Sell – Pfizer, Inc. (PFE)
Pfizer’s (PFE) recent earnings show signs of stabilization, with Q2 revenue up 8% year-over-year ex-COVID, and the stock screens cheap on earnings and cash flow multiples. Their COVID franchise now also makes up less than 15% of overall revenue (down from 56% at its peak) and investors are beginning to look past the materiality of that franchise. That said, the primary case for staying invested in PFE would be for a reversion to the mean trade on valuation, not conviction in the underlying business model. That is not how we’d like to invest. We prefer durable businesses with compounding characteristics at fair prices.

Pharmaceuticals are inherently capital-intensive, requiring constant reinvestment to replenish drug pipelines as existing products lose exclusivity. Billions are deployed each year into R&D and M&A simply to offset patent cliffs. Unlike higher-quality compounders, this business doesn’t build cumulative compounding advantages. They spend heavily simply to offset lost revenues. Additionally, the regulatory environment is becoming more hostile. The Inflation Reduction Act introduces Medicare price negotiations, reducing the long-tail profitability of blockbuster drugs. Approval hurdles remain high, while payer and political scrutiny further compress returns on capital. These are industry-wide risks, but we see PFE as structurally weaker in navigating them due to its reliance on acquisitions rather than internally developed innovation.

PFE has repeatedly leaned on M&A to fill its pipeline, rather than leading with organic R&D. Its R&D spend as a % of revenue (14-15%) lags key peers like Merck, Bristol Myers, Eli Lilly, and Roche (>20%) raising questions about the sustainability of its innovation engine. This approach introduces the risk of overpaying for external pipelines, often with disappointing outcomes. Their $5.4 billion and $11.4 billion acquisition of Global Blood Therapeutics and Array BioPharma in the last 5 years are key examples of acquisitions that did not live up to expectations, significantly eroding shareholder value.

PFE is also facing patent cliffs for several of their key drugs like Eliquis, Ibrance, Xtandi, and Xeljanz over the next 5 years. Together, these drugs make up 24% of PFE’s current revenue base and are expected to increase to 30% of PFE’s revenues. This would be approximately $17-18 billion worth of potential revenues lost annually between 2026 to 2028. Management touted that their recent acquisition of Seagen would add $10 billion of additional revenue by 2030, up from $3.4 billion currently. Still much of that revenue would be back-end loaded, not guaranteed, and would still fall relatively short to the loss of revenues from their existing drugs. This illustrates the continued challenge of pharmaceutical companies.

PFE’s business is stabilizing ex-COVID, and the valuation looks inexpensive. But the structural realities of its business model: capital intensity, dependence on acquisitions, and regulatory headwinds limit its long-term compounding ability. In our opinion, this is not a business that fits our philosophy of owning companies with self-reinforcing competitive advantages at fair prices. Staying invested would be a bet on a temporary multiple rerating, not durable quality. We prefer to exit now and allocate capital toward businesses with stronger moats, better capital discipline, and more consistent long-term growth potential.

Sell – Clorox, Co. (CLX)
Clorox is a well-established household name with over a century of operating history, strong brand recognition, and a proven track record of consistent dividend growth. The company has long appealed as a low volatility, income-oriented stable investment. However, despite these strengths, we believe the investment case for Clorox has weakened considerably.

We acknowledge and continue to like their Health & Wellness segment leadership- where cleaning and hygiene products like bleach and Clorox wipes dominate. Secular tailwinds for the category remain as consumers and institutions have structurally elevated their standards of cleanliness and have shown a higher baseline demand for disinfecting wipes, sprays, and cleaners since the Covid pandemic. Net sales were +3% year over year in their last report, highlighting the only bright spot in what has been an overall weak Clorox portfolio performance. Other Clorox segments like Household (Glad trash bags, cat litter, grilling) and Lifestyle (Condiments, Brita water filtration, Burt’s Bees) continue to face significant pressure without much innovation or differentiation to offset the weakness. Clorox’s Health & Wellness segments make up 38% of their overall revenue while the other segments make up the remaining 62%.

