August 2025 alone, slashing his stake from 9% to 1.4% year-to-date.

At surface level, it's alarming: a founder cashing out amid volatility screams misalignment. Reality? A brutal margin call cascade. JPMorgan and RBC seized $82 million in pledged shares after Cogent's stock plunged post-earnings, triggered by Schaeffer's broader woes: a $1.1 billion D.C.-area commercial real estate portfolio (42 buildings) that's shed $600 million in value since 2022 amid COVID vacancies (now 35%) and sluggish sales. Loans backed by Cogent stock backfired as shares dipped below thresholds; sales were "under duress, most... completely involuntary," per Schaeffer, who draws no salary and relies on dividends/stock awards. He's negotiating lender extensions, but this personal storm, completely unrelated to Cogent ops, clouded perception without tainting fundamentals. Audit reviews found no material company risk. Schaeffer was diversifying his money and betting on two horses: Cogent and the commercial real estate business. As you can see, diversifying isn’t always good. His commercial real estate business is now hurting his Cogent ownership significantly. Must be very difficult for a founder to see this happening.

A 2028 Snapshot: From Losses to $400 Million+ Free Cash Flow

To quantify the arc, consider this adjusted 2028 bridge (conservative, excluding full asset sales). It starts with management's multiyear targets: $1.5 billion revenue (6% CAGR from $984 million run-rate), driven by $500 million wavelengths (+140% CAGR), 5% core on-net/off-net growth, and non-core normalization. EBITDA hits $500 million (33% margin, +400 bps from today via 200 bps annual gains).

Subtract interest at $55 million (post-$1.5 billion divestiture deleveraging to $840 million debt at 6.5%), capex at $150 million, and taxes at negligible. Add the ~$100 million T-Mobile residual (full-year equivalent from the $244 million Q2 NPV tail, prorated for 2028's partial overlap with the 40-month stream at ~$8.3 million/month). Operating cash flow approximates $445 million (EBITDA - interest - taxes, plus non-cash addbacks). After capex, FCF lands at ~$278 million.

For net income, layer in estimated D&A of ~$180 million (based on current $182 million quarterly run-rate, adjusted for post-sale asset base and growth capex). This yields NI ≈ ($500M EBITDA - $180M D&A - $55M interest) × (1 - 0% tax) + $100M T-Mobile/other = $300–$350 million range (midpoint $325 million, allowing for WC changes and IPv4 ramps). With ~49 million shares outstanding (current fully diluted basis, net of modest buybacks), that's $6–$7 per share, a swing from today's losses. But the 100M T-Mobile is gone after 2028.

So it’s good to run a DCF model and insert all expected cash flows for the next ten years given the expected revenue growth and increased margin because of improving product mix and especially the wavelength business to kick in. With a 10% desired return and an FCF for year 1 of just 10 the undervaluation is 15.2%. I have considered the divestment of 24 data centers and hence net debt to improve by 1.5B. As Cogent already received LOI’s I expect this to happen within the next months and this could be a catalysator for the stock price. Also after 2030 I considered Cogent will have to pay 21% tax, so that is why FCF is dropping in year 7.

Un undervaluation of 15.2% might doesn’t sound wild, but the real value is in their assets which have way more value than their current market cap and which gives a floor towards the stock price in my opinion.

Is the dividend high? Yes, it is close to 200M a year at the moment, so 2025 and 2026 they are paying more than the cash inflow, but from year 3 onwards it’s covered. Cogent doesn’t need more capex to grow, investments have been made.

So expect a 10% yearly return, paid in dividends, an upside of 15% to get back to intrinsic value and a free call option for the hidden value of their assets.

I think this case looks quite solid, but given the high debt it’s important that the divestment of these data centers will happen and the revenue of the wavelength business to grow towards 500M in 2028. Because of the cost advantage and the high reliability management of Cogent states this 500M as conservative.
Another “risk” is that Cogent is seen as an acquisition target. Just a high-over calculation of the assets minus the debt: ~1.5B for 24 data centers + remaining 156 core data centers ~8.3B plus the IPv4 adresses ~0.9B (38M * $25) = $10.7B minus net debt $2.4B is $8.3B. At a market cap of $1.9B this could easily get the attention of companies like:

• Digital Realty Trust, which is the largest global data center operator with 300+ facilities. They're expanding edge/colocation for AI interconnects, and Cogent's urban, fiber-dense sites fit their hybrid strategy.

• Equinix, which focuses on interconnected ecosystems (1,000+ DCs). Cogent's edge sites with built-in fiber (19K+ route miles) could enhance their xScale platform for hyperscalers.

• Blackstone Inc. (via QTS Realty Trust): PE giant with $108B+ in 2025 data center deals; QTS is their vehicle for hyperscale/edge builds. They'd value Cogent's power-ready sites (212MW) amid scarcity, plus IPv4 for cloud ops. Blackstone acquired AirTrunk for $13B in 2024; $3.8B for Cogent (double today’s price) would be a bargain at ~$18M/MW vs. $30M+ comps.

• Other companies like Microsoft, Amazon, KKR (via CyrusOne), Lumen Technologies, Zayo Group or Iron Mountain.

I have to say that Cogent's DCs are small/low-density (not hyperscale-grade), and a deal would include non-DC assets like wavelengths and an enterprise in decline. CEO Schaeffer draws no salary, he relies on dividends, and has no sale signals. His focus is on wavelengths and growing this market, so can imagine he isn’t very interested in an acquisition, but with his ownership reduced his influence in the company reduced.

As a shareholder I am going to track the development of Cogent Communications closely! Although it’s a value play instead of a quality play, I think the odds of winning outweigh the odds of losing with a very interesting risk-reward profile.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any mistakes or investment decision made by you. You are responsible for your own investment research and investment decisions.

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July & August update

My Compound & Fire portfolio dipped 4.6% over the past two months. The old adage, “Sell in May and go away, but remember … be back in September” might have spared me some losses. However, as a long-term compounder, I steer clear of market maxims and short-term trading, focusing instead on the enduring strength of my chosen companies.

The recent decline stemmed from mixed half-year earnings reactions, with sharp drops in Judges Scientific (-26.3%), The Trade Desk (-23.4%), and Watches of Switzerland Group (-21.0%). On the brighter side, standout performers included Nedap (+25.2%), M&A Research Institute (+10.7%), ZIGExN (+9.5%), and my July addition, LVMH (+6.1%).

Since inception, my portfolio’s performance remains strong, as detailed below. Join our Discord app for free for lively discussions, full portfolio transparency, watchlist insights, and stock ideas!

Here is the table with the results per position for the last two months:

Risers and Fallers

Here’s a breakdown of last months key movers, with insights into what drove their performance:

• Nedap (+25.2%): Nedap surged after robust earnings and a promising outlook. First-half revenue climbed 9% year-over-year to €134.9M, with key markets up 17%. Recurring revenue rose 11%, now 40% of total revenue, while operating profit soared 31% to €13.8M, boosting the operating margin to 10.3%. After heavy investments in personnel and systems, this margin expansion is exactly what I’d hoped for! A sign of Nedap’s growing efficiency.

• M&A Research Institute (+10.7%): Q3 earnings reaffirmed the full-year forecast, but operating profit progress at 56.6% raises doubts about meeting targets. I anticipate a productivity rebound next year. Join my free Discord for a detailed breakdown of this year’s challenges and the optimistic outlook.

• ZIGExN (+9.5%): This serial acquirer announced its subsidiary, REJOB Co., will acquire AnyCareer Inc. for ¥2,924 million, becoming a wholly owned subsidiary by September 1, 2025, strengthening its strategic footprint.

• LVMH (+6.1%): My new position is off to a solid start. Despite negative chatter, I’m bullish on LVMH after my in-depth analysis (read it here). The Arnault family’s ongoing share purchases signal confidence, and I’m betting on their long-term vision.

• Judges Scientific (-26.3%): Half-year results suffered from U.S. federal research funding cuts, though a Geotek contract (absent last year) cushioned the blow, driving 7% organic revenue growth. U.S. sales, however, fell 20%. Last year’s China and Geotek dynamics shifted to U.S. headwinds this time. Guidance for adjusted EPS was cut to 285p–330p. While disappointing, I see this as a potential buying opportunity given Judges’ compelling long-term story.

• The Trade Desk (-23.4%): Despite beating revenue and EBITDA expectations, TTD’s stock tanked due to slowing revenue growth, a CFO departure, macroeconomic pressures, and lofty valuations. My entry at $43.50 earlier this year provided a solid margin of safety. I remain optimistic about TTD’s long-term potential, despite its volatility. Join my Discord for a deeper dive into these factors.

