Key Market Outlook(s) and Pick(s)

On Tuesday, I had the pleasure to interview the President and CEO of VF Corp. – Bracken Darrell (VFC is one of our larger holdings). I am very grateful to him for taking the time out and participating in this long-form format. It enabled us to get granular on the details of the business, where we’ve come from and more importantly – where we are going!

This conversation exceeded any expectations of what I had going in and I believe you will find this to be one of the most important hours of content I have ever put out. I hope you enjoy watching it as much as I enjoyed hosting it:

On Friday, I joined Ash Webster on Fox Business to discuss markets, the Fed, Alibaba, and more. Thanks to Ash and Christian Dagger for having me on:

Bank of America Fund Manager Survey Update

On Monday, we put out a summary of the monthly Bank of America “Global Fund Manager Survey.” This month they surveyed 197 institutional managers with ~$475B AUM:

Here were the 5 key points:

1) Managers are slowly starting to turn bullish on China, with a net 11% now expecting a stronger Chinese economy, up from only 2% in July and reaching the highest level in five months.

2) A record net 91% of fund managers say US equities are overvalued, up from 87% in July. Emerging markets are viewed as the most undervalued, with 49% holding that view, the highest since February 2024. Rotation, rotation, rotation.

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3) 45% of managers see “Long Magnificent 7” as the most crowded trade, reclaiming its crown yet again.

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4) Equity allocation among managers rose for the fourth consecutive month to a net 14% overweight but remains well below the 24-year average of net 25% overweight and the recent December 2024 high of net 49% overweight. This continues to reinforce our view that the pain trade remains to the upside, with trapped bears still stuck on the sidelines and becoming forced buyers as we continue to work higher.

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5) Healthcare has been left for dead, with just a net 2% of managers overweight the sector (1.6 standard deviations below its long-term average). This is down 16% month over month and marks the lowest level since January 2018. Meanwhile, the sector is at its lowest weighting in the S&P in nearly 25 years. There are plenty of ponies in this pile.

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GXO Update

Each week we try to cover 1-2 companies we have discussed in previous podcast|videocast(s) and/or own for clients (including personally).

GXO delivered another lights-out quarter last week. Revenues of $3.3B came in ~$200M ahead of consensus, beating by ~6%, while adjusted EPS of $0.57 topped $0.55. On top of that, management raised full-year guidance for the second time in two months, as every sign points to an inflection and acceleration in the business from here.

We first got involved with GXO in early 2024 with a solid starter position and the intent to add on any weakness. Lucky for us, the market gave us plenty of chances and we took full advantage.

What originally attracted us, beyond GXO being a Brad Jacobs company (spin-off from XPO in late 2021) with him still holding ~1.7 million shares, was its heavy exposure to Europe and international markets. In fact, GXO generates well over 70% of its revenues from outside the US.

For nearly all of last year and until we were blue in the face, we pointed to the cyclical nature of international and US equity outperformance and how they often track US dollar cycles. With international equities left for dead after a record long 16-year stretch of underperformance, this was an area ripe with opportunity.

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At the time, we were on an island with that call. But with the dollar now down ~10% YTD and international markets trouncing US equities by a wide margin, +19% vs +9%, it’s suddenly all anyone wants to talk about. Most importantly, GXO continues to be a direct beneficiary.

Shortly after its spin from XPO in late 2021, GXO found itself caught in the middle of a once in a hundred year de-stock/re-stock cycle. The stock sold off in concert with the shift from goods to services following the pandemic, with organic growth falling from 15.4% in 2022 to (2%) by year-end 2023. Management took advantage of the cyclical drawdown and used its strong balance sheet to go shopping at sector-wide trough multiples, acquiring Clipper in 2022 for $1.3B at ~13x EBITDA, PFSweb in 2023 for $142M at ~7x, and most recently Wincanton for $958M at ~7x.

