Year Zero: How AI Is Reshaping Our Investment Process

In our last commentary, we discussed Claude Code as “a more recent discovery” with “jaw dropping” potential. With the benefit of hindsight, we were too restrained in sharing our enthusiasm for Claude. In many respects, the past few months have felt like “Year Zero” for our research process, reorienting and rebuilding our tools with and around Claude Code. Chatting with LLMs is helpful, but we have learned this year that it only scratches the surface of AI’s real potential. By leaning into these new discoveries, we have not just enhanced our process, we have already generated key investment insights.

The key point is not that AI makes research faster, though it does. The more important point is that it changes the surface area of what we can monitor, test, and revisit. We can now track more companies, more inputs, and more changes without diluting the quality of our attention. For an investment process built around patience, selectivity, and evidence, that is a meaningful change.

In this commentary we will walk you through our workflow and then discuss a few specific investments. We have several goals in sharing some of our discoveries here:

• We want you to share in our enthusiasm for these new tools.

• We hope others will share ideas with us on how we can become more productive and generate even more value.

• We want to hold ourselves accountable and track our progress over time. We cannot yet quantify the ROI of these tools, but we expect to demonstrate their value more objectively over time.

At the outset, we should be clear that we do not view the deployment of AI itself as proprietary, though we have built proprietary tools that we will not share or discuss. AI is the ultimate force multiplier for human thought, it is not a replacement. Our process is fundamental to our ethos and does not change. RGA believes deeply in a low turnover, GARP orientation, with an appreciation for quality. In fact, in our version of Claude’s core memory (Claude. md), we have memorialized our own investment worldview with a memo describing our workflow from idea generation through portfolio management. Stated another way: Claude, as we use it ourselves, is deeply indoctrinated in our worldview and process. The only real change is in the tools we are using. We have replaced Factset (FDS) with a combination of AI models and a handful of APIs.

Our Workflow

The workflow starts with our dashboard that pulls together all of our various projects. At the very top, we see the results of our agentic project manager. If any of our various projects fails to run or launch as expected, we get a large red tile indicating which project we need to troubleshoot and why it failed to run. Given the time we have put into building these projects, those failures are increasingly infrequent, though it is incredibly important to know if what you are looking at is clean, factual information or something is broken.

Next, we have embedded links into each of our projects, sorted by category:

• Interactive Tools

• Expert & Management Calls

• Industry Dashboards

• Consumer Demand Trackers

• Filings and Macro

• Screening and Quantitative

• Live Signals

• Alternative Data

• Company Deep Dives

• Cross-Project Synthesis

Cross-Project Synthesis then leads into the next section: our daily “Cross-Project Memo.” Each day, this memo focuses on the critical changes across all of our dashboards. Change here is the key—we isolate and focus on what new material surfaces and where there are notable deltas across our various projects. In the delta lie the insights and the questions that we need to pursue. The cross-project memo is heavy on bullet points and visuals. It flows into/concludes “What to watch” and “suggested follow-up inquiry” and these are geared to our North Stars. In a similar fashion to all of our workflows—it concludes with a hole finding agent which uses a cross model validation framework we have developed internally to identify gaps and potential data weaknesses and/or misstatements.

Beyond these projects, we have built dozens of skills. These are not skills with AI, but rather ones that we have taught Claude and built into repeatable workflows. We have built dozens of skills ranging from more rudimentary pieces of our own workflows to call prep and synthesis. These skills are not exactly projects per se, but they help feed into them and have been tremendous accelerants in our own process.

Architecture and Structure

Our preferred setup uses the Antigravity IDE, Google (GOOGL)’s AI-native integrated development platform. We leverage a number of tools therein, with Claude Code in the command-line interface, Gemini side agents for efficient planning, large context windows, and efficient token use, and Codex for heavy quantitative validation work. We are also increasingly leveraging Claude Code via the desktop app for simple recurring tasks we share across our team.

Ryan’s background in CLI has been extremely helpful from the outset. As a consequence, early on, we developed an appreciation for building with thoughtful, scalable architectures and optimizing for token efficiency. These are critical points that ultimately have significant investment ramifications, but should also be at the heart of how projects are executed. Although this commentary focuses on what we have built with Claude, most of these projects do not run on Claude. Most of our projects run on Python scripts, rely on APIs that access structured information, and do not use AI during execution. We have simply leveraged Claude to build durable tools. To the extent they do utilize AI, the LLMs are accessed via API calls with specific parameter settings which we have refined internally. We further cache all the resulting LLM outputs in our own databases—allowing for cost efficient future access. These projects use SQL, JSON and MD files and we have chosen to visualize them in locally stored HTML files. ^¹ Claude knows our preferred architectures and folder structures, so each project we start immediately builds in exactly the same, organized way.