• Watches of Switzerland Group (-21.0%): Post-earnings, WOSG guided 6–10% constant-currency revenue growth for FY26 but flagged flat to 100 basis points lower adjusted EBIT margins due to U.S. tariffs. A 39% tariff on Swiss exports added pressure. I’m monitoring whether these tariffs stick, but they’re clearly weighing on results.

• Dino Polska (-14.0%): Dino’s 4.8% like-for-like (LFL) growth slightly trailed Poland’s H1 food inflation (~5.7% average, 4.9% in July), yet remains solid in a cooling market. Compared to rival Biedronka’s 0.9% H1 LFL, Dino’s fresh/proximity format shines in underserved areas, reinforcing its moat. My Discord community has unpacked these earnings in detail.

• Computer Modelling Group (-13.8%): CMG’s earnings disappointed, with a customer loss to competitor Schlumberger raising red flags. A Discord member noted this client hired 10+ developers to transition models. While I admire CMG’s 4.0 strategy and M&A focus, organic growth is critical. As a long-term investor, I’m giving CMG time to navigate their transition.

Portfolio return

Since April 2024, my Compound & Fire portfolio has achieved a 20.6% total return. My strategy centers on high-ROIC businesses with durable moats, aiming to outpace inflation and build lasting wealth.

Portfolio holdings

The Compound & Fire portfolio remains well-diversified across quality compounders. See the full allocation breakdown below for details on current holdings. As we move forward, I’m excited to continue this journey with you all!

Thank you for joining me on this journey at Compound & Fire. Let’s keep building wealth the smart way and share your thoughts, join our Discord, and subscribe to my Substack for free.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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June update

The Compound & Fire portfolio gained 1.8% in June 2025, trailing the S&P 500’s 5.0% rise but outperforming its 1.0% euro-adjusted return due to a declining dollar. The Nasdaq surged 6.6% (2.6% in euros), outpacing my lower-risk portfolio (beta 0.8), which prioritizes stability over high volatility. Standouts included Nedap (+13.7%) and Judges Scientific (+8.8%), while M&A Research Institute (-16.4%), The Trade Desk (-7.9%), and Watches of Switzerland Group (-6.0%) weighed on returns.

Since inception, my portfolio’s performance remains robust, as detailed below. Join our Discord app for detailed graphs on expected vs. actual returns for each position!

Here is the table with the results per position:

Risers and Fallers

Here’s a breakdown of June’s key movers, with insights into what drove their performance:

• Nedap (+13.7%): Nedap soared after launching an AI-powered lameness detection feature for its Livestock platform. Its Security unit gained traction with Inditex’s rollout of new technology across Zara, Bershka, and Pull&Bear, enhancing customer experience. The Healthcare unit’s MediKIT added recurring revenue from small clients, boosting my confidence in this compounder.

• Judges Scientific (+8.8%): No specific news, but a high-volume purchase, as shared by Discord member JBL, drove the uptick. This resilience underscores Judges’ quality.

  

• Rightmove (+4.6%): Rightmove’s steady gains, despite no major news, reflect its strong moat and ongoing share buyback program, reducing shares by 533.4 million since 2007. With 774.8 million shares outstanding, this supports long-term value creation.

• M&A Research Institute (-16.4%): Last month’s winner fell sharply without clear news. Its 1% allocation minimizes portfolio impact, but I’m monitoring for recovery signals.

• The Trade Desk (-7.9%): A Wells Fargo downgrade to Equal Weight, citing Amazon’s competitive push in connected TV advertising, drove the decline. I remain optimistic about its long-term AI-driven growth.

• Watches of Switzerland Group (-6.1%): A 9.5% drop in Swiss watch exports, U.S. tariffs, and luxury market fatigue, as forecasted by Bain & Company, pressured performance. I’m evaluating opportunities in this dip, also considering other luxury companies like LVMH (my next deep dive analysis).

Portfolio return

Since inception, the Compound & Fire portfolio has delivered a 26.4% total return, reaching an all-time high of 126.41 in June 2025. My focus on high-ROIC businesses with durable moats continues to drive steady compounding, outpacing inflation and aligning with my goal of long-term wealth creation. Join our Discord for detailed return graphs!

Portfolio holdings

The Compound & Fire portfolio remains well-diversified across quality compounders. See the full allocation breakdown below for details on current holdings. As we move forward, I’m excited to continue this journey with you all!

Thank you for joining me on this journey at Compound & Fire. Let’s keep building wealth the smart way and share your thoughts, join our Discord, and subscribe to my Substack for free.

Subscribe now

Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

This community is free, but if you’re enjoying the deep dives and want to fuel more, you can treat me to a coffee on Buy Me a Coffee. Every bit helps keep the fire burning, and I’m truly grateful for your support!

Come join the conversation on our Global Quality Investing Discord App here and hop on board my Substack for free if you haven’t yet—let’s grow this journey together!

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May update

The Compound & Fire portfolio gained 4.4% in May 2025, a solid result that trailed the broader market’s exuberance. The S&P 500 rose 6.2%, the Nasdaq soared 9.6%, and the Dow added 3.9%, fueled by optimism over paused U.S.-EU tariff hikes and rebounding consumer confidence. Tech-heavy indices like the Nasdaq benefited from AI-driven rallies, while my lower-beta portfolio (0.8) captured upside with less volatility, aligning with my long-term view.

Standout performers included Judges Scientific (+35%), rebounding sharply, and The Trade Desk (+34%), exceeding expectations after April’s dip. Watches of Switzerland (+22%), ASML (+12%), and M&A Research (+12%) also contributed, recovering from recent pressures. On the downside, Computer Modelling Group (-16%) faced earnings headwinds, and Kelly Partners Group (-8.8%) declined without any news. Euronext dipped slightly (-0.6%) post-dividend.

Despite trailing the Nasdaq’s tech-fueled surge, I’m thrilled with my 4.4% gain. My focus on quality compounders—businesses with strong moats, high margins, and disciplined capital allocation—keeps me on track for sustainable wealth creation. Since inception, my portfolio’s performance remains robust, as detailed below. Join our Discord app for detailed graphs on expected vs. actual returns for each position!

Here is the table with the results per position:

Risers and Fallers

Here’s a breakdown of May’s key movers, with insights into what drove their performance:

• Judges Scientific (+35%): My top performer, rebounding impressively. Increasing my position at £61 lowered my average cost to £72.21, and May’s close at £80.90 delivered a strong gain. Judges’ niche in precision instruments and disciplined M&A continues to shine, justifying my conviction.

• The Trade Desk (+34%): After initiating a position in April’s dip, The Trade Desk roared back, far exceeding my expectations. Its leadership in programmatic advertising, bolstered by AI-driven ad tech, fueled this surge. I am well ahead of my target return, but its growth runway keeps me holding.

• Watches of Switzerland (+22%): The luxury watch retailer recovered strongly, though it remains undervalued. Positive market sentiment, driven by stabilizing luxury demand and potential U.S. tariff relief, likely boosted the stock. Its global footprint and exclusive brand partnerships (e.g., Rolex) reinforce my long-term thesis.

• ASML (+12%): The Dutch lithography giant rebounded after tariff-related volatility. ASML’s Q1 2025 strength (€7.7 billion sales, 54% gross margin) and optimism for 2025–2026 growth, despite U.S.-China trade concerns, supported its rise. Its High-NA machines, critical for 2nm chips, keep it indispensable.

• M&A Research (+12%): Recovering alongside broader tech, M&A Research benefited from renewed investor confidence post-tariff pause. While specific news is scarce, its niche in M&A analytics likely rode the wave of dealmaking optimism. I remain confident in its specialized data moat.

• Euronext (-0.6%): A slight dip after going ex-dividend (€2.83/share). Its wide-moat exchange business remains steady, with M&A and ESG data growth as tailwinds. No concerns here.

• Kelly Partners Group (-8.8%): Down due to CEO Brett Kelly’s planned stake reduction to 35% for better free float, as previously announced. No operational red flags; KPG’s 18% annualized return target remains intact. My 37% gain since May 2024 tracks closely to my 39% forecast by May 2026. Patience is warranted.

• Computer Modelling Group (-16%): Disappointing earnings dragged CMG, with organic revenue down 13% due to falling oil prices and reduced Carbon Capture and Storage (CCS) activity. Management projects a $6–$7 million professional services revenue drop in 2026, tied to CoFlow wind-down and Bluware’s non-core cuts. Despite this cyclical hiccup, CMG’s strategic pivot and energy-sector exposure keep me holding for a 2027 recovery.

Portfolio return

Since inception, the Compound & Fire portfolio has delivered strong returns, compounding steadily with a focus on quality over speculation. May’s 4.4% gain, while shy of the S&P 500 (+6.2%) and Nasdaq (+9.6%), aligns with my 0.8 beta, offering attractive risk-adjusted performance. The Dow’s 3.9% gain was closer to my pace, reflecting my diversified, less tech-heavy approach.

