Long-time readers might remember the victory lap from earlier this year. We don’t currently own a single share, but 2026 was kind to us here… RDVT ended up being our best single-name trade of the year, handing us a clean +98.53% return off an average cost basis right around $40.

Most micro- and small-cap setups are classic “one-and-done” catalyst plays: you get the pop, take the cash off the table, and never look back. But occasionally, names like RDVT or TGS force you to slow down and pay closer attention. Despite the tiny market caps, these aren’t speculative shell games.

They boast legitimate network effects, real cash-flow generation, and the structural DNA to be multi-decade compounders.

But… The market’s mood swings down here are violent. Volatility routinely launches valuations well past sanity on the upside, only to drag them straight into the gutter on the way down. More importantly, in an era where AI is aggressively rewriting the playbook on proprietary datasets, even the deepest moats deserve constant stress-testing.

So, we tore through the latest quarterly print and the footnotes to see what’s really under the hood.

Today, we’re unpacking:

1. The good, the bad, and the ugly from the latest 10-Q and earnings call.

2. The 2 glaring red flags we genuinely dislike right now.

3. A no-nonsense DCF model to figure out what the business is actually worth today, and whether Mr. Market is giving us another entry point or asking us to pay for perfection.

Grab a coffee. Let’s break it down.

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

🔍 RedViolet ($RDVT) Q3 Observations

Red Violet Inc. (NASDAQ: RDVT) builds identity intelligence software. Its cloud-native platform, CORE, utilizes a proprietary entity-resolution engine (IRON) to map out complex real-time connections among individuals, businesses, and assets.

The company commercializes this tech across two main brands:

1. IDI (idiCORE): An enterprise-grade risk, compliance, investigative, and fraud prevention solution sold to financial services, law enforcement, corporate security, collections, and background screening firms.

2. FOREWARN: A mobile safety app built originally for the real estate industry to verify prospective clients before face-to-face meetings.

Q3 Quantitative Observations

In Q3 2026, revenue increased +20% to $27.75m (surpassing $100m in LTM revs for the first time).

Other than the obvious statement that their performance is really good, two things happened during the month that are not shown here:

• In August 2026, the company completed a public offering of ~1.92m shares at $60.00/share, bringing in $108.7m (net).

• As of September 30, 2026, Red Violet holds $165.66m in cash (basically US Treasuries) with zero debt.

The question, though, is why does this already cash-flow-positive company need cash?

Q3 Qualitative Observations. On Growth.

The answer to that question comes in the form of two internal reinvestment themes and one inorganic possibility.

(1) Expansion into Home Healthcare [Organic]

Having captured over 50% of all US Realtor Associations (>665 associations under contract) with a 100% renewal rate, Red Violet is effectively duplicating the FOREWARN play in the home healthcare market.

The addressable market here is ~4m home health aides and >12k Medicare-certified agencies. Atm, Red Violet is rolling out mobile apps and scheduling/workforce API integrations to provide pre-visit household safety verification.

This seems like a great use of cash.

(2) Enterprise & Public Sector Move [Organic]

The company is moving upstream from small transactional accounts to multi-year enterprise contracts ($100k+ ARR).

In the public sector, RDVT has begun displacing legacy providers (e.g., LexisNexis, Thomson Reuters CLEAR) at major municipal law enforcement and state agency levels, with federal procurement testing underway.

It’s just a much better product.

This is an acceptable development, although we must note that these processes come with strict compliance rules (more work) and long procurement processes (more work and a possible distraction). As long as this is an add-on and not just a substitute, we like the development.

(3) Iffy M&A Deployment [Inorganic]

Around June, we were already hearing rumors that their capital raise was being done almost exclusively for this purpose. At various points in time, including the quarterly call commentary, management has outlined an acquisition focused on:

1. Proprietary data assets to feed into their identity graph.

2. Enabling software/AI capabilities where “buying beats building”.

3. Entry into adjacent vertical markets or selective international footprints.

Although on paper this may sound smart, acquisitions are usually a red flag. Unless you are a specialist, people are, in general, clueless about how this works.

You commonly rely on external help, assume too many synergies, pay too much, and worst of all, you are left holding a bag of multicultural, unintegrable people playing politics instead of focusing on making money through a better product.

So… no bueno.

Q3 Qualitative Observations. On Core Business.

Beyond the M&A developments, there are also some internal business decisions that we dislike, including some accounting shenanigans and just blatant lying to our faces, which sure, is perfectly legal, but man… we’re not stupid, so why do it?

Treasury Management

Following the $108.7m equity raise, RDVT used its excess cash and bought a ton of Treasury securities ($36.29m short-term and $61.32m long-term).

Sadly, we don’t know what short- and long-term actually mean. Is it direct holdings, is it an ETF, is it 0- 3 months, is it up to 10 years?

Due to interest rate hikes, the portfolio recorded a small unrealized loss of $476k ($352k net of tax) through Accumulated Other Comprehensive Income (AOCI).

They stated that “all securities carry zero credit risk and will be held to maturity”, but if you’re using that cash to buy a company, you don’t know that, so… why?

This is unnecessary, albeit minor. I wouldn’t even call it a yellow flag.

Capitalized Software Dynamics

As every software company does, we did it back in the day w/ ~5% of revenues; RDVT heavily capitalizes software development costs.

During 9M 2026, RDVT capitalized $12.04m in intangible assets (including $1.47m of capitalized SBC), while recognizing $8.23m in intangible amortization.

There is $9.02m of internal-use software currently under development that has not yet started amortizing.

This accounting BS enhances GAAP operating margins relative to cash flow while deferring expense recognition over 5 to 10 years. You paid for it, and it’s probably useless in a few years. Again, all software companies do this, but it’s not 5% of rev, more like 15%.

Backlog or Lost Money

Contractual pricing models continue to expand, accounting for 78% of Q3 2026 revenue (up from 75% in Q3 2025).

Unbilled receivables totaled $1.70m ($1.11m current, $0.59m long-term).

RDVT disclosed $23.90m of remaining unsatisfied performance obligations under multi-year contracts, with $12.15m scheduled to be recognized in 2027. Hopefully, this will turn into actual revenue.

Historically, they’ve performed well here, but it’s always an important check.

Hidden Share-Based Comp

This is the part we dislike and a direct copy of the SpaceX payment package, just that goals are not going to freaking Mars. While GAAP SBC for 9M 2026 was $6.37m (plus $1.47m capitalized), there’s a disclosed but not factored-in massive executive incentive package:

• In January 2026, executives were granted 832,690 RSUs ($52.77 grant-date fair value = ~$43.9m) tied to aggressive revenue and adjusted EBITDA margin thresholds through March 2030.

• Another acquisition-focused grant of 30,000 RSUs was made in April 2026… a shit incentive, as it guarantees (or pushes for) an acquisition.

• Because management has deemed these milestones “not probable of achievement” under ASC 718 to date, zero expense has been recognized for them. Total unvested, unrecorded SBC expense sits at $46.14m.

Once these performance milestones become probable, P&L operating expenses will absorb 6% dilution charges.

Other Items. Commitments & Daniel’s Law Litigation

Beyond these, there are also two minor items that are still something to note for the company. RDVT has $32.44m in fixed future commitments: a 5-year cloud agreement ($3.0m/yr minimum) and core flat-fee data supplier licenses.

Also, RDVT is one of ~150 data brokers sued in New Jersey state court under Daniel’s Law (Atlas Data Privacy Corp) for alleged failure to suppress covered public officials’ home addresses/phone numbers within 10 days.

Liquidated statutory damages could be substantial across defendants; however, RDVT has confirmed the claim falls within the scope of its commercial liability insurance, which is actively covering defense costs and indemnification.

Minor, but still there.

Q3 Valuation Update

Not much changed in terms of valuation. The numbers the company reported were very close to our assumptions. The only real update is the present value (PV) of cash flows.

With that in mind, the $55 price tag seems fair.

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This presentation is provided for informational purposes only and is not intended to be, and should not be taken as an offer or solicitation to buy or sell any securities or to invest in any investment strategy. The information contained in this presentation is not investment advice and should not be relied on as the basis for any investment decision.

The views, thoughts, and opinions expressed in this presentation belong solely to the author and are not necessarily indicative of the views of Hermit Ventures Ltd., Hermit Advisory OÜ, its management, affiliates, or employees. This presentation may contain forward-looking statements, which are based on beliefs, assumptions, current expectations, estimates, and projections of the author. Such statements are subject to risks and uncertainties that could cause actual results to differ materially.

Participants should consider the investment objectives, risks, charges, and expenses of any investment carefully before investing. The author does not guarantee the accuracy or completeness of the information presented, which is subject to change without notice. The author is not responsible for any errors or omissions, or for the results obtained from the use of this information.

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Investments involve risks, including the loss of principal. The value of investments and the income from them can fluctuate, and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future results.

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Enjoyed the breakdown? If you want us to run a teardown on your own portfolio, feel free to reach out directly.

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None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision.

During the session, the discussion centered on a comprehensive portfolio teardown with our guest subscriber, covering his background, investing strategy, position sizing, and risk management:

• Background & Objectives: Deep transitioned from studying commerce to working in VFX in Canada, starting his self-taught investing journey around 2018–2019. His primary goal is achieving financial independence and a seven-figure portfolio before considering a home purchase, strictly avoiding debt.

• Evolution of Strategy: Shifting away from early speculative plays in junior gold miners and uranium due to unpredictable geology and cyclical swings, moving toward Canadian small/micro-caps with repeatable fundamentals.

• Current Portfolio Themes & Scuttlebutt: A major concentration in turnaround and cash-flow-positive Canadian cannabis companies (such as Auxly and Village Farms). Deep highlighted using real-time consumer tracking tools (headset.io) and grassroots observation (scuttlebutt) on shifting consumer habits from alcohol to cannabis.

• Risk Management & Position Sizing: Managing heavy concentration in top holdings versus high-risk “casino” allocations at the bottom of the portfolio (like Avicanna). Our discussion also covered cutting losers quickly (referencing lessons from Hash), trimming positions after doubles, and moving past regret on early exits (such as Carvana or UR-Energy).

• Account Structure & Tax Strategy: Allocating higher-conviction core positions in a TFSA (tax-free savings account) to minimize turnover, using cash accounts for rebalancing, and leveraging RRSPs to optimize tax brackets.

• Cash Allocation & Dry Powder: We strongly emphasized the strategic value of holding 15–25% in cash equivalents/short-term yields (~5%) rather than staying 100% invested, pointing out how liquidity provides the optionality to capitalize on deep market pullbacks and volatile swings in illiquid exchanges like the TSX Venture.

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Index

1. Executive Summary & Asset Allocation

• 1.1.- Public Equities: Detailed YTD Performance, Asset Allocation, and Holdings Overview

• 1.2.- Private Assets: Coffee Business Unit Economics Breakdown

2. October Review

• 2.1.- Macro Context and Market Observations

• 2.2.- Navigating the Big 6 Options Markets

• 2.3.- Cash & Treasury Compartment: % Remuneration Breakdown & FX Push

• 2.4.- ETF Compartment: Broad Index and Emerging/Frontier Markets

• 2.5.- Opportunistic Compartment: Reviewing Exits and Improved Goals

3. Holdings & Portfolio Activity

• 3.1.- Position Sizing, Entries and Exits

• 3.2.- Earnings Releases, Upcoming Catalysts, Insights and Updates

Briefing

This 29th edition was just too much fun. We did a lot of digging on the public side on three major topics: market makers (especially for options), Chinese low-cost producers, and North American high-quality food distributors.

We’ve included a comprehensive review of the big six US options exchanges, digging into routing mechanisms, internal order-matching engines, maker-taker fee models, and which players are winning market share.

It was definitely one of our most intense preparations, given that we are now set to spend about three weeks traveling across Eastern China to visit a handful of companies, look at their business models from the factory floor, and assess how we want to proceed there.

On the private side, there were a lot of moving pieces. We will be breaking down the unit economics of the coffee business live with a high degree of precision, and show you major developments on both the revenue and cost sides of the equation.

Back on public equities, October and November are a great time to be a full-time investor. Everyone is reporting earnings and, crucially for us, once earnings are out, management teams are liberated from quiet periods and can sit down with us.

The next few weeks are packed with 1-on-1 interviews with both leadership at our portfolio companies and their competitors. All of these should provide a ton of useful context to shape conviction. We’ll include insights from the earnings calls in this write-up, along with our rationale behind recent buys, exits, and position sizing.

On the mistakes front, this month saw way too much activity, with 44 trades executed versus 32 in September and 19 in August. We want to bring that number as close to zero as possible, so we are putting up strict guardrails to curb overtrading via strict weekend revisions.

Note: Even though the trade count is high, they only involve a dozen companies. e.g. Omni represented 3 trades during the month.

In terms of portfolio concentration, we peaked at 22 individual names. After careful reflection, we trimmed that down to 18 positions by month-end, and expect to be at 16 by the end of November.

We’ve laid out clearly why two of our current holdings no longer make sense. We only want the best of the best, and when the original thesis weakens, we must take decisive action. Monitoring existing ideas is almost always more important than generating new ones. A great investor simply doesn’t have dozens of exceptional ideas, nor can anyone process infinite noise.

We’re sticking to the high-conviction names that offer 3x–10x upside with concrete catalysts over the next 12 to 18 months.

Simple in theory, but hard as hell in practice.

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By accepting to receive the full post as a 🧙‍♂️ Inner Circle member, the recipient agrees to be bound by the foregoing limitations.

