The JB Global Capital Fund declined 12.1% in Q2, driven primarily by Alibaba, which represented roughly 55% of the portfolio and closed the quarter near a 52-week low of $92 per share. By the time I write this, however, it trades above $129, a 40% move in five weeks. PayPal, my third-largest position, received a joint acquisition proposal from Stripe and Advent International at $60.50 per share, a ~52% premium to my purchase price. The bid was reported July 14th, two weeks after the quarter closed. Whether the deal closes at that price, a higher one, or not at all remains uncertain.

I mention this not to dismiss the quarter's result, but to illustrate why performance alone is not the point of these letters. The numbers represent an arbitrary snapshot of a living portfolio. I write these letters to talk about businesses and the world they operate in, not to keep score every ninety days. I'll keep publishing results as a matter of form, but I ask that you hold the number as a receipt, not a verdict. A single quarter measures volatility. Several years begin to measure the quality of the process.

Portfolio Company Updates:

Alibaba Group Holdings

Alibaba reported its March-quarter and fiscal year 2026 results on May 13th. A full breakdown is available in Alibaba's Earnings: Strategic Implications, including an updated sum-of-the-parts financial model for paid subscribers.

The results show a company deliberately redirecting capital into AI infrastructure. Near-term profitability reflected those investments. Net income and free cash flow declined, and quick commerce losses continued to weigh on results. Against that backdrop, the parts of the business directly tied to the AI thesis told a different story: customer management revenue and Cloud both returned to growth. Cloud's external revenue growth reached 40%, and management expects growth to accelerate in the quarters ahead. CEO Eddie Wu told shareholders that not a single server card sits idle right now, suggesting demand already exceeds capacity.

Management communication is my second-largest investment criterion after financial analysis. What leaders choose not to say often matters as much as what they disclose. In my Q1 letter, I criticized Alibaba's vague AI monetization commentary and lack of measurable targets. This quarter, management addressed both concerns directly, disclosing AI product revenue for the first time at an annualized run rate of approximately $5.3 billion, alongside specific targets through fiscal year-end.

Since quarter-end, two developments have strengthened my conviction that Alibaba’s AI opportunity is becoming a competitive advantage rather than simply a capital allocation story. In mid-July, Chinese regulators approved Apple Intelligence for launch in China, with Alibaba’s Qwen selected as a technical partner. The financial impact of the partnership may be modest, but the strategic significance is meaningful. Apple had several domestic AI providers to choose from, making its decision additional evidence that Alibaba is among China's leading AI platforms.

Then on August 3rd, Alibaba released Qwen 3.8-Max, its largest model to date, reporting benchmark performance comparable to leading frontier models, although independent verification and additional technical details are still pending. Six months ago, the bull case rested on Alibaba's distribution and infrastructure carrying an AI business that was merely adequate. The evidence now points toward a different possibility: Alibaba may possess both the infrastructure and the technology to compete near the frontier.

I have made no changes to the position through the decline to $92 or the subsequent recovery above $129. Alibaba remains roughly 55% of the portfolio, a deliberate level of concentration that reflects both my conviction and the volatility that comes with it.

PayPal Holdings

I initiated PayPal at $39.84 per share in February, publishing my thesis in PayPal: Heads I Win, Tails I Don’t Lose Much, available in full to paid subscribers with downloadable EPV, SOTP, and DCF models. I bought PayPal because I believed the market was valuing a durable, cash-generative payments franchise as though it faced permanent structural decline. My analysis suggested that even under conservative assumptions, intrinsic value exceeded the market price by a meaningful margin. The investment ultimately rested on a simple conclusion:

The business didn’t need to improve dramatically to generate an adequate return; it simply needed to remain intact.

Since then, two things happened. On July 14th, Stripe and Advent International offered $60.50 per share, a ~52% premium to my entry, backed by roughly $50 billion in committed financing. Two weeks later, Q2 results provided additional evidence supporting several elements of the original thesis. Branded checkout stabilized at 2% for a second straight quarter, Venmo delivered its seventh straight quarter of double-digit growth at 14%, Braintree accelerated to 13% from 11%, and management raised full-year guidance for both transaction margin dollars and EPS. Trailing twelve-month buybacks reached $6 billion, consistent with the pace assumed in my models and supportive of the intrinsic value framework.

CEO Enrique Lores tied the cost-savings program directly to self-funding future investment rather than margin expansion for its own sake. The agentic commerce thread from the original thesis also resurfaced unprompted: Lores called agentic payments and digital identity areas where “the industry will be fundamentally reshaped,” pointing to 2028 as when these initiatives, alongside PayPal World and ads, start contributing meaningfully.

The $60.50 offer lands almost exactly within my conservative EPV and SOTP valuation ranges while remaining just below my $64.76 DCF base case. Between the acquisition proposal and Q2 execution, the original valuation framework has held up well.

Flowers Foods

Flowers Foods, my second-largest position, reported earnings on May 21st, and the stock surged over 15% on the release. I covered the full breakdown in Flowers Foods Earnings: The Dividend Cut the Market Mispriced, available to paid subscribers with accompanying valuation models.

The reasoning was straightforward: a conservative, defensive business at a distressed price. Bread is one of the most resilient consumer categories: non-discretionary, habitual, and remarkably stable across economic cycles. Flowers is the second-largest player behind Grupo Bimbo, backed by a direct-store-delivery network that’s expensive for competitors to replicate. At entry (first $8.50, then $6.80), the stock carried a double-digit dividend yield, and my sum-of-the-parts model put fair value at $13-14 even under conservative assumptions, a low-risk category at roughly half of asset value.

Management cut the dividend 50%, freeing roughly $112 million annually to pay down debt. Combined with a target of below 3x debt-to-EBITDA by fiscal 2027, the move directly addresses the October 2026 maturity I identified as a key risk. Additionally, the brands are holding up: Flowers raised prices without losing as much volume as feared, and Simple Mills contributed 3.6% growth to branded retail sales in its first full quarter under Flowers ownership. The key remaining risks are continued volume pressure or a more prolonged competitive response from private-label alternatives. Overall, the quarter did not change the thesis; it strengthened the view that the market had priced in a worse outcome than the business ultimately delivered.

What Went Wrong: Lululemon

In September 2025, I published Investment Case: Lululemon Athletica Inc., calling the stock compelling value at $162 per share. The thesis rested on a business trading well below what its fundamentals justified: a debt-free balance sheet, 58% gross margins against a 33% industry average, and a brand strong enough to sustain 37% operating margins in both North America and mainland China. Triangulating across a DCF, relative comps to Nike and Adidas, and net asset value, I arrived at a fair value range of $194-280 per share. Today, the stock trades at roughly $123 per share, 24% below my initial entry.

So what went wrong? Two things: one about my own process, and one about how little of the future can be known in advance.

The first is the limits of backward-looking analysis. My thesis leaned heavily on trailing financials that were real, but historical. Since then, gross margin has compressed, operating margin has contracted, and ROE is down nearly 10% from a year ago. None of this means the business is broken. The balance sheet is still debt-free with $1.5 billion in cash, margins remain well above most apparel peers, and I still hold the position at roughly 9% of the portfolio. But it's a reminder that heavily underwriting the past for an exceptional business is an easy way to end up underwater on a position.

The second: two months after I published the thesis, CEO Calvin McDonald announced his departure amid a slowing North American business and mounting pressure from founder Chip Wilson, who then waged a five-month proxy fight. Heidi O'Neill, formerly of Nike, was announced as taking over as CEO in September. The lesson here is that a financial model can price margins and balance sheets; it has no way to price a leadership vacuum or a founder-versus-board fight. I don't yet have a strong view on who was right, and I'd rather say that plainly than manufacture conviction either way.

Lululemon is a reminder that conviction and certainty aren't the same thing. I still have conviction in the business. I don't yet have certainty about the leadership, and at a smaller position size, I can afford to wait for the dust to settle.

Looking Ahead

Between Alibaba’s move off its lows, PayPal’s takeover offer, and Flowers’ dividend reset all landing within weeks of each other, it would be easy to read this letter as a string of catalysts finally paying off. I’d caution against that read and Lululemon is a useful example: same process with a worse result. None of these outcomes were catalysts I anticipated or timed. The only thing I can take credit for is the underlying work: building conservative valuations, focusing on the business itself rather than the stock price, and having the discipline to hold through a 52-week low as long as the underlying thesis remains intact. That is harder than it looks.

As always, thank you for being a member of JB Global Capital, and a special thank you to my paid subscribers. I look forward to putting out more work that helps you build your own investment process.

With gratitude,

Jack Beiro, MBA

JB Global Capital

Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. From time to time, the author holds positions in the mentioned stocks consistent with the views and opinions expressed in this article. This is a disclosure—not a recommendation to buy or sell stocks.

On May 21st, the company reported its Q1 2026 earnings. Following the release, the stock surged over 15%. The market expected deterioration and got stabilization instead.

Low Hurdles

Expectations entering the quarter were extremely low. The market was valuing Flowers like a declining business, not a stable consumer brand. Investors were worried about three things: increased debt after the Simple Mills acquisition, weak bread sales, and a likely dividend cut. This report needed to address all three to restore credibility.

The Dividend Reset

Management tackled debt concerns directly by cutting the quarterly dividend by 50%. The new annual payout is $0.50 per share, which still gives the stock roughly a 6.5% yield at current levels. On the earnings call, CEO Ryals McMullian said the reset allows the company to prioritize debt reduction while still investing in the business. Importantly, Flowers keeps its decades-long dividend streak intact while freeing up cash to pay down debt.

Management also set a specific, time-bound deleveraging target: below 3x debt-to-EBITDA by fiscal 2027. The dividend cut frees up about $112 million per year. Combined with normal cash generation and potential asset sales, management believes debt could fall by roughly $280 million over the next six quarters.

As we noted in our original thesis, the key near-term risk was the October 2026 debt maturity. The dividend reset and management’s explicit leverage target meaningfully reduce that risk.

The math works, and we’ll be following this closely in upcoming quarters.

Topline Pressure, Strategic Response

Traditional loaf bread, which accounts for roughly 38% of branded retail sales, remains the company’s weakest category. During the earnings call, McMullian said stabilizing the category would have the biggest impact on the business.

To achieve this, Flowers is executing a nationwide relaunch of Nature's Own with a clean-label, non-GMO formula, backed by an aggressive marketing campaign. The move aligns with documented consumer willingness to pay premiums for cleaner-label food products.

Competitive discounting has widened price gaps as consumers increasingly trade down. Despite that backdrop, Flowers was still able to raise prices without losing as much volume as the market feared, suggesting the brands may be stronger than investors currently believe. Management also noted improving market share trends in regions where pricing gaps have begun to normalize, early evidence of brand durability.

While traditional loaf bread remains under pressure, the rest of the portfolio is performing much better. Premium bread, snacks, and Simple Mills are all showing stronger momentum. In its first full quarter under Flowers ownership, Simple Mills contributed 3.6% growth to Branded Retail net sales. While one quarter is too early to draw firm conclusions, the direction is right and the strategic logic remains intact.

Over time, Flowers is becoming less dependent on traditional packaged bread and more exposed to higher-growth, higher-margin categories like snacks and premium products. Taken together, the quarter reinforced our view that Flowers’ brands remain more durable than the market’s current valuation implies.

Durable Cash Flows

Cash from operations came in at $107.9M, with a compressed 6.9% margin versus 8.7% in the prior year. Margins were temporarily pressured by acquisition costs and working capital swings, not by deterioration in the core business. The more telling metric for this business is free cash flow, which came in at approximately $87M for the quarter. Against full-year management guidance, gross free cash flow before dividends is projected at roughly $228M.

On the cost side, the picture is more constructive than previously assumed. Core commodity inputs are fully hedged through year-end, while oil remains volatile with a $0.02–$0.03 per share headwind embedded in managements reaffirmed guidance. The oil headwind, however, deserves closer scrutiny than the market is giving it.

The instinctive reaction to a logistics-heavy food distributor facing higher oil prices is negative. However, the structure of Flowers’ direct store delivery (DSD) model tells a different story: diesel costs flow primarily through the independent distributor partner network rather than directly through Flowers’ P&L. This was confirmed by CFO Anthony Scaglione on the call.

In practice, the DSD structure means a large portion of that exposure is absorbed outside of the financials, undermining the implicit market assumption. The market appears to believe fuel costs affect Flowers more than they actually do.

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Noisy, Messy, Ugly

Let’s get the ugly numbers out of the way first. Net income fell 19% year-over-year, income from operations for the full year decreased 64%, and free cash flow was negative $6.76B. While these numbers look scary, Alibaba is currently in an extreme investment cycle centered on what management describes as a “critical window of opportunity” in agentic AI. The declining bottom-line figures are less a sign of operational deterioration than a deliberate decision to redirect capital from near-term returns into AI infrastructure. The company is spending ahead of demand it can already see in its backlog.

In other words, being discouraged by the bottom-line results at this stage would be like scolding a farmer for not harvesting in February. The planting comes first.

Green Shoots

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The JB Global Capital fund’s results for Q1 2026 and since inception are presented below alongside the VT World Index and the S&P 500. These returns have been achieved without the use of leverage, shorting, or financial derivatives.

During Q1 2026, the JB Global Capital fund declined by 2.3%. Given our highly concentrated positions and the geopolitical backdrop, we consider this result to be satisfactory. The 4.3% decline in the S&P 500 was driven by heavy losses in mega-cap tech, particularly the Mag Seven. International held up better than the U.S., given the valuation cushion to start the year and the weakening of the dollar. Ultimately, the quarter was shaped by two dominant events: regulatory uncertainty surrounding tariff policy, which created direct headwinds for our China-exposed position, and sustained military conflict throughout the Middle East, which drove extreme volatility in oil prices and broadly reduced risk appetite for equities.

When analyzing the major events of the first quarter, we find a common lesson applicable to investing and life more generally. Both events remind us of the limits of intention against a world that refuses to cooperate; that outcomes are shaped not only by what is decided, but by innumerable conditions operating well beyond anyone's control.

Alibaba Earnings/Qualitative Red Flags

As the largest position in the fund (50%!), we need to discuss Alibaba’s latest earnings, which left us genuinely conflicted. On the one hand, the earnings demonstrated the company’s strength in Cloud, which grew 36% year-over-year, accelerating from 29% last quarter. In tandem, Alibaba is moving towards aggressive monetization of its AI portfolio by shifting from open-source to a proprietary paid enterprise model for its high-end tools: Qwen3.6-Plus. All of this is good news as it reflects significant momentum in cloud computing and monetization potential for AI products.

However, Alibaba’s foray into the quick commerce price war with Meituan and JD.com is proving to be extremely costly without any indication of financial return to date. China e-commerce adjusted EBITA declined 43% year-over-year, with sales and marketing expenses jumping from 15.2% to 25.3% of consolidated revenue. While management has repeatedly framed quick commerce losses as strategic and temporary, there was no quantifiable framework for evaluating the progress of the initiative. Per-order economics were not disclosed. Contribution margin trajectory was not provided. The 1% growth in customer management revenue against double-digit MAU growth implies subsidy-driven user acquisition rather than genuine ecosystem engagement.