My long-term view prioritizes businesses with durable moats and high ROIC, minimizing downside risk while capturing upside. The portfolio’s total return since tracking began is robust, outpacing inflation and aligning with my goal of consistent wealth creation. Detailed return graphs are available in our Discord app, showing actual vs. expected performance for each position. May’s results reinforce our conviction: quality compounders thrive over time, even in choppy markets. Total return since inception at 24.2%.

Portfolio holdings

Below is the Compound & Fire portfolio overview for May 2025, with current allocations:

As always, thank you for following Compound & Fire. Feel free to like, share, and join my community to dive deeper into quality investing. Here’s to building wealth the smart way!

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P.S. Enjoying these posts? Buy me a coffee at buymeacoffee.com/arnoldweenink—keeps this free for all!

Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

This community is free, but if you’re enjoying the deep dives and want to fuel more, you can treat me to a coffee on Buy Me a Coffee. Every bit helps keep the fire burning, and I’m truly grateful for your support!

Come join the conversation on our Global Quality Investing Discord App here and hop on board my Substack for free if you haven’t yet—let’s grow this journey together!

Subscribe now

This article dives into TTD’s Q1 performance, emphasizing the transformative upgrades—particularly the Kokai platform and the Sincera acquisition—that are unlocking the next wave of growth. We’ll explore three key focus areas from the earnings call: the macro environment fueling TTD’s market share gains, the open internet’s competitive edge over walled gardens, and the strategic upgrades positioning TTD for long-term dominance. Insights from the Q&A, including CEO Jeff Green’s perspective on Google’s antitrust challenges and Amazon’s role, will be woven throughout to highlight TTD’s strategic clarity.

Financial Strength Sets the Stage

TTD’s Q1 financials reflect robust growth and operational efficiency. Revenue of $616 million marked a 25% increase from Q1 2024, driven by strong adoption of its upgraded platform and expanding market share in programmatic advertising. Adjusted EPS of $0.33 exceeded expectations, reflecting disciplined cost management and high-margin revenue streams. The company’s adjusted EBITDA margin improved, reaching $208 million, a testament to its scalable business model. Schenkein emphasized TTD’s capital allocation strategy, with $386 million returned to shareholders via buybacks, signaling confidence in long-term value creation. For Q2, TTD’s guidance of at least $682 million in revenue and $259 million in adjusted EBITDA suggests sustained momentum, despite increasing economic uncertainty.

Macro Environment: Grabbing Land in a Programmatic Surge

The macro environment is a tailwind for TTD, as headwinds in traditional advertising accelerate the shift to programmatic channels. Green noted that economic uncertainty and secular trends, such as the rise of streaming, are pushing advertisers toward data-driven, agile solutions.

TTD is capitalizing on this “land grab,” gaining market share as advertisers prioritize programmatic platforms that offer precision and efficiency. The company’s ability to outperform in an “unfair market”—marked by walled gardens like Google and Amazon—positions it to thrive as markets become fairer, particularly following recent antitrust verdicts against Google.

These rulings, which found Google guilty of monopolistic practices, may force it to divest parts of its ad tech stack or refocus on core businesses like Search and YouTube, reducing its influence in the open internet. Green sees this as a “major victory” for TTD, enabling it to accelerate growth by offering objective, transparent solutions aligned with advertisers’ interests.

For deeper context on TTD’s market positioning, see this March 2025 deep dive, which highlights its moat in programmatic advertising.

The Open Internet: A Competitive Edge Over Walled Gardens

TTD’s commitment to the open internet sets it apart from walled gardens like Google, Amazon, and Meta, which prioritize their own ecosystems over advertiser objectivity. Green emphasized that walled gardens lack transparency and alignment with buyers’ interests, a flaw increasingly evident as advertisers demand fairer markets.

Four massive shifts are reshaping the landscape: the rise of streaming, regulatory scrutiny on big tech, the move to programmatic buying, and growing demand for supply chain efficiency. These trends play to TTD’s strengths, as its DSP enables advertisers to access diverse inventory across the open internet—spanning CTV, display, and audio—without the conflicts of interest inherent in walled gardens.

TTD’s competitive advantage lies in its objectivity and transparency. Unlike Google’s DV360, which primarily serves YouTube, or Amazon’s DSP, which pushes Prime Video ads, TTD focuses solely on maximizing advertiser outcomes. Green dismissed Amazon as a direct competitor, noting its core focus on retail and AWS limits its commitment to the open internet. He argued that content owners (e.g., sports or music platforms) are unlikely to partner with Amazon, which competes for ad dollars via Prime Video.

In contrast, TTD’s OpenPath initiative enhances supply chain efficiency by connecting advertisers directly to premium publishers like Reuters and The Washington Post, boosting win rates and reducing middleman costs. As Green put it, “The more efficient the supply chain, the more the open market will win.” In a fairer market post-antitrust rulings, TTD’s objective approach positions it to capture the “lion’s share” of DSP market share.

Strategic Upgrades: Kokai, Sincera, and Open Sincera

TTD’s platform upgrades, including the rapid adoption of its AI-powered Kokai platform and the acquisition of Sincera, are driving exceptional performance and unlocking new growth opportunities. Kokai, now used by two-thirds of TTD’s clients—ahead of schedule—leverages AI to optimize campaigns, delivering lower-funnel KPIs like a 24% reduction in cost per conversion and a 20% lower cost per acquisition. Green described Kokai as a “bigger step forward than ever,” noting that clients are still realizing its full potential. These upgrades contributed significantly to Q1’s outperformance, with campaign results described as “exceptional” for both existing and new clients.

The acquisition of Sincera, a supply-side data provider, enhances TTD’s ability to improve supply chain visibility and efficiency. By integrating Sincera’s data, TTD can better steer advertisers toward high-quality inventory, reducing waste and strengthening partnerships with publishers. The launch of Open Sincera, an open-source initiative, further amplifies this value by making supply-side data accessible to the broader ecosystem, fostering transparency and trust. Green emphasized that these upgrades are critical to competing with walled gardens, which historically dominated through supply chain control. OpenPath’s “phenomenal” results, with improved win rates for publishers, underscore TTD’s progress in building a more efficient open internet. With “a few major pieces” left to complete Kokai’s evolution, Green expressed unprecedented excitement about TTD’s trajectory.

Q&A Insights: Strategic Clarity and Market Confidence

The Q&A session reinforced TTD’s strategic vision. Green highlighted the company’s role as a “source of vision” for clients, particularly large brands facing economic challenges. By acting as a strategic consultant with aligned interests, TTD has built trust over years, positioning it to guide advertisers through a complex landscape. On Amazon, Green reiterated that its DSP is a secondary priority to retail and AWS, limiting its threat. He noted that Prime Video’s inventory could open to external demand, benefiting platforms like TTD. Regarding Google’s DV360, Green argued it’s primarily a tool for YouTube monetization, not a true open internet competitor, especially as antitrust pressures mount. Finally, Green’s optimism about OpenPath and Kokai upgrades underscored TTD’s ability to “put products in a market to compete,” with the market moving in its favor.

Conclusion: Positioned for the Lion’s Share

The Trade Desk’s Q1 2025 earnings reflect a company firing on all cylinders, with 25% revenue growth, market share gains, and transformative upgrades unlocking new opportunities. The macro environment favors programmatic advertising, and TTD is capitalizing on secular tailwinds like streaming and regulatory shifts. Its commitment to the open internet, bolstered by initiatives like OpenPath and Open Sincera, gives it a clear edge over walled gardens. The rapid adoption of Kokai and the strategic acquisition of Sincera signal that TTD is not just keeping pace but setting the pace for the industry. As Green stated, “I could not be more excited about Q1 and about our future and that of the open internet.” With a fairer market on the horizon, TTD is poised to claim the lion’s share of the DSP market, delivering value for advertisers and shareholders alike.

For a deeper exploration of TTD’s competitive moat, check out this March 2025 analysis. Hopefully yoy have enjoyed this earnings update of TTD. Feel free to share it with friends or discuss it in our Discord community.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

This community is free, but if you’re enjoying the deep dives and want to fuel more, you can treat me to a coffee on Buy Me a Coffee. Every bit helps keep the fire burning, and I’m truly grateful for your support!

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April update

As a long-term investor, I focus on the big picture, but sharing monthly updates offers a glimpse into the short-term trends that can hint at our long-term trajectory. For April 2025, the Compound & Fire Portfolio delivered a solid return of +1.9%, a result I’m pleased with given the market’s volatility. This performance was boosted by strategic additions of ASML, The Trade Desk, and M&A Research Institute during the turbulent session on April 7th, where I managed to buy near intraday lows—a bit of luck that paid off. The top performers for the month were the new additions ASML (+13.5%), The Trade Desk (+25.0%), and M&A Research Institute (+33.5%), which significantly contributed to the overall gain.

