Thank you for your continued support and engagement. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

All three major indices finished their sixth consecutive week of gains as we head into the start of earnings season for Q3 reporting, marking the longest streak of weekly advances in 2024 for both the Dow and S&P 500. So far, more than 70 S&P 500 companies have reported earnings, with 75% surpassing expectations, according to FactSet, showing signs the U.S. economy is holding up. The S&P 500 rose 0.4% on Friday, notching its 47th record in 2024. The Nasdaq 100 climbed 0.7% while the Dow Jones Industrial Average was up 0.1%.

In economic news for the week, New York Fed's September 2024 Survey of Consumer Expectations showed long term inflation expectations rose slightly, while inflation uncertainty decreased for the shorter term. Earnings growth remained steady, and unemployment expectations declined, signaling a positive labor market outlook. However, household finance and spending expectations continued their gradual decline. Additionally, the likelihood of missing a debt payment in the next three months rose to its highest level since April 2020, reflecting worsening financial conditions for some consumers.

Corporate Highlights:

Adobe Inc. unveiled artificial intelligence tools that can create and modify videos, joining Big Tech companies and startups in trying to capitalize on demand for the emerging technology.
SoFi Technologies Inc. reached a deal to use $2 billion of Fortress Investment Group LLC funds for the origination of personal loans.
Walgreens Boots Alliance Inc. plans to close 14% of its US store fleet as part of ongoing strategy to cut costs as consumers pull back spending.
Procter & Gamble Co. posted a second straight quarter of sluggish sales growth, dragged down by minimal price increases and weakness in key areas such as skin and baby care.
Airbus SE plans to eliminate as many as 2,500 positions at its defense and space division as the European aircraft manufacturer seeks to streamline a business that’s consistently racked up charges and suffered from stiff competition.
Amazon announced that it is investing $500 million to develop small modular nuclear reactors in a partnership with Dominion Energy.

Friday’s Close (Weekly Performance)

S&P 500 5,864.67 (+0.85%)
Nasdaq 18,489.55 (+0.95%)
Dow Jones 43,275.91 (+1.25%)

Thank you Blue Room Analyst NICK PEART.

You've likely heard it often this year: the S&P 500 has reached an all-time high. What excites us even more is that Fund One finished the week ahead of the index. Strong contributions came from several companies, including Coinbase, Atai Life Sciences, Cameco, and Zuora, each posting impressive double-digit gains. Additionally, our short positions in Cadence and Synopsys bolstered our performance.

On the other hand, a few of our short positions, such as Thor, ended the week on a positive note, while our long position in Advanced Micro Devices saw a slight dip. However, these fluctuations didn’t significantly impact our overall results. With earnings season still in its early stages, stay tuned for upcoming reports where we'll provide a more in-depth look at our holdings.

Thank you Blue Room Investing President JOHN FENLEY

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WANDERLUST

and

WISDOM:

Lessons From 30 Years of
International Research Travel

by JOHN FENLEY
BLUE ROOM PARTNER
BLUE ROOM INVESTING PRESIDENT

INTERNATIONAL EXPERIENCES

Over the past 30 years, I’ve had the privilege of visiting 50 countries, with most of my journeys focused on investment research. During this time, I’ve interviewed over 1,000 company officials, each encounter leaving a lasting impression. Here are a few standout experiences that encapsulate the richness of my travels.

A Luxurious Introduction

One of my earliest research trips to Europe was marked by an unexpectedly extravagant experience. A colleague convinced me that taking a helicopter from Nice airport to Monaco was standard procedure. Unbeknownst to me, this wasn’t typical, but I embraced the adventure. The aerial views of the French Riviera were breathtaking. Upon arriving at the Hotel de Paris, I was delighted to discover I’d been upgraded to a suite overlooking the Palace, as my original room's carpet was still wet from cleaning. The luxury continued with two memorable seafood dinners—one in a charming coastal town on the French side and the other at a picturesque beachside restaurant in Italy.

Cultural Contrasts in Japan

My recent trips to Japan were memorable for vastly different reasons. In Tokyo, I found myself caught in a typhoon, forcibly packed into a subway by men in white gloves. The discomfort of being pressed tightly against fellow passengers was compounded by my formal attire, which made the humid heat even more unbearable.

Confronting History in South Africa

During my college years, I vividly recall student protests against Apartheid, driven by a desire for social justice. My only trip to South Africa allowed me to confront that history firsthand. After a red-eye flight from Bangkok to Johannesburg, I requested my driver take me to the Mandela House, as my packed schedule left little time for sightseeing. A few days later, flying into Cape Town, I caught a glimpse of a shantytown from the air—a stark reminder of those college protests.

Yet my stay at the luxurious Cape Grace Hotel, coupled with an unforgettable dinner overlooking the mountains and ocean, left me grappling with the complexities of privilege and injustice that continue to resonate with me today.

Rapid Development in Asia

Having made numerous trips to Hong Kong and China, I’ve witnessed firsthand the rapid development of major cities. The transformation of Shanghai over two decades reminded me of Denver’s evolution from horse-drawn carriages to a modern metropolis in just over a century.

