"During the quarter, we sold our position in Magna International and invested in a new position, Jazz Pharmaceuticals plc (NASDAQ:JAZZ). Founded in 2003, Jazz Pharmaceuticals is a global biopharmaceutical company headquartered in Ireland. The drugmaker’s portfolio of nine approved products focuses on conditions with limited therapeutic treatments in neuroscience (~75% of 2022 revenue) and oncology (~25%).

Jazz’s drug Xyrem was added to its portfolio in 2005 and was approved for use in patients with narcolepsy. The drug’s strong efficacy propelled it to be the standard of care for this incurable sleep condition and has achieved wide adoption for the treatment of excessive daytime sleepiness and cataplexy (episodes of loss of muscle control).

Xyrem’s patent exclusivity ended in January 2023, and authorized generic versions of the product have entered the market. To prepare for the patent cliff, the company developed Xywav, a lower‐sodium version of Xyrem, which is touted for its potentially better heart safety. The drug has received FDA approval for the treatment of narcolepsy and idiopathic hypersomnia and has orphan drug exclusivity through 2027...” (Click here to read the full text)

"Rover Group, Inc. (NASDAQ:ROVR) has surpassed Tech Resources to become a top 5 position in the portfolio. Rover, a pet care marketplace, is a prime example of a business that's poised for success in virtually any economic environment. It reported a set of fantastic earnings due to which its stock gained 50% and has not given up much of that gain in the recent pullback. This is a position that has been in the portfolio since September 2022 but we added to the position as we gained conviction in the thesis.

Operating as a marketplace, Rover earns a "take rate" or a kind of "toll" on every transaction occurring within its platform. In the face of inflation, as pet sitters request higher prices for their services, Rover's revenues naturally grow because its share of the transaction value increases. In addition, Rover is a category disrupter due to which its revenue growth is likely to be much higher than the average stock - it is taking share from friends and family as well as kennels. Finally, networks like Rover get more valuable over time due to which they have to spend less to attract more users on their platform. This results in operating leverage due to which its earnings are poised to grow even faster than revenues.

Rover is expected to produce $230 mn in revenues in 2023. At an average cost per share of $4.25 we bought Rover with a market capitalization of $775 million and an EV of $525 mn. Rover is currently at adj EBITDA margin of 15% and, with scale, should be able to move up to 30% in adj EBITDA margin. At that rate, it should have a ‘look-through’ adj EBITDA of $70 mn in 2023, essentially meaning that we underwrote this investment at 7.3x adj EBITDA. The stock is now ~50% higher than our cost base. However, its fundamentals are improving at an even faster pace. Next year, in 2024, according to consensus estimates, Rover is expected to do $300 mn in revenues. Due to this, Rover is now trading at 10x our estimate of $90 in ‘look-through’ adj EBITDA for 2024. We believe this is a very cheap multiple for a high quality and growing business. In Appendix A to this letter, we detail our thesis on Rover (ROVR)... " (Click here to read the full text)

"We made one new purchase in Q3: Waters Corporation (NYSE:WAT) Classified in the health care sector, Waters is a specialty measurement company that offers analytical workflow solutions for quality assurance/quality control (QA/QC) to pharma, industrial, academic and government customers. As always, for a new name to enter the portfolio, we require it to meet each of our three margin of safety criteria: attractive business economics, a sound financial condition and an attractive valuation. With regard to Waters, its business economics benefit from high growth visibility given the recurring nature of its portfolio. Moreover, it has industry-leading margins that have been very stable over time, it converts most of its earnings to cash, and its free cash flow margin is ~20%. Waters has a high recurring revenue stream (about 50% of revenues), which includes consumables, services and software, and this also contributes to a stronger financial condition. The balance is instruments, which are driven by replacement, moderate market growth and innovation. Instruments sales are quite sticky because methods for testing are part of regulatory filings, which are difficult and cumbersome to change. The company has a conservative balance sheet. Net leverage (net debt/EBITDA) has risen to 2.3X post its acquisition of Wyatt Technology, but we believe it should de-lever back to its long-run average of 1.0X in a few quarters. We were able to purchase it at an attractive price because the stock de-rated due to concerns about pharma capital spending. Waters is trading close to a trough multiple on EV/EBIT and at a discount to peers."

"Speaking of payment trends, it has been 8 years since we published a stock specific note on PayPal Holdings, Inc. (NASDAQ:PYPL). If you click on www.manolecapital.com/research, you can re-read that note from September 2016. In it, we specifically discuss how PayPal could begin to monetize its Venmo asset, following its spinout from eBay.

Here’s a picture we recently took at a retailer’s point-of-sale. While PayPal and Venmo are not yet as universal as Visa and Mastercard, more and more retailers are beginning to accept other brands.

Following some difficult performance of late, we thought it might be helpful to examine what’s going on with PayPal….” (Click here to read the full text)

"This month, we detail one of only two listed companies (the other is Flow Traders) whose main business is to operate as a liquidity supplier in financial markets: Virtu Financial, Inc. (NASDAQ:VIRT). Virtu reputedly sees over 9% of US equity volumes per day pass across its desks (well, through its machines) - but is utterly unloved at present. The loathing is partly to do with recent volatile business performance, partly with flawed execution of their capital management strategy, a response to fundamental competitive trends in (stock) exchanges, but most recently with the aggressive stance taken towards the Chair of US SEC, the key regulator, Gary Gensler, and his attempts to “protect” retail investors. The whole industry is happy to embrace certain reforms – but not others. Moreover, Virtu has – to a degree – led with its head, seemingly eliciting a particularly aggressive response. Investors don’t like uncertainty, especially regulatory uncertainty. Herein lies the opportunity, perhaps.

In one guise or other, in January 2024, assuming Dynasty Trust is still holding, I will be into my SEVENTH year of having exposure to Virtu Financial Inc (VIRT), though not necessarily continuously. Given what Virtu does, even allowing for cycles in its earnings, that’s a long time.

Virtu Financial, with an equity market capitalisation at end September 2023 of just overUS$2.8billion and with $1.8billion of long-term debt due in 2029, is the sole listed US based “liquidity provider”. Liquidity providers, or market makers, are a controversial industry of financial market “plumbers” who are receiving extra unwanted and tainted publicity with the release of the movie “Dumb Money” regarding the meme stock explosion of securities like Game Stop and AMC Entertainment in early 2021. The March quarter of that year was Virtu’s second most profitable ever, measured by “daily profit”. The short term “sugar-hit” has provided a longer-term hangover – an SEC enquiry and proposed tighter regulation..." (Click here to read the full text)