April 2025 was a volatile month for global markets, and the American indices showed mixed results. The Dow Jones Industrial Average and S&P 500 closed the month with losses, down -3.2% and -0.8%, respectively, marking their third consecutive month of declines. Meanwhile, the Nasdaq Composite managed a modest gain of +0.9%, breaking its two-month losing streak.

The Compound & Fire Portfolio’s +1.9% return outperformed all three major U.S. indices, surpassing the Dow by 5.1 percentage points, the S&P 500 by 2.7 percentage points, and the Nasdaq by 1.0 percentage point. This outperformance highlights the portfolio’s resilience and the value of a diversified, global approach during choppy market conditions. While monthly results are just one piece of the puzzle, this positive trend reinforces my confidence in the long-term growth potential of the Compound & Fire Portfolio as we continue to navigate the path to financial independence.

Here is the table with the results per position:

Risers and Fallers: A Month of Contrasts

• Nedap: Nedap announced a significant partnership with HEMA, rolling out its iD Cloud RFID platform across all 740+ HEMA stores in the Netherlands, Belgium, France, Luxembourg, Germany, and Austria by mid-2026, enhancing inventory management and customer experience. Additionally, Nedap rewarded shareholders with a dividend of €3.20 per share, reflecting its strong financial position and commitment to delivering value.

• Kelly Partners Group: KPG experienced a challenging March 2025, with a steep 20% drop, but April brought a partial recovery of +8.2%, despite no significant news driving the movement. Looking ahead, KPG is set to present at the Berkshire event in Omaha this weekend, and I’m excited that Brett Kelly has confirmed they’ll record the session and share it on their website for broader access.

• Kinsale Capital Group: Kinsale saw a 10.6% drop in April 2025, driven by its Q1 earnings results, which reflected challenges in the specialty insurance market. For a deeper dive into the earnings and my perspective on KNSL’s performance, check out my detailed analysis in the earlier published article on Compound & Fire: Kinsale Capital Group Q1 2025 Earnings.

• Dino Polska: Dino Polska (DNP) delivered an impressive 14.6% gain in April 2025, further validating its strong growth potential. Earlier this month, I updated the valuation models—shared on our free-to-join Discord app—showing a 54% undervaluation for a 10% annual return, even before this latest surge; join us to explore the details: Discord Link.

• Rightmove: Posted a solid 5.9% gain in April, continuing its upward momentum, with its ongoing share buyback program contributing to shareholder value as part of a strategy initiated in 2007. Additionally, Rightmove reported positive market trends, with a 19% rise in demand for office leases year-over-year per their latest Quarterly Commercial Insights Tracker, alongside asking prices increasing in March despite looming stamp duty hikes, signaling resilience in the UK property market.

• Euronext: Continued its impressive run, gaining another 10% in April, fueled by its strong moat and robust March volumes: cash market transactions soared (+41.01% YOY), derivatives grew moderately (+8.50% YOY) with a spike in index derivatives (+28.32% MOM), FX trading rose (+22.03% YOY), and clearing activity in derivatives skyrocketed (+571.07% YOY). The stock is on fire, showcasing the power of Euronext’s market position.

• ZIGExN: The company announced a non-operating income of ¥1,755 million in dividends from subsidiaries like RFJOB and Apple World for Q1 FY2026, expected to be booked around May 2025. This dividend income, which will not impact consolidated financials, underscores ZIGExN’s strong subsidiary performance and supports its stable financial outlook.

• Watches of Switzerland: Down another 16%, likely driven by a combination of new U.S. tariffs and broader struggles in the luxury market. The U.S. imposed a 31% tariff on Swiss imports starting April 9th, impacting the cost of luxury watches—a core offering for WOSG, which operates showrooms featuring brands like Rolex and Omega—potentially dampening U.S. demand, a key market for Swiss watches. Additionally, the luxury sector faced headwinds from global trade tensions and economic uncertainty, with European luxury stocks broadly affected by Trump’s “Liberation Day” tariffs, as seen with peers like Richemont and Swatch Group, which also saw declines earlier in the month. On a positive note, Norges Bank recently acquired a 3.139% stake in WOSG, signaling confidence in its future growth.

• Judges Scientific: Down a significant 25%, despite no specific company news, likely due to broader market concerns and the announced retirement of COO Mark Lavell in 2026, which may have sparked a bit uncertainty about leadership transitions. I took advantage of this dip, adding 25% to my position at £61 using dollar-cost averaging, as I believe Judges remains one of the most compelling opportunities at its current valuation. Judges mean organic growth (around 6%) is high compared to other serial acquirers, though with higher variance (standard deviation near 8%), making it an attractive buy when growth slows and valuations compress, as seen now.

• ASML: I added ASML to the Compound & Fire Portfolio in April, and I’m finalizing a deep dive on the company to share soon—stay tuned for more insights! ASML paid a modest dividend in April, while continuing its aggressive share buyback program, repurchasing €3.4 billion worth of shares so far this year, contributing to its strong 13.46% gain versus my purchase price this month.

• The Trade Desk: Delivered an impressive 25% return in April since my purchase, which was guided by my deep dive analysis identifying $43.50 as an attractive entry point—check out the full insights here: The Trade Desk: A Moat Master.

• M&A Research Institute: Soared with a 33.52% return since my purchase earlier in April 2025, driven by what I saw as a deeply undervalued stock; however, their H1 FY25 results, released after market yesterday, were disappointing to me, though management’s bold 12% market cap share buyback signals strong confidence in the stock’s undervaluation—read more in my latest article: M&A Research Institute H1 FY25. Stock today is up another 6.4%.

Portfolio return

The total return since I start sharing my portfolio as per May 2024:

The Compound & Fire portfolio has been steadily building value, true to its quality-first, long-term roots—starting at 100 in May 2024, it’s grown to 118.96 by April end, a solid 18.96% rise. I’m not chasing flashy short-term wins here; that’s a recipe for bigger risks. Instead, I play the long game—holding steady, avoiding knee-jerk switches, and keeping my eyes on the horizon.

Portfolio holdings

Here is an overview of the current portfolio holdings:

Hopefully you have enjoyed this update of my portfolio. Feel free to like the post and share it with friends!

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

This community is free, but if you’re enjoying the deep dives and want to fuel more, you can treat me to a coffee on Buy Me a Coffee. Every bit helps keep the fire burning, and I’m truly grateful for your support!

Come join the conversation on our Global Quality Investing Discord App here and hop on board my Substack for free if you haven’t yet—let’s grow this journey together!

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M&A Research Institute ($9552.T) recently released its financial results for the six months ended March 31, 2025, revealing a mixed performance. As Japan’s leading SME M&A intermediary, MARI is navigating a challenging landscape with declining M&A deal closures, a little offset by robust consulting growth. Here’s a breakdown of the key figures, outlook, and what it means for quality-focused investors.

H1 FY25 Results: Consulting Shines, M&A Struggles

MARI reported net sales of ¥7,658M, down 10.2% year-over-year (YoY) from ¥8,526M, reflecting a tough environment for M&A deals. Operating profit fell sharply to ¥2,480M (-49.8% YoY), driven by fewer deal closures (114 vs. 123 in H1 FY24) due to increased competition. Net profit followed suit at ¥1,568M (-50.6% YoY), with an EPS of ¥26.81 (-50.6% YoY). The operating margin compressed to 32.4%, a steep decline from 57.9% last year, as costs rose significantly—SG&A expenses jumped 41.1% to ¥2,289M, fueled by advisor growth (329 advisors, +36.0% YoY).

On the bright side, MARI’s consulting (incubation) segment soared, with revenue up 1,211.0% YoY to ¥563M, though it remains loss-making (¥-166M operating loss). This diversification highlights MARI’s strategic pivot to offset M&A cyclicality, but cost pressures from rapid headcount expansion continue to weigh on profitability.

Full-Year 2025 Outlook: Cautious Optimism

MARI revised its full-year forecast downward, reflecting M&A challenges. Net sales are now expected at ¥17,950M (down 22.6% from the initial ¥23,200M), with operating profit at ¥5,732M (-44.9%) and net profit at ¥3,960M (-40.9%). EPS is projected at ¥67.65, a significant drop from the initial ¥115.19. The company anticipates closing 275 M&A deals (down from 367), implying 161 deals in H2—a tall order given the competitive landscape. Consulting revenue is a bright spot, raised to ¥1,450M (+20.8% from initial), though losses are expected to persist (¥-668M).