We also found management’s commentary during the earnings call to be unsatisfactory. In our 2024 article, Selling StoneCo Ltd. (STNE), we discussed how besides considering financial operations, we also closely monitor the way management communicates with shareholders as an indication of credibility and high-quality leadership. In business communication, jargon and euphemism are often used to present reality in the most favorable light. There are times, however, that what is unsaid is more revealing than what is, and it takes a certain qualitative instinct to read that subtext. This quarter, that instinct was triggered. We identified four specific red flags:

• The $100 billion self-contradiction. Management guided $100 billion in combined cloud and AI revenue over the next five years while simultaneously arguing the AI industry evolves too rapidly to forecast. When an analyst pressed for a CAGR to anchor the target, CEO Eddie Wu responded: “use your calculator.” A five-year target with no interim milestones and no underlying growth framework is a marketing statement, not a financial commitment.

• Ten quarters of growth, zero numbers disclosed. Management has cited triple-digit AI revenue growth for ten consecutive quarters yet has never disclosed an absolute figure. The term "AI-related products" is not an industry-standard definition, leaving investors unable to independently verify what is even being measured. After more than two years of explosive growth, the continued absence of a dollar figure is a choice, not an oversight. It is one we intend to scrutinize closely in the quarters ahead.

• Free cash flow turned negative. Nine-month free cash flow reached negative $4.2 billion, against positive $10.0 billion in the same period last year — a swing of over $14 billion in a single year. Buybacks are now being funded from the balance sheet rather than from earnings. While the balance sheet provides ample runway ($42.5 billion in net cash), this signals a fundamentally different capital allocation posture than the one we underwrote initially.

• Where is Joseph Tsai? Chairman Tsai was listed as a call participant and said nothing. In prior quarters he served as the primary voice on capital allocation, buybacks, and shareholder returns. This quarter, the entirety of shareholder return commentary was reduced to a single line: “we are reinvesting our cash flow.” For Western minority shareholders holding ADSs in a VIE structure, management’s voluntary commitment to capital return is our primary governance mechanism. Its complete absence at the precise moment free cash flow turned negative was the most concerning signal of the quarter.

One meaningful post-earnings development: Chinese regulators have reportedly intervened to end the food delivery price war, a catalyst that should accelerate quick commerce profitability. In China, we note that government risk is not an outlier event, it is a permanent condition requiring ongoing analytical judgment. We remain committed to the cloud thesis and ecosystem optionality, while closely tracking the concerns outlined above.

Portfolio Additions

PayPal Holdings— Initiated at $39.84

We initiated a significant position in PayPal (Ticker: ) at $39.84 per share. We first looked at the company in late 2023, shortly after Alex Chriss became CEO, when shares were near $60. The business had most of what we look for, but the valuation did not meet our margin of safety threshold. The roughly 40% price decline since then created a price we found compelling.

The market is pricing PayPal as a business in structural erosion. That conclusion is not supported by the fundamentals. The company generates $5.6 billion in annual free cash flow, earns returns on invested capital above 20%, and yields roughly 15% on free cash flow at our purchase price. Q4 2025 results triggered the sell-off: branded checkout growth decelerated from roughly 5% to 1%, and management withdrew its multi-year outlook. The stock fell more than 20%. The market read this as confirmation of structural decay. We looked closer and disagreed.

Much of the slowdown was intentional. Management deliberately shed low-margin PSP volume that had been inflating Braintree’s top-line growth while contributing little to profitability. Unbranded processing volume growth fell from roughly 29% in 2023 to about 2% in Q4 2025 as a direct result. That shift made the revenue picture look worse than the underlying economics. Transaction margin dollars grew 8% and the margin rate expanded 274 basis points to 47.7%. PayPal chose margin over volume. Investors punished the optics. The business improved.

Branded checkout weakness added a separate layer: softer spending among lower- and middle-income consumers, European headwinds, and deceleration in certain Asian corridors driven by tariff uncertainty. These are real pressures, and cyclical ones. They do not change the fact that the core platform continues to generate significant cash while improving its unit economics.

The prevailing bear case frames PayPal as a legacy platform being displaced by rising competition. This oversimplifies a more durable reality. Payments is not a winner-take-all market — it is fragmented, multi-modal, and large enough to support multiple scale players. PayPal’s global footprint has compounded a dataset on fraud, behavior, and conversion over two decades that is genuinely difficult to replicate. The competitive threat from Apple Pay and Google Pay is frequently overstated. Both originated as NFC tools designed for in-person transactions, a fundamentally different use case than e-commerce checkout. PayPal has spent two decades embedding itself into merchant infrastructure that these platforms are still working to penetrate.

What the bear case consistently omits is Venmo. The platform processes more than $250 billion in annual volume with monetization still well below its earnings power potential. A 10-basis-point improvement in effective take rate alone would generate roughly $250 million in incremental high-margin revenue. Current multiples assign it almost no credit.

Our analysis across EPV, SOTP, and DCF methodologies converges on meaningful upside from current prices, with our base case suggesting intrinsic value meaningfully above $60 per share. Downside is protected by a net cash balance sheet and $5.6 billion in annual free cash flow. The business does not need to grow to generate attractive returns from these levels.

Flowers Foods — Initiated at $8.50

During Q1, we initiated a position in Flowers Foods (Ticker: ) at $8.50 per share. Flowers is a 107-year-old consumer staples company best known for its packaged bread portfolio, including Nature’s Own, Wonder, and Dave’s Killer Bread. More recently, the company expanded into better-for-you snacks through the $795M acquisition of Simple Mills in early 2025. The stock declined from roughly $30 in late 2022 to our purchase price—a 72% drawdown.

The selloff has clear drivers: structural pressure in the bread category, intensifying private label competition, incremental leverage from the Simple Mills acquisition, and a $136M non-cash impairment charge that depressed reported earnings. These are real challenges. We believe, however, the market has overcorrected, creating a dislocation between price and underlying asset value.

Flowers is the second-largest packaged bread manufacturer in the U.S., behind Grupo Bimbo, forming a functional duopoly in a category with meaningful barriers to entry. The most important of these is its direct-store-delivery (DSD) network: nearly 6,000 distributor territories where independent operators own exclusive rights to deliver and merchandise products. This infrastructure is difficult to replicate and costly to rebuild.

Importantly, the DSD network has observable private market value. Approximately 4,784 routes have been sold to independent distributors, with transaction comps implying roughly 14.5x average weekly sales. Applying a conservative $65,000 per route yields approximately $311M of embedded value that we believe is underappreciated by the market.

Our sum-of-the-parts analysis applies similarly conservative assumptions. Core branded bakery is valued at 8x EBITDA, a discount to both public peers and recent food M&A. Dave’s Killer Bread is valued at $600M, below 1x sales despite significant growth since acquisition. Manufacturing is valued at $600M, below replacement cost and modestly below book value. Simple Mills is carried at $600M in our analysis, a deliberate discount to the $795M acquisition price.

Aggregating these components—core bakery ($2.72B), Dave’s ($600M), Simple Mills ($600M), manufacturing ($600M), and DSD network ($311M), less $1.73B in net debt—yields approximately $3.10B in equity value, or $14.71 per share. This implies 73% upside from our entry price based on asset value alone.

The primary near-term risk is the October 2026 debt maturity, which management expects to address through refinancing. Importantly, the business has remained structurally profitable for nearly two decades and maintains a consistent dividend track record. From current levels, even modest operational improvement represents incremental upside to an already asset-backed valuation.

Looking Ahead

Given our concentrated portfolio, we are prepared for outsized volatility ahead. While we focus our discussions on the financial implications for our holdings, we also recognize the tragic realities of war and global instability. The geopolitical backdrop is genuinely complex, and we hold no special insight into its resolution. In the meantime, our default posture remains patience.

What we can control is our analytical discipline: focusing on the competitive strengths, financial durability, and customer relationships of our portfolio companies, including their ability to absorb shocks. In short, we aim to buy and hold resilient businesses in an unstable world.

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Thank you for reading. We would like to thank our subscribers for your continued support. We look forward to sharing updates about our fund’s performance throughout the remainder of the year.

With gratitude,

Jack Beiro, MBA

JB Global Capital

Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. From time to time, the author holds positions in the mentioned stocks consistent with the views and opinions expressed in this article. This is a disclosure—not a recommendation to buy or sell stocks.

PayPal at ~$40

At ~$40 per share, the market is pricing PayPal for terminal decline. The fundamentals do not support that conclusion.

Company Overview (February 2026)

Founded in 1998, PayPal operates a global two-sided payments network connecting 439 million consumer accounts with millions of merchants across 200+ markets. Its ecosystem spans PayPal checkout, Venmo, Braintree merchant processing, and consumer credit products.

By sitting between consumers and merchants, PayPal captures transaction data on both sides of the network, supporting fraud prevention, credit underwriting, and checkout optimization that single-sided payment rails struggle to replicate. These two-sided network effects create switching costs, forming a classic competitive moat.

Despite the company’s scale and embedded position in global commerce, PayPal’s stock has declined roughly 85% from its 2021 peak, falling from over $300 to under $40 per share.

The question is: why?

Stock Performance: What Went Wrong And What Didn’t

PayPal’s 85% drawdown was not driven by a collapse in profitability or balance sheet stress. It was driven by a breakdown in capital allocation discipline, product execution, and investor trust.

From 2020 through 2022, management deployed $9.2 billion repurchasing shares at elevated valuations, buying aggressively as the stock traded between $200 and $300 per share. In total, PayPal retired 67.9 million shares at an average cost far above today’s price. Those shares are now worth approximately $2.7 billion, implying a ~70% loss on deployed capital.

The opportunity cost of this decision was substantial. While PayPal consumed capital on buybacks, competitors invested aggressively in payments integration, merchant tooling, and user experience, areas where PayPal’s product stagnated. Customer satisfaction metrics deteriorated, with PayPal’s Net Promoter Score trailing peers such as Stripe, Adyen, Shopify, and Apple Pay.

Long-standing friction points including slow support response times, account freezes, and interface complexity remained unresolved as competition intensified. PayPal’s core business was now under threat from well-capitalized, tech-enabled competitors whose payment products were already embedded in the daily habits of existing users.

These execution gaps culminated in a Q4 narrative break. In February 2026, management disclosed a sharp deceleration in branded checkout growth from 5% in Q3 to 1% in Q4 and withdrew its multi-year outlook, citing slower merchant adoption and execution failures. Interim CEO Jamie Miller stated:

“We recognize as a company that our execution has not been what it needs to be. We have not moved fast enough, with the level of focus required. Given everything I’ve outlined, we are no longer committing to the specific outlook for 2027 we laid out at Investor Day last year. For these reasons, we think it’s prudent for now to provide financial guidance one year at a time.”— Q4 2025 Earnings Call

The market response was immediate. The stock fell over 20%, effectively repricing PayPal from a challenged growth platform to a structurally declining asset.

What broke was confidence in management’s ability to allocate capital wisely, modernize the product, and execute consistently. What did not break was the business’s ability to generate cash, earn attractive margins, or compound capital above its cost.

The Foundation at $40

Despite the issues outlined above, PayPal’s core economics remain fundamentally strong. The business generated $5.6 billion in free cash flow in 2025, representing a 15% FCF yield at the current market cap. ROIC reached 23.3%, more than double the 11.7% cost of capital, creating an 11.6 percentage point spread, the widest since 2021. Operating margins expanded to 19.3%, 224 basis points higher than when the stock traded above $300. The balance sheet carries $10.4 billion in cash against $10.0 billion in debt, effectively net-zero leverage, eliminating bankruptcy risk and providing strategic flexibility.

More importantly, PayPal retains structural assets that do not appear on the income statement but create genuine barriers to displacement. The company sits on 439 million active consumer accounts and relationships with millions of merchants across 200 markets. It processes over $1.8 trillion in annual payment volume, generating a proprietary dataset on consumer behavior, merchant performance, and transaction patterns. This data powers fraud detection with authorization rates above 95%, credit underwriting for PayPal’s $40+ billion BNPL book, and checkout optimization that demonstrably improves merchant conversion. While competitive pressure is real, PayPal has retained these structural advantages.

At $40 per share, the market is pricing PayPal as a structurally impaired asset: a business earning $5.2 billion in net income, returning capital through $6 billion in annual buybacks, and paying a newly initiated dividend. In reality, this is a cash-generative business with competitive advantages sold at distressed multiples because growth has slowed and management credibility has collapsed. The gap between operational reality and market pricing creates a clear asymmetry: downside is protected by structural cash flow and a fortress balance sheet, while upside emerges through operational stabilization, activist involvement, or strategic alternatives. The business does not need to materially improve to generate attractive returns from current levels; it simply needs to remain economically intact. This asymmetry forms the foundation of our investment thesis.

Valuation: What Are You Actually Buying at $40?

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• Shifts our original Clorox investment thesis from post-ERP operational recovery toward long-term portfolio quality enhancement

• Increases exposure to the Health & Wellness category, characterized by durable brand economics and high trust sensitivity

• Reinforces management’s capital allocation discipline at a time of market pessimism

On January 22, Clorox announced the acquisition of GOJO Industries, the maker of Purell hand sanitizer, for $2.25 billion. The transaction represents a strategic doubling down on Clorox’s fastest-growing segment: Health & Wellness, which already accounts for approximately 40% of total company sales. GOJO is expected to contribute roughly $800 million in annual revenue, with an 80% business-to-business channel mix that complements Clorox’s existing portfolio, where roughly 80% of cleaning sales occur through retail. Combined, the two businesses create a more integrated health and hygiene platform spanning both professional and consumer channels.

The acquisition will be financed primarily through debt, temporarily increasing leverage to approximately 3.6x EBITDA at closing. During the M&A call, management outlined a clear deleveraging path, targeting a return to roughly 2.5x leverage by the end of calendar year 2027 while maintaining the company’s dividend policy. The transaction is expected to close by the end of fiscal 2026 and to become EPS-accretive beginning in fiscal 2027.

Strategic Fit: Category Selection as a Competitive Advantage

With this acquisition, Clorox is continuing to build a portfolio of earned monopolies— businesses whose products command leading market share across their respective categories:

• Clorox Bleach: 61% share of North American bleach market (#1)

• Clorox Disinfecting Wipes: ~45% share of disinfecting wipes category (#1)

• Clorox Toilet Bowl Cleaner: ~35% share of toilet care category (#1)*

• Pine-Sol: ~30% share of multi-surface cleaners (co-leader with Fabuloso)

• Kingsford Charcoal: ~50% share of charcoal market (#1, nearly double nearest competitor)

• Purell Hand Sanitizer: ~45% share of retail hand sanitizer (#1 by significant margin)

These positions were not won through promotional spending alone. They reflect decades of consistent product reliability that has translated into deep consumer trust. That trust has proven resilient even under significant operational stress. When Clorox’s ERP-related supply disruptions led to prolonged stockouts across major retailers, household penetration for Clorox bleach did not decline; it increased. Consumers waited for the brand rather than substitute away.

This behavior reveals something fundamental about these categories: in products tied to health, safety, and hygiene, trust becomes a structural competitive advantage. Reliability is not just a product attribute; it’s a moat that increases over time.

The Health & Wellness category, which the GOJO acquisition meaningfully expands, is particularly attractive from a brand-power perspective. Post-COVID, consumer health consciousness has remained structurally elevated as hand sanitizer usage patterns developed in 2020 have become habitual. Purell’s 20 million dispensers in hospitals, schools, offices, and airports create passive brand exposure at the precise moment of need. An employee sanitizing before eating lunch, a commuter after gripping subway poles, a parent before holding their newborn —each interaction reinforces the association between Purell and protection in high-stakes environments.

The psychological trigger is identical across scenarios: “My hands just contacted something that could make me or someone I care about sick—I need to eliminate that risk NOW.”