As mentioned, several of these projects leverage AI along the way, and for that, we tap into the LLM model of our choice. This is an important point that you will hear more of over time. Although we are mainly using Anthropic (ANTHRO)’s Opus model via Claude Code to build, we are carefully selecting the appropriate model for the given task. For more rudimentary operations ((think aggregating numbers, more like data entry)), we are using the cheapest capable model and for more complex analyses that are semantic in nature, we tend to use Gemini. For numerate and internal reconstruction, we use Sonnet or Opus. These simple rules of thumb are subject to change, but model token efficiency aside, we expect our actual use of AI, as measured by the volume of tokens we burn, to level off or even decline once our phase of heavy building is behind us.

What Next?

The beauty of this structure is that our projects are evolving into the RGA Investment Management Operating System. Our thesis is housed in our own words, nested within how our ideas are being tracked. We are building structured datasets across key areas of our work, and while we are already harvesting insights, we expect the output to grow meaningfully over time. This is happening in a variety of ways. Each of our screeners is built with a real-time performance tracker; in other words, we will objectively know which screens generate value and which ones do not.

To share a few small examples—we are acquiring data points on key inputs for our companies, ranging from points of distribution to pricing to sentiment of reviews and tracking the progression over time. We have developed the logic that sits behind these workflows and translates this data into actionable insights with quantifiable signal value.

Soon, we will undertake a critical step forward, which was referenced above. We will be nesting our projects in a private domain, where our key assets are hosted and accessible online. We may instead forego online hosting and use a physical server that we can access directly. If you are reading this and have strong opinions on the functionality and security of either path, please do let us know.

The most important test for these tools is whether they lead to better questions, analysis and insights. Dashboards and agents are only useful if they sharpen the research agenda, reveal changes we might have missed, or help us say “no” faster. We are already seeing clear value from our new tools.

Turning Process Into Insights

In our Q3 commentary, we featured Google (Alphabet (GOOGL)) as an AI stock. We remain convicted in Google’s positioning, but our work has made us increasingly enthusiastic about AWS, Amazon’s cloud infrastructure segment, as a beneficiary of where AI workflows are heading. In that spirit, our obsession is far more about the profit pools and platforms built on and leveraging AI than with the picks and shovels required to build out AI infrastructure. The market is focused on companies seeing a surge in sales as hyperscalers rush to build AI infrastructure, but we think that focus is misplaced.

When capex inevitably levels off at the hyperscalers ((and it will)), growth will evaporate and margins will compress at suppliers. Tier 2 suppliers in particular will see demand fall off a cliff, particularly as Tier 1 suppliers add capacity into a plateau in demand. As this generational buildout matures and growth capex tapers, investors will likely realize that an entire class of companies should never have had their earnings capitalized at such high multiples. Meanwhile, the companies building recurring revenues that will continue for decades receive little attention amidst the hype. The recurring revenues layer on slowly compared to the surge in orders for hot items, but the recurring revenues compound and do so at high incremental margins. Free cash flow is crimped as companies rush to meet growing demand; however, as growth slows, free cash flow will soar. These dynamics are opposite what today’s market obsessions will experience. Herein lies our obsession with the profit pools that are emerging today.

In that very same commentary we featured Google, we gave a brief shout-out to Amazon’s opportunity to thrive in building the “application layer” of AI by deploying smart orchestration across the retail business’ robotics and logistics layers. The orchestration opportunity will take time to play out, but meanwhile, we see AWS at a critical inflection point today. As discussed above, using the right model for the right task matters, and Amazon is uniquely positioned to benefit from a shift toward token efficiency and workflows built by AI but executed largely through non-AI processes. This has become increasingly clear in our own work and there is growing evidence that the most advanced companies deploying AI are moving this way themselves: durable value should accrue to platforms that can orchestrate models, data, compute, storage, security, and workflow execution at scale. Said differently, Amazon’s ability to remain model agnostic, while serving the lowest cost tokens, positions them uniquely to capitalize on AI adoption at scale.

AWS has been the platform that helped launch countless software, ecommerce and digital service companies and has empowered numerous older companies to migrate their digital infrastructure to the cloud. They have done this with a combination of driving down the cost of compute, leveraging their proprietary chips and building an ecosystem of integrations around their offering.

Amazon was an early partner to Anthropic and owns a considerable equity stake in the company and more recently became an owner in OpenAI (OPENAI) with an equity stake alongside a commitment from OpenAI to spend $138 billion “to consume approximately 2 gigawatts of Trainium capacity through AWS infrastructure.” ^² Trainium is AWS’ custom AI chip, designed to compete with Nvidia (NVDA)’s GPUs at an industry-leading total cost of ownership. As CEO Andy Jassy explained, “Our Trainium2 chip has about 30% better price performance than comparable GPUs and is largely sold out. Trainium3, which just started shipping at the start of 2026 and is 30% to 40% more price performance than Trainium2, is nearly fully subscribed. And much of Trainium4, which is still about 18 months from broad availability, has already been reserved.”