Fast forward to today, volumes and inventories have largely normalized. This quarter marked the sixth consecutive quarter of organic growth and the strongest print in over two years at +6%. While fundamentals have clearly improved, two temporary overhangs kept a lid on the stock: the CMA’s extended Wincanton review and the surprise retirement of CEO Malcolm Wilson.

The good news is that with this Q2 report, both are now in the rear view mirror. Earlier in the quarter, the CMA approved the Wincanton deal, with GXO agreeing to divest roughly 5% of lower-margin grocery contracts. Integration between the two businesses will begin in the coming weeks, unlocking $60M in cost synergies and opening new opportunities in higher-growth verticals like aerospace and defense.

On the leadership front, Patrick Kelleher, a 33-year industry veteran and most recently CEO North America at DHL, will take over on August 19. He will be joined by a refreshed board with seven top-notch new members, all hand-picked by Brad Jacobs.

With the smoke cleared out, the market is finally waking up to what we have been pounding the table on for months: record-high revenue, the highest organic growth in nine quarters, a $2.4B sales pipeline, and guidance raised twice in two months. All of this from a stock that was hitting fresh all-time lows just a few months ago.

The best part is that despite the beats and raises, guidance still looks awfully conservative. GXO has already booked $795M in incremental 2025 revenue through Q2. Assuming 95% retention, in line with historical averages, that alone translates to 6.45% organic growth with ZERO additional contract wins. So even with flat volumes and no new business for the rest of 2025, GXO would be at the high end of its organic growth range. We think this sets a low bar for MATERIAL UPSIDE in the back half.

The bottom line is that GXO is back. As the business accelerates, we expect a re-rating from trough multiples toward levels consistent with a double-digit grower and cash machine. By comparison, its former parent XPO Logistics trades at an average annual p/e of 25x. That sets up a clear path to what we believe is a double over the next few years as the story unfolds.

This was a textbook Great Hill Capital setup. A high-quality compounder with recovering fundamentals while price lagged due to short-term noise and uncertainty, trading at a valuation that assumed the cycle would never turn. The cycle has already turned. The market is still catching up. We are not.

Q2 Earnings Breakdown

10 Key Points

1) Q2 revenues reached a record $3.3 billion, up 16% year over year. Organic growth was 6%, the strongest in more than two years, accelerating from 2.8% last quarter and improving across every region. Most importantly, management said customer inventory levels are largely normalized, implying the acceleration wasn’t driven by pull-forward demand.

2) GXO booked new business wins of $307 million in annualized revenue during the quarter, up 13% year over year. This brought total incremental revenue for 2025 won through Q2 to $795 million and incremental revenue for 2026 to $513 million, a company record through the first half. More than half of these wins came from e-commerce, which is also driving outsized growth in the higher-margin reverse logistics (returns) business. Reverse logistics now accounts for roughly 10% of the pipeline and a high single-digit to low double-digit percentage of revenues.

3) The total sales pipeline remains robust at $2.4 billion, up YoY and still excluding the Wincanton sales pipeline. Since the last full year before the spin, the pipeline has grown by more than one-third and is more diverse than ever, with roughly $500 million tied to industrial and aerospace and defense, a segment that has doubled over the last 18 months.

4) Earlier in Q2, GXO received final regulatory approval for the Wincanton acquisition, agreeing to dispose of roughly 5% of the business tied to lower-margin grocery contracts. Wincanton continues to perform well, delivering 10% revenue growth on its own in Q2. Management is set to begin integration in the coming weeks and expects to deliver the majority of the run-rate $60 million in cost synergies by the end of 2026, ahead of prior expectations. This will be a major driver of EBITDA margin expansion and is also expected to generate significant revenue synergies, particularly in the key industrial and aerospace verticals where Wincanton has significant exposure. Management is already working on very large bids in the aerospace and defense verticals, expected in the back half of 2026, with scale comparable to the landmark 10-year, $2.5 billion NHS contract.