Household categories like trash bags, wraps, cat litter, and charcoal face intense private label competition and are perceived as commodities with limited pricing power and low differentiation. With inflation being top of mind, retailers have been aggressively pushing private labels and maintaining price pressure on commodity-like categories. This resulted in Household net sales being significantly down -11% year over year, with earnings down -18% in their last earnings report. Consumers have not shown any momentum in switching back to more premium products like Glad or Kingsford Charcoal despite inflation abating over the last several quarters, further challenging Clorox’s recovery efforts. Within their Lifestyle category, products have been losing relevance against newer, more innovative brands, and are competing in a mature and slow growing category. For example, Burt’s Bees has stalled against beauty challengers that focus on cleaner, healthier, and more prestigious brands. Brita faces newer filtration competitors (ZeroWater, PUR) that offer new formats like subscription filter deliveries and reusable bottles. Smaller, digital-first competitors have also been able to capture consumer niches more quickly by leveraging the internet, social media, and influencer marketing. Consequently, we believe this significantly undermines Clorox’s historical advantage of scale and retailer shelf space that used to contribute to their business moat.

The company’s IGNITE strategy has delivered cost savings and margin stabilization (10 consecutive quarters of margin improvement) but has not addressed the structural issue of owning businesses in stagnant categories and weak product innovation (ex-Health and Wellness). Without meaningful innovation or portfolio reshaping, the core 62% of revenue in Household and Lifestyle segments are likely to remain challenged. We see limited growth prospects, intensifying competitive pressures, and changing consumer preferences that undermine Clorox’s long-term value creation.

Sell – Keurig Dr. Pepper (KDP)
Keurig Dr Pepper (KDP) business is split into two segments: Refreshment Beverages and Coffee. They have a separate International segment as well but is immaterial for now. We continue to rate KDP’s Refreshment Beverages franchise highly. Brands like Dr Pepper and recently acquired equity stake in GHOST energy drinks have been taking share in their respective categories, supported by a scaled direct-store delivery (DSD) network that KDP keeps expanding. That combination of brand equity plus delivery execution is a durable moat that is hard for competitors to replicate. This was evident in KDP’s most recent earnings report- where Refreshment Beverages saw a 4% organic net sales growth (+10.5% when including GHOST energy drink acquisition), with an operating margin of 29.4%. This contrasted with their Coffee segment where sales declined -0.2% driven by a -3.8% decline in volumes and offset by a +3.6% increase in price. K-cup pod volume declined -4% and Coffee gross margin contracted by approximately 110 basis points year over year. This highlights the ongoing softness in core coffee demand and pressure by inflation and cost dynamics.

In our opinion, the Coffee segment looks more commoditized, more contested, and lacks a defensible moat. The recent decision to double down on Coffee with their acquisition of JDE Peet’s Coffee for $18 billion materially increases the risks for the overall company. KDP has fully committed bridge financing of $18billion to finance their acquisition and would bring their leverage post-acquisition from 4x to mid-to-high 5x debt/EBITDA. This puts the dividend growth and potentially its level at risk as management prioritizes de-leveraging over returning cash to shareholders. Management has also indicated that they are going to split KDP into two separate businesses (Coffee and Refreshment Beverages) once the acquisition is finalized. We see this as logical, allowing each business segment the autonomy to leverage its strengths. Nonetheless, even if management executes the acquisition perfectly, investors must first absorb elevated financial risk, integration risk, and a complex separation across regions and listings. The company is targeting $400M in run-rate synergies, but those are back-ended and far from guaranteed amid volatile coffee input costs and tariff noise. In our view, the risk-adjusted timeline to value is long, while near-term balance-sheet strain is immediate.

We do not want to wait for the separation while remaining invested in the company. For starters, the debt sits on the combined entity’s balance sheet before the spinoff. If macro or execution wobbles, all equity investors bear the de-rating. We do not need to be around for that. Additionally, Coffee is likely to set the narrative until the split. Headlines, guidance, and rating actions are likely to be coffee-centric given the size of the deal. That could cap multiples for the whole company even if Refreshment Beverages continue to execute well. Finally, opportunity cost of remaining invested is high. We can always re-evaluate KDP’s Refreshment Beverages post-spinoff when the balance sheet, dividend policy, and governance are clearer. Meanwhile, we can own other high-quality assets today.

KDP remains a good company with a great beverages business, but the coffee segment lacks a defendable moat, recent unit trends are weak, and the JDE Peet’s acquisition tips it over the edge. We believe the risk/reward deteriorates into the separation, with leverage (5.5 – 6x Debt/EBITDA) and rating pressure placing the dividend at risk. We prefer to redeploy capital into other opportunities, and revisit Refreshment Beverages after the split, when balance sheet and policy are clearer.