At the heart of AWS’ AI offering is Amazon Bedrock. This is a hosted environment that can run many of the leading AI models and agents, as well as many of the open-source cost efficient ones. In a world where leading users of AI require a variety of models, alongside the ability to run non-AI programs, AWS is positioned to win because their scale is greater and their cost per unit ((whether we’re talking tokens, CPU or memory)) is lower than anyone else’s. Notably, Amazon is already seeing clear signs that the flywheel between AI workflows and core cloud infrastructure is starting to take hold and accelerate, as explained by Jassy:

And then at the same time, we’re seeing very significant growth in our core business. And some of that are the migrations that have picked up from enterprises from on-premises to the cloud. But a lot of that is also as AI growth is exploding, it turns out that it leads to a lot of core growth as well, all the post-training, all the reinforcement learning, all the agentic actions and tool usage that these agents are using. And it fits with what you’re asking about on the chip side, which is because we have an unusual collection of chips, we have the leading CPU chip in Graviton, and we have the leading price performance silicon AI chip in Trainium. It means that we’re really unusually well positioned for the inflection that we’re seeing and the type of growth that we’re experiencing.

This growth is only just beginning and will accelerate as people move beyond experimenting with AI to running workflows built by AI, but the market has yet to recognize this reality. The opportunity in Amazon today feels similar to Google at this time last year. Due to AWS’ industry-leading scale during the rise of AI, growth rates are slower than other hyperscaler cloud peers; however, the absolute dollar volume of growth is incredible and accelerating today. This acceleration will continue throughout the year.

Saas Risk Tracker

We wanted to share one of our high value panels built by AI. This is a project we built in order to decipher the SaaS landscape and mine for opportunities where the market might be indiscriminately punishing software companies that are relatively inoculated from AI risk. The learnings have been actionable: since quarter-end, we have purchased two companies where this tracker helped us better understand the relevant risks. We will write about these purchases in our Q2 commentary. It has also kept us from acting on other companies that had been high up our watchlist.

Essentially what we have done is use a combination of quantitative and qualitative factors to assign a score that measures the risk a software company faces from AI. We defined the logic behind resilience and identified a key of traits that would be strong indicators of resilience quantitatively. In our benchmarking, a low score is good, while a high score is bad. We have turned our scores into three separate indexes: a high, medium and low risk bucket, each of which we can track on their own. We can also track an aggregate index. Notably, although market performance is not an input in the model, actual market results have aligned strongly with the model’s assessment of risk. While we are still tracking these data points prospectively—the backtested results and early tracking look promising.

We have overlaid fundamental data and given Claude the opportunity, knowing our worldview, to point us to mispriced market opportunities and to alert us to “value traps” w here the fundamentals might appear compelling, but the risk is too great.

Further down the tracker, we have ranked and sorted every company in our SaaS universe based on the quality of their free cash flow. Each company is ranked objectively on free cash flow quality—high contribution from net income, low contribution from stock-based comp, little deferred revenue, etc. We also take note of the companies with the greatest improvements in free cash flow quality over time. We also analyze the composition of bookings. Companies with very short-duration bookings face different risks than those with longer-term contracts locked in.

The tracker mines the transcripts of each company and pulls out the most important quotes as it pertains to AI’s impact on the business and ranks the quality of those insights. Companies who merely speak qualitatively receive less credit than those who quantify the benefits ((and risks)).

Last, we can click into any of the SaaS companies we track and see the key statements relating to AI displacement, renewal pricing, downsell/seat compression, build vs buy questions, profitability, renewal walls and AI monetization, amongst other factors. Everything is sourced and clickable back to the actual filings or transcripts. This has meaningfully accelerated our work in the SaaS space in a way that previously would not have been possible. We can cover more ground, get to “no” faster on certain companies, and develop a deeper appreciation for the persistence of certain businesses in ways that would have required a very different level of effort in the past.

The full quarterly snapshot of our tracker—covering every company in our SaaS universe along with their risk scores, free cash flow quality rankings, and AI-related management commentary—is available here.

We believe this is an environment where disciplined active management matters. The opportunity set is changing, dispersion is meaningful, and the ability to separate durable fundamentals from temporary enthusiasm remains critical. We are excited about the opportunities in front of us and grateful for the trust you continue to place in us.

If anything in this commentary prompts questions, please reach out. You can contact any of us at 516-665-1945 or through our direct lines listed below.

Jason Gilbert, CPA/PFS, CFF, CGMA | Managing Partner, President

Elliot Turner, CFA | Managing Partner, CIO

Ryan King | Partner

References

1. We will soon migrate everything to a secure, virtual host as our primary portal, but that’s not exactly necessary today.

