Last September, prior to the start of the DOJ’s trial against Google’s alleged monopolization of the search market, we laid out a thesis that pointed out investors’ complacency about Google’s antitrust risks in both the search and ad tech trials. While the outcomes of the search trial were hard to handicap (until June 4th, more on that later), we saw a very compelling case and a definable set of outcomes in the ad tech trial – and most importantly, wildly mispriced publicly traded beneficiaries in the event of a Google loss. In both cases, the dominoes are starting to fall, and our thesis is coming to fruition.

The UK housing market is egregiously undersupplied to the tune of millions of homes. However, due to regulatory impediments, high capital demands, cyclicality, and now elevated interest rates, new construction has continually failed to rectify the imbalance. As a result, there is wide support across all levels of the UK government for financial aid to potential homeowners and for initiatives to increase home construction.

Against this backdrop, UK homebuilder Vistry Group (VTY.L) is transitioning to a pure-play “partnerships” business model that combines the financial and land resources of local authorities/housing associations, the central government, and even financial institutions with those of the homebuilder to create a capital-light home construction enterprise at the center of a virtuous cycle for all stakeholders. Unlike traditional homebuilders, “partnerships”model builders pre-sell over 50% of their homes at affordable prices mostly to cycle-agnostic local councils/housing associations, shortening cash collection times and considerably reducing the business’s cyclicality and interest rate sensitivity. Vistry’s shift from a hybrid traditional/partnerships housebuilder to a pure-play “partnerships” business will not only make it the UK’s largest affordable housing manufacturer but will also drastically improve its revenue stability and visibility, return on capital, and earnings potential.

On the eve of Google’s first trial versus the DOJ, in which the government is arguing that the company’s search business is an anti-competitive monopoly, we are more struck by the allegations in a second suit. This second suit brought by the DOJ, which alleges that Google’s dominant ad tech business is an anti-competitive monopoly, should go to trial around January 2024. As we’ll explain below, this is the trial to watch. We believe it has not only a higher probability of success, but also the potential for a greater financial impact on Google, as Google’s ad tech stack powers the rest of its advertising ecosystem.  

Amazingly, most investors seem to be uninterested in analyzing the risk/reward to Google’s business should the DOJ prevail in either of these suits. We’ve seen plenty of investment theses recently presented by sophisticated managers highlighting Google’s moat as a de facto monopoly without any consideration of what might happen should that no longer to be the case. And while some investors are choosing to look this drastic potential change right in the eye, we believe they’re applying elements of historical legal precedents incorrectly, leading to an intriguing endgame that Mr. Market isn’t properly discounting.  

So, if you read this intro and immediately think “The DOJ successful in breaking up Google? That’s never going to happen!” or you’re a shareholder in Google unsure of the trial outcomes, then this letter is for you (especially if you’re a name-brand investor in Google with a history of successfully hedging tail events in your portfolio).

ZipRecruiter (ZIP) claims to be a two-sided marketplace for job seekers and employers that utilizes a proprietary AI to curate and improve the recruiting process, when, in actuality, the company is more akin to an employer-paid job advertising channel charging SMB’s on a per job posting basis, requiring massive spending in sales and marketing to maintain market share. Even worse, its substantive R&D investment into its AI-based features seems unlikely to offer ZIP any long-term differentiation versus rivals.

Alphawave IP (AWE) is a semiconductor firm focused on developing high-speed wired connectivity IP for data infrastructure end markets. The complexity at the leading edge of semiconductor design is necessitating a new tool kit for wired connections inside and between chips as traditional methods of scaling down wiring no longer yield competitive results. The company’s founders have extensive knowledge of this niche domain (SerDes) and have quickly developed a unique connectivity IP portfolio, already a year or so ahead of competitors, which has allowed them to rapidly gain share in a short period of time. While the company IPO’d in May of ’21 and have incurred erroneous accusations of illegitimacy/self-dealing in the press, the adoption of their solutions is expected to truly materialize in ’23 as design wins from ’19-’21 scale up into full production. With their lead in connectivity IP accelerating, Alphawave is now undergoing a transformation to provide entire connectivity chiplet design solutions in addition to licensing following the acquisition of OpenFive, a SoC design firm. This transaction should create a scaled firm in the style of Marvell as the adoption of chiplets massively increase the number of connection points within data centers/networks and therefore AWE’s market.

There’s a lot to like about Nintendo, but ultimately we own the stock for one fundamental reason:  its “goldplated” IP portfolio.  Nintendo’s astonishingly lengthy roster of “triple-A” videogame franchises represents a formidable moat that keeps would-be rivals from eating away at the big N’s market share and profits.  And this is one moat that’s likely to last.  After all, no matter how much technological progress other videogame companies make, and no matter how efficiently they run their operations, they will never have Mario, Pikachu, Link, Kirby, Samus, Donkey Kong, or any of Nintendo’s dozens of other widely beloved characters.  Nor will they have the best-selling, industry-leading videogames those characters star in.

To the Members of the Board:

I’d like to share my concerns with you about Transform’s plan to acquire the remaining 41.2% of Sears Hometown and Outlets (SHO) for $2.25 per share. I’m writing on behalf of Crossroads Capital, a Kansas City-based value-oriented investment manager that specializes in uncovering underappreciated, high-quality businesses undergoing transformative, valueunlocking change. I also write to represent a number of other funds and individual shareholders that have expressed interest in this letter.

As a longtime significant shareholder with a multi-year history of carefully studying SHO, engaging in thoughtful conversation with many of its senior executives, and building my own demonstrable track record of public advocacy and support for both management and Mr. Lampert, I think I have some standing to discuss the issues presented in these pages.

Dear Partners,  

If you’re a fan of the 1980 comedy Caddyshack, you’ll no doubt recognize the following poem, which Judge Elihu Smails proudly reads at the launch of his sloop, the Flying Wasp:  

It's easy to grin when your ship comes in
And you've got the stock market beat.
But the man worthwhile is the man who can smile
When his shorts are too tight in the seat.  

Judge Smails is hardly an admirable character. He lacks compassion. He’s quick to take offense. He’s a liar, a cheat, and a hypocrite. Yet his understanding of investor psychology is exactly correct. How many of us grin and pat ourselves on the back for our superior investing acumen when our portfolio is beating the market – only to wince and wonder what we did wrong the moment our outperformance starts to unwind? Few of us, it seems, can smile when our shorts (pants, that is, not positions) are too tight in the seat.  Since late September, the markets have been testing our ability to smile. Elevated valuations, rate hikes, a trade war with China, “quantitative tightening”, and more have coalesced in a perfect storm, sending equities sharply lower. Fear, bordering on panic, has returned.