Financial Implications: Stable Growth, Predictable Cash Flow

Given that the transaction is financed primarily through debt, the key financial question is the temporary increase in leverage from 2.0x EBITDA to 3.6x. However, management committed to reach a 2.5x leverage ratio by end of 2027, implying $1.1 billion in debt reduction over roughly two years:

“We expect to be back to approximately 2.5x by the end of calendar year 2027... The combination of Clorox’s and GOJO’s strong cash flows as well as significant anticipated tax benefit from the transaction support our confidence in reaching our target leverage ratio while continuing to support dividends... Near term, balance sheet discipline and deleveraging as well as supporting dividend is really our priority, and will take priority over share repurchase. So we do not expect to make any share repurchase until we reach our targeted debt-to-EBITDA ratio.”- Luc Bellet, CFO (January 22, 2026 M&A Call)

GOJO generates cash flow in line with Clorox’s long-term target of 11–13% of sales, implying approximately $88–$104 million in annual free cash flow. When combined with Clorox’s normalized free cash flow of ~$850 million and approximately $330 million in transaction-related tax benefits, the deleveraging path appears achievable. More impressively, management reiterated their commitment to maintain the dividend policy, showing financial confidence in the underlying cash generation.

Management’s announced synergy targets appear deliberately conservative. The projected $50 million in run-rate cost savings, to be realized over two to three years, represent roughly 6% of GOJO’s revenue base. This estimate leaves room for upside revisions, particularly given procurement scale benefits (chemical inputs, packaging, logistics), overhead reduction through the elimination of duplicate functions, and Clorox’s existing retail relationships, which could meaningfully expand Purell’s retail presence.

CEO Linda Rendle highlighted this opportunity during the acquisition call:

“During COVID, the Purell team had to make what was a very easy and a very difficult decision at the same time. They had to stop selling their brand in retail in order to supply enough doses in the professional space... They literally went to a zero share in retail. And I think everybody thought, okay, hand sanitizers was just going to be commoditized... They did [a test] …And in well under a year, they were back up to a 45% share, and it was expanded nationally nearly overnight.”- Linda Rendle, CEO (January 22, 2026 M&A Call)

On valuation, the deal metrics reveal disciplined capital allocation. At a cost of $2.25 billion before tax benefits, Clorox is paying 11.9x EBITDA, or 9.1x on a synergized basis after $50 million in cost savings. For context, Clorox itself currently trades at approximately 14.8x EV/EBIT—meaning management is acquiring a faster-growing business (5% historical CAGR vs. Clorox’s 2-3%) with comparable margins at a meaningful discount to their own valuation multiple. For a company trading at decade-low valuations, deploying $2.25 billion to acquire scaled assets in its strongest category represents rational capital allocation—a quality that we admire in a portfolio company. While our original investment thesis was centered on ERP normalization, this acquisition adds to our conviction regarding management quality and their focus toward building a resilient business in health and wellness.

Thank you for reading!

Sincerely,

Jack Beiro, MBA

JB Global Capital

Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. From time to time, the author holds positions in the mentioned stocks consistent with the views and opinions expressed in this article. This is a disclosure—not a recommendation to buy or sell stocks.

Managing real capital exposed a simple truth, judgment fails before analysis does. The solution: a metacognitive framework for decision-making.

As eternal students of investing, we’re always looking to improve our decision-making process. When starting out, the focus was naturally on the analytical toolkit—understanding basic accounting and finance, analyzing financial statements, studying business models, and practicing valuation techniques. But after years of managing real capital through multiple market cycles, it becomes clear there’s a more foundational element that’s often ignored: the ability to recognize your own thinking processes and regulate your decisions accordingly.

This skill is metacognition: the practice of bringing awareness to our own thinking. Over time, it may be the most important capability an investor can develop.

Habitual tendencies drive our behavior more than we would like to admit. Most discussions of habit focus on physical behavior—checking your phone at breakfast for example. But our deepest habits are cognitive ones. How we interpret information, the patterns we default to under stress, the narratives we construct to explain uncertainty—these mental habits shape every investment decision we make. Left unexamined, these habits begin to operate automatically, outside of conscious awareness.

The Metacognitive Framework

Our framework operates on two dimensions. First, knowledge about cognition: understanding your own mental blind spots in real-world decision-making. An investor might recognize, for instance, their tendency toward narrative seduction, overweighting a compelling story regardless of quantitative concerns. Second, regulation of cognition: the ability to monitor and adjust thought processes in real-time. This is the ability to notice when emotional reasoning has overtaken analysis, or when confirmation bias is filtering incoming information. Consider the investor watching a position drop by 50%. Can they distinguish fear-based loss aversion from rational business judgment? That distinction is impossible without metacognitive awareness.

Research in behavioral finance demonstrates that metacognitive ability directly influences decision-making quality across domains. Markets, by their very nature, demand decisions under ambiguity. Metacognitive investors acknowledge this reality explicitly, not defensively. They build systems to compensate for known limitations and remain alert to psychological states that compromise judgment.

Metacognition isn’t about achieving perfect rationality—it’s about developing honest awareness of cognitive tendencies and creating systems to work with human psychology rather than attempting to eliminate it. It also allows for greater clarity to emerge within the thinking process itself. In markets where most available information is already priced in, durable advantage increasingly comes not from more data, but from seeing it more clearly.

That advantage begins with knowing yourself.

How We Apply Metacognition in Practice:

• Decision Journaling

Document the reasoning and conviction behind each buy/sell decision. This creates an audit trail that reveals patterns in thinking over time. When reviewing past decisions, we’ve noticed our highest-conviction purchases made during periods of market pessimism (StoneCo during their 2023 credit business collapse and Alphabet during AI competitive concerns), consistently outperformed impulsive additions during bull markets. This pattern awareness now triggers a metacognitive pause: Am I buying because the opportunity is exceptional, or because recent gains have made me overconfident?

• Examine Emotions Before Acting

Every decision has an emotional component—excitement, calmness, urgency. These feelings are diagnostic. Excitement often signals narrative seduction: we’re attracted to the story rather than present value. Urgency suggests FOMO or anchoring to recent price action. Calmness paired with grounded conviction often signals genuine mispricing.

In late 2024, we watched as our Alibaba stock fell by roughly 30%. During a drastic drawdown in a core holding, a natural thought arises: What if we’re wrong? This scenario requires reassessing the investment thesis and valuation. It is possible that the thesis has structurally deteriorated. Selling solely due to a rapid decline—before completing the analysis—would have been a metacognitive failure.

• Establish Falsifiable Metrics

Define the investment thesis using actionable and trackable data points. If results consistently fall short of expectations, continuing to hold could reflect ego-based attachment rather than rational analysis. Our Clorox thesis relies heavily on operational improvements through ERP benefits. For example, we are tracking fill rates, market share, and gross margin thresholds that would break our thesis if they were violated. This creates valuation guardrails that reduce the risk of cognitive bias.

Metacognition transforms investing from a reactive, data-driven exercise into a disciplined, self-aware practice. By understanding how we think, we navigate uncertainty more skillfully, mitigate behavioral errors, and develop the subtle edge that separates superior investors from everyone else.

These principles inform everything we publish, including our recently released Q4 2025 Letter, where we discussed the concentrated value positions that contributed to our 67.5% annual return. These letters remain free and are intended to be transparent records of our thinking.

Newsletter Update

Beginning February 2026, we’re introducing paid content for readers who want deeper access to our work. This will include in-depth earnings reviews for portfolio companies, new investment cases, and detailed financial models outlining our valuation methodology. Our quarterly letters will continue to remain free.

We’re grateful to share this journey with you and welcome feedback on how we can continue to improve the quality and value of this work.

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With gratitude,

Jack Beiro, MBA

JB Global Capital

Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. From time to time, the author holds positions in the mentioned stocks consistent with the views and opinions expressed in this article. This is a disclosure—not a recommendation to buy or sell stocks.

The JB Global Capital fund results for FY 2025 and since inception are presented below, along with comparable quarterly results for a leading global stock market index (VT World Index) and the S&P 500. These results have been achieved without the use of leverage, shorting, or financial derivatives of any kind.

During Q4 2025, the JB Global Fund declined 8.9% while global markets rose modestly. The drawdown was driven primarily by weakness in Alibaba Group, our largest holding, which fell approximately 25% during the quarter on concerns over slowing Chinese consumption and regulatory headwinds. This downward pressure was partially mitigated by the 28% increase in Lululemon’s stock from our purchase price of $162 per share. For the full year, however, the fund appreciated 67.5%—more than tripling the S&P 500's 16.4% and the VT World Index's 22.4%. Since inception on January 3, 2023, we have generated cumulative returns of 108.9%, nearly double that of global markets.

Both the S&P 500 and VT World Index posted modest gains for the quarter and strong returns for the full year. The quarterly outperformance was driven by remarkable concentration: technology and communication services stocks accounted for nearly 60% of market gains in 2025. Just two companies—Nvidia and Alphabet—contributed over a quarter of the S&P 500’s entire return. The VT World Index mirrors this concentration, with the same AI infrastructure names dominating. Semiconductors surged 42.8%—more than double the broader market—while consumer defensive stocks rose just 1.1% and real estate managed 4.1%.

This concentration creates fragility: when ten stocks account for 40% of returns, any stumble exposes how diversified indexes have become inadvertent leveraged bets on AI infrastructure.

The AI “Bubble”: Revisited

Our decision to avoid U.S. technology stocks isn't a temporary position—it's a deliberate stance on valuation that will define our relative performance in 2026 and beyond. In December, we published an article titled “The A.I. Bubble: A Value Investor's Perspective,” which drew parallels between today’s AI infrastructure boom and historical episodes like the airline industry expansion in the 1940s and the telecom bubble of the late 1990s. The piece generated thoughtful pushback, much of it valid. Critics note that AI companies enjoy structural advantages—network effects, platform economics, oligopolistic markets—that distinguish them from past technology cycles. They're right. These differences are real, and they suggest that the best AI companies will indeed build enduring competitive advantages. But here's what critics miss: these advantages don't exempt investors from valuation arithmetic.

When revolutionary technology becomes obvious to everyone, the market prices in decades of perfect execution. The very strengths that critics cite—network effects, platform economics, oligopolistic market structures—become the intellectual justification for paying prices that assume no missteps, no competition, and no surprises. This is precisely when valuation discipline matters most. The “industrial differences” that make AI companies superior businesses also make investors more willing to pay premium prices, creating the same dynamic we’ve seen in every technological revolution: obvious prospects for growth priced so aggressively that even excellent execution can’t generate adequate returns.

Amazon illustrates this dynamic perfectly. The company is arguably the best business built in the past 30 years, transforming retail, proving naysayers wrong at every turn, and creating shareholder value that exceeded even the wildest bull cases from 1999. Yet if you bought Amazon at its 2000 peak, you had to wait nearly a decade just to break even, and your returns over the first 15 years underperformed Treasury bonds. The business was excellent; the entry price was terrible. Everything the bulls said about Amazon’s competitive advantages proved correct—and investors who overpaid still underperformed for years.

The AI trade will shape markets in 2026, and it will certainly impact our relative performance. We do own AI exposure—Alibaba is aggressively investing in AI and cloud infrastructure, with cloud revenue growing 34% year-over-year and AI-related products recording nine consecutive quarters of triple-digit revenue growth. But we're paying a dramatically different price for it. At roughly $146 per share, Alibaba trades at 18x trailing earnings with $41 billion in net cash, generating nearly $35 billion in quarterly revenue from proven, cash-generative businesses in e-commerce and cloud computing. If the AI thesis proves correct, we'll participate through Alibaba's rapidly growing cloud division. If it disappoints, we're protected by established businesses purchased at reasonable valuations. In essence, we're playing value in a growth-dominated category—betting that valuation discipline will matter over time.

Portfolio Updates:

Alibaba Drawdown

We made the decision to decrease our exposure to Alibaba stock after a nearly 85% run-up in price. We trimmed the position by roughly 10% at $172 per share, a level at which we felt comfortable reallocating profits into other opportunities. Our decision relates more to the changing risk/reward profile than a loss of conviction in business value.

Since reaching a high of ~$190 per share, Alibaba’s stock has fallen subsequently to $146 per share by the end of Q4.

Does this change our thesis? No. The 25% drawdown was triggered by political headlines (sentiment vs. fundamentals) and margin pressure from quick commerce investments.

In mid-November, the Financial Times reported on a White House memo alleging Alibaba provided "tech support for Chinese military operations against targets in the U.S."—claims Alibaba immediately rejected as "completely false." Shortly after, the Pentagon recommended adding Alibaba to its Section 1260H list of Chinese companies deemed military-linked, with Deputy Defense Secretary Stephen Feinberg informing Congress in an October letter that Alibaba "should be added" to the roster. The narrative shifted from “AI cloud growth story” to “uninvestable political risk” within weeks. These headlines arrived just as Alibaba was aggressively investing into quick commerce infrastructure, while adjusted profit fell 18% year-over-year as fierce competition in China compressed margins.

Throughout 2026, we're monitoring three key metrics:

1. Cloud revenue growth sustaining above 30%.

2. AI product monetization improving.

3. E-commerce margins stabilizing as the competitive environment in quick commerce reaches equilibrium.

Addition: The Clorox Company (CLX)

During Q4 2025, we initiated a position in The Clorox Company at an average cost basis of approximately $104 per share—a decade-low valuation for a business generating 35%+ returns on invested capital.

Founded in 1913, Clorox has built a $6.8 billion portfolio of brands dominating essential household categories: 61% of North American bleach, 50% of charcoal, 35% of toilet care, and one-third of trash bags. Nine out of ten U.S. households own at least one Clorox product—a remarkable statistic representing decades of brand equity built through consistent quality and strategic investments in inherently resistant categories.

The capital efficiency story is exceptional. For every dollar Clorox invests, it generates $3.50 in profit above its cost of capital. This reflects genuine competitive advantages: co-owned clay mines for cat litter, strategic charcoal sourcing, strong retail relationships, and brands consumers trust enough to pay premium prices for during private-label erosion.

In August 2025, Clorox’s $580 million SAP S/4HANA implementation—the company’s first ERP overhaul in two decades—went catastrophically wrong. Order fulfillment collapsed from 96%+ fill rates to the low 80s. Q1 fiscal 2026 organic sales declined 17%. The stock fell from $150+ to current levels around $104.

The opportunity: ERP disasters are temporary by definition. The technology works—it requires process refinement. By late October, fill rates had recovered to 92%, with full stabilization expected by March 2026. More importantly, Nielsen data through October showed Clorox bleach household penetration actually increased 0.3 points despite stockouts. Consumers waited for product rather than switching—compelling evidence of genuine brand moat. This mirrors the company’s recovery from the August 2023 cyberattack, which created similar supply disruptions that were resolved within three quarters.

The $580 million ERP investment is expected to drive $75-100 million in annual cost savings once stabilized: 30% reduction in forecasting errors, 15-20% improvement in working capital efficiency, and better promotional spend optimization. These benefits will begin flowing in H2 fiscal 2026 as per management’s commentary.

At current prices, Clorox trades at 16x depressed earnings with a ~5% dividend yield—the highest in company history. Our DCF analysis yields fair value of $134-145 per share, implying 30-40% upside as operations normalize. The company maintains conservative leverage at 2.0x net debt/EBITDA with 8x interest coverage, providing flexibility to maintain its 62-year dividend streak while investing through the recovery.

