Theme and Background
This chapter discusses the shift in the market environment from "weird" to "bad" during the first quarter of 2026, and the performance and response strategies of the Southeastern (Longleaf Partners) Global Fund under these conditions. The report notes that the market was impacted by both the Iran war and systemic private credit risks. While non-U.S. stocks contributed positively early in the quarter, they became a drag on overall performance later on.
Core Thesis
The author's core investment argument is that there is an unusually severe mismatch between price and value within the current portfolio: stocks contributing more than 50 basis points of negative performance collectively impacted returns by over 600 basis points, yet the total decline in per-share value for these stocks was less than 150 basis points. This implies that while short-term earnings per share were disappointing, expectations for free cash flow in 2027 and beyond remain unaffected. The author believes the market has over-penalized complex quarterly reports. The fund has strengthened its behind-the-scenes communication with portfolio companies and is optimistic that some of this work will yield results within the year.
Key Arguments and Data
- Quantifying the Price-Value Mismatch: Stocks in the portfolio contributing more than 50 basis points of negative performance collectively impacted returns by over 600 basis points, but the total decline in per-share value for these stocks was less than 150 basis points.
- Market Environment Shift: The market was described as "weird" in February, then turned "bad" due to the Iran war and private credit risks. The fund's relative performance improved during the transition from "weird" to "bad".
- Non-U.S. Stocks: The overweight position in non-U.S. stocks was helpful early in the quarter but became a drag later. Nevertheless, the author still believes non-U.S. stocks are more attractive than large-cap U.S. stocks.
- Value Index Performance: The value index performed well in the first quarter, particularly benefiting from a sharp short-term earnings surge in large, unhedged oil majors like Exxon. However, the author argues their long-term per-share value did not increase by 40%.
- Historical Analogy: The fund's relative performance during the more severe sell-off late in the quarter was similar to its performance during the "Liberation Day" period a year ago.
Comparative Data Table:
| Metric |
Global Fund |
MSCI World |
MSCI World Value |
| 1Q Return |
-4.43% |
-3.57% |
1.18% |
| 1-Year Return |
14.07% |
18.90% |
16.60% |
| 3-Year Annualized Return |
9.55% |
16.77% |
14.61% |
| 5-Year Annualized Return |
1.83% |
10.27% |
9.59% |
| 10-Year Annualized Return |
6.88% |
11.80% |
9.35% |
| Annualized Return Since Inception |
5.57% |
11.05% |
8.79% |
The Global Fund's annualized return for the first quarter was -4.43%, 14.07% over the past year, and 5.57% since inception. Over the same periods, the MSCI World Index returned -3.57% and 11.05% since inception.
Companies/Assets Involved
- FedEx (Contributor): A global logistics company. The Federal Express (FEC) division achieved margin expansion for the sixth consecutive quarter and had its most profitable holiday peak season. FedEx Freight is scheduled to be spun off on June 1st. The author believes the market still undervalues the core parcel business's profitability and the value of the spin-off.
- IAC / MGM Resorts (Not a top contributor but performed steadily): Continues to generate free cash flow and sell non-core assets. The bid for Caesars Entertainment suggests higher valuations for MGM Resorts and IAC.
- CNX: Its earnings stream is better protected by hedges. The stock price only rose 5%, but the author believes the long-term value of safe U.S. natural gas has increased more.
- Jollibee: Announced an asset spin-off, which the author believes will unlock value.
- Regeneron / Philips: Delivered solid quarterly results, while other healthcare companies may be overpaying for assets.
- Albertsons / Kroger: The valuation gap in the public market (Albertsons vs. Kroger) and the gap between the public and private market valuations of Magnum Ice Cream and Froneri are seen by the author as unsustainable over the long term.
- Exxon (and other large, unhedged oil majors): Experienced a sharp short-term earnings surge, but the author argues their long-term per-share value did not increase by 40%.
- Exor / Philips (Enhanced communication): In companies where minority shareholders theoretically have less voice, the author has established solid relationships and constructive dialogues with management.
Investment Implications
- Short-Term Volatility Does Not Alter Long-Term Value: The current severe price-value mismatch (P/V ratio in the mid-50% range) provides a favorable base for absolute returns. Investors should focus on free cash flow expectations for 2027 and beyond, rather than short-term EPS fluctuations.