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

📊 Portfolio Overview

Returns (Asset-Weighted)

Public Market Portfolio

Throughout the month, we purchased shares in these new names:

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As always, we’ve included our usual short overview, but if you’re already familiar with the company, feel free to skip straight to the insights from our 1-on-1 interviews.

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Priority Briefings. Investing is dynamic, so our research never sits still. We don’t file a report and walk away; we maintain an active, ongoing dialogue with the key stakeholders and management teams of our past, present, and future holdings.

Think of these briefs as your “insider access” to those calls. We bring you contextualized highlights and actionable updates. You’ll see exactly how the business is evolving in real-time, long before it hits the quarterly report.

This series is exclusively for 🧙‍♂️ Inner Circle members

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

Alfa Financial Software Holdings ($ALFA) Brief

Alfa Financial Software Holdings (LSE: ALFA) provides enterprise software and cloud hosting solutions for the global asset finance and leasing industry.

Its flagship product, Alfa Systems (now in version 6), acts as the operational “heart and lungs” for tier-1 banks (e.g., Société Générale, large US banks), auto manufacturers/captives (e.g., Mercedes-Benz), and independent lenders.

The platform manages the entire lifecycle of complex financing. This includes front-end originations and workflow decisioning all the way to middle-office contract servicing, physical asset depreciation, and back-office statutory lease accounting.

Because of the high operational risk of replacing back-office lease-accounting engines, customer retention is ~97% (with effectively zero competitive churn on modern versions), creating a long-term, predictable, high-cash-conversion annuity-like business model.

How the Business Makes Money

Alfa operates a hybrid enterprise SaaS model divided into three core revenue streams:

Subscription & Cloud Hosting (~35% of revenue and growing)

This is a high-margin recurring SaaS fee business for software access, Alfa Cloud infrastructure hosting, maintenance, and ongoing upgrades.

It’s priced primarily on portfolio volume and active contract counts managed on the platform (rather than per-seat licensing).

This structure directly indexes Alfa’s recurring revenue to customer asset growth and insulates the company from seat-reduction automation.

Delivery Services (~50% of revenue)

The largest chunk, for now, comes from the implementation, systems integration, data migration, and project management.

Asset finance platforms take 1 to 2+ years to implement across complex regulatory jurisdictions and asset classes (especially true in the EU).

Alfa utilizes its own onshore consultants to onboard clients, billable on time-and-materials or milestone schedules. Post go-live, delivery continues generating recurring services revenue via multi-country rollouts and major module additions.

Software Engineering (~15% of revenue)

On the side, Alfa delivers chargeable development fees for bespoke customer modifications, regulatory enhancements, and client-requested roadmap features.

Over time, these enhancements are incorporated into the more standard core product modules (e.g., syndications, fleet management, wholesale originations), which are then cross-sold across the wider customer base.

The discussion is a continuation of our auto parts and services research, which seems to be the theme of these last two months. We are constantly diving into all parts of the business, expanding on our Copart bay understanding, Carvana unit economics, and insurance dynamics of Credit Acceptance.

Note: On this last one, as we’ve been tracking Admiral for their auto coverage since COVID. Maybe that should be a post.

This was one of the tangets from our previous SaaSpolcaypse themed research in companies like Monday, Atlassian, CMG, etc.

For starters, it’s easier to visualize this world if you can see it side by side. Here is how the three companies compare, giving you a baseline frame of reference.

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There’s really no point in introducing these guys...

It’s just a freaking great business.

Let’s break it down.

As we now do every week for transparency, here is our list of past Pick of the Week posts and their returns since publishing:

• All picks (equally weighted): +21.78%

Pick of the Week. A curated series of high-conviction research on companies currently under our microscope. We screen for specific dislocations where the market has mispriced the balance sheet or earnings power (or both).

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

🏦 doValue S.p.A. ($DOV)

⭐ Overall Grade: 9.5 / 10

doValue is the leading independent credit and loan servicer in Southern Europe (ranking #1 in Italy, Greece, and Cyprus) and, following the transformational acquisition of coeo Group (closed April 2026), #2 in digital receivables in the DACH region.

Despite operating with an asset-light, pure-fee servicing model (bearing essentially zero balance-sheet credit risk on its core NPE books), the stock has suffered a ~90% drawdown since its IPO peak.

The market views doValue as a ‘melting ice cube’, pricing in an endless terminal run-off of legacy non-performing loan (NPL) books caused by European banking cleanup and record-low default rates.

At ~€1.60–€1.80 per share (~€305m–€345m market cap), the stock trades at ~3.5x to 5.0x normalized FCF.

The consensus (price) treats the business as a balance-sheet-heavy debt buyer (analogous to distressed peers like Intrum or its Norwegian acquisition Lindorff) rather than a pure-fee asset manager.

Sell-side models extrapolate the cyclical trough of Southern European NPL volumes into perpetuity.

Both of these assumptions are clearly wrong, but more importantly, the market attaches essentially zero option value to:

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If you aren’t aggressively pitching a five-figure VIP mastermind or oozing slick, tailored-suit confidence, people sometimes mistake it for weakness.

But we aren’t here to extract maximum dollar value from your inbox, hype up random ticker tips, or tell you how to gamble your savings away.

Our deal has always been simple from the start. We document what we actually do with our own capital, including the good setups, the brutal mistakes, the operators we meet on the ground, and the hard lessons learned along the way.

Most investing errors don’t come from a lack of data; they come from the shortcuts our brains take when things get… messy. We lean on lazy rules of thumb to make a complex world feel manageable, and in the process, we strip out the nuances that can improve our lives meaningfully.

So, in the spirit of passing along genuine economies of scale (where the only currency that really matters is your attention), we’re trying something new.

Welcome to a brand-new series: 1-on-1 subscriber portfolio breakdowns.

The goal isn’t to judge or play stock-picking guru. It’s an open, constructive audit of your public holdings to dissect decision-making constructively:

1. Asset Allocation & Structural Balance: How the whole machine is built to survive different regimes.

2. Security Selection & Thesis Quality: Why each bet earned its place on the roster.

3. Behavioral Traps & Heuristics: Pinpointing the mental shortcuts and blind spots quietly eating away at returns.

More reps, better decisions, none of that sales pitch. Let’s get into it.

Here is the lowdown on how this is actually going to work.

Our plan is to turn this into a monthly issue, delivered either as a recorded session or a casual live stream.

We treat every breakdown as a fully anonymized case study… no names, no faces, no identifying marks. If you want to jump on audio, great; if you’d rather stay completely behind the curtain while we review your books, that works too. Your comfort sets the terms.

If you’d like to throw your hat in the ring, just reply directly to this email. The only prerequisite is an active paid subscription so we can keep the room focused on serious participants.

Hit reply with the following four bullets:

• Age

• Approximate gross annual income (in € or $)

• A screenshot of your current public portfolio (holdings, weightings, cash)

  • Note: It doesn’t matter whether you have $10k or $10m saved up; this is all about shaping your unique approach.

• A few lines on your strategy and framework —how you approach the market, your time horizon, and what you’re trying to achieve

Quick note on size: Whether your savings account sits at $10k or $10m doesn’t make a blind bit of difference here. The math scales, but the approach is identical. This isn't a net-worth flex but rather about shaping your unique framework.

We’ll run a few quick screening chats (10-15 mins) over the coming days to select our first profile and dial in the format. First teardown drops in mid-November.

One final, mandatory house rule before we kick things off: none of this is individualized financial advice.

Yes, we hold official certifications and have slogged through our fair share of financial acronyms (CFA, CAIA, EFA, and the rest of the alphabet soup…. full credentials are on the About page if you want the pedigree check).

Read the Full About Page

But this series is strictly educational: a practical stress-test of thinking frameworks to help you sharpen your own decision-making muscle.

We won’t be handing out cookie-cutter prescriptions like “bump your cash allocation from 20% to 25%.” That’s useless without context.

Instead, we’re going to dig into the why:

• Why are you holding 20% in cash right now?

• What specific job is that capital supposed to do?

• Are the instruments you picked actually the most efficient tool for that mandate?

We’ll share how we tackle similar tradeoffs with our own capital so you have a concrete baseline, but every portfolio lives in a unique reality.

The point isn’t to tell you what to do, but rather to pressure-test the logic so you can make your next move with total clarity and independence.

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As you know, we tend to hang out upstream where the operational drama (and expected volatility) lives, but sometimes there’s charm in moving down the chain into the toll roads of energy infrastructure.

In this case, you get rock-solid (pun intended) visibility, fee-based contracts, and a very juicy 10%+ yield that pays you handsomely while management finishes spending capital that will flow straight back to equity holders a few years down the line.

Let’s break this one down, run the numbers, and see if this dip is an actual bargain or a falling knife.

As we now do every week for transparency, here is our list of past Pick of the Week posts and their returns since publishing:

• All picks (equally weighted): +17.51%

Pick of the Week. A curated series of high-conviction research on companies currently under our microscope. We screen for specific dislocations where the market has mispriced the balance sheet or earnings power (or both).

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

🛢️ Hess Midstream LP ($HESM)

⭐ Overall Grade: 8.0 / 10

Hess Midstream LP (HESM) is a fee-based infrastructure player built around crude oil, natural gas, and produced water handling.

Historically, it served as the captive midstream arm for Hess Corporation’s core acreage across the Bakken and Three Forks plays in North Dakota.

Its operational setup covers the full hydrocarbon chain: gathering pipelines that pull production directly from the wellhead, processing plants (anchored by the Tioga Gas Plant) that strip out NGLs, and terminal/rail export assets that route barrels out to coastal refineries or long-haul pipes like DAPL and Enbridge.

The economic engine behind HESM has always been its contract architecture: 100% fee-based contracts with zero direct commodity exposure, baked-in CPI inflation escalators, and three-year rolling Minimum Volume Commitments (MVCs) guaranteeing around 80% of revenue. More on all of these later.

The Business Model Explained

At its foundational level, Hess doesn’t produce, buy, or trade oil, gas, or natural gas liquids (NGLs). It operates solely as an integrated midstream tollbooth.

When an upstream operator drills a well, HESM provides the plumbing to take messy, raw wellhead output, process it, extract the valuable components, and deliver pipeline-spec crude and dry gas to interstate markets.

The business is divided into three interconnected segments:

Midstream Unit Economics

What made HESM a Wall Street cash-generation darling regardless of the cycle was how it structured its agreements with its sponsor:

• Zero Commodity Price Exposure: HESM bills on a pure fee per unit (e.g., dollars per thousand cubic feet of gas gathered, or dollars per barrel of crude terminaled). If West Texas Intermediate (WTI) drops from $80 to $35, HESM’s unit tariff remains identical.

• CPI Inflation Escalators: Tariffs adjust annually based on inflation benchmarks (subject to contractual caps), ensuring that rising electricity, steel, and labor costs are passed directly down the pipe to the upstream operator.

• Dedicated Acreage: Rather than hunting for customers in the open market, HESM holds massive, contiguous acreage dedications across North Dakota, meaning all future barrels drilled on those lands must legally flow through HESM infrastructure.

As you can probably tell by now, this company is quite easy to understand. The base case of returning capital to shareholders through a tollbooth business model is as straightforward as it gets.

But the company, more accurately the stock, comes with a few caveats and one BIG question mark.

For starters, their October 2026 deal with Chevron changes the narrative in two major ways. Firstly, HESM is picking up Chevron’s DJ Basin gathering/storage assets in Weld County, Colorado, plus a 20% stake in the FERC-regulated Saddlehorn pipeline.

Secondly, Chevron is relinquishing its General Partner (GP) stake and exiting its ownership, converting HESM into an independent C-Corp-style midstream operator with full public board governance beginning in 2028.

In exchange, HESM gave Chevron tariff cuts in the Bakken (resetting agreements to fixed-fee with an 80% Minimum Revenue Commitment through 2033) and extended terms all the way to 2045.

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It aggregates information on where the company is going and what the key risks are in terms of business quality, competitive advantages, and AI.

Of course, none of this replaces a much deeper analysis that you must conduct before deciding with adequate conviction, and we think the best way of doing that is by performing a full scuttlebutt rundown.

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During the chat, we went over the following topics:

• Bulgarian Heating & Infrastructure: Initial banter about cold central heating in Sofia, Bulgaria, the monopoly on heating utilities, and poor internet connections.

• Fun Facts & Pop Culture: Brief tangents on Starlink, looking like a younger Leonardo DiCaprio, and the etymology of “slaves.”

• Gold Origins & Facts: Discussion on gold coming from neutron stars, its finite supply, recycling processes, and eucalyptus trees acting as natural gold pumps.

• Gold Usage Breakdown: A quick pop quiz ranking gold demand: jewelry (40%), central banks (25%), private investment, and industrials (6–7%).

• China’s Gold Strategy: Detailed analysis of why Chinese central banks and retail investors are heavily buying physical gold due to capital controls, real estate market struggles, and concerns over US asset freezing (similar to the 2022 Russian sanctions).

• Paper Gold vs. Physical Gold: The vast discrepancy between physical gold and synthetic/derivative paper gold.

• China’s Economic Model: The dynamics of Chinese corporate taxes, heavy subsidization followed by brutal competition, and the low unit energy costs (burning coal).

• Sourcing & Quality: Discussion on importing manufacturing goods from China, quality-to-price ratios, overcoming the “made in China” stigma, and using super apps like WeChat.

• CareCloud & Medical Billing: Deep dive into hospital/insurance billing software, why medical software remains sticky and looks like it’s from the 1990s, and the challenges of migrating data.

• Financial Engineering & Risks: CareCloud’s recent debt restructuring and redemption of Series B preferred shares, balanced against the risks of a major data breach and pending class-action lawsuits.

• Short Selling Masterclass: Review of David Capablanca’s book on short selling and day trading.

• Closing: Brief plug for the new specialty coffee joint venture (Nokora Coffee Group) in Bilbao, Spain.

Hope you enjoy!

Alejandro Yela

I’m obviously kidding. I’m in no position to lecture anyone on basically anything, but I want to share a much more personal piece than what we typically cover here.

This one is all about processing signals from your body. What people commonly refer to as instinct, intuition, or gut feeling.

Part 1

We all have it. I’m confident you’ve listened to at least one song in your life that gave you goosebumps, just as I’m sure you’ve looked down a dark hallway and felt an immediate chill. There are chemical processes behind pain and pleasure that are tough to explain rationally.

Take falling in love: you don’t make an executive decision to do it, yet when it hits, you can’t stop it. The reverse happens when you instantly dislike a stranger. It isn’t blind prejudice; it’s subtle pattern recognition. Your brain registers cues that make you suspicious—often because someone with those exact traits burned you in the past. You might not pin down why in the moment, but your guard is up.

All of these reactions (and many more), are what I’d describe as gut feeling. They are fundamentally a collection of chemical reactions and biological rules of thumb acting as navigation tools through life.

Part 2

For better or worse (and at the expense of another self-deprecating joke), I usually describe myself as a Labrador. In most settings, I’m just a guy with an easy smile and a non-threatening, non-competitive demeanor that makes it easy for people to open up.

Yet, I’ve also been called intimidating or arrogant, especially by people who have just met me. I express opinions with conviction; I’m quick to spot and discard nonsense, and, most importantly, I listen very closely.

Those traits are an immediate red flag for anyone operating with an ocean of knowledge that’s only one foot deep. They can’t casually talk in circles around a subject with half-baked takes, nor can they dynamically adjust their thinking as the conversation evolves. If I say “I like black”, they’ll cling to that for the rest of the chat, assuming it means I somehow hate white and have ignored every shade of grey in between.

When I mention my political perspectives, which I rarely bother doing these days, the takes are usually met with head-on resistance from both sides of the aisle. Yet as I lay out the underlying logic, the people I actually want as friends update their views in real time and find common ground, while the rest stay fixated on the fact that I said I like white.

I imagine a lot of you run into the exact same thing.

Part 3

What might not happen as often, though, is the intersection of these two things: raw instinct and deep analytical processing.

For me, when they collide, it sucks. Let me pause and deliver that with full emphasis in a greatly improvable British accent:

It bloody sucks.

The reason is simple: when the two combine, it surfaces as depression.

It’s an overwhelming state I can’t simply switch off. It goes on for about a full week and colors (more like removes the light of) everything I do.

The only real cure is time.

You might ask: gut feeling and low moods? Sure, they rhyme. But what do personality, logic, and knowledge have to do with it?

Somewhere in the back of my mind, my brain has been running scenarios on a complex problem, and my nervous system delivers the final output as quiet sadness. The sadness is the answer to an unconscious mathematical equation. It’s preemptive grief for something that I do not know or understand (at least yet). The variables have already aligned in my head, even if the events haven’t played out in real life.

Something bad is approaching, and I can feel it in my bones.

Part 4

Beyond any melodramatic framing, I have a personal track record with this sensation that I genuinely despise… mostly because it has a 100% hit rate.

I’ve felt this specific weight three times in my life:

• The first was around 2008. It hit me roughly three months before one of my major reference figures, my grandfather, passed away.

• The second was in July 2019. I vividly remember aggressively pacing a dark corner of Keio University in Tokyo, calling my girlfriend, and bawling my eyes out over an impending sense of collapse in the markets and the world.

• The third time started a few weeks ago.

I can’t pinpoint the source yet, but it genuinely gives me the creeps. This may all very well be some type of main character delusion.

Yet… I’m confident a shift is coming; I just don’t know what it is. But I do know that the impact (in my life) will be substantial.

And because all of this feels a bit gloomy, I’ll finish with a very short, personal video from a training session with a dog that should still be in my life.

Miss you, buddy.

If you found value in this analysis, please hit the ❤️ button and share your thoughts in the comments. It helps us bring institutional-grade research to a wider audience.

And if you liked this post, we’re confident you’ll love this:

As always, we’ve included our usual short overview, but if you’re already familiar with the company, feel free to skip straight to the insights from our 1-on-1 interview.

Access the Inner Circle

Priority Briefings. Investing is dynamic, so our research never sits still. We don’t file a report and walk away; we maintain an active, ongoing dialogue with the key stakeholders and management teams of our past, present, and future holdings.

Think of these briefs as your “insider access” to those calls. We bring you contextualized highlights and actionable updates. You’ll see exactly how the business is evolving in real-time, long before it hits the quarterly report.

This series is exclusively for 🧙‍♂️ Inner Circle members

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

OMS Energy Technologies ($OMSE) Brief

OMS Energy Technologies (NASDAQ:OMSE) operates an asset-light, high-spec precision engineering and machining model serving upstream shallow-water and platform oilfield operations.

Instead of putting their eggs into the more speculative deepwater plays, OMS focuses on the unsexy physical hardware that holds onshore and shallow operations together:

• Specialty Connectors & Pipes (61.6% of FY26 Revenue): The engine of the business. They manufacture large-diameter welded casing joints and conductor pipes using proprietary fast-locking designs (the JV family) that save operators massive offshore rig time. The vast majority ships directly out of Dammam to Saudi Aramco under a 10-year Long-Term Agreement through 2033.

• Premium Threading & Ancillary Services (31.4% of FY26 Revenue): A pure tollbooth stream. Pipe giants like Tenaris, VAM, and Hunting license OMS to precision-machine patented, gas-tight threads onto seamless pipe before it goes downhole. Every new development well needs it, providing a steady, recurring base of inspection and machining fees with zero raw-steel inventory risk.

• Surface Wellhead Systems & Christmas Trees (7.0% of FY26 Revenue): Precision-engineered surface pressure-control valves and downhole retrievable packers, primarily serving Southeast Asian national oil companies like Indonesia’s Pertamina.

How the Commercials Work

OMS operates on an installed-capacity framework agreement model. They lock in multi-year master supply agreements with massive national oil companies (NOCs) to establish pricing and sole-supplier relationships, while actual cash realization happens via periodic “call-off” purchase orders.

Because the business relies on precision value-add machining rather than capital-heavy foundries or shipyards, capex is tiny (just ~1% of revenue), allowing high-margin hardware sales to convert directly into free cash flow.

If you want to learn more about the catalysts and our valuation for this company, make sure to check out this post.

This conversation reminded us a lot of some of the conversations we’ve had in the past with Massimo Gismondi. Many items are framed as external decisions when they seem mostly internal, and naivety may be disguising a deeper meaning or truth the CEO isn't telling us.

Note that this does not imply they’re bad actors; just like Massimo, it may simply be a different set of priorities from what we as shareholders want.

Just to be super clear about this: investors want returns in the form of payouts, ROIC, FCF reinvestment, etc. For someone who already has money and is a majority owner of the business, interests may look more like status, prestige, networks, holding the CEO title of a listed company, bragging rights… the whole nine yards.

Again, this does not imply they’re bad, and it is usually connected with high intelligence… or at least the fact that they are trying to hide it is.

But it can also mean other stuff. For example, this is common practice in scams where people don’t want you to keep digging because they fear you may find exactly that.

For this reason, we’re confident this is but the first of at least half a dozen meetings we will have with How Meng Hock (and his CFO Kevin Yeo) to fully understand the situation and, in so doing, steer the ship in the right direction.

You’ll be the first to know how that pans out. In the meantime, here are the key takeaways from our very insightful first conversation. You’ll easily notice it’s our first given the tone and initial content.

Takeaway #1. The Saudi Aramco relationship/contract is more complex than we thought and can lead to working capital mismatches.

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If you couldn’t make it, here’s the recording for our Inner Circle members.

Again, we went a bit overboard with 90 minutes of discussion, so if your question wasn’t answered, expect a DM with our take.

We’ve left a timetable below in case you want to jump directly to any part of the discussion.

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

Introduction & Disclaimer (00:00 – 02:07)

• Context of the quarterly review covering personal, public, and private investments.

Macro Asset Allocation & Portfolio Performance (02:07 – 08:31)

• Cash & Yield (~36%): SGOV vs. ICSH duration mechanics, yield roll (~4–5%), generating ~$2k/month.

• Equities & ETFs: 19 individual equity positions; ETF buckets in commodities (gold/Bitcoin), broad large-cap (MSCI World, NASDAQ), and regional/opportunistic (China/Hong Kong tech).

• YTD Return: ~11%+ total return.

Core Holdings & 3 Operational Themes (08:31 – 46:33)

• Theme 1 — Capital Restructuring: CareCloud (Series B preferred redemption), Naked Wines (buybacks & inventory cash unwind), and monday.com (large buybacks offsetting 4-5 years of stock comp).

• Theme 2 — Operating Leverage: AEP (Clinton robotic truss line) and Supreme PLC (moat from the UK vaping duty tax stamp).

• Theme 3 — Picks & Shovels: TSSI (Dell integration partner, power capacity, 30% fixed vs. variable capacity upside).

• Individual Focus Deep Dives:

Read more

Here’s the last time we published the companies we were screening including :

The crowd has bashed it for its reliance on tiny-margin procurement that inflated the numbers on the way in and is deflating them on the way out.

But looking beyond that distraction, what we’re really seeing is a servicing component funneling business for Dell Technologies’ data center go-to guy.

We’ve been discussing this name quite a bit, especially throughout the second half of September. Make sure to join our chat so you don’t miss these discussions.

Let’s break this one down.

As we now do every week for transparency, here is our list of past Pick of the Week posts and their returns since publishing:

• All picks (equally weighted): +17.42%

Pick of the Week. A curated series of high-conviction research on companies currently under our microscope. We screen for specific dislocations where the market has mispriced the balance sheet or earnings power (or both).

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

🧰 TSS Inc. ($TSSI)

⭐ Overall Grade: 8.0 / 10

TSS, Inc. (Nasdaq: TSSI) operates as an infrastructure and deployment partner embedded within the physical part of the value chain of hyperscale and AI data centers.

Headquartered in Georgetown, Texas, the company takes high-density computing components (CPUs, high-performance GPUs, liquid cooling loops, switches, power units) and configures them into all-in-one server racks and modular data centers (MDCs) ready for immediate cloud deployment.

Before We Start… Procurement. What is it? Can I eat it?

For all of those who haven’t gone through the grueling process of tenders and procurements… no, you can’t eat it, but here’s a short summary of what the hell that actually is:

Procurement is a zero-margin pass-through purchasing service with a small markup fee that gets booked on gross revenue accounting whenever TSSI touches or configures the gear.

TSSI acts as an official purchasing agent for Dell and its end customers (frequently federal, state, and defense public-sector accounts).

In 2025, TSSI processed $279m of product in procurement. Reported procurement revenue was tens of millions per quarter, which maskes their core Systems Integration business look weak.

TSSI earns roughly an 8% to 11% reported gross margin on GAAP procurement revenue (which drops to ~5.5%–6.0% when measured against total gross merchandise value processed).

On deals where TSSI does not modify the product (pure drop-ship), GAAP forces them to book revenue on a net basis. That means they only recognize their ~6%–8% fee as revenue, and the massive hardware cost never hits the income statement.

The business itself doesn’t really change.

Because TSSI is a micro-cap with a limited balance sheet, it cannot afford to float $50m–$100m of third-party hardware on normal 60-to-90-day corporate payment terms. The mechanism that makes procurement function involves:

1. 80-Day Payment Terms: When TSSI delivers the hardware, the customer (Dell/government) has up to 80 days to pay the invoice.

2. Non-Recourse Factoring: TSSI immediately takes those invoices to its banking partner and sells them within 2 to 3 days.

3. The Factoring Fee Drag: The bank advances the cash immediately so TSSI can pay its equipment vendors within 30 to 45 days, but the bank charges a factoring fee (recorded under operating expenses).

   • In H1 2026 alone, TSSI paid $1.21m in bank factoring fees (and $2.33m in H1 2025).

4. The Net Operating Margin: After factoring fees, shipping, direct admin, and overhead are subtracted, procurement’s true operating margin is only around 3-5%.

With this part cleared up, let’s now look at what they actually do.

The Business Model Explained

Read more

Get the Unredacted Report

Index

1. Executive Summary & Asset Allocation

• 1.1.- Public Equities: Detailed YTD Performance, Asset Allocation, and Holdings Overview

• 1.2.- Private Assets: Business Development Update [Disclosing Details]

2. Q3 Review

• 2.1.- Quantitative Evaluation: YoY Performance Metrics, Sizing, Concentration, Winner/Loser Spread, and Cash Transition

• 2.2.- Qualitative Evaluation: Objectives Assessment, What Worked vs. What Didn’t, Behavioral Biases, and Philosophy Adjustments

3. September Review

• 3.1.- Macro Context and Market Observations

• 3.2.- On Chinese Monetary Policy and Gold Hoarding

• 3.3.- Cash & Treasury Compartment: % Remuneration Breakdown & FX Push

• 3.4.- ETF Compartment: Broad Index and Emerging/Frontier Markets

• 3.5.- Opportunistic Compartment: Individual Names and Goals

4. Holdings & Portfolio Activity

• 4.1.- Position Sizing, Entries and Exits

• 4.2.- Earnings Releases, Upcoming Catalysts, Insights and Updates

Briefing

This 28th edition is a massive one, and we’ve been working on it for a while. We are finally disclosing our private project, laying out the hard numbers alongside how operations are materializing.