More recently, during a flight from Sydney to Perth, I marveled at the vast mining sites below, reflecting on how much of the iron ore extracted there contributed to building modern-day China.

These experiences have shaped my perspective and enriched my understanding of global markets. Each trip has been a journey of discovery, filled with lessons that extend far beyond investment insights.

Why International Small Cap Investing Deserves a Place in Your Portfolio

In today’s interconnected global economy, international small cap investing presents a unique opportunity for growth and diversification. Companies with market capitalizations under $5 billion are often overlooked, leading to significant mispricing in the market. These firms typically operate in less saturated markets, particularly in emerging economies, allowing them to capitalize on rising middle-class incomes and increasing consumer spending. This growth potential is especially appealing for investors seeking high-quality opportunities that can yield substantial returns.

Investing in international small caps can significantly enhance portfolio diversification. These companies often exhibit lower correlation with large-cap stocks and domestic small caps, helping to reduce overall portfolio volatility. Additionally, this strategy provides exposure to different currencies and economies, serving as a hedge against domestic economic downturns. By diversifying geographically, investors can achieve a more balanced portfolio, as various economies respond differently to global economic shifts, enhancing overall stability.

Historically, small-cap stocks have traded at lower valuations compared to their larger counterparts. This discrepancy allows discerning investors to identify undervalued companies with strong fundamentals. Many international small caps are even further undervalued due to limited analyst coverage, creating enticing entry points for investment. While international small caps can be volatile in the short term, historical data suggests they often outperform larger caps over the long haul. The focus on high-quality, cash-generating firms means that the market rewards these companies for their free cash flows over time.

The Blue Room International Small Cap Fund

At Blue Room, our approach to this asset class stands apart. Our investment team employs a rigorous, multi-step process designed to identify and invest in high-quality international small-cap stocks. This process begins with a comprehensive screening of approximately 15,000 international small-cap stocks.

The initial screening phase aims to identify attractively valued, cash-generative companies with a history of consistent growth. The team employs a disciplined, proprietary screening process that focuses on:

Double-digit operating income per share growth
Double-digit return on invested capital (ROIC)
Strong free cash flow (FCF) conversion
Balance sheet strength
Growth quality and consistency
Preliminary valuation

This systematic screening typically eliminates more than 95% of the companies in the universe.

For the companies that pass this quantitative screen, analysts conduct a qualitative assessment to develop an initial investment thesis. They seek to identify firms that exhibit:

Involvement in strong secular growth trends
Honest and transparent management teams focused on maximizing shareholder returns
Proprietary products or services with high market share
Strong competitive positions and limited economic sensitivity
Clear business models and demand drivers
Strong FCF generation and high ROIC
Robust balance sheets with net cash or favorable liquidity ratios
Attractive valuation

To validate or refute their initial thesis, analysts engage in extensive discussions with company management, often emphasizing face-to-face meetings. These discussions help evaluate management's integrity, vision, and ability to rationally allocate capital. Analysts utilize a proprietary scorecard to assess all quantitative and qualitative factors that inform whether to proceed with a portfolio recommendation.

Analysts determine each company's intrinsic value using a proprietary discounted FCF model. To be considered for purchase, a company's intrinsic value must reflect a potential upside of at least 50% from its current price. This conservative approach ensures investments are made with a sufficient margin of safety. Analysts also forecast various risk scenarios and assess their potential impacts on the company's value.

The analyst presenting the investment thesis shares their scorecard and valuation findings with the entire investment team, fostering collaborative discussion and debate. This team-based approach ensures that all potential investments are evaluated against the same stringent criteria.

The portfolio typically consists of 35 to 50 securities, with individual position weights ranging from 1% to 6%, determined by expected appreciation. The team aims for geographic and sector diversity.

International small cap investing is not merely a niche strategy; it offers a compelling avenue for enhancing growth, diversification, and resilience within investment portfolios. By employing a disciplined investment process that emphasizes quality and value, the Blue Room Investing team is well-positioned to capitalize on the unique advantages of this asset class. In a rapidly changing financial landscape, embracing international small caps may be key to unlocking new horizons of growth and opportunity, positioning investors for significant long-term rewards.

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10% OF ALL BLUE ROOM REVENUES GO DIRECTLY TO FUND OUR NON PROFIT TOGETHERISM.
WE CAN ACCOMPLISH ANYTHING TOGETHER.

These materials do not purport to be all-inclusive or to contain all the information that a prospective investor may desire in considering an investment. These materials are intended merely for preliminary discussion only and may not be relied upon for making any investment decision. Any discussion or information contained in this presentation does not serve as a receipt of, or as a substitute for, personalized investment advice from Blueroom or your advisor.

This publication does not constitute an offer to sell or a solicitation to buy any securities in any fund, market sector, strategy or any other product. Investing is speculative and involves substantial risks (including, the risk of loss of the investor’s entire investment). Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable.

For more information about us and our general disclosures contact us directly.

Weekend Update #201

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WANDERLUST

and

WISDOM: