Dear Partners,
In the third quarter, the partnership returned +0.5%, bringing our net return for the first nine months of 2026 to +7.2%. Over the same periods, the S&P 500 returned +2.3% and +12.8%, including dividends.
The clearest way to understand our performance this year is to separate the businesses we still own from those we sold. Our current holdings contributed +9.4%, while investments we exited detracted (2.2%), leaving the partnership with its +7.2% net return.
Six of our current holdings accounted for most of the gains. ASA International contributed 4.7%. RS Technologies, Puuilo, Ashtead Technology, Kri-Kri and Halozyme contributed another 9.7% combined. These gains were partly offset by Inter & Co, which detracted (2.0%), and Dino Polska, Mader, China Sunsine and Globus Spirits, which together detracted another (3.0%).
Among the investments we exited, goeasy and Goodfood were the largest detractors, costing (2.3%) and (0.9%), respectively. We discussed both investments and the reasons for our exits extensively in prior letters. Synektik, which we sold at a 59.0% gain, contributed +1.0 percentage point.
Q3 trading update
We were active during the quarter, even though the portfolio's overall return was modest at +0.5%.
We sold Synektik S.A. (WSE: SNT), a Central European medical technology business we first purchased in the third quarter of 2025. The share price reached our estimate of intrinsic value much sooner than we had expected. We also completed our exits from goeasy and Goodfood.
We added to three existing holdings where business performance remained strong but share prices, in our view, did not reflect their prospects. We also initiated one new position.
Inter & Co (Nasdaq: INTR) is a Brazilian digital bank whose shares had fallen roughly 32.0% earlier this year, despite reporting its thirteenth consecutive quarter of earnings growth and a 38.0% year-over-year increase in earnings per share. We added in July, taking advantage of the divergence between the company's operating performance and its valuation.
Auto Partner S.A. (WSE: APR) is a fast-growing European auto parts distributor. Earnings were broadly flat over the past three years ($57 million, $50 million and $55 million in 2023–2025) as the company invested in expanding its logistics network across Europe. That investment has weighed on near-term earnings but increased the capacity of the business. Earnings are on track to grow approximately 25.0% this year, suggesting that the benefits of the expansion are beginning to emerge. We added in early July, and the shares rose 19.0% during the quarter.
Ashtead Technology Holdings plc (LSE: AT.) is a leading provider of subsea equipment rentals. We added to our position in July. On September 23, the company announced that it had received a cash takeover proposal at a 70.0% premium to its undisturbed share price. The board is evaluating the proposal and has provided the bidder with preliminary due diligence information.
The timing of our purchase was coincidental. We have owned Ashtead for approximately two years, attracted by the quality of its business, its market position and its long-term growth prospects. The proposal is a reminder that the value created by good businesses is not always reflected promptly in their share prices. A takeover is one possible route to recognition, but it was never central to our investment case.
A new position: Modern Dental Group (SEHK: 3600)
This quarter, we initiated a position in Modern Dental Group, a Hong Kong-listed dental laboratory business producing over two million custom crowns, bridges, veneers and dentures annually for 35,000 dentists across 28 countries. Europe accounts for roughly half its $500 million revenue.
Dental laboratories are overwhelmingly small workshops, competing on proximity to dentists. Modern Dental has spent 25 years building what they cannot: scale. Its 6,000 Asian technicians provide a cost advantage, supporting 55.0% gross margins, while its volume justifies investments in digital technology unavailable to smaller competitors.
Digitization is accelerating consolidation. Once a dentist adopts an intraoral scanner, impressions become files transmitted to Asia as quickly as to a lab across town, eliminating the local lab's principal advantage. Modern Dental's share of a converting dentist's work rises from roughly 10.0% to over 40.0%. With only 25.0% of dentists using scanners, adoption has a long runway. Digital cases also eliminate 10.0–15.0% of production steps without reducing prices. Net margins have risen from 13.0% in 2023 to 17.0% in the first half of 2026, while European revenue grows 10.0% annually against market growth of 2–3%.
Aligners have already gone fully digital and are now made by a technology company rather than a lab. Crowns, bridges and dentures have not: the finish still takes skilled hands, and chairside milling handles only simple crowns.
The only larger labs, Glidewell and National Dentex, operate solely in the US. In Europe, Modern Dental has no rival of its size; in the US, it is a subscale challenger, still restructuring. We are paying for Europe; a US turnaround would be upside.
The founding Chan family, master technicians still on the factory floor in their seventies, retain control. The risks are a flat Greater China market, euro revenue against renminbi wages, and thin trading, so we are buying patiently. At 10x earnings, with no debt and earnings per share up eightfold in a decade, we start with a 10.0% earnings yield that should grow as the industry continues consolidating.
Looking forward
The S&P 500 trades at roughly 26 times trailing earnings, with an increasing share of its value concentrated in a handful of companies whose valuations assume sustained growth. Some of these are exceptional businesses, and their growth may well justify their prices. We do not know whether or when market sentiment toward them will change, and our investment approach does not depend on predicting it.
Our portfolio looks very different. The businesses we own trade at approximately nine times earnings and are growing earnings at roughly 15.0% annually. That represents an earnings yield of about 11.0%, compared with roughly 4.0% for the index.
The difference is important. At the prices we are paying, a substantial portion of the value of our investments is supported by current earnings, rather than expectations of what those earnings might become many years from now. If our businesses continue to grow and retain or reinvest their earnings productively, we can earn attractive returns without relying on higher valuation multiples.
Many are founder-led businesses taking market share in fragmented industries. Their management teams are ambitious about growth but conservative in their use of capital and financial leverage. We believe that combination of strong competitive positions, disciplined management, earnings growth, and modest valuations, offers an attractive balance of return potential and risk.
None of this guarantees that we will outperform the index over any particular period. This year-to-date is a reminder of that. But we are not trying to own the businesses that have performed best recently. We are trying to own businesses whose future earnings and cash flows are worth materially more than the prices we pay for them.
Markets priced for perfection leave little room for disappointment. Our businesses, at their current valuations, need far less to go right. We believe that distinction will matter over time.
Thank you, as always, for the trust you place in us. Please do not hesitate to reach out with any questions. I look forward to reporting again in January.
Cordially,
John G. Khabbaz