The best opportunities emerge when temporary complexity obscures underlying business quality. Clorox at $104 represents precisely this: a 112-year-old franchise with genuine competitive advantages, trading at decade-low valuations, while paying a sustainable ~5% dividend.

The risks are real: extended ERP recovery beyond our 18-24 month timeline, permanent market share loss in Glad trash bags or Fresh Step cat litter, or structural margin compression from tariffs and inflation. Each 100 basis points of margin compression costs $8-10 per share in our DCF. But with limited downside to our conservative floor of $95-103 and 3-4x upside versus downside, the asymmetry is compelling.

You can read our full Investment Case for The Clorox Company here!

Portfolio Concentration

Our top three positions represent 82% of the portfolio—concentrated exposure to businesses we believe offer asymmetric risk/reward at current valuations. This concentration will drive volatility, but it reflects our conviction that a handful of deeply researched ideas outperform broad diversification.

This quarter reminded us why conviction requires patience measured in years, not quarters. The same discipline that kept us out of AI infrastructure at 40x earnings now has us buying Clorox during an ERP crisis and holding Alibaba through political headlines. These decisions won't be validated by next quarter's performance—they'll be measured over the next 3-5 year period where dislocations resolve and valuations matter.

We would like to thank our subscribers for your continued support. 2025 has been a breakout year for the fund and we still have much to learn. We look forward to another year of investing and sharing our results with you.

Until next time,

Jack Beiro, MBA

JB Global Capital

Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. From time to time, the author holds positions in the mentioned stocks consistent with the views and opinions expressed in this article. This is a disclosure—not a recommendation to buy or sell stocks.

A Timeless Investing Lesson, Repeated Across Generations

In the late 1940s, Benjamin Graham, the father of value-investing, watched as investors poured money into airline stocks. The logic seemed clear: air travel was the future, passenger volumes would soar, and the companies facilitating this revolution would benefit greatly and enrich their shareholders. Graham did not participate in the airline stock frenzy.

Writing in The Intelligent Investor, Graham drew a critical distinction that investors had missed. Yes, the airline industry would grow tremendously. But that growth came at a devastating cost- massive capital requirements, brutal competition, and economics that guaranteed most of that demand growth would never translate into investor profits. Despite carrying 2 billion passengers by 1978, the airline industry had delivered overall negative cumulative returns to shareholders. From this painful lesson, he crystallized a principle that would echo throughout investment history:

Obvious prospects for growth in an industry do not translate into obvious profits for investors.

By the late 1990s, the excitement over the airline industry was replaced by a newer, even more revolutionary technology: the internet. Retail investors began quitting their day jobs in order to day trade internet stocks that were doubling every few days. Cisco’s stock, the business at the heart of this transformation, surged 3,800% between 1995 and 2000, becoming the world’s most valuable company at $560B. During this time, telecom firms spent hundreds of billions laying fiber-optic cable across the globe because internet traffic (demand) was doubling every three months. The result of all this infrastructure investment? Capacity utilization fell to 5% and wholesale bandwidth prices collapsed 70% in a single year. When the bubble burst, Cisco’s stock collapsed more than 80% and hasn’t recovered to its 2000 peak in real terms to this day.

Fast-forward to present day and we are in the middle of an A.I. frenzy set to change everyday life as we know it. Tech giants have collectively poured $325 billion into AI infrastructure in 2025—a 46% increase year-over-year—representing one of the most aggressive capital deployment cycles since the mobile revolution. OpenAI recently announced spending plans of $1.4T over eight years while generating ~$15B annually in revenue. To put this in perspective: imagine a restaurant chain doing $15M in sales announcing it will spend a trillion dollars on kitchen expansions and new locations. They’d be committing 93 years’ worth of current revenue to infrastructure before knowing whether customers will fill those seats, whether tastes will change, or whether competitors will open better restaurants across the street. This isn’t business planning—it’s a bet that the rules of business economics don’t apply.

Consider Nvidia, the poster child of the A.I. boom and the first company to reach a $5T market capitalization. Backing out the revenue requirements implicit in this market cap, the company would need to generate ~$500B in annual revenue within a decade to justify current prices. The problem? Industry estimates suggest the entire A.I. chip market will reach ~$330B. Translation: Nvidia’s current valuation requires it to capture more revenue than the total addressable market. This means that either Nvidia is overvalued or industry experts are significantly underestimating TAM. Given the current market optimism around A.I., we find it more plausible that the stock is overpriced than that the entire semiconductor industry is underestimating its addressable market by 2X. History shows that excited markets rarely underprice things.

Michael Burry has identified a more insidious problem lurking beneath A.I. valuations: the accounting. In his November 25th post, Burry accused major cloud and A.I. infrastructure providers of systematically inflating earnings through depreciation practices that ignore economic reality. Burry argues that companies are depreciating A.I. hardware over 6-year useful lives while simultaneously replacing that same equipment every 2-3 years due to rapid technological obsolescence. This accounting sleight-of-hand understates annual depreciation expense by 50-70%, artificially inflating reported earnings.

This behavior mirrors exactly what happened during the telecom bubble. WorldCom, Global Crossing, and others capitalized infrastructure costs with optimistic depreciation schedules, only to watch that equipment become economically obsolete years before the accounting reflected it. When reality caught up, $200B+ in asset write-downs followed. Burry is betting we’re watching the same movie. That gap doesn’t close gently; it closes with write-downs, earnings revisions, and repricing.

If Burry is correct, the infrastructure companies driving Nvidia’s demand are reporting artificially inflated profits while simultaneously racing to replace equipment faster than they’re depreciating it. This suggests both that (a) current A.I. economics are worse than reported earnings indicate, and (b) the replacement cycle driving chip demand may be unsustainable once accounting catches up to reality.

Considering our discussion around the airline industry in the 40s or telecoms in the 90s, we notice a pattern emerge with the following elements: rapid expansion that excites investors, massive capital requirements to fund that expansion before ROI clarity, and intense competition that ultimately erodes excess profits. To be clear: we’re not arguing that A.I. will fail or that great businesses won’t emerge from this shift. Our concern is narrower: at current valuations, the market has priced in an optimistic scenario, leaving little margin of safety for the inevitable surprises that accompany any technological revolution.

The crux of whether or not we are in an A.I. bubble isn’t whether it will transform society- it clearly will. The question is whether the companies today will earn adequate returns to justify their spending and current market values. That is the question that has stopped us from participating in the current A.I. boom- that and the general exuberance found among the U.S. tech industry. If you’ve been following us, you will know that we prefer quieter, less crowded rooms.

Benjamin Graham didn’t doubt that air travel would revolutionize transportation. He simply recognized that transformative technology and profitable investment are not synonymous. While A.I. will undoubtedly reshape the world, we’re not convinced today’s infrastructure providers—at today’s prices—represent sound investments. History suggests otherwise.

The AI “Bubble”: Revisited

Our decision to avoid U.S. technology stocks isn’t a temporary position—it’s a deliberate stance on valuation that will define our relative performance in 2026 and beyond. In December, we published an article titled “The A.I. Bubble: A Value Investor’s Perspective,” which drew parallels between today’s AI infrastructure boom and historical episodes like the airline industry expansion in the 1940s and the telecom bubble of the late 1990s. The piece generated thoughtful pushback, much of it valid. Critics note that AI companies enjoy structural advantages—network effects, platform economics, oligopolistic markets—that distinguish them from past technology cycles. They’re right. These differences are real, and they suggest that the best AI companies will indeed build enduring competitive advantages. But here’s what critics miss: these advantages don’t exempt investors from valuation arithmetic.

When revolutionary technology becomes obvious to everyone, the market prices in decades of perfect execution. The very strengths that critics cite—network effects, platform economics, oligopolistic market structures—become the intellectual justification for paying prices that assume no missteps, no competition, and no surprises. This is precisely when valuation discipline matters most. The “industrial differences” that make AI companies superior businesses also make investors more willing to pay premium prices, creating the same dynamic we’ve seen in every technological revolution: obvious prospects for growth priced so aggressively that even excellent execution can’t generate adequate returns.

Amazon illustrates this dynamic perfectly. The company is arguably the best business built in the past 30 years, transforming retail, proving naysayers wrong at every turn, and creating shareholder value that exceeded even the wildest bull cases from 1999. Yet if you bought Amazon at its 2000 peak, you had to wait nearly a decade just to break even, and your returns over the first 15 years underperformed Treasury bonds. The business was excellent; the entry price was terrible. Everything the bulls said about Amazon’s competitive advantages proved correct—and investors who overpaid still underperformed for years.

The AI trade will shape markets in 2026, and it will certainly impact our relative performance. We do own AI exposure—Alibaba is aggressively investing in AI and cloud infrastructure, with cloud revenue growing 34% year-over-year and AI-related products recording nine consecutive quarters of triple-digit revenue growth. But we’re paying a dramatically different price for it. At roughly $146 per share, Alibaba trades at 18x trailing earnings with $41 billion in net cash, generating nearly $35 billion in quarterly revenue from proven, cash-generative businesses in e-commerce and cloud computing. If the AI thesis proves correct, we’ll participate through Alibaba’s rapidly growing cloud division. If it disappoints, we’re protected by established businesses purchased at reasonable valuations. In essence, we’re playing value in a growth-dominated category—betting that valuation discipline will matter over time.

Related Articles:

• Contrarian Investing

• Digital Economics

• In Search of Inefficient Markets

Thank you to our subscribers for your continued support. We look forward to sharing updates with you regarding our funds performance in early January. We wish you a happy holiday season. See you in the new year!

Sincerely,

Jack Beiro, MBA

JB Global Capital

Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The author currently holds no positions in the stocks mentioned in this article but may initiate positions in the future. This is a disclosure—not a recommendation to buy or sell stocks.

The Clorox Company trades at $103.68—representing 16x depressed forward earnings for a business generating 35%+ returns on capital. This is the lowest valuation in a decade. Our analysis yields fair value of $134-145 per share, implying 30-40% upside over 24-36 months with a 4.78% dividend yield while you wait.

The opportunity: A temporary ERP implementation disaster has created a compelling entry point in a 112-year-old franchise with genuine competitive advantages and a clear path to normalization by mid-2026.

Why Clorox Deserves Your Attention

The Clorox Company isn’t sexy. It sells bleach, trash bags, and cat litter—products that haven’t fundamentally changed in decades. But that’s precisely the point.

Founded in 1913, Clorox has built a $6.8 billion portfolio of brands that dominate mundane but essential categories: 61% of North American bleach, 50% of charcoal, 35% of toilet care, and one-third of trash bags. Nine out of ten U.S. households own at least one Clorox product. These market positions aren’t accidents—they represent decades of brand equity built through consistent quality, consumer trust, and strategic investments in inherently resilient categories.

Here’s what matters: People don’t stop cleaning, taking out trash, or feeding their cats during recessions. Clorox expanded bleach share from 59% to 61% since 2015—a remarkable feat in the private-label era where store brands control 30%+ of many categories. The company maintained premium pricing while growing share, evidence of genuine brand strength.

What distinguishes Clorox economically are structural advantages that competitors can’t easily replicate: co-owned clay mines for cat litter, strategic charcoal sourcing near manufacturing facilities, and strong retail relationships built over decades. These translate into gross margins around 45% and operating margins historically in the high teens (17.2% average from 2017-2019).

The capital efficiency story is exceptional: For every dollar Clorox invests, it generates $3.50 in profit above its cost of capital. Returns on invested capital (including goodwill) consistently exceed 35%—levels typically found among tech companies, not businesses selling cleaning products. This isn’t financial engineering; it reflects genuine competitive advantages and disciplined capital allocation.

The ERP Disaster: What Happened and Why It Creates Opportunity

In August 2025, Clorox’s $580 million SAP S/4HANA implementation went catastrophically wrong.

The system—the company’s first ERP overhaul in two decades—was supposed to integrate order management, inventory systems, manufacturing execution, and financial reporting across North American operations. Instead, it created cascading disruptions:

• Order fulfillment collapsed: Fill rates plummeted from 96%+ to the low 80s in September. Retailers couldn’t get product despite strong consumer demand.

• Inventory visibility vanished: The system couldn’t provide real-time data, forcing conservative production schedules that worsened stockouts.

• Billing chaos: Invoice processing backlogs strained retailer relationships during peak fall stocking season.

The damage was immediate and severe. Q1 FY2026 organic sales declined 17%—a stunning number for a consumer staples company. The stock fell from $150+ to current levels around $104.

Why This Creates Opportunity

First, ERP disasters are temporary by definition. The technology works—it just needs process refinement. Hershey experienced similar chaos during its 1999 SAP implementation. Nike’s recent supply chain upgrades contributed to DTC strategy failures. Both companies recovered. By late October 2025, Clorox’s fill rates had recovered to 92%, and management confirmed full stabilization expected by March 2026.

Second, no market share has been permanently lost in core categories. This is critical. Nielsen data through October 2025 shows Clorox bleach household penetration actually increased 0.3 points despite stockouts. Consumers waited for product rather than switching—compelling evidence of genuine brand moat. This mirrors what happened during the August 2023 cyberattack that shut down IT systems: Clorox recovered within three quarters and recaptured lost share.

Third, the $580 million investment drives $75-100 million in annual cost savings once stabilized. Benefits include 30% reduction in forecasting errors, 15-20% improvement in working capital efficiency, and better promotional spend optimization. These aren’t theoretical—they’re standard ERP outcomes. Management expects benefits to begin flowing in H2 FY2026.

The market is pricing in permanent impairment. We see temporary disruption.

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Why We Believe in Management

CEO Linda Rendle (CEO since 2020, at Clorox since 2003) has earned our confidence through crisis management and capital allocation discipline.

• Crisis Management: The August 2023 cyberattack provides a recent playbook. That crisis created supply chain disruptions and temporary market share losses similar to today’s ERP problems. Clorox’s response: prioritize retail relationships, accept near-term margin pressure, don’t panic on pricing, maintain the dividend. They recovered within three quarters. We expect the same approach here—and indeed, that’s exactly what we’re seeing.

• Capital Allocation: Management’s track record demonstrates economic rationality. The decision to divest the underperforming vitamins/minerals business (acquired 2010 for $913M, written down $445M in 2022, sold in 2024) and exit Argentina showed willingness to admit mistakes. Over the past five years, Clorox returned $3.2 billion to shareholders through dividends and buybacks while maintaining investment-grade credit ratings and a conservative balance sheet.

• Financial Strength Provides Flexibility: Net debt sits at $2.3 billion, representing just 2.0x trailing EBITDA with 8x interest coverage. With $167M in cash and conservative leverage, management has substantial flexibility to maintain the dividend and invest through the recovery period.

THE BEAR CASE: WHY WE MIGHT BE WRONG

Before discussing valuation, we must examine what could break our thesis.

Extended ERP Recovery

The 17% Q1 organic sales decline suggests more complexity than management initially acknowledged. If recovery extends beyond our 18-24 month timeline (vs. management’s 6-9 month guidance), fair value drops to $95-105 per share, offering minimal upside from current levels.

Our monitoring plan: Track fill rates monthly (must reach 96%+ by March 2026), order accuracy metrics, and retailer feedback. If fill rates aren’t above 94% by January 2026, the thesis weakens substantially.

Permanent Market Share Loss

Glad trash bags and Fresh Step cat litter (~20% of sales) face intense competition from Reynolds, Church & Dwight, and store brands. If consumers who switched during stockouts don’t return, Clorox could permanently lose 3-5 points of share, reducing EBIT by $80-120M and fair value to $108-115 per share.

Why we’re not panicking yet: Household penetration for Clorox bleach increased despite disruptions. The company successfully defended share during the 2008-2009 recession when consumers were aggressively trading down. We monitor Nielsen data monthly, and current trends don’t show permanent defection.

Structural Margin Compression

Between $40M in tariffs, $70M in input cost inflation, and elevated promotional spending, margins face headwinds. If terminal EBIT margins settle at 14.5% instead of our 15.75% assumption (vs. 17.2% historical), fair value drops to $118-125 per share. Each 100bps of margin compression costs $8-10 per share in our DCF.

Our margin assumption already incorporates 140bps of conservatism. If gross margins compress below 44% through FY2027 despite ERP cost savings, the thesis breaks.

Dividend Sustainability

The $4.96 annual dividend represents 95% of current free cash flow—uncomfortably high. A dividend cut would eliminate the 4.78% yield floor and signal deeper problems, potentially driving the stock to $85-95.

Why we believe it’s maintainable: With 2.0x net debt/EBITDA and $167M cash, management has flexibility even if FCF stays depressed for 12-18 months. The company sustained dividends through the 2023 cyberattack and has 62 consecutive years of payments. We expect coverage to normalize to 65-75% as ERP benefits flow through H2 FY2026.

Management Credibility Risk

If management’s March 2026 normalization guidance proves wildly optimistic and they revise downward repeatedly, the stock de-rates due to a “trust discount” regardless of fundamentals. We’re already incorporating skepticism by modeling 18-24 month recovery vs. management’s 6-9 months, but repeated guidance misses would be damaging.

VALUATION: SUBSTANTIAL UPSIDE WITH DOWNSIDE PROTECTION

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Results as of 9/30/2025

The JB Global Capital results for Q1-Q3 2025 and since inception are presented below, along with comparable results for a leading global stock market index and the S&P 500. These results have been achieved without the use of leverage, shorting, or financial derivatives of any kind.

During Q3 2025, the JB Global Fund appreciated by 38.4%, reaching a new all-time high at quarter-end. We have significantly outperformed our benchmarks for the quarter, year-to-date, and—most importantly—since launching the fund on January 3, 2023. Our performance to date stems largely from our decision to heavily overweight Chinese equities throughout 2023 and 2024, when market sentiment drove valuations far below what we considered reasonable relative to underlying earnings power. In our May 2023 article, Investing through Geopolitical Risk, we wrote:

While there are significant geopolitical risks associated with investing in China, we believe that capital markets have priced in many of these known risks. As such, long term investors who are willing to bear the China risk have an opportunity to purchase high-quality operating businesses at a significant discount. - JB Global Capital

Today, sentiment around Chinese equities—particularly Chinese tech stocks—appears to be shifting, driven by the precipitous fall of the U.S. dollar and the technological breakthroughs being reported by Chinese businesses.

At JB Global Capital, we run a highly concentrated portfolio with approximately 50% of available funds invested in a single company. We are comfortable with this level of concentration as it aligns with our temperament and investment philosophy. If you study how fortunes were built through stock market investing, you’ll find that they weren’t built through portfolios of 50 different companies. They were built by investors who correctly identified wonderful businesses and held them over the long term. When we say “wonderful,” we are referring to businesses that are protected from the vicissitudes of the economy and against effective competition over decades.

Impatience as the Enemy

The stock market, by its nature, does not incentivize the long-term ownership of securities. The stock market exists primarily to facilitate the trading of fractionalized shares-daily, with the ease of tapping a button: BUY or SELL. Gamified investing apps like Robinhood encourage active trading through reward animations commonly associated with gambling operations to motivate habitual behavior. These apps also typically have a trending stocks list, showcasing stocks with the highest daily volatility; (i.e. look at how much you could’ve made!)

Financial news media reinforces short-term thinking through 24/7 news cycles, sensational headlines, and “top stock picks.” Combined with the ease of online trading and constant “do something!” messaging, it’s unsurprising that so many investors overtrade based on short-term news. The average U.S. equity holding period is approximately 10 months—a sharp contrast to the more than five years seen in the mid-1970s. While modern technology may have accelerated boom-bust cycles in business, we believe the primary driver of overtrading is the investment industry’s compensation structure: the more clients trade, the more money the industry makes.

Investors have never really reconciled their ability to trade daily with the permanence of equity. We own the only permanent capital in a company’s capital structure – everything else in the company; management, assets, boards, employees can change but our equity can still be there! - Nick Sleep, Nomad Partnership Letters

This short-termism is in direct conflict with the nature of equity. For example, if you own a 20% interest in a rental property, the ownership claim is permanently yours. The asset is there to produce earnings for you as long as it physically can. Chances are, you wouldn’t look up a quoted value for your equity at 10am on a Monday, check again at 12pm, and again at 3pm. As absurd as this sounds, it is exactly what many investors do with their public equities, obsessively tracking stock price movements that update constantly throughout the day. This is purely non-productive behavior, especially when there is no intention to sell.

Another example of impatience commonly occurs during the research process. Before making an investment, it is standard practice to conduct due diligence. How much due diligence is necessary varies depending on the investor and the business in question. However, stock market participants often rush through this process—a tendency that becomes starkly apparent when compared to other forms of investment.

Imagine that you were approached at a cocktail party by a restaurateur who offered to sell you one of his best-performing restaurants. How much due diligence would be required to make an informed decision? In all likelihood, you would have many questions before committing to an investment. Some would involve intricate details: the current staff, menu, customer base, supplier agreements, location, pricing, and so on. You might even silently question the seller’s motives. (If this restaurant is so great, why are you compelled to sell it to me?)

Now compare this to the buying process investors engage in with public equities. Imagine, at the same cocktail party, you were approached by another guest who told you about a technology company poised to change the world with its new A.I. model. He further informs you of how much money he has already made from the stock and how it’s the opportunity of a lifetime. How much due diligence would you need to make a sound investment in this opportunity? You shouldn’t be surprised to hear that many investors would be inclined to purchase shares the very next day— (ironically, investors who have no real-world experience with advanced technology but visit restaurants regularly).

Portfolio Company Updates:

Alibaba Group Holding

Alibaba reported its June quarter earnings, posting $34.6B in revenue and $6B in net income. Management has articulated its forward strategy, and we are pleased to see the company leveraging its significant resource advantage (~$82B in cash) to prioritize aggressive growth. The company has entered a price war in the quick commerce space against rivals and has reportedly gained substantial market share from Meituan, the former market leader, in a relatively short period. Recent trends indicate that Alibaba has captured meaningful food delivery and quick commerce share while increasing spending only modestly compared to Meituan.

Looking ahead, Alibaba Group has two historic opportunities: to build a technology platform centered on AI + Cloud, and to create a comprehensive shopping and daily life services consumption platform. - Eddie Wu, CEO Alibaba Group, Earnings Call

The path forward is clear: leverage multiple consumption scenarios (food delivery, quick commerce, etc.) combined with AI and cloud capabilities to drive engagement across the company’s vast global ecosystem of over 1B users. If successful, this strategy could create a self-reinforcing flywheel: Higher Engagement → Increased Revenue → Increased R&D and Capex Spend → Increased Technological Capabilities → Higher Engagement. We believe Alibaba is well-positioned to build a defensible moat around this strategy given its cloud market leadership, technological advantages, and massive global user base.

You can read our Earnings Review for Alibaba, here!

Addition- Lululemon Athletica Inc.

During the third quarter, we have opened a position in Lululemon Athletica Inc. Lululemon is a premium athletic apparel company founded in Vancouver, Canada in 1998 by Chip Wilson. The company has built a distinctive market position by combining high-quality, technically advanced fabrics with fashionable designs that transition seamlessly from workouts to everyday wear. Due to their early success, Lululemon is widely credited with popularizing and shaping the modern athleisure market. The brand has successfully cultivated a loyal community around its products through initiatives like complimentary yoga classes, running clubs, and local fitness events, positioning itself as a wellness lifestyle brand.

Putting aside the current narrative in the market, Lululemon’s historical financial metrics are outstanding. The company has grown its revenue from approximately $4B in 2020 to $11B in the trailing twelve months, while maintaining average gross margins of roughly 58% during that time. To put this into perspective, the average gross margin for retail apparel is 33.05%. With operating margins in the low-mid 20s and no debt to pay off, Lululemon is structurally profitable and financially sound.

Similar to Starbucks and, to a lesser extent, Apple, Lululemon’s high margins are the direct result of its intangible brand asset. While the firm operates in an industry with many participants and low barriers to entry, its performance through challenges like COVID-19, inflation, and a general slowdown in activewear spending suggests that its brand is strong enough to consistently outperform peers. The brand has also demonstrated its ability to perform well outside the United States, with international sales growing 22% year-over-year as of the latest earnings report. Even more impressively, the company’s profitability appears to be equally high in China as in North America: over the past four years, its segment operating margins averaged 37% in the Americas and 36% in mainland China.

From a capital allocation standpoint, we believe that Lululemon’s management has been mostly sensible in its use of cash, as the majority of it has been funneled into organically expanding the business through store openings and boosting shareholder returns. Returns on invested capital over the last 5-years have averaged 34.6%, well above any reasonable estimate of WACC, indicating significant value creation. The company has been aggressively buying back stock, and we hope with the current situation, it continues to do so.

You can read our entire Investment Case for Lululemon for free, here!

The Portfolio

Since inception, we have made 22 investments in 9 industries as classified by Morningstar. While the investments span throughout various sectors, there is material concentration in the sectors of internet retail, financial services, and cloud computing. We anticipate high volatility in the fund due to portfolio concentration, emerging market risk, and a contrarian investment strategy. We thank our partners and readers for their continued support!

Until next time,

Jack Beiro, MBA

JB Global Capital

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The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.

Business Overview:

Lululemon Athletica is a premium athletic apparel company founded in Vancouver, Canada in 1998 by Chip Wilson. The company has built a distinctive market position by combining high-quality, technically advanced fabrics with fashionable designs that transition seamlessly from workouts to everyday wear. Due to their early success, Lululemon is widely credited with popularizing and shaping the modern athleisure market. The brand has successfully cultivated a loyal community around its products through initiatives like complimentary yoga classes, running clubs, and local fitness events, positioning itself as a wellness lifestyle brand.

Lululemon operates through multiple channels including company-owned retail stores, e-commerce, and wholesale partnerships, with a strong presence in North America (21.2% market share), Asia-Pacific, and growing international markets. The company’s core business model emphasizes:

• Direct-to-consumer: Lululemon generates less than 10% of its sales through third-party retailers (mostly specialty yoga shops and the like). Instead, the company mainly sells its merchandise through company-owned, full-price physical stores and e-commerce.

• Community-centric approach: The company only spends about 4-5% of its sales on advertising. For comparison, most of its competitors spend 8%-13% of their annual revenue on marketing. In contrast to Nike, Adidas, and others, Lululemon’s online and TV advertising is limited, and its athletic sponsorships are small (but growing). Rather, the firm engages in more personal forms of marketing, such as through its seemingly ubiquitous reusable shopping bags and by offering fitness classes in its stores.

• Organic Growth: Lululemon is unusual in that it developed a multi-billion-dollar apparel brand and store network without long-term debt. The company’s consistent profitability and free cash flow have made this organic growth possible. Over the past 10 years, the company has generated an annual average of about $575 million in free cash flow to the firm while spending $360 million per year on capital expenditures. By spending less on traditional advertising, the company has used the excess savings to expand geographically and build out digital capabilities.

Why We Like the Business:

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June Quarter 2025 Financial Highlights (Figures converted from RMB to USD)

• Revenue: $34.6B (+2% YoY’)

• Operating Income: $4.9B (-3%)

• OI Margin: 14.2%

• Net Income: $6.0B (+76%)

• NI Margin: 17.34%

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Quick Commerce Success

Alibaba reported its June quarter earnings this past week, posting $34.6B in revenue with $6B in net income. The management team has articulated its strategy moving forward and we are delighted to see the company use its significant resource advantage (~$82B in cash) to focus on growth at all costs. The company has successfully entered into a price war in the quick commerce space against rivals, allegedly decimating Meituan’s market share leadership in short order. Recent trends indicate that Alibaba has been able to gain substantial food delivery and quick commerce share while only modestly increasing spending relative to Meituan.

Price wars are not new to the Chinese market and have become the prominent strategy during the last 5 years as economic growth slowed to a crawl. Alibaba’s management team appears to have learned some hard lessons from this period, in which they saw their ecommerce market share decline from ~75% to ~41%. The company’s current strategy in quick commerce is playing out in its favor, as it allows Alibaba to cross-sell and enhance engagement across its various business units.

“First, if you look at the scale of our quick commerce, the channel is already serving a huge user base, with approximately 150 million daily active users. We’ve also observed that these users do have demand for in-store pickup and group-buying services. So from a user needs perspective—and particularly to enhance synergy with our to-home delivery business—we will also consider ways to provide more diversified services for our users.” - Jiang Fan, CEO of Alibaba E-Commerce Business Group, Earnings Call

The plan going forward is clear: leverage various consumption scenarios (food delivery, quick commerce etc.) with AI + cloud to drive engagement across the company’s vast global ecosystem of over 1B total users. If successful, this strategy can lead to a self reinforcing flywheel effect. We believe that Alibaba has a very good chance of building a moat around this strategy due to its cloud market leadership, technological capabilities, and its massive global user base.

Cloud Growth Returns in a Big Way

Growth at Alibaba Cloud accelerated to 26% with AI-related product revenue maintaining triple-digit year-over-year growth for the eighth consecutive quarter. We believe that Alibaba is emerging as a top AI company in China with the latest version of Qwen matching/surpassing western counterparts in multilingual understanding, reasoning, coding, and mathematical tasks.

Alongside earnings, the Wall Street Journal reported on Friday that Alibaba has developed a new chip that it's now testing and that could be a domestic replacement for Nvidia's H20. Unlike a previous AI processor that relied on Taiwan Semiconductor Manufacturing Co. for fabrication, Alibaba's new chip is being manufactured directly in China, according to the report. While details on the chip’s performance are unknown at this point, speculation has propelled the stock higher by roughly 20% since the announcement. We believe that if the chip’s performance is comparable to Nvidia’s H20, Alibaba’s stock will experience a multiple rerating closer in line to its western counterparts (i.e. Amazon, Microsoft), due to the massive market opportunity in China and Asia more broadly.

Analyst Upgrades

After Alibaba’s June quarter results, several analysts have weighed in on the stock:

• Goldman Sachs analyst Ronald Keung raised his price target on Alibaba to $163 from $147 while keeping a Buy rating. The analyst raised his overall price target on the back of faster international e-commerce recovery and stronger growth in cloud. He said Alibaba’s new focus is on becoming an “AI + everyday consumption app” and an “AI + Cloud hyperscaler.”

• JPMorgan analyst Alex Yao raised his price target to $170 from $140 while keeping an Overweight rating. Yao said Alibaba’s food delivery and quick commerce units are now large enough to run more efficiently, similar to Meituan, China’s leading food delivery company. He added that with more orders and riders, losses should narrow in the next few quarters, and Ele.me, Alibaba’s food delivery arm, could move into profit over time.

• Bernstein analyst Robin Zhu raised his price target to $160 from $145 while keeping an Outperform rating. Zhu pointed to strong Q1 results, noting that Alibaba now has 300 million monthly quick commerce customers, more than 2 million daily riders, 80 million daily orders, and 20% growth in Taobao’s daily users. He added that losses in Alibaba’s food delivery unit could be cut in half by October, making Q2 the peak quarter for spending.