The steep revision and H2 dependence introduce execution risk, but MARI’s growing pipeline and consulting momentum provide some optimism. The decline in results is much higher than I had anticipated and I will have to adjust my valuation models.

Capital Allocation: Buybacks and Dividends

MARI announced a significant ¥7.5 billion share buyback program, targeting up to 7,500,000 shares (more than 12% of issued shares!) from May 1, 2025, to September 30, 2025. This aggressive move signals strong confidence in undervaluation and could boost EPS by ~14.6%, assuming no share price change—a meaningful tailwind for shareholders. The dividend policy has changed after the announcement of the buybacks and the payout ratio will go to 10% with the aim of maintaining a stable and consistent dividend.

Valuation model

Based on the reduced earnings and steep decline in expected net income and free cash flow I have adjusted the Reverse DCF model, also considering the high buybacks which will result in a lower share count and a lower cash position. At current share price the market is expecting a 10% annual growth based on the depressed cash flow levels for 2025.

Quality Assessment: Growth Potential with Risks

For Quality Investors, MARI presents a mixed picture:

• Strengths: Consulting growth (+1,211.0% YoY) showcases diversification, while a ¥7.5 billion buyback and consistent dividends reflect capital discipline. Financial strength is robust, with total assets at ¥12,930M and an 82.0% equity-to-asset ratio.

• Weaknesses: Margin compression (32.4% vs. 57.9%), M&A volatility (114 deals vs. 123), and cost pressures (advisors +36.0% YoY) highlight operational challenges. The severe forecast revision (-44.9%) adds uncertainty.

MARI offers growth potential if you are comfortable with cyclicality, but stability-focused quality investors may find the volatility and risks less appealing.

Investment Takeaway

MARI’s consulting growth, aggressive share buyback, and capital allocation make it an intriguing option for growth-oriented quality investors. Margin pressure and M&A cyclicality warrant caution and results are much worse than I expected. The bold share buyback program is a relief. Investors should monitor H2 deal execution and margin trends closely. For now, growth investors may see value long-term, while stability seekers might wait for clearer signs of recovery. Because of the high Investment Readiness Score, the low valuation and the growth perspective I had initiated a 1% position earlier this month. Given the high volatility in the earnings I am not planning to increase this position.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

This community is free, but if you’re enjoying the deep dives and want to support more content, you can treat me to a coffee on Buy Me a Coffee. Every bit helps keep the fire burning, and I’m truly grateful for your support! Let’s grow this journey together—join the conversation on our Global Quality Investing Discord App and subscribe to my Substack for free if you haven’t yet!

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Dear Members,

Kinsale Capital Group (KNSL) released its Q1 2025 earnings, and the market’s reaction—a 16% stock drop on Friday—suggests investors are fixating on short-term challenges rather than the company’s robust long-term prospects. As I outlined in my deep dive on Kinsale, this owner-operated insurer thrives on disciplined underwriting, a low combined ratio, and a statistical approach to risk analysis, positioning it as a compounding machine in the excess and surplus (E&S) insurance market. While Q1 growth fell short of my 15% assumption at 7.9%, driven by competitive pressures in commercial property large accounts, Kinsale’s focus on profitability over volume and its strong fundamentals remain unchanged. I have listened to the earnings call, so let’s address the short-term noise, and reaffirm why Kinsale is a long-term winner.

Q1 2025 Performance: Solid Profitability Amid Slower Growth

Kinsale delivered strong profitability in Q1 2025, even with elevated catastrophe losses and competitive headwinds. Key metrics include:

• Adjusted EPS: $3.71, up from $3.50 year-over-year, beating consensus estimates of $3.25.

• Revenue: $423.4 million, a 13.6% increase year-over-year, though slightly below expectations of $427.2 million.

• Gross Written Premiums: Grew 7.9% to $484.3 million, a slowdown from the ~20% historical average.

• Combined Ratio: 82.1%, up from 79.5% in Q1 2024, reflecting higher catastrophe losses but still industry-leading.

• Operating ROE: 22.5%, showcasing Kinsale’s ability to generate exceptional returns.

• Net Investment Income: Surged 33.1% to $43.8 million, bolstered by a high-performing equity portfolio.

The headline disappointment was the 7.9% premium growth, well below my 15% assumption and Kinsale’s typical 10-20% range. Analysts in the Q&A honed in on this, pressing management about near-term trends for Q2 and the competitive landscape, particularly in commercial property. However, Kinsale’s leadership—CEO Michael Kehoe, CFO Bryan Petrucelli, and President/COO Brian Haney—emphasized that this slowdown is a deliberate choice to prioritize profitability over chasing volume in a softening market.

Analyst Q&A: Short-Term Focus on Commercial Property Headwinds

The Q&A session revealed analysts’ preoccupation with short-term dynamics, especially the competitive pressures in commercial property large accounts. As Haney explained, “The commercial property market, particularly for larger accounts, is seeing increased competition, which has led to rate deceleration and, in some cases, rate reductions.” This explains the Q1 growth shortfall, as Kinsale opted not to chase unprofitable business. When pressed by JPMorgan’s Pablo Singzon about Q2 expectations, Haney noted, “We expect similar headwinds in Q2, but the second half of 2025 should see reduced pressure as market dynamics stabilize.”

Analysts also asked about catastrophe losses, which impacted the combined ratio. Kehoe clarified that Kinsale’s statistical modeling and conservative underwriting limited the damage: “Our proprietary data analytics allow us to price risks with precision, ensuring we maintain margins even in volatile quarters.” This statistical rigor, a cornerstone of Kinsale’s strategy, was a recurring theme in the call, reinforcing my confidence in their ability to navigate market cycles.

The focus on short-term metrics—Q2 growth, catastrophe impacts—misses the bigger picture. Kinsale’s business model is built for the long haul, and management’s decision to prioritize high-margin, smaller accounts over competitive large property schedules aligns with their disciplined ethos.

Commercial Property Challenges: A Temporary Drag

The commercial property market’s competitive intensity is the primary driver of Kinsale’s Q1 growth slowdown. As I noted in my Kinsale analysis, I modeled 15% premium growth, assuming Kinsale would maintain momentum in its 10-20% target range. The 7.9% growth reflects a strategic pullback from large commercial property accounts, where competitors are cutting rates to gain market share. Haney acknowledged, “We’re seeing pricing in some divisions that we can’t sustain long-term, so we’re focusing on smaller accounts and high-margin segments where we have a competitive edge.”

This aligns with Kinsale’s long-standing strategy of targeting the E&S market’s small and mid-sized risks, where their low expense ratio and technology-driven underwriting provide a durable advantage. The company’s combined ratio of 82.1%, while higher than last year’s 79.5%, remains among the industry’s best, reflecting their ability to price risks effectively even in a competitive environment.

Looking ahead, management expects commercial property headwinds to persist in Q2 but ease a bit in the second half of 2025. This temporary growth dip doesn’t alter Kinsale’s long-term trajectory, as their focus on profitability ensures they emerge stronger when market conditions normalize.

Long-Term Strength: Disciplined Underwriting and Statistical Edge

Kinsale’s long-term outlook remains as compelling as when I wrote my original analysis. Their competitive moat is built on three pillars:

1. Disciplined Underwriting: Kinsale’s focus on the E&S market, particularly smaller accounts, allows them to target niche risks with less competition and higher margins. Their 82.1% combined ratio, even in a challenging quarter, underscores their ability to price risks conservatively and maintain profitability.

2. Low Expense Ratio: By leveraging proprietary technology, Kinsale keeps costs low, enabling competitive pricing while delivering best-in-class margins to shareholders. Kehoe emphasized, “Our technology model’s durability gives us a structural advantage that will only grow stronger.”

3. Statistical Risk Analysis: Kinsale’s data-driven approach to underwriting, highlighted in the call, ensures they set reserves conservatively and price risks with precision. Haney noted, “Our statistical models allow us to stay ahead of loss cost trends and inflation, protecting our margins.”

These strengths position Kinsale to capitalize on the E&S market’s long-term growth. As standard carriers continue to push business into the E&S space due to inflation and tightening underwriting conditions, Kinsale’s ability to take market share while maintaining margins remains intact. The commercial property slowdown is a short-term blip, not a structural shift.

Equity Portfolio Surprise

One pleasant surprise in Q1 was the outperformance of Kinsale’s investment portfolio, which I didn’t factor into my original analysis. Net investment income jumped 33.1% to $43.8 million, driven by strong equity returns. Kinsale’s portfolio is split roughly one-third passively invested and two-thirds actively managed with a value orientation, a strategy that paid off handsomely this quarter.

