Dear Partners,
In the second quarter of 2026, our partnership gained approximately 15.9%, bringing our return to roughly 6.9% for the first six months of the year. Over the same period, the S&P 500 TR Index rose 15.2% for the quarter and 10.2% for the year. As of this writing, we're up about 11.0% for the year, versus about 9.3% for the S&P 500.
The quarter played out largely as described in the Q1 update. We entered the period with capital to deploy and found several opportunities among small-cap businesses trading below what we think they're worth.
A gap closing
We continued to trim positions that had run ahead of what we think the underlying businesses are worth and redeployed that capital into names where the opposite was true. Most of that opportunity continues to sit in global small- and mid-cap businesses that get comparatively little coverage, rather than in the handful of U.S. mega-caps absorbing most of the market's attention. Tighter position sizing, greater diversification, and the ability to buy, sell, and redeploy capital far faster than in the past have also cut the portfolio's realized volatility roughly in half over the past couple of years, without giving up the return profile we're after.
In February 2026 I stepped down from the Goodfood Market board and we did not repurchase the shares we sold in late 2025 as the Q4 letter had contemplated. The position had shrunk to well under 1% of the portfolio and after years spent trying to help the company turn, I was reminded of Buffett's old observation that turnarounds seldom turn. We wish the new management well and will be rooting for them from the sidelines.
Halozyme Therapeutics (Nasdaq: HALO)
During the quarter, we bought shares in Halozyme Therapeutics, Inc. HALO licenses a technology, ENHANZE®, that allows large pharmaceutical companies to replace hours on an IV drip for a quick shot under the skin. The technology works by injecting an enzyme that temporarily clears a natural gel-like barrier under the skin, letting a large volume of drug spread and absorb fast enough to replace the drip. HALO does not make drugs itself; it licenses the technology and collects fees and royalties on every dose of an approved partner drug sold worldwide, more like a toll road than a drug company. Once a partner's drug is approved using Halozyme's technology, switching to a competitor would mean spending years re-running clinical trials, which most partners won't do.
The most material risk in the HALO investment is patent cliff exposure: core ENHANZE patents expire between 2027 and 2034 depending on jurisdiction, and management is working to extend the royalty runway toward the 2040s before that window closes. Separately, Halo licensed ENHANZE in December to Skye Bioscience to co-formulate Skye's obesity drug candidate for subcutaneous delivery in combination with a GLP-1 obesity drug. The drug is still in early trials, with the next study only starting in mid-2026, but Halo would earn payments and a royalty on any future sales, so this is optionality, not something we're underwriting.
Over the past five years, Halo generated approximately $2 billion in free cash flow and reinvested approximately $2 billion in acquisitions that are expected to generate additional revenue in the future but haven't yet. Today, the company generates roughly three times the revenue of five years ago, with earnings roughly unchanged, because the acquisitions haven't yet scaled into the operating leverage built into the model. As they do, we expect earnings to catch up to revenue. We built the position at a meaningful discount to what we think the business is worth, and only about half of that value depends on the distant future, a healthier mix than is typical this early in building out a royalty business.
Looking forward
Our work is the same as it has always been: finding good businesses, run by people who are obsessed with growing their business competitive advantages, purchased at prices that offer a real margin of safety.
Thank you, as always, for the trust you place in us. Please do not hesitate to reach out if you have any questions. I look forward to reporting again in October.
Cordially,
John G. Khabbaz