Laughing Water Capital Q3 2025 Letter

Pricey Companions,

As you understand, I favor to NOT write each quarter because of the long-term nature of our technique. Nonetheless, I’m of the view that data is the most effective help system for a concentrated portfolio, so when I’ve one thing to say, writing is suitable. I would like you to know what we personal and why.

Within the third quarter, Laughing Water Capital (“LWC”) declined by roughly -1%, bringing our YTD returns to roughly -2.7% . i In distinction, the SP500TR and R2000 returned 12.4% and eight.1% within the quarter, and are actually up 14.8% and 10.4% respectively for the 12 months. As all the time particular person outcomes might fluctuate, so please test your particular person assertion for probably the most correct studying of your efficiency.

In each letter I remind you our portfolio is completely different from the indexes by design, so there isn’t a cause to anticipate that our portfolio will observe the indexes over shorter durations of time. Notably, within the practically 10 12 months historical past of LWC, September was the worst month we’ve ever had vs. the indexes, and within the blink of a watch we went from roughly matching the indexes this 12 months, to badly trailing them.

Importantly nevertheless, for my part this drawdown was not attributable to any basic deterioration of the long-term prospects of our companies. Fairly, it appears as if the violent transfer downward was attributable to market members whose strategy to investing taking part in the market is extra short-term centered than our personal. In reality, in a number of situations our companies introduced information that’s undeniably optimistic in case your curiosity is long-term worth creation, but the shares had been punished resulting from different elements that ought to quickly show to be fleeting in nature.

I stay assured that over longer durations of time, if our administration companions can efficiently steer our companies, we will likely be nicely rewarded. On that entrance, we stay nicely positioned, even supposing the market has not but acknowledged the excellent news that I see simply over the horizon. Historical past has proven that with time widespread sense prevails, which is why nearly the whole thing of my and my household’s cash is invested in our technique, proper subsequent to your cash. Our pursuits are aligned.

Timber, Fundamentals, and Endurance

“If a tree falls within the woods, and nobody is there to listen to it, does it make a sound?”

The above query is one in every of life’s nice mysteries… at the least within the eyes of precocious youngsters, like my very own. Whereas wrestling with questions like this is usually a good option to entertain youngsters for a couple of minutes throughout lengthy automobile rides, extra not too long ago I’ve been on the psychological mat with an identical model of this query that’s extra particular to our portfolio.

Approaching investing by managing a concentrated portfolio of companies which are off-the-beaten-path and most frequently out-of-favor could be irritating, particularly in a world that fairly clearly doesn’t care about these items. Many many occasions in these letters and elsewhere I’ve referred to a 2019 JP Morgan piece that acknowledged that by their estimate, 80% of the investing world depends fully on quantitative inputs for his or her funding resolution making. The issue with this strategy is that by definition quantitative fashions assume that GAAP financials are an ideal software, when that is clearly not the case. Extra not too long ago, until you might be residing beneath a rock (which I attempt to do!) you might be conscious that the market is fixated on all issues associated to synthetic intelligence, the place the issue as I see it’s that the entry payment could be very excessive, however the future could be very unsure.

In contrast, I’m merely making an attempt to deal with good companies, led by good individuals, whereas they’re coping with some form of operational, optical, or structural downside that leads them to be mis-priced by the market. Over time, as our administration companions take care of these issues, the market ought to acknowledge the bettering potential of our companies, and we ought to be rewarded by the twin forces of accelerating earnings energy and a number of growth.

This sounds fairly easy, however the issue with this strategy is that it requires persistence; typically in huge portions. It is because in a world that appears to be solely centered on quantitative inputs and synthetic intelligence, clear basic enhancements in off-the-beaten-path companies could be ignored by the marketplace for lengthy durations of time. This begs the query:

“If an funding thesis has clear optimistic developments, however they do not present up within the numbers but, do they make a sound?”

Of late, the silence in our portfolio has been deafening.

However not like the falling tree, the place the sound quickly dissipates, basic enterprise enhancements reverberate into the long run, and finally attain a crescendo that the market can’t ignore. In my opinion, one of the best ways to stay affected person at a time when it seems like we’re being left behind by the market is to deal with logic. Whereas this appears apparent, I might notice that specializing in logic is at direct odds with a market that appears to deal with quantitative inputs and momentum above all else.

Just a few examples of the logic I’m leaning on are discovered under:

• If the thesis is that personal market worth of a enterprise is considerably larger than its public worth, after which administration says that they are going to be evaluating all choices to comprehend this worth, that is logically thesis validating, and will transfer shares larger.
• If the thesis is that unused capability being stuffed will result in super working leverage, then information that capability is certainly being stuffed is logically thesis validating, and will transfer shares larger.
• If the thesis is that an organization is a winner in a “winner take most” market, then information that the corporate has a record-large pipeline and is in place to win the largest clients out there, that is logically thesis validating, and will transfer shares larger.
• If the thesis is “addition by subtraction” and that promoting off underperforming models will unlock worth, then promoting off underperforming models is logically thesis validating, and will transfer shares larger.