While I focused solely on operational insurance returns in my analysis, this equity portfolio performance adds an extra layer of upside. It’s not a core driver of Kinsale’s value proposition, but it demonstrates management’s capital allocation savvy, reinforcing their owner-operator mindset. Investors should view this as a bonus, not a dependency, as Kinsale’s insurance operations remain the primary engine of long-term returns.

Conclusion: Market Overreaction, Long-Term Opportunity

Kinsale’s Q1 2025 earnings highlight a business firing on all cylinders, despite short-term growth headwinds from commercial property competition. The market’s 16% sell-off on Friday is a classic overreaction, punishing Kinsale for missing lofty growth expectations while ignoring its exceptional profitability and long-term potential. As I argued in my Kinsale analysis, this is a high-quality compounder built on disciplined underwriting, a low combined ratio, and a statistical edge in risk analysis. The Q1 results don’t change that thesis.

Short-term, expect continued pressure in Q2 from commercial property, but the second half of 2025 should see some improvement as market dynamics stabilize. Long-term, Kinsale’s focus on high-margin, smaller accounts and its technology-driven cost advantage position it to deliver consistent 10-20% premium growth and mid-20s ROE. The equity portfolio’s Q1 outperformance is icing on the cake.

For patient investors, Friday’s drop is an opportunity to own a best-in-class insurer at a discount. Kinsale remains a core holding for those focused on long-term wealth creation. Join our Global Quality Investing Community on Discord to discuss further.

Disclosure: I am long KNSL. This is not financial advice. Always do your own research.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

If you’re a member of our Global Quality Investing Discord, you’d have already heard the news—I initiated three starter positions today in The Trade Desk (TTD), ASML, and M&A Research Institute ($9552.T). Our Discord community is where I share real-time updates, dive deeper into my investment decisions, and engage in lively discussions with fellow quality investors. If you’re a Substack subscriber who hasn’t joined yet, I highly encourage you to hop on board—it’s free, and you’ll get a front-row seat to my investment journey! Join us here and let’s grow this community together. Now, for those catching up, let’s dive into the details of these new positions and why I’m excited about them.

This community is free, but if you’re enjoying the deep dives and want to fuel more, you can treat me to a coffee on Buy Me a Coffee. Every bit helps keep the fire burning, and I’m truly grateful for your support!

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As markets continue to reel from the recent tariff storm and the S&P 500’s sharp drop last three days (incuding today)—its worst since 2020—I’m reminded of Warren Buffett’s timeless advice: “Be fearful when others are greedy, and greedy when others are fearful.” With the VIX signaling “extreme fear” and the Dow down 10% from its December peak, I see opportunity amid the panic. After careful analysis, I’ve initiated three starter positions in high-quality companies that I believe are poised for long-term success: The Trade Desk (TTD), ASML, and M&A Research Institute ($9552.T). These are calculated moves, and I’m keeping cash on hand to double down if the market presents even better entry points. Let’s dive into why I’ve made these investments, and I’ll also share my updated portfolio allocation with a pie chart for transparency.

Why These Starter Positions?

For those new to my approach, a starter position is a smaller initial investment—typically 2-3% of my portfolio per position—that allows me to establish a foothold in a company I believe in while managing risk. I keep a cash reserve to double down if prices drop further, ensuring flexibility in volatile markets like this one. These three companies align with my quality investing philosophy: durable cash flows, strong moats, and fair (or undervalued) prices. Here’s the breakdown.

1. The Trade Desk (TTD) at $43.50 – A Moat Master in Programmatic Advertising

I’ve been eyeing The Trade Desk for a while, and at $43.50—down from its $100+ highs last year—it hit my conservative fair value calculation. TTD is a leader in programmatic advertising, a sector I believe has immense long-term potential despite its cyclical nature. As I detailed in my recent Substack article, The Trade Desk (TTD): A Moat Master, TTD’s data-driven precision and AI platform, Koai, give it a competitive edge. The company’s 30%+ revenue growth and 95%+ customer retention rate for ten consecutive quarters signal a business built for the future. Yes, its beta of 1.6 means it’s 60% more volatile than the market, and a recession could pressure ad spending. But at this price, I see a margin of safety for a quality compounder looking at the long-term. This starter position lets me build exposure while I monitor the ad cycle and broader economic risks.

2. ASML at EUR 515.00 – A Semiconductor Giant with a Resilient Moat

ASML, the world’s leading supplier of lithography systems for the semiconductor industry, is another quality name I’ve added as a starter position. Despite the tariff storm, I don’t expect ASML to be heavily impacted in the long term. Chip companies are poised to continue investing in new machines, driven by unrelenting demand for smaller, faster, and greener chips.

Why Chip Companies Will Keep Investing

The semiconductor industry is in a structural growth phase, fueled by trends like AI, 5G, and the Internet of Things (IoT). According to a 2024 report by McKinsey, global semiconductor demand is expected to grow at a 6-8% CAGR through 2030, with capital expenditures (capex) by chipmakers projected to rise to meet this demand. ASML’s monopoly on extreme ultraviolet (EUV) lithography machines—critical for producing advanced chips—positions it as a key beneficiary. For example, TSMC, a major ASML customer, announced in 2024 plans to invest over $30 billion annually in capex through 2025 to expand capacity, despite tariff pressures. Similarly, a Reuters report from March 2025 notes that Intel and Samsung are ramping up investments in new fabs, with ASML as their primary equipment supplier. Japan, home to major semiconductor players, is also a growth hub for ASML, where they note close collaboration with TSMC and other fabs in the region.

ASML’s rock-solid cash flows and dominant market position make it a quality anchor for my portfolio. Tariffs may cause short-term volatility, but the long-term demand for chips—and thus ASML’s machines—remains intact. This starter position reflects my confidence in ASML’s ability to weather the storm and grow over the coming years.

3. M&A Research Institute ($9552.T) at JPY 936.00 – An Undervalued Japanese Growth Gem

Finally, I’ve taken a starter position in M&A Research Institute, a Japanese M&A brokerage firm that I believe is a true hidden gem. At 936 JPY, this company is trading at a price that I consider extremely undervalued given its growth trajectory and fundamentals. As I shared in my X thread on March 18, 2025, M&A Research Institute is a compounding machine in Japan’s $124 billion M&A market. Here’s why I’m excited:

• AI-Driven Efficiency: Their AI technology matches buyers and sellers in just 50 days—far faster than the industry’s 7-month average. This is a game-changer in Japan’s SME succession crisis, with 2.45 million firms at risk by 2025.

• Client-First Model: They charge no upfront fees, only taking a cut when deals close. This alignment of incentives has fueled explosive growth—revenue nearly doubled in 2024, and they’re scaling to 360+ advisors.

• Stellar Financials: Zero debt, a 67.6% gross margin, 57% ROA, and 94.7% of net income converting to cash. This asset-light, high-return profile is what quality investing dreams are made of.

• Visionary Leadership: Shunsaku Sagami, the 34-year-old founder, owns 53.52% of the company (a $400M stake) and has built a top-4 M&A firm in just five years. Owner-operator companies are the companies I like a lot because of the alignment of interests with shareholders.

Yes, there are risks—fast growth could lead to missteps, and competitors might try to replicate their model. But with Japan’s M&A market heating up (JPMorgan estimates SME M&A deals will double to ¥500 billion by 2033), I see significant upside. This starter position lets me capitalize on this undervaluation while I keep an eye on execution risks.

Cash Reserve Strategy: Ready to Double Down

These are starter positions for a reason. I’ve allocated a small portion of my portfolio to each—roughly 3% for ASML and TTD and 1% for M&A—while keeping a healthy cash reserve. This gives me the flexibility to double down if prices drop further, a strategy that’s served me well in past downturns. Markets are volatile, and with recession odds rising (JPMorgan now pegs it at 60%), I want to stay nimble. Quality investing isn’t about timing the bottom—it’s about owning great businesses at fair prices and compounding over time.

Updated Portfolio Allocation

Below is my updated portfolio with the new positions. I’ve included a pie chart for clarity, showing the weightings of TTD, ASML, M&A Research Institute, and my other holdings.

This tariff storm isn’t fading anytime soon. If it escalates, we could see a deeper market correction—potentially pushing the S&P 500’s Shiller CAPE ratio from 31 to 25 with another 15% drop. But as long-term quality investors, we thrive in chaos. I’ll continue refining my models and share in the Discord app, monitoring these new positions, and sharing updates with you. What’s on your watchlist? I’d love to hear your thoughts—join the conversation on our Global Quality Investing Discord or drop a comment below.

If you’re enjoying this journey and want to support more content like this, consider treating me to a coffee on Buy Me a Coffee. Every bit helps keep the fire burning! Let’s keep growing this community together.

