Position closed on 6 Oct. 2025 at a price of $31.78, with a return of 6.7%.

Caris Life Sciences, Inc. (CAI: $34.21 per share) positions itself as a future leader in precision medicine, but the odds are firmly against it. The company faces an intensely competitive landscape dominated by larger, better-capitalized rivals, ongoing accounting weaknesses, persistent losses, and limited transparency as an emerging growth company. Despite these challenges, the market has priced Caris Life as if it will achieve extraordinary scale and profitability for decades to come. The gap between these euphoric expectations and the company’s difficult realities creates significant downside risk for investors. Accordingly, I find Caris LIfe, “Unattractive”.

A Fiercely Competitive Market

One of the paradoxes of investing is that highly competitive industries produce what economists call a “consumer surplus”, and yet these firms often find it most difficult to create sustainable value. As Peter Thiel once said, “competition is for losers”. In fact, recent research by Boston University researchers has found that technological rivalry measured by research & development (R&D) investments by peers, increases the risk of obsolescence, making firms more reluctant to invest in new technology for fear that such investments will quickly become obsolete. This implies that firms in highly competitive industries may not experience the future profits they expect because increased competition will make customers less likely to buy new technology. 

Unfortunately, Caris Life operates in the highly competitive precision medicine industry, one where management is alive to it being, “characterized by rapid changes, including technological and scientific breakthroughs, frequent new product introductions and enhancements, and evolving industry standards.” Competition compels investments to keep up with peers, in the race for physician, patient, and biopharma clients, and competition increases the more attractive the potential profits are. These investments carry with them an expectation of future profits, yet, as economists have found, managers typically overestimate the potential gains from investments, leading to future losses. As people become more aware of the importance of genetic information, competition to serve the market with genomic profiling and sequencing services has grown. 

Caris Life faces competition from a myriad of firms, some of which are better resourced, able to invest more into R&D than it can, and with a greater ability to sell their products. If research that firms become more cautious as competition intensifies is correct, this could favour products from more established firms. Caris Life’s tissue-based molecular profiling services face competition from firms such as Roche Holding AG’s (RHHBY) Foundation Medicine and Tempus AI, Inc. (TEM). The firm also faces competition from academic centers, such as the Memorial Sloan Kettering Cancer Center and the NewYork-Presbyterian Hospital, while Weill Cornell Medicine provides genomic profiling to its patients. The firm’s blood-based early detection services face competition from firms such as GRAIL, Inc. (GRAL), Freenome, Guardant Health, Inc. (GH), Exact Sciences Corporation (EXAS), and Delfi Diagnostics. The firm’s blood-based molecular profiling for therapy selection services face competition from Guardant Health and Foundation Medicine. In blood-based molecular profiling for MRD tracking and treatment monitoring, the company faces competition from Natera, Inc. (NTRA), Guardant Health, and Adaptive Biotechnologies Corporation (ADPT). The firm’s core biopharma services face competition from firms such as Foundation Medicine, Guardant Health, Tempus AI, Natera, and Personalis, Inc. (PSNL). The firm’s genomic data and AI services face competition from Tempus AI and Foundation Medicine. Finally, other testing firms in precision oncology are Illumina, Inc. (ILMN), NeoGenomics, Inc. (NEO), Myriad Genetics, Inc. (MYGN), the Laboratory Corporation of America, Quest Diagnostics Incorporated (DGX), and BostonGene. This extensive list could grow as awareness of the importance of genomic information grows and the market opportunity expands.

Limited Transparency from Emerging Growth Company Status

Caris Life is what is known as an “emerging growth company”, which means that the Securities and Exchange Commission (SEC) does not require it to meet certain disclosure requirements required of other SEC-registered firms, requirements that may be beneficial to shareholders. In its S-1/A filing, management notes that,

Under these exemptions, we are not required to comply with the auditor attestation requirements of SOX Section 404 or the auditor requirements to communicate critical audit matters in the auditor’s report on the financial statements, have reduced disclosure obligations regarding executive compensation, and have exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, the information we provide shareholders will be different than the information that is available with respect to other public companies. We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and we have not included all of the executive compensation related information that would be required if we were not an emerging growth company.

This is especially pertinent given that the firm has already identified material weaknesses in its internal control over financial reporting. For the uninitiated, the company explained that,

A material weakness, as defined by Rule 12b-2 under the Exchange Act, is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

These material weaknesses, relate to a

…lack of sufficient qualified accounting resources, including those with technical expertise necessary to account for and disclose accounting transactions which require complex calculations or thorough evaluation of the accounting literature.

These material weaknesses are still being remediated, as management notes in its Q2 2025 report, with management reviewing, documenting and testing its internal controls. The lower bar for transparency puts some doubt onto the financial reporting.

Exceptional Growth Without Economic Value

Since 2020, Caris Life’s revenue has compounded by 26.64% a year, a 5-year sales CAGR greater than the global mean and median of 9.2% and 7.3% respectively, for firms with sales of between $325 million and $700 million. Whereas firms tend to grow slower as they get larger, Caris’ growth has accelerated with size, with the firm enjoying a 3-year sales CAGR of 27.35%. 

It cannot be said of Caris Life that exceptional profitability has followed exceptional growth. While the firm’s net operating profit after tax (NOPAT) has substantially improved from -$308.64 million in 2023 to -$171.48 million in the last twelve months (LTM), it has yet to turn a profit. Driving this substantial improvement has been a rise in NOPAT margin from -100.82% to -32.12%. In turn, the firm’s invested capital turns, a reflection of balance sheet efficiency, have improved from 1.36 to 2.8. The net result of burgeoning NOPAT margins and invested capital turns is a return on invested capital (ROIC) that has also improved markedly, from -137.12% to -90.01%. 

