After a bumpy but not terrible Q1 for Middle Coast Investing, and a Liberation Day crash to start Q2 that has been bad for everyone, one of my favorite movie quotes comes to mind.
The movie is Vision Quest, which as far as I know is still the high school wrestling movie, despite it coming out a few months after I was born. The scene sees our hero, Louden, in the bathroom, trying to stop an incessant nose bleed, one that forced him to default in a match. The big bad villain, Shute, who watched the match, confronts him in the bathroom.
Shute: ‘You got a problem.’
Louden: ‘I’ve got a lot of problems.’
Shute: You can’t hold your mud.
The you can’t hold your mud line was the key punchline when I was a kid, but the defensive, ‘I’ve got a lot of problems’ stands out to me in the market context. Every day prices and information are coming across the line, and every day, new problems are raised. There are always a lot of problems.
POV: Checking your portfolio after another policy making tweet.
And yet, over time, most of the time, the U.S. and global economy, and the best companies therein, endure. It’s easy to focus on the problems and forget the strengths, the same way it’s easy to focus on the debts and forget the assets.
I’ve needed a few tries to write our Q1 investing letter, in light of a fast-moving, gut-punching Liberation Day crash and several plot-twists since. We’ve seen a rapid sell-off like none since the Covid pandemic, and also one of the greatest market days of all time. Today’s market is in some ways a scarier one than March 2020’s, though also a more easily fixable one, if the President just has the courage. Which, alas…
I don’t know what happens next. Markets process information faster than ever, and that information is more confused and hard to follow than ever. The decision-making ‘process’ is less strategic or thought out than ever. We’re doing our best to prepare for all situations.
I’ll explain how much the problems have changed, how we’re adapting to try to stop the nosebleed, and how much we’re trying to focus on the same old things we always do. When there are a lot of problems, it’s best to focus. Owning good companies at fair to good prices that should grow over time tends to be a successful strategy, and as startling as the new problems are, that’s what we plan to do.
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The predicted volatility and the surprising part
I mentioned in my last pre-2024-election letter that I thought President Trump would be the wrong choice for the U.S. economy and the stock market in the 2024 election. I said in our Q4 letter that we could expect volatility, as Trump is volatile as a person and a leader. All that played out in the first quarter. We planned to be quicker about buying and selling to take advantage of volatility, and we stuck to that plan.
What I was wrong about is how little the President and his administration would care about the stock market. In Trump’s first administration, Treasury Secretary Steven Mnuchin admitted the stock market was a good way to measure the administration’s success, saying this was a ‘mark-to-market business.’ This time around, President Trump is making fun of business people for always complaining about uncertainty, and Treasury Secretary Scott Bessent is putting blame on high valuations in tech.
This indifference is actually correct. The President should not care about the stock market. If the administration does a good job within their control with the economy, the stock market will follow. And tech valuations were high.
But it also stretches the imagination to think the current erratic approach will be good for the economy. Even if you believe in a more protective trade policy, the slapdash way tariffs from other countries were calculated is a sign of the quality of ‘effort’ from our leaders. It beggars belief to say that the bear market – a 20% drop from highs, which the S&P 500 crossed just before the President’s ‘tariff pause’ tweet – is not due to the government’s policy and President Trump’s Liberation Day crash-inducing announcement.
Dealing with volatility
What have we done about this? During Q1, we decided to raise our target cash levels about ~5% per portfolio. We did 3% more selling than buying in the quarter. Then, while I don’t like to sell into the teeth of a sell-off, we did some selling on April 4th, after the Liberation Day crash, to build up more cash and lessen exposure to our oversized tech stocks, smaller positions, and apparel companies. We have net sold the week of April 7th, mostly into the surge on Wednesday. I have also shorted Tesla in a personal account for the first time, a position we’ve opened twice and closed twice, and we may consider more aggressive hedging/shorting across the portfolio as needed.