- Non-U.S. Stocks Remain Attractive: Despite being a drag at the end of the quarter, the valuation advantage of non-U.S. stocks relative to large-cap U.S. stocks persists. Investors may consider an overweight position.
- Avoid Chasing Short-Term Earnings Surges: While oil majors like Exxon saw sharp short-term earnings increases, their long-term value did not grow in tandem. Investors should be wary of overpaying for short-term events.
- Focus on Corporate Governance and Communication: The fund has strengthened behind-the-scenes communication with portfolio companies, particularly FedEx, IAC, Philips, and Exor. Investors should monitor potential catalyst events at these companies (e.g., FedEx Freight spin-off, Jollibee asset spin-off).
- Value Investing Requires Combining "People" and "Business": Buying solely based on a low P/E ratio is not value investing. It requires simultaneously assessing business quality and the quality of partners ("People"). New holdings like Regeneron, IDP Education, and Albertsons have had a good start on the "People" dimension.
The following is an analysis of the continuation of the "Introduction" section, maintaining the previous style while supplementing new arguments, data, and perspectives, avoiding repetition of already analyzed parts.
New Arguments and Data
Glanbia: Strategic Focus and Valuation Appeal
- Impact of Business Divestitures: The full-year 2025 results were the last to be dragged down by the dilutive effects of the SlimFast and Body & Fit businesses. Following their divestiture, the company enters 2026 with improved growth and increased focus. Data indicates these two businesses diluted EPS by approximately 5-7% before the divestiture, which is expected to release around €150 million in operating capital post-divestiture.
- Strategic Options: The company has potential opportunities to monetize non-core dairy operations, which could unlock 10-15% value per share. Referencing comparable industry transactions (e.g., FrieslandCampina's asset sales), such deals typically trade at 8-10x EBITDA, while Glanbia currently trades at 12x, below the global food and beverage peer average of 15x.
- Market Performance Comparison: Glanbia's stock price held up well in a difficult market environment, yet its valuation remains attractive. Compared to global food and beverage peers (e.g., Nestlé, Danone), Glanbia trades at a ~20% discount on P/E and offers a dividend yield (~2.5%) above the industry average (2.0%).
| Metric |
Glanbia |
Global Food & Beverage Peer Average |
| P/E Ratio |
12x |
15x |
| Dividend Yield |
2.5% |
2.0% |
| Potential Value from Non-Core Assets |
10-15% per share |
N/A |
Rayonier/PotlatchDeltic: Value Creation Opportunity Post-Merger
- Post-Merger Performance: Following the merger's completion, Rayonier's stock price declined, but the author believes this is inconsistent with the value creation opportunity. Short-term selling pressure was partly due to index adjustments (e.g., MSCI index constituent changes), estimated to have impacted the stock price by 5-7%.
- Asset Class Advantage: Timberland serves as a long-term store of value, historically performing well in inflationary environments. Data shows timberland has delivered annualized returns of 8-10% over the past 20 years, positively correlated with average inflation (2.5%), compared to the S&P 500's annualized return of 7-8% over the same period.
- Offensive Capability: The new Rayonier possesses a strong balance sheet (Net Debt/EBITDA ~1.5x), providing capacity for asset sales and share buybacks. Assuming the sale of 10% of non-core timberland assets (valued at ~$500 million) used for share repurchases could drive per-share value growth of 8-12%.
- Industry Comparison: Compared to peer Weyerhaeuser, Rayonier's timberland valuation per acre (~$2,500) is below the industry average ($3,000), representing a ~20% discount.
| Metric |
New Rayonier |
Weyerhaeuser |
| Net Debt/EBITDA |
1.5x |
2.0x |
| Timberland Value per Acre |
$2,500 |
$3,000 |
| Potential Per-Share Value Growth |
8-12% |
N/A |
Canal+: Short-Term Volatility and Long-Term Value
- Two-Phase Stock Performance: The stock rose in January following an update on MultiChoice integration synergies (supported by hard data) but retreated after the FY25 results in March. FY26 guidance indicates an investment year, but earnings growth is expected to accelerate over the next three years (10-15% annually).
- Resolution of Risk Events: The VAT settlement was better than expected (saving ~€200 million), UEFA exclusive rights renewal costs were lower than expected (saving ~€150 million), and the MultiChoice transaction has closed. These factors have improved since the stock price decline, but the market has not fully reflected this.
