Sonu Chawla - Managing Mid Cap Exposure - $TSCM

0:00Ladies and gentlemen, welcome to the business brew. I am your host Bill Brewster. As always, thank you for your time. This episode features Sonu Chowla of Times Square Capital Management. She is a PM over there and discusses her strategy. It is a mid cap strategy. They have just released an ETF called TSM as in Times Square Capital Management, not to be confused with TSMC. I think you'll find Sonu is a very thoughtful person and has an eclectic portfolio. I enjoyed the conversation and I think it highlights the mind of someone that's willing to look in a lot of different areas. So I hope that you all enjoy it. Slight delay on getting the podcast out. I was on spring break and then we figured some of y'all were on spring break. So there's a little bit of a break. We didn't talk a lot about Iran. Sorry you'll have to go elsewhere for that.

1:02Everyone's got an opinion. Probably no one's right. That's neither here nor there. Anyway, nothing in this program is investment advice. All of the information contained is for entertainment purposes only. Consulate your financial advisor before making investment decisions. Do your own due diligence. Additionally, the information in this interview represents the opinions of Sonu Chala and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the individual and may differ from those of other portfolio managers and or of Times Square Capital Management as a firm. Like to give a quick shout out to the sponsors of the show. Thank you to Fiscal.ai. You can try it out at Fiscal.ai forward slash brew. Get yourself 15% off any paid plans to free weeks. I find it to be a very useful data platform. They recently added annotations and they are quite responsive. I just wrote yesterday. I said,

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4:37Ladies and gentlemen, thrilled to be joined by Sonu Chavla of Times Square Capital Management today. Sonu, how are you doing? Good. How are you? I'm doing well. I'm looking forward to this conversation. Thanks for coming on. Thanks for having me. Any time. Is the Bloomberg in the holster? Yes. Okay. There we go. Sonu, she gets a lot of notifications on Bloomberg. We did a test run and I don't know if it's DMs. I don't know what it is, but you're very important on that. So that's a good thing. Just trying to keep up with the news flow. There you go. What's going on in your news flow, speaking of which? What are you looking at today? Nice calm markets, huh? Yeah. Wallatility is the name of the game. We have ISM data, a geopolitical things to worry about. The tariffs, the AI trade, everything coming to a head, year to date so far.

5:41Yeah, the time stamp things because they move quickly these days. We were recording on Monday, March 2nd. Probably should say it new and also just in case something happens. Do you want to give people a little bit of a background of where you came from? Then I'd like to talk a little bit about your investment philosophy and how you developed it over time. Yeah, absolutely. So Bill, I have been in the investing field now for more than two decades. I'm a portfolio manager on the mid cap growth and focus growth strategies at Times Square Capital Management. Prior to the PM role, I was a technology consultant and working for a big four consulting firm in my prior life to the investment career. I have a master's of science degree in mathematics and computer science from Indian Institute of Technology and an MBA degree from Kellogg School of Management. And prior to arriving at Times Square, I had worked at a couple of multi-strategy hedge funds

6:47and I've been a growth investor throughout my two decades long investing career. And that's a small snapshot in time about myself. Something I was thinking about as we were getting ready for this. Some people identify as values, some identify as growth. What do you think about it? I would consider you growth at a reasonable price is probably how you would really define it. What about that strategy? I guess spoke to you or do you think is good with your personality or why do you think that that is where your specialty sort of is within the market? Yeah. So I also call myself as a practitioner of something that we call around here growth with a conscience. And what that means to me, it's daring to valuation discipline throughout the entire investment cycle. And so this commitment dictates that the price paid for securities must be anchored in sound fundamentals and cannot defy the physics of gravity.

7:52Therefore, valuation plays a critical role both when initiating a position and when selling a security. And then in terms of the quality piece of it, we've found that quality businesses are grounded by strong management teams. So one of the hallmarks of the Times Square investment approach and my investment approach, even prior to coming here, Times Square is the assessment of company management. So we're evaluating the management teams on the merits of their integrity, their decision making, their alignment of interest with the shareholders, the stewardship of capital, and the vision for future. And once we gain that level of confidence, we evaluate the company to determine if it possesses sustainable and competitive advantages. You know, this advantage can manifest itself in the form of unique product patent service, some kind of structural or regulatory barrier to entry. And finally, from a financial profile standpoint, we're looking for

8:56businesses that, you know, have some kind of a recurring revenue model. We are looking for businesses with solid balance sheets, strong free cash flow generation. And that's that's basically the quality growth, you know, investment process that we follow at Times Square. And I followed throughout my career as well. I realize this is not the easiest question to answer, but how, if you were to talk about the weighting of sort of the soft your research on management versus the underlying business, you know, there's the Buffett quote that's by a business and it can run because eventually someone will or one will, but I found you really want the marriage of the good management and the good business. So how do you think about that and how do you think about assessing management? Yes, no, that's a that's a very important point. I, you know,

