John Durkin

“Late Capitalism” [has] two paradigms [that] combine to swamp the efficient, free-market allocation of capital: 1. Crony capitalism and corruption…choke[s] out the rule of law and reduce the extent to which markets are “free.” 2. The transformation of markets from capital-allocation machines to casinos in which finance becomes just another form of gambling. Reasonable people can argue how far down the path we are… but I do not believe anyone would claim that we weren’t on the road.

Through its core hardware and software technologies of switching, routing, and wireless, Cisco Systems, Inc. (CSCO) is the clear leader in global computer networking. CSCO’s capabilities have made -- and continue to make -- the company a central player in shaping the operations of the modern internet, including the growing internet of things (IoT) landscape.

Some of our recent work has highlighted growing economic risks, especially in tech and crypto, with signs of a looming profits recession. The pieces document the remarkable grift from vendor finance, preliminary appearances of consumer weakness, inflated valuations, and debt-driven demand.

“As soon as you allow politicians to determine that which is bought and sold, the first thing bought and sold will always be politicians.” -P.J. O’Rourke, Parliament of Whores: A Lone Humorist Attempts to Explain the Entire U.S. Government, 1991

What’s causing the current malaise in healthcare stocks? Returns have been lagging and valuation multiples are lower than the vast majority of stocks in the S&P 500. We doubt everyone has become so much healthier that we no longer need medicines and hospitals. Is this as simple as “Healthcare isn’t Tech”? We don’t think so.

The research published in this newsletter is organized and authored by a group of fund managers and researchers who have over 90 years of combined experience and have worked together for over 14 years. As long-time readers know, our sister company, L2 Asset Management, runs a collection of long-only as well as long/short products.

Pediatrix Medical Group, Inc. (MD) operates a nationwide network of more than 2,300 affiliated physicians who provide neonatal, maternal-fetal, and pediatric specialty care. As of December 31, 2024, 1,335 of MD’s neonatal physician specialists provided clinical care, primarily within hospital-based neonatal intensive care units (NICUs), to babies born prematurely or with complications.

Our last white paper on tech, The Troubles of 2025 are on Full Display, demonstrated that: • Technology’s share of total market cap has eclipsed the prior peak in the dot com bubble • Technology’s bloated market cap has come, in no small part, from multiple expansion

Watching the mega-cap bubble reflate in 2024, the research in this newsletter peppered readers with warnings about the law of large numbers, soaring capital intensity, dubious accounting and vendor financing activities.

Answer: Nobody can predict the future. With that done, let’s revisit a moment of pain for the KCR team. October of 2010 marked the single first ranking list produced by KCR. The top-ranked stocks were a magnificent collection of companies, in our view. Stocks like Lubrizol, Microsoft, Lorillard, Discover Financial and the 8th ranked stock, Eli-Lilly, sat as our highest ranked healthcare name.

Today’s piece will discuss the current state of tech investing in US markets. A decade of zero interest rates coupled with the dramatic and unsustainable fiscal stimulus post Covid has taught investors a precarious lesson:

KCR believes that many of the most speculative, loss-making, hype-driven, low-quality tech companies are actually in private hands today. Many of them held by venture capital funds. Why does this matter?