2. OpenAI and Amazon announce strategic partnership

O`riginal Post

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

NEW YORK — Costco Wholesale Corp. shares advanced Tuesday, building on recent strength as the membership-based retailer continued delivering robust sales growth and high renewal rates amid steady consumer demand for bulk essentials.

The stock traded at $964.71, up 1.40 percent or $13.36, in morning activity on the Nasdaq. The move reflected investor appreciation for Costco’s resilient business model and consistent execution in a competitive retail landscape.

Costco reported solid fiscal third-quarter 2026 results, with total revenue reaching $70.5 billion, up 11.6 percent year-over-year. Net sales rose similarly, supported by strong performance across U.S., Canadian, and international warehouses. Comparable sales increased 10 percent, with digitally-enabled sales up 21 percent.

Membership fee income grew 10.7 percent to $1.37 billion. The company ended the quarter with 82.9 million paid members and 148.5 million cardholders. Renewal rates stood at 92.2 percent in the U.S. and Canada and 89.7 percent worldwide, highlighting member loyalty.

Net income increased to $2.2 billion, with diluted earnings per share at $4.93. The results underscored Costco’s ability to drive top-line growth while managing costs in an environment of fluctuating commodity prices and consumer behavior.

President and CEO Ron Vachris has emphasized the company’s focus on delivering value to members. Costco maintains its signature low prices on merchandise and services, including the longstanding $1.50 hot dog and soda combination. Vachris has committed to preserving this pricing.

The company continues expanding its footprint. Capital expenditures reached $4.23 billion in the first 36 weeks of the fiscal year, with plans for about $6.5 billion for the full year. Investments target new warehouses, remodels, depot expansion, and digital capabilities.

Operational Strengths and Strategy

Costco’s warehouse club model centers on high-volume sales of limited SKUs at low margins, supplemented by membership fees. This approach fosters customer loyalty and predictable revenue streams. The company operates more than 800 warehouses globally, with plans for continued openings.

Recent sales results for June are scheduled for release in early July. Analysts will watch for trends in comparable sales and membership metrics as the company progresses through the fiscal year.

Costco benefits from economies of scale and efficient operations. Its private-label Kirkland Signature products offer quality at lower prices, appealing to value-conscious shoppers. The company also provides services including gas stations, pharmacies, and optical centers.

International expansion remains a growth driver. Markets in Canada, Mexico, Asia, and Europe contribute meaningfully, with opportunities for further penetration. Management has expressed optimism about long-term potential in these regions.

The company invests in technology to enhance the member experience. E-commerce improvements, mobile app enhancements, and data analytics support omnichannel strategies. These efforts help Costco compete with traditional retailers and pure-play online platforms.

Market Position and Challenges

Costco operates in the competitive warehouse club sector alongside Sam’s Club and smaller players. Its differentiated member-focused approach and treasure-hunt shopping experience help maintain market leadership. Strong renewal rates underscore satisfaction with the value proposition.

Broader retail dynamics influence performance. Inflation, though moderating, affects purchasing power for some members. Supply chain efficiencies and selective pricing adjustments help Costco navigate cost pressures while protecting margins.

Labor market conditions and wage trends represent ongoing considerations. The company has invested in employee compensation and benefits to attract and retain talent in a tight market. Warehouse operations require significant staffing, particularly during peak periods.

Regulatory and geopolitical factors add layers of complexity. Trade policies, tariffs, and international relations can impact sourcing costs. Costco sources products globally and maintains diversified supply chains to mitigate risks.

Financial Health and Capital Allocation

Costco generates strong cash flow. Operating cash flow reached $11.1 billion in the first 36 weeks of the fiscal year. The balance sheet remains solid, with substantial cash and short-term investments providing liquidity and flexibility.

The company returns capital to shareholders through dividends and occasional special payouts. The regular dividend provides a modest yield, appealing to income investors. Share repurchases offer additional flexibility for capital management.

Analysts project continued growth. Earnings per share for the full year are expected in the mid-teens, with revenue advancing at a solid clip. Long-term forecasts suggest sustained expansion driven by membership growth, same-store sales, and new locations.

Consensus price targets cluster in the $1,000 to $1,100 range over the next 12 months. Ratings lean heavily toward Buy, reflecting confidence in Costco’s durable competitive advantages and growth runway.

Outlook and Strategic Priorities

Costco plans to open additional warehouses in coming years, targeting both domestic and international markets. The company maintains a disciplined approach to site selection and development, focusing on locations with strong demographic support.

Innovation in private label and services remains central. Expanding Kirkland Signature offerings and testing new formats help drive incremental sales. Digital investments aim to capture more e-commerce volume without undermining the core in-warehouse experience.

Sustainability and community engagement feature in Costco’s corporate responsibility efforts. The company sets targets for renewable energy, waste reduction, and responsible sourcing. Local initiatives support education, hunger relief, and disaster response.

