January 2026

Dear clients and fellow shareholders:

In case you have already forgotten, it is worth recalling that 2025 delivered no shortage of alarming headlines. At various points during the year—most notably in April—it appeared as though markets and geopolitics were unraveling simultaneously. As a reminder, here are just a few of the more concerning developments from the past year.

• U.S. equity market drawdown: Tariff-driven trade tensions triggered a sharp selloff in April, with the S&P 500 and Nasdaq Composite declining roughly 20% from their respective peaks. Market leaders such as NVIDIA and Apple fell more than 30% in just a few weeks.
• Escalating U.S.–China tensions: Trade disputes and broader geopolitical frictions between the world’s two largest economies intensified.
• Worsening war in Ukraine: The conflict deepened, with combined fatalities and injuries now estimated to exceed one million across both sides.
• Gaza conflict: The death toll since October 7, 2023, surpassed 70,000 by the end of 2025.
• Rising global violence: Despite a decline in U.S. murder rates, global violent fatalities increased an estimated 23%, as armed conflicts, societal breakdowns, and state repression spread across multiple regions.
• Heightened nuclear risk: The United States, Russia, and China expanded nuclear weapons testing and strategic capabilities, even as the New START Treaty between the U.S. and Russia approached expiration.
• Macroeconomic concerns: Persistent worries over global debt levels, fragile supply chains, stretched equity valuations, an AI bubble, renewed inflationary pressures, signs of stagflation, and the prospect of a U.S. recession dominated commentary throughout the year.

Despite this ongoing stream of negative news, the fact most investors remember from 2025 is that their 401(k)s increased.

How did that happen?

There are many possible explanations, but one stands out: as grim as parts of 2025 were, the world did not “go to hell” in ways that ultimately mattered to corporate profitability.  While headlines can dominate markets in the short term, earnings remain the primary driver of stock prices over time. And in 2025, despite the torrent of bad news, S&P 500 earnings grew by approximately 13%—broadly in line with the index’s price appreciation.

Although corporate fundamentals ultimately matter far more than headlines, that’s not where many investors focus. A fundamental flaw in investor psychology is that we tend to overweigh what is emotionally resonant and easy to grasp—politics, wars, and dramatic headlines—while underweighing what is incremental and unglamorous, such as the steady compounding of business fundamentals. Media incentives amplify urgency and extremes, so worst-case narratives often dominate the conversation. Investment markets, in contrast, tend to reward patience and the quiet accumulation of earnings—things that don’t create an avalanche of social media clicks.

Compounding this challenge, our brains are hardwired for myopia.  We instinctively extrapolate the present, believing that whatever is foremost in our consciousness will persist indefinitely. When markets are rising, we blindly assume the reasons are durable and increases will continue. When markets are falling, we assume the causes are overwhelming and permanent. In both cases, we mistake the present for the future.

The present always feels permanent.

April 2025 offered a clear example of this. At the time, the dominant narrative was that markets were breaking down. Confidence eroded quickly, and fear felt both rational and unavoidable. Shortly thereafter, that fear gave way to optimism as prices recovered and attention shifted elsewhere. Each narrative felt urgent and explanatory in the moment—until it was replaced by the next one pointing in the opposite direction.  Market sentiment, much like the weather, has a habit of changing whether we anticipate it to or not. It is an emotion—and you pay us to remain rational when others are reacting emotionally.

The uncomfortable lesson, which investors relearn every few years and then promptly forget again, is that the news and the market are often only loosely related. Bad things can happen while stocks rise. Good things can happen while stocks fall. Most narratives that feel overwhelming in the moment have little bearing on long-term investment outcomes.

Our approach reflects this reality. In our experience, periods of uncertainty and volatility are almost always the worst times to sell. Rather than obsessing over the direction of the general market or the headlines of the day, we focus on business fundamentals.

This is not to suggest that markets are immune to fear or that the nature of economic cycles has changed. Expansions still end, valuations still matter, and sentiment eventually runs its course.

And bear markets remain inevitable.

When the next downturn arrives, it will feel just as urgent, real, and all-consuming as the headlines of 2025 did at the time. Our own concerns about market valuations over the past year serve as a very personal reminder that trying to time the stock market is a fool’s game. Never forget that shares of stock are simply claims on corporate profits. Over the long term, the underlying math of investing—earnings power, balance sheets, incentives, and capital allocation—will reassert itself and ultimately determine the trajectory of a stock.

What matters most over time is not the narrative dominating the news cycle, but the slow, methodical arithmetic of fundamentals. These forces accumulate quietly in the background, eventually overpowering even the most dramatic stories or fears. Human nature, with its focus on the immediately visible and emotionally resonant, rarely makes this easy. We overweight what is recent, underweight what is incremental, and are prone to forget how quickly yesterday’s crisis can fade from memory.

History is clear: investors are not rewarded for reacting quickly, but for thinking clearly, remaining disciplined, and allowing time and compounding to do the heavy lifting. The challenge is not avoiding uncertainty—it is learning to live with uncertainty long enough for fundamentals to matter.  Patience, not panic, is what ultimately creates wealth.