Naturally, because good due diligence requires proper fuel, we have also sprinkled in a few serious specialty coffee pointers along the way.

The heart of this letter pulls together several high-stakes threads across our investable universe. Among the newest bits, we’ll break down how we’ve been building out a position (still incomplete) in a major O&G hardware manufacturer, splitting the OpCo from the FinCo to understand what is really going on.

From there, we pivot directly into the legal trenches of Eastern Europe, walking through the critical Ukrainian asset dispute heading straight toward a pivotal ruling on October 12th. Classic case of using a 28%+ WACC to discount dubious production.

Then comes one of the most intriguing valuation anomalies on our desk: a specialized data management firm that would terrify a traditional screener because of its extreme reliance on a single customer. Dig a layer deeper, though, and you find a business minting money with 20% FCF margins while running at 40% capacity.

We round out the entire letter with our classic quarterly retrospective, walking through every single position on our books to check in on thesis tracking, risk management, and the near-future catalysts lined up on the horizon.

Please do not skip the conclusion. We left an essential note at the end detailing how our structure and capital deployment will pivot if that potential merger crosses the finish line.

Inner Circle community, you know exactly what deal we’re referring to… strictly between us for now, of course.

For the Inner Circle members

Your invitation to our live quarterly review is waiting below.

RSVP Oct 12th

We will dissect the individual holdings and themes for the upcoming quarter. We think the value is in having an open room to tackle all of your questions head-on. Make sure to jump in live, but if you can’t make the slot, the full recording will be up shortly after.

So just shoot us your questions via DM, leave a comment at the end of this post, or email us beforehand so we can address everything on the call.

This publication is confidential and intended solely for the use of the person or entity to whom it is given or sent. It may not be reproduced, distributed, or transmitted without the author’s prior written consent.

By accepting to receive the full post as a 🧙‍♂️ Inner Circle member, the recipient agrees to be bound by the foregoing limitations.

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

📊 Portfolio Overview

Returns (Asset-Weighted)

Public Market Portfolio

Throughout the month, we purchased shares in a few individual names, including:

Read more

We were saving this for the portfolio update (next week), but you all deserve to know, and immediately benefit from, a few defining developments.

Quick note: None of this is chest-thumping. It’s meant as radical transparency so you see exactly where we stand, and where we’re charging next

We’ve had a breakout year. Markets can end on a high or low note, but the ride in between has been nothing short of phenomenal:

• Up 10%+ on the year (+€34,806.91 unrealized, +€89,988.04 realized), staging a decisive turnaround from last year’s drawdown.

• Recaptured our capital from a legacy PE investment (+€79,842.78 net proceeds).

• Cleanly eliminated a major drag, cutting a vehicle after painfully absorbing €135k+ in costs.

• Closed one private transaction (details in the monthly update), with the ink nearly dry on another.

We still have a modest bank balance to clear, which we’ll finish wiping out over the next 12 months.

The discipline and forward planning has paid off. Now the personal balance sheet is fortified, momentum feels on our side, and we are primed to keep building.

The dual goal is pushing both our passion-maxxing endeavors and our profit-maxxing core smartly and with care.

Join Our Community

Insider Developments

Beyond this review, the projects we’ve worked on create a very stable base of income… and that’s basically freedom. Additionally, we’ve been listening to your feedback, and we’re big believers in shared economies of scale.

Beyond natural subscriber rotation, the two primary friction points are too much content and price.

We have deeply thought about cadence, price, content, and community building for a long time. As you know, we’ve made minor adjustments over time, but as an ongoing process, we require testing and improvements.

To address cadence and focus: starting in 2027, our publishing cadence will shift to 1–2 posts per week (down from at least two). We will also likely invert the schedule: publishing PoW on Wednesdays, with portfolio updates and deep dives dropping on Saturdays.

We’ll spend less time on broad, open-ended series like OIJ, sticking strictly to actionable, investment-specific research. And while we do leverage AI to filter and correct grammar, our interviews can’t be found anywhere else. They’re 1-on-1s with management (and stakeholders), the very definition of primary data.

Expect sector deep-dives, like our automotive review spotlighting specific companies, to come out much more frequently.

To address accessibility while protecting the community: we are effectively going almost exclusively paid. We don’t want casual browsers, but committed members of a community that has been growing in quality for a long time.

This fee isn’t meant to monetize research for profit; it serves strictly as a filter against automated scrapers, bot crawlers, and general noise, ensuring our community remains focused on serious market participants.

With that foundation set, we’ve split the offering into two distinct paths:

• The Annual Sub ($30/year): If you want the research component (write-ups, PoW). If you just want to learn and have commenced your journey, it’s a low friction point to participate.

• The Inner Circle Sub ($699/year): If you want the journey component, direct access, and game-changing insight from exclusive conversations.

(Do not worry, anyone who has held an annual subscription for a few years will be automatically upgraded to the Inner Circle.)

In theory, if you want the deeper access, you always have the option to upgrade, and in the meantime you commit to being part of something great:

The Hermit Community

Two Short Notes

New firepower in our evermoe professionalized operations and financing is unlocking more than a few institutional-grade doors, tier-one management rooms, and research caliber we simply couldn't touch before.

The necessary trade-off of scaling up? We’re outgrowing the illiquid shadows of nano-caps to hunt where serious capital can actually deploy effectively.

Our lens is shifting toward better known, high-upside small caps ready to run.

This was always inevitable. It was just a matter of time.

Upcoming Docket & Pipeline:

• Oct 5 [Expected]: MicroCapClub interview dropping. An upstream and midstream O&G masterclass. Delivering an intuitive framework for beginners and very interesting single-name depth for veterans.

• Oct 7: Q3 Portfolio Review covering major public/private moves, YoY performance comps, and dedicated breakdowns on our specialty coffee position and private deal structuring.

• Oct 10: Mini write-up on TSS Inc. ($TSSI). A fantastic, high-conviction play.

• Oct 14 [Target]: Full Naked Wines ($WINE) deep dive. Content has been complete for a week now; we’re simply awaiting final sign-off on direct quotes from management to protect that relationship.

Also landing within the next two weeks: three video updates, including our Q3 review and Q&A for Inner Circle members, Buy Now, Cry Later #3 (w/ Yegor), and an unfiltered review of the Baseline platform.

That adds a ton of value to the piece, so... definitely worth the wait.

Let’s use some Buffett-esque language. Imagine coming across a business that the market has priced like a cigar butt, even though it operates more like a tollbooth on the world’s most lucrative energy basins.

Cue the dramatic tension music, dim the studio lights, and zoom in tight on the hot seat.

Final answer?

In case you’re still unsure, here are the ROCE stats for option D:

As we now do every week for transparency, here is our list of past Pick of the Week posts and their returns since publishing:

• All picks (equally weighted): +15.93%

Pick of the Week. A curated series of high-conviction research on companies currently under our microscope. We screen for specific dislocations where the market has mispriced the balance sheet or earnings power (or both).

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

🛢️ OMS Energy Technologies Inc. ($OMSE)

⭐ Overall Grade: 8.0 / 10

We originally discovered OMSE while deep in the weeds researching CMG.

While both sit squarely in oilfield optimization, OMS carved out a wildly profitable niche on the physical hardware side, effectively anchored in the Middle East and Southeast Asia with an iron grip on shallow offshore and platform operations.

We actually just spoke directly with OMSE’s senior management a few days ago.

If you know our playbook, that executive check is always the capstone of our primary scuttlebutt process. Let’s call it a final sanity check.

While we won’t share direct quotes, you bet we’ll include verified insights from that discussion.

OMS Energy Technologies (NASDAQ: OMSE) is an upstream oilfield hardware and precision-engineering specialist that manufactures the high-spec metal components holding oil and gas wells together at the surface and just below the seabed.

It operates in an unpopular spot, as what’s in vogue are the much deeper offshore facilities.

Shallow-water offshore drilling has fallen out of favor primarily because it centers on mature brownfields with declining production profiles.

The multi-billion-dollar capex cycles and massive reserve discoveries that capture excitement are flowing almost exclusively toward frontier deepwater and ultra-deepwater plays like Guyana, Brazil, and West Africa, leaving the more traditional shallow-water platforms out of the spotlight.

Compounding this lack of excitement is severe dayrate and contract volatility across the jackup space.

Supply additions over recent years were met with abrupt regional pauses. The most explicit example is when Saudi Aramco suspended dozens of jackup rigs to recalibrate its maximum sustainable capacity targets. This all casts a cynical shadow across the entire shallow supply chain.

Lastly, shallow operations basically carry a commoditization stigma. A very large group of people are writing off standard surface wellheads and conductor casing as basic, interchangeable metal, contrasting it unfavorably against their 50-million-dollar subsea blowout preventers and wet trees engineered by global giants that we’ve looked at before like SLB, Baker Hughes, or TechnipFMC.

How Does OMS Make Money?

OMS operates across six core jurisdictions: Saudi Arabia, Singapore, Indonesia, Thailand, Malaysia, and Brunei. They operate 11 precision manufacturing and service facilities. The company generates revenue across four distinct revenue streams:

Let’s break these down:

Specialty Connectors and Pipes (61.6% of FY26 Revenue)

These are large-diameter (16 inches and up) welded joints and conductor casings. These heavy steel pipes are driven or drilled into the ground/seabed to form the foundational structural column of a well.

OMS’s proprietary connections (the JVLW and JVDD series) feature fast make-up thread designs (often 1 to 3 rotations to lock) that save rig crews hours of offshore rig time, where daily spread rates can exceed hundreds of thousands of dollars.

The massive Dammam facility in Saudi Arabia accounts for 95% to 99% of this segment’s sales, delivered directly to Saudi Aramco under a 10-year Long-Term Agreement (LTA) running through 2033.

Surface Wellhead Systems (SWS) & Christmas Trees (7.0% of FY26 Revenue)

This is the complex stack of mechanical valves, casing heads, and chokes sitting directly on top of the well to control pressure (up to 10,000–15,000 PSI) and fluid flows.

Centered in Indonesia (87% of segment revenue), primarily serving Pertamina Hulu Rokan. OMS also holds API Spec 11D1 certification to manufacture its own mechanical and hydraulic downhole retrievable packers, recently expanding into Pakistan, Oman, and Angola.

Premium Threading & Ancillary Services (31.4% of FY26 Revenue)

This part of the company centers around high-precision threading of Oil Country Tubular Goods (casing and tubing) under proprietary licenses from global pipe giants (VAM, Tenaris, JFE, Hunting, NOV Grant Prideco).

It’s effectively a pure toll-booth. Recurring service revenue. Exploration operators purchase seamless pipe, and OMS cuts patented, leak-proof micro-groove threads into the pipe ends before it goes downhole.

To understand whether OMS’s product is good, you have to look at how oil and gas equipment is judged in the field.

If an iPhone has a bug, the app crashes. If an offshore conductor casing joint or a 10,000-PSI surface wellhead shears or leaks downhole, the operator faces an environmental blowout, millions (USD) in rig downtime, and a big bag of liabilities.

Because of all of these, operators never buy unproven equipment on price alone.

OMS’s product suite is technically proven, highly certified, and trusted at the highest tier of the industry.

Prop. Connectors: The JV Series

OMS’s core proprietary hardware line is the JV Family of weld-on casing connectors (JVDD, JVDD2, and JVLW).

These are large-diameter mechanical joints (16” to 36” nominal pipe) used to lock together the top foundation pipe that anchors an offshore or onshore well.

Standard pipe requires long make-up times and carries a high risk of cross-threading. The JVDD series uses a low-ramp angle, multi-start thread design requiring as few as 3 to 6 turns to achieve full make-up torque. On a deepwater drillship costing $300,000+ per day, shaving hours off casing runs saves the client tens of thousands of dollars per well.

Unlike standard threaded pipes that warp or crack if hammered into dense seabed rock, OMS connectors feature dual load shoulders designed to withstand repetitive, high-impact hydraulic driving apparatus strikes without deformative yield.

The JV connection line underwent finite element analysis (FEA) and destructive physical validation by independent engineering consultants in Singapore and Houston, formally passing ISO 13679:2002 CAL-1 (Connection Assessment Level 1) physical test standards.

Surface Wellheads, Christmas Trees & Downhole Packers

OMS manufactures complete onshore and offshore surface wellheads rated up to 10,000 to 15,000 PSI working pressures, as well as production Christmas tree valve blocks.

• API Specification 6A Monogram: API 6A is the gold standard for surface well control equipment. OMS holds this license across multiple plants, including securing API 6A certification for its primary Dammam facility in Saudi Arabia in early 2026. This allows OMS to supply and service complete Christmas trees directly to Saudi Aramco.

• Downhole Tools (API Spec 11D1): In late 2025, OMS Indonesia developed and earned API 11D1 certification for its proprietary retrievable mechanical and hydraulic downhole packers. Packers must reliably isolate casing rings under high-differential pressures downhole—a technical step up from standard surface piping.

• Field Acceptance: Pertamina Hulu Rokan (Indonesia’s largest oil producer) repeatedly extended OMS’s contracts in FY26 beyond baseline award values because of product reliability in steam-flood and conventional basins. In FY26, OMS secured its first 10,000-PSI full wellhead system deployment in Pakistan, as well as customer wins in Angola and Oman.

Premium Threading (Licensing)

Perhaps the clearest validation of OMS’s precision quality is that the world’s most protective seamless pipe manufacturers (VAM (Vallourec), Tenaris, Hunting, NOV Grant Prideco, and JFE) license OMS to machine their patented thread profiles.

