2Q25 Partners Fund Commentary

Theme and Background

This section is the opening part of Southeastern (Longleaf Partners Fund)’s investment report for the second quarter of 2025. The report first reviews the fund’s performance in 2Q25 (return of 5.33%, trailing the S&P 500’s 10.94% and the Russell 1000 Value’s 3.79%), and then elaborates on the investment strategy and portfolio logic under the current market environment (a strong market rebound after “Liberation Day” and rampant speculation in low-quality stocks).

Core Thesis

The author’s core investment argument is that, although the fund’s short-term performance lags the market, the market has not correctly priced in widespread earnings uncertainty, and speculation in low-quality stocks (the return of Meme stocks) is prevalent, creating opportunities for value investors. The fund maintains a high cash level (18.2%) and low valuation (P/V in the low-60% range, P/FCF below 10x vs. the market’s over 20x), suggesting that this “underperformance” may be prudent. The counterintuitive judgment is that the author believes market fears of a recession are exaggerated (especially overweighting the 2008 financial crisis as an outlier), while the fund’s holdings (such as Mattel, PVH, and FedEx) are taking offensive actions—such as stock buybacks and insider purchases—to address tariff impacts.

Key Arguments and Data

1. Fund Performance vs. Market:

• Longleaf Partners Fund 2Q return: 5.33%, YTD: -0.08%.
• S&P 500 2Q return: 10.94%, YTD: 6.20%.
• Russell 1000 Value 2Q return: 3.79%, YTD: 6.00%.
• The author notes that the fund performed relatively strongly during the market turmoil from mid-February through April, which reinforced confidence.

Key fund metrics show P/V ratio in the low-60s%, cash position at 18.2%, and a total of 19 holdings

2. Market Environment and Valuation:

• Widespread earnings uncertainty exists in the market but is not properly priced.
• Speculation in low-quality stocks has returned (citing a Wall Street Journal headline: “Meme Stocks and YOLO Bets Are Back and Fueling the Market’s Rally”).
• The fund’s holdings have a P/V ratio in the low-60% range and a P/FCF multiple below 10x, while the overall market’s P/FCF is well above 20x.

3. Portfolio Themes and Actions:

• Tariff Impact: Mattel, PVH, and FedEx are responding through actions such as stock buybacks, insider purchases, and spin-offs (FedEx).
• Healthcare Policy: “RFK-care” introduces uncertainty, but an aging population provides a long-term tailwind. Regeneron and Bio-Rad are creating value through stock buybacks and other actions. The fund initiated a position in another complementary healthcare company after quarter-end.
• Energy Volatility: CNX and HF Sinclair are taking value-creating actions from positions of strength.

4. Specific Holdings Analysis:

• HF Sinclair: An energy infrastructure company and one of the quarter’s largest contributors. Drivers include Middle East tensions, normalization of refining margins, growth in non-refining assets (accounting for over half of valuation), and an unusually high level of insider purchases over the past year.
• MGM Resorts: A hospitality and gaming company and a contributor. Strong quarterly performance gained market recognition, and it is one of the largest stock repurchasers in the fund. The author believes market recession fears are exaggerated, especially overweighting the 2008 financial crisis, while MGM’s current financial position is stronger.
• Kraft Heinz: A food and beverage company and a detractor. Despite industry weakness, the company is undergoing a quality transformation toward premium products (Heinz, Philadelphia, Ore-Ida), which the market may be overlooking. Rumors of a potential stake reduction by major shareholder Berkshire Hathaway are considered more complex by the author.
• Regeneron: A healthcare company and a detractor. The market is overly focused on Eylea (which accounts for less than 20% of the company’s valuation), and a new product had disappointing clinical trial results during the quarter. The author used the opportunity to increase the position.

Companies/Assets Involved

Partners Fund returned 5.33% in Q2, underperforming the S&P 500’s 10.94%, but has a 10-year annualized return of 4.66%

Company/Asset	Role	Key Data/Actions	Bullish/Bearish
HF Sinclair	Energy Infrastructure	One of the quarter’s largest contributors; non-refining assets account for over 50% of valuation; unusually high insider purchases over the past year.	Bullish
MGM Resorts	Hospitality and Gaming	Quarterly contributor; one of the largest stock repurchasers in the fund; financial position stronger than in 2008.	Bullish
Kraft Heinz	Food and Beverage	Quarterly detractor; transitioning toward premium brands; rumors of Berkshire Hathaway stake reduction considered more complex by the author.	Bullish
Regeneron	Healthcare	Quarterly detractor; net cash balance sheet; Eylea accounts for less than 20% of valuation; disappointing clinical trial results during the quarter; author increased position.	Bullish
Mattel, PVH, FedEx	Consumer/Logistics	Responding to tariff impacts through stock buybacks, insider purchases, and spin-offs (FedEx).	Bullish
CNX	Energy	Taking value-creating actions from a position of strength.	Bullish
Bio-Rad	Healthcare	Creating value through stock buybacks and other actions.	Bullish
Undisclosed	Global Entertainment Media	New position added during the quarter, a contributor; the author has held it successfully before.	Bullish

Investment Implications

1. Focus on Low Valuations and High Cash Positions: In the current environment of rampant speculation and high earnings uncertainty, holding a fund with a high cash ratio (18.2%) and low valuations (P/FCF < 10x) may serve as a defensive strategy. Investors should focus on companies with strong cash flows and clear value-creating actions (such as stock buybacks and insider purchases).

2. Beware of Excessive Recession Fears: The author believes market recession fears are exaggerated, particularly by over-referencing the 2008 financial crisis. For companies like MGM Resorts, whose financial position has significantly improved, the market may be underestimating their resilience.

3. Long-Term Opportunities vs. Short-Term Uncertainty in Healthcare: Despite policy uncertainty from “RFK-care,” an aging population is a long-term tailwind. Investors can look at healthcare companies with net cash and active management stock buybacks (e.g., Regeneron), taking advantage of low prices created by short-term uncertainty.

4. Company Actions Under Tariff Impact: For companies affected by tariffs, focus on whether management is taking concrete actions (such as buybacks or spin-offs) to respond, rather than passively enduring. The actions of Mattel, PVH, and FedEx are viewed as positive signals.