Recent purchase: Molina

We recently initiated a position in Molina Healthcare (MOH), which we believe is a mispriced compounder experiencing transitory margin pressure. The stock traded as high as $300 per share only six months ago; we purchased our shares at approximately $160 in late December.

Molina provides managed healthcare services primarily to low-income families and individuals via Medicaid, Medicare and the various state marketplaces established by the 2010 Affordable Care Act (Obamacare). The company is an example of a situation in which the stock price decline has been vastly exacerbated by negative political news—and mostly disconnected from the company’s actual business fundamentals. In our view, the market’s reaction extrapolates short-term pressures indefinitely and underappreciates both the structural dynamics of Medicaid rate resets and Molina’s long track record of operational outperformance versus peers. We see a credible path to 2–3x upside over the next several years as margins normalize and earnings power becomes evident.

Molina’s business

Molina serves more than 5.6 million members across Medicaid, Medicare, and Marketplace programs in 21 states, with Medicaid representing roughly 75% of premium revenue. The Medicaid industry is currently experiencing its most difficult margin environment in decades. After more than 20 years of consistent profitability, 2025 marked the second consecutive year of industry-wide losses. These pressures stem primarily from post-COVID redeterminations, which removed approximately 17 million beneficiaries from Medicaid rolls, leaving a sicker remaining population and driving roughly 400 basis points of industry-wide medical loss ratio (MLR) expansion over two years.

While painful, these cost pressures are inherently temporary, given the contractual structure of Medicaid.

Despite these industry headwinds, Molina is one of the rare managed care businesses continuing to generate profit in this environment. Its medical loss ratio (MLR) runs approximately 250 basis points better than the industry, and management expects Medicaid alone to generate roughly $16 per share of earnings in 2025. In the most recent quarter, management provided a conservative starting point for 2026, indicating approximately $14 of EPS from Medicaid, and only breakeven results in Marketplace and Medicare. This baseline assumes a Medicaid margin of just 2.5%, well below Molina’s long-term target of 4.5% and even below expected 2025 levels, despite most Medicaid contracts resetting roughly 50 basis points above cost trend.

Medicaid’s payment structure operates with a lagging feedback loop. Managed care organizations initially absorb excess medical costs, but contractual reset mechanisms are built into the system. States are required to certify actuarial soundness, meaning rates must ultimately reflect expected medical costs plus an underwriting margin. That is, over time these adjustments essentially guarantee restored profitability. For Molina, only about 130 basis points of Medicaid rate improvement are needed to return to its 4.5% target margin—roughly half of what the broader industry requires just to break even.  Each 100 basis point improvement in Medicaid MLR translates to approximately $4.50 in incremental EPS for the company.

While Marketplace results are expected to be roughly breakeven in the near term, meaningful improvement is likely. Rate increases averaging approximately 30% in 2026, combined with exits from unprofitable counties, create a clear path back to profitability. Longer term, Molina’s earnings power is substantial. At its 4.5% target margin, the company would generate over $30 in normalized EPS today, with that figure growing over time.

Operationally, Molina continues to outperform the industry. Enrollment has grown despite redeterminations, and the company wins approximately 80% of new contract bids and 90% of re-procurements, reflecting strong state confidence in its operational efficiency. Management targets 11–13% annual premium growth, largely from strategic contract wins within its existing footprint. Embedded earnings from recently awarded contracts amount to roughly $8.65 per share, providing built-in earnings growth.

We also view concerns around the long-term role of managed care organizations in Medicaid as overstated. Managed care is no longer an optional component of the program—approximately 75% of Medicaid beneficiaries receive care through HMOs, and that percentage continues to rise. These organizations provide the infrastructure required to administer Medicaid at scale. Commentators who suggest managed care could be replaced by direct payment models overlook the operational complexity and practical realities of the system that has evolved in this country.

Government-focused managed care companies trade near all-time low multiples despite high returns and recession-resistant business models, even as the broader market sits near all-time highs. If Medicaid rates revert toward the high end of management’s long-term MLR guidance of 88.5%, Molina could earn approximately $37 per share in 2028 on roughly $52 billion in premiums. That assumes a 4.5% pretax margin, consistent with the company’s five-year average prior to 2024. Notably, SG&A is now running roughly 70 basis points below historical averages, providing additional margin upside.

On the same premium base, EPS could exceed $41 in 2028 if the company retires 10% of its shares outstanding. Molina has already repurchased $1 billion of stock year-to-date, including 5.3% of shares in the most recent quarter alone, and recently added a $500 million term loan earmarked for additional buybacks.

If premium growth continues at management’s 11–13% target, EPS could exceed $45 by 2028, implying just 3.5x forward earnings.

Finally, there is significant upside from potential multiple expansion. Molina’s five-year average multiple is approximately 15x earnings. Applying a 13x multiple to $40 of 2028 EPS yields a share price of roughly $520, representing approximately 225% upside from current levels. At 15x on $45 of EPS, fair value approaches $675 per share—more than four times today’s price.