These pipe manufacturers spend hundreds of millions developing proprietary gas-tight metal-to-metal seal threads.

They only license machine shops that can repeatedly achieve microscopic CNC tolerances (within thousandths of an inch) under strict API Spec Q1 quality management systems.

If OMS had loose QA/QC or high scrap rates, those licensors would revoke their machine shop agreements immediately to preserve their brand integrity. OMS has held these licenses across Southeast Asia and the Middle East for decades.

Product Scorecard (vs. peers)

OMS’s product is not bleeding-edge, but it does operate in a safety-first, low-risk tolerance environment where proven reliability is everything.

In its target market (onshore, shelf, and shallow-water upstream wells across the Middle East and Asia-Pacific), OMS’s hardware is thoroughly proven, fully certified, and trusted by the most demanding national oil companies in the world.

Contract Structure: Are Revenues Truly Recurring?

In software or consumer staples, recurring revenue means predictable, contractually locked subscriptions. In the upstream oilfield sector, revenue is rarely contracted as a fixed monthly retainer.

While long-term master contracts are multi-year and provide continuous customer exclusivity, actual revenue realization is lumpy and volume-dependent.

Revenue recurrency is driven by “Call-off Orders” (purchase orders issued on demand under fixed pricing agreements) rather than guaranteed minimum take-or-pay volume commitments.

Contract Count & Core Agreement Inventory

OMS has served over 200 upstream clients, but consolidated business visibility rests on a core set of long-term master agreements and framework supply contracts:

The Nature of Recurrence: Revenue vs. Cash Flow

The Call-Off Order “Whiplash”

A long-term contract at OMS is not an annuity. Saudi Aramco’s 10-year LTA is an umbrella agreement that fixes unit prices and technical qualifications, but Aramco orders in batches via call-off purchases:

• FY2025: Revenue spiked to $203.6m because Aramco was winding down an older contract while overlapping the aggressive ramp-up of the new 10-year LTA.

• FY2026: Revenue fell 23.4% to $155.9m when call-offs normalized and Aramco temporarily digested inventory.

This dynamic explains why backward-looking stock screens mistakenly flag the company as declining, even though the master 10-year relationship remains intact.

The 12-Month Visible Order Backlog

OMS tracks short-term guaranteed visibility using its firm order backlog (orders scheduled for delivery within the next 12 months):

• March 31, 2025 Backlog: $102.0m

• March 31, 2026 Backlog: $60.7m

Management explicitly notes that backlog contraction was not due to lost tenders or cancellations, but purely the timing interval between major Aramco call-off tranches.

For instance, right at fiscal year-end in March 2026, OMS booked a fresh $11.0m call-off order from Aramco to kick off FY27.

Premium Threading: “Consumable” Baseload

While connector projects come in multi-million dollar batches, the Premium Threading and Ancillary Services divisions ($48.9m combined revenue in FY26) act as steady, recurring consumables. Every time an operator runs casing into a new development well, pipe joints require threading and NDT inspections. Operators do not alter their casing thread suppliers mid-drilling program due to downhole blowout liabilities.

Quality of Earnings Assessment (Quick Summary)

• Contract Duration: High (Anchored by a 10-year agreement with the world’s largest oil producer through 2033 and a multi-year partnership with Thailand’s PTTEP through 2028).

• Revenue Volatility: Moderate to High (Zero minimum volume guarantees mean revenue swings year-to-year based on NOC budgeting cycles).

• Customer Retention: Exceptional (NOC relationships span 20 to 50 years, with virtually zero historical contract cancellations).

The revenue is pretty sticky over a 3- to 10-year horizon, but lumpy on a quarterly and annual basis.

For an investor, this lumpiness creates mispricings which are basically entry opportunities for us.

Note that the underlying multi-year master supply agreements remain there, which means visibility.

The Unit Economics: Dissecting the Cost Stack

OMS is not a basic foundry; it operates an integrated precision machining and fabrication model. It buys certified heavy steel casing, pipes, and forged bar stock from regional mills, machines high-tolerance threads, welds specialty connectors onto conductor pipe sections, and performs non-destructive testing (NDT).

Segment Gross Margin Profile

• Specialty Connectors & Pipes: Delivers ~29.6% gross margin ($28.5m gross profit on $96.1m revenue in FY26). Highly sensitive to raw steel input prices and volume absorption in Saudi Arabia.

• Surface Wellheads & Trees: Delivers ~28.3% gross margin ($3.08m gross profit on $10.9m revenue). Compressed slightly by higher imported raw material components.

• Premium Threading Services: Historically the highest-margin segment, delivering 28.3% to 40%+ gross margin. Threading carries little raw steel inventory risk; costs are predominantly machinist hours, machine wear, and variable patent royalty cuts.

• Ancillary Services: Delivers ~40.1% gross margin ($6.2m gross profit on $15.5m revenue in FY26), reflecting pure testing, refurbishing, and inspection labor.

Working Capital Dynamics and Cash Conversion

The unit economics of this business are shaped by its cash conversion cycle:

• Receivables & Payables: In FY26, Days Sales Outstanding (DSO) sat at 44 days, while suppliers were paid in ~46 days.

• Inventory Run-Down as a Cash Spigot: In FY25, OMS stocked up heavily ($32.5m inventory) ahead of expected Saudi Aramco call-off orders. In FY26, as Aramco orders normalized, OMS converted that raw inventory down to $17.2m, which released $16.2m in working capital straight into cash.

• Capex Lightness: Manufacturing these tools does not require massive smelters or shipyards. OMS incurred just $1.64m in total Capex in FY26 ($1.11m PPE + $0.52m intangibles) against $155.9m in revenue (a Capex intensity of barely 1.05% of sales).

• Cash Conversion: Because maintenance Capex is negligible, OMS generated $54.1m in operating cash flow and $52.5m in Adjusted Free Cash Flow in FY26.

How can Baseline make your life easier?

As you know, we’ve partnered with Baseline to get you an easy way to verify whether a company is worth your time.

Baseline helps you screen for and analyze companies, identifying potential issues from the very first pass.

It aggregates information on where the company is going and what the key risks are in terms of business quality, competitive advantages, and AI.

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Of course, none of this replaces a much deeper analysis that you must conduct before deciding with adequate conviction, and we think the best way of doing that is by performing a full scuttlebutt rundown.

Baseline, however, accelerates the process of discarding companies, which saves you time and allows you to focus more on what’s important.

You don’t have to take our word for it; here’s the report for a few companies we love and hold so you can see firsthand what we’re talking about:

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712KB ∙ PDF file

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🎯 Catalysts: Why Now?

Initiating Cash Returns

The company holds $154.3m in cash and restricted cash (against an ~$185m market cap) with zero bank debt.

Because this cash sits largely in short-term bank deposits earning modest yields, it dilutes headline ROE and fuels market skepticism that the cash is “trapped” or earmarked for empire-building.

For us shareholders, the solution is super straightforward:

With the stock trading around book value ($4.03) and cash backing ~$3.60 per share, buybacks at current levels would be heavily accretive to per-share intrinsic value.

Even establishing a modest 4%-6% dividend yield would cost less than $10m annually, a fraction of FY26’s $52.5m in Adjusted FCF, instantly putting the stock onto institutional income screens.

Saudi Aramco Call-Off Resumption & Revenue Normalization

This is also an easy one. Revenue fell from $203.6m in FY25 to $155.9m in FY26 as Aramco call-off orders normalized following an overlap period between supply contracts. Algorithmic screens and quant models see this as a red flag (top-line decline) rather than normal contract timing.

The $11m call-off order booked right at the end of FY26 in March was the first sign of this replenishment.

Once upcoming quarterly filings demonstrate that the Aramco baseline has stabilized back toward its historical $120m–$200m multi-year run-rate, the market’s “terminal decline” narrative should break.

Diversification Beyond Aramco

Saudi Aramco accounted for 57% of group sales in FY26 and 67% in FY25. The market demands a heavy small-cap discount because a single procurement pause in Saudi Arabia directly hits earnings. If the company accelerates conversion of non-Saudi contract pipelines, particularly for Surface Wellhead Systems (SWS) and proprietary packers, we should see an instant rerating (it’s only upside).

In FY26, non-Saudi specialty connector sales rose 130%. OMS secured its first 10,000-PSI surface wellhead contracts in Pakistan, landed initial customer orders in Angola and Oman, and earned the new API Spec 11D1 certification for downhole retrievable packers.

Proving that OMS can generate $40m–$50m+ in recurring high-margin billings outside of Saudi Arabia will show institutional investors that the company is a multi-regional platform rather than an Aramco captive shop.

Material Weakness in Internal Controls and Visibility

In its Form 20-F for FY26, management disclosed a continuing material weakness in internal control over financial reporting, citing a shortage of personnel experienced in IFRS and SEC accounting guidelines following its recent transition to public markets. Not sure how to fix this beyond a clean third-party audit, but addressing this should change perception and clarify what a red flag is for most institutional players.

This is a tiny company, but it’s one of those that, with a bit of coverage, would zoom as it checks most of the criteria that institutional holders look for.

💰 What’s It Worth?

We used a demanding 13% discount rate to account for its small-cap size and customer concentration with Saudi Aramco, along with a 2% perpetual growth rate.

Base Case [$4.30] (126% Upside)

On the operating side, we assumed revenue rebounds gradually from its FY26 post-order normalization ($155.9m) toward $200m, while maintaining operating margins that level out at 21.5%.

Setting aside cash to upgrade equipment across its plants and rebuild raw steel inventory, OMS projects to generate $27m to $33m in annual FCF, giving its underlying operations an enterprise value of $272.4m.

After adding back OMS’s $154.3m cash and subtracting minority partner interests and facility leases, the total net value to shareholders reaches $412.5m.

Divided across its 42.45m shares, that’s an intrinsic (fair) value of $9.72 per share.

Even under harsher stress tests with higher discount rates and slower growth, fair value remains comfortably in the $8.30 to $9.30 range.

Note that unrestricted cash alone accounts for $3.58 (~80% of the entire stock price), meaning you are effectively buying OMS’s manufacturing hubs, proprietary connection designs, and multi-year national oil company contracts for a stub enterprise value of just ~$40m.

We’ll leave you to do the super complex math on EV/FCF figures. 😉

Bear Case [$3.50]

We really don’t think a bear case is necessary here. Given the nature of their operations, it would be very surprising if the company lost money. At the end of the day, the stock has a natural floor value anchored by its net cash.

Don’t forget to check out Baseline. Take it for a spin using code HERMIT for that sweet 20% off.

Disclaimer

This presentation is provided for informational purposes only and is not intended to be, and should not be taken as an offer or solicitation to buy or sell any securities or to invest in any investment strategy. The information contained in this presentation is not investment advice and should not be relied on as the basis for any investment decision.

The views, thoughts, and opinions expressed in this presentation belong solely to the author and are not necessarily indicative of the views of Equity Focus FIL, Hermit Ventures Ltd., 25Delta E.A.F., their management, affiliates, or employees. This presentation may contain forward-looking statements, which are based on beliefs, assumptions, current expectations, estimates, and projections of the author. Such statements are subject to risks and uncertainties that could cause actual results to differ materially.

Readers should consider the investment objectives, risks, charges, and expenses of any investment carefully before investing. The author does not guarantee the accuracy or completeness of the information presented, which is subject to change without notice. The author is not responsible for any errors or omissions, or for the results obtained from the use of this information.

This publication does not take into account the investment objectives, financial situation, or specific needs of any particular participant. It is not to be construed as legal, tax, investment, or other advice, and the author recommends that investors seek independent financial, legal, and tax advice before making any investment decision.

Investments involve risks, including the loss of principal. The value of investments and the income from them can fluctuate, and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future results.

This presentation is confidential and is intended solely for the use of the person or entity to whom it is given or sent and may not be reproduced, distributed, or transmitted without the prior written consent of the author. By accepting this presentation, the recipient agrees to be bound by the foregoing limitations.

For everyone in our chat, you already know what’s up.

We’ve been covering this company for a long time (since 2021).

It used to be priced for perfection, and now it’s trending toward being priced for obliteration. Neither extreme reflects reality.

While a sudden collapse is almost impossible, the company is heading to a slow bleed of it’s serial compounding machinery that can be easily resolved with some good decision making and a unified focus on deleveraging.

We think there’s light at the end of this tunnel, and the investment case grows stronger by the day as the valuation continues to de-risk the entire thesis.

As we now do every week for transparency, here is our list of past Pick of the Week posts and their returns since publishing:

• All picks (equally weighted): +14.91%

To keep things clear and easy to follow, we’ve slightly adjusted the formatting.

1. Companies we purchased are in bold.

2. We’ve replaced "Allocation" with Current Allocation to show the approx weight of each position as a percentage of our total assets today.

As a reminder, companies that we don’t hold that were discussed over a year ago are removed from the list and excluded from our average performance. In this update, we removed Portillo’s (-40%) and Tobila (+40%), which roughly cancel each other out. We still own CROX.

Overall, the priority is maintaining a clean LTM track record as we’re only as good as our last pick.

Pick of the Week. A curated series of high-conviction research on companies currently under our microscope. We screen for specific dislocations where the market has mispriced the balance sheet or earnings power (or both).

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

🌿 Green Landscaping Group AB ($GREEN)

⭐ Overall Grade: 8.0 / 10

As its name states, this is a landscaping company; more precisely, it operates as a decentralized Stockholm-based HQ for 59 companies dedicated to outdoor environment services, grounds maintenance, and green infrastructure across Sweden, Norway, Germany, Finland, Lithuania, and Switzerland.

Note: Green Landscaping reports profitability using EBITA, whereas we generally prefer standard EBIT.

