Argosy Investors Q3 2025 Letter

Dear Investors,

I want to take a minute to highlight an interesting case in the news of restructuring because it highlights some interesting finance topics all in one. A subprime lender named Tricolor abruptly shut its doors and began Chapter 7 liquidation, which set off a mad dash of numerous creditors attempting to verify/repossess the collateral (the actual vehicles). It also resulted in the bankruptcy of another company, auto parts company First Brands. What is rumored is that Tricolor was pledging the same vehicles to multiple parties. This is equivalent to if you owned a house worth $400,000 and had two separate $300,000 mortgages on the same property.

While there are more details that have yet to come out, what appears to have happened is perhaps a culmination of several factors whose origins date back to the prior financial crisis in 2008-2009. Prior to 2008-2009, lenders generally believed that if forced borrowers would rather default on auto debt vs. defaulting on their home loan and risk sleeping on the street. Of course, home lending got so aggressive in the early 2000’s that supposedly safe home loans became risky too as there was limited documentation required, adjustable rate mortgages re-priced as intro rates lapsed, and some loans were collateralized by 2nd and 3rd homes. Ultimately, faced with a difficult decision, many people defaulted on their home loans and continued to pay their auto loans, contrary to lender expectations.

This experience shifted how lenders viewed auto debt. The auto loans of the 2000’s, which might have had “conservative” loan-to-values of 120% or less, loan terms of 60 months or less, reasonable income coverage ratios on mostly new vehicles. Today, similar loans have with skyrocketing LTV’s, loan terms of 84 months or more, more aggressive income to debt ratios, and a higher proportion of used vehicles. In addition to these changes, the post-COVID world resulted in vehicle shortages which allowed dealers to sell vehicles at significant premiums to MSRP, which has resulted in lower recoveries when loans do default.

As Hyman Minsky might have said, stability breeds instability.

Confidence in auto loan credit quality has caused lenders to stretch underwriting assumptions to or beyond their breaking point, even being so lazy as to potentially allow widespread fraud in the case of Tricolor. This combination of stretching for continued growth and loose protocols on securing collateral results in credit loss experience higher than historical trends would suggest.

What impact does this have on the portfolio? It’s a great example of how extrapolating growth or stability too far into the future without appropriate conservatism can lead to ruin. My goal remains to steward the capital in the portfolio through these potential pitfalls to compound capital for the long-term. Using appropriate discretion is not obvious in real-time, as the discussion below around homebuilding hopefully clarifies, because value is often found where there are temporary challenges obscuring long-term earnings. Prior letters on the post-COVID hangover in businesses as varied as pool suppliers and electrical raceway products (the racking that holds electrical wires in commercial buildings) are an additional reference point into this topic.

Existing Portfolio Activity

Trim: DFH, FERG, W

Sell: POST

I want to touch on Post Holdings (POST) first because it’s been a long-time holding and my ownership pre-dates the founding of Argosy Investors. Bill Stiritz became well-known to investors through his profile in the Outsiders, a book written by William Thorndike. Mr. Stiritz ran Ralston Purina for decades and Ralcorp Holdings spun off Post Holdings in 2012. Mr. Stiritz became executive chairman of Post Holdings with Rob Vitale as CEO. They embarked on a publicly-traded LBO model similar to what Stiritz successfully did at Ralston Purina. While there have been many successes at Post, over time the long-term results have been dissatisfying relative to the results one could have earned owning a broad stock market index. While not a very large position, given the time the stock has been owned, its worth some reflection on what didn’t work as well as hoped.

There are 3 factors that I think made POST perform worse than expected: 1) interest rates have increased, creating a headwind for leveraged capital structures, both public and private; 2) consumer staples brands have faced long-term headwinds as brand allegiance has fragmented in the age of social media, while the cereal brands POST owned faced accelerating secular declines from consumer tastes shifting away from carb-heavy diets; and 3) POST’s capital allocation track record has only been average, as certain deals such as Weetabix and Bob Evans have not meaningfully improved the business and its not clear the valuations paid were attractive in hindsight.

