The last three months have been noisy ones, both in markets and the world at large. For all that, those months left U.S. stocks at all-time highs. Our accounts also did well, not dropping as much as markets at the bottom in April and with our core accounts still staying ahead of our benchmarks for the year. I wrote the Q1 2025 letter as we were in the throes of the Liberation Day sell-off. I post our Q2 2025 letter as we wait to see what July 9th and August 1st mean. The logical conclusion after the rapid recovery would be that the problems triggering that sell-off have been resolved, and we can look forward to good times. But is that the case?

Positive signs

Let’s start with some of the good signs. First, the Trump administration has, for now, backed off its most extreme tariff positions. July 9^th, today, was the original possible reinstatement of the severe tariffs – and as far as I know, only one actual trade deal has been reached between the U.S. and other countries since April – but also, that’s just a made-up date, and the deadline can be pushed back. The new August 1st date is also moveable. The signals on what the Trump Administration will do are, as ever, mixed.

Clear seas or a rocky shore? Photo by Rikin Katyal on Unsplash

Also, inflation has for the most part not spiked up. Whether that continues or not – especially as the dollar weakens compared to countries we might import goods or materials from – is to be determined, but it seems probable that interest rates will go somewhat lower by the end of the year. That is positive for the economy and markets.

And, we haven’t seen job growth turn negative. A recession does not yet appear here, GDP readings aside. Whatever you might say about the economic policies espoused and implemented by the Trump administration, they are for the moment getting away with it.

Yellow Flags

At the same time, there are plenty of reasons to be concerned. Most fundamentally, tariffs now are higher than tariffs before April 2^nd. We have the aforementioned one new trade deal (plus a couple trade ‘frameworks’). The Trump administration has expressed admiration for the current tariff levels – 30% for China, varied tariffs for NAFTA partners, at least 10% for the rest of the world – and, China aside, it seems likelier tariffs go higher than lower.

The Trump administration is a somewhat volatile apparatus, and also an interventionist one. The government has argued for a ‘golden share’ of the company U.S. Steel, has swung wildly on tariffs, and has threatened companies who point out the reality of the current environment or who might respond to changing circumstances in a ‘normal’ economic way. That is not, on its face, a good thing for investing.

The new budget bill has passed, and will reshape the economy and the country. It seems to negatively affect some sectors – renewable energy – while not really helping a lot of other sectors, and increases the deficit. It’s not likely to be an immediate negative, but it doesn’t help.

And lastly, there was a little war between Iran and Israel that the U.S. intervened in. It’s another example where, in the short term, the administration may get away with it – no U.S. casualties, no huge spike in the price of oil, some damage done to Iran. But in the long term, a world that is primarily and openly conducted via power politics, where Iran still might have a path to nuclear weapons, and where countries contemplating that path may feel less inclined to cooperate with the U.S. and the global west is a less inviting world to invest in.

The Market is Day to Day (But Aren’t We All?)

All of which is to say, even though the President backed off the tariffs to a degree, and even though stocks recovered from a very brief bear market to set all-time highs, I’ve remained cautious. We did more selling than buying in Q2, some of our buying was bonds and hedges to set us up for recessionary or inflationary environments, and we are preparing for different types of markets. I still primarily invest in stocks and look for their individual value to bear out over time, and that will remain our focus. But over time is a foggier period to make sense of, even if it seems like the sun is shining when the S&P 500 rises so quickly.

Q2 2025 Performance

Disclaimers and notes:

• See performance disclosures for more details on performance.
• These results are net of fees and include reinvested dividends or the cash received.
• 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 22.4. This compares to 19.8 P/E at end of Q1. (Note: these calculations are not to be relied upon and are based on best efforts. I also have stopped reporting price/free cash flow ratio, as we own too many financial stocks for this to be meaningful)
• Cash and equivalents (the ETFs MINT, JPST, SGOV, and BIL, the money market fund SNOXX, and short-term U.S. T-bills) was 14.6% of our quarter-end portfolio, with an estimated average yield of 3.1%. This compares to 16.6% of our portfolio and 3.1% yield at the end of Q1. We also had a bond portfolio that accounts for 6.3% of the total portfolio size compared to 5.9% at end of Q1, and a hedge position of 0.9% of the portfolio as compared to negligible at end of Q1.
• We sold 66% more equity positions than we bought in Q2.