In practice, the difference between the two is small, it just comes down to non-cash amortization from past acquisitions.

Relying on EBITDA, however, would be deeply misleading. Physical machinery and fleet equipment are the lifeblood of this business, and because these assets wear out quickly in the field, depreciation represents a very real and unavoidable cost of keeping everything running.

Service Lines & Revenue Breakdown

The business is a mixed bag of recurring and seasonal jobs awarded via procurement processes that combine low-cost labor and very manual work:

1. Grounds Maintenance (Recurring): Lawn mowing, pruning, arboriculture, seasonal plantings, and facility perimeter care.

2. Winter Services (Seasonal): Snow clearing, gritting, salting, and ice removal for municipalities and commercial centers.

3. Hard Landscaping & Green Space Construction (Project-Based): Urban park development, civil stone paving, retaining walls, drainage systems, and green roof installations.

Around 60% of group revenue originates from the public sector (municipal councils, state agencies, public housing authorities, regional transit hubs), while the remaining 40% comes from private real estate managers, corporate facilities, and general contractors.

Grounds maintenance contracts are typically multi-year framework agreements running 3 to 5 years, often carrying extension options (up to 8 years) that push customer relationships well past a decade.

This creates a stable base of predictable cash flows, but it can also lead to painful multi-year opportunity costs when contracts are lost.

In practice, this dynamic tends to produce binary outcomes:

• On the one hand, operators in smaller municipalities often enjoy quasi-monopoly status with high margins, though this eventually draws the eye of neighboring competitors.

• On the other hand, larger or growing municipalities attract aggressive, low-cost bidders. Price wars ensue, compressing margins until unsustainable operators are eliminated from the market.

Over time, these procurement dynamics move in distinct cycles.

Decentralized M&A Playbook & Track Record

We’ve seen this play out successfully with a few other Swedish companies:

• Fasadgruppen Group: Building facades, masonry, exterior insulation, roofing, and window replacement.

• AddLife: Life sciences, laboratory equipment, diagnostics, and medtech. Spun off from Addtech in 2016.

• Sdiptech: Critical infrastructure and urban environmental technology.

• Instalco: Technical installation services (electrical, heating & plumbing, ventilation/HVAC, and industrial piping).

• Beijer Ref: Commercial & industrial refrigeration, HVAC, and heat pumps.

• Nederman: Industrial air filtration and environmental clean-air technology.

• VBG Group: Specialized commercial vehicle components and industrial power transmission.

• Teqnion: Niche B2B industrial products (specialized logistics equipment, safety illumination, surgical components, lab machinery).

• Cary Group: Vehicle glass repair, calibration (ADAS), and replacement.

• Addnode Group: VMS, CAD/BIM tools, and digital engineering platforms.

Back to Green Landscaping, they acquire subsidiaries that keep their local branding, customer relationships, equipment yards, and day-to-day management teams. More than 99% of group staff are employed directly at the operating subsidiary level rather than at corporate headquarters.

Context: If numbers on employees seem a little off is becasue they are. Beyond their 2,500+ mostly fixed staff they hire heaps of seasonal workers locally from April/May through October to handle all the labor-intensive work.

Management targets profitable, niche market leaders generating roughly SEK 50m ($5m) to SEK 250m ($25m) in sales with sustainable EBIT margins of 8%–10%.

Management used to publish a count of how many subsidiaries were in approximate EBIT margin ranges (in 5%-ish intervals), which was very helpful.

Note that management has also purchased subpar operations that can be pushed towards that 8% EBIT hurdle with a few tweaks.

Historically, deals are completed at disciplined multiples of 4.5x to 6.5x EV/EBIT. A substantial portion of the transaction consideration (often 20% to 40%) is structured as multi-year earn-outs (contingent considerations) linked directly to operating cash flow and EBIT hurdles.

Over the past five years, the group scaled net sales from SEK 3,139M in 2021 to a rolling twelve-month run-rate of SEK 6,632m as of Q2 2026.

However, rapid balance sheet expansion pushed leverage up to 3.4x pro-forma EBITDA (above the 2.5x internal ceiling), forcing management to pull back their acquisition pace in 2026 and focus entirely on deleveraging.

Pricing Dynamics & Economic Moat

Green Landscaping does not possess IP or patented technology… in general, the contracts they work on are price- and relationship-based bids that usually go to the person who can best do the job for the lowest price tag.

Let’s break down a few of their other advantages.

Grounds maintenance and snow plowing are route-density businesses. The subsidiary with the greatest concentration of nearby parks, housing complexes, and roadways incurs lower non-billable drive times and lower equipment transportation costs per job.

Bidding on municipal tenders in Northern and Central Europe requires ISO certifications, environmental compliance credentials, labor union registrations, and substantial financial bonding. Independent “mom-and-pop” operators are locked out of the largest regional contracts, leaving Green Landscaping to bid against a limited field of mid-sized contractors.

Local subsidiaries retain decades-long relationships with municipal purchasing officers, yet gain central group advantages: group-wide fuel discounts, preferred fleet leasing terms, insurance procurement, and back-office IT infrastructure.

How can Baseline make your life easier?

As you know, we’ve partnered with Baseline to get you a simple and easy way to test for all of these.

Use code HERMIT for 20% off

Baseline helps you screen for and analyze companies, identifying potential issues from the very first pass.

It aggregates information on where the company is going and what the key risks are in terms of business quality, competitive advantages, and AI.

Of course, none of this supersedes a much deeper analysis that you must conduct before making a decision with adequate conviction, and we think the best way of doing that is by performing a full scuttlebutt rundown.

Baseline, however, accelerates the process of discarding companies, which saves you time and allows you to focus more on what’s important.

You don’t have to take our word for it, here’s the report for a few companies we love and hold so you can see first hand what we’re talking about:

Baseline Five Name Pack Bl Cmg Mndy Tssi Green

712KB ∙ PDF file

Download

Download

🎯 Catalysts: Why Now?

There’s a bit of everything, but we will focus on imbalances between regions, balance sheet leverage, and a leadership transition.

Here are some catalysts that could prompt a market re-rating:

Resolution of the Norwegian Drag

While Sweden has returned to organic growth and the Continental European unit (Germany, Lithuania, Switzerland) continues to print operating margins between 15% and 22%, Norway has dragged down group earnings (reporting negative EBIT in Q1 and just a 4.1% margin in Q2).

The primary internal catalyst is the restructuring underway by new regional leadership, cleaning out legacy fixed-price contracts that lacked inflation indexation, standardizing operational controls, and aligning project bidding discipline with group standards.

Deleveraging Toward the 2.5x Target

Group net debt sits at SEK 2,859m including earn-outs, leases, and minority interests.

Management has paused aggressive M&A to let working capital and operating cash flow pay down bank credit facilities.

As leverage drops below 3.0x on its way toward the 2.5x target, financial risk diminishes, reducing the cost of debt and freeing up capital to resume acquisitions.

There is a denominator issue here, though, as less efficient operations (lower EBIT) will increase the ratio. So they want to at least maintain their capex and operations as is.

New CEO Appointment & Governance Upgrades

Following Johan Nordström’s departure after 11 years as CEO, the board appointed Clein Johansson Ullenvik as interim CEO while a permanent search is underway.

A permanent CEO with an operational integration background who can institutionalize financial controls across autonomous subsidiaries without destroying their entrepreneurial spirit could restore investor confidence.

We are aiming for decentralized (and no dividends).

Contract Indexation & Inflation Pass-Through

Public contracts signed during past inflationary spikes are systematically resetting or expiring into renegotiations with municipal inflation-adjustment clauses.

In Lithuania, recent contract extensions were renewed at margins higher than segment averages, demonstrating that long-term contract pricing is catching up with wage and equipment costs.

💰 What’s It Worth?

Green Landscaping has built up a sizable debt load to fund its acquisition strategy, which heavily shapes what the business is actually worth to shareholders.

Right now, the company owes about SEK 3.33bn across bank credit facilities, corporate bonds, vehicle and equipment leases, and future earn-out payments owed to the entrepreneurs they bought businesses from.

Because they carry elevated leverage, their lenders charge higher interest rates, putting their borrowing cost before taxes at around 6.2%.

However, interest payments reduce taxable income; factoring in Sweden’s 20.6% corporate tax rate brings their true out-of-pocket borrowing cost down to 4.92%.

We’ll be using a 9.0% (total) cost of capital and assuming the business grows at a steady 2.0% each year into perpetuity.

Please note that with the assumed data, the appropriate cost of capital should be ~7.5%, but we choose to be overly conservative just in case.

Base Case [SEK 41.59] (152% Upside)

To value the core operating machine, we look at the actual cash it produces each year before paying off lenders.

Starting from roughly SEK 6.7bn in annual revenue and working toward normalized profit margins around 6.5%, the business is projected to generate between SEK 266m and SEK 405m in clean FCF each year between 2026 and 2030 after funding mandatory lease payments, machinery upgrades, and daily operations.

The combined present value of these future cash flows values the entire operating enterprise at roughly SEK 5.21bn.

After taking out the roughly SEK 2.86bn in net financial debt, lease balances, and earn-out commitments (offset by their cash on hand), what remains for common equity holders is SEK 2.35bn.

Spread across their 56.46m outstanding shares, this yields an intrinsic fair value of SEK 41.59 per share.

Bear Case [SEK 6.40]

In a realistic bear case, Green Landscaping pauses all acquisitions to focus entirely on paying down debt, leaving top-line revenue to drift higher at just 1.5% to 2.0% annually purely through basic contract price indexing.

Rather than rebounding toward historical highs above 6.5%, operating margins remain pinned near current levels around 5.0% as intense bidding competition in Sweden and persistent operational friction in Norway prevent meaningful profitability gains.

This steady-state profile still generates reliable cash flow from recurring municipal upkeep contracts, delivering roughly SEK 270m to SEK 285m in unlevered free cash flow each year between 2026 and 2030 after funding maintenance equipment needs and mandatory fleet lease repayments.

Even though we have preliminary pessimistic income statement assumptions, we have to change out our WACC slightly, as their borrowing costs will stay higher for longer with credit facilities and senior bonds rolling over.

A 10.0% WACC would be an appropriate rate together with a 1.5% long-term terminal growth rate.

This combination values the operating enterprise at approximately SEK 3.22bn.

With this, senior claims take nearly the entire pie: after subtracting SEK 2.86bn in net bank debt, bond obligations, lease liabilities, and earn-out commitments (offset by cash on hand), only SEK 361m in residual equity value remains for common shareholders.

Spread across 56.46m shares, this bear scenario provides us with an intrinsic fair value of SEK 6.40 per share.

Note that there is even a worst-case scenario whereby debt rollovers become unsustainable, and the Equity Value is completely absorbed by their net debt, meaning the price per share could reach SEK 0.

To avoid this doomsday scenario, we must see operating margins reaching roughly 5.5% or borrowing costs dropping as leverage recedes. If either of these is true, we can discard total loss.

This, in our take, is what is being discounted by the market.

Overall Take

As we said at the beginning, people are discounting the worst possible scenario for this company, but things are never really so extreme in normal conditions.

We are still conducting interviews mainly to validate our ideas on pricing power, but this company looks like a pretty decent candidate to us.

The only thing we don’t like is debt, which effectively creates friction or stops their ability to continue compounding inorganically, but we strongly think that once that is worked out, which may take about 1 year, this company still has a role to play in the Northern EU groundskeeping business.

At least we’re confident AI won’t take those jobs away; at least that’s what Baseline says, especially if you try it out using code HERMIT for that sweet 20% off.

Disclaimer

This presentation is provided for informational purposes only and is not intended to be, and should not be taken as an offer or solicitation to buy or sell any securities or to invest in any investment strategy. The information contained in this presentation is not investment advice and should not be relied on as the basis for any investment decision.

The views, thoughts, and opinions expressed in this presentation belong solely to the author and are not necessarily indicative of the views of Equity Focus FIL, Hermit Ventures Ltd., 25Delta E.A.F., their management, affiliates, or employees. This presentation may contain forward-looking statements, which are based on beliefs, assumptions, current expectations, estimates, and projections of the author. Such statements are subject to risks and uncertainties that could cause actual results to differ materially.

Readers should consider the investment objectives, risks, charges, and expenses of any investment carefully before investing. The author does not guarantee the accuracy or completeness of the information presented, which is subject to change without notice. The author is not responsible for any errors or omissions, or for the results obtained from the use of this information.

This publication does not take into account the investment objectives, financial situation, or specific needs of any particular participant. It is not to be construed as legal, tax, investment, or other advice, and the author recommends that investors seek independent financial, legal, and tax advice before making any investment decision.

Investments involve risks, including the loss of principal. The value of investments and the income from them can fluctuate, and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future results.

This presentation is confidential and is intended solely for the use of the person or entity to whom it is given or sent and may not be reproduced, distributed, or transmitted without the prior written consent of the author. By accepting this presentation, the recipient agrees to be bound by the foregoing limitations.

How would you feel about dragging this over to your Primary inbox right now?

And while you’re there… hit Reply with the one ticker keeping you up at night and what makes it worth a teardown. What’s the biggest reason we shouldn’t cover it?

We are releasing a comprehensive update on the Car Distribution and Logistics segment (with a North American focus) centered around Carvana ($CVNA), Copart ($CPRT), and Credit Acceptance ($CACC), while incorporating insider perspectives on roughly a dozen other listed companies referenced throughout the piece.

This write-up includes key takeaways and contextualized transcripts from four interviews conducted a few weeks ago.