To be sure, they made many correct moves over time, consolidating manufacturing footprints and moving away from carb-heavy diets in several of their capital allocation decisions. They have bought many smaller stranded assets and plugged them in to their operations in an accretive way, including their pet foods and Peter Pan peanut butter brand acquisitions. They also successfully built and spun of Bellring Brands, whose primary asset is Premier Protein. They have also repurchased 16% of the company over the last 7 years. All in, their long-term returns have been below-average, and I no longer feel it was an the best home for investment.

In terms of partial sales, I trimmed Wayfair (W), Ferguson (FERG), and Dream Finders Homes (DFH) due to their exposure to new home construction. I still believe there is value in the new home building sector, but trimmed some positions where I think exposure to new home construction is not being fully appreciated.

Ferguson is a great business but does have significant exposure to new home construction, and a premium valuation. The combination of these factors led us to reallocate capital elsewhere. Similarly, I have owned Wayfair less than one year and the stock (not to be confused with the business) was up 140% at the time of the sales. I did not buy the stock expecting such a rapid rise in price, so recognizing the stock has gotten ahead of where I might value the business, I trimmed our position in the mid-$70’s per share. Finally, Dream Finders Homes is one of two homebuilding stocks we own (the other being Hovnanian (HOV). Between DFH and HOV, I believe HOV is cheaper and has more upside as it deleverages its balance sheet at a challenging time for homebuilders.

Overall, I felt our exposure to homebuilding should be lower, so I sold a bit of DFH, but still believe valuations and end market conditions are neutral for now. I do not hold the same views on housing undersupply that many other housing bulls have. Instead, there are several countervailing forces that could work in favor of or against new home construction. For instance, lower interest rates would seem like an obvious positive for new home construction. However, existing home supply has been historically low for a few years and there are many people who would desire to move if not for the current interest rate environment. Also, the low supply environment has propped up homebuilder volumes even if pricing has been a headwind. It’s not clear to me that net housing demand would increase with lower rates, although I would certainly expect existing home sales activity to pick up.

New Portfolio Activity

Bought: DAVA, NVO

Despite my better judgment, I purchased shares in Endava (DAVA) again based on a number of factors: 1) Endava operating margins are at trough levels, 5-10 percentage points below peers, despite being at parity in the past; 2) all-time low valuation <10x P/E without adjusting for the trough margins; 3) peak pessimism from the market about disruption from AI at the same time AI developments on the ground have actually slowed down, and 4) customer-specific delays at a major customer that have hampered growth relative to peers.

There is a lot of pessimism baked into the price of this business and I believe there is a self-help story here that either management or a bidder will ultimately seek to realize.

Novo Nordisk (NVO) is one of two major players in the GLP-1 space, along with Eli Lilly (LLY). Novo Nordisk had some execution missteps in the major North American market and allowed Eli Lilly to take a lead in a space Novo knows very well due to its massive insulin franchise. While the near-term is foggy, GLP-1’s are still not used by anywhere near the number of adults who could potentially benefit from them, and even though pricing could be a headwind for the market overall and potentially Novo’s major product Wegovy specifically, I believe the current mid-teens P/E valuation does not adequately reflect the long-term growth potential of the business.

Conclusion

I am guarded in my optimism towards the market. While there are massive trends supporting spending on artificial intelligence via Nvidia (NVDA) chips, data centers, electric power supply, and more, the real world use cases have not kept up with the spending. This may be ultimately healthy for AI innovation long-term, as prior buildouts of infrastructure have seen extended gaps between the buildout and the profitable commercialization of the technology.

With that in mind, while AI-exposed businesses are optimistically priced based on current projections of AI usage and despite some concerning levels of what I’ll call circular financing among the largest AI-exposed businesses, there is a huge underbelly of businesses somewhat ignored by the market where there are interesting opportunities.

The life science tools space is for instance an interesting current hunting ground for value given the post-COVID hangover, arguably temporarily reduced government spending on research at top institutions, and investor fatigue from missed expectations despite what are generally some of the best business models one can find. I will continue to hunt for interesting opportunities and am excited for the developing landscape of opportunities being obscured by general market valuations.

Best,

Mike Loeb

Original Post

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