Sell – Amdocs Limited (DOX)
Amdocs Limited (DOX) is a well-established leader in telecom Business Support Services (BSS) and Operations Support Services (OSS) software with solid profitability and cash flows. But the lack of meaningful growth, industry headwinds, and competitive risks limit its upside relative to other opportunities.

Over the past five years, DOX’s revenue has hovered around 2-3% per year growth, significantly below peers in enterprise software and below global IT services growth. Additionally, the company’s backlog has remained stagnant at $4.1 billion for nearly two years, suggesting muted forward momentum. Part of the drivers behind this weak growth stem from industry headwinds. Telecommunication Service Providers (TSP) remain constrained by high debt loads from spectrum purchases and 5G rollouts. Their budgets have been and continue to be focused on network build-outs, spectrum acquisition, and AI/edge investments, not back-office software modernization. Telecoms are also risk averse when it comes to large back-office IT transformations. Migrating billing and monetization systems is complex, costly, and risky. Operators prefer to extend legacy systems rather than invest in new ones. Despite the long-term narrative of digital transformation, TSPs show no urgency to materially increase BSS/OSS spend.

On a competition front, telecoms are increasingly demanding AI-native, composable platforms for real-time billing, network anomaly detection, and customer engagement from their legacy system providers. DOX has launched initiatives like amAIz and Google Cloud partnerships, but its execution speed still lags their more disruptive smaller peers. Additionally, DOX could also face competition from in-house back-office software development from larger telecom providers. Despite DOX’s leading market share in BSS/OSS categories, stable margins (17-18% operating margin), strong free cash flow generation, and high customer stickiness in managed services (65% of revenue), the anemic growth is unlikely to improve given the industry spending constraints. Although DOX is a decent, resilient business, it is not a growth compounder, and we believe that capital can be better deployed into better opportunities with strong secular tailwinds with similar defensive characteristics.

Buy – McKesson Corp (MKC)
MCK is one of the world’s largest pharmaceutical distributors, delivering medicines, medical products, and healthcare services across North America and Europe. The company plays a critical role in the U.S. healthcare system as one of three national drug distributors that together handle over 90% of the market. Its scale, distribution network, and embedded customer relationships make it an essential, recession-resilient business, where volumes are driven by demographics and innovation rather than consumer spending cycles.

We view MCK as a highly defensible, recession-resistant investment with strong secular tailwinds. Demographic trends such as an aging population, coupled with rapid drug innovation, point toward rising prescription volumes that directly benefit distributors. Unlike PBMs, distributors are currently under less political scrutiny, as regulatory and legislative attention is focused more on rebate practices and transparency. This regulatory positioning lowers headline risk and makes MCK’s earnings profile relatively more predictable.

Central to our MCK thesis is that the company is increasing its focus on specialty distribution and oncology assets. Specialty medicines (eg: GLP-1 drugs) already account for more than half of U.S. drug spending and are expected to drive the majority of future growth. MCK is the leading distributor in this space, supported by complementary platforms like US Oncology Network (supporting over 2,000 oncologists) and Ontada (leveraging real-world data and tech to improve cancer care). Recent tuck-in acquisitions such as PRISM Vision (ophthalmology) and Core Ventures (oncology) further expand this specialty presence. Specialty distribution carries higher margins, stronger switching costs, and greater defensibility than traditional generics, giving MCK both earnings leverage and a moat as the market tilts increasingly toward these therapies.

MCK also continues to execute well. In FY 2025, the company generated $5.2 billion of free cash flow, returning $3.5 billion to shareholders through buybacks and dividends. ROIC consistently screens at the top of the peer group (24% vs 14% for Cencora and 12% for Cardinal), highlighting efficient capital deployment. The company also extended its distribution agreement with CVS Health through 2027 (continuing their 20+ years partnership), reinforcing stability with one of its largest customers, and secured the OptumRx contract beginning mid 2024 after Cardinal lost it, a major volume win. Both contracts provide visibility into future volumes and earnings durability.

MCK’s moat is built on scale, infrastructure, compliance capabilities, and customer stickiness. Drug distribution in the US is an oligopoly, with significant barriers to entry due to capital intensity, regulatory oversight, and the complexity of handling controlled substances and specialty therapies. Beyond pure distribution, MCK’s investment in adjacent markets like oncology networks, real-world data analytics, and prior-authorization/access solutions via CoverMyMeds raises switching costs and embeds it further into the healthcare ecosystem. This positions MCK not just as a low-margin distributor, but as an increasingly valuable partner in the specialty supply chain. Their scaled oligopoly business with secular growth drivers, industry-leading capital discipline, and high returns on invested capital makes the company an attractive compounder with durable, recession-resistant cash flows.

Buy – Motorola Solutions Inc (MSI)
Motorola Solutions (MSI) combines the resilience of a government-anchored business model with the growth characteristics of a software and services company. MSI’s core foundation is its land-mobile radio (LMR) business, which provides mission-critical communications tools to first responders and government agencies globally. These systems are deeply embedded, contractually long dated, and generate recurring service revenues that make them difficult for competitors to displace. This creates a strong base of cash flow that supports the rest of the company.

Over the past decade, Motorola has successfully repositioned itself toward higher-quality, recurring revenues. In 2024, software and services contributed approximately 36% of total revenue, and management has guided that this will approach 40% in 2025. Importantly, growth in this segment remains robust: excluding temporary regulatory headwinds in the U.K., recurring software and services grew by about 15% last year. This shift toward subscription-like revenues is structurally improving the company’s earnings visibility and lowering volatility. The company is also broadening its opportunity set beyond the public sector. Through acquisitions such as Avigilon, Openpath, Ava, and Theatro, Motorola is building a comprehensive platform spanning video security, access control, cloud-based command center applications, and AI-enabled workforce communications. These businesses are gaining traction not only with governments but also with enterprises in education, healthcare, transportation, utilities, and retail. We view this diversification as a meaningful secular driver that expands Motorola’s total addressable market well beyond its traditional radio communications base.

Financially, MSI remains exceptionally strong. The company consistently delivers operating margins of nearly 30%, generates more than $2 billion of annual free cash flow, and requires relatively modest capital reinvestment (2.5% – 3.5% capital expenditures as a % of revenue since 2020), making it a capital-light compounder. Its balance sheet has strengthened significantly, with Fitch upgrading its credit rating for two consecutive years and net leverage reduced to below 2x EBITDA as of June 2025. This gives the company ample flexibility to pursue bolt-on acquisitions and continue returning capital to shareholders without compromising its financial resilience.

Looking ahead, MSI is expected to experience multiple secular growth catalysts in its business. These include the modernization of 911 call centers and emergency command infrastructure, the continued upgrade cycles in global LMR systems, the migration of physical security and access control systems to cloud-based platforms, and new opportunities such as high-speed mesh networking for defense and unmanned systems. We believe that MSI offers a rare combination of predictability in a mission-critical government-anchored business with the upside of secular growth in security, enterprise software, and AI-enabled services. The business is highly capital-light, attractive margins, and strong management financial discipline. This balance makes it a high-quality long-term holding for the portfolio.

Buy – Chubb Limited (CB)
We are investing in Chubb Limited (CB) because it combines best-in-class underwriting with diversified global scale and attractive secular tailwinds in the property & casualty (P&C) insurance industry. Chubb has long distinguished itself with a multi-point combined ratio advantage versus peers, consistently reporting underwriting profits well below 90% while global competitors such as Travelers, AIG, and Zurich typically run in the low-90s. For FY 2024, Chubb’s consolidated P&C combined ratio was 86.6% and improved further to 85.6% in Q2 2025, underscoring the firm’s strong risk selection, pricing discipline, and claims management. A combined ratio of 85% meant that Chubb earned $0.15 in underwriting profits for every policy underwritten. Being 5-8% stronger than peers means that Chubb is 5-8 cents more profitable per premium dollar underwritten than peers. This structural underwriting edge translates into superior profitability: every percentage point of combined ratio advantage adds hundreds of millions of dollars in underwriting income on Chubb’s premium base.

