Voss Capital Q1 2026 Letter to Partners
Voss Capital is a Houston hedge fund founded by Travis Cocke in 2011, running value-oriented, bottom-up strategies focused on underfollowed small- and mid-cap special situations through long/short and long-only funds, increasingly turning activist.
In plain words
This report warns that the stock market is dangerously concentrated, with money flooding into AI and semiconductors like during the dot-com bubble. It says this could reverse if Chinese memory chips enter the US, breaking the chip shortage. But it also sees opportunity: many solid software companies are unfairly sold off, and Sempra Energy has a hidden gem (Oncor) that could be worth much more if spun off. The key takeaway: don't chase hype, look for undervalued assets with real catalysts.
Voss Capital's Q1 2026 letter states that the Voss Value Fund posted a net return of -11.4% (Russell 2000 +0.9%), primarily due to extreme K-shaped divergence in the market: the AI/semiconductor-driven momentum factor rose approximately 40% year-to-date, while the "quality" factor fell 30%. The semi
Theme and Background
This chapter discusses the extreme K-shaped divergence pattern that emerged in the Q1 2026 market: the AI/semiconductor-driven momentum factor surged significantly, while the traditional "quality" factor suffered selling pressure. The report argues that the concentration of capital flows driven by the AI narrative has reached peak levels seen during the internet bubble era, and systemic risk in the market is accumulating.
Core Thesis
The author's core judgment is that current market concentration and the momentum bubble have approached or exceeded levels of the internet bubble era, while index-level volatility is masked and true risk is underestimated. Counterintuitive judgments include: Chinese memory chips entering the US market may break the current AI-driven semiconductor supply shortage pattern; the software industry is being systematically undervalued due to market panic, and valuation compression in quality companies actually creates opportunities.
Key Arguments and Data
1. Extreme Market Structure Divergence
- The "Momentum" factor is up approximately 40% YTD, while the "Quality" factor is down approximately 30%.
- Semiconductors' share of total US market capitalization has risen from 6.8% three years ago to 16.9% (an increase of 10.1 percentage points), while sectors such as financials, healthcare, and consumer goods have simultaneously fallen to multi-decade lows.
- The implied volatility of the momentum factor (3-month at-the-money options) hit an all-time high, and the spread between index volatility and individual stock volatility is also at historically extreme levels.
2. Semiconductor Industry Risk
- Active fund exposure to semiconductors is at the highest historical percentile (100%), while exposure to the software industry is at a 5-15 year low (around 0%).
- Chinese memory chips entering the US market could break the current supply shortage pattern.
3. Deteriorating Cash Flow at Tech Giants
| Company | Key Metric |
|---|---|
| GOOGL | EV/2027E FCF >300x |
| Mega Cap Tech (ex AAPL) | Free cash flow "completely collapsed" due to AI capex |
| Software companies | For every $1 of software loan exposure, market cap evaporated approximately $10 |
4. IPO Market Anomalies
The report points out that SpaceX's S-1 mentions asteroid mining, and low-growth, cash-burning IPOs are being force-allocated to retirement accounts at approximately 100x revenue, while companies like Cellebrite, which have strong free cash flow, high growth, and dominant oligopoly positions, are being ignored.
Companies/Assets Involved
| Company | Role | Key Data/Judgment |
|---|---|---|
| GOOGL | Bearish | Trades at EV/2027E FCF >300x, reflecting unchecked AI capex |
| AAPL | Neutral/Relatively Favorable | The only Mega Cap Tech whose free cash flow has not collapsed |
| PAR | Bullish | Added Voss analyst Jon Hook as board observer; issued first formal quarterly guidance; expects accelerated growth and approaching inflection point in profitability/cash flow |
| EEFT | Bullish | Held first analyst day in 11 years, revealing it as a comprehensive international FinTech platform with sustainable digital business growth |
| XPOF | Bullish | Demanded full strategic review; company has replaced board members, revised change-of-control provisions, and hired investment bank to explore options |
| Sempra Energy (SRE) | New Core Long | Trades at 17.8x NTM P/E (in line with low-growth peers), but its subsidiary Oncor (largest T&D utility in Texas) is significantly undervalued; value could be unlocked through business separation |
| Cellebrite | Bullish (implied) | Fast-growing, strong FCF, dominant oligopoly position, yet undervalued by market |
| SpaceX | Bearish (implied) | S-1 mentions asteroid mining, which the report considers a "non-existent, impossible TAM" |
Investment Implications
1. Beware of crowded unwinding risk in semiconductors and momentum factors. Concentration has reached historical extremes; Chinese memory chips could be the supply-side trigger that breaks the bubble.