Since 2023, the firm has burnt through -$659.33 million in cash. Improvements, however, can be seen, with free cash flow (FCF) rising from -$274.11 million to -$124.89 million, with a current yield of -1.18%. 

As Warren Buffett noted in his 1992 letter to the shareholders of Berkshire Hathaway (BRK.A), that,

Growth benefits investors only when the business in point can invest at incremental returns that are enticing – in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value.  In the case of a low-return business requiring incremental funds, growth hurts the investor.

Investors should remember this rule. Value is created when returns are in excess of what can be got in the market, and destroyed when returns are below what can be got in the market. With such profoundly negative ROIC, it is probable that the firm has never created value. In the LTM, the firm earned an economic profit of -$190.73 million, or -$0.68 per share, compared to -$18.57 in GAAP diluted earnings per share.

Priced for Gargantuan Scale

The price of a thing carries with it expectations about the performance of that thing. That is true of share prices. Using my reverse discounted cash flow (DCF) model, I was able to determine the expectations implied by the current price, and use a variety of scenarios to show the potential downsides to investing in the stock. The reader may view the accompanying spreadsheet to see the logic of the following argument. 

In the base scenario, where I determined the hurdles Caris Life is expected to exceed in order to justify the current price,

• Revenue grows by 0% in 2025, 43.52% in 2026, 23.24% in 2027, 17.19% in 2028, 13.00% in 2029, and 17.02% in 2030, in line with Seeking Alpha’s revenue consensus estimates, before growing at 27.35% a year thereafter, and,
• NOPAT margin immediately improves to 2%. 

I found that in this base scenario, Caris Life has a market-implied competitive advantage period (MICAP) of 33 years, at which point it records $984.09 billion in revenue and earns $19.68 billion in NOPAT in 2058. By way of comparison, the world’s largest company by revenue is Walmart (WMT), who earned $693.15 billion in revenue in the LTM. 

Given where the firm’s NOPAT margins are, and the competitiveness of the market, it is prudent to wonder what downsides exist if the firm does not so markedly and immediately improve NOPAT margin. If we suppose that,

• Revenue grows by 27.35% a year, and,
• NOPAT margin improves immediately to 1%,

Caris Life is worth $27.79 a share, a downside of 18.14% from the current price, with the company posting $1.53 trillion in revenue and earning $15.32 billion in NOPAT. 

Finally, if we suppose profitability initiatives are less successful, and,

• Revenue grows by 27.35% a year, and,
• NOPAT margin improves immediately to 0%,

Caris Life is worth $2.78 a share, a downside of 91.81% from the current price, with the company posting $1.53 trillion in revenue and earning nothing in NOPAT.

Conclusion

Caris Life Sciences has delivered strong top-line growth but has failed to convert that momentum into durable profitability or economic value. Competition is intensifying, rivals are better resourced, and management continues to remediate material weaknesses in financial reporting. Yet the stock price reflects assumptions of flawless execution and revenue on a scale rivaling the world’s largest companies,  expectations that are implausible given the firm’s track record. Investors are being asked to pay upfront for profits that may never arrive. For these reasons, I assign an “Unattractive” rating to the stock.

Gold mining has historically been a poor way to capture gold’s value, with overinvestment, low-quality assets, and poor capital discipline destroying returns. Today, elevated gold prices are supported by disciplined capex, strong free cash flow, and conservative balance sheets, transforming miners into cash-generative, shareholder-friendly businesses. Apex Mining Co., Inc. (PSE:APX:₱8.22) exemplifies this shift. Once forced to close its Maco Mines, the company now delivers strong margins, rising returns on invested capital, and robust free cash flow, supporting dividends and demonstrating disciplined capital allocation. Market expectations are modest: even conservative assumptions imply upside, while realistic growth scenarios suggest meaningful gains. With a price-to-economic book value near 1.03, disciplined management, and structural tailwinds from the current gold regime, Apex Mining is very attractive for investors seeking both value and growth in the gold mining sector.

Elevated Prices Are Supportable

Historically, gold mines have been terrible investments. My first job out of university, in 2007, was running a small-scale family-owned gold mine in Zimbabwe, Scallywag Mine, and it was with some horror that I heard an old joke in the mining community in Gwanda: “It takes a large fortune to make a small one in gold mining”. In fact, for many of the older gold miners, it was a misnomer to call them “gold miners” because gold mining had been so unprofitable for so long that many instead treated tailings, or what was colloquially referred to as “dumps”, a highly profitable endeavour. I remember seeing old shafts, last worked by Germans before the start of the First World War, symbols of the unattractiveness of the business. In fact, Apex Mining, the subject of this thesis, closed the Maco Mines in Maco, Davao de Oro, Philippines, in 1991, as a result of depressed gold prices. Such has been the historical capital destruction in the industry that Reuters observed, 

Anyone acquainted with the industry might find that hard to believe. Historically, gold miners have offered remarkably poor protection against rising prices. Over the past three decades the index of U.S. consumer prices more than doubled and the price of gold rose sixfold. Over the same period, the Philadelphia Gold and Silver Index of listed miners climbed by about 40%. The mining benchmark remains well below its peak in 2011. Since that date U.S. prices and bullion have risen by 33% and 55%, respectively.  