As Costco progresses through the fiscal year, attention will center on sales trends, membership metrics, and margin management. The company’s ability to balance growth investments with profitability will influence performance in a dynamic retail environment.

With shares showing strength, Costco continues exemplifying successful execution of its membership warehouse model. The company’s focus on value, quality, and member satisfaction positions it well for sustained success.

This article was written by

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of CHTR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

A Broken Record

Here we go again, repeating our mantra that the markets are too high and vulnerable to declines. Adding to our argument, interest rates are now on the rise around the world. Stock prices have ignored this, increasing risk, especially if rates continue to rise, which appears likely in the near term.

Interest rates impact everything from valuations (as discount rates adjust) to borrowing costs. The bloated U.S. federal government deficit has been further exacerbated by defense spending and escalating interest rates, since interest expense—the debt burden—was already a disproportionate amount of the federal budget. A vicious cycle could follow if the Treasury is forced to post even higher rates to attract buyers to its continuous bond offerings.

Bond yields are primarily rising because of inflation. Core PCE, the U.S. inflation rate excluding food and energy, is running at 3.3% annually. Producer prices have leaped materially and have yet to be passed on to consumers. As a result, it’s ironic that the new Fed chair will likely need to boost administered short-term rates despite the President’s insistence otherwise. Either way, the bond market is doing its job by increasing rates, requiring a higher yield to offset risks.

Investors aren’t being compensated sufficiently given current market levels. Real yields (net of inflation) for short-term bonds are negative. Credit spreads between government bonds and corporates are tight, so reaching for yield is also generally unattractive. And based on several valuation metrics that have accurately forecast subsequent returns historically, forward annualized returns for the S&P 500 over the next several years are negative.

Record Low Consumer Sentiment

Consumer sentiment, which is normally high when the economy and stock markets are buoyant, is making new record lows, likely attributable to rising inflation expectations, polarized politics, falling home prices, AI-related layoffs, and the war with Iran. It’s not just a U.S. phenomenon; UK confidence is also at an all-time low. Credit card delinquencies in the U.S. are at their highest levels since 2008, car loan defaults are at multi-decade highs, and student loan delinquencies are at record-high levels. Consumers are clearly feeling pinched. Walmart (WMT) noted that their customers are fueling up less than 10 gallons per fill-up, topping off tanks since gas prices are so high. Inflation impinging upon real income growth and savings rates have also diminished.

Despite this, stock markets have powered higher. AI-related capital spending has been a significant driver of GDP growth—in Q1, all growth was attributable to AI and federal government spending. It’s propelled corporate earnings higher too.

Only time will tell whether we’ve been in a period of irrational exuberance or that the markets have been forecasting a period ahead of unusual prosperity.

While market bottoms tend to occur in a flash, tops are usually longer drawn-out processes. Since the U.S. stock markets now appear to be priced for perfection, right at TRAC™ ceilings, with a current seasonal headwind and rising interest rates, we suspect a rollover is imminent.

Too Many Record Highs

Primarily because of rising inflation, yields on 30-year bonds have increased to 15 to 20-year highs in the U.S., UK, France, and Japan. While the correlation between stocks and bonds has been quite low historically, they’ve moved much more in tandem since 2022. If rates keep rising, bonds should fall and, in turn, share prices too.

Since Producer Price increases are running so high, record-high profit margins are vulnerable, especially since companies may be unlikely to pass price increases along. Net profit margins (now nearly 14%) are cyclical, having fallen to 8% or below on 5 separate occasions in the last 25 years. Free cash flows are already under pressure because capital spending on AI projects has surged.

Earnings expectations appear too high. Long-term growth estimates are about 19%. Previous peaks in expectations occurred in 2000, 2018, and 2021, and each subsequently led to substantial market declines.

The stock market is overly concentrated. Nvidia (NVDA) and Apple (AAPL) alone are over 15% of the S&P 500. The top 10 stocks now exceed a record high 40% of the index value. Nvidia’s market cap alone has surpassed the entire Russell 2000 small cap index. Concentration may be masking the broader picture. During several recent record high days, more stocks declined than rose.

Allocations to stocks remain at record highs, which has also corresponded with market tops.

Asset managers remain overweight equities and individual investors have been using disproportionate amounts of leverage. Buying on margin and call option buying are at record highs, as is exposure to leveraged ETFs. The Market Vane Bullish Percentage index (an indicator that measures trader sentiment) is as high as it ever gets. An abundance of market optimism usually does not auger well for future returns.

The Cypress Capital Market Risk Index, that gauges vulnerability to major market drawdowns, hit 100%, its most elevated level, a mark that was only achieved near the market peaks in 1973, 2000, 2007, and 2021. In each of those instances, a much more attractive market risk level, below 40%, presented itself withing 24 months.