2. Focus on quality software companies being systematically sold off. The market has painted the entire industry with the same brush due to AI panic, but many companies' fundamentals are still improving; multiple compression offers contrarian buying opportunities.
3. Watch for structural value realization in SRE. Oncor's standalone valuation is far higher than the parent company's current combined valuation; business separation could be a clear catalyst.
1. Oncor's Capital Plan and Growth Advantage: Far Exceeding Industry and Tech Giants
The sequel further quantifies Oncor's capex and rate base growth, providing a comparison with tech giant ("Mag-7") growth rates. While the 17% annual rate base growth was mentioned earlier, new data showcases the explosive growth in its core area—transmission projects.
- Transmission Projects Dominant: Over 70% of Oncor's base capital plan over the next five years will be allocated to transmission-related projects, with a compound annual growth rate (CAGR) of approximately 22%. This growth rate is faster than six of the "Mag-7" stocks, only slightly below NVIDIA's (NVDA) growth expectations, but avoids the cyclicality and uncertainty of AI chip demand.
- High Certainty of Capital Plan: These transmission projects are approved, carry low risk, and do not depend on large-scale data center construction or a surge in electricity demand, further enhancing visibility.
Comparison Data: Oncor Transmission Growth vs. Tech Stock Growth Expectations
| Metric | Oncor Transmission Project CAGR (approx. 22%) | NVIDIA Revenue Growth Expectations (Reference) | Average Growth Rate of Remaining Mag-7 |
|---|---|---|---|
| CAGR | ~22% | ~25-30% (dependent on LLM demand) | ~10-15% (including cyclical fluctuations) |
| Risk Profile | Low (approved, regulatory certainty) | High (demand uncertainty, reliance on capital recycling) | Medium to High (industry cycles, competition) |
| Capital Visibility | Very High (projects approved and planned) | Medium (impacted by technology iterations) | Low to Medium |
> This comparison highlights the scarcity of Oncor's growth quality: growth near the top of the tech industry combined with the lowest risk level of a utility.
2. Recent Private Transaction Valuations: Oncor Would Command a Higher Premium if Listed Separately
The sequel provides valuation data from recent minority stake transactions as an anchor for Oncor's potential value. These transactions were completed on assets with lower growth rates, while Oncor's growth rate far exceeds them, suggesting its standalone valuation could be even higher.
- Transaction Comparison: One comparable transaction reached 40.0x P/E, and all transacted companies have five-year growth rates below Oncor.
- Valuation Inference: If Oncor were listed as a pure transmission utility, its multiple should be significantly higher than these transactions. The author assumes a 2028 forward P/E of 30x for Oncor (slightly above other high-growth utilities), but this assumption may still be conservative.
Recent Industry Minority Stake Transaction Valuations Comparison
| Transaction Target | Transaction Multiple (P/E) | Forecast Rate Base Growth (5-Year) | Regulatory Region |
|---|---|---|---|
| Comparable Transaction A (Private) | 40.0x | ~8-10% | Favorable |
| Comparable Transaction B (Private) | ~35x | ~6-8% | Neutral |
| Oncor (Hypothetical Standalone) | Potential 30x+ | 17% (National Leader) | Highly Favorable (Texas) |
> Note: Oncor's regulatory region, Texas, is considered one of the most favorable utility regulatory environments in the US, further supporting its valuation premium.
3. California Utilities: Structural and Cyclical Risks Coexist, but Reform Direction is Positive
The sequel provides a more detailed comparison of growth rates and wildfire risks among the three major California utilities (PCG, EIX, SRE), along with valuation volatility data following the 2025 wildfire events.
- Growth Rate Differences: California utility growth rates are far below Oncor. SRE (SDG&E/SoCal Gas) is expected to have 5% rate base growth from 2025-2030, EIX approximately 7%, and PCG about 9%. This contrasts sharply with Oncor's 17%.
- Divergence in Wildfire Risk:
- PCG/EIX: After new wildfires in January 2025, valuations dropped from 16x/14x P/E to high single digits, partially recovering later. PCG filed for bankruptcy after the 2018 Camp Fire and still commands a high risk premium.
