Argosy Investors Q2 2025 Letter

Dear Investors,

As of this writing, Congress has passed a new spending and tax bill which will provide further juice to an economy that has been living on high and expanding government deficits. For the immediate future, this bill makes stress on the economy less likely, although the ongoing tariff negotiations, geopolitical risks, and domestic policy changes present different risks and opportunities. I won’t continue with the macro concerns that I addressed in last quarter’s letter, but it continues to be important to consider mid-cycle, normalized interest-rate earnings in an environment where we continue to recover from the post-COVID environment and interest rates that were low for a decade or more. With both now no longer the case, investors need to think deeply about today’s investment choices. With that said, I’ve found success with recent investment choices where we found strong business models with secular growth opportunities suffering from post-COVID hiccups. Some companies with long-term advantages in my view have seen their valuations downgraded permanently based on recent revenue declines post-COVID. This is a different scenario entirely from cyclical businesses that saw their margins explode higher temporarily and which are still in the process of coming back to Earth.

EXISTING PORTFOLIO ACTIVITY Trim: TRRSF

Sell: FTV, VNT, DEO, STNE

I decided to trim Trisura (OTCPK:TRRSF) during the quarter for predominantly portfolio management reasons, as it was a large percentage of many portfolios. Additionally, the company has expanded rapidly in recent years and while it’s multiple has contracted back to a level that I find reasonable, its underwriting has been a bit troubling in recent years with continuous negative reserve development for multiple years. The company needs to correct this trend and we believe is aggressively working on this, as their underwriting quality is key to the success of the business.Vontier (VNT) was a successful exit for us after 2 years and 5 months holding period. I purchased the position after the stock had taken a nosedive due to poor forward-looking results related to the adoption of their next generation gasoline pumping products rolling off at an accelerated pace. I was not as sour on the rest of their business and believed it was trading at a very depressed FCF multiple below 10x. It now trades for a much more reasonable multiple of cash flow and their recently acquired DRB Car Wash POS software has been somewhat disappointing, and I don’t have a positive view of their competitive prospects to get back to the levels they achieved in years past. With Diageo (DEO), I exited after a brief holding period where the business struggled with heightened inventory in a long-lived asset business where the outlook for the business as a cash substitute was no longer attractive relative to the opportunities I was seeing in a market that was being upset by tariff concerns. This position held up relatively well during the tariff chaos, and we exited to make room for better alternatives. StoneCo (STNE) has continued to struggle in an increasingly complex Brazilian payments industry. It was a starter position that I never sized up and I decided to rationalize the portfolio given my lack of ongoing conviction in the business’ direction, which has shifted dramatically over the years.

NEW PORTFOLIO ACTIVITY

Bought: AVTR, FND, QQQ

Avantor (AVTR) was a recent purchase that for us represents a great opportunity to take advantage of a few different catalysts. Avantor is a distributor of biotech products as well as a manufacturer of certain biotech products and consumables. The catalysts I foresee potentially occurring are: 1) biotech industry recovering to a more normal growth rate, 2) new management correcting past execution mistakes at Avantor, and 3) the multiple for Avantor and the industry increasing in tandem as the industry recovers post-COVID. Avantor’s multiple is in the low-teens in an industry where typical multiples are in the mid-to-high twenties, so we’re expecting improved execution to help the company close that gap over time, even as the company returns to mid-single digit growth and improved margins. Floor and Decor (FND) has been one of my favorite companies for a few years now, but I never felt comfortable pulling the trigger making a purchase given the company’s historically elevated valuation. Recently, the company’s stock price fell to a level where I felt like the company’s future growth was significantly discounted. In my valuation, I give FND credit for margins that they’ve shown in the recent past that have since declined. I believe that the company’s margins are at a trough due to a significant number of immature stores, mature stores with below-average traffic due to depressed existing home sales, and an SG&A base that should be well built-out for future growth. Nasdaq 100 ETF (QQQ) represents an admission by myself that I am likely not going to be on the bleeding edge of many innovations taking place in Silicon Valley and Boston, and even if I were I might not be better than a blindfolded monkey at choosing securities in these domains. With that said, the long-term arc of innovation positively impacting society and resulting in very valuable companies arising from obscurity fairly rapidly leads me to want to gain exposure to these sectors where I cannot add security-specific expertise. I may add to this investment over time to ensure investors get exposure to innovative businesses within the economy.

CONCLUSION

Thanks the Trump’s OBBB, the necessary hangover to the last few years of unprecedented peacetime spending and debt accumulation has been deferred once again, but risks lie ahead, be they economic contraction, increasing inflation, or a combination of both. On top of economic issues, there are more geopolitical risks to the American economy than any time in recent memory. While I am charged to push forward making sound investments, this combination of market frothiness and emerging risks has me looking for less exposure, not more, and for limiting new positions to businesses where cyclicality should play less of a role going forward.

Best,Mike Loeb

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.