• Barclays analyst Jiong Shao raised his price on the company to $190, citing cloud growth improvements. As China’s largest AI infrastructure provider, Alibaba is quickly emerging as a central player in the country’s booming AI sector. Shao notes that the company’s cloud arm already generates around $20 billion in revenue and $2 billion in EBITDA annually, and that number is likely to grow with the increasing adoption of AI With China shifting from AI model training to real-world use cases like inferencing and edge computing, Alibaba seems well-positioned to benefit, according to the analyst.

Note: Of the 32 analysts polled by FactSet since Alibaba’s earnings print, 20 have boosted their price targets for the stock.

Thanks for reading! Stay tuned for more.

Jack Beiro, MBA

JB Global Capital

The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.

The Results

During Q2 2025, the JB Global Capital fund depreciated by 3.4%. The slight decline was the result of mitigating price action of our top two holdings, Alibaba and Nike. Our performance in the second quarter fell short in comparison to both the VT Total World Stock Index and the S&P 500. Over the longer term however, we are outperforming the market by a significant factor. Due to the nature of the fund (long-term, highly concentrated positions), we expect our performance to vary greatly from our benchmarks.

When creating a portfolio, there are two general approaches one can take: Active or Passive investing. Passive investing is straightforward and basically anyone can do it; you simply purchase a diversified market ETF and enjoy average market returns without the risk of making any major mistakes, relatively speaking. Active investing involves concentrating on individual businesses that you believe can achieve higher than average market returns. We obviously fall into the later camp. With this approach however, in order to achieve long-term superior results, your thinking has to be both correct and different; different because market consensus is intrinsically built into present day values.

Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Thus, your thinking has to be better than that of others – both more powerful and at a higher level. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You have to be more right than others, which by definition means your thinking has to be different. - Howard Marks, I Beg to Differ.

Our approach to active investing involves significant concentration of positions. Diversification is seen in the investment community as insurance against any one idea being wrong. While true in a mathematical sense (if a position makes up only 1% of your total portfolio, the most you can lose in a worst case scenario is 1%), it goes against business logic and the spirit of entrepreneurship. True investment success does not come from making hundreds of correct decisions (after all, how can any one individual be an expert across businesses in different life stages, industries, geographies etc.). It comes from recognizing the sources of enduring business success, getting in early, and owning enough to make a difference.

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Portfolio Addition in the 2nd Quarter

In our Q1 Letter, we discussed the addition of Nike to the portfolio, citing the potential undervaluation driven by tariff announcements and global economic headwinds. Due to the erratic nature of trade negotiations and uneconomic reasoning behind the tariff rates, we believe that they will eventually be reversed to a more accommodative level for the functioning of an optimal global trade system. We think it is obvious that globalization is a net positive for the world and cannot be reversed without severely reducing the quality of life for all participants. Along the same theme, we have added another footwear company, Steven Madden ltd., Ticker to the portfolio.

Steven Madden designs and sells brand-name and private-label footwear and accessories. We like footwear as a product due to its dual functioning nature: it’s a practical necessity for every man, woman, and child and it functions as a fashion item for self-expression. It is safe to say that 100 years from now, we will still be needing shoes (whether on Earth or Mars). We wrote about footwear generally in our Q1 Letter, stating,

The company grew its revenue base from $1.2B in 2020 to $2.3B at the end of 2024 (CAGR 17.6%) while increasing both gross and operating margins during the same time period. The business is conservatively financed with a net cash position and has generated free cash flow every year since 2010. In May 2025, the company completed its acquisition of Kurt Geiger for $360M, increasing its international footprint (pun intended). The company’s founder and CEO, Steven Madden, is considered an icon in the footwear industry and has recently went viral for his appearance on The Cutting Room Floor podcast.

In our view, the company’s stock is trading cheaply from both an historical and a relative level; (~8X EV/EBITDA, 8.5% FCF Yield, 3.7% Dividend). Net asset value provides solid downside protection (47% of current market cap). We also believe that an acquisition is not out of the question being that the founder is in his late 60s. It seems reasonable that at some point, the board may begin to consider how to set the business up for continuity, which may be easier to accomplish under the umbrella of a large corporate parent rather than as a small public company. With $2B in sales and a globally recognized brand, Madden would seem to be an attractive target for a variety of companies.

The Portfolio

Since inception, we have made 20 investments in 9 industries as classified by Morningstar. While the investments span throughout various sectors, there is material concentration in the sectors of internet retail, financial services, and cloud computing. We anticipate high volatility in the fund due to portfolio concentration, emerging market risk, and a contrarian investment strategy. We thank our partners and readers for their continued support!

Until next time,

Jack Beiro, MBA

JB Global Capital

The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.

The Results

During Q1 2025, the JB Global Capital Fund increased by 41.4%, reaching an all-time high on March 17^th, 2025. Since inception, the fund has appreciated by ~83%, doubling the return of the S&P 500. Relative to the VT Total World Stock Index and the S&P, we have outperformed by a significant factor. The outperformance of the fund has been the result of:

• High exposure to Chinese Equities (purchased at bargain prices) ~68% of total portfolio

• Moderate exposure to U.S. Treasuries ~14% of total

• Minimal exposure to U.S Tech Stocks

• Depreciation of the U.S. Dollar

The S&P 500 experienced a drawdown during the first quarter — largely in part to U.S government policies that have increased uncertainty for investors, business leaders, and global trading partners. The first 72 days of the Trump administration have been marred by inconsistent communication, erratic behavior from the world's richest man involving a chainsaw, a massive blunder from the secretary of defense, and a deportation “error”. These actions ultimately sow distrust in the current administration — saying nothing of the blatant conflict of interest regarding the President's involvement in cryptocurrency. From an investment perspective however, the most central issue in Q1 has been the administrations global trade war with allies and adversaries alike.

In a general sense, decisions are made in pursuit of a clearly defined and logical goal. The stated goal(s) of the Trump administration's use of tariffs are both unclear and contradictory. President Trump has stated that tariffs will generate “trillions of dollars” in revenue AND bring manufacturing back into the country. However, if the tariffs incentivize companies to make more of their products in the United States, American consumers will buy fewer imported goods. As a result, tariffs would generate less revenue for the government. As an aside, manufacturing is the most commoditized part of the value chain. Investing in manufacturing in the U.S is an inefficient use of resources that ultimately make businesses less competitive globally.

Another stated aim for tariffs is to force Canada, Mexico, and China to stem the flow of fentanyl and illegal immigration into the United States. If the countries were to oblige and meet his demands, the president would be expected to drop his threat of tariffs. As a result, no additional revenue would be raised and companies would not have a reason to move production to the United States — nullifying both original goals. To make matters worse, communication regarding tariffs has been untethered from reality with the President and Press Secretary Karoline Leavitt continually repeating that “tariffs are paid by foreign countries and not American consumers”, a statement factually equivalent to saying 2+2=5.

Edit: Since writing this, the Trump administration has announced reciprocal tariffs on nearly all trading partners (except Russia) alongside economically illiterate calculus and reasoning, wiping “trillions and trillions of dollars” off markets globally.

Portfolio Company Updates:

As the largest position in the fund, Alibaba’s shares play a leading role in our performance quarter to quarter. The company reported positive earnings during the quarter, surpassing analysts’ expectations for both top and bottom line, sending shares higher by 16% since the announcement. The company has returned to a more normalized growth rate in their core business (Taobao and Tmall Group) while re-accelerating growth in their international retail and cloud computing business units. Management attributed this growth to investments in user experience and higher monetization methods through software service and payment processing fees. Growth at Alibaba Cloud has been backed by triple-digit growth of A.I. related product revenue for the sixth consecutive quarter. We find that this is indicative of the growing adoption of A.I. in China and the leadership of Alibaba’s cloud business. (~36% Market Share as of Q4 2024)

You can read our full review of Alibaba’s latest earnings results HERE.

In our previous discussion we spoke about the concept of reflexivity, stating,

“The concept boils down to diminishing the distinction between subject (thinking participant/investor) and object (market prices/company fundamentals). The object is affected by the subject’s thinking/behavior which then reinforces the subject’s thinking/behavior, (i.e. a feedback loop). A reflexive change in narrative ultimately leads to bull markets as investor sentiment improves, leading to higher capital flows, which businesses can then exploit through equity and debt markets to generate higher returns.”

It is our opinion that the 60% increase in Alibaba’s shares in Q1 are the result of a reflexive shift in narrative for both the company and Chinese tech stocks as a group. While we are comfortable with our current allocation, we have trimmed the position and used the proceeds to purchase shares in two new positions.

Portfolio Additions:

• The Hershey Company (Ticker: )

The Hershey Company is one of America's most iconic chocolate manufacturers. Founded in 1894 by Milton Hershey, the company began with caramels before focusing on chocolate production. Their first and most famous product was the Hershey's Milk Chocolate Bar, which helped democratize chocolate in the U.S. by making it affordable for average consumers. Today, Hershey is a global confectionery leader with a diverse portfolio including Reese's, Kit Kat, Twizzlers, and many other beloved brands.

Hershey's brand power and cost advantages have given the company a wide economic moat — underpinned by its 36% market share position in the U.S. The business has generated a ROIC averaging over 20% for the past decade, well above any reasonable estimate for Hershey’s cost of capital. High ROIC (relative to WACC) alongside market share stability indicate a dominant firm’s ability to fund growth internally. The company’s shares have been under pressure more recently due to a combination of factors including high cocoa prices and the popularization of GLP-1 weight loss drugs (Ozempic and the like), which artificially curb appetite.

Our investment thesis is founded in the temporary nature of these concerns; Cocoa prices have been distorted through supply shocks and non-physical market factors such as:

1. Disease outbreak in West Africa

2. Bad weather conditions

3. Speculative activity in the cocoa futures market in New York (ICE)- Link

While these factors will put temporary pressure on forward earnings (25’-26’), we believe that the business has cost advantages that will help it mitigate the impact better relative to competitors. The narrative of GLP-1 drugs hampering demand has been priced into the confectionery market. We also believe that Hershey’s long history demonstrates strategic capabilities to adapt to changing consumer habits. We estimate that the business is currently trading around EPV value and with a dividend yield of ~3.5% — we don’t mind waiting for Hershey’s operating environment to normalize.

• Nike Inc (Ticker: )

Nike is a global athletic footwear and apparel giant founded in 1964 as Blue Ribbon Sports before rebranding to Nike in 1971. The company has built its dominance through innovative product design, aggressive marketing strategies featuring high-profile athlete endorsements, and a powerful brand identity. The company operates through a diversified business model that includes direct-to-consumer (DTC) sales via its retail stores and digital platforms, as well as wholesale distribution to retailers in 190+ countries. While Nike has successfully expanded beyond its initial running shoe focus to encompass athletic apparel and accessories, footwear accounts for 2/3 of overall sales.

Footwear is a simple product to understand, made typically of leather, rubber, foam, and synthetic materials. However, simple does not mean insignificant. There are more nerve endings per square centimeter in the foot than any other part of the body. Our feet constantly supply us with vital information, without our being consciously aware of it. As such, comfortable footwear is deeply connected to the limbic system, regulating emotions, memory, motivation, and social behavior. Being that the product is simple to reverse engineer, it is highly unlikely that a new entrant will create a more comfortable running sneaker that Nike couldn’t simply copy. This is good news.

The deep reality of Nike’s business model is that it relies heavily on building and maintaining mindshare (brand equity) among consumers (~$4.5B on marketing per year). The transcendental nature of Nike’s branding ties it to an ideal that deeply resonates with the human spirit; the drive to succeed, to accomplish, to win etc. The “Just do it” slogan is a celebration of decisive action vs. nervous hesitation, a message that travels across demographics and culture, again speaking directly to the human spirit.

As the dominant leader in global sportswear (~18% vs 9% for Adidas), Nike can lead the sports advertising market through simply outspending competitors or through brand momentum. Who else can afford lifetime deals with Cristiano Ronaldo, Lebron James, Kevin Durant while at the same time paying to be the uniform provider of the NFL, NBA, and MLB? With structural profitability (6B FCF per year), and very little net debt, we don’t see this advantage changing anytime soon. As evidence of its competitive edge, Nike’s adjusted ROIC, including goodwill, have averaged 36% over the past 5 fiscal years — well above any reasonable estimate for cost of capital.

So why are shares so cheap today, relative to historical levels? Three main reasons:

1. Strategic Misstep: Nike’s attempt to shift sales from retail partners to DTC (where they have better margins) backfired as they underestimated the stickiness of consumer habits. Instead, what occurred was that Nike gave up valuable shelf space to competitors and sales have fallen by nearly double digits.

2. Tariffs: Nike doesn’t manufacture any of their products. The company uses third-party contract manufacturers in Vietnam, Indonesia and China (50%, 27% and 18% respectively). Fun fact: Approximately 99% of footwear that is sold in the US is imported, primarily from Asia.

3. Increasing recession risk (partly from tariffs) puts pressure on Nike’s sales globally.

Similar to our discussion on Hershey, we find that these issues are temporary in nature and are immaterial in comparison to the competitive positioning of the company and the structural profitability of their operations.

The Portfolio

Since inception, we have made 19 investments in 9 industries as classified by Morningstar. While the investments span throughout various sectors, there is material concentration in the sectors of internet retail, financial services, and cloud computing. We anticipate high volatility in the fund due to portfolio concentration, emerging market risk (largely in China), and a contrarian investment strategy. We thank our partners and readers for their continued support.

With great appreciation,

Jack Beiro, MBA

JB Global Capital

The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.

December Quarter 2024 Financial Highlights (Figures converted from RMB to USD)

• Revenue: $38.38B (+8% YoY)

• Operating Income: $5.65 (+83% YoY)

• OI Margin: 15%

• Free Cash Flow: $5.35B

• FCF Margin: 14%

Impressive Results from Top to Bottom

Alibaba’s most recent earnings surpassed analysts expectations for both top and bottom line, sending shares higher by 16% since the announcement. The company has returned to a more normalized growth rate in their core business (TTG) while re-accelerating growth in their international retail and cloud computing business units. Management attributed this growth to investments in user experience and higher monetization methods through software service and payment processing fees. Growth at Alibaba Cloud has been backed by triple-digit growth of A.I. related product revenue for the sixth consecutive quarter. We find that this is indicative of the growing adoption of A.I. in China and the leadership of Alibaba’s cloud business. (36% Market Share as of Q3 2024)

Operating margins improved significantly, with scaling effects improving retail and cloud margins while losses continued to narrow in their smaller business segments. (Cainiao, Local Services, Digital Media). In our original Investment Case for Alibaba, we highlighted the potential of loss making units to scale toward profitability, leading to a market re-assessment of the company’s total earnings power:

“We see [Alibaba’s cash flow] growing significantly as economic conditions normalize in China, cloud adoption accelerates in Asia, and their loss-making divisions continue to scale and trend toward break even margins. - Investment Case

The company has committed to spend aggressively over the next 3 years in capital expenditures to build out capacity for their cloud computing network. While this will put temporary pressure of FCF generation moving forward, we agree that the demand opportunity and Alibaba’s current edge in integrating cloud and A.I. is worth the heavy capex spend. Alibaba is one of the few companies globally with capabilities in both cloud and A.I, and with the financial resources required to build a long-term competitive advantage. For instance, as of the latest quarterly filing, the company has $83.6B in cash equivalents and structural free cash flow generation. This combination makes Alibaba a top pick for the leader in Cloud and A.I. in China and potentially throughout Asia.

Ant Group, of which Alibaba owns one-third, saw its quarterly profit surge more than 50-fold after it benefited from an investment gain. As Alibaba and Ant Group have significant investment exposure to the Chinese market, both companies would reap the benefits of a broader market rally. Marketable securities held by Alibaba grew from $4,659B in 2020 to $48,090B in 2023, increasing ~10-fold during a time when the Hang Sang Index (HSI) fell roughly 40%. Furthermore, a market rally would benefit Ant Group, which saw its valuation plummet from $280B in 2020 to $80B in 2023— We expect Alibaba to revive it’s IPO of Ant when market sentiment improves.

A.I., Chips, and Capital Returns to Shareholders

Much of the earnings call was dedicated (not surprisingly) to A.I. To summarize the overall discussion, here are some of our key takeaways:

1. Artificial general intelligence, a theoretical type of AI that could match or exceed human intelligence, is predicted to achieve 80% of human capabilities. As 50% of Global GDP is represented by mental and physical labor that can be optimized or replaced by AGI, the value creation opportunity is comparable to the invention of the internet.

2. High-quality A.I. models are becoming more ubiquitous at lower costs, leading to faster and wider adoption by businesses and consumers. Cloud network providers like Alibaba are the current beneficiaries of this increasing demand, as models need to be hosted on a cloud computing network. As an analogy, management explained how A.I. is like electricity and the cloud computing network is like the power grid.

3. A.I. is currently being implemented throughout the business to increase efficiency and user experience. Even at this early stage, the results are promising.

4. The company has optimized its chip procurement in response to export controls from the United States, claiming that they have designed their cloud network deliberately to be compatible with a range of chips— domestic and international.

5. The company will continue to return capital to shareholders through a combination of buybacks and dividends. As of the latest quarter, Alibaba has $20.7 billion dollars (7% yield) remaining in their share buyback program which runs through March 2027. Management stated that they would be opportunistic in their use of buybacks, considering market prices.

A Reflexive Shift in Narrative - From Retail to Technology

Alibaba’s shares have risen ~71% year to date. This surge has been underpinned by a reflexive shift in narrative that we first discussed in our Q3 Investor Letter,

Reflexivity is a concept developed by George Soros to explain the phenomenon of psychology that leads to boom/bust cycles in markets. Essentially, the concept boils down to diminishing the distinction between subject (thinking participant/investor) and object (market prices/company fundamentals). The object is affected by the subject’s thinking/behavior which then reinforces the subject’s thinking/behavior, (i.e. a feedback loop). A reflexive change in narrative ultimately leads to bull markets as investor sentiment improves, leading to higher capital flows, which businesses can then exploit through equity and debt markets to generate higher returns. Pretty cool huh!

The shift in narrative that we have witnessed over the past few years relates to Alibaba being discounted as a retail business losing share to competitors such as Pinduoduo (Temu) and Bytedance (Tik-Tok). The discount in value was further exacerbated by geopolitical factors and an economic crises in China, leading to institutional banks such as J.P. Morgan calling China “uninvestable”. What appears to have been overlooked was the technological capability of Alibaba in particular relative to ecommerce competitors. Furthermore, U.S exceptionalism in A.I. was undercut by the release of open-source Deepseek, which matched top A.I. models in performance at a fraction of the cost.

*We plan to discuss this more in depth in our upcoming letter, expected in early April. Stay tuned!

Valuation

Upon review, we have increased our base case fair value estimate for Alibaba Group from $120.00 per share to ~$210 per share which would equate to a ~45% increase from today’s prices. This increase in fair value is based on faster breakeven for most segments and increased cloud growth related to A.I adoption. The valuation also assumes a recovery in China over the next 5 years, leading to higher revenue growth in TTG than previously anticipated. Our updated DCF model makes the following assumptions:

• 10-YR Revenue CAGR: 8.10%

• Average Operating Margin: 15.08%

• Average FCF Margin: 10.92%

• WACC: 7.30%

• TGR: 3.00%

Thank you all for reading! Please feel free to share our work with friends and colleagues interested in all things investing and finance. Until next time.

Sincerely,

Jack Beiro, MBA

JB Global Capital

The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.

Disclaimer #2: The following consists of general political commentary. I am not a political expert or claim to be an authority on the subject. In the words of Marcus Aurelius, “all is opinion”.

Enjoy!

The Results

During Q4 2024, the JB Global Capital Fund declined ~20%, giving up more than half of the gains from the prior quarter (easy come, easy go?). The whipsawing in our top holdings (Alibaba, Tencent, PayPal) resulted in a pretty terrible quarter, on a relative and absolute basis. Over the longer term however, the fund has performed adequately. In full year 2024, the fund outperformed both the VT Total World Stock Index and the S&P 500. Since inception, the fund has outperformed the VT, while falling short compared to the exceptional S&P 500.

We anticipate high volatility to continue into Q1 2025 with cease-fire talks in the middle east, the inauguration of a widely unpredictable Donald Trump, and earnings reports around the corner. Also, let’s not forget the nationwide ban of TikTok set for tomorrow… (or not?). One thing is for sure, high drama moves markets.

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Geopolitics

During the final months of the Biden presidency, the government has passed a myriad of laws designed to restrict China’s access to U.S. technology. The government crackdown is being implemented under the label of “national security concerns”, a term that can seemingly be used broadly as any technology clearly has both commercial and military applications. The underlying assumption is that China-based businesses are (or could be one day) state owned enterprises in disguise, spying and/or “brainwashing” on behalf of the CCP. While the truth is most likely somewhere between the two polarities of opinion (All or None), this political pressure has created a strong negative bias in markets regarding all Chinese businesses, leading to low historical price multiples.

For example, in recent news, the U.S. Department of Defense designated Tencent as one of several "Chinese military companies". Tencent’s inclusion in the list was a negative surprise , leading to a 10% decline in share price. Tencent has since issued a statement asserting that it is not involved in military activities, emphasizing that the inclusion has no impact on its business operations. The company is actively seeking clarification and removal from the list. Given Tencent’s business model (social networking and online gaming) it follows that the company has a decent chance to secure exclusion through US courts, which it plans to pursue. Regardless of the final outcome however, the designation reflects continued tensions between the U.S. and China over technology, national security, and economic competition.

In other news, the Supreme Court upheld the law requiring China-based ByteDance to divest its ownership of TikTok or face an effective ban in the U.S. The law, Protecting Americans from Foreign Adversary Controlled Applications Act, was signed by President Biden in April 2024. TikTok’s fate in the U.S. now lies in the hands of President-elect Donald Trump, who originally favored a TikTok ban during his first administration, but has since reconsidered. More recently, Trump has invited TikTok’s CEO Shou Chew to his inauguration and has been communicating directly with China’s President Xi Jinping, potentially warming relations. Who would’ve thought?

Trump- The Unreliable Narrator

Our approach to investing involves a conscious weighing of potential scenarios that can unfold affecting our stock holdings. One such weighing is of the promise President Donald Trump made along his campaign to use blanket tariffs Day 1 in office. (60% on Chinese imports, 25% on Mexico and Canada, and 10% on all others). The problem we face in determining how much to factor in such a scenario involves an understanding of political idealism and economic reality.

In our previous article, we discussed how political aspirations can come into conflict with economic realities, stating,

“Politicians can promise whatever they want regarding the economy, but they won’t be able to deliver if their promises fly in the face of economic reality. Ultimately, the laws of economics are irrefutable. In other words, governments can pass laws designed to compel or discourage behavior, but in general they can’t mandate economic outcomes due to the complexity of second-order consequences and the ever-changing nature of causes and effects.” - Q3 2024 Letter

To avoid a long-winded discussion about game theory regarding tariffs, I will state my unauthoritative opinion regarding the matter: the incoming Trump Administration is fully aware of the potential retaliatory fallout from global trading partners around the world. I find it hard to believe that “they believe” that a 60% tariff on all Chinese imports “would be paid by China in full” without any retaliation that could be detrimental to the American consumer and thereby the overall American economy. The idea that “the appreciation of the dollar would simply offset the increased inflation caused by tariffs” as proposed by Scott Bessent (the incoming treasury secretary) is a clairvoyant prediction about what currencies will do in the future (which no one, regardless of I.Q, can predict). The ironic part of Bessent earnestly defending the use of tariffs as a net positive is that before his nomination, he emphasized that tariffs could be used as a negotiating tool to get better trade deals from other nations without imposing them.

“I think that given Donald Trump’s credibility and what he has done in the past on tariffs that we may not have to get to tariffs, but the threat of tariffs will change the quality and the fairness of a lot of historically poor trade deals…I believe that in a conservative agenda, tariffs do have a place, but I believe it’s part of the calculus of all the tools in the tool kit.” – Scott Bessent, Key Square Group Investment Firm CEO at Free Market Conference, June 6th , 2024

If tariffs were an absolute net positive for the country, there would be no reason to downplay using them outright, in every instance. The reason for this “tool in the toolkit” comment is the inherent understanding of the negatives that come with using blanket tariffs.

Portfolio Company Q4 Updates:

Alibaba

During the quarter, Alibaba continued to sell “non-core” assets such as Intime, a leading department store operator in mainland China, and Sun Art, China's largest hypermarket operator. The sales mark a move away from brick-and-mortar retail toward the asset-light model of third-party ecommerce. While we welcome a shift in strategy as the moves will free up capital toward more efficient units, the timing of the asset sales will cost the company ~$3B. ($1.7B loss from Sun Art and $1.3B loss from InTime). The “new retail” strategy that Alibaba touted during the time of these purchases has not come to fruition, with competitors benefiting (at the expense of Alibaba) from the agility that comes with asset-light business models.

Alphabet

On December 9th, 2024, Google's Quantum AI lab released Willow, its highest-performing Quantum AI chip. On a high level, Willow's computational performance far exceeds that of traditional supercomputers by a large margin. A few days later Alphabet released its Gemini 2.0 LLM with a slate of performance improvements and end-user cost reductions. These announcements are indicative of Alphabet’s high level strategy, which consists of speculative bets on potentially transformative technologies while dominating search and online advertising markets.

Plans for 2025

In 2025, you can expect to receive quarterly letters discussing the performance of the fund, along with general market commentary. You may also receive the occasional general article when inspiration calls for it. We would like to thank you for your attention and support throughout the years. We are happy to have you along for the journey.

With great appreciation,

Jack Beiro, MBA

JB Global Capital

The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.

To our Partners:

Q3 was a good quarter. It was not a good quarter because we had a gain of ~35%, but because our performance was substantially better than our benchmarks; the S&P 500, and the VT Total World Stock Index. As a restatement, our goal is to outperform relative to the indexes over a period of 3-5 years. While absolute gains in the fund are pleasant to announce, our goal would be equally realized if our fund lost 5% for the quarter and the indexes lost 10%. We find it unreasonable to aim for consistent positive market returns as financial markets are inherently cyclical. We instead aim for finding well managed businesses with competitive advantages in growing industries selling at a discount to a conservative estimate of fair value.

Results and Reflections

Our results to this point have been promising.  While it is still early days, we have outperformed the benchmarks by a significant factor since the inception of the fund.

The quarter’s results can be attributed to a few major developments that unfolded over the previous month. The first is the federal reserve’s decision to begin lowering interest rates in the United States; a larger than expected cut in September signaled the start of a new cutting cycle alongside slowing inflation. (i.e. a soft landing). Our U.S. equities increased in value due to the increased liquidity and anticipated economic activity that comes with lower interest rates. This decision also had far reaching consequences as it allowed the Chinese government to lower their interest rates, (without currency depreciation) and begin expansive monetary and fiscal reforms to combat the current economic crises. During the quarter, China’s yuan surged to a 16-month peak on the back of optimism related to the proposed rescue package.

The surge in Chinese equities over the quarter has caught the attention of many prominent investors including David Tepper, Michael Burry, and Rob Vinall of RV Capital. In discussing Chinese equities in his latest investor letter, Vinall wrote the following:

“The valuations in China are the most astonishing I have seen in my investment career, including during the Great Financial Crisis of 2008/09. Take the companies we own. They are blue chips with dominant competitive positions in their respective industries. They are highly profitable. They have oodles of net cash. They are growing at the top and bottom line despite the struggling Chinese economy. Despite these favorable characteristics, they trade at P/Es ranging from mid-single digits to low double digits, and […] are aggressively returning cash to shareholders.”

We believe that we are at the beginning of a reflexive shift in narrative for Chinese equities. The shift in narrative that we are witnessing has the potential to start the next bull market, provided that the monetary and fiscal policies take effect and kickstart economic activity. Caveat: The wild card of investing in China is always a political one. The deteriorating relationship between the U.S. and China has been one of the narrative drivers that have kept Chinese equities under owned and under appreciated by global investment funds. In the next section, we will discuss our views on the upcoming U.S. election and the role it plays (if any) in our investment decisions. 

The Laws of Economics vs. Political Reality 

As the U.S. election is just months ahead, we find it appropriate to disclose our thoughts here on investing through political reality. In the run up to the election, both candidates have been making economic policy promises that seemingly ignore economic reality or at least oversimplify it to a nonsensical degree. Trump’s call for a 60% tariff on all Chinese goods and Harris’s attack on grocery profiteering are merely two examples of proposals that have significant economic costs that the candidate seemingly ignores. Politicians can promise whatever they want regarding the economy, but they won’t be able to deliver if their promises fly in the face of economic reality. Ultimately, the laws of economics are irrefutable. 

In other words, governments can pass laws designed to compel or discourage behavior, but in general they can’t mandate economic outcomes due to the complexity of second-order consequences and the ever-changing nature of causes and effects. Many command economies of the past have failed due to this fundamental misunderstanding. The incentives provided by free markets efficiently direct capital and other resources where they’ll be most productive. They prompt producers to make the goods people want most and workers take the jobs where they’ll be most productive. In general, capitalism produces the highest standard of living for society because it allows the system to balance its shortages and excesses through natural processes of the free market. 

As a way of illustrating the discrepancy between economic systems in history, we can look at what happened to Korea after WWII. Eighty years ago, Korea was a single country. Following WWII, it was split into two countries, South Korea (under U.S. influence) and North Korea (under Soviet influence). Both countries at the time of the split consisted of similar people, culture, geography, and resources. According to the CIA’s Worldbook, North Korea’s GDP per capita is most recently estimated at $2,000 per person versus $50,000 in South Korea. There are political differences in addition to economic ones, but we think it’s fair to say that much of this discrepancy in economic outcome can be attributed to free market capitalism. 

At this point, a reader might ask, “What about China? Their GDP has grown at nearly 9% per annum for the last 45 years, and in 2010, became the world’s second-largest economy. How could that be?” China is often misunderstood in the western world due to the contradiction between a communist political ideology, alongside a market lead capitalistic economy. We, in the western world, predominately think of China as a “communist country,” with state-owned enterprises, industrial policy, and an autocratic leader. However, if you study the economic policies over the last 45 years, you will see a pragmatic adoption of the incentives provided by capitalism such as efficiency gains, free capital flows and ultimately, the reduction of poverty on a grand scale. 

As far as our portfolio is concerned, we do not consider political outcomes when making individual investment decisions. We aim to be informed about political headwinds or tailwinds as it relates to business sentiment and the general stock market, but do not make decisions by forecasting economic policies and their effects on our specific businesses. We believe that decisions regarding long-term investments should be based in economic reality rather than the political party that happens to be in power at the time of the decision. Over a long-term holding period, our businesses will see a variety of challenges and opportunities related to changes in the political landscape. However, if the investment is based in economic reality, we believe there is a high chance of success, regardless of which political party is in power at any given time. 