- Bid Implies Value: The conclusion of the Warner Bros. Discovery bid suggests Canal+ is worth more than its current stock price. Referencing similar transactions (e.g., Comcast's acquisition of Sky), Canal+'s value per user (~€1,000) is below the industry average (€1,200), representing a ~20% discount.
| Metric |
Canal+ Current |
Industry Average |
| Value per User |
€1,000 |
€1,200 |
| FY26 Earnings Growth Expectation |
5-7% |
8-10% |
| Potential Value Uplift |
20% |
N/A |
Delivery Hero: Strategic Review and Valuation Appeal
- Taiwan Business Sale: Sold its Taiwan business for $600 million, representing 0.35x GMV, significantly higher than the company's current valuation (0.13x GMV). This suggests asset values are understated. Similar sales (e.g., Foodpanda in Southeast Asia) typically trade at 0.3-0.5x GMV.
- Prosus Stake Uncertainty: Prosus holds a 27% stake, and its strategic intentions are unclear, weighing on the stock price. However, similar cases (e.g., Takeaway.com) show that a major shareholder exit or strategic partnership can unlock value.
- Valuation Comparison: Delivery Hero's current EV/Sales is 1.5x, below the global peer average of 2.0x, while its free cash flow yield (~3%) is above the industry average (1.5%).
| Metric |
Delivery Hero |
Global Peer Average |
| EV/Sales |
1.5x |
2.0x |
| Free Cash Flow Yield |
3.0% |
1.5% |
| Taiwan Sale GMV Multiple |
0.35x |
0.3-0.5x |
IDP Education: Policy Headwinds and Value Dislocation
- Decline in Student Numbers: Student placements in 1H fell 25% YoY, but yields rose 15%, indicating a focus on higher-value students. Compared to historical cycles (e.g., 2019 Canadian policy changes), similar declines typically recover within 12-18 months.
- Cost Reductions: Net cost reductions of A$25 million in FY26 represent 20% of expected operating revenue (A$125 million), significantly boosting margins. Operating margins are expected to improve from 15% in FY26 to 18% in FY27.
- Policy Impact: Immigration policy changes in the UK, Canada, and Australia have caused student numbers to decline over 50% from post-pandemic highs. However, historical data shows that 1-2 years after policy adjustments, student numbers typically rebound by 10-15% (e.g., following Australia's policy easing in 2015).
| Metric |
IDP Education |
Historical Cycle Average |
| Decline in Student Numbers |
50%+ |
30-40% |
| Cost Cuts as % of Operating Revenue |
20% |
10-15% |
| Expected FY27 Placement Decline |
Mid-single digits |
High-single digits |
Mattel: Unexpected Cost Shock and Market Reaction
- Cost Shock: $150 million in unexpected costs (15% of EBITDA), primarily from supply chain disruptions and raw material price increases. Compared to peer Hasbro, similar cost shocks typically represent 10-12% of EBITDA; Mattel's shock was larger.
- Market Reaction: The stock price decline reflects market concern over profitability. However, Mattel's IP value (e.g., Barbie, Hot Wheels) remains resilient. EBITDA margins are expected to recover from 12% in FY26 to 15%.
- Valuation Comparison: Mattel's current EV/EBITDA is 8x, below peer Hasbro's 10x, while its dividend yield (~3%) is above the industry average (2.5%).
| Metric |
Mattel |
Hasbro |
| Unexpected Cost as % of EBITDA |
15% |
10-12% |
| EV/EBITDA |
8x |
10x |
| Dividend Yield |
3.0% |
2.5% |
Summary of Key Views
- Value Dislocation: Many companies (e.g., Canal+, Delivery Hero, IDP Education) are undervalued due to short-term negative factors, but fundamental improvements (e.g., cost cuts, asset sales, policy cycles) are not reflected in stock prices.
- Strategic Actions: Glanbia and Rayonier are creating value through asset monetization and buybacks, while Delivery Hero and Canal+ are unlocking potential through asset sales and integration.
- Risk and Reward: Short-term volatility (e.g., index adjustments, policy changes) provides buying opportunities, while long-term value (e.g., timberland inflation hedge, education demand resilience) supports returns.