10:00I think assessment of management teams is sort of the intangible part of our process that is, I think sets as a part from competitors. No, the one thing I want to highlight is that when we think about quality growth is that some people will use quantitative screens to look for profitable companies, you know, certain filters on ROIC's or whatever the metric be on the quality angle. We use, we do not use quantitative screens. So our assessment is very qualitative. So from that standpoint, if you think about that's filter that we use on the qualitative side, we, we are able to invest in companies, even if they are unprofitable today, even if they're not generating cash flows today, as long as we can see a pathway to profitability in, you know, in the near term. So, you know, we are trying to capture alpha in the second or third innings versus if you have a

11:07strict, you know, quantitative filter, you might be leaning into investment in the fifth or sixth when the company is profitable. And so for that, we are obviously depending on the expertise, the domain expertise of the team at Times Square, our senior analysts, all the subject matter experts in their domains. And so we're using their judgment and assessment of management teams in the business models to ferret out these promising companies that are early in their scaling journey in terms of the top-line growth, you know, and the profitability, profitability obviously follows the revenue growth. So let me, you know, shine, you know, give an example of a company, for example, in biotech, we were just talking about biotech prior to starting our conversation here. So one of, you know, our larger investments is in a company called Arginx. And Arginx, ticker symbol is

12:08Arginx is a global immunology company, which is focused on improving the lives of patients suffering from severe autoimmune diseases. They have a drug called VivGuard, which is today helps with patients on myosthenia gravis or CIDP. And this was a, you know, an unprofitable company prior to 2024. But sales of VivGuard have taken off in 2025 due to pre-filled syringe being approved for self-medications. And we expect this momentum for the blockbuster drug to be sustained on uptake in CIDP and new formulations. So the pipeline is well stocked and includes other drugs, other diseases that, that the clinical trials are going on. So if you look at their revenues, they've exploded from, they've 10xed from 2022 to 2025. They were 440 million in 2022.

13:13They were 4.2 billion in 2025. While the adjusted EBITDA went from negative 600 in 2022 to 1.2 billion in 2025. So that's an example of a company that we were able to identify earlier in the process before it was profitable and, you know, took a significant investment in the company. So that's sort of like shining spotlight, you know, on our process through an example if that makes sense. Yeah, yeah. So now would this be a company that you would typically be interested before it's fully approved by the FDA or are you typically waiting until the regulatory risk is sort of resolved itself so that you're betting simply on the trajectory of the drug, not so much the regulatory process. Absolutely. So we are, we're not investing in just molecules that haven't been approved. It has to have a commercial, you know, a drug be approved by the FDA. So the initial

14:16you know, indication for which we've got was approved was myosthenia gravis and it's most recently been approved for another indication CIDP and then the pre-fill syringe approval came last year. But yeah, they had the drug that was already approved by FDA for one of one of the indications around myosthenia gravis and we knew about the clinical trial and the pipeline of stuff that they've been working on and so that was just a matter of scaling and getting FDA approval for other formulations like the the pre-fill syringe. Yeah, so it sounds like you're more comfortable taking the execution risk of the scaling portion of the business than you are. Yeah, that makes sense. And then not to not to take the inning analogy too far and companies can go into extra innings a lot. But would you would you say that you're trying to ride like the second inning to the seventh inning or, you know, is there is there sort of a growth a part of the growth curve where it

15:20gets more mature that you get a little bit less interested in? Yeah, I know. So the part of our process involves, you know, building out financial models on all our companies and, you know, having forecasts on our on all our names that we have investments in. We have target prices on every company. Now the valuation methodology will vary from sector to sector use PE multiples as a valuation framework for more mature industries, but for growth long duration assets like Argenics, you know, discounted cash flow analysis is used. And so we have target prices. If target prices are being met, that's a high quality problem to have. And we'll have a discussion internally that's a candidate for monetizing and, you know, trimming the position back. And in some cases, it might be an outright exit as well as the investment thesis might have played out. And we'll

16:22look for other investment ideas to rotate into. I think the we've found that keeping the portfolio fresh and having this pipeline of new ideas, driving, you know, the portfolio in any given year is important planting those seeds that can be harvested in terms of returns, you know, in the following year is an important part of, you know, process that we have, you know, our 2025 was solid, but if you look at the stocks that drove the returns in that year, it was the seeds that we planted in 2024 in terms of new ideas. And so that's important part of our process is to be disciplined both in the buying and the selling side of things, you know, moving on from names if the thesis has played out. And if it is a compounder and that we still see a long runway for growth, steadily compounding, then we'll stick around but at a lower position size. Yeah, that makes sense.