Our top 12 equity positions as of July 1, 2025:

• Amazon.com (AMZN) – 12.3% of our portfolio
• Apple (AAPL) – 7.6%
• Progressive Corporation (PGR) – 5.5%
• Grupo Aeroportuario del Centro Norte (OMAB) – 5.4%
• Capital One Financial (COF) – 4.2%
• Astronics (ATRO) – 3.6%
• Broadcom (AVGO) – 2.9%
• AerCap (AER) – 2.9%
• Steelcase (SCS) – 2.5%
• First Citizens National Bank (FCNCA) – 2.2%
• F&G Annuities & Life (FG) – 2.2%
• Charles Schwab (SCHW) – 2.2%

Q2 Winners / Losers

Winners	% Gain*	Losers	% Loss*
AMZN	1.5%	AAPL	-0.7%
OMAB	1.5%	PGR	-0.3%
ATRO	1.1%	Lululemon (LULU)	-0.2%
AVGO	1.1%	FG	-0.2%
COF	0.9%	J.M. Smucker (SJM)	-0.2%
Everus Construction Group (ECG)	0.9%	Vimeo (VMEO)	-0.1%

* % gain or loss in this table is as part of our total U.S. portfolio value (including non-core). ECG stock rose 71% in the second quarter, resulting in a 0.9% in total portfolio gain, which is what we list in the table, for example.

Stock Commentary

New Stocks

Lyft (LYFT)

We opened starter positions in two stocks.

Lyft is a ride-hailing company, though it also provides bikes and scooters and other transportation. It has been a loss-maker and a bad investment since coming public. It priced its initial public offering at $72/share. We bought shares 6 years later at $14.5, 80% lower. Its operating losses in 2022 and 2023 were nearly $2B, vs. a market capitalization of $6.1B at where we bought it. Uber is the dominant player, competing at a much different level than Lyft.

Of course, I’m omitting a few things from that picture as well. For one, Lyft has a new management team, as of April 2023. Lyft is still growing very fast – 31% revenue growth last year, 13.5% to start 2025. It has a very strong balance sheet, with over $1B in net cash available (again, against a $6.1B market cap). Its operating loss has narrowed to the point where the interest it earns on its cash holdings makes it profitable, both for 2024 and the first quarter of 2025.

And, we bought it for less than 10x free cash flow when adjusting for its net cash and taking out share-based compensation from its free cash flow. That’s a little bit of cherry-picking – Lyft’s cash flow last year benefited from an insurance reserve release. I don’t understand the complete dynamics of Lyft’s insurance exposure and policy. But car insurance should be in a getting cheaper cycle, unless used car inflation strikes due to tariffs.

All of that is to say the financials are decent and on the cusp of getting really good. Lyft as a business has seemed to settle into a clear #2 in a U.S./Canada duopoly with Uber. There are other global players, but Lyft has plenty of room to grow both at home and abroad. It just announced a purchase of FreeNow, the taxi-hailing app we use in Spain that is available in 9 European companies. It successfully managed an activist campaign pushing it to buy back more shares – Lyft fended it off by announcing, yes, it would buy back more shares – and seems focused on the right things: growing profitably, most of all.

Deckers Outdoor Corp (DECK)

Higher-priced fashion and apparel have been among the companies most directly caught up in the tariff crosswinds. Lululemon was one of our bigger losers for the quarter; we sold a few shares in the initial tariff downturn, and then a few more right before its Q1 earnings report when I thought shares had risen too much. The U.S. recovery hasn’t manifested yet for Lulu, and its international growth is strong but not as strong as I hoped. It trades legitimately cheaply now, and I think will work out over time, but we missed a chance to sell more at the start of the year.

The one trade deal the U.S. has signed, besides ‘frameworks’ with the U.K. and China, is with Vietnam. It entails a 20% tariff on goods from Vietnam, 40% on goods from third-party countries shipped through Vietnam, and no tariffs on U.S. goods to Vietnam. I’m skeptical we will see many Ford Broncos driving in Hanoi, but this at least gives clarity to the apparel industry, which produces a lot of its goods in Vietnam. Lululemon produces 40% of its products in Vietnam, and 28% of its fabric comes from China. We can start to model that impact.

This is a long way of getting to Deckers, the other new starter position we opened. Deckers sells shoes, under the Uggs, Hoka, and Teva brands primarily. Uggs is 51% of its sales in the last fiscal year; Hoka is 45%; Teva and assorted brands are the rest. Its finished goods are completed ‘predominately in Vietnam.’

Uggs is more fashion-oriented and has been historically volatile, while Hoka is a newer running shoe brand with more growth, at least in theory, ahead of it. Uggs has grown sales by a compound 8.4% over the past 3 years, while Hoka has grown by 35%.

But, with the uncertainty of tariffs and the possibility that growth might slow, Deckers shares have dropped over 50% this year. We bought shares at $105, not quite the bottom but closer to bottom than top. At that price, we are getting a reasonably priced company – 11x EV/EBITDA, vs. 9.2 for Lululemon and 24.7 for Nike; 17.3x forward earnings vs. 16.1 for Lulu and 45.2 for Nike – that, if it can come anywhere near maintaining its Hoka momentum, should do well going forward. Incidentally, I bought a pair of Hoka shoes a couple weeks ago and had at least one stranger come up to me and ask how I liked them and talk about how he uses his for walking around.