It’s hard to predict the exact dynamics at this point – for example, who would have predicted that Mexican airports would do relatively well in the wake of tariff announcements? – so we are sticking to the basics: investing in companies with solid balance sheets and businesses that serve their customers in an essential way, and cutting stocks that don’t fit that framework. A crisis is an opportunity to reposition.
Each of the accounts we manage has solid companies in its portfolios, as well as a solid amount of cash to invest when the time is right. On April 11th as I write, that time doesn’t seem here, but it will come.
Recent Parallels
This echoes March 2020, and not only because of the President. Then, the S&P 500 dropped 34% from February 19th to March 23rd. It returned to its February 19th level by August 18th of the same year. The speed and the suddenness of the sell-off, even as there were inklings of what was coming, is the strongest connection between then and now.
The difference then was the government swooped in with heavy spending and the Federal Reserve took interest rates to zero immediately. That’s unlikely to happen this time. There are recent market crashes where it took a long time to recover – 12 years post dot com bust, and six years post financial crisis, using the S&P 500. The circumstances are different in each individual case, but circumstances always are.
But, one way or another, there will be another side to this. Whether that is due to political pressure, calmer minds prevailing, or just the aggravated rebuilding cycle of a global economy, things will change. We’re doing everything we can to protect our capital and get through this, to the point where this is another of the lot of problems that the market has survived and forgotten about.
Q1 2025 Performance
| Q1 2025 | 2024 | 2023 | 2022 | 2021 | 2020 | |
| U.S. portfolios | -3.7% | 15.1% | 47.0% | -13.4% | 16.8% | 12.0% |
| S&P 500 | -4.6% | 23.3% | 24.2% | -19.4% | 26.9% | 16.3% |
| Core U.S. portfolios | -0.7% | 11.2% | 47.0% | -13.4% | 16.8% | 12.0% |
| Russell 2000 | -9.8% | 10.0% | 15.1% | -21.6% | 13.7% | 18.4% |
| S&P 600 | -9.3% | 6.8% | 13.9% | -17.4% | 25.3% | 9.6% |
| Nasdaq | -10.4% | 28.6% | 43.4% | -33.1% | 21.4% | 43.6% |
| European Portfolios | 9.2% | 10.9% | 13.4% | -15.3% | 4.5% | 18.3% |
| Euro Stoxx 50 | 7.2% | 8.3% | 20% | -11.7% | 21.0% | 3.5% |
| DAX | 11.3% | 18.8% | 19.2% | -12.3% | 15.8% | -6.3% |
Disclaimers and notes:
- See performance disclosures for more details on performance.
- These results are net of fees and include reinvested dividends or the cash received1.
- Core portfolios exclude a portfolio with huge Amazon and Apple positions.
- All calculations are done by me and subject to error.
Portfolio stats
- Our portfolio level price to earnings for trailing 12 months (TTM) was 19.8. Our price to free cash flow TTM ratio was 21.3. This compares to 20.9 P/E and 19 P/FCF at end of Q4. (Note: these calculations are not to be relied upon and are based on best efforts)
- Cash and equivalents (the ETFs MINT, JPST, SGOV, and BIL, the money market fund SNOXX, and short-term U.S. T-bills) was 16.6% of our quarter end portfolio, with an estimated average yield of 3.1%. This compares to 15.3% of our portfolio and 3.1% yield at the end of Q4. We also had a bond portfolio that accounts for 5.9% of the total portfolio size
- We sold 3% more equity positions than we bought in Q1, not counting cash management trades.
Our top 12 positions as of April 1, 2025:
- Amazon.com (AMZN) – 12% of our portfolio
- Apple (AAPL) – 10.4%
- Progressive Corporation (PGR) – 6.3%
- Grupo Aeroportuario del Centro Norte (OMAB) – 4.4%
- Discover Financial Services (DFS) – 3.55%
- Astronics (ATRO) – 3.1%
- AerCap (AER) – 2.7%
- Steelcase (SCS) – 2.5%
- Lululemon (LULU) – 2.3%
- First Citizens National Bank (FCNCA) – 2.25%
- Broadcom (AVGO) – 2.2%
- TripAdvisor (TRIP) – 2%
- Charles Schwab (SCHW) – 2%
Q1 Winners / Losers
| Winners | % Gain | Losers | % Loss |
| ATRO | 1.1% | AMZN | -1.7% |
| PGR | 1.0% | AAPL | -1.3% |
| OMAB | 0.5% | AVGO | -0.8% |
| Portillo’s (PTLO) | 0.4% | LULU | -0.7% |
| Berkshire Hathaway (BRK.B) | 0.2% | Dallas News (DALN) | -0.5% |
| AerCap | 0.2% | Atkore (ATKR) | -0.4% |
Note: Percentages reflect effect on cumulative portfolio performance, not individual stock performance.