17:26That makes sense. So would you would you say that as as the company is so sorry, I'm getting a second thought in my head, but you said that the seeds that you planted in 2023 or 2024 started to bear fruit in 2025. Is that a function of a process that looks, you know, three years out in a market that looks 18 months out, right? And then eventually sort of the market says, oh, look at what they, you know, what you've already seen. And then if you keep looking three years out, that's sort of how you're going about it. I don't mean to put specific timelines on your process, but is that kind of conceptually how to think about it? Yeah, for sure. We are long-term investors. So we have the advantage of duration on our hands. And so definitely when we are underwriting and investment thesis, we're looking out, you know, in terms of the long duration

18:28assets, five years out through to five years out in case of more mature industries, two to three years out to see their earnings potential. And trying to underwrite that, you know, the investment case over that investment horizon. And, you know, I think we've done a decent job on that front. So, you know, maybe again, I'll shine an example, you know, bring an example to light to just, you know, on, you know, underline how our process works. So, you know, one of the names, you know, there are certain parts of market that are, you know, going through some cyclical challenges or some execution challenges. And sometimes those are the best times to do the work on these names to, you know, underwrite sort of the three to five year time horizon for these

19:30names. And so if you look back into the mid cap area specifically at the benchmark, you'll see that there is a lot of aerospace exposure in the benchmark. It has continued to climb actually with the largest name in benchmark. Actually, in the Russell mid cap growth is an aerospace name that's north of 300 basis points. And aerospace is very well reflected in the benchmark. They're like multiple names with that as sort of, you know, the end market. And when we were looking for sort of quality names to get exposure to this theme. And, you know, aerospace with the challenges in production at Boeing and Airbus went through some, you know, challenging time. And so the production volumes were very depressed. And we started to look at a name called Carpenter, CRS is the Carpenter

20:33technology. The company CRS is the ticker. And we, and CRS at that point wasn't even classified as an aerospace company. It was in the materials, Gix sector. What they are, manufacture, fabricate, and distribute over 500 different high performance specialized alloys, which are used in mission critical components across aerospace, defense, power, and other industrial applications. And the aerospace in the defense and market is nearly two-thirds of their revenues. And, you know, their business model is centered in producing this mission critical alloys that require extensive and stringent certifications. This, there was a period of time when the volume growth in this key and market for them was pretty depressed. But what started to happen, obviously, is the production volume is ramped up. This is a very consolidated industry. Now, there aren't many players in this

21:37industry, given the significant capex requirements, given that it takes 10 years to bring a new plant up and running. So, the beauty of their business model was that only 40 to 45 percent of their revenues are linked to long-term supply agreements or LTAs, while the rest of it is on spot pricing, it's tied to spot pricing. Yeah, so when things get tight, they can make a lot. Yes, so as the production volumes have come back up, and it was sort of like a name that was not on most people's radar screen, and as you started to see production volumes pick up, the pricing has gone up a lot. They also have a play in the power generation market. If you think about the GE or NOVA turbines, the alloys that go into the blades and the veins that also are carpenter technologies, specialty alloys. So, they have robust pricing power,

22:43and looking forward, we think they have a very strong growth profile with a lot of visibility into that growth as well. And last but not least, to bring it full circle, because I talked about, we describe ourselves as a growth with conscience and valuation plays an important part in our investments. Carpenter trades at half the multiple office customers, so it supplies into howmet, and howmet trades at north of 30 times, EBITDA, and Carpenter is roughly half of that, for similar growth prospects with the potential for margins to expand. So, we really liked, you know, that as a company to invest behind to get exposure to the aerospace theme as an example. That makes sense when you start looking at like valuations to competitors or suppliers or

23:45customers, right, how do you try to keep yourself grounded? What's the, I don't know, I'm thinking of if all the valuations are going higher, are you getting disconnected by saying, oh, well, relative to the sector, we're cheap, but meanwhile, the sector is standard deviation, or whatever, a lot higher than it has been. How do you avoid that problem? Yeah, no, for sure. The valuations have risen, and valuations have risen for themes and names that have, you know, some sort of secular tailwind, which is right now on the AI infrastructure build out, or, you know, it could be things around defense tech or space tech. And so, there is definitely the, you know, the challenge on valuations on that front, but again, since we are, you know, benchmark to the Russell mid cap growth, which has even, you know,

24:49it's on the relative basis, we try to keep ourselves grounded relative to the benchmark, but then also keeping a barbell approach, you know, in owning things on the cyclical end, where things might still be cheap, may not have re-rated, or things that may be out of favor. So, having, you know, planting the seeds on the out of favor category, and, you know, where the valuations are depressed for a reason, because they're out of favor. So, keeping it as a barbell, not being too over the skis in one side of the boat versus the other, and that's, you know, something we try to achieve through the portfolio construction, you know, at the portfolio level. Yeah, that makes sense. So, would you say, I mean, when I hear you talk and you're talking about the benchmark, would you say that, I mean, your real goal in the products that you offer is to give people a reasonable mid cap exposure that can, the extent that they're looking for that, you can

