2025 - Q4 - LP Letter

Dear Partner,

The fund gained 3.1% in Q4, finishing the year with returns net of fees of 21.55%. This compares favorably with 19.45% for the QQQ and 15.7% for the S&P 500, representing outperformance of roughly 10.8% and 37.3%, respectively. Much of the quarter’s strength came from our healthcare holdings, including Option Care Health (OPCH), Vertex Pharmaceuticals (VRTX), and Eli Lilly (LLY).

As is often the case, several of our best performers experienced selling pressure toward year-end as other managers locked in annual bonuses. We tend to hold through such periods, allowing gains to compound rather than generating unnecessary taxable events.

During the quarter we initiated positions in the IJR Small Cap ETF, Robinhood, and Affirm. We reopened a position in Weyerhaeuser, a lumber REIT we use as ballast when interest rates appear likely to stabilize or decline. We also added meaningfully to positions in CrowdStrike, QXO, Option Care Health, Google, and several eVTOL air-taxi companies. I know some of you shared my misgivings about Affirm’s business model, so I want to briefly address the rationale.

With respect to Affirm, I have long admired its CEO, Max Levchin, but only recently did two ideas align in a way that made the opportunity compelling. In a stretched but still-spending consumer environment, Buy Now Pay Later (BNPL) should become the preferred form of payment, a shift the market appears to underappreciate. At the same time, Affirm’s model is fundamentally different from both credit cards and many BNPL providers: rather than profiting from late fees or revolving debt, Affirm is paid by merchants and provides a cash-flow-smoothing service that makes purchases easier for consumers. That structure gives Affirm a more durable moat and should make it more resilient in a downturn. We therefore opened a ~1% position and may increase it over time if the opportunity continues to develop.

I expect 2026 to be profitable and volatile like 2025, though with more frequent swings. The economy appears broadly sound. Corporate earnings, especially within our portfolio, should grow with continued demand and rising productivity. However, large portions of the market are fully valued, which is likely to produce sharp price movements. Earnings misses will be punished severely, while earnings beats may be met with either indifference or bursts of enthusiasm, much as we see in other high-valuation periods. Unforeseeable events, particularly as we move toward the midterm elections, are also likely to arrive more often and provoke market reactions similar in magnitude to earnings surprises. The volatility should yield some good opportunities along the way.

As always, I am grateful for your support and trust and I look forward to serving you with another year of strong returns.

Sincerely,
Nick Carpenter
Managing Partner
NJC Horizon Fund