Portfolio Company Update: 

• Alibaba Group Holdings

During the quarter, Alibaba reported earnings that were mixed. Consolidated revenue grew mid-single digits while free cash flow decreased 56% compared to the same quarter last year. The decrease in cash flow was due to higher expenditure related to Alibaba Cloud and increased promotional spending in their Taobao and Tmall Group. The company has continued to repurchase shares at attractive levels. In the June quarter alone, Alibaba reduced their total shares outstanding by 2.3%, net of any share-based compensation. 

During the earnings call, CEO Eddie Wu took questions regarding the higher CapEx spend related to A.I. Wu defended the increased spend, stating,

“If you look at the pipeline, you know there's going to be ongoing demand. So, whether it's for training or inference or API calls, what we see when we're making this kind of capex investments, as soon as we get a server up, a server is instantly running at full capacity. There's that kind of demand. So, we can expect to see a very high ROI over these next quarters because we're building compute power to meet existing demand and that new compute power coming online is getting instantly taken up and running at full capacity on day one.” 

The company has continued to make strides in artificial intelligence, releasing more than 100 open-source A.I. models and boosting the capabilities of its proprietary technology. During the quarter, the number of paying users using Alibaba Cloud’s AI platform increased by over 200% Q/Q. Alibaba also launched a new text-to-video tool based on its AI models. This allows users to input a prompt, and the AI will create a video based on it, similar to OpenAI’s Sora. 

On September 20^th, 2024, Alibaba announced a new collaboration initiative with Nvidia () that will enable Chinese automakers to advance the autonomous driving experience for smart vehicle owners. The collaboration brings together China’s largest cloud computing platform with the globe’s largest semiconductor powerhouse. While the earnings impact from this collaboration could be negligible, we find this announcement to be indicative of the lead that Alibaba has in A.I. compared to its peers. Nvidia, being the largest and most powerful player in the A.I. space, is not constrained in who they can collaborate with. The fact that they chose Alibaba to collaborate with (rather than Baidu or Tencent), is very telling of the competitive strength of Alibaba’s LLM, Qwen 2.5. 

There are a few things that are becoming apparent as the A.I. wave continues to strengthen around the globe: 

1. Alibaba is emerging as the top A.I. player in Asia (followed by Baidu and Tencent)

2. Alibaba is currently the largest Cloud Computing player in Asia 

3. Demand for Cloud services and A.I. are interconnected and growing exponentially. Alibaba can benefit by providing both services to a massive user base. (1 billion + globally)

4. The use cases for A.I. applications are seemingly endless. 

We believe that over the next 5 years, these trends will naturally continue to the benefit of the companies that have been willing to invest at this crucial stage of development. While most of the value in Alibaba’s business today is in global e-commerce, we are looking forward to the full integration of A.I. with e-commerce and all of the optionality that brings with it. 

The Portfolio

Since inception, we have made 16 investments in 7 industries as classified by Morningstar. While the investments span throughout various sectors, there is material concentration in the sectors of internet retail, financial services, and cloud computing. We anticipate high volatility in the fund due to portfolio concentration, emerging market risk (largely in China), and a contrarian investment strategy. We would like to thank our partners and readers for their continued support.

Until the next quarter,

Jack Beiro, MBA

JB Global Capital

The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.

The Results

The JB Global Capital Fund increased by 7.31% in the second quarter ending June 30th, 2024. This compares to 2.38% for the Vanguard Total World Stock Index Fund (VT), and 4.30% for the S&P 500. Our relative outperformance was due to positive developments in our core holdings amidst a slight-slowdown in the U.S. consumer market. While the Fund outperformed in Q2, we are still underperforming on a YTD basis and since inception. (See above chart for results) The underperformance longer-term stems from our exposure to Chinese equities such as Alibaba, JD.com, and Tencent, while U.S. equities have gone from strength to strength, largely shrugging off rising interest rates and signs of a weakening consumer. Although Chinese equities have begun to recover in Q2, they have been marred by setbacks related to a struggling consumer market and geopolitical trade tensions that have increased in China’s effort to export themselves out of an economic malaise.

Meanwhile, in the United States, the big tech trade continues to gain strength. Drilling into the second quarter’s biggest winners, tech and large-growth stocks, a common thread appears. A few major players capitalizing on artificial intelligence continued carrying the market. Those stocks are AI giants Nvidia, Microsoft, Apple, Amazon.com, Meta Platforms, Alphabet, and Broadcom. These seven companies have contributed 24.39% of the 44.23% gained by the market since the start of last year.

Portfolio Company Updates:

StoneCo

As of May 9^th, 2024, we have sold our entire position in the Brazilian merchant acquirer business StoneCo, for a net return after tax considerations of 61.4%. This sale provides us with an opportunity to discuss our thinking when it comes to selling a portfolio company and analyze the facts and reasoning behind our decision.

We published our original investment thesis for StoneCo on March 18^th, 2023. In the write-up, we discussed the business overview, qualitative and quantitative factors affecting the business, and our thoughts on the investment opportunity.  Our thesis was backed by three fundamental ideas:

1. The business was selling far below our estimate of intrinsic value.

2. The risks that created the value opportunity were well-known (priced-in), transitional in nature, and non-fatal.

3. The market seemed to be ignoring interest rate optionality which would’ve significantly changed the P&L of the company.

We were very fortunate in that our #3 played out in quick fashion as inflation in Brazil continued its decent throughout our holding period. This allowed our #2 to be priced in accordingly and ultimately addressed our #1, bridging the gap between an extreme undervaluation to a more rational price, which brings us to our reason for selling the stock.

Material Changes to the Risk/Reward Opportunity

Our first step in valuing any business is to begin with the Net Asset Value (NAV). We start with this approach as it provides the most conservative estimate of what the business is worth in its current state, ignoring any forecast about the future earnings stream. We begin with the balance sheet and examine the stated asset values at the end of the most recent operating period. We know that the stated accounting values are going to be more accurate for some assets compared to others. (i.e. current tangible assets like Cash vs. long-term intangibles like Goodwill) As such, we adjust stated values based on our opinion of their reliability. When we first published our thesis for StoneCo, our NAV Model was as follows:

Based on our model, we saw that the company was trading under its stated NAV of USD $2,571B. After adjusting for accounting reliability, we still had ~60% of the market cap protected on the downside by net asset values, of which the majority being held in tangible current assets. With relatively little value given to the earnings power, what we expected to find was a struggling business with bad economics and weak prospects. Instead, we found a business that grew sales 26% from the previous year with a gross profit margin of 70%, an operating margin of ~45%, and free cash flow to be reinvested as the company saw fit. Furthermore, Brazil’s POS terminal market was expected to grow at a CAGR of 17.8% through 2028, with highly favorable trends in smartphone penetration, digital payments, and e-commerce. These combined characteristics did not make for a bad business.

So what changed in a year?

What changed was our adjusted NAV dropped slightly to USD $ 1,476B but the market cap nearly doubled, changing the original risk/reward profile of the investment. At the higher valuation, our exposure to downside risk increased from 40% to nearly 70% from a NAV perspective. It’s important to remember that investments are not just valued in absolute terms but also relative to other opportunity sets. For us to invest in a fintech business (ever-changing industry dynamics) domiciled in Brazil (less familiar political, socioeconomic, and regulatory framework), we require a larger margin of safety than would be required for a business in a more stable industry with lower external risk factors.

From an operating perspective, Stone’s latest results also gave us some cause for concern. For example, selling expenses increased 36% year over year, while consolidated revenue grew just 14% over the same time-period. The management and board of directors have gone through numerous changes, most notably at the CEO and CFO levels since our initial investment. The latest quarter also saw Stone make an internal accounting change to revenue recognition for membership fees. The revenue is now being deferred throughout the lifetime of the client. When asked about this change on the latest earnings call, management told investors that they do not disclose how many months are currently being used to calculate customer lifetime value.

While this might be considered a minute detail in analyzing an entire business, we do care about how management communicates with investors, the simpler and more straightforward, the better. Any attempts to obfuscate data through accounting practices or language raises red flags for us. For example, a manager that must increase marketing spend due to higher competition might tell analysts they are “investing in their brand” as a euphemism. This is not to say anything illegal or fraudulent is happening at StoneCo, only that matters of risk/reward can change through qualitative as well as quantitative factors.

Revisiting PayPal

PayPal's stock has underperformed so far in 2024, down nearly 3% year to date while the broader market saw a 14.50% increase. The stock's muted price action reflects a lack of growth catalysts and an increase in competitive threats, most recently from Apple with their introduction of "Tap to Cash" at its Worldwide Developers Conference. Despite these challenges, PayPal managed to deliver a promising Q1 earnings report.

In the latest quarterly earnings release, PayPal exceeded revenue and earnings per share consensus estimates, signaling positive momentum for the company. Revenue grew by 9% year over year, driven primarily by increasing transaction revenue. Despite a slight decrease in the number of active accounts, the number of payment transactions per active account grew by 13%, mitigating any negative impact on the top line. PayPal's focus on cost discipline is evident as profitability outpaced revenue growth. Operating income increased by 17% year over year, significantly outpacing revenue growth, which allowed the company to boost non-GAAP earnings per share by 27%.

The company generated adjusted free cash flow of $1.9B for the quarter and $5.4B over the last 12 months. Much of this free cash flow is currently being used to repurchase shares at what we believe to be attractive levels. On a trailing 12-month basis, share repurchases of $5.1B reduced weighted average shares by 5%. Management told investors on the earnings call that they expect Free Cash Flow for 2024 to come in at approximately $5 billion and to spend at least $5 billion for share repurchases.

PayPal’s Earnings Power Value

At the time of writing PayPal is valued at ~$60B, or $59 per share. This translates to a 14.86 times TTM earnings ratio, (significantly below the P/E ratio of over 20 for the S&P 500), a price to book of 3 times, and a FCF yield of 8%. In its current state, PayPal is trading at its lowest valuation in its 9-year public history for P/E, P/B, and P/FCF, indicating a severely pessimistic outlook by the market. We have previously written about PayPal HERE, where we valued the business using a traditional DCF Model.

Rather than taking another look at PayPal using a DCF, today we are going to be valuing PayPal using the more conservative EPV Model (Earnings Power Value). EPV is a method of valuing a company, assuming that the current earnings are sustainable, and there is no future growth. This allows us to understand what the business would be worth in a steady state normalized environment.

Based on our model, we can see that PayPal’s EPV can range from $42 to $62 per share. At its current price, the market is pricing in little to no growth for PayPal going forward. We find that this pessimistic outlook does not line up with the history of the business or with its current situation:

• PayPal holds 45% of the global payments market share, making it the #1 payment processor globally.

• PayPal has 426 million active users, comprising consumers and merchants.

• 36 million merchants use PayPal in over 165 countries worldwide, a CAGR growth of 10.76% over the past five years.

• Businesses using PayPal have 25% better conversion rates than their cohorts.

• Large enterprises that use PayPal see 33% more completed checkouts than traditional payment methods.

• Shoppers paying through PayPal spend 12% more than those using other payment methods.

• PayPal users purchase 60% more frequently compared to other digital buyers.

The Portfolio

Since inception, we have made 16 investments in 7 industries as classified by Morningstar. While the investments span throughout various sectors, there is material concentration in the sectors of internet retail, financial services, and cloud computing. We anticipate high volatility in the fund due to portfolio concentration, emerging market risk (largely in China), and a contrarian investment strategy. We would like to thank our partners and readers for their continued support.

Until next time,

Jack Beiro, MBA

JB Global Capital

The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.

Disclaimer: The following is not financial advice. The content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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We published our original investment thesis for StoneCo on March 18^th, 2023. In the write-up, we discussed the business overview, qualitative and quantitative factors affecting the business, and our thoughts on the investment opportunity.  Our thesis was backed by three fundamental ideas:

1. The business was selling far below our estimate of intrinsic value.

2. The risks that created the value opportunity were well-known (priced-in), transitional in nature, and non-fatal.

3. The market seemed to be ignoring interest rate optionality which would’ve significantly changed the P&L of the company.

We were very fortunate in that our #3 played out in quick fashion as inflation in Brazil continued its decent throughout our holding period. This allowed our #2 to be priced in accordingly and ultimately addressed our #1, bridging the gap between an extreme undervaluation to a more rational price, which brings us to our reason for selling the stock.

Material Changes to the Risk/Reward Opportunity

Our first step in valuing any business is to begin with the Net Asset Value (NAV). We start with this approach as it provides the most conservative estimate of what the business is worth in its current state, ignoring any forecast about the future earnings stream. We begin with the balance sheet and examine the stated asset values at the end of the most recent operating period. We know that the stated accounting values are going to be more accurate for some assets compared to others. (i.e. current tangible assets like Cash vs. long-term intangibles like Goodwill) As such, we adjust stated values based on our opinion of their reliability. When we first published our thesis for StoneCo, our NAV Model was as follows:

Based on our model, we saw that the company was trading under its stated NAV of USD $2,571B. After adjusting for accounting reliability, we still had ~60% of the market cap protected on the downside by net asset values, of which the majority being held in tangible current assets. With relatively little value given to the earnings power, what we expected to find was a struggling business with bad economics and weak prospects. Instead, we found a business that grew sales 26% from the previous year with a gross profit margin of 70%, an operating margin of ~45%, and free cash flow to be reinvested as the company saw fit. Furthermore, Brazil’s POS terminal market was expected to grow at a CAGR of 17.8% through 2028, with highly favorable trends in smartphone penetration, digital payments, and e-commerce. These combined characteristics did not make for a bad business.

So what changed in a year?

What changed was our adjusted NAV dropped slightly to USD $ 1,476B but the market cap nearly doubled, changing the original risk/reward profile of the investment. At the higher valuation, our exposure to downside risk increased from 40% to nearly 70% from a NAV perspective. It’s important to remember that investments are not just valued in absolute terms but also relative to other opportunity sets. For us to invest in a fintech business (ever-changing industry dynamics) domiciled in Brazil (less familiar political, socioeconomic, and regulatory framework), we require a larger margin of safety than would be required for a business in a more stable industry with lower external risk factors.

From an operating perspective, Stone’s latest results also gave us some cause for concern. For example, selling expenses increased 36% year over year, while consolidated revenue grew just 14% over the same time-period. The management and board of directors have gone through numerous changes, most notably at the CEO and CFO levels since our initial investment. The latest quarter also saw Stone make an internal accounting change to revenue recognition for membership fees. The revenue is now being deferred throughout the lifetime of the client. When asked about this change on the latest earnings call, management told investors that they do not disclose how many months are currently being used to calculate customer lifetime value.

While this might be considered a minute detail in analyzing an entire business, we do care about how management communicates with investors, the simpler and more straightforward, the better. Any attempts to obfuscate data through accounting practices or language raises red flags for us. For example, a manager that must increase marketing spend due to higher competition might tell analysts they are “investing in their brand” as a euphemism. This is not to say anything illegal or fraudulent is happening at StoneCo, only that matters of risk/reward can change through qualitative as well as quantitative factors.

We hope that this discussion has given you insight into our decision to sell StoneCo at current levels. The stock may well be undervalued and continue to increase from this level. We do not make stock price predictions. However, our decisions are guided by conservative investing principles which we believe to be the cornerstone of good investing.

Thank you for reading.

Until next time,

Jack Beiro, MBA

JB Global Capital

The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.