25:56potentially offer a solid risk reward product by sort of manufacturing your way around. I don't know if some of the junk in the index and capturing both the good and then betting on the bad when no one else wants to. Absolutely. It's interesting, Bell, that we, we've looked at, you know, VR's small to mid cap specialist, and if you, you know, we've looked at the study, over the last 25 years, mid caps have returned 9% plus outperforming both large and small, and they've been less speculative than their smaller counterparts, offering 14% less risk over the long term, and commonly stand on a firmer financial footing. So, when you compare even the sharp ratios, mid caps continue to have an advantage on a risk adjusted basis. And you know,

26:57if you look at sort of the role five year monthly rolling performance over the last 25 years, mid outperforms large 57% of the time by an average of 373 basis points, and they outperform small, 92% of the time by an average of 186 basis points. So, you know, they're, they're, mid caps are great, average hunting grounds to find these high quality names that have proven business models that are inflecting up in their revenue growth profiles, but are also higher up in the quality spectrum, given expanding profitability and free cash flow margins from greater economies of scale. And thus, they definitely can provide positive risk adjusted relative returns for multiple years if you buy them at the right valuation multiples. So, we think they're sort of a happy medium between large and small caps in terms of outside revenue growth and expanding profitability.

27:59And, you know, our goal is at Times Square to provide, you know, 200 basis points gross returns over the benchmark returns. And we've done through, you know, through our discipline process and focusing on quality growth. Yeah, well, it makes sense. You've got, you've got real management teams at that level. You've got real businesses, real access to capital markets, a little bit more robust, but as far as just strictly from a size standpoint, probably a little easier to grow in capture market share on average, right? 100%. And I think the companies are also staying private for longer have a days, you know, when they come public, they come public either in the mid to large cap arena as well. So again, a lot of the hard work on terms of scaling the businesses, you know, happens in the private markets. And when they are tapping the public markets, you know,

29:00obviously, it's to fund that growth, but eventually the profits come in a more medium term rather than, you know, undefined, indefinite, indefinite period of time kind of a time frame that people use to underwrite during the 2020 and 2021 time frame. Yeah, that makes sense. Do you, do you mind highlighting when you got sort of interested in shaneer? That's one that I've always been, I think the ability to raise capital when it was just an idea was something that just astounded me and then the ability to execute on the capital raise and what they built. It's a heck of a, just an asset to build. How long have you followed it and sort of what were you thinking when you initiated a position in it? Yeah, so actually, that's a great example of a company that has been, that

30:01had been in sort of the ignore bucket for a period of time. Actually, though, a lot of the energy complex was in the ignore bucket for in the middle part of the last decade. When companies go through that that time period, I think they become more disciplined on the capital allocation and that's what we've seen with pretty much all the operators in the energy space. Growth for growth sake is not the important metric that investors reward energy management teams on and shaneer, obviously, has we got involved in shaneer as they were coming to an end of the the build out cycle. So when free cash flow is going to inflect? Yeah, free cash flow we're going to inflect and more of their free cash flows were going to go and be returned to the shareholders in form of buybacks and it was after the de-levering part as well. They were de-levering their balance

31:04sheets. So it was at that sweet spot. Now we've been involved in that stock for, forget exactly the time frame, but I think it must be hitting four to five years since we've owned shaneer and it has done fantastically well what we would have hoped from the management team in terms of capital allocation discipline and they've been fantastic operators signing. So I talked about Carpenter where where it's only 40 to 45% on LTAs and rest is on spot pricing. The thing that we actually appreciate about shaneer is that most of their contracts go out in the future. There is very little underlying commodity risk. They're not taking the risk of the price of the natural gas and so it provides them with the visibility and that allows them to obviously also plan out

32:05their capital allocation. Well you're so asset heavy you want to have you want to be able to plan into that right because if you get on the wrong side of utilization it can get ugly quick. 100% right and even I think coming into 2026 at least by Q3 they had very little left. I think they were still low to mid single digits that were still to be contracted out for this year but now pretty much everything has been sewn up. There's very little left you know on spot pricing so we like that visibility. We like the fact that they've returned capital to shareholders but also you know planting seeds and being thoughtful about there has been some kind of over the last three months exiting you know 2025. There was definitely an overhang on the stock from some people were concerned about more supply coming online but the management team has been

33:08pretty vocal about the fact that pretty much everything that they have has been contracted out so we take comfort in that and with the flare up in the mid east over the weekend we're always reminded about you know that these things the pricing can move up and down and this supply can get tighter as it seems like it is happening right now but I think Shania has done a phenomenal job executing to a plan that they have and sticking to it and we've been paid as shareholders. This episode is brought to you by Trata. You can find Trata at trytrata.com forward slash brew. Trata is a transcript library that has interviews of analyst and analyst so you know the differences sometimes you'll get on the major transcript platforms and it'll be an analyst talking to an