Furthermore, the seasonal period just ahead typically provides poor stock market performance. May to November has underperformed historically, but it’s much worse during a midterm election year. There’s only been one up May-to-November period for the S&P 500 in a midterm election year since the early 1960s. And the average decline from intra-year highs is 18%. Though the period that follows, through the following April, has had double-digit annualized returns with no down periods since 1950.

For the Record

With a GDP growth rate of -0.1% for Q1, Canada just triggered a technical recession—two consecutive quarter of negative GDP growth. The Purchasing Managers Index, based on surveys of executives, is showing contraction for the eurozone, though it’s still above 50, indicating expansion, in the U.S.

Economic weakness should ultimately act to suppress inflation. Because major economies, such as China, Japan, and Europe rely so heavily on oil and gas imports, this alone should quell growth thereby suppressing inflation—high prices are the cure for high prices.

As such, we continue to hedge, holding short positions (where authorized) or inverse long ETFs.

We have been anticipating a recession because the yield curve previously inverted, monetary growth has been weak, and unemployment is likely to rise. Our economic composite, TEC™, alerted us to a U.S. recession some time ago, though one has yet to occur.

While the current bout of inflation may carry forward for several months, it should dissipate. Ultimately, secular forces from high debt levels, poor demographics, and AI-related job losses and competitive threats should lower growth and result in disinflation. Though, if governments excessively print money to cover high budget deficits, inflation could remain problematic.

Our Model Portfolios

Our managed accounts are invested based on one or more of our Models (particular investment strategies with notional allocations of securities). A managed account’s holdings will generally be similar to its applicable Model’s, but may not hold all of them based on client-specific factors (income requirements, tax-related considerations, requests/restrictions, and cash available for purchases) and/or market forces which impact specific investment decisions from time to time.

The following descriptions of the holdings in our managed accounts are intended only to explain the reasons that we have made, and continue to hold, these investments in the accounts we manage for you and are not intended as advice or recommendations with respect to purchasing, selling or holding the securities described. Below, we discuss each of our new holdings and updates on key holdings if there have been material developments.

All Cap Model

The All Cap Model combines selections from our large cap strategy (Global Insight) with our small and medium cap ideas. We generally prefer large cap companies for their superior liquidity and lower volatility. The smaller cap positions tend to be less liquid and more volatile; however, we may hold these positions where they are cheaper, trading at relatively greater discounts to our Fair Market Value (FMV) estimates, making their risk/reward profiles favourable.

Orca Energy Group (ORXIF) recently announced that it entered into an agreement to divest its Tanzanian business, along with its associated commitments and liabilities. Should the transaction be completed, the company would be positioned to distribute a significant portion of its cash holdings to shareholders.

Our large cap positions are summarized in the Global Insight section.

Global Insight (Large Cap) Model

Global Insight portfolios hold large cap stocks (typically with market caps over $5 billion at the time of purchase but may include those in the $2-5 billion range) where portfolios are managed Long/Short or Long only. At an average of less than 70 cents-on-the-dollar versus our FMV estimates, our Global Insight holdings appear much cheaper, in aggregate, than the overall market.

In the last few months, we have made several changes in our large-cap positions. We bought Keurig Dr Pepper (KDP), Eli Lilly and Company (LLY), United Health Services (UHS),and WSP Global (WSPOF). We sold Cenovus Energy (CVE), Diamondback Energy (FANG), Grupo Aeroportuario del Sureste (ASR), Veolia Environement (VEOEY), and ServiceNow (NOW) (after buying it recently), after each ran up TRAC™ceilings near our FMV estimates and Henkel (HENKY) after it inflected down from a TRAC™ceiling.

Keurig Dr Pepper is one of the largest beverage companies in the U.S. Its portfolio includes Dr Pepper, A&W root beer, Snapple, Ghost energy drinks, Mott’s, and the Keurig coffee brewer. Last August, the company announced the acquisition of Peet’s Coffee. Investors reacted negatively. However, the acquisition appears to be a smart addition to the portfolio, especially in a post-GLP world where calorie-light coffee and energy drinks have become preferred indulgences. Though integration risk remains as with any substantial acquisition. The company now plans to split into two companies, Global Coffee Co. and Beverage Co., focused on its iconic non-coffee beverage brands. Investors have started to see the vision. Our FMV estimate is $38.

Eli Lilly and Company’s recent results have been astounding: Q1 revenue rose 56% on strong sales of key products such as Mounjaro, Zepbound, Ebglyss, and Jaypirca. Free cash flow was nearly $12 billion for the last twelve months. The company’s “key products” group, which is driving growth, generated over $13 billion of revenue, up from just $1 billion at the start of 2023. Lilly has a 60% U.S. market share in incretin analogues, and just surpassed Novo Nordisk (NVO)’s international market share. Volatility in the company’s share price has picked up around results relating to its and its key competitor’s GLP-1 efficacy. The price has risen to our $1,100 FMV estimate, but with over 30 therapies in Phase 3 and exciting technology such as VERVE-102 gene editing therapy, we are likely to raise our estimated value.

