Cash Is a Position
In Q4 2025, we ended our letter by noting that Cash had become the largest position in the portfolio. The first quarter of 2026 was the first negative quarter for the S&P 500 since Q1 2025’s tariff shock. The S&P fell 4.3%. The Nasdaq Composite fell 7%. The “Magnificent 7” also turned negative; Microsoft alone accounted for roughly a quarter of the S&P’s drawdown. The equal-weight S&P outperformed the cap-weighted index by about 5%, its becoming a stock pickers market. While we do not attempt to time the market, we note when markets start to ignore growing risks in the economy, and valuations are high (on average), we opt for more defensive positioning. The most speculative asset, Bitcoin fell 22.6%. FINRA margin debt hit $1.28 trillion in January, the eighth consecutive monthly record, and rolled over in February.
We have described this setup in each of the last two letters. We did not predict a selloff, and we are not predicting one now. What we did was act on our valuation discipline: we sold our position in Alibaba, Fannie Mae common, BWM & Mercedes Benz, trimmed Corning, and closed our position in Tri Pointe Homes due to the announced sale of the business. By and large with these proceeds, we let cash build.
The point of this quarter’s letter is not to take a victory lap. One quarter is noise. The point is to explain what “defensive positioning” actually means for a long-only equity investor, because the word gets thrown around in ways that lose its meaning. Defensive does not mean bearish. It does not mean “in cash, waiting for a crash.” It means we are unwilling to own things at prices that require everything to go right.
What Defensive Means in 2026
A position in cash has an opportunity cost. The 10-year Treasury yields 4.38% as of quarter-end. The S&P’s long-run real return is roughly 7%. If the next five years return the long-run average, holding cash costs us meaningful compounding. This is the case critics of cash always make, and it is a fair one.
Consider what we are being asked to pay. The Mag-7 has grown to 33.7% of the S&P 500 by market cap, up from 12.5% in 2016 and the technology sector commands 43% of the index’s market cap. Meanwhile, combined hyperscaler capex for 2026 is now tracking at approximately $700 billion, versus the roughly $600 billion we flagged in our Q3 letter. Meta’s FCF is down 90%. Amazon’s is turning negative. Microsoft’s is down 28%. These are the most profitable businesses in human history, and they are spending faster than they can earn. In early February, The Wall Street Journal reported that Nvidia’s $100 billion investment in OpenAI had stalled. That set off a short but telling selloff. Microsoft then disclosed that 45% of its $625 billion commercial backlog — roughly $250 billion — was tied to OpenAI. Oracle’s stock fell on similar exposure concerns. OpenAI closed a $110 billion round at a $730 billion pre-money valuation a few weeks later. Anthropic priced at $380Billion. Whats interesting is Claude Code appears to be the best model/app, while ChatGPT is more of a commodity.
The bulls argue this is the pick-and-shovel plays winning, because the customers are unprofitable and will be forced to consolidate. The bears argue this is the vendor-financed telecom buildout of 1998–2000, where Lucent and Nortel lent money to their customers so the customers could buy their equipment. Both sides have a point. We do not claim to know which narrative wins. What we do know is that when cash flows are uncertain, the market should be assigning higher discount rates, not lower ones. Instead, on almost every measure of forward multiples and implied growth, it is assigning lower ones. That is the definition of pricing perfection.
Our portfolio is not a hedge against these outcomes. We own NVIDIA and Corning. We are not short the AI thesis. But we are unwilling to build a portfolio in which the marginal dollar chases another point of multiple expansion in a name where the range of outcomes is widening. So we let cash build when we sell positions that have reached fair value, and we wait for dislocations. This quarter, we found Baxter and added to our position in Perrigo.
Cash is not the absence of a position. It is a position with a yield, optionality, and a payoff profile that is negatively correlated with the positions being most aggressively priced.
What would make us redeploy? Nothing macro. We do not try to call tops or bottoms. What would make us redeploy is the same thing that always has — individual securities trading at prices that require only ordinary outcomes to earn acceptable returns. Baxter at $17 qualified. Perrigo at $15 qualified.