5) As part of the $500 million repurchase program announced in February, management bought back 2.6 million shares during the quarter at an average price of $34.86. This brought total repurchases for the first half to 5.4 million shares, reducing shares outstanding by ~4%, at an average price of $37.34, which represents a 26% discount to the average share price over the last 30 trading days.

6) Free cash flow during the quarter was an outflow of $43 million compared to $31 million generated in the same period a year ago. However, this was primarily due to a one-time payment for a regulatory item recorded last quarter. Management remains on track to deliver the full-year target of 25% to 30% adjusted EBITDA to free cash flow conversion, which implies ~$262 million of free cash flow at the midpoint.

7) Net debt stood at $2.5 billion at the end of the quarter, bringing net leverage to 3.0x. Management’s top priority is de-leveraging the balance sheet, ideally to between 1.5x and 2x over time. Liquidity remains strong at $1.2 billion as of the end of Q2. After receiving an upgrade from Moody’s in June, GXO now holds an investment-grade credit rating from all three major agencies for the first time since the spin.

8) Operating return on invested capital during Q2 stood at 46%, well above the long-term target of over 30%.

9) With over 70% of revenues generated outside the US, a strong dollar has long been a headwind for GXO. However, with the dollar now down ~10% year to date, it is becoming a meaningful tailwind for the company. GXO does not hedge revenue, with favorable FX rates driving 4% of the 16% revenue growth during the quarter, or ~$127 million.

10) After already raising full-year guidance back in June, management continues to see strong momentum across the business. With over a third of Q3 complete, Q2 trends have remained consistent so far this quarter, along with strong planning for a good holiday season already underway with customers. That gave management enough confidence to raise full-year guidance for a second time in two months. For 2025, they now expect to deliver organic revenue growth of 3.5% to 6.5%. Adjusted EBITDA is expected between $865 million and $885 million. Adjusted diluted earnings per share are forecasted at $2.43 to $2.63. Finally, adjusted EBITDA to free cash flow conversion is projected to be between 25% and 35%.

Earnings Call Highlights

Cooper Standard Update (CPS)

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Q2 Earnings Breakdown

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10 Key Points

1) Management continues to deliver significant margin improvement, with gross profit margins reaching 13.2% for the quarter, up 150 basis points YoY, and adjusted EBITDA margins at 8.9%, up 170 basis points YoY. Keep in mind, this margin expansion is occurring despite lower overall revenues, so operating leverage has not yet kicked in, but it will soon do so in earnest. Most importantly, management continues to expect to hit their long-term goal of reaching double-digit margins as they exit Q4 and head into 2026, with management saying they would be “shocked if we don’t.”

2) Management released long-term 2030 financial targets for the sealing systems business, where they are the global leader. CPS expects the segment to deliver >$1.8 billion in revenues, up from this year’s projected $1.4 billion, a 6% CAGR, adjusted EBITDA margins >13%, up from this year’s projected 9.25%, and return on invested capital >20%, up from this year’s projected 10.25%. At base-level assumptions, this implies ~$234 million in adjusted EBITDA from the sealing segment alone, essentially the midpoint of what the entire company is projected to deliver this year. Most importantly, these aren’t pie-in-the-sky projections. ~80% of the incremental revenue is already booked, volumes assume the “morticians forecast” and never exceed 15.3 million in North America, and the current vehicle mix remains the same with no benefit assumed from increased hybrids (+80% CPV) or EVs (+20% CPV). Meaning, the writing is on the wall for MATERIAL UPSIDE to these conservative projections.