United Health Services provides acute care through hospitals and outpatient facilities and behavioural health services, primarily through inpatient centres. First quarter results were weak due to weather, a soft flu season, and volatility in state directed payments, health insurance exchange mix, and supplemental Medicaid. Medicaid-related operations accounted for 29% of 2025 revenue; however, looking at the core business model, there’s steady demand for acute and behavioural health care which should translate to mid-single-digit top-line growth and high-single-digit earnings growth. The move into virtual care, with the recent acquisition of Talkspace (TALK), a leader in virtual outpatient behavioural health care with over 6,000 licensed professionals, is underappreciated. The transaction should be accretive in the first 12 months post-close. Our FMV estimate is $240.

WSP Global is one of the world’s largest engineering consulting firms. The share price has been highly correlated to the software sector, investors seemingly believing that AI poses an existential threat. This appears misguided since AI should be additive for WSP. First, AI enables better design, boosts productivity, and enhances customer relationships. Second, WSP is winning data centre business, from site due diligence to data centre design, with contract win rates of 75%. Data centre power demand has exposed outdated infrastructure around the world; WSP is seeing solid growth in the U.S. and was recently appointed to the Northern Powergrid’s Engineering Services Framework to support the delivery of power to 8 million UK residents across design, planning, engineering, and commissioning. Top-line growth should be mid-single-digits and free cash flow should hit $2 billion by 2030. Our FMV estimate is $250.

Multifaceted Diversification

We can construct portfolios with multiple unique return drivers—strategies that differ in style and approach—based on bottom-up fundamentals, macro tools, or pure quantitative analysis. This can provide exposure to different styles and asset classes beyond just stock and bond indexes. The approach aims to limit volatility and drawdowns by combining investment strategies, especially where returns are less correlated. The goal is to outperform through economic cycles with low correlation, therefore less susceptibility to market index declines.

The benefits of multifaceted diversification are not only from different ways to perform but also from a portfolio comprised of strategies that are less correlated. So that when a strategy underperforms, it’s less likely to occur at the same time as another strategy, which softens the volatility and drawdowns of the overall investment portfolio.

If you wish to discuss whether our multifaceted diversification approach might apply to your personal situation and investment accounts(s), please contact your investment representative.

Global Tactical Allocation Model

Our Global Tactical Allocation Model (GTAM) investment process combines macroeconomic analysis with valuation and momentum. ETFs (exchange traded funds) are used to gain exposure to 4 broad asset classes: Equities—major markets, emerging markets, sectors, styles, private equity; Fixed Income—bonds issued by governments, investment grade corporations, high-yield issuers, as well as mortgages, and bond indexes; Real Assets—real estate, infrastructure, renewable energy; and Commodities—Precious Metals or Oil. GTAM emphasizes ETFs that should outperform based on the macro environment, are selling at attractive absolute and relative valuations, possess good relative price momentum, and are at TRAC™ floors.

Current exposures are: Equities (83%); Real Asets (17%), Fixed Income (7%); and Commodities (none). Its current broad themes are international equities, software, consumer staples, insurance, healthcare, and forestry.

Quantitative Investment Models

Quantitative equity strategies commonly select securities based on systematic, rules-based decisions, using technology to uncover and exploit historical statistically significant anomalies. Our quantitative equity strategies employ proprietary and systematic processes that rank large cap stocks based on factors such as relative valuation, operating metrics (quality), financial strength, and price momentum. The two models noted below select approximately 30-40 holdings from the top-ranked stocks in the model’s respective universe. TRAC™ is utilized to optimize entry and exit points.

The Quantitative Global Value Model (QGVM) invests in large-cap equities from around the world. The U.S., Canada, and Japan currently represent the top 3 countries. The top 3 sectors are Financials (25%), Information Technology (20%), and Consumer Staples (15%). The companies held in QGVM currently have the following characteristics: median forward P/E of 17.1x, ROE and ROIC of 23% and 13%, respectively, and dividend yield of 1.8%.

The Quantitative Canadian Value Model (QCVM) restricts its universe to Canada’s S&P/TSX Composite. The top 3 sectors are currently Information Technology (22%), Materials (21%), and Financials (19%). The companies held in QCVM currently have the following characteristics: median forward P/E of 13.2x, ROE 15%, and dividend yield of 1.5%.

Income Model

Our high-yield investment strategy has an average current annual yield (income we receive as a percent of current market value of income securities held) of about 5.0%, and most of our holdings—corporate bonds/debentures, preferred shares, REITs, and high-yielding common shares—trade below our FMV estimates.