• If the thesis is that the federal government wants one thing from a enterprise, after which the Chair of the federal government company that oversees that enterprise makes a speech reaffirming that want, that’s logically thesis validating, and will transfer shares larger.
• If the thesis is that the federal government wants one thing from a enterprise, after which places in place a large funding program to make sure supply, logically that’s thesis confirming, and will transfer shares larger.

Admittedly, the above examples are all gross simplifications of current developments at a few of our companies, and the truth at every of them is after all far more advanced. In some instances, this complexity consists of information that’s adverse within the quick time period. Nonetheless, from 40,000 ft if I’m proper on these gross simplifications, the quick time period will shortly fade into the background, and the investments ought to work nicely for us over time. The issue as I see it within the fast time period is that these long-term optimistic developments will not be but “within the numbers” and will not essentially have an effect on this quarter’s earnings and even this 12 months’s earnings. Thus, in a market that appears to solely care concerning the GAAP financials and quick time period “beats” or “misses” vs. consensus, these clear positives are simply ignored, inflicting our shares to languish.

Of Observe:

Under are just a few particular examples from our portfolio that ought to assist for instance my factors above.

Clarus Corp (CLAR) – Clarus, proprietor of Black Diamond climbing gear and Rhino Rack roof racks, was launched in our H1’25 letter . The thesis is straightforward. These are sturdy manufacturers which are valued by the market nicely under the place non-public transactions for related belongings happen, and the Chairman and largest shareholder of Clarus is correctly incentivized to comprehend full worth, most certainly by means of a sale of the enterprise.

In Q3 a number of insiders purchased inventory on the open market, and when Clarus reported their Q2 earnings in July, they acknowledged, “we’ve initiated an inner evaluate to make sure we’re evaluating all attainable alternatives to create worth for shareholders” and additional indicated they’re “dedicated to looking for to maximise long-term worth.” Usually this form of language is only a hair shy of hanging a “on the market” signal on the enterprise.

In my opinion, if the thesis is that the inventory trades nicely under non-public market worth, and insiders are incentivized to comprehend full worth, after which these insiders improve their very own publicity and point out that they’ve initiated an inner evaluate to comprehend worth, then the thesis could be very clearly on observe. However, Clarus declined ~21% from just a few days earlier than earnings to after earnings as they “missed” expectations for quarterly earnings. I suppose the miss is unlucky, however when the true prize is realizing a personal market worth that ought to be multiples larger than the inventory market would have you ever consider, it’s fully inconsequential.

Lifecore Biomedical Inc (LFCR) – Lifecore is our fill-finish CDMO. Primarily they put liquid medicines into vials or syringes. The thesis is that Lifecore has extra capability to promote in an business the place demand far outstrips provide, and it takes years for brand spanking new provide to come back on-line. Excessive fastened prices and low variable prices implies that extra income will include super working leverage. Within the quarter the corporate introduced a number of new buyer wins together with a GLP-1 and a big worldwide pharmaceutical firm, and there have been a number of indicators that successful extra enterprise ought to be getting simpler. Notably, the Meals and Drug Administration (FDA) introduced that medication which are manufactured domestically will obtain precedence evaluate. Additional, whereas the information right here is fast-changing, Trump indicated that corporations that manufacture their medication overseas will face 100% tariffs until they’re in technique of growing home capability. Lastly, an business rag printed a chunk noting that not too long ago there was an issue with CDMOs main biotechs on after which backing out of any potential deal. The implications of this will not be crystal clear, however I consider CDMOs have been bailing on biotechs (smaller clients) in order that they will deal with the larger and higher alternatives which are surfacing resulting from regulatory pressures on worldwide pharmaceutical corporations to maneuver manufacturing to the U.S. All of those developments appear to be superb for the thesis.

On the flip aspect, the corporate filed an S-3 that included a shelf that might be used to lift fairness capital, and the market appears to have interpreted this to imply that dilution could be forthcoming. Nonetheless, the corporate has made clear that that is simply good company housekeeping, they usually haven’t any intention to lift capital. Fairly, as they solely turned present on their filings a 12 months in the past, this was the primary time they had been S-3 eligible, and a survey of different corporations of comparable measurement reveals that having a shelf in place is commonplace apply.

The web of those clear long-term positives and meaningless short-term negatives is that the inventory declined 22% from intra-quarter excessive to quarter finish.