To quality and long-term compounding,

Arnold - Compound & Fire

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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March update

March threw markets a curveball—the S&P 500 slid 5.8%, the Nasdaq tumbled 6.6%, and the Compound & Fire portfolio wasn’t immune, dipping 3.4%. Still, that’s a lighter bruise than the big indices took, thanks to some standout performers balancing the scales.

Here is the table with the results per position:

Risers and Fallers: A Month of Contrasts

• Nedap: A bright spot, climbing 9%. Their 2024 earnings showed margin gains, and they’re forecasting revenue growth across all key markets in 2025 after a strong second half last year. The cherry on top? A new AgriTech partnership with Gallagher Animal Management, merging Nedap’s SmartTag Ear with Gallagher’s eShepherd fencing for smarter livestock management—starting in New Zealand.

• Euronext: Up 10%, proving its worth in shaky times. On March 21, Euronext hit its fifth most active equity trading day ever, with €25.5 billion traded—€16.5 billion during the closing auction alone—fueled by index rebalancing and derivatives expiry. This surge underscores its dominance in European equity trading. Plus, the bolt-on acquisition of Admincontrol beefed up its SaaS offerings, a smart move for a growing exchange operator.

• Kelly Partners Group: Ouch—a 20% drop for my biggest position. Michael Hoyle’s exit from the Texas Growth Partnership Platform raises questions—did he fail to land a deal, or is Kelly taking the reins himself? Either way, Texas acquisitions might shift to direct partnerships (51% ownership) instead of the growth platform model where KPG would have had 51% of 51% (just 26%). On the flip side, KPG’s first European grab—Asple & Co in Ireland via Kudos International—is a win for their global pipeline and marks their first step for an accountancy firm in Europe!

• Watches of Switzerland: Down 14%, but not without fight. A £25M share buyback (2.5% of shares) at these lows signals confidence, and their new flagship Rolex boutique on London’s Old Bond Street marks a milestone in a century-long partnership.

• Dino Polska: Down 9%. They’re eyeing European expansion through e-Zebra, their online drugstore, after hitting 2,688 stores domestically by year-end 2024. A bold pivot for a Polish supermarket champ.

• Rightmove: Up 2% as listings hit a decade-high. Sellers gear up for 2025 moves, while Rightmove repurchased ~0.4% of shares daily—a steady buyback grind.

• ZIGExN: No major price swing noted, but action-packed. They paid a dividend and announced Apple World’s acquisition of USAEL Inc., a travel DX specialist, for 344M yen. Synergies with Apple World should juice up their travel business, tapping a market JTB forecasts at 305M domestic and 14.1M overseas travelers in 2025.

• Computer Modelling Group: A 4.5% drop in the month. CMG joined Redeye’s Serial Acquirers event in Stockholm. CEO Jain’s panel talk is worth a watch here.

• Judges Scientific: flat but on the radar. Earnings call insights stole the show—check my notes here.

Portfolio return

The total return since I start sharing my portfolio as per May 2024:

The Compound & Fire portfolio has been steadily building value, true to its quality-first, long-term roots—starting at 100 in May 2024, it’s grown to 116.69 by March’s end, a solid 16.69% rise. I’m not chasing flashy short-term wins here; that’s a recipe for bigger risks. Instead, I play the long game—holding steady, avoiding knee-jerk switches, and keeping my eyes on the horizon, even when March’s market waves tried to rock the boat.

Portfolio holdings

Here is an overview of the current portfolio holdings:

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The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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Hey Quality Investing Crew! I recently watched the Judges Scientific earnings call and wanted to share some fascinating insights from their update. They’re a buy-and-build company with a strong track record, and there’s a lot to unpack about their strategy, financials, and future plans. Let’s dive in!

A Proven Buy-and-Build Strategy

Judges Scientific kicked off the call with an updated overview of their buy-and-build approach, which has been their cornerstone since 2005. The numbers speak for themselves:

• 25 acquisitions since 2005.

• 20% CAGR in revenue and an impressive 26% CAGR in total EBIT.

• Organic revenue growth at a solid 7% CAGR.

These stats highlight their ability to grow both through acquisitions and organically, a key trait for quality investors looking for sustainable compounding.

Geotek’s Core Expedition: A Unique Growth Driver

A big focus was on their Geotek subsidiary, which specializes in core expeditions—a highly specialized operation where Geotek extracts geological core samples. Only four countries can even perform these expeditions: the US, Japan, India, and China. In 2024, Geotek didn’t have a core expedition, but they’ve already started one in Japan in 2025, which is expected to boost revenue by 5-7M GBP. Interestingly, Judges can currently handle only one expedition per year—not because of a lack of boats, but due to the preparation and specialized staff required. However, they’re now building a fifth boat, which could potentially allow for more expeditions in the future. I’ve reached out to them to confirm if this means they might manage two expeditions annually down the line—I’ll keep you posted on their response in the Quality Investing Discord App!

Addressing the Geotek Impairment: It’s Not What It Seems

There was an 8M GBP impairment on Geotek, which raised some eyebrows, but the CFO provided a detailed explanation that actually left me feeling optimistic. On a group level, Judges paid 80M GBP for Geotek (including the earn-out). However, at the parent level—where the impairment test is conducted—the total value was 100M GBP, due to financing costs (a 100M facility from Lloyds, Santander, and Bank of Ireland) and Geotek’s 11-12M GBP cash at acquisition. With a high 16% WACC in their impairment model, there’s little room for surprises. A year without a coring contract forced a more conservative outlook, resulting in a valuation of 92M GBP in the model—hence the 8M impairment. But here’s the key: this 92M is still above the 80M purchase price, and with the new boat investment, Geotek’s future looks promising, not bleak. This transparency really underscores how Judges, and their accountants, approaches valuations conservatively while still investing for growth.

Financial Firepower for Future Deals

Judges also shared that they’ve increased their banking facilities to fuel future acquisitions, without changing their bank covenants—a positive sign of financial stability. They typically pay 3-7 times earnings for acquisitions (with 3 and 7 as outliers), which shows a disciplined approach to deal-making. This expanded firepower positions them well for more growth in their niche markets.

ROTIC: A Core Metric, With Ambitious Targets

Return on Total Invested Capital (ROTIC) is a key metric for Judges, but 2024 was a weaker year, with ROTIC dropping to 16.5%. Their goal is to get back to 20%+, with a medium-term target of an ambitious 30%! While 30% is a stretch, it signals their focus on high-quality, high-return investments—a great alignment with our quality investing philosophy.

The Art of Winning Deals: Integrity Over Price

Judges shared an interesting insight into their acquisition process: they’re often not the highest bidder, but they still win deals. Why? Because they offer certainty, integrity, and a good home for the seller’s business. This reputation has helped them secure 25 acquisitions over the years, even in competitive bidding situations. They also noted that the incubation period for new deals can be long, reflecting their patient and deliberate approach.

Leadership Development: Quality Over Speed

Leadership is becoming increasingly critical as Judges grows. They’re heavily involved in hiring for subsidiaries, prioritizing high-quality personnel. In one example, they shared that even when a subsidiary narrowed down to three candidates and wanted to pick the “best” one, Judges stepped in and said, “Let’s restart the process—this person isn’t good enough.” They’d rather take longer to find the right fit than settle. They also highlighted a common challenge: as companies grow, founders often need to transition into managers, which isn’t always their strength. For those interested, they recommended the book What Got You Here Won’t Get You There by Marshall Goldsmith—a great tip for understanding leadership transitions.

Tax Strategy: Leveraging the Patent Box

The UK corporate tax rate increased from 19% to 25% in April 2023, impacting Judges’ bottom line. To mitigate this, they’re investing more in intellectual property and patents, allowing them to apply for the Patent Box—a tax incentive that lowers the tax burden for innovative businesses. This strategic move shows how they’re adapting to a tougher tax environment while continuing to innovate.

Revenue Model: Niche Focus Over Recurring Revenue

Judges operates as a capital goods business, focusing on niche companies to avoid competition. When asked about recurring revenue, they clarified that it’s not their primary model. While they do have some service-related revenue streams and annual contracts (about 5-10% of total revenue), their niche focus means they don’t rely heavily on recurring revenue—and they’re okay with that. This approach allows them to maintain high margins in specialized markets.

A Balanced Customer and Geographic Mix

Finally, Judges emphasized that they don’t overly depend on any single customer or country. Their revenue comes from a well-diversified mix, reducing risk and ensuring stability—a key trait for a quality business.

Final Thoughts

Judges Scientific continues to impress with their disciplined buy-and-build strategy, focus on quality (from acquisitions to leadership), and ambitious financial targets like their 30% ROTIC goal. The Geotek impairment might look concerning at first glance, but their explanation and ongoing investment in a fifth boat show confidence in its future. With increased banking facilities and a smart tax strategy, they’re well-positioned for more growth. For quality investors, Judges offers a compelling mix of growth, stability, and a thoughtful approach to capital allocation. I’ll keep you updated on their response about the potential for two core expeditions per year!