U.S. high-yield corporate bonds ((ICE BofA Index)) yield 6.9%. The spread versus government bonds appears too narrow, less than half the historical average of 5.5%. A widening to the average implies a yield closer to 10%. If the economy weakens and corporate delinquencies increase, spreads could expand even further. As such, we continue to carry cash in most of our income accounts, awaiting better entry points.

We sold Diversified Royalty (DIVRF) when it inflected down from a TRAC™ ceiling in line with our FMV estimate.

Investment Grade Income Model

Our investment grade strategy utilizes a systematic process to rank Canadian investment-grade rated corporate bonds based on their duration, yield, financial strength, and momentum.

Currently, positioning has emphasized longer-dated bonds—duration is 10.3 years, 4.7 years more than the S&P Canada Investment Grade Corporate Bond Index. The average yield-to-maturity is 4.8% versus 4.1% for the index.

Records Were Made to be Broken

Markets should rise over time, achieving ever-higher record levels. Earnings rise as the economy grows and assuming fair valuation levels are maintained, new highs ought to be expected. However, market rises don’t normally occur in an up-and-to-the-right straight line. Ebbs and flows are the norm, frequently sizeable ones.

When profit margins, optimism, and exposure to stocks are all at record-high levels, near-term record highs in the markets shouldn’t be anticipated, especially when valuations are so high and the prospect of a peak in the economic cycle is elevated.

The markets appear ready for a timeout.

Randall Abramson, CFA

References

1. In this letter, ROE, ROIC, dividend yield, yield, and yield to maturity, are calculated for the respective Model portfolio based on the holdings as at the date of this letter of an actual representative account managed in accordance with such Model. These figures are neither a measure of results achieved nor projected future performance. The Model’s holdings, and therefore ROE, ROIC, and yields, are subject to change at any time and may differ among accounts managed based on the same Model.

Original Post

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

While older people are most likely to vote, it is younger generations who feel the most short changed.

With house prices rising more slowly than earnings, purchasing a home for the first time is more possible compared to just a couple of years ago. At the start of the year, the Nationwide Building Society said mortgage payments accounted for a third of take home pay – well below the record of 48% in 1989.

But today’s prospective buyers tend to be juggling high rental costs too, making it harder to save for a deposit. This is partly he average age of the first time buyer has risen over recent years.

The most sustainable solution is to build more homes, but the government’s behind on its target. The number of new homes was down by 6% last year and below the 300,000 needed to reach the government’s target.

Andy Burnham wants to build more social housing, which would help. But, as successive governments have found, it’s not easy.

Housing is one the many big plans Burnham has hinted at to cure our economic malaise, but he has to grapple with a challenging inheritance.

Ironically, the easiest way to fund his plans would be to draw on the spoils of faster growth.

Like many before him, Andy Burnham’s vision appears to be that you have to spend more money to make money. But whose money?

E-commerce giant Alibaba has launched a high-stakes legal challenge against the US government, suing to get off a Pentagon blacklist that claims it is linked to the Chinese military.

The US Department of Defense (DoD) has said that because Alibaba complies with Chinese technology regulators, it is effectively an arm of the military.

In the lawsuit filed in a California federal court Alibaba pushed back, claiming the determinations “have no basis in fact or law”.

The challenge comes after the Pentagon recently expanded its blacklist of companies it will not be able to do business with from the end of the month to include massive tech names like Baidu, BYD, and Nio.

The defence department put Alibaba on the blacklist, saying the firm was a “military-civil fusion contributor to the Chinese defence industrial base” because of its regulatory ties to Beijing.

But Alibaba countered the argument, saying none of the members of its independent board had any military affiliation.

Every multinational operating in China – including American firms – must follow the exact same local rules, it noted.

Its platforms, Alibaba said, are built for retail and cloud computing, not weapons or intelligence.

“Alibaba is not a Chinese military company nor part of any military-civil fusion strategy,” the company told the BBC.

“The decision to place Alibaba on the 1260H list is arbitrary and capricious, and we are filing a lawsuit against the Department of War to demand removal from the list,” it added.

While the blacklist does not freeze finances immediately, it triggers a brutal operational penalty on 30 June.

Starting next week, the Pentagon is legally banned from doing business with any blacklisted firm.

Crucially, the law also extends to any US contractor that shares a lobbyist or law firm with a blacklisted entity. In Alibaba’s case, the company argues that this restriction creates a functional blockade, forcing its long-term American advisers to sever ties to protect their own lucrative defence contracts.

The rule effectively strips the company of its political and legal voice in Washington at the exact moment it needs to defend itself.

According to the complaint, Alibaba had previously asked to meet with the agency to address the Chinese military affiliation concerns, which included presenting evidence of its US economic contributions.

However, the tech giant says that even after its submissions, the agency did not raise any concerns with the firm nor did it request additional information. Rather, it “designated Alibaba without notice or a fair hearing”, the compliant notes.

The DoD declined to comment on the matter, telling the BBC, “We do not comment on ongoing litigation”.