Fundamental Signals

Editor's Notes:

• AI is still leading, but expectations feel heavy. The market is optimistic, yet conversations are shifting from “AI = growth” to real constraints—optical bandwidth, transmission lines, and capex pressure. I’m still constructive, but I’m also more selective; not every AI-linked story deserves a growth multiple.

• Japan continues to stand out to me. Governance reforms and PE-driven take-privates are creating a rare backdrop where public markets are behaving like private equity opportunities. I’m not chasing momentum, but I’m actively watching for event-driven setups and asset-rich names where corporate action can unlock value.

• Precious metals have my attention. Silver outperforming oil and gold extending a major move isn’t noise—it feels like a market quietly hedging valuation, geopolitical risk, and policy uncertainty. I’m not treating metals as speculative trades here, more like portfolio insurance that’s suddenly repricing.

What are the Current Global Market Themes, Sentiment, and Key Debates?

US Market: AI's Dual Edge & Broader Dynamics

Sentiment remains cautiously optimistic within AI and tech, but concerns about "stretched multiples" and "valuation expectations" for top AI and Magnificent 7 stocks are prevalent. Many fear "a lot of 'ifs' priced in"—peak margins, endless hyperscaler spending, no competitive pressure, and linear growth. The NVIDIA-Intel deal signals potential chip industry consolidation, raising questions about future margin compression and the diversification of AI spending across chip architectures. The debate around Micron ($MU) transitioning from cyclical memory to structural AI growth also highlights this. A key argument suggests the "next AI wave" in 2026 might be led by the optical communications industry, not just GPUs, due to critical network bandwidth constraints. Elsewhere, the utilities sector faces a "Transmission Gap" risk, with long lead times for transmission lines versus data center demand potentially creating "stranded asset" risks for utilities. The restaurant sector is likely to see further bifurcation in 2026, with winners focused on cost control and value perception over growth stories, following an "ugly year" in 2025 marked by rising costs and consumer resistance. Precious metals are generating buzz, with silver now reportedly worth more than crude oil, driven by surging industrial and investment demand, and gold seeing a "2σ event" with a 70% rise in 2025.

Japanese Market: Governance Reforms Driving Value & PE Action

Japan continues to present a "golden era" for investing in asset-rich, cheaply valued stocks due to "unstoppable momentum" in governance reforms. Private Equity firms like KKR & Co. are highly bullish, actively pushing delistings and Management Buyouts (MBOs). The Yomeishu Seizo case, where the stock surged on news of mulling going private and KKR & Co. securing negotiation rights, is a prime example of this trend. Activist pressure, such as that seen at Yutaka Giten, further underscores the focus on unlocking shareholder value. This environment creates significant opportunities for value and PE investors, particularly in public market assets considered illiquid.

Hong Kong Market: Mixed Signals Amidst China Policy & EV Strength

The Hang Seng Index dipped, reflecting broader market pressure, yet managed to hold above key support. The market saw a notable rebound in the EV sector post-holiday, with NIO, XPeng, BYD, and Geely showing strength, buoyed by new EV standards and strategic expansions. Conversely, several Hong Kong stocks, including CK Hutchison and China Feihe, faced headwinds from China's economic slowdown, weak retail performance, and concerns over capital allocation. The power sector (Datang International) also saw declines due to lower 2026 PPA prices. Chinese fiscal spending and policy support for domestic demand remain key drivers for some sectors, exemplified by China Tourism Group Duty Free's strong performance.

Which Stocks Showed Notable Moves, Earnings, and Developments Today?

What are Today's Interesting Market Comments, Facts, and Investment Ideas?

• AI Hardware Bottlenecks & Critical Components: AXTI is highlighted as a "single point of failure" and a "monopoly" in Indium Phosphide (InP) substrates, crucial for photonics and optical interconnects vital for the entire AI industry buildout (Google, NVDA, MSFT). A target price of $150 from the current $15 reflects extreme bullishness on its critical role. Similarly, ASM International ($ASM) holds an estimated 60% market share for specific tools essential for 2nm production, targeting strong growth as chipmakers transition.