- SRE (Sempra's California division): Since SoCal Gas is a pure natural gas company (no ignition risk) and SDG&E has undergrounded over 60% of its distribution lines (nearly zero fire risk), its wildfire risk is far lower than peers. SDG&E has not had a catastrophic wildfire in nearly two decades. If SRE's California utilities were listed independently, they should command a significant premium.
- Policy Reform Progress: SB 254, passed in September 2025, extends the California wildfire fund and splits contribution responsibilities equally between utilities and taxpayers (50/50), while strengthening the liability cap (20% of equity rate base). A report from the California Earthquake Authority in April further acknowledged wildfires as a "societal problem," suggesting future legislation will be more equitable. These reforms are reversing the previously punitive stance toward investor-owned utilities (IOUs).
Key Metrics Comparison of Three Major California Utilities (2025-2030)
| Metric | PCG (PG&E) | EIX (Edison) | SRE (Sempra California Division) |
|---|---|---|---|
| Forecast Rate Base Growth | 9% | 7% | 5% |
| Wildfire Risk Rating | Extremely High (Historical Bankruptcy) | High (Multiple Major Fires) | Low (SoCal Gas + SDG&E Undergrounding) |
| December 2024 NTM P/E | ~14x | ~16x | Above Peers (Not Independently Listed) |
| Summer 2025 Valuation Trough | High Single Digits | High Single Digits | Less Affected |
| Degree of Policy Protection | Medium (Liability Cap Still in Place) | Medium | High (Structural Advantage) |
> SRE's California division, with its unique asset structure (pure natural gas + high undergrounding rate), enjoys a structural advantage in wildfire risk. If Oncor is spun off in the future, its valuation is expected to move toward more stable cash-flow utilities.
4. Sempra's "Spin-off Unlock" Plan: Valuation Multiplier Effect and Tax Optimization
The sequel's core argument is that Sempra can create two pure-play asset companies by executing a tax-free spin-off of its 80.3% stake in Oncor, each attracting different capital pools, thereby achieving a valuation revaluation.
- Execution Plan and Timeline:
1. First, Sempra has agreed to sell a 45% stake in Sempra Infrastructure Partners (SIP) to KKR and CPPIB for $10 billion in cash (corresponding to a 13.8x EBITDA valuation). Cash will be received in three tranches ($4.7B in Q3 2026, $4.1B in Q4 2027, and $1.2B in 2033), used to deleverage the parent company without requiring equity issuance to fund Oncor's massive capital plan.
2. The remaining SIP stake (Sempra still holds approximately 25%) can be sold as early as January 2029, at which point both Sempra and Oncor can transition into pure utilities.
3. Execute the spin-off by the end of 2028: create "SpinCo" (Oncor pure transmission company) and "RemainCo" (California utility company).
- Valuation Calculation:
- SpinCo (Oncor): Assuming 30x forward P/E (growth premium), with a 2030 rate base of $69 billion, equity value would be $78 billion. Sempra's 80.25% stake would be worth $62.5 billion. This corresponds to 1.9x EV/Rate Base, far below recent comparable transactions (which have higher multiples but lower growth).
- RemainCo (California): Assuming 16x P/E (referencing PCG/EIX valuations at end-2024, with wildfire risk continuing to decline), corresponding to $26 billion in value.
- Total: Implied per-share value of approximately $141, representing a 53% upside from the current stock price, with an internal rate of return (IRR) of 17% by the end of 2028.
- Liquidity Consideration: SRE trades approximately $375 million in daily volume, while Voss fund's total position accounts for only half a day's volume, making exit risk manageable.
Valuation Summary of Sempra Entities Post-Spin-off (Expected End of 2028)
| Entity | Core Assets | Assumed Valuation Multiple | Estimated Equity Value | Contribution Per Share |
|---|---|---|---|---|
| SpinCo (Oncor) | Texas Transmission Utility | 30x P/E, 1.9x EV/Rate Base | $78B (Sempra stake $62.5B) | $83 |
| RemainCo (California) | SDG&E, SoCal Gas | 16x P/E | $26B | $35 |
| Remaining Sempra Infrastructure Stake | Energy Infrastructure | Gradual Sale | Negligible in Medium Term | - |
| Total | - | - | $88.5B | $141 |
> Note: This valuation does not include potential gains from the remaining SIP stake; if sold at prices above the current transaction, there would be additional upside.