34:10expert and maybe that platform is trying to fill some space and you get a lot of filler. I have found the transcripts on Trata to be a higher level of discussion. I was flipping through today a constellation transcript that dropped. It looks like it was recorded on the 23rd. One analyst says the largest concern for me and why we're not long the stock today is inorganic growth. When you look at growth and disaggregate it on an organic side they might take two to three percent a year in price but the inorganic growth engine has really been the bread of butter yada yada so then you're reading and analyst two says um constellations market share transaction share has grown since 2021. This is completely contrary to the consensus view which is that competition is ramped up in the last 18 months. I think a number of copycats launched in the

35:11last 12 months is probably lower than in the 12 months before that. I think the number of copycats launched in the last 12 months is probably lower than the 12 months before that. End of the day I find that these transcripts identify an issue and then you can hear two analysts going back and forth on the issue. So if that's the type of product that could be additive to your process you should try Trata. And again Trata is trytrata.com forward slash brew if for any reason that doesn't work try try Trata.com and ping me and say you'll build the affiliate links not working so you may not be getting all the props that you deserve and you deserve the props. Anyway that is what they do I have found the there's value in these transcripts so if this is something that your process involves try Trata. This episode is also brought to you by the OG

36:17sponsor Fiscal.ai you already know the pitch if you don't you should listen to the episode with Braden Dennis in part because it's a great episode of you know like one he's a good guy to interview two he's a good guy period three I find that to be a good business episode and he lays out what they're doing with fiscal AI historically these reads have sort of focused on hey if you're looking for a financial data provider Fiscal.ai forward slash brew is a great way to get a discount and a free trial for two weeks and you can try that I'm going to I'm going to skew this read a little bit more towards the enterprise folks especially with cloud code and all this vibe coding going on if you need data that you can pull into your own models or your own processes at a

37:18more sophisticated level and an enterprise level I would highly encourage you to reach out to Braden and the team that is the market that they are going for they believe that they can provide you with the value that you would have to pay a much larger much more expensive data provider they think that they can do it for a lot cheaper and that means that you're winning and they're winning and that's win-win and that's good stuff so go to Fiscal.ai forward slash brew so that you can try the product with a discount and do reach out to Braden and his team for the enterprise level stuff if that is something that may interest you it is probably worth your time with sticking to that management team yeah seems to me in energy the best time to be interested is when geopolitical tensions are low and no one's interested and a nice time to own it is once the geopolitical tensions go higher and then you have a decision to make whether

38:21now you want to continue right by insurance before the storm hits is the the name of the game there I think 100% will and so the goal is always to zigg when everyone is zagging and zag when everyone is ziggging so that's a little bit of what we we were doing on we've been doing on shaneer as well so but have you been able to zigg and zag SaaS apocalypse or what's going on with some of the software you know I guess narratives versus realities that you see yeah um no sass the sassacre has been has been tough for for people following the space and we have a viewpoint you know on on these for actually for the first time you must have noticed last week it's it's a beginning you have to start somewhere i.g. we actually outperformed

39:25socks last week yeah started to catch a little bit yeah and even this week it is starting off on the right foot maybe it's nothing maybe it is something but you know there has there is an investor action that when stocks go up on you know bad news tension yeah where it is worth paying attention to i mean we saw some of the sass application software names report last week like workday salesforce and to it and they all were down and pre and post market trading but they rallied to finish green on the earnings report i think um it's interesting there there has been very little nuance to the the initially it was it started from application software uh sent a side of things you know the names that i just talked about workday salesforce adobe but then it has you know spread to infrastructure

40:29software um you know where their uh business models are really tied to the cloud hyperscalers and consumption you know they're not seed based revenue models they're consumption based models we are in a 20% plus drawdown and infrastructure software we are in a 20% plus drawdown and cybersecurity whose actually importance increases in an AI world um and you know similarly on vertical software uh so there is there has been very little nuance um so you know so far in the in the sell-off but uh you know i would just say this that you know building agentic AI requires data requires context requires expertise um and um you know if you think about

41:29enterprises we talked a lot of IT departments at these big companies and regulated industries and the way they're looking to adopt uh AI in their businesses is to is through their software incumbent vendor you know the incumbent vendors that they have they're not looking to go out and recreate the view and because they want that guardrails of security compliance legal and also cost and so we think while the world is changing fast and so we all should be humble about what we don't know the the sell-off seems to be overdone in in certain pockets just because i think the businesses are still growing and i know the first thing the market does when there's uncertainty about the pace of technology innovation is to um is to de-rate the terminal multiples

42:32and that's the process that the market has gone through a lot of these stocks have gone through but hopefully we're now at a point uh where the SaaS is dead it means that it cannot be killed further or we are already in the basement and there is no place to fall from the basement we shall see but hopefully um people can pick their spots and lean behind some of the names that have been hit in this carnage and there is still a solid growth trajectory for some of them going forward yeah it's uh as i think about it it's uh it's unlikely that companies that to your point are relying on vendors for technology both advice and implementation are all of a sudden going to become their own tech departments uh no doubt there no doubt there will be opportunities to drive efficiencies and work easier and and perhaps even create new tech products but the fundamental ethos of the companies i think will probably remain somewhat similar what 100% and i would say