Stock Commentary
New Stocks
Everus Construction Group (ECG) – I mentioned this briefly last quarter. We had a small position in a spin-off from MDU Resources, a utility company, and sold that position not long into Q1 at $70/share. The stock dived after its earnings report underwhelmed the market, and then further due to sector worries. We bought between $39 and $48, and the stock finished the quarter at $37.09.
Everus primarily builds power lines, pipelines, and similar infrastructure. It is based in North Dakota but operates everywhere in the U.S. except New England and Wisconsin. Providing construction services means it should be able to maintain decent gross margins, since it aligns its costs to each given project. It is levered to demand for power and energy infrastructure, which is needed in the United States. Its revenue backlog grew 38% in 2024 and is nearly equal to 2024 revenue (not all of that backlog will be realized in 2025, but also, 2024 revenue was 41% higher than 2023 year-end backlog). It has been a steady grower for the past five years. This is the sort of business that gets a good multiple, and in a stable environment is worth in the $60s or $70s (around where we first sold it).
The earnings sell-off is attributable to ECG being a relatively small ($1.9B market cap) spin-off. It’s newly public, and analysts and investors haven’t decided on how to value it. Analyst estimates dropped .10 for 2025 earnings, or 3.8%, and the stock’s multiple dropped 27% (from 26 to 19) in two days. This inefficiency is the attractive element.
What worries me about Everus, and what has been reflected in the second leg of that sell-off, is that it may be benefitting from tailwinds that die off. Renewable energy (including electric vehicle network buildout), data centers, and grid hardening. A lot of this has been fueled by the AI boom and the Biden administration major bills. If these short-circuit, it would presumably affect ECG’s business, and is why shares trade at only 14.66x 2025 earnings as of the end of the quarter.
On the tariff front, I would expect Everus to be able to pass on increased costs to customers. The question is whether increased costs slow down the underlying demand.
Sonoco Products (SON) – This is not the oil and gas company (that’s Sunoco). Sonoco produces consumer packaging for food and staples products, in both metal and paper, and industrial paper packaging. It is shuffling its business portfolio, acquiring Eviosys in Europe and selling its heat-safe packaging businesses. It is attractive because it should be able to pay off debt, leading to more value for the equity, and because the equity is cheap compared to earnings. This is – or should be – a boring business, levered to the sorts of things we buy in any environment. In that way it’s similar to Crown Holdings (CCK), which we also added to this quarter after it had a good report. Crown Holdings is focused on beverages, but similar idea.
The tariff risk here is mostly in metal coming into the United States. Both businesses have large international presences and source locally, which means that, again, demand may be the biggest factor.
Alphabet (GOOG) – We bought Alphabet (i.e. Google) in a few accounts. I’ve owned it before, but not for very long. I usually don’t focus on buying the biggest tech companies, even as we have the one portfolio with the large AMZN / AAPL positions.
One reason to do this is to give the portfolios with Alphabet exposure to large cap technology, a huge part of the market. But also, of the so-called Magnificent Seven or any other trend of huge tech stocks you want to name, Alphabet is the most attractive. At $170/share, where we bought it, it traded at 19x 2025 earnings estimates and 21x 2024 earnings results before crediting its balance sheet for its huge cash position. That is less than the S&P 500.
Alphabet is supposedly threatened by the advent of ChatGPT and generational AI. It seems as likely to me that Alphabet wins or at least ties Microsoft and OpenAI in these battles as anything else. It also seems as likely to me that the generative AI trend slows down, and the incumbent, Google search, becomes the business winner.
Alphabet is also facing regulatory and governmental pressure, and may be forced to break up. A break up would be fabulous for shareholders, in my view; owning YouTube as an independent company is not something I would complain about. Alphabet’s Waymo unit is also the likeliest winner of self-driving, if that becomes a real market. (If it doesn’t, Alphabet stops burning money on Waymo and becomes more profitable).
Lastly, Alphabet is less directly exposed to the tariff issues than Apple or Amazon. While it may face more backlash from other governments, and faces regulatory scrutiny on a number of fronts, and reduced demand would affect advertising sales, it is in a relatively better spot compared to Magnificent 7 peers.
Comments on Q1 Winners
Astronics had two things go right in the quarter. The expected one is its results: there is a lot of aerospace demand to catch up to in the post Covid period. Boeing’s struggles, supply chain snarls, and that demand pause five years ago have ensured that the backlog and growth outlook for Astronics is good, and their Q4 report supported that. The company has generally reached or beat its top guidance estimates, and top guidance calls for 8% revenue growth in 2025.
The unexpected good thing – a U.K. judge ruled Astronics has to pay Lufthansa $11.9M over a patent dispute. Lufthansa was seeking $105M. That’s a big difference for a company that entered Q1 with a market cap under $600M.
The aerospace supply chain is susceptible to tariffs, and Boeing is one of the star exporters of the U.S. and so in theory liable to be a target of other countries. The essential nature of aerospace makes me think Astronics’s business should hold up, and its balance sheet has improved to help it survive any hiccups.
We added more Progressive shares in the wake of the horrible wildfires outside LA. Progressive’s home insurance business is smaller and its exposure in California wasn’t bad.
The company’s year-over-year policy in force growth rate is 18% in the first two months of 2025, after having the same growth in 2024 for the full year. Its combined ratio was below 85 in both months year to date (Progressive targets 96; lower is better). The combined ratio is unsustainable, and the growth rate will also likely so (annualized December to February growth is about 12%). But it gives Progressive options.
There are risks: competition is starting to grow again, meaning profitability or growth rates will come down. Tariffs will cause car repairs to become more expensive, which is what hit the industry in 2021-22. Climate change is a broad risk to insurance. But Progressive has an enormous lead and continues to extend it. It is still valued at 18.3x trailing earnings at the end of Q1, below the S&P 500. I will not be surprised if this becomes our top holding in the next couple years.
Grupo Aeroportuario del Centro Norte has also put up impressive numbers so far this year. Passenger growth is up 9.1% in the first three months of the year, well ahead of its Mexican airport peers. All the idiosyncratic problems of the past couple years – Hurricane Otis affecting Acapulco, airplane engine issues in Mexico – are now in the comparable numbers for OMAB to beat.
The new idiosyncratic problem – President Trump’s policies – has so far not hurt OMAB. Mexican President Claudia Sheinbaum has seemed to play her hand well, holding firm with Trump while also seeking to work together. The focus on this relationship may also constrain Sheinbaum from more extreme domestic measures, whether rewriting the concession relationship with the airport companies or any follow on from the controversial judicial reform changes, though I am no expert on that.
In 2023, OMAB passenger traffic grew 15.6% and total aeronautic/non-aeronautic revenue grew 24.4%. We’re not quite at that pace, but revenue growth should be faster than traffic growth. A global recession would dent traffic, but OMAB is reasonably valued even without growth.
Portillo’s became a big position for us last quarter as the stock plummeted for no clear reason. Sometimes momentum dictates; that momentum turned in Q1. The company announced better than expected results for Q4 and guidance for 2025, and is making progress on its restaurant of the future models. The turnaround in the stock price may have again got ahead of itself, and we sold shares in the $14 range. But the food itself is a reasonably good value, and I hope demand holds up even as we hit a recessionary environment.
Comments on Q1 Losers
Taiwan Semiconductor (TSM) is the company we own with the most obvious geopolitical risk, and we cut our position in half. I know that if Taiwan-China flares up the damage will extend much wider, but TSM would seem to be the first domino there. And it’s not as if Taiwan is having an easy time of it with the current U.S. administration.
We added a fair deal to our position of Dallas News. At its quarter closing price, it traded for at most negative $6.1M when you factor in the most recent sale of its building according to my math.
Dallas News has resolved its pension obligations and reduced its operating expenses another $5M per year. The company is not far from profitability, Dallas is a growing part of the country, and if there is any revenue stabilization or growth, this will be worth a lot more even after the company issues a lot of its cash to a share buyback or dividend, which seems likely. An advertising recession is of course a risk, and while I’m at it, the Mavericks trading away Luka Doncic is not great for sports interest in the area.
If all else fails, an important Texas media outlet would seem to have trophy asset potential, especially with a pristine balance sheet. Given who the likely buyers would be, and how big money buyouts of news outlets have gone, this is not my preferred outcome as a citizen. But still.
I think there’s some impatience in the market, and disappointment the company hasn’t yet told us what they’ll do with all their cash.
We sold just about all of our Axcelis (ACLS) position and a large chunk of our Atkore position. I didn’t like the answers I had to the key questions surrounding the companies. Both hit lucky demand seams and saw huge growth in the 2020-2022 period, but are cyclical companies and haven’t maintained an edge. Axcelis sells a lot into China, which was also a major risk, but also faces overbuilding in its vertical (electric vehicles is a key driver for its products) and increased competition. We have a larger holdover Atkore position because I think it is closer to the bottom, but neither is a big position anymore.
Comments on other stocks
Vimeo and TripAdvisor reported earnings around the same time and faced the same market reaction, for similar reasons, I think. Each saw takeover interest last year. Each has a unit or strategy that is growing fast – enterprise sales for Vimeo, Viator for TripAdvisor – that is leading the business, but also a declining legacy business that is hurting overall sales growth. I think investors hoped that both companies would have either news about a sale or some sort of ‘we plan to batten down the hatches and wait for profitability’ statement, rather than ‘we plan to grow in 2025 and 2026,’ which is essentially what both said. Growth requires investment.
Vimeo’s business isn’t affected by tariffs per se, but we’ll see how essential their video software services are to businesses in a tight spending climate2. If travel spend goes down, TripAdvisor will suffer, but travel is a secular, long-term theme, and TripAdvisor should do ok even if there is less cross-border travel into/out of the U.S.
We were net sellers of Discover Financial shares, buying and selling at different times. Two things are going on here – whether Capital One will successfully buy it, and the impending recession risk. We sold earlier in the quarter at $200, feeling it would be stupid to not take some risk off the table if a deal doesn’t close. Then when reports broke that the deal might face heavy scrutiny, we bought at $145, which would be a fair value for just Discover, in my view. Another report suggested the deal will be approved, and we sold some shares at $166.5, out of concern for economic sensitivity. Ultimately, COF and DFS should be a winning combination, and the deal seems likely to go through. But credit card companies tend to be very cyclical, and if the economy hits a recession, the stock (though not necessarily the long-term business) will suffer.
Interested in more from Middle Coast Investing? Or in talking to us? Get in touch.
Please read our full performance disclosures.
Disclosure: I am long all bolded companies mentioned in this letter and short Tesla. I may change positions at any time. I have no immediate plans to make major changes. This is not investment advice. Investing is risky. Any investing decisions are your own responsibility and should be taken after speaking with an advisor or at your own risk. This is not a solicitation to buy or sell anything. Past performance is of course no promise of future results.
Disclaimer: I calculate performance and all portfolio figures manually, so it may be prone to error. The accounts I manage may deposit or withdraw money over the course of a quarter. I account for that in my calculations by adding/subtracting that money to/from the starting amount at the beginning of the period. This means withdrawals intensify performance and deposits dampen it. For half-year, 9-month, and full-year performance, I multiply quarterly performance by one another to control for deposits/withdrawals.
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