Few industries have a more dismal record of allocating capital. After the gold price took off in the early 2000s, miners pursued growth at any cost. They borrowed freely, splurged on new developments, and pushed up costs by extracting gold from low quality mines – what’s known in the business as low-grading. Debt levels at the four senior miners – Newmont (NEM.N), Barrick Gold (ABX.TO), Agnico Eagle Mines (AEM.TO),  and Kinross Gold (K.TO)  – rose to an average 50% of net assets. After the gold price dropped in 2011, the miners were left stranded. Barrick, the world’s largest miner at the time, announced some $23 billion of asset writedowns between 2012 and 2015.

The year I entered mining turned out to be near the start of a great bull run, a run that has largely continued to the present day. 

Source: World Gold Council

As I said in an earlier and more general thesis on the iShares MSCI Global Gold Miners ETF (RING), and the iShares MSCI World ETF (URTH),

That era is, for now, a thing of the past. Today, gold prices are so high that gold miners can comfortably pay their all-in sustaining costs and all-in costs. Although the gold price has shot up to dizzying heights, part of a run that began around 2002, thereabouts, capex has actually fallen from its peak in 2012. In fact, capex for the top miners globally, across all commodities, has not recovered from the 2012-2013 heights, despite the temptations posed by the commodities boom. The economic result is clear: since 2010, supply has risen from 4,316.9 tonnes in 2010 to 4,974 tonnes in 2024, compounding at just 1% a year. Although demand is currently below supply, on balance, demand is more likely to rise quickly than supply is, pushing prices up. I try to avoid demand forecasts. What is essential is the realisation that the excesses of previous cycles have been avoided, supporting high gold prices.   

A recent discussion in the Financial Times shows the extent to which capital allocation has improved in the industry. Not only have miners shunned capex expansion, but M&A deals are far more conservative. As prices have risen, gold miners have become free cash flow (FCF) spigots. The FT cites a report by TD Securities which shows that, at current prices, Barrick Gold Corporation (GOLD) will earn an FCF yield of 9.5% and the Newmont Corporation (NEM) will enjoy an FCF yield of 7.5%. Kinross has doubled its FCF to $1.3 billion year-over-year. Gold miners have also become better about returning capital to shareholders. Barrick Gold, on the back of doubling its FCF in Q4 2024, announced a $1 billion share buyback. AngloGold Ashanti plc (JSE:ANG) declared a final dividend of $0.91 per share, five times the previous year’s dividend, having said that its balance sheet is at its strongest in a decade. Gold Fields Limited (JSE:GFI) has also said it will initiate a share buyback this year, while Harmony Gold Mining Company Limited (JSE:HAR) has said it will be able to self-fund the construction of a new copper mine in Australia.   

My own research suggests that a high-cost gold miner can make $1,000/oz more than it costs to produce, while low-cost producers can earn half of the gold price in profits. Usually, gold miners do not do as well as gold in terms of returns, but as profitability has risen, the market has started to wake up to the attractive economics of gold mining. In March, gold mining ETFs experienced their first net monthly inflows in six months. We are at a moment now where, if gold continues to do well, gold miners will benefit on the market. The capital discipline within the industry is even more remarkable when one considers that gold miners did not budget for prices in excess of $3,000. They have been built for lower prices, so that they are now earning excess FCF which, based on recent history, will be allocated in a disciplined fashion.  

Gold as a Stable Currency

In the paper, “Mining Gold for Regimes”, Colin Suvak et al, of LongTail Alpha, use a novel methodology to identify financial market regimes and they apply it to an analysis of gold’s performance across different macroeconomic environments. They use a relevance-based approach that identifies periods similar to the current one but distinct from historical averages. This creates a transparent, flexible, and non-arbitrary framework positioned between simple and complex methods. They employ k-means clustering on a relevance-based encoding matrix (RBEM) to automatically identify regimes. In doing do, they identify three “Faces” of Gold: a “Real Asset Regime”, in which gold acts as an inflation hedge, with average returns of 14.5% per year, a “Commodity Regime”, in which gold behaves like other commodities, with modest returns of 3.4% per year, and a “Stable Currency Regime”, in which gold serves as a flight-to-safety asset -especially during periods of loose monetary/fiscal policy-, delivering returns of 6.9% per year. When gold serves as a real asset, it has a high sensitivity to inflation, and a negative beta to real rates; when it serves as a commodity, it has a positive beta to equities and real rates, and a high correlation with other commodities, and when it serves as a stable currency, it has the lowest volatility, richest valuation, and most negative beta to real rates. We are presently in an epoch of gold as a stable currency, an epoch that began in the Global Financial Crisis. Spot prices in the post-2008 regime are at their highest level in half a century, all falling in the 99.8th percentile of gold prices. This has implications for portfolio allocation: under a Real Asset Regime, the optimal portfolio allocation is 30.9% equities, 54.5% bonds, and 14.6% gold, whereas under a Commodity regime, the traditional 60-40 portfolio is near-optimal, and under a gold regime, a 59.5% equities, 33.8% bonds, 6.7% gold allocation is optimal, although I take this as a long-run allocation and not what investors should have at present. 