43:37clarna you know the IPO from 2025 is actually a sobering case study on um in sourcing and uh just trying to recreate the wheel i mean software spend is a very small percentage of the company enterprises spend it's like single digits and it's a utility it's uh there is no value add in terms of recreating the wheel it just is just distracting to recreate the wheel and you know deploy resources towards recreating that wheel and it takes away from the core of what you do so for example clarna you know in august or september of 2024 the you know the clarna uh CEO of generated massive headlines by announcing that the company had shut down sales force along with workday and hundreds of other

44:40SaaS tools to build a custom internal tech stack powered by AI um he famously claimed that their AI assistant was doing the work of 700 customer service agents and instituted sweeping hiring freezes and what happened was you fast forward to 2025 early 25 the really the reality of ripping out the enterprise architecture and human support hit them hard by by early 2025 the CEO admitted he was tremendously embarrassed quote unquote by the follow up clarifying that it didn't just dump their CRM data into large language model but rather had to build a complex internal graph database and what happened was they realized that they had cut too deep and customer complaints surged due to bland and unhelpful AI responses to complex issues and they had to reverse course

45:47they you know they hired back these human customer service agents and um it was it was embarrassing you know uh all all all and you can look at the IPO since the IPO the the results have been mediocre at best you know in its at its IPO it was valued at 15 billion um in September 2025 which was a haircut from 46 billion when at its peak in 2021 and today the stock you know has dropped another close to 70 percent from the IPO price as the results have been mediocre and again the point that i'm trying to highlight with this example is that i don't know maybe it took away from their core mission and it's just it's just an important case study to highlight that i think not not a lot of businesses want to go you know are looking to go down that route to to just recreate

46:51the wheel that it's a solve problem uh why create recreate your own CRM database or uh a HR database when tools already exist at a fraction of the cost yeah that's tough and then and then you have to end up hiring people to help you undo some of the problems that maybe you have created for yourself yeah um you know and it's it's interesting we can go through a thought exercise with a lot of these software tools and and we'll come to the same place i mean something like a slack when slack went private when they were acquired by salesforce.com they had about 500 engineers that you i don't know you put a 200 k per engineer so that's sort of they're spending 100 million on R&D annually uh so now let's say um you know

47:52saw a slack seed cost about 18 dollars per head per month so for a you know a company of thousand people you're paying approximately a little over 200 k a year for slack so 200 k a year you know um if you were going to say well i'm going to going to buy code this application internally let's say the 200 k's peanuts and the grand scheme of things if you were actually ironically going to do it in house um even the cost of one engineer is 200 k you know who will be vibe coding this solution and then there's the day two problem where you have an ongoing maintenance software system uh so i know the the cost-benefit analysis of vibe coding and doing these things in house just makes no sense um so are you are you predominantly i guess drawn to more enterprise

48:57and b2b software as opposed to consumer software or do you not draw a distinction between those two or just like i don't know do you have a natural inclination to one or the other yeah i would say for sure we are uh if you if you look at our investments they're more on the b2b side of things and um more on the infrastructure software layer we where we do not have the seed based um less of a headwind from seed based pricing models you know in the world where um maybe organizations get some uh productivity gains and efficiency gains from deploying AI and your headcount doesn't grow um are you know you know for for those seed based revenue models it's going to be a headwind so we like infrastructure software which has more a consumption angle we like cyber security um in you know companies as well as vertical software companies where

50:01um there is domain expertise to what you know the verticals that they have um that they play in and so that's there there are bigger modes in those businesses so that's sort of the places that we like to be invested in terms of software yeah that makes sense it makes a lot of sense what um i guess the uh i'm looking at your portfolio and i can't help it see or Riley in it and it's uh it's sort of outside of of what i think of the rest of the of your portfolio is that is that a good example of maybe something that's a little bit not as loved as it once was and uh plant for two years or or what's going on with that one yeah or Riley actually has been one of our steady-eddy compounders um it's been in the portfolio since 2011 2012 wow so that's that's a very long time yeah it's one of our

51:06days day and age 100% this is actually maybe the only one with um that tenure in the portfolio we've uh we've been big fans of the management team in terms of their execution and obviously you know um there are a few publicly traded companies in this space um that we can all benchmark against and or Riley has had by far sort of the best execution from handling various kinds of ups and downs in the the space you know in the market that they play in um yeah i'm and and the last um year are actually the last quarter in particular wasn't really good for the stock um on a few things um you know they've always gained market share because of their superior

52:08execution you can see it in their same store sales their comps data they've outgrown the industry and uh what happened was in in Q3 of last year uh the management team came out on its earnings call and said that obviously due to the tariffs the the space has enjoyed some nice pricing gains and it should still benefit their comps in Q1 and some in Q2 as well and then it'll start to be a headwind as you look back in the back half of the year but in on the Q3 earnings call the management had said that so they have two segments they have the do it yourself DIY and then DIFM do it for me um segment which is they more they skew more on the DIFM side um which has been a fantastic uh growth area for them which is where their execution capabilities shine