Apparel had the most uncertainty related to tariffs, since the U.S.’s tariffs were most surprising here. That uncertainty has at least clarified. The next question is how much an economic slowdown and/or inflation might eat away at these companies, and after that, how well they do against competition. I think we’ve seen the worst of it, for now.

IEF/IEI/FGSN

PSQ/RWM/TBF

As part of my reaction to the sell-off, I took the time to build small bond and hedge positions across much of the portfolio. We had some of this already, but added more (though it’s still relatively trivial). IEF and IEI are exchange traded funds that track U.S. treasuries for 3-7 years and 7-10 years; we own those in the thinking that in a recession, they should do ok and provide income.

FGSN is a ‘baby bond’, or a bond you can purchase on a stock exchange that is like a preferred stock, and it is issued by FG, which we own shares of as well (see below). This seems like safe credit and pays an over 7% coupon, and approaching 8% at the prices we paid.

We have owned RWM – an inverse ETF that bets against the Russell 2000 – and TBF, an inverse ETF that bets against long-term U.S. treasuries – for some time, but added to those positions. TBF specifically is a hedge against inflation, which would send bond yields higher and bond prices lower.

And we added PSQ in the one portfolio with large AMZN and AAPL positions. PSQ is an inverse ETF set against the Nasdaq. Our stocks often sync better with the Russell 2000, but for that specific portfolio, PSQ makes more sense.

Ideally, all of the hedges lose money, and the bond positions just earn a little income. But, I think it’s always good to have something in the account go green, psychologically, and this gives us some protection if we have another sudden sell-off in the months and years ahead.

Comments on other stocks owned

Boring Companies

One of the themes I have been focused on this year is investing in ‘boring’ companies. Companies that trade cheaply and grow slowly, but should grow in any climate. They shouldn’t do awful in a bad environment, and might do quite well if things break right.

These three stocks are among our biggest buys for the quarter, and we’ve owned each for a while. Steelcase had a perfectly fine earnings report but sold off, and we added to the position. The company is finally seeing revenue growth from the corporate sector again, continues to improve profitability, and has a great balance sheet.

ABM Industries (ABM) is seeing its microgrid business grow to the point where it may start pushing the needle on overall company growth – up 34% in Q1 and now 10% of the business. The rest of the business – janitorial and maintenance services for office buildings, schools, and airports – is making some headway in growing closer to 4%. It’s not as screamingly cheap as Steelcase, but this is a company that doesn’t worry me, and we also bought more shares after an earning sell-off.

F&G sells life insurance and annuities, making it another boring company, but a weirder one to track. It had a terrible sales quarter, which the company explained as having to do with volatile movement on interest rates. It sold more of one of its products in the month of April than it did in all of Q1, and that was the product with the miss. I think this is down to the weird ups and downs of selling investment products, as well as the uncertain start to 2025.

The other important point: F&G’s CEO bought $1.6M worth of shares after the earnings report. It’s still only a 6% increase of his position, and 14% of his 2024 earnings, but that’s a real vote of confidence. The last time he did this much buying was in March 2023; shares doubled in less than a year. There’s no promise history repeats, but it’s a good incremental sign.

TripAdvisor (TRIP)

TripAdvisor was down in the first quarter despite a solid earnings report (from which it rose). It was one of the few stocks I bought at close to bottom, though not a lot. I mention it here only because it spiked in the first week of Q3 as an activist firm, Starboard Value, bought up a bunch of shares and then filed about its position. They own 9% of the company. TripAdvisor has turned away several takeover offers, and recently cleaned up its ownership structure. While its Viator business is good enough to carry the business as a whole and the stock higher, some pressure to consider takeover offers may work in our favor as well. I wrote it up more thoroughly before its earnings report, along with a post-earnings comment.

Comments on Stocks sold

We closed our positions in these stocks, for the following reasons:

DMC Global (BOOM) – we bought this on a hostile takeover situation, and it’s become clear that the takeover will not happen and there is no quick exit here. I’m not excited to own an oil services company, and skeptical the price of oil will move much higher.

Hershey’s (HSY) – still exposed to cocoa prices, still way more expensive than our consumer staples stocks like J.M. Smucker’s and Pepsi, though admittedly they both have problems of their own.  

Levi-Strauss (LEVI) – still doesn’t seem to have a consistent growth plan and faces the same tariff exposures as Deckers and Lulu, though admittedly, the stock is much cheaper.

Worthington Steel (WS) – I didn’t like how dependent this is on car production amidst pressure on electric vehicles and the auto industry as a whole. I should admit, the stock is up since we sold (as are most stocks).  

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. 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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