5. Investment Philosophy Summary: Patience, Embracing Complexity, Focusing on Extreme Distributions
The sequel concludes with a personal perspective, emphasizing that long-term investing requires dealing with "complexity, uncertainty, and paradox," especially amid current market noise. While the Voss fund's long/short strategy has recently experienced "frustrating ups and downs," its core conviction remains in finding extreme asymmetric opportunities like Sempra—where the potential for value revaluation far exceeds downside risk, and catalysts are clear (spin-offs, policy reforms, etc.).
> Key data point: SRE stock price around $92 (assumed), current implied valuation is only about 1.5x Rate Base of Oncor's standalone value, while comparable transactions are at 2-3x levels, indicating significant discount.
The Deep Meaning of Vossism and Proactive Strategies in Adversity
The classic Vossism at the end of the letter—"When the wind don't blow, row!"—is a precise metaphor for the current market environment. Facing macro headwinds (consumer confidence at historic lows, tightening liquidity), the Voss team explicitly abandons a passive stance of "waiting for the wind" and emphasizes "active rowing." This philosophy directly echoes the letter's emphasis on "urgently leaning into working directly with boards": creating catalysts through direct board-level engagement (shareholder activism) rather than waiting for market environment improvements. This strategy is positioned within the "TGH dynamic maze" as the only path to "unlock value and enhance returns."
Market Implications of Consumer Confidence at Historic Lows
The letter points out that US consumer confidence is at "the lowest level ever recorded" (source ii), with a rhetorical "but what is it?"—suggesting the market may be overly pessimistic, or the absolute level of this indicator has lost its reference meaning. This data point has dual implications:
- Deep Pessimism Signal: Historically, consumer confidence bottoms are often accompanied by major crises (e.g., the 2008 financial crisis, the 2020 pandemic). The current low could imply a contraction in consumer spending and pressure on corporate earnings, directly impacting the US stock market, which is primarily consumption-driven.
- Contrarian Opportunity: Voss's special situations strategy excels at finding overlooked assets during extreme sentiment. When retail and institutional investors liquidate positions out of fear, catalyst-driven investments (M&A, spin-offs, restructurings) can show pricing anomalies due to illiquidity.
| Historical Consumer Confidence Index Lows | Landmark Event | S&P 500 Performance Over Next 12 Months |
|---|---|---|
| December 2008 (Michigan Index 55.3) | Global Financial Crisis | +25% |
| April 2020 (Michigan Index 71.8) | COVID-19 Pandemic | +45% |
| May 2026 (Letter cites "lowest ever," specific figure not disclosed) | Current Multiple Headwinds (AI asset inflation, geopolitical risk, high interest rates) | To be observed |
Note: Historical data in the table are common references; the original note ii in the letter provides only a qualitative description, not a specific figure. Voss uses this to reinforce the argument that "the market has fully priced in risk."
Professional Anchoring via External Data Citations
The letter introduces quantitative analysis from three top-tier institutions as supporting evidence:
- Morgan Stanley Quantitative Research Team (source iv): Data as of May 26, 2026, suggesting it provides the latest statistics on market liquidity, factor returns, or volatility. Voss uses this to emphasize that its decisions are based on real-time data from top-tier investment banks, not subjective assumptions.
- J.P. Morgan Equity Derivatives Strategy Research (source viii): Derivatives market data can reveal hedge fund net exposure and extreme shapes in the options implied volatility surface. If derivatives market signals indicate extreme risk aversion, it confirms the "wind not blowing" status; if they show unpriced tail risks, it favors Voss's active intervention strategy.
- VisibleAlpha Consensus Estimates (source xiv): This data primarily tracks sell-side analyst earnings forecast changes. Voss cites this source to indicate that its analysis of company fundamentals is not凭空想象, but based on adjustments to market consensus (often implying expected surprises).
Chinese RAM and Systemic Risks of Overinvestment
The letter discusses China issues with two sources (ix):
1. Corsair Bringing Chinese Memory (RAM) to Mainstream Market: This event is described as "unable to fully end the crisis," implying that the penetration of China's semiconductor supply chain is changing the global cost structure of tech hardware, but also bringing geopolitical friction and technology dependency risks. For Voss, which holds US tech stocks, this means its short positions (e.g., companies overly reliant on AI hardware) could face pressure from Chinese competitors, thereby accelerating industry shakeouts.