• Deep Value Opportunities & Event-Driven Plays:

  • Acacia Research ($ACTG): Pitched as a "mini Berkshire Hathaway" transitioning from patent monetization to a holding company, trading at 0.6x P/B with substantial liquid assets and cash-flowing portfolio companies.

  • Zhihu ($ZH): A deep value play with a ~$300M market cap vs. ~$500M in current assets minus liabilities. As China's 6th-8th most popular website, it shows narrowing operating losses, with a suggested target of $6/share.

  • Aspen Aerogels ($ASPN): Deep value at $2.97 with $150M cash vs. a $240M market cap, implying the core business (EV battery fire tech, 600+ patents, OEM contracts) is valued at only $90M.

  • Acadia Healthcare ($ACHC): A "sin stock" at $14.70/share, positioned for a Free Cash Flow inflection in 2026 due to activist pressure and CapEx cuts. Legal liabilities are acknowledged but seen as distant, allowing for "timeline arbitrage."

• Strategic Diversification & New Ventures:

  • BYD Electronic (HK: 00285): Strategically expanding into the AI server and robotics industry, indicating a proactive move to diversify and capitalize on emerging tech opportunities beyond its core EV components.

  • Axon Enterprise Inc.: Entering the 911 space with 'Axon 911,' integrating acquisitions and leveraging AI to significantly reduce response times and improve public safety workflows.

  • Walmart ($WMT) & Sam's Club: Leading an aggressive expansion in China, successfully attracting wealthy individuals and expanding e-commerce, showing a strategic focus on high-growth international markets and consumer segments. Walmart is also expanding its advertising segment, achieving 53% YoY growth, as a strategic initiative to boost profit margins.

  • Starbucks: Expanding into "riskier markets" like China due to U.S. market saturation, reflecting a broader corporate strategy for growth.

  • Waymo (Alphabet): Planning expansion of Robotaxi operations into London, UK, collaborating with Moove, signaling continued global momentum for autonomous driving technology.

• The "Transmission Gap" in Utilities: A bearish thesis suggests utilities like American Electric Power ($AEP) might be mispriced. The long lead times for building transmission lines versus the rapid demand for data centers driven by AI could lead to "stranded asset" risks and negative free cash flow for utilities trying to monetize this demand. Conversely, traditional energy and utilities with stable operations (e.g., Canadian Utilities, Exxon Mobil, Nextera Energy) are seen as lower-risk plays benefiting from energy creation and data center expansion trends.

• Silver as a "2σ Event": An ounce of silver is now reportedly worth more than a barrel of crude oil, an "historically unusual" event, driven by failed production keeping pace with surging industrial demand (solar, EVs, electronics, AI) and increased investment demand (inflation hedge, leveraged gold play). Gold's spot price significantly above its 200SMA represents a "2σ event" with a 70% rise in 2025, raising questions about sustainability.

• Emerging Energy & Industrials: Kawasaki Heavy Industries' successful test of a hydrogen-resistant Thermal Barrier Coating (TBC) for hydrogen turbines highlights advancements in hydrogen energy infrastructure. Air Liquide ($AI) demonstrates stable sales growth and margin expansion, underpinned by a massive order backlog, particularly for hydrogen projects. NXXT (NextNRG) focuses on decentralized energy and domestic battery manufacturing, providing containerized storage for microgrids, reducing supply chain risks.

• Geopolitical Risks & Portfolio Hedging: Broader market concerns about "stretched multiples" and "a lot of 'ifs' priced in" for top AI/Magnificent 7 stocks, coupled with geopolitical risks (China/Taiwan, US foreign policy shifts), are prompting investors to consider "defensive" investments or look outside the US market. Ping An Insurance (China) is pitched as a defensive play against perceived US market overvaluation, highlighting its integrated financial/services ecosystem, robust insurance growth, and industrial-scale AI adoption.

Happy Alpha Hunt! - Distilla

Disclaimer: This content is generated using AI, synthesizing public data (filings, reports, news) and social media (Reddit, X). It may contain errors, inaccuracies, or hallucinations. Nothing herein constitutes financial advice. This newsletter is for informational purposes only; please consult a qualified professional and conduct your own due diligence before making any investment decisions.