Take your time with these, as the reading time of this article exceeds 2 hours. We recommend going over the takeaways and then dissecting each interview slowly, one by one.

Because these businesses are already well covered, we are skipping the standard overview and jumping straight into the insights from our three direct 1-on-1 conversations and one third-party interview.

Access the Inner Circle

Priority Briefings. Investing is dynamic, so our research never sits still. We don’t file a report and walk away; we maintain an active, ongoing dialogue with the key stakeholders and management teams of our past, present, and future holdings.

Think of these briefs as your “insider access” to those calls. We bring you direct contextualized highlights and actionable updates. You’ll see exactly how the business is evolving in real-time, long before it hits the quarterly report.

This series is exclusively for 🧙‍♂️ Inner Circle members

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

We provide context on who these experts are at the top of each interview in the full transcript section.

This is a clear example of combining warm introductions with expert networks, but more importantly, it illustrates the sheer amount of work that goes into every single write-up.

Most of these primary checks never see the light of day, yet they remain essential to the process. Sometimes they lead nowhere; other times they completely rewarp our perspective.

The following conversations fall squarely into the second camp.

Copart ($CPRT)

Brad Stewart’s account confirms why Copart behaves more like an entrenched liquidity monopoly than a standard auctioneer.

Takeaway #1. A shadow dealer in the making

Your typical person views Copart as a junkyard for wrecked cars, but its fastest-growing profit engine is selling clean, drivable vehicles that command double the sale price of a total-loss clunker.

Copart Dealer Services (CDS) processes roughly 300,000 units annually, while its higher-spec whole-car channel, Blue Car, runs around 8,000 units. While this is a small fraction of the ~12m commercial wholesale cars remarketed annually in the US, it represents a massive TAM expansion beyond the saturated insurance salvage pool.

The unit economics are driven by Copart’s tiered member fee schedule, where fees scale with the Average Selling Price (ASP).

Because member transaction fees are back-end loaded and scale with ASP, capturing whole-car inventory compounds incremental EBIT margins with negligible added variable cost.

To unlock dealer trust on drivable cars, Blue Car instituted 45-point condition inspections and a 45-day arbitration policy. Similar to Carvana, this systematically neutralizes the historic “as-is, buyer-beware” penalty that depressed whole-car bids. In the end, it’s all a trust-building exercise.

Takeaway #2. There’s a lot to say about offshore cost arbitraging

Copart is an active global brokering desk where 90% of dealer car deals are negotiated after the virtual auction ends.

39% of all vehicles sold across Copart’s 200+ yards are exported to international buyers spanning 190 countries. These global buyers possess fundamentally different salvage economics, lower offshore repair labor costs, and resourceful workarounds (such as cutting unibodies into sections to clear customs as low-tariff “parts” before re-welding them abroad).

Crucially, roughly 90% of CDS inventory does not clear at the reserve during the live auction; it is completed through post-sale intermediation.

Copart’s internal platform captures all bidder identities and pricing thresholds down the line. Dedicated sales reps call the second- and third-highest bidders overseas (e.g., in Dubai or Eastern Europe) to negotiate directly between the seller’s reserve and the runner-up bids.

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As we now do every week for transparency, here is our list of past Pick of the Week posts and their returns since publishing:

• All picks (equally weighted): +15.52%

Pick of the Week. A curated series of high-conviction research on companies currently under our microscope. We screen for specific dislocations where the market has mispriced the balance sheet or earnings power (or both).

None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.

🌊 Wavestone SA ($WAVE)

⭐ Overall Grade: 8.5 / 10

Wavestone is a solid European consulting firm. I know what you’re thinking… another one of those (e.g. Accenture), but do listen in because these guys are absolutely crushing it while the sector is being punished. So it’s one of those macro super pessimistic with a micro doing fantastic stories.

These guys operate in the intersection of management tech and IT. Rather than executing on separate strategies, Wavestone positions itself as a trusted partner for tier-1 enterprises (more on these in a second) for complex and high-stakes transformations.

The company employs over 6,000 professionals across 17 countries, with primary operational strongholds concentrated in five key geographies: France, Germany, Switzerland, the United Kingdom, and the United States.

FYI, based on Wavestone’s client disclosures, these are the Top-20 accounts across these key sectors:

• Energy & Utilities (18% of Group Revenue):

  • EDF (5% of total revenue)

  • Engie (3% of total revenue)

  • TotalEnergies (3% of total revenue)

• Financial Services. Insurance & Banking (33% combined):

  • Crédit Agricole (4% of total revenue)

  • AXA (3% of total revenue)

  • BNP Paribas (2% of total revenue)

  • BPCE (2% of total revenue)

  • Munich Re (2% of total revenue)

  • Confidential Tier-1 Insurance Client (2% of total revenue)

• Luxury & Consumer Goods (10% of Group Revenue):

  • L’Oréal (2% of total revenue)

  • Chanel (2% of total revenue)

  • Hermès (1% of total revenue)

  • (Wavestone also works extensively across Asia with LVMH)

• Transportation, Travel & Logistics (13% of Group Revenue):

  • Deutsche Bahn (5% of total revenue)

  • SNCF (2% of total revenue)

  • SBB (Swiss Federal Railways) (2% of total revenue)

  • La Poste (1% of total revenue)

Now that you have a big-picture understanding of where they stand and who's buying, let's look at what they actually do and how they monetize it.

How Wavestone Makes Money & Unit Economics

Wavestone’s revenue model revolves around intellectual services and billed consulting hours/days.

Note: As you already know, having worked in this space, how it works comes naturally to us, but these guys do have a distinct tech edge.

The firm operates via two primary contracting frameworks:

• Time-based Services: Approximately 45% of total revenue is derived from traditional time-and-materials contracts.

• Fixed-price Contracts: Roughly 55% of revenue comes from fixed-price projects, where Wavestone assumes delivery risk but captures margin upside through efficient project execution and proprietary methodologies.

Key Unit Economic Drivers:

• Wavestone commands a robust pricing power across its markets, with an annual ADR hovering around €938 (and varying slightly by geography). This is usually a product of expertise (specialization) and seniority. E.g. your typical partner/manager hours will be billed at 4-5x that of a junior consultant.

Note: While working for the Canadian Pacific spin off as an analyst (back in 2021/22) we charged roughly C$300-350/day for my extremely undeveloped financial modeling skills. My boss could charge up to C$1,500/day but he worked as a supervisor so less hours.

Your average project had roughly a C$500-600/day rate. These guys are doing 2x of that, so they’re freaking experts… or should we say LE EXPERTS 🥖.

• The Utilization Rate is the critical operational heartbeat of the business… manhours (not very politically correct). It’s calculated as the ratio of billable days to total available billable hours (excluding vacations). Historically normalized around 72%–73%, utilization rates have faced temporary macro pressure (slipping to roughly 71%) as clients adjust deployment schedules.

  • 75% and above is really good; 80% is peak.

• The cost structure is heavily weighted toward personnel expenses (accounting for over €600m annually [2/3 of revenue]). Managing the balance between junior staffing, senior management oversight, and subcontracting purchases (~€134m) dictates operating margins (EBIT).

Economic Moats & Competitive Advantages

This really is a game of specialists. Most traditional consultants are either pure-play strategic advisors (lacking deep technical implementation capacity) or IT system integrators (lacking board-level strategic vision).

Wavestone is a combo of both, allowing it to design transformation roadmaps and execute them down to the code and infrastructure level. We guarantee you that this is much better than writing up a report, which usually no one reads.

Additionally, Wavestone derives a significant portion of its revenue from repeat relationships with mega-cap European institutions (e.g., EDF, Engie, Deutsche Bahn, TotalEnergies, and major European banks and insurers).

Switching costs are high because Wavestone embeds itself directly into core operational workflows. There are quite a lot of layers of bureaucracy in these institutions, plus career risk for the higher-ups, so supplier changes happen rarely, and when they do, they’re reaaaaaally slow.

On a final note, unlike consulting arms tied to major software vendors or audit firms, Wavestone remains independent. This objectivity is vital when advising executive boards on multi-million-dollar software and cloud architectures. It sounds like a small detail, but it really is a game changer. Instead of giving these companies multiple commodity-like services, they’re focused on one very specific thing.

🎯 Catalysts: Why Now?

Pretty Freaking Explosive Multi-Year AI Wave

AI is the name of the game. It’s all transitioning from an experimental sandbox to a core corporate priority for all of their clients.

Wavestone’s AI-related revenue has expanded significantly, surging from 8% of total revenue in FY 2024/25 to 17% in FY 2025/26, and tracking even higher in recent quarters (reaching ~22%).

Management expects AI to become the firm’s primary growth catalyst, moving toward >25% of revenues.

Unlike software houses vulnerable to product disruption, Wavestone monetizes the implementation, organizational change management, and agentic governance required to scale AI safely inside Fortune 500 enterprises.

It really feels like when you buy an iPhone and then purchase an indestructible privacy screen, a hard case, and a subscription tutorial on how to get the most out of it… with all of the installation and guidance, of course, provided by Wavestone.

Thus Far… Value-Accretive M&A

Wavestone has strategically deployed its balance sheet to acquire high-value niche capabilities. We’ve seen this playbook before with firms like MHA absorbing Baker Tilly offices across regions to scale operations and consolidate costs.

The recent acquisitions of AI Builders (~50 consultants specializing in AI strategy in France) and Sand Cherry (a Denver-based US business consulting firm expanding their North American platform footprint to ~€103m in proforma revenue and ~370 employees) add directly into high-margin segments without overextending the balance sheet (net cash position of €121m).

Green Energy Transition (important in the EU)

While traditional segments like banking and transport have experienced headwinds, Wavestone’s strategic expansion into Energy and Utilities has turned it into the firm’s leading revenue sector (18%).

Driven by Europe’s mandate for energy autonomy and grid decarbonization, this vertical provides a structural, non-discretionary revenue stream.

It’s not where the super intense growth will occur, but green transition revenue serves as a very stable base from which to grow and expand via the AI theme.

Utilization Rebound = Operating Leverage

Consultant utilization rates dipped to ~72% during recent geopolitical and macroeconomic friction points (including trade policy shifts).

As enterprise decision paralysis thaws and backlogs clear, even a modest 2–3% recovery in utilization back toward historical normalized targets (73%–75%) will drive outsized operating margin expansion due to high operational leverage.

If they ever go past 75%… well, that’s a bull-case guarantee right there.

The 2030 Strategic Roadmap: “Lead the Shift”

We separated this section because it's not really a short-term (12-18 month) catalyst, but it does speak loudly of the ambition of the company. Probably the thing that makes us like this company the most is how they’re targeting growth, and that’s laid out in their 2030 plan (up to €100m in organic OPEX dedicated to AI and up to €800m in firepower for external growth (inorganic) funded via cash flows and debt facilities).

We could discuss this thoroughly, but it might just be better to show you where they’re focusing their efforts:

💰 What’s It Worth?

Both our cases use an 8.5% discount rate and a long-term terminal growth rate of 2.0%.

You can probably be more aggressive, but their healthy FCF, net cash position, and overall growth are really pointing in the right direction. Plus, there is no need for an illiquidity discount or any type of size add-ons to the WACC.

FYI, the company is sitting on €121.4m of net cash with a market cap of ~€730m (€29.20/share). They have effectively no debt, disregarding the €20.2m of property and equipment lease liabilities.

Base Case [€82.60] (183% Upside)

To figure this out, our projection model relies on a few key assumptions. We start conservatively, reflecting management’s guidance of modest organic growth between -1% and low single digits for the immediate term.

From there, we model a steady acceleration toward the 5% organic CAGR outlined in their 2030 roadmap. We assume operating margins gradually climb from 12% to 15% over the next five years, backed by strict operational execution and disciplined capital spending.

Over the next five years, the business is projected to generate roughly €454m in cumulative NPVed cash flows, with a terminal value contributing another €1.48bn in present value.

Bridging that enterprise value back to equity, adding back net cash and dividing by the 24.91m diluted shares outstanding, gives us an intrinsic value of €82.59 per share.

Wavestone has been dragged down by broader tech sector jitters and temporary utilization hurdles. However, its underlying cash engine remains pretty much untouched and debt-free.

This feels like a solid margin of safety.

Bear Case [€61.68]

Stress-testing our assumptions, we can include some macro headwinds lingering longer than expected, European client decision-making remaining sluggish, and the integration of recent acquisitions facing friction.

Instead of a smooth recovery, we model organic growth stagnating near 0% for the next two years before limping up to a modest 3% CAGR by 2030.

We also assume operational inefficiencies persist, keeping recurring operating margins compressed at an average of 10.5% to 11.5% rather than expanding.

Running those tighter margins and slower growth rates through the same WACC (8.5%) and growth rate (2%), the cumulative present value of explicit cash flows drops to €365m, and the present value of the terminal value shrinks to around €1.05bn. Adding back their net cash (€121.4m) gives us a stressed intrinsic value of roughly €61.68 per share.

Even under this pessimistic bear case, where management largely fails to execute their 2030 roadmap and margins stay depressed, the intrinsic value still sits comfortably above the current market price.

That’s, by definition, margin of safety.

Overall Take

We would not be surprised if there was a short-term rerating towards €60.00 to €75.00 once the narrative changes and as their AI transformation strat (25% of revenue) takes effect.

Any additional share repurchases at these prices would disproportionally add to the intrinsic value, so keep an eye out for that.

Disclaimer

This presentation is provided for informational purposes only and is not intended to be, and should not be taken as an offer or solicitation to buy or sell any securities or to invest in any investment strategy. The information contained in this presentation is not investment advice and should not be relied on as the basis for any investment decision.