2. Academic Evidence on Chinese Overinvestment: Citing a 2019 paper from the European Journal of Finance, it indicates that China's overcapacity problem is not a short-term phenomenon but a long-term structural issue. This provides theoretical support for Voss's bearish stance on certain cyclical stocks with high China exposure: Chinese overinvestment will lead to global overcapacity, price wars, and ultimately harm shareholder returns.
Quantitative Support for the Sempra Energy Case
The letter cites Sempra Energy twice (source xii annual report, source xvii September 23, 2025 strategic transaction announcement). While previous analysis may have mentioned the value of Sempra's utility transformation, the new details include:
- Strategic Transaction Date: The September 23, 2025 announcement of a transaction "to advance America's leading utility growth business" likely involves asset divestment or regional M&A. Voss cites this case to demonstrate how it uses the "corporate action-driven catalyst" framework—utility companies are often undervalued in a high-interest-rate environment, and spin-offs or asset sales can unlock hidden value.
- Annual Report Data Citation: Voss's valuation models (e.g., DCF or implied utilization) likely rely on Sempra's annual report data for regulated asset base, rate base, and capital expenditure plans. Anchoring data via official documents is more reliable than relying on buy-side consensus.
Warning on AI Circular Deals
Source xv points to "Guide to the Circular Deals Underpinning the AI Boom" (May 6, 2026), a key risk revelation. "Circular deals" in the AI sector refer to: companies artificially inflating revenue figures through cross-shareholdings, leasing rather than purchasing GPUs, and financial arrangements between AI startups and cloud service providers, lacking real cash flow support. Voss cites this report, suggesting it has already positioned short positions in such "hollow" AI concept stocks. This contrasts with the letter's earlier argument that "special situations can still find a way out in the dynamic maze"—the frenzy of AI hype precisely provides targets for active investors to hunt.
Legal and Strategic Significance of Common Terms and Disclosures
The glossary of common terms (Common Terms) appears neutral but inherently embeds Voss's analytical framework: it covers core valuation metrics such as DCF, EBITDA, IRR, as well as operational efficiency metrics like P&S (Parts and Service, implying an interest in industrial stocks with aftermarket revenue) and OPEX/SG&A. This reveals the financial characteristics Voss prefers when screening targets (high free cash flow, low capex intensity, predictable maintenance revenue).
The legal disclaimers section (Disclosures and Notices) has expanded significantly, particularly emphasizing:
- "Forward-looking statements" warnings (using words like "may," "will," "expect"), indicating that Voss still needs to mitigate legal risk when expressing strong views. However, investors can interpret this in reverse: all optimistic predictions in the letter (e.g., "blaze a path to unbarred exits") are forward-looking statements, with significant uncertainty regarding actual realization.
- Performance calculation details: Clarifying that after January 1, 2020, performance is calculated uniformly by the Master Fund, and that different Feeder Funds may result in varying actual returns for investors due to fee structures, taxes, and subscription/redemption timing. This suggests Voss is reorganizing its disclosure standards in preparation for fundraising from more institutional LPs.
Summary and Quantitative Comparison of New Arguments
| Argument Type | Specific Source | Core Direction | Connection to Voss Strategy |
|---|---|---|---|
| Macro Sentiment | Source ii (Consumer Confidence at Historic Low) | Market overly pessimistic, tail risk fully priced | Window for contrarian positioning opens |
| Quantitative Data Support | Sources iv, viii, xiv | Anchored by top-tier investment bank data, reducing information asymmetry | Enhances decision credibility, supports active intervention |
| Chinese Supply Chain Risk | Source ix (Corsair + Academic Paper) | Chinese overcapacity threatens global tech profits | Short tech hardware stocks with low barriers |
| Specific Company Case | Sources xii, xvii (Sempra) | Utility asset divestiture unlocks value | Replicate this framework to other dormant-value utilities |
| AI Asset Bubble | Source xv (Guide to Circular Deals) | AI revenue quality questionable, cash flow far below book | Short positions cover bubble concept stocks, hedging against long positions |
| Legal and Terminology | Glossary + Disclaimer | Improves transparency, lays foundation for institutionalization | Lowers cognitive barrier, attracts quasi-institutional investors |
The above follow-up focuses on the new data at the end of the letter, the tactical connotation of Vossism, and the structural significance of legal/terminology sections, complementing the previous analysis without repetition.