3) Management also released long-term 2030 financial targets for the fluid handling systems business, the key space where they expect to “unlock the full potential of the organization” as they leverage growth in hybrid trends. CPS expects the segment to deliver >$2.0 billion in revenues, up from this year’s projected $1.4 billion, an 8% CAGR, adjusted EBITDA margins >16%, up from this year’s projected 9.25%, and return on invested capital >30%, up from this year’s projected 13.25%. Similar to the sealing projections, these are based on the same “morticians forecast” assumptions. At base-level assumptions, this implies ~$320 million in adjusted EBITDA from the fluid handling segment alone. Combining both segments, the 2030 projections imply CPS delivering $3.8 billion in revenues and $554 million in adjusted EBITDA, or 14.6% margins. For context, in 2017 CPS delivered $3.62 billion in revenues and $452 million in adjusted EBITDA, a 12.5% margin, which earned $7.21 in EPS (the stock traded up to $146/chare on these numbers in 2017). Ladies and gentlemen, THIS THING IS JUST GETTING STARTED.

4) Free cash flow during the quarter was an outflow of ~$23 million, in line with Q2 of last year despite cash interest paid being more than $14 million higher this year. The outflow is largely due to working capital timing and reflects the normal seasonality of the first half. Most importantly, management continues to expect this to unwind in the back half and still generate positive free cash flow for the full year, even from the current YTD outflow of nearly $56 million. This is despite the $55 million in cash interest paid in June, which will be repeated in December, meaning positive free cash flow despite $110 million in total interest payments. Management expects this positive free cash flow, combined with hitting the midpoint of previously stated full-year guidance, will result in a net leverage ratio below 4x by year-end.

5) CPS continues to evaluate options for strengthening the balance sheet and is monitoring conditions in the credit markets, with a global refi on the table. During Q2, CPS received an upgrade from Moody’s, moving their outlook from stable to positive, as management believes they are on the cusp of a ratings inflection point, potentially reaching single B territory. CPS is working to refi both the $612 million 13.5% first lien notes and the $388 million 10.625% third lien notes, both maturing in 2027. The upside implications of getting this done are MATERIAL. For example, if management is able to refi both loans at 9%, this would save ~$34 million a year in interest expense, or ~$1.93 per share pre-tax. Applying a trough multiple to those savings alone nearly gets you near today’s share price.

6) Capex during the second quarter totaled just $7.8 million, or 1.1% of sales. This is well below last quarter’s 2.6% and just a fraction of the bloated heyday averages of 5% to 6%, levels management has no intention of returning to. For the full year, management continues to expect $45 million to $55 million in capex, or about 1.8% of sales at the midpoint, with the focus firmly on disciplined investments and getting back to double-digit returns on invested capital.

7) CPS secured $77 million in net new business during the quarter, bringing first-half bookings to $132 million. The company also earned several key supplier honors, including Ford Supplier of the Year, selection for the Renault Group Emblème project, and Toyota’s Excellent VA Achievement Award earlier in the year. Management views these recognitions as a strong signal of future opportunities to win profitable new business, noting that relationships with key customers have never been better.

8) Management continued to execute on the cost optimization program, removing $25 million in manufacturing and purchasing lean savings and another $4 million from the restructuring and headcount reduction program announced last year. This brings the total cumulative sustainable cost savings impact to adjusted EBITDA to $687 million since inception in 2019.

9) Based on stronger than expected first half results and continued execution, management raised full year adjusted EBITDA guidance to $220–$250 million, up from the prior $200–$235 million, an ~8% increase at the midpoint. Importantly, the raise is driven entirely by manufacturing and purchasing improvements, not higher production volumes. In fact, management expects to achieve this despite what they called “rather depressing” S&P volume forecasts, which they would be shocked to see materialize. Current S&P forecasts call for North American production of 14.9 million units, down from 15.1 million last quarter and well below 2024’s 15.5 million. The bottom line is there is material upside to guidance if and when volume forecasts improve in the back half of the year.

10) With the vast majority of commercial negotiations with key customers now complete, management has secured agreements that will allow them to pass through or recover nearly all direct tariff impacts on the business.

Earnings Call Highlights

General Market

The CNN “Fear and Greed Index” ticked up to 59 this week from 56 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) ticked up to 96.25% this week from 76.85% equity exposure last week.

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