53:14you know they have this um they they provide access to i forget the number of skews but it is in a really like close to 50,000 skews and the way they've built their distribution network you can get access to their skew in a very um you know a short period of time um so the wide availability of the skews for the repair shops who you know are working on a project has been one of their competitive differentiations but on the DIY side management said that um there was some um um you know price elasticity of demand that had hit them uh where there were some deforels happening on some of the more non discretionary elements of auto you know the and that was a reason why the stock had been weak in q3 um coupled with the fact that people were worried about the the

54:18pricing side of the equation as well as to how much of a benefit it'll be for them in 2026 fast forward to this year and the earnings report that they had they said things are looking great that the you know the DIY uh headwind was just very well contained and in here and the weather has been it's been pretty brutal up in the northeast which is no driving which causes actually funnily more wear and tear on your vehicles when it's snowing so much in the in the salt on the salt yeah um and actually that the the weather should be a tailwind for their comps at least uh at least in the nearer term but it's it's just we actually have found that the weather creates both headwinds and tailwinds and we are happy to you know scale back the position when it's a

55:20tailwind and lean into a name like this when it's creating a headwind to the stock price so uh yeah we've been digging and sagging on orally over more than a decade and uh and and that's sort of the game plan on that one i actually i didn't realize uh how strongly it traded on a multiple basis i just kind of knew that the results were arguably a little bit weak a little a little bit ago but um yeah sometimes when you ask a lot of questions as a podcast host you ask some dumb ones so please please forgive me on the on the initial multiple question how you know i go back to a little bit when when a stock that you've owned is trading at a at a rich multiple this kind of a little bit of a segue here but do are you inclined to hold it longer if it's taxable and if so what does does the ETF give you a little bit more flexibility to make decisions uh without considering taxes as much or does that not really matter uh and how you're running things

56:24yeah we don't um for the mutual fund obviously uh we do consider tax law selling um but we that you know taxes do not really play a role in whether we're going to be owning a name or selling a name um ETF thanks for highlighting the ETF that was uh just recently launched on December 29 and we are excited about having an active ETF in the mid cap space where there is duress of offerings it is off to a good start we you know we are at the 25 million mark we had put out a press release in in fab and the goal is to get to um by end of q1 at the 50 million in assets for the ETF the the ETF is it's it's a cousin not a clone of the the diversified mid cap growth product from a trading perspective it's only rebalanced once a month of course if

57:32we are selling out of a name we in the mid cap product we will sell it um immediately in the ETF as well but um there there are differences between how the two products look like it's not yeah well there's got to be right i mean there's it's it's it's required yeah yeah yeah well it's nice to have that offering for people and yes and it is uh and and it is a uh uh 30 to 40 stock portfolio compared to our diversified mid cap product which is on the 70 to 75 stock and the phishing pawn for that ETF is the diversified mid cap portfolio so it's a bit more concentrated so you get the the benefits of concentration and obviously there is tax advantages and uh to the ETF and and as as I the business case for it was that there was just there is a lot of demand when we talk to prospects and clients there is not a lot of offerings in the space today so we're we're happy um to have

58:38an offering in the marketplace yeah well it seems like it's a structurally attractive product to offer yeah to people and and i would think in your position if you're pitching clients and and prospects generally uh you know having that may open up some doors that not having it happens 100% 100% I mean when we talk to registered investment advisors or the wealth channel that's something that they're they're looking for on an ETF and so we're happy to um you know have a product uh that appeals to that marketplace yeah and nice to have a an AUM that it's uh it's not like a material economic drag right yeah so yeah then you got to get to the next level but yeah yeah that makes sense interesting so uh what else did you want to talk about I I sort of you know I I was looking through the only other one that I think um at least

59:39name wise that I think is super interesting is j-frog um but not could because not because I'm like some super uh you know sharp name on it but whenever people talk about it I find it to be a very interesting business yeah um j-frog obviously um this was a seed be planted in 2024 in the mid cap product when the company had a sharp sell-off post earnings you know in in the small to mid cap world uh 25 to 30% drawdowns are not on her no off yeah and sometimes those are the best opportunities if you've done the work and the new diligence to pull a trigger if you you know if you still believe in the investment thesis and so we saw that with j-frog when um they had a 1 million revenue miss because uh the the deal um they're the thing about j-frog is

1:00:41it's a small cap company that sells to a large cap enterprises and really large deals because uh you know they're buying their software for their security as well as uh for the developer teens and um they were they had like three really large deals that were in the pipeline and one of them literally slipped by a couple of days it caused they caused them to miss by a million and the stock sold off uh like a lot yeah and uh and so that was our opportunity to to initiate a position and and obviously it was a it was a it was a nice winner last year as the stock doubled and we were we would scale back the position size you know coming into 2026 it's been it's been a much more difficult period for the stock as I mentioned um there has been very little nuance to this