Gold regimes are persistent, and there is no evidence as yet that gold’s regime is changing. Although the current trade war could change what regime gold is in, it could deepen the entrenchment of this regime. For now, investors should expect that gold’s spot price will continue to rise. Indeed, it is hard to think of a better investment. As Vineer Bhansali, one of the authors of the paper, and the founder and chief investment officer (CIO) of LongTail Alpha noted, among the many reasons why “gold is the only alternative”, is that gold is a superior safe haven to the Swiss franc and Japanese yen; its liquidity is similar to that of Treasury bonds and is likely rising, in my opinion, as the U.S.’s market dynamics take on the characteristics of an emerging market; it thrives under inflation; deterioration in financial assets is a plus for gold; increased sovereign credit risk for the U.S. benefits it; geopolitical crisis makes it attractive; and, deficits and taxes –such as tariffs– are good for gold prices. 

A Child of the Bull Run

Present-day Apex Mining was given new life by this bull run. In its Q1 2025 filing, the company reported an ore grade for the Maco Mines of 3.16 grams of gold per tonne of ore (g/t Au), a grade that is not what one would deem high-grade. When I started, 6g/t was generally considered workable, and the mine often reached 12g/t, and never lower than 7g/t. If the current grade reflects realities in 1991, it is likely the reason why the mines had to be mothballed. 

In its 2024 annual report, management explains than in 2005, Canadian miner, Crew Gold Corporation, and its Philippine subsidiary, Mapula Creek Gold Corporation, acquired 28% and 45% respectively, of Apex Mining’s shares, as part of an effort to rehabilitate and refurbish the Maco Mines’ processing plant. Crew Gold and Mapula would later sell their stakes in the company, and, today, the largest shareholder is Prime Strategic Holdings, Inc., which controls 64.63% of Apex Mining’s outstanding shares through its direct and indirect holdings. Alongside the Maco Mines, the company has, since 2015, owned Itogon-Suyoc Resources, Inc. (ISRI), which holds the Sangilo and Suyoc mines in Benguet province. Apex also owns Monte Oro Resources & Energy, Inc. (MORE), which in turn controls Paracale Gold Ltd. and Coral Resources Philippines, operator of a mineral processing plant in José Panganiban, Camarines Norte. The Maco Mines and ISRI’s Sangilo operation produce gold and silver bullions and buttons, with output refined by Heraeus Ltd. in Hong Kong, while its copper ambitions were strengthened in February 2023 with the acquisition of Asia Alliance Mining Resources Corporation, giving it 19,135.12 hectares of copper claims in Davao de Oro.

A Fast Growing, Highly Profitable Miner

Since 2020, the company’s operating revenue has compounded by 20.81% a year, from ₱6.32 billion in 2020 to ₱16.26 billion in the last twelve months (LTM). By way of references, according to Credit Suisse’s “The Base Rate Book”, between 1950 and 2015, the mean and median 5-year sales CAGR were 6.9% and 5.2% respectively. In that time, Apex Mining’s net operating profit after tax (NOPAT) compounded by 28.11% a year, from ₱1.63 billion to ₱5.6 billion. NOPAT margins in that period averaged 30.47%, rising from 25.85% to 34.66%. The firm’s rising NOPAT margins have occurred in tandem with an improvement in its balance sheet efficiency, with invested capital turns ticking up from 0.52 to 0.66 in that time. The result of rising NOPAT margins and invested capital turns has been a marked upscaling in Apex Mining’s return on invested capital (ROIC) from 14.25% to 21.6%. In that period, Apex Mining’s incremental ROIC has averaged 141.16% and has always been positive, last dipping below 5% in 2021, and currently standing at 11.68%. 

Dividends Supported By FCF Generation

Surging profitability has brought with it a gush of free cash flow (FCF), with the firm growing FCF from ₱568.17 million in 2020 to ₱8.84 billion in the LTM. In the last five years, Apex Mines has generated ₱7.29 billion in FCF, some 16.98% of its present market capitalisation. LTM FCF has an extraordinary yield of 19.68%. With dividend payments beginning in 2022, totalling ₱925.6 million since then, the company has ample room to support and expand its highly conservative dividend payments. 

Management Creating Value

Since Alfred Marshall first published his Principles of Economics, economists have known that a firm creates value when it earns a return greater than the cost of capital. Indeed, this is the most important of management’s tasks. In that, management, led by Luis R. Sarmiento, the president and CEO, has succeeded, with the firm earning an economic profit throughout the 2020-LTM period. Economic profits have compounded by 30.23% in that time, from ₱702.13 million to ₱2.63 billion. In the LTM, that amounts to ₱0.42 per share, compared to ₱0.35 per share in 2024. 

Further Upside in Apex’ Valuation

At the current share price, ₱8.22 at time of writing, Apex Mining has a price-to-economic book value (PEBV) of 1.03, implying that the market expects just an at-most 3% increase in its NOPAT from current levels. Using my reverse discounted cash flow model (DCF), I teased out the expectations implied by the current share price. This should be read with the accompanying spreadsheet. 

In the first scenario, I determined the hurdles revenue and NOPAT growth must meet to justify the current price. There,

• revenue compounds by a modest 5% a year, and 
• NOPAT margin remains at 34.66%.

In that scenario, the company’s market-implied competitive advantage period (MICAP) is less than a year, wherein its shareholder value per share equals the current share price. In this scenario, the company earns ₱15.89 billion in revenue and ₱5.51 billion in NOPAT, by the end of 2025. 

If, however, those price-implied expectations are exceeded, and,

• revenue compounds by 10%, and
• NOPAT margin remains at 34.66%, then,

Apex Mining’s stock is worth ₱9.18 today, an upside of 11.68% from the present price. 

Finally, if,

• revenue compounds by 15%, and,
• NOPAT margin remains at 34.66%, then,

Apex Mining is worth ₱9.54 today, an upside of 16.06% from the present price. 

In these scenarios, I have purposefully frozen the impact of a change in NOPAT margin to current levels. Yet, there is evidence from VanEck that suggests that as gold prices climb, gold miners margins will climb as well; and evidence from Farmonaut that investments by 60% of gold miners into new tech will likely lead to greater operational efficiency. PwC, on the other hand, have pointed to cost pressures pushing margins down in mid-2025. Apex Mining’s investments into operational improvements, such as equipment upgrades, drain tunnel developments, and use of training simulators, should boost efficiency, support ongoing production targets, and, at a minimum, weigh against the cost-pressures discussed by PwC. 

Impact of Accounting Adjustments  

I made numerous accounting adjustments to Apex Mining’s LTM financial statements, with the following impact:  

Income Statement: I made ₱1.52 billion in adjustments to calculate NOPAT, with the net effect of adding ₱710.65 million in non-operating expenses. The adjustments are equal to 30.77% of Apex Mining’s IFRS net income.    

Balance Sheet: I made ₱8.2 billion in adjustments to calculate invested capital with a net increase of ₱7.39 billion. One of the largest of these adjustments was ₱1.85 billion in excess cash, an adjustment which, on its own, is worth 5.81% of reported assets.    
Valuation: I made ₱7.21 billion in adjustments with the net effect of reducing shareholder value by ₱3.49 billion. The largest of these adjustments was ₱5.35 billion in adjusted total debt, representing 11.47% of Apex Mining’s market cap. 

My investment methodology and risk philosophy has earned me the #7 ranking on SumZero for the last twelve months. SumZero is a highly exclusive buy-side only platform that connects capital allocators and money managers. More than 16,000 portfolio managers and analysts from across the world are pre-screened before being allowed to join. The rankings, based on SumZero’s proprietary Rankings algorithm, highlight analysts who have the highest risk-adjusted returns relative to the market. I have also ranked in multiple categories: 

• #10 in Industrials
• #21 Micro-Cap
• #44 All-Time
• #49 Long
• #50 Deep Value
• #61 Financials
• #68 North America
• #74 Mid-Cap
• #98 Large-Cap

Since joining in September last year, the 16 stocks and instruments submitted have earned an average total return of 14.87%, beating the S&P 500 by 11.69%, and my Model Portfolio has generated an annualised total return of 42.8% to-date. As a dear friend joked, “crypto returns without crypto risk”.

This position was closed on August, 18, with a return of 21.47%.

Thirteen years after Apollo Global Management, Inc. (APO) took McGraw Hill, Inc. (MH: $17/share) private, the global education solutions provider, raised $415 million in its initial public offering (IPO) at a valuation of $3.25 billion. Sold in 2021 by Apollo to Platinum Equity, LLC for $4.5 billion, the company sought a $4.2 billion valuation, and to raise $537 million. These details alone are enough to rouse the suspicion that this is a business in decline, at a time when private equity-backed IPOs are on the rise, even at the price of markdowns, in order to improve their liquidity in a climate of inflationary pressures, somewhat elevated interest rates, and geopolitical uncertainty. As this thesis will show, McGraw Hill is a business whose products are facing commodisation, which has experienced value-less growth, and faces pressure from niche players, and is priced for a surge in profitability. These factors lead me to assign a “Very Unattractive” rating to the forthcoming stock.

The Commoditization of Education Resources

With competitors such as AMBOSS, Amplify, Cengage, Curriculum Associates, Elsevier, Houghton Mifflin Harcourt, Macmillan Learning, Pearson plc (PSORF), RELX PLC (RELX), Savvas, and Wolters Kluwer N.V. (WOLTF), the industry structure is oligopolistic, with McGraw Hill touting in its S-1 filing, an industry defined by a “relatively small number of large competitors”, in which none of its peers competes with it “across the full learning lifecycle”, “from K-12 to higher education and through professional learning”. However, this is an industry under siege in the wake of the Internet Revolution. As McGraw Hill itself observes, it also faces competition from “open educational resources, which may offer similar digital products at lower costs”. 

McGraw Hill’s core value proposition is being eroded by a fundamental shift in the education value chain. In decades past, the legacy providers benefitted from high transaction costs related to physical production, relationships with institutions, distribution networks, and bundled content, which made centralised publishers indispensable. These publishers could control distribution, and integrate that backwards with control of authors, in order to earn and conserve attractive profits. Indeed, the company says of itself that,

The quality of our content and the effectiveness of our digital solutions are fundamental aspects of our business, and third parties such as authors, subject matter experts and software engineers help to enable us to maintain and to continuously improve in these areas.

In a world of high transaction costs, control of supply relationships was enough to conserve attractive profits. The Internet Revolution reduced the cost of distribution to zero for those publishers with digital goods, reducing to little the importance of supply integration. Moreover, with the cost of transactions reduced to zero, distributors could integrate forward with their users at scale. With educators and learners integrated, direct access to modular, digital content, and platforms was enabled. With control shifting downstream toward users, supply has become commoditized, with user experience rather than control of supplier relationships the key differentiator. Consequently, as Mcgraw Hill acknowledges, it faces competition from digital products that can be delivered at no cost, and offered free of charge. Open education resources such as MIT OpenCourseWare, and Khan Academy, show that education resources have been commoditized. The company acknowledges this commoditization, saying,

Free or relatively inexpensive educational products are becoming increasingly available, particularly in digital formats and through the internet. For example, some governmental and regulatory agencies have recently increased the amount of information they make publicly available at nominal cost or for free. In recent years, there have also been initiatives by not-for-profit organizations to develop educational content that can be “open sourced” and made available to educational institutions for free or nominal cost. In addition, there have been initiatives by the U.S. federal government and certain state governments to enact legislation or regulations that mandate or favor the use by educational institutions of open sourced content and provide funding for the same. The increased availability of free or relatively inexpensive educational products may reduce demand for our products or require us to reduce pricing, thereby impacting our sales revenue.