The views, thoughts, and opinions expressed in this presentation belong solely to the author and are not necessarily indicative of the views of Equity Focus FIL, Hermit Ventures Ltd., 25Delta E.A.F., their management, affiliates, or employees. This presentation may contain forward-looking statements, which are based on beliefs, assumptions, current expectations, estimates, and projections of the author. Such statements are subject to risks and uncertainties that could cause actual results to differ materially.

Readers should consider the investment objectives, risks, charges, and expenses of any investment carefully before investing. The author does not guarantee the accuracy or completeness of the information presented, which is subject to change without notice. The author is not responsible for any errors or omissions, or for the results obtained from the use of this information.

This publication does not take into account the investment objectives, financial situation, or specific needs of any particular participant. It is not to be construed as legal, tax, investment, or other advice, and the author recommends that investors seek independent financial, legal, and tax advice before making any investment decision.

Investments involve risks, including the loss of principal. The value of investments and the income from them can fluctuate, and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future results.

This presentation is confidential and is intended solely for the use of the person or entity to whom it is given or sent and may not be reproduced, distributed, or transmitted without the prior written consent of the author. By accepting this presentation, the recipient agrees to be bound by the foregoing limitations.

Leverage does not pass judgment; it merely accelerates arithmetic.

You guys know we’re suckers for great stories… and this one’s not only entertaining, but extraordinarily educational. Like an ogre, it has a lot of layers.

By now, we all know the gist of it. Leopold Aschenbrenner managed to vaporize $30 bn in a matter of weeks, clearing out roughly 67% of Situational Awareness LP while his wedding guests were gathering in Carmel for pre-ceremony colloquiums.

The immediate post-mortem from financial media was, to say the least, predictable: a 25-year-old former OpenAI researcher ran 4-to-1 leverage on concentrated tech equities, met a wave of prime broker margin calls, and was carried out on a stretcher.

On the morning of Thursday, July 30, Citadel stepped in, winning a fire-sale block auction against Millennium and Jane Street to absorb the fund’s $16bn public book at a steep discount. Aschenbrenner was left with roughly $10bn, anchored largely by an illiquid private stake in Anthropic.

Blaming leverage explains the surface component of it all, the speed of the liquidation… but it misses the underlying core of it all.

Aschenbrenner did not blow up because he used borrowed money. He blew up because his core economic premise, the thesis underpinning Silicon Valley’s multi-trillion-dollar infrastructure land grab, was fundamentally inverted.

Let’s break it down.

But before we do… at the end of this month, we are publishing our most exhaustive deep dive since launching The Hermit.

This is an overlooked micro/small-cap that the market has written off, but whose inflection into a high-quality compounder is backed by more than 50 first-hand interviews with management, competitors, plant operators, and institutional peers.

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Claiming one of these (now) two spots locks in your lifetime rate and keeps that full $100 credit intact if you later decide to step into our Inner Circle, which unlocks 360º portfolio tracking, private chat access, and uncut full-transcript access to the primary interviews we conduct (and their insights).

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The Pseudo-Hedge and the Fatal Pivot

The fund was designed around a dual trade:

In theory, long/short equity eliminates broader market beta. For the uninitiated, that’s exposure to the ups and downs of the market.

In practice, Situational Awareness eliminated beta only to double down on an aggressive factor or thematic bet:

• Long Hardware & Speculative Power: SanDisk (-55.3%), Nebius (-46.3%), Bloom Energy (-45.9%), CoreWeave (-38.9%), Micron (-36.0%), and IREN (-35.9%).

• Short Enterprise SaaS: Workday (+37.2%), Adobe (+28.5%), Intuit (+27.6%), Salesforce (+20.3%), and Veeva Systems (+17.2%).

While the S&P 500 stayed essentially flat and Nvidia slipped just 5%, capital executed a violent rotation. That doesn’t mean individual companies are bad, but rather that there was a narrative change which, in retrospect, was a temporary blip of mostly noise.

This, however, resulted in institutional money for a second abandoned capital-hungry buildout infrastructure and piled into higher-margin + cash-generative software incumbents.

SaaSpocalypse In a Nutshell

Aschenbrenner articulated the consensus view of the AI engineering complex, which is basically that large foundational models will automate knowledge work.

This, in turn, will make everything super cheap and, in the process, disintermediate “thin” software applications.

If an autonomous agent can code, reconcile books, and execute workflows, software companies selling digital labor become obsolete. They effectively become commoditized, and we all know human labor would be their higher cost.

In our opinion, this view misdiagnoses what enterprise software actually sells. Corporations do not pay Salesforce or Microsoft for code; they pay for systems of record, legal compliance, and liability protection. And more importantly, they pay for consistency.

We’ll give you a few examples:

• Veeva Systems dominates the pharmaceutical pipeline with 19 of the top 20 global biopharmas on its platform. Its architecture is validated under FDA 21 CFR Part 11 and GxP standards.

  • An AI agent generating raw code cannot replace a federally qualified audit trail where an unauthorized schema change halts a clinical trial.

• A Veeva seat runs $1,800 to $6,600 annually against an enterprise field rep costing $150,000 to $220,000. Microsoft 365 E5 sits around $60 a month. Enterprise software represents 1% to 3% of a knowledge worker’s fully loaded cost.

  • Even if an internal open-source agent matches the software’s utility, no enterprise CIO risks multi-million-dollar compliance breaches to shave 100 basis points off headcount overhead.

• Panorama Consulting pegs average enterprise ERP transition budget overruns at 189%, with Gartner projecting that over 70% of implementations fail to realize initial objectives.

  • Enterprises are locked into their core transactional databases (and contracts).

Rather than being hollowed out by models, mature software platforms are acting as compute toll booths. In fact, they’re the first to use agents to improve processes within their existing workflow. Incumbents package foundational models directly into validated workflows and charge high-margin markups:

Market participants pricing these at 11 to 14 times earnings mistook deep-value cash-flow machines for dying entities.

And in the case of Situational Awareness, the sheer size of their shorts was pushing per-share prices down. The more capital it attracted, the more this was the case, as they needed to find liquid names that could act as a “hedge”. In fact, their size forced them to start using… alternative tactics.

If you look up the official public data for big software stocks like Adobe, Salesforce, Workday, Intuit, or Veeva, the numbers look completely harmless.

The stock exchanges publish a report twice a month showing how many shares are being bet against, and for these enterprise giants, that figure usually hovers between 1.5% and 4.5% of their available stock.

Something obviously changed in March for all of these.

At one point, the size of these bets against a stock could no longer happen with just institutional money.

So they went directly to the prime brokerage banks like Goldman Sachs or J.P. Morgan and set up private derivative contracts. These are custom off-exchange side bets on baskets of stocks they label as “AI losers.”

Because these private swap contracts don’t show up in the standard public short-interest numbers, the real level of skepticism across the industry was actually invisible.

This is, by definition, a massive hidden traffic jam.

When Microsoft delivered a solid earnings report and buyers suddenly stepped in, every fund caught on the wrong side rushed to exit through a very narrow door at the same time.

Trying to unwind billions of dollars in off-market bets against an illiquid market triggered a short squeeze, rocketing these supposedly doomed software stocks up anywhere from 17% to 37% in just a few trading sessions.

The Capital Cycle and Depreciation Arithmetic

The inverse error of the thesis was assuming that massive societal transformation yields equivalent equity returns for infrastructure builders.

In historical capital expenditure cycles, the opposite is almost uniformly true.

Hyperscaler capex projections for 2026 approach $785bn, trending toward $1tn by 2027. Amazon alone is running near $220bn in annual capex guidance. Microsoft’s capital expenditure reached nearly 35% of total revenue, causing free cash flow to drop from $74.1bn to $67.0bn even as sales grew double digits.

To shield operating income from this capital intensity, hyper-scalers extended server asset depreciation schedules from three years to six, inflating accounting profits by billions.

Amazon quietly bucked this trend by reverting hardware life back to five years, taking a $1.4bn depreciation charge because cutting-edge silicon becomes obsolete long before it physically degrades.

David Cahn (Sequoia) and Bain calculate an implied $800+ bn annual revenue deficit between infrastructure amortization requirements and real AI revenue.

While OpenAI and Anthropic generated a combined ~$23 bn in 2025, Nvidia extracts 72% to 75% gross margins upstream. The margin resides almost exclusively in selling the picks and shovels, not running the processing workloads.

Secondary infrastructure players like CoreWeave carry net debt above 8x EBITDA with double-digit debt coupons, while balance sheets across the sector are buffered through off-balance-sheet Special Purpose Vehicles (such as Meta’s $27bn Hyperion funding structure).

The combination of all these elements created a narrative that may or may not be entirely true. But overall, it’s a story… and like every good story, it’s based on facts, with a few myths and legends baked in.

Infrastructure Destroying Capital. A Trip Back to 1873

Capital markets have run this exact experiment before. Between 1865 and 1873, the United States built out its transcontinental rail system:

• Rail track grew from 35,085 to 74,096 miles.

• By 1870, railroad issues represented 87% of all New York Stock Exchange volume.

• European capital poured in, chasing 6.5% to 7.5% debt yields.

The economic thesis of the transcontinental buildout was correct: rail completely transformed logistics, lowered shipping friction, and industrialized North America. Yet the equity was an absolute slaughterhouse.

In September 1873, Jay Cooke & Co. (bank) collapsed under unplaced Northern Pacific rail paper. The NYSE shuttered for ten days.

By 1876, 134 rail companies defaulted on $500m of debt (that’s about $16bn in today’s money which at the time was even more because railways were 6% of US GDP); by 1877, fully 20% of all US rail mileage was in receivership. Severe price competition drove New York-to-Chicago freight rates from $1.88 per ton-mile down to $0.20.

Great for consumers, awful for companies trying to stay afloat.

The durable fortunes were not forged by the track layers. They were generated by the asset-light operators running cargo. Two great examples are:

• Adams Express Company: Owned zero track. It secured payload space on competing trains to move high-value freight. Adams paid an unbroken $8 per share dividend straight through the Long Depression of the 1870s and 1890s, later converting into a closed-end fund that trades today on the NYSE (ADX).

• Pullman’s Palace Car: Formed with $1m in initial equity to build luxury sleeper cars. Pullman leased the rolling stock directly to rail operators, taking virtually no physical line construction risk. By 1879, it cleared $1m in pure annual profit on a network funded by billions in defaulted capital.

The identical script played out in the 2000 telecom crash.

Global Crossing, WorldCom, and 360networks (Canadian) laid tens of millions of miles of dark fiber. Over 95% of transatlantic fiber lay unlit as operators went bankrupt at 1 to 2 cents on the dollar.

The ultimate beneficiaries were Amazon, Google, and Netflix, which built software monopolies on top of stranded, sub-marginal infrastructure capital.

A Bit of Math: Volatility Drag and the Ruin Problem

Aschenbrenner did not simply make an incorrect fundamental rotation call. To put it very plainly, he violated the mathematics of geometric compounding, technically inverting it to the point where it was working against him.

In leverage-constrained portfolio theory, the expected long-term compound growth rate (g) of a portfolio is approximated by:

Where:

• mu (μ) is the expected arithmetic return.

• sigma^2 (σ²) is the variance (volatility squared).

When applying leverage (L), expected return scales linearly, while the variance drag scales quadratically:

Note: For those who don’t know the Kelly Criterion, here’s a short guide. It effectively tells you how to optimize your bet given the certainty/conviction of an outcome.

Assuming an unlevered AI thematic basket with an expected return (μ) of 15% and an annualized volatility (σ) of 40%:

By running at 4x leverage on an asset class with 40% historical volatility, Aschenbrenner mathematically guaranteed a negative geometric (or exponential) drift.

Even if the terminal bull case for AI infrastructure carries a positive arithmetic mean over a decade, the distribution is extremely right-skewed. This means the positive mean is propped up by low-probability, hyper-lucrative tail scenarios, while the median path decays toward zero.

This may sound like a minor detail, but it makes all the difference… in fact (and as a side note), if we ever write a PhD dissertation, it will be on these mathematical moments and their effect on compound returns.

In sum, a low chance of super-high returns paired with a slightly negative median. Amplifying this profile with leverage leads to a near-guaranteed loss as you constrain your time horizon, cutting off the window needed for these rare giga-positive tail events to occur, while the average play plus the added cost of borrowing guarantees the downside.

A leveraged vehicle hits an absorbing boundary condition like a margin call, decades before the right tail has time to materialize. Even if things happen faster today, we can almost guarantee that the margin call will come in first.

Core Takeaways

The collapse of Situational Awareness LP marks the turning point of this first phase of the AI capital cycle.

We have observed market shifts towards the cash-flowing end of the spectrum, with companies like Google, Nvidia, and Microsoft taking on the burden of debt to finance these operations.

We strongly believe past, present, and future capital allocation rests on three principles:

Tech Transformation ≠ Capital Return

The absolute utility of a technological breakthrough has no correlation with the return on capital invested to construct its physical footprint.

When supply expands unchecked, basic infrastructure rapidly commoditizes.

Moats Lie in Systems of Record, Not Systems of Compute

Ripping out deeply entrenched, heavily regulated, and auditable enterprise workflows is economically irrational for corporate operators.

The applications will purchase commodity intelligence at marginal cost and re-sell it as high-margin workflow automation to their captive user bases.

Correct Capital Structure = Survival

No investment thesis survives excessive leverage if its factor exposures are correlated.

The winners of industrial shifts are consistently the liquid buyers of last resort… the Citadels, Pulmans, and Adams Expresses.

These acquire distressed, essential physical assets for cents on the dollar after the visionary capital has been liquidated.

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