The P&C industry is traditionally seen as recession resistant because insurance is not discretionary: businesses and households must maintain coverage to operate legally, protect assets, and satisfy lenders. Even during downturns, renewal rates remain high, and premium inflows continue. Chubb’s leadership in commercial lines, personal lines, and reinsurance, along with its scale in over 50 countries, positions it to benefit from this resilience. Its Private Client business focusing on high-net-worth individuals is another differentiator, insuring luxury homes, art, and collectibles with bespoke coverage. This client segment tends to be less price sensitive and offers sticky, recurring relationships that support pricing power and margins.
Chubb also enjoys meaningful secular tailwinds. A “higher-for-longer” interest rate backdrop, even if the Fed begins cutting, supports elevated investment income as maturing assets roll into yields far above the 2010s. Net investment income has already reached record levels, providing a powerful second earnings engine on top of underwriting profits. Meanwhile, global exposure offers long-term growth potential as rising middle classes in Asia and Latin America drive insurance penetration (Q2 2025 earnings reported +13% and +17% growth in those regions respectively). In addition, Chubb’s acquisition of Cigna’s accident, health, and life operations in Asia expands its consumer footprint and fee-based income streams. The continued growth of global wealth also plays directly into its high-net-worth personal risk segment. On top of that, structural risks such as climate change and more frequent catastrophes, while posing near-term volatility, increase awareness of underinsurance and support demand for coverage, especially from corporate and high-net-worth clients who value financial strength and claims certainty.

In the last quarter, Chubb produced record core operating income of $2.48 billion (up +13% year-over-year) and core operating EPS of $6.14, up +14%. Net premiums written was up +6.3%, while combined ratio improved to 85.6%. Capital efficiency is robust, with book value per share up +6.1% and tangible book per share up +8.0% quarter-over-quarter. Return on tangible equity (ROTE) remains strong at 21.0%, indicating excellent capital deployment. Their dividend track record is also reliable with 32 consecutive years of dividend raises. Notably, Chubb raised its dividend during the 2008-09 Financial Crisis and during the COVID-19 selloff. It has not cut its dividend during bear markets or recessions, a testament to its underwriting and balance sheet strength.

With a durable business model, stable investment income outlook, and exposure to secular growth trends in high-net worth clients and emerging markets, Chubb offers a compelling mix of defensive quality and growth optionality. We believe this positions the stock for continued strong performance over the long term.

Buy – Rentokil Initial PLC (RTO)
Rentokil Initial (RTO) is the largest pest control and hygiene services company in the world, operating in over 90 countries across continents with a highly recurring, route-based model that provides steady cash flow and resilience across economic cycles. The company’s services are non-discretionary, deeply embedded in both residential and institutional settings that are supported by long-term contracts. More than 80% of revenue is contracted or subscription-like, ensuring its recession resilient nature. RTO became one of the largest pest control companies in the US after their acquisition of Terminix in 2022. However, the acquisition has faced several challenges and has not lived up to expectations, dragging near-term share price performance.

RTO underestimated the integration complexity of Terminix. Terminix was a large US player with thousands of employees and branches. Integrating a business of that scale into RTO’s operating model has been slower and more complex than expected. Terminix’s operations were more fragmented, with more disbursed branch networks, highest cost-to-serve, and lower route optimization- dragging margin along with it. Major IT upgrades, cultural realignment, and branch consolidation resulted in inconsistent service quality and higher customer churn.

Despite the challenges, we are encouraged by the progress being made by the company and have confidence in their operating model. RTO has accelerated the rollout of more satellite branches (36 to 100 in the last year with more planned). This leads to higher branch density which reduces technician drive time, increases route efficiency, and lowers costs per service call. Lead generation and customer retention metrics have also dramatically improved recently, with residential and termite lead flow +6.6% year-over-year in June 2025 and customer retention now >80%. The company is also simplifying their portfolio by divesting non-core businesses such as France Workwear (estimated $420 million in proceeds) which reduces capital expenditure needs by $100 million annually and sharpens their focus on pest control and hygiene. Furthermore, their International operations delivered 19% operating margins, demonstrating the scalability and profitability achievable with route density, disciplined pricing, and balanced growth. Their North America margins are currently below this level, but we expect them to converge as synergies, branch density, and operational improvements are realized.

Pest control is an essential service with low price elasticity. Ongoing digital marketing and salesforce improvements allow for selective price increases while divesting lower-return businesses allows reinvestment into higher-margin core pest control operations. RTO combines the defensiveness of a non-discretionary service business with a clear pathway to margin expansion and cash flow growth. Free cash flow conversion reached 93%, well above the 80% target, underscoring management’s disciplined cost management and efficient working capital practices. The company is making progress on its North American turnaround, evidenced by improving lead flow, branch rollout, retention, and synergy capture, while international businesses remain strong and margin accretive. With operating improvements beginning to materialize and further upside from integration synergies and network densification, we see a compelling case in RTO as a long-term value creating investment.