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The D's- Deals, Digital Domain, and Diligence-
Jun 01, 2025
(Return figures come from the May 30, 2025, edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
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My wife is a foodie, although like many, she would deny that if you asked her about it. Every year we have Thanksgiving at our house. It started rather small, with maybe five or ten people other than our family. Fifteen years later, because of her fabulous cooking and desire to please people, well over 50 attendees enjoy the day. Plenty of others long for an invite. One of the dishes she serves is salmon. She has told me repeatedly about the different kinds of salmon which are available. For our purposes, let’s just classify one as organic and the other as non- organic. Organic is sold at places like Whole Foods (or more derisively called whole paycheck), Trader Jo’s and Sprouts. You would not be surprised to learn organic salmon is priced at a higher price point than non-organic salmon. These classifications, and price levels, are also applicable across other kinds of foods. Organic gets a higher price, while nonorganic is called, well, more affordable. Why does this matter?
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It is pertinent because in the financial markets, investors have their own versions of organic and non-organic, but the underlying subject is not food, but company growth rates. Organic growth is more highly valued because a company has control over the ability to reinvest capital in a large market with plenty of expansion ahead of it. Currently, industries like artificial intelligence, quantum computing, robotics, humanoids, self-driving cars, low orbit space satellites, drones, and biofuels, among others, are areas investors believe will grow for a long period of time. As such, participants are awarded with high multiples. Conversely, if a company is perceived in an industry without the possibility for growth, the multiple will not be nearly as large. In these industries, the ability to do a merger or an acquisition, can transform both a company and an industry, and with it, change investor perception. Deals get a lot of attention, and they warrant it, because it is how many large companies have been created. Consider the way Google (Youtube, Doubleclick, Motorola, Fitbit, Wiz) and Microsoft (LinkedIn, Activision, Aquantive, Skype, Nokia) were built. Yes, plenty of organic growth, but the listed acquisitions were certainly a part of it. Clearly great companies have both aspects, but in the financial markets, deals are always a source of attention. They are the domain of the investment banks, which is why there is always heightened interest as well.
Over the last month, a few large deals were announced. First, Dick’s Sporting Goods bought Foot Locker. Second, Charter Communications announced they will acquire privately held Cox. This week, Elf Beauty bought Rhode in a deal worth what could be up to $1 billion. These agreements are important because they indicate the financial markets may be thawing for similar transactions. The IPO window has been shut for the last few years, and 2024 was very light for mergers in the secondary market. Like these big arrangements, the appetite for others with smaller sizes is most certainly present. With the ten-year treasury hovering at 4.5%, financing terms are not expensive for companies with decent or strong balance sheets. Valuations in many industries are also not demanding, as there are very few entities like the magnificent ten which have astronomical capitalizations. If not now, when? In sum, the conditions may be in place for much more capital markets activity, which always helps the investment climate.
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Spanning the Globe: The Digital Domain and the Dollar
In our modern world, the movement of everything analog to digital proceeds at a rapid pace. Other than a specific kind of semiconductor chip, in nearly every industry, society has embraced digital services and the effort to make things faster and more convenient. Last week in the Senate, a bill moved forward to establish a regulatory framework for Stablecoins. Until the bill gets final approval in both houses, the finished product won’t be known, but in the financial services industry, this is potentially a very big development. Foreign exchange is a massive market for many participants and is known to be both highly competitive and inefficient. Stablecoins offer a way to help reduce the inefficiency in a few ways, mainly by making cross border transactions easier from both a cost and settlement perspective. Elsewhere in the digital world, here in Las Vegas, a bitcoin conference was held where Donald Trump’s sons and Vice President Vance highlighted the benefits of the crypto and digital space. As part of this, earlier in the month, the Abu Dhabi sovereign wealth fund made a $2 billion dollar deal to invest in the crypto firm Binance. It used the Trump family stablecoin USD1 to do so. Certainly, the transaction heightens the attention on the stablecoin segment, and it is one industry which is probably poised for growth.
Relatedly, the dollar remains worthy of attention as the big, beautiful bill, the comprehensive tax and spending proposal by the Trump Administration, passed with a one vote majority in the House of Representatives. It now moves to the Senate. Until the final version is negotiated, one can debate its effect on the country’s financial position, but it appears it will increase the debt level, some believe by up to $43.8 trillion over 10 years. One thing I should emphasize is looking at absolutely levels of debt does not give one an idea of the ability to service debt, meaning pay the interest payments when they come due. As an example, if a company can cover interest payments by 3-10 times, there is no problem in servicing the debt amount. As for the dollar, adding to a 36 trillion-dollar debt pile with higher fiscal deficits probably does not help improve investor confidence. One could legitimately point to gold and bitcoin’s appreciation as reflective of the lack of faith in the dollar. The Trump Administration’s evolving policy positions on tariffs are probably not helping conviction, either. The counterpoint by Trump advocates is these policies will lead to improved incomes, higher confidence, and better growth. If correct, the deficit would come down. Time will tell which side is accurate.
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Y H & C Investments Firm Update-
May was a good month on a number of different levels. A large fintech holding which we have owned many years reported strong numbers and was rewarded. In the financial markets, the deal climate rubbed off on one energy holding. As I mentioned in prior months, an activist took a position in an energy concern and was able to oust the CEO. Management clearly did not like this development and decided to promptly turn to other suitors rather than face the prospect of having a different group running what was built over many years. As a result, the board entered into a transaction with a large producer and owner of pipelines. The deal is scheduled to be completed later this year. In the smaller company area, one holding presented at Planet Microcap had an investor day at the Nasdaq the following week. It is an excellent company which is building high quality businesses in a few interesting industries, and its capital structure gives it the advantage of benefiting from any kind of capital flow which starts to find the situation attractive.
In a different domain, I used May as a time to complete the continuing education requirements for the CFA Institute. They fulfill state conditions here in Nevada and in California. There were a few different learnings which stood out. The most prominent was a reading on intangible assets and their heightened importance during the current market environment. It is pertinent because when one looks at the most highly valued companies in the market, all have benefited from acquisitions related to intangible assets- Microsoft, Google, Facebook, Amazon, Tesla, Louis Vuitton, etc. The article noted the accounting treatment of internally developed intangible assets versus acquired intangibles and market participants perspective on how to more accurately treat these balance sheet issues. Another article which stood out brought up the trading volumes of fractional shares and highlighted the different classes of Berkshire Hathaway and the volumes at different custodians during various periods. The other helpful reading was a refresher on investor biases and mistakes. It is quite pertinent as these biases can be present in nearly every investment decision or holding. A few to highlight are hindsight, confirmation, anchoring, and recency biases. There are often criticisms of the CFA Institute, but my experience is if one wants to continue to learn about all areas of investing, there is no better way than through CFA Institute membership and participation. Personally, applying these learnings to existing and future investment holdings is the priority.
Here are the links to these articles-
12/RR_2025_L1V9R5.The_Behavioral_Biases_of_Individuals.pdf
https://www.tandfonline.com/doi/epdf/10.1080/0015198X.2025.2489924?
https://rpc.cfainstitute.org/research/surveys/2025/investor-perspectives-intangible-assets
Finally, June is mostly a calm month. I will be attending the Centurian One LA Summit in Los Angeles next week. There are quite a few online conferences during June as well and I am meeting with some of our holdings so that will provide a chance to hear about their business progress.
Thank you for reading the June update, I really appreciate it. If you have any investment questions, please reach out to me at information@y-hc.com. I hope you have a great month and stay cool and hydrated!
(Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
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