NextNav Inc (NN) – NextNav is our wi-fi spectrum and various GPS funding. The thesis is that since the USA desperately wants a terrestrial backup to the GPS system, the Federal Communications Fee (FCC) will permit NextNav to repurpose its present spectrum for 5G wi-fi communications that will even deliver a terrestrial backup GPS system to the plenty. When greenlit for 5G, NextNav’s spectrum ought to be price multiples of the place NN inventory presently trades.

Through the quarter there have been a number of optimistic developments for NextNav. First, Brendan Carr, Chairman of the FCC, once more made a speech highlighting that the U.S. wants a backup to the present GPS system . ii Second, NextNav filed papers with the FCC documenting sure ex parte conferences that had taken place between NextNav administration and the very members of the FCC that might be chargeable for drafting a Discover of Proposed Rulemaking (NPRM), which might be the subsequent step within the course of to greenlight the spectrum for 5G. iii That is necessary as a result of the danger with the FCC is that NextNav’s proposal simply winds up misplaced in a drawer someplace. That’s clearly not the case. Third, NextNav moved long-term CFO Chris Gates out of the CFO position and into a company improvement position. Gates isn’t just a numbers man. He’s listed on Nextnav’s patents and has deep data of spectrum, which will likely be necessary in terms of monetization. I consider the sign worth of this transfer is excessive; why transfer the CFO right into a enterprise improvement position until you thought you’ll imminently have approval from the FCC? Final, it was introduced that AT&T (T) could be shopping for spectrum from EchoStar (DISH). The deal consists of low-band (just like NextNav’s spectrum) and mid-band spectrum so it’s not attainable to know the way a lot was paid for the low-band spectrum with 100% accuracy, however my finest guess is that the worth was ~$2.50 per MHz/pop. This isn’t essentially apples to apples with NextNav’s spectrum and there’s nonetheless appreciable uncertainty round what monetization of this spectrum will appear like, however at $2.50 per MHz/pop that might suggest a value for NN’s inventory that approaches $60 per share.

Along with these clear long-term positives, through the quarter there have been some short-term negatives. Most notably, fears of a authorities shutdown – which after all have come to move – weighed on the inventory primarily based on the (inaccurate) assumption that closing the federal government would delay NextNav’s course of with the FCC. Moreover, NextNav introduced the profitable closing of a beforehand introduced transaction whereby the corporate bought extra spectrum licenses. The vendor of those licenses was paid in shares, and because the vendor is the property of deceased people, the thought is that this property will likely be a pressured vendor of kinds.

The web of those clear longer-term positives and meaningless short-term negatives is that the inventory declined roughly 20% from its intra-quarter highs to quarter finish.

PAR Know-how Corp (PAR) – PAR is the main participant in enterprise software program for enterprise scale fast serve eating places. Within the quarter the corporate reported a report backlog, famous that buyer win charges stay very excessive, famous that multi-product wins are accelerating, indicated that 2H’25 ought to be very sturdy, and indicated they’re pursuing 3 mega-tier one offers, 2 of which they hope to listen to on by YE’25, and one that’s doubtless Q1’26.

Along with these clear positives, the corporate additionally provided cautious steering round FY’25 income resulting from a mixture of shoppers delaying the rollout of already contracted enterprise resulting from macro uncertainty, and an inner resolution to delay some enterprise as a way to divert sources towards successful the beforehand talked about enterprise with mega-tier one clients. None of this enterprise has been misplaced. It has solely been pushed out a bit, however the internet of those long-term positives and near-term negatives has been a inventory that declined greater than 40%.

In my opinion, if the thesis is that PAR has the most effective product suite in a world the place eating places are more and more software-centric, an simply defined non permanent delay in income shouldn’t result in blood within the streets. It’s not as if a brand new competitor with a greater product has emerged. It’s not as if restaurant homeowners have determined that software program is now not the long run. The thesis continues to be on observe, and I anticipate that within the coming months PAR will win at the least one of many mega-deals they’re presently pursuing, additional validating the thesis.

Thryv Holdings Inc (THRY) – Thryv is our small and medium enterprise software program firm. The bottoms up thesis is {that a} declining enterprise (that’s spitting off a ton of money) has been masking the expansion within the software program enterprise. From the highest down, there are thousands and thousands of small companies within the U.S. and different geographies which are run on excel and sticky notes. Because the child boomer technology strikes on, the subsequent technology of enterprise homeowners is investing in software program that will increase their income and reduces their prices. Thryv’s SAAS enterprise is a rule of 40 firm (Q2: 25% natural YoY natural income development, 20% adj. EBITDA margin) with rising ARPU, internet income retention of ~100%, that has been quickly paying down debt. Consequently, now for the primary time the corporate has some flexibility on the way it will allocate their capital going ahead. Insiders seem excited concerning the future, as 4 of them have purchased shares within the open market this 12 months, and the corporate not too long ago raised steering.