Portfolio Performance
| Winners | Performance | Losers | Performance |
| SPHR | 55.60% | PRGO | -21.00% |
| GLW | 23.50% | ||
| CALY | 18.90% |
Q1 Winners
Corning (GLW)
Corning continued to do what we described in our Q3 2025 letter. On January 27, Corning and Meta announced a multi-year agreement worth up to $6 billion for optical fiber, cable, and connectivity for U.S. AI data centers, anchored at the Hickory, North Carolina plant that Corning says will become the world’s largest fiber-optic cable facility. The stock jumped 16% on the news. The next day, on its Q4 2025 earnings call, management raised the Springboard plan’s incremental annualized sales target to $11 billion by end-2028 (from $8 billion), with $5.75 billion now at “high confidence” by end-2026 (from $4 billion). Core EPS grew 26% year over year in Q4 to $0.72. Free cash flow for the full year nearly doubled versus 2023.
On virtually every metric that matters, Corning executed. On the one metric that worries us, the valuation. At quarter-end levels, Corning trades in the mid-60s on TTM core EPS, versus the ~36x we flagged in Q3 when the stock was ~$80. The company is meaningfully better than it was six months ago. It is not twice as good. We are not wholesale sellers of Corning; the multi-year setup around AI-driven fiber demand remains real, and management has executed. But we are keeping portfolio and risk management at the forefront of our process.
Sphere Entertainment (SPHR)
Sphere’s operating results continue to surprise us to the upside. On January 19, the company announced that The Wizard of Oz had crossed 2 million tickets sold and more than $260 million in ticket revenue; by late February, cumulative ticket revenue had moved toward $290 million, and management announced an “enhanced 2.0” version of the show for later in 2026 with new scenes and 4D effects. The December quarter delivered $308 million of revenue and $33 million of adjusted operating income. Harry Styles announced a 30-night MSG residency beginning in August 2026. Per-show Sphere revenue was up mid-single digits year over year.
The two announcements that matter most to us are strategic. On January 18, Sphere, the State of Maryland, Prince George’s County, and Peterson Companies announced intent to develop the first smaller-scale Sphere at National Harbor near Washington, D.C. — 6,000 seats, a 16K x 16K LED interior, roughly $200 million in state, local, and private incentives, and a projected $1 billion in annual economic impact. In Abu Dhabi, the franchise, JDP, and pre-opening services agreements were finalized in July 2025; construction is expected to begin in 2026, fully funded by DCT Abu Dhabi, with franchise fees flowing to SPHR on a capital-light basis.
This is exactly the monetization path we described in Q4. If a smaller-format Sphere can be built for a fraction of Las Vegas’s cost, and if franchise fees flow back to SPHR without incremental capital, the business evolves from “one expensive venue in Las Vegas” to a content-plus-royalty model that is fundamentally more valuable. We continue to trim into strength — the stock has had an extraordinary run off the 2025 low — but we remain bullish on the underlying trajectory.
Callaway (CALY)
Our Q4 letter introduced the thesis: MODG’s sale of its 60% stake in Topgolf was the catalyst to transition from a levered conglomerate to a clean, pure-play golf OEM. On January 1, the sale closed — Leonard Green & Partners paid at a $1.1 billion valuation for Topgolf, generating roughly $800 million of net proceeds to Callaway. On January 16, the ticker changed from MODG to CALY. Management used $1.0 billion of those proceeds to retire its Term Loan B; the balance sheet now carries approximately $680 million of cash against $480 million of gross debt. The board authorized a $200 million share repurchase.
At quarter-end levels, we estimate the stock trades at ~12x 2027 earnings and look for management to continue to paydown debt, and repurchase shares. The previously complex story is now in the past, and go forward is a much easier story to underwrite.
Q1 Laggard
Perrigo (PRGO)
Perrigo was our biggest loser in 2025 at -46%, and the pain continued into Q1. On February 26, Perrigo reported Q4 2025 results, missed EPS, took a $1.3 billion goodwill impairment, and guided 2026 “All-In” adjusted EPS to $2.00–$2.30 against 2025’s $2.75. Infant formula revenue fell 25% in the fourth quarter, driven by weakness in the Good Start contract-manufacturing arrangement; the segment contributed roughly $21 million of negative operating income in the quarter. Layer in continued OTC destocking, and the market treated the print as a thesis-breaking event. The stock fell to $9.81 on March 11, roughly a 35% drawdown from year-end.