1:01:47to this sell-off in software and um this company um we think is very well positioned in fact three out of the five uh AI model companies are there customers including the the two big ones that we all talk about so uh you know I think it is an AI beneficiary but uh that that that isn't to say that people aren't nervous and you know trigger happy and any we live in the world of headline investing unfortunately and narrow-wrestling and so any headline crosses you shoot first to ask questions later so Jayfrog has been caught in that so what it is is it is um it think of them as sort of the system of record for software code so software code that is now been going to be executed in sort of the machine language so it's called binaries so uh it's a system of record for

1:02:54executable software code which are called binaries and there are the actual pieces of software that are going to be deployed into production and so while many competitors focus on the source code you know the writing phase the Jayfrog's artifact re-platform manages the shipping phase so you know it is um you know it is supports virtually all software package types and cloud environments which makes them an essential glue in a multi cloud hybrid world and this universal you know universal support of all these packages leads to high switching costs and a land and expand model that allows them to layer on high margin security products once they're embedded as the sort of the core you know repository for these binaries so uh if you think about you know ones that

1:03:58and one more thing on the security front they have a product called curation think of them as you know we all to the extent vibe coding catches on and people use cloud or whatever um to uh there are a lot of hobby developers now right people who never caught it just start building apps and stuff like that you're downloading a lot of open-source packages software packages behind the scenes when you're developing an app and that is from a security standpoint a big no-no because you might be downloading a lot of vulnerabilities that come along with these open-source packages and so what their curation product is it is a firewall that enforces the corporate policies and scans it to make sure that

1:05:01not you know bad things aren't getting downloaded into your environment and it's become so table stakes that a lot of their growth recently has been coming from curation product in the security realm security used to be almost zero non-existent two years ago now it's 10% of their ARR exiting 2025 and we think there's a lot of growth potential for this business because only you know a fraction of their customer base has has even bought security from from them so we're excited about the growth potential for jfrog and especially at these levels since the stock has pulled back you know you said something there you said you said we're in a shoot first or a headline investing environment unfortunately and I can't help but ask the follow-up is is it actually unfortunate because it seems to me that

1:06:05that should in theory create long-term opportunities for people such as yourself 100% the dislocations are a boon for active managers such as us you know if you've done the due diligence and have conviction on the work that you've done I think these prices and these dislocations create opportunities for us and so we are very busy right now our team is very busy looking at new names in places taking advantage of the dislocations in the Times Square quality guardrails so yeah no it is an exciting time but again the the non-stop barrage of headlines can sometimes get overwhelming and you're like yeah well and the performance questions at times can I'm sure get a little bit uh right not the most fun thing to answer 100 percent there's a headline

1:07:09100 percent yes why why did why did these docs go down 20 percent while there was a headline yeah yeah and to that to your point on the million dollars slipping I mean that to me given the customer base sounds like somebody wanted to push something to behind quarter end to make their numbers like good you know and and Jay frog doesn't quite have the you know the muscle to say no you got to close before quarter end here and they lost that little public content battle and then uh yeah and then it gets and then it misses the revenue number and then people sell it and there's no liquidity to buy but should theoretically be a better environment for the long-term investor and especially the liquidity is definitely challenging the small to mid cap space right so it's easier to move the stocks off and down and so yeah the the penalty for punishment tends to be much higher for misses uh for sure do you think as that increased over the the past I don't know five to ten years or has it always been kind of you know rough I

1:08:15talked to a few people that feel like right now is particularly a punitive market for misses yeah yeah right now especially this year I mean uh even names that tend to be lower beta and less volatile or moving in five to ten percent increments on headlines I mean you saw that right I mean we had headline about insurance broker and AI and all the insurance broker names sold off and they're not exceptionally volatile stocks you had something similar for wealth management you had something similar in transportation we're at two million dollar company said that they had vibe coated a um a transportation brokerage I have been you saw you saw the likes of CHRW um CH Robinson and some other publicly traded name sell off pretty

1:09:20hard so no I mean the volatility is another level this year uh like another level and it's hitting all corners even the you know supposedly safe defensive names are moving in large increments so that's that's just the reality of year to date action so far yeah well here here's the opportunity in the future resulting from it right so yeah 100 percent yeah we'll see how that goes all right well awesome do you have it do you have anything else you want to say or uh you know we can we can wrap this but I've you know enjoyed the conversation and you're always welcome to come on thank you for coming on absolutely you know this was fun and thank you for having me on and uh you know listening to some stock ideas and uh that's what uh you know I enjoy talking about I'm passionate about talking uh talking about stocks so uh you know in the future uh we can have

1:10:24another one of these conversations but I really enjoyed our time talking through what we do here at Times Square and our process and and some examples well thank you very much and uh hello to Chris who's in the background I know he'll be listening but uh yes yes he's lurking somewhere around here all right well sounds good well thank you very much for your time and we'll be in touch great thank you so much all right take care bye oh

1:12:13You