Nonetheless, the GAAP financials stay messy because of the declining Advertising and marketing Providers enterprise, which can have been fully exited by 2028, and the corporate nonetheless “screens” as a “Media / Promoting” enterprise, even supposing the SAAS enterprise has eclipsed the legacy enterprise. Moreover, current development has been tied to upselling present clients slightly than rising complete buyer rely, which causes some to query the expansion mannequin. This has been a deliberate resolution made by administration; the return on SG&A {dollars} is solely larger when they’re centered on the upsell slightly than new clients. To me, making an attempt to maximise your return on spend is totally logical and administration has indicated that in 2026 they’ll as soon as once more shift focus towards rising buyer rely slightly than upselling. However for now, it appears as if the market disagrees.

At current THRY inventory trades at ~9x my estimate of FY’26 EBITDA from the SaaS enterprise, giving no credit score for the money they anticipate to obtain over the subsequent few years from the runoff of their legacy enterprise. This even supposing the corporate expects this money to be greater than half of the corporate’s present market cap. If we do a gift worth calculation of this money, aggressively discounting it at 20%, at current THRY trades at ~1.1x my estimate of subsequent 12 months’s SAAS income and ~6.2x my estimate of subsequent 12 months’s SAAS EBITDA. I acknowledge there are some considerations across the well being of the patron today, however the valuation right here has entered the realm of absurdity… until you suppose that small companies will ceaselessly eschew the advantages of software program in favor of the inventive enchantment that comes from a wall full of colourful sticky notes.

Vistry Group PLC (VTY.L) – Vistry, is our U.Ok. primarily based dwelling builder that’s centered on decrease earnings clients. The U.Ok. has a large scarcity of reasonably priced housing, and Vistry is the biggest supplier of reasonably priced housing within the U.Ok by an element 5. Their Partnerships strategy to constructing houses is capital mild, and traditionally has confirmed resilient by means of cycles. Admittedly the thesis was knocked off observe a 12 months in the past when the corporate disclosed that through the wind-down of their legacy, extra capital intensive, Housebuilding enterprise they found accounting irregularities. The inventory has been within the penalty field since that point, and stays ~50% under the place it was when the information was introduced. This even supposing the problems had been unrelated to Vistry’s core enterprise, and have since been remediated. Moreover, the sunsetting of the U.Ok.’s prior funding program for reasonably priced housing led to a decline in enterprise.

Nonetheless, the U.Ok. has since introduced a brand new ten 12 months, £39B funding program that dwarfs the earlier program in each measurement and period. Administration not too long ago introduced they anticipate to develop EBIT within the excessive teenagers in H2’25, greater than 20% in 2026, and that “the true step-up” will are available 2027 because the not too long ago introduced funding flows by means of the market. This trajectory appears to match feedback from the U.Ok. housing Secretary, who not too long ago acknowledged “We’re doubling down on our plans to unleash one of many largest eras of constructing in our nation’s historical past and we’re backing the builders all the best way.” iv Additional, Vistry CEO Greg Fitzgerald appears to be a believer as he has bought ~£1M of inventory within the open market this 12 months. Regardless of all this, Vistry shares nonetheless commerce at ~4.5x 2026 EBIT, whereas transaction comps point out a low double digit a number of could be extra applicable.

Wanting Ahead

As I say on the finish of practically each letter, I don’t know what is going to occur subsequent within the inventory market, and neither does anybody else. The place I really feel extra assured is that clear basic enhancements at our companies won’t be ignored ceaselessly, even when in the mean time the market appears to care about synthetic intelligence and fast time period outcomes above all else. Finally, if my evaluation proves appropriate, our shares will profit from rising earnings energy and bettering sentiment. That is true whether or not AI takes over the world or not, and that is true even when the trail our companies take is a bumpy one.

As all the time, I’m open to pushback and admit that I’m usually flawed, however above I feel I demonstrated how the prospects of our companies are steadily bettering, and that the theses stay on observe, regardless of the inventory market not caring. A part of the issue is that in lots of instances these enhancements are taking place in the true world slightly than within the monetary statements. This makes it exhausting for a quantdominated, short-term centered market to understand them.

Nonetheless, because the optimistic developments concurrently develop alongside a inventory market that doesn’t care, our future prospects turn out to be increasingly enticing. This has me feeling a bit grasping, and I’ve been steadily rising my private funding in our partnership. As all the time, there are issues that may go flawed with each the macroeconomy and at our companies. However with time the monetary statements will meet up with the true world, and I believe we will likely be amply rewarded for our persistence.

Please let me know in case you have any questions,

Matthew Sweeney

Managing Associate

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Unique Put up

Editor’s Observe: The abstract bullets for this text had been chosen by In search of Alpha editors.