We added to Perrigo during the quarter
What was once viewed as a cyclical headwind now appears more structural, as the infant formula business has struggled to regain market share and shelf space. On November 5, 2025, the company launched a formal strategic review of the $360 million infant formula business. We view this as prudent given it would take additional capital the company does not have to potentially regain shelf space. The dermacosmetics divestiture is expected to close in Q2 2026, with proceeds earmarked for debt paydown. Management announced an additional $80–$100 million per year of cost savings on top of the existing $320 million Project Energize program, along with a 7% workforce reduction. Net leverage is 4.0x, with management targeting 3.8x. One reason we added to the position is because the distressed valuation the stock is trading at has the potential for two events. 1. Attract an activist investor that may look to further simplify the business. 2. Through the strategic review of the Infant Formula business, we believe there is an increasing chance the company puts the entire business up for sale.
The stock trades at approximately 4.8x forward earnings, 8.6x EV/EBITDA, and 0.4x sales. The core OTC/self-care franchise, excluding the problem businesses, still earns over $2.50 per share. If we assume zero value to infant formula — which the market appears to — the remaining business trades at roughly 5x earnings, with optionality from deleveraging, sale proceeds, and eventual mean reversion in the OTC destocking cycle. That is not a valuation for a permanently impaired business. That is a valuation for a business where the market has decided the bad outcomes are the only outcomes.
Position sizing matters. We have not made Perrigo a top-five holding. But adding on weakness at 5x earnings into an OTC business with a nine-figure cost-out program and active divestitures is consistent with the framework we wrote in Q1 2025. We will find out whether we were right. Our willingness to add on weakness rests on the thesis that this is a fixable balance-sheet and portfolio problem, not a franchise in secular decline.
New Position — Baxter International (BAX)
We initiated a position in Baxter during the quarter in the high teens.
Background.
Baxter spun off its kidney care business as Vantive, closing the sale to Carlyle on January 31, 2025 for approximately $3.8 billion gross and $3.3–$3.4 billion net of taxes. The RemainCo is a focused hospital-products company generating roughly $11.2 billion in 2025 revenue across three segments: Medical Products & Therapies (IV solutions, infusion pumps including Novum IQ, nutrition, drug delivery — roughly half of sales), Healthcare Systems & Technologies (smart beds, patient monitoring, Hillrom-era capital equipment), and Pharmaceuticals (injectable generics and compounding). The North Cove, North Carolina facility supplies about 60% of U.S. IV solutions and was damaged by Hurricane Helene in late 2024 — its production recovery continues to weigh on margins into 2026.
The setup.
On February 12, Baxter reported Q4 2025 results that disappointed, and guided 2026 adjusted EPS to $1.85–$2.05 versus consensus of ~$2.25. The stock fell 12–16% on the print and exited Q1 roughly 40% below its 52-week high. Management cut the quarterly dividend 94% (from $0.17 to $0.01) beginning January 2026, freeing up more than $300 million per year for debt paydown. Net leverage target: 3.0x by end-2026, pushed out one year from the prior plan.
Our thesis in five bullets:
Risks are real. Hospital capital-equipment budgets are tightening; GLP-1 adoption may pressure IV-fluid demand over time; the CFO departed in March 2026 with an interim in place; and the company remains levered above 3.0x. But we are paying a trough multiple for a trough year in a business whose next three years of deleveraging and margin normalization are already mechanically in motion. This is our kind of setup.
Other Portfolio Activity
We also added to Weyerhaeuser (WY) during the quarter. Our Q4 letter made the case that softwood lumber was nearing the end of a three-plus-year downturn: Canadian supply continues to come offline (West Fraser permanently closed four mills in Q4 2025; Canfor shut Polar and suspended Houston), Canadian producers now face combined landed duties of 45.16%, and inventories are lean across the channel. Lumber prices worked higher through the quarter, and January 2026 housing starts surprised to the upside at 1.487 million SAAR. The GreenFirst-type illiquid lumber exposure we discussed in Q4 gave us a view; Weyerhaeuser gives us the liquid way to express it, along with 10.4 million acres of timberland, an investment-grade balance sheet, a REIT structure, and a 2030 plan targeting $1.5 billion of incremental adjusted EBITDA. We still expect things to take longer than is pleasant. We are patient.
We exited Tri Pointe Homes (TPH) during the quarter. On February 13, Sumitomo Forestry announced a definitive agreement to acquire TPH for $47.00 per share in all cash, a roughly 29% premium to the prior close and a figure that exceeded Tri Pointe’s all-time closing high. The deal values the company at approximately $4.5 billion, is not subject to financing, and is expected to close in Q2 2026. This is the textbook version of what we hope for when we own a well-run homebuilder trading below replacement value: a strategic acquirer executing a multi-year plan arrives and pays cash above the all-time high. No stub equity, no CVRs, no merger arbitrage to monitor. We collected the premium and moved on.
We exited Alibaba (BABA) during the quarter. BABA bottomed near $65 in late 2024 and ran to $181 in late January 2026 — nearly a triple — driven by Jack Ma’s public return at Xi’s February 2025 entrepreneur summit, the DeepSeek-ignited re-rating of Chinese AI, and genuine acceleration in Alibaba’s cloud and AI business (AI-related cloud revenue has posted triple-digit growth for eight consecutive quarters; Qwen crossed 300 million monthly active users; capex committed at ¥380 billion over three years). The thesis worked. With the stock in the $170s and U.S.-China trade relations visibly deteriorating — the Supreme Court struck down the IEEPA “reciprocal” regime in February and the administration quickly reimposed a 10% global tariff under Section 122 — we decided we had been paid enough for the risks we were carrying. We are not paid to be heroes at the top.
A quick update on Fannie Mae common. In Q4 2025, we sold our FNMA common position after the September peak near $15.30. By quarter-end, FNMA sat in the high single digits — roughly 40%+ below where we exited and roughly half the peak. The privatization story has not gone away, but it has clearly moved further into the future. Bill Ackman himself pivoted in mid-November to advising against immediate privatization and acknowledging that it will “take significant time.” Secretary Bessent has emphasized a deliberate approach to avoid disrupting MBS markets. The average Wall Street price target now sits below where we sold. We remain holders of the preferreds, which are a cleaner, contractual bet on eventual privatization. On the common, selling the story into peak narrative was the right call. Bird in the hand.
Top 5 Holdings
Our top five positions at quarter-end were Cash, NVDA, BKRIF, GLW, and HCC. Cash has now been the top position for two consecutive quarters, and we expect it to remain so until enough names trade at prices that justify deploying it.
Closing
We spend a lot of time in these letters talking about process. The reason is that process is the only thing in our control. We cannot control multiple expansion in names we do not own. We cannot control the speed with which Sumitomo Forestry decides to buy a homebuilder. We cannot control the timing of a lumber cycle inflection. What we can control is the quality of our research, the discipline of our sizing, and our willingness to act when prices get where we want them and to sit when they don’t. Q1 rewarded the latter. We suspect the rest of 2026 will reward the former.
We are grateful, as always, for the trust you place in us.
Portfolio Top 5 Holdings
At the end of the quarter, our top 5 positions were Cash, NVDA, GLW, BKRIF, and HCC.
Regards,
Dominick D’Angelo, CFA Dominick@okeefestevens.com 585-497-9878
The performance information included in this letter reflects selected investments and portfolio activity discussed for illustrative and informational purposes only and does not represent the performance of any specific client account or a composite of client accounts. Individual client results will vary based on factors including, but not limited to, timing of investment, cash flows, portfolio composition, and market conditions.
Returns discussed herein are historical in nature and are not indicative of future results. Past performance does not guarantee future performance. There can be no assurance that any investment strategy or security discussed will achieve similar results or be profitable in the future.
Index returns referenced are provided for general market comparison purposes only. Indices are unmanaged, do not reflect the deduction of fees or expenses, and cannot be invested in directly. Comparisons to indices are not intended to imply that client portfolios mirror or track any benchmark.
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