Large language models ((LLMs)) pose another threat, delivering commoditized education resources in highly personalized ways, even as the company warns that it can deliver inaccurate information. Again, McGraw Hill acknowledges this. Much as Mark Zuckerberg aims at the commoditization of advertising and a world in which Meta Platforms (META) can create ads with AI, generative AI could lead to a world in which educational resources are created by cannibalizing existing content created by McGraw Hill and its peers. 

Finally, with platforms such as Patreon and Substack making it possible for authors and subject matter experts to directly engage with educators, and students, the scale of competition is actually rather great. In its Risk Factors section, McGraw Hill acknowledge that,

The market shift toward digital education solutions has induced both established technology companies and new start-up companies to enter certain segments of our market. The risks of competition are intensified due to the rapid changes in the products our competitors are offering, the products our customers are seeking and our sales and distribution channels, which create increased opportunities for significant shifts in market share. Competition may require us to reduce the price of some of our products or make additional capital investments and may result in reductions in our market share and sales.

In attracting these authors and subject matter experts, McGraw Hill not only has to consider what competitors could offer them, but what they can earn if they embrace the disintermediation offered by the internet. 

Where McGraw Hill paints a portrait of an attractive industry structure, the realities of the Internet Revolution are that McGraw Hill is structurally disadvantaged and prevents it from exercising the kind of pricing power needed to create value, or to protect the bottom line in challenging times. The import of this is that, while McGraw Hill can boast that “ in the United States, on average, 89% of K-12, higher education and medical school students, faculty and administrators would consider McGraw Hill for their classes”, there is downward pressure on the prices it can charge, because there are free alternatives.

Full Learning Lifecycle Integration is Not a Strength

McGraw Hill, as aforementioned, provides educational resources throughout the learning cycle, from K-12 to professional, competing in the United States and abroad. This is not the advantage that it appears to be. If transaction costs have hurtled toward zero as a result of the Internet Revolution, swelling the number of competitors, then, not only is it easier for niche producers to emerge such as AMBOSS, who educational resources for medical doctors and students, it is also easier for schools and students to access their content, and, I think, more sensible. The specialised knowledge that AMBOSS possesses is likely to be greater than that available to McGraw Hill, and, with focus comes an ability to better reflect the needs of niche markets.

Growth Without Value

Since fiscal 2023, McGraw Hill has grown revenue by 3.85% a year. This is a rather low level of growth and reflects the maturity of the business. Growth has come with rising profitability, with the firm’s net operating profit after tax (NOPAT) going from -$6.44 million to $159.04 million. Driving the rise in profitability has been an improvement in the firm’s NOPAT margin from -0.33% to 7.57%. McGraw Hill’s invested capital turns have declined, however, from 0.85 in fiscal 2024 to 0.48 in fiscal 2025, leading to a fall in return on invested capital (ROIC) from 3.78% in fiscal 2024 to 3.61% in fiscal 2025. McGraw Hill’s anemic profitability has profound consequences on its ability to create and grow value, that is, to earn ROIC in excess of the cost of capital, with the firm generating economic losses in both fiscal 2024 and 2025.

Debt Weighs Heavily on the Company

Absent the impact of the firm’s adjusted total debt, McGraw Hill has an economic book value (EBV) of $1.9 billion based on the IPO price, and a price-EBV ratio of 1.71, implying a 71% growth in NOPAT from current levels. However, with debt, some $3.27 billion, the EBV of the company sinks to -$877.56 million, with a PEBV of -3.7. Loaded with debt that its economics cannot support, McGraw Hill’s value has been obliterated.

Priced for a Surge in Profitability

Using my reverse discounted cash flow (DCF) model, I analysed the price-implied expectations for future cash flow, and found clear evidence that the company is a very unattractive investment proposition. 

In order to justify its IPO price my model shows that McGraw Hill will have to:

• immediately improve its NOPAT margin to 9.9% in fiscal 2026, 12.37% in fiscal 2027, 17.32% in fiscal 2028, 19.8% in fiscal 2029, and 22.27% in fiscal 2030
• revenue grows by 3.85%, its 2-year CAGR. 

In this scenario, McGraw Hill generates $2.5 billion in revenue, and $565.39  million in NOPAT in fiscal 2032, with NOPAT compounding by an average of 13.62% a year within its market-implied competitive advantage period (MICAP) of four years. 

In my second DCF scenario, I unlocked the downsides of this valuation if this surge in profitability does not materialise. 

If one assumes that McGraw Hill’s

• NOPAT margin rises to 9.9%, and,
• revenue grows by 7.18% a year, its 1-year CAGR, then,

McGraw Hill is worth $1.37 per share, a 91.94% downside to the target valuation. In this scenario, McGraw Hill generates $2.97 billion in revenue and $294.24 million in NOPAT in fiscal 2030. 

Finally, if,

• NOPAT margin jumps to 14.85%, and, 
• revenue grows by 7.18% a year, then,

McGraw Hill is worth $10.07 per share, a downside of 40.76% from the target valuation. In this scenario, the firm earns $441.36 million in NOPAT. 

In each of these scenarios, I assumed that Mcgraw Hill will not have to grow its net working capital or adjusted fixed assets. Should McGraw Hill need to grow its invested capital, the stock’s riskiness is even greater. The lesson is simple: given how deep a hole the firm’s debt has left, even incredible performance will not be enough to make the present valuation palatable.

Recently, I have found value in banks, specifically, JPMorgan Chase & Co. (JPM), and Lion Finance Group PLC (LON:BGEO), and now, with Danish regional bank, Ringkjøbing Landbobank A/S (CPH:RILBA, 1400 kr.), the subject of this thesis. With a favourable capital cycle, a robust and resilient business model, and a history of profitability, the firm’s valuation creates a very attractive entry point for investors. This stock forms part of my model portfolio with a very attractive rating.

Scope for Healthy Credit Expansion

Global interest rates have been in suprasecular decline for the last eight centuries, and Europe and Japan’s flirtation with negative interest rates may, in time, be seen as a return to a historical trend, rather than the aberration it is currently viewed as. Having reached near-zero interest rates in early 2019, Denmark emerged from a brief period of negative interest rates in early 2022, lifting net interest margins (NIM), which peaked in October 2023. Since that peak, the NIM has been under pressure, with Ringkjøbing Landbobank noting that in addition to this, “continuing keen competition for loans resulted in pressure on the lending margin”. 

Regulators report that banks’ deposit margins are at historically high levels, driven by abundant deposits and positive policy rates, while lending margins have fallen to record lows. In other words, banks pay more on deposits but have not raised loan rates commensurately. The Danish Financial Supervisory Authority (FSA) cautions that record‐low lending margins for households may underprice underlying risk. Nonetheless, banks’ profits have surged, with credit institutions earning a record 71.4 billion Danish kroner (kr.) pre‐tax in 2023, about 30 billion kr. above 2022, driven chiefly by higher net interest income thanks to the wide deposit‐loan spread. The Systemic Risk Council likewise notes “high earnings and moderate lending growth” are allowing banks to build capital, even as lending margins on new household loans continue to decline.

Credit is supplied endogenously by banks to meet profitable loan demand, creating deposits and driving aggregate demand. Historically, this credit‐driven process can amplify business cycles, as rising loans fuel an asset boom and bust cycle. In Denmark, medium‐term swings in house prices and credit are tightly linked to GDP, with Nationalbanken noting that peaks in financial cycles often precede crises. 

Recent Danish data show moderate credit expansion. Private housing debt grew only 0.6% in 2024, up 12.2 billion kr. to 1.94 trillion, finally surpassing its mid‐2022 peak. Nationalbanken attributes this to higher real incomes and falling long rates, which have kept house‐price inflation subdued. Mortgage institutions’ outstanding lending is climbing again, after 2022’s plunge, as rates stabilised in 2023, but overall loan growth remains modest in historical terms. Commercial bank lending to businesses has been mostly flat, while mortgage credit to firms is rising.

With dividend restrictions imposed by regulators in the wake of the Covid-19 pandemic, banks were left with excess capital to deploy. That, alongside strong balance sheets, with a current non-performing loans (NPL) ratio of 1.9%, led to a wave of consolidation, which in turn boosted shareholder value. Rising interest rates and deepening consolidation have continued, leading to strong results in the industry, with profitability doubling in the last two years. However, consolidation in Demand, and indeed across Europe, is at such high levels now that it is bound to slow down. 

Banks now face the prospect of higher expenses, and squeezed net interest margins and growing loan losses as a consequence of this epoch of uncertainty, although only the first has materialized. 

Denmark’s robust employment and real incomes support sustainable household borrowing, and banks’ high profits and capital buffers mean there is ample capacity to lend. Indeed, the systemic council maintains a 2.5% counter-cyclical capital buffer to allow creditworthy lending to continue. Current conditions, defined by subdued growth in credit volumes, stable banks’ liquidity, and plentiful capital, permit moderate loan growth.

A Low Cost Regional Giant

Ringkjøbing Landbobank is a regionally focused retail and small-to-medium enterprises (SME) bank in Denmark that describes itself as a “customer-focused relationship bank” in Jutland, with branches in Copenhagen and Aarhus for niche clients. The bank serves household and business clients with a full suite of products, but concentrates on markets in West, Central and North Jutland. It also pursues niche segments: private banking for affluent individuals and medical professionals, financing of renewable energy projects (wind, biogas, solar), and select commercial real estate financing. In all its lending, the bank’s philosophy is conservative: it typically requires first‐lien security and closely monitors credit quality through its robust evaluation models. The bank’s low and secularly declining cost/income ratio and its good credit quality are what makes it so unique and able to generate a high free cash flow (FCF) and a strong revenue shield.

Strategically, management emphasizes organic growth through cross‐selling and deepening relationships, backed by strong personal advisory service and enhanced digital capabilities. The CEO, Mr. John Bull Fisker, highlights the mantra “the customer is king”, aiming to offer all functions that matter and partnering where others excel. Notably, Landbobank has invested heavily in digitalisation and staff training to combine the benefits of personal advice with efficient execution. This dual focus on personal service and technology is a core element of its business model, and management cites its low cost structure as evidence of efficiency, with the cost/income ratio remaining below 26% in Q1 2025.

A Customer-Centric Brand

Independent surveys consistently rank it very highly for customer satisfaction and brand image. The bank itself notes that its “strong image and high level of customer satisfaction” drove a large increase in new customer relationships. This virtuous cycle helped grow loans, up and deposits, up 10% and 8% respectively in 2024. Such loyal retail and SME customers allow the bank to maintain high margins on new business despite overall margin pressure and keep impairment rates negligible.

Extreme Efficiency

The bank’s cost/income ratio is among the lowest in Danish banking. With a less-than 26% cost/income ratio, the bank boasts superior efficiency to the wider Danish banking sector, and the wider European banking sector, which boasts a cost/income ratio of 53.89%. This, as aforementioned, supports high profitability. The bank’s 22% return on equity (ROE), at 22% in Q1 2025, is nearly double the 12% Danish banking sector average. The firm’s return on invested capital (ROIC) has improved from 14.26% in 2020 to 20.7% in the LTM.

Exceptional Financial Strength

Ringkjøbing Landbobank’s very strong capitalization and conservative funding mark it out. At the end of Q1 2025, the bank reported a common equity tier 1 (CET1) ratio of 15%, and a total capital ratio of 15%, compared to a 28.2% Minimum Requirement for own funds and Eligible Liabilities (MREL) capital ratio. With a loan‐to‐deposit ratio of 99.15%, nearly all lending is funded by stable retail deposits, giving a very strong liquidity profile. Regulations demand that the bank maintains a statutory requirement of at least 100% for both the liquidity ratios Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), and it has done so, with an LCR of 184.1% and an NSFR of 118.8%. With one of the highest capital and liquidity cushions of any Danish bank, it is extremely resilient.

Earning Attractive Profits

Since 2020, Ringkjøbing Landbobank’s operating revenue has compounded by 17.14% a year, from 2.39 billion kr. to 5.27 billion kr. in the last twelve months (LTM), compared to a 6.9% and 5.2% global mean and median 5-year sales CAGR respectively. In that time, the bank’s net operating profit after tax (NOPAT) compounded by 15.22% annually. NOPAT margin, however, declined in that period, from 47% to 43.25%.

FCF Generation Supports Dividend Payments

Ringkjøbing Landbobank’s rising profitability has given it the platform to generate meaningful free cash flow (FCF), with the bank generating positive FCF throughout the analysis period, and a cumulative 6.69 billion kr. over the last five years, equal to 19.17% of its present market capitalisation. Ringkjøbing Landbobank’s 2.3 billion kr. in FCF over the LTM equates to an attractive 6.48% FCF yield. The firm’s FCF generation supports its dividend payments, with the firm paying out 1.19 billion kr. in dividends in the last five years, compared to 6.69 billion kr. in FCF generated. This demonstrates the prudence that guides the firm’s dividend payment policy. 

Priced for a Fall in Profitability

At the current price, Ringkjøbing Landbobank has a price-to-economic book value (PEBV) of 0.71, implying that the market expects its NOPAT to permanently fall by 29% from current levels, despite the firm’s history of earning attractive profits. 

Using my reverse discounted cash flow (DCF) model, I tested a variety of scenarios to unearth the cash flow expectations baked into Ringkjøbing Landbobanks current stock price. Afterwards, I analyzed the implied value of the stock based on different and conservative assumptions to predict the bank’s future growth in cash flows.  

In the first scenario, I modeled the catastrophist scenario implied by Ringkjøbing Landbobank’s current stock price. In this scenario, I assume:  

• Revenue declined by 5% a year, 
• NOPAT margin falls to 30.08%, its lowest level in my analysis period.  

In that scenario, the company’s market-implied competitive advantage period (MICAP) is less than a year, at which point its shareholder value per share equals the current price.   

In the second scenario,  

• Revenue grows by 11.33%, its 3-year CAGR, and, 
• the bank maintains its current NOPAT margin of 43.52%. 

In this scenario, the stock is worth 2,335 kr., an upside of 66.79% from the current price.   

In the final scenario,   

• Revenue grows by 10%, and, 
• NOPAT margin falls to 37.59%. 

In this scenario, the stock is worth 1993.43 kr., an upside of 42.36% from the current price. 

I recently published an investment thesis exclusive to the investment platform, Seeking Alpha, where I will be covering recent and forthcoming initial public offerings (IPOs). The article is on Aspen Insurance Holdings Limited (AHL). From the executive summary of the article is the following:

• Aspen has demonstrated strong underwriting profitability and value creation despite industry headwinds, supported by a hardening insurance market and disciplined capital allocation.
• The company’s integrated ‘One Aspen’ approach and ACM platform differentiate it, enabling bespoke risk solutions and stable, growing fee income from third-party capital.
• Aspen continues to generate economic profit with solid free cash flow and an attractive valuation, with the market pricing in conservative growth assumptions.
• Given the company’s resilient performance, unique value proposition, and undervaluation, I assign Aspen a Buy rating, despite ongoing industry risks.

The rest of the article is available here.

I recently published an investment thesis exclusive to the investment platform, Seeking Alpha, where I will be covering recent and forthcoming initial public offerings (IPOs). The article is on Flowco Holdings Inc. (FLOC). From the executive summary of the article is the following:

• Flowco appears cheap on P/E but is in a phase of the capital cycle defined by deteriorating ROIC, with no clear turnaround catalyst.
• Material weaknesses in internal controls and questionable executive compensation practices undermine trust in financial reporting and management alignment.
• The Up-C structure and noncontrolling interests siphon most economic benefits away from public shareholders, with dilution risks compounding the problem.
• Despite theoretical upside in optimistic scenarios, the risk of total capital loss makes Flowco a gamble, not an investment—Strong Sell rating assigned

The rest of the article is available here.