Hopefully you have enjoyed this update of the earnings call. In my opinion it’s very important to watch these and pay close attention. There is often more information in it then you would initially think! It only takes time and, but if you’d like to support my time in providing such updates, you can Buy Me a Coffee.

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The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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Watches of Switzerland Group PLC, a leading luxury watch retailer, today announced a £25 million share buyback program. The program is set to commence shortly after the announcement and conclude no later than December 31, 2025. This initiative follows a successful refinancing in 2024, which strengthened the company's financial position with a new £300 million revolving credit facility maturing in 2029.

The board believes this buyback aligns with their capital allocation strategy, prioritizing investment in growth opportunities—like showroom upgrades and acquisitions—while returning surplus capital to shareholders.

This move reflects Watches of Switzerland's confidence in its financial health and future growth prospects. By launching this share buyback, the company is signaling that it has excess cash after funding its strategic priorities and sees value in rewarding shareholders directly.

For a more comprehensive analysis of Watches of Switzerland Group's business model and growth strategy, you can read my in-depth deep dive on the company. This earlier analysis provides context for understanding the significance of this latest financial move. Buying back shares at such an undervalued level is something I encourage!

If you find this type of financial analysis valuable, consider buying me a coffee to support more in-depth research and timely updates on luxury retail and watch industry developments. Of course all optional but highly appreciated!

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The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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The Compound & Fire portfolio add another 2.2% in February. Here you can find the results per position:

There are four clear winners in the month and three clear losers:

• Dino Polska gained 11.2% in February and published their outstanding results on February 27th. Here are the key highlights and focus especially on the strong cash generation and reinvestment strategy:

  Quarterly results:

  • Revenue: 7.753 billion PLN (approximately €1.86 billion), up 15.8% year-on-year (YoY) from Q4 2023. This fell slightly short of analyst projections of 7.779 billion PLN, suggesting solid but not exceptional growth.

  • Net Profit: 424.7 million PLN (approximately €101.9 million), a beat against forecasts of 402 million PLN. This implies a net margin of about 5.5%, up from analyst expectations of 5.3%, reflecting decent profitability despite revenue missing the mark.

  Annual results:

  • Revenue: 29.274 billion PLN (approximately €7.03 billion), a 14.1% increase from 25.666 billion PLN in 2023. This growth reflects Dino’s ongoing expansion and resilience in a competitive Polish retail market.

  • Net Profit: 1.51 billion PLN (approximately €362.4 million), up 7.2% YoY from 1.408 billion PLN in 2023.

  • EBITDA: 2.317 billion PLN (approximately €556.8 million), up 3.8% from 2.232 billion PLN in 2023. The EBITDA margin dropped to 7.9% from 8.7%, due to higher operating expenses and price competition.

  • Free Cash Flow (FCF): 960.6 million PLN, more than doubling (2.2x) from 2023, driven by a 27.8% YoY increase in operating cash flow. This is a standout metric, showcasing strong cash generation.

  • Net Debt/EBITDA: Improved to 0.1x from 0.4x in 2023, reflecting a 41% reduction in long-term debt. Dino’s balance sheet is exceptionally robust compared to peers like Jeronimo Martins (Biedronka’s parent), which increased debt in 2024.

  Outlook 2025

  • Store Expansion: Dino plans to accelerate growth, targeting a store count increase in the "high teens" percentage range over 2024’s total of 2,688 stores. This could mean 400–500 new stores, building on the 283 opened in 2024 (up from 250 in 2023). Management’s confidence in this goal is a very positive signal.

  • Capital Expenditures (CapEx): Expected to range between 1.7–1.8 billion PLN (€408–432 million), funding new stores and infrastructure. This aligns with Dino’s cash-reinvestment strategy.

  • Like-for-Like (LFL) Sales: 2024 LFL growth was 5.3%, down from 17.2% in 2023, reflecting a post-inflation normalization. No specific 2025 LFL forecast was provided, but mid-single-digit growth can be expected if consumer spending holds.

  • Market Context: Poland’s retail sector faces price wars and labor cost pressures, but Dino’s EBITDA margin outpaced Biedronka’s by over 1% in 2024, positioning it well for 2025.

• Judges Scientific gained 12.7% without any direct news. I have shared my deep dive in February after taking a position in January. Here you can read the full deep dive of Judges Scientific

• Euronext gained 8.1% after record results, which I have discussed here.

• Kelly Partners Group won another 7.9% in February. The company is working hard on getting listed in the US by the end of this year and in the meantime building a company with decades of runway to go.

• Watches of Switzerland Group (WOSG) lost most with 15.2%. A potential clue emerged from broader market context: Swissinfo.ch reported on February 5 that Swiss retail saw a slight decline in 2024 despite strong online sales, hinting at a softening luxury market into early 2025. Since WOSG relies heavily on Swiss-made watches (e.g., Rolex, Omega), a dip in Swiss export momentum could trickle down. However, WOSG has been optimistic about the start of the year earlier.

• Computer Modelling Group dropped 13.3% and also on my additional stake in the company I am down 12.8%. Maybe I was a bit too quick in adding to my position, but for the long-term my confidence in management is high. It was mainly stagnation in revenue and some margin pressure which disappointed investors, expecting low double-digit growth and raising concerns about future momentum.

• ZIGExN was down 6.3% in the month following disappointing earnings and especially an M&A deal which didn’t go through. I have shared this update earlier in February.

The total return since I start sharing my portfolio as per May 2024:

The portfolio has been performing well and the 100 in May has turned into 120.76 by the end of February. With my portfolio I am not aiming for the highest returns in the short-term, as this will go hand-in-hand with a higher risk. I try not to lose and not to switch too often in my positions and focus on the long-term.

The portfolio split as per today:

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The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

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In this overview I will share how Nedap did in the full year, the fourth quarter and their outlook for 2025.

Overall in 2024:

Revenue: They earned €251.6 million in 2024, which is 4% less than in 2023. This drop happened because 2023 was a really strong year to compare to, and some markets (like livestock) were slow for much of 2024.

Recurring Revenue: The money they get regularly from subscriptions or ongoing services went up by 19%, making up 40% of their total revenue (compared to 32% in 2023). This is a good sign because it means more reliable income.

Profit: Their operating profit was €23.9 million, down from €27.3 million in 2023. The profit margin (how much they keep after costs) was 9.5%, a bit lower than 10.4% in 2023.

Challenges: They faced tough market conditions, especially early in the year, and worked hard to lower inventory and control costs by hiring fewer people.

Fourth Quarter (Q4) of 2024:

The last part of 2024 (July to December) showed improvement. Their profit margin jumped to 10.5%, up from 8.7% in the same period of 2023. This means they made more money compared to costs in the second half of the year.

Demand for their products picked up as market conditions got better, especially in their key areas like healthcare and retail.

Outlook for 2025:

Nedap expects things to keep getting better in 2025. They predict revenue growth in all their main markets (healthcare, retail, livestock, and security), as long as nothing unexpected happens (like a big economic downturn).

They’re confident because the second half of 2024 showed signs of recovery, and they’ve positioned themselves well as a leader in “Digital Twin Technology” (a fancy way of saying they connect physical stuff, like sensors, to digital systems for better decision-making).

Key Highlights:

Revenue Drop but Steady Growth in Subscriptions:

Total revenue fell 4% to €251.6 million, but recurring revenue grew 19%, showing they’re building a stronger, more predictable income stream.

Better Second Half:

The profit margin improved to 10.5% in the last six months, meaning they finished 2024 stronger than they started.

Added Value Up:

They increased “added value” (how much worth they create from their revenue) to 71.5% from 69% in 2023. This shows they’re getting more efficient.

Dividend (money for shareholders):

They’re keeping the dividend at €3.20 per share, the same as last year, which is a nice reward for investors despite the challenges.

Strategy Paying Off:

At a big event in November (Capital Markets Day), they showcased their focus on Digital Twin Technology and a “Create & Scale” plan to grow organically. People liked it, and it’s helping them stand out.

Easy Explanation of How They Did:

In 2024, they sold a bit less overall because some customers (like farmers) didn’t buy as much early on. But they made more money from regular subscribers, which grew a lot. By the end of the year, business picked up, and they earned more profit per sale in the last few months. For 2025, they’re hopeful customers will keep coming back, and they plan to sell more across all their sections.

That’s it. I am happy with this update and especially their outlook. Dividend remains high, although not fully covered by their earnings, but that will change when they increase their margins. Their cash position makes them able to keep the dividend at this level.

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Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.