Bastion Industrial and Infrastructure Portfolio First Quarter 2026 Letter

Bastion Industrial and Infrastructure Portfolio First Quarter 2026 Letter

The Four Pillars of My Investing Philosophy

By John Rotonti, Portfolio Manager

Two quick updates…

(1) I will be featured in the April 2026 issue of Value Investor Insight (VII) to discuss a business that I have not shared much about publicly in the past, but that is a high-conviction day 1 holding (a stock that has been in the Bastion Industrial and Infrastructure portfolio since inception in January 2025) so please keep an eye out for that. 

(2) The United States and other parts of the world (like Germany and Japan) are reindustrializing and Bastion Fiduciary’s podcast, Rebellious Allocations, has now published 9 deep dives into a variety of industrial and infrastructure businesses, and we hope to publish the tenth episode by the end of this month. If you are interested in themes like the reindustrialization, electrification, and the AI infrastructure buildout, please consider subscribing on Spotify, Apple, or YouTube. Thank you.

OK, now onto the letter…

The Bastion Industrial and Infrastructure model portfolio currently has about 25% cash sitting in a money market fund earning about 3.6%. The plan is to wait patiently and to deploy cash on VIX spikes and/or when stocks hit my “buy-around” prices. The top ten stocks account for about 49% of the portfolio. I expect that the portfolio (as measured by the number of stocks and the weight of the top ten positions) will consolidate to some degree over time. In other words, I expect that our number of holdings may drop a few and the weight of the top ten holdings will almost surely rise. I’d be more comfortable if the top ten stocks made up closer to 60% of the portfolio, and I think we’ll get there over time. 

More than one year into this journey, the portfolio is still not fully built out or where I’d like it to be. Either I’ll get the portfolio to where I want it slowly over time, or preferably faster if the market cooperates by falling. The Bastion Industrials and Infrastructure portfolio is less diversified and more volatile than the S&P 500 and not for the faint of heart or those with shorter investment horizons. I’m investing client capital with a ten to thirty-year time frame. 

In my fourth quarter 2025 letter I shared my thoughts on corporate management. It’s one of the most enjoyable notes I’ve ever written because it covered a topic that I spend a lot of my time reflecting on. I said that I think corporate management is the most powerful source of optionality and the single criteria that I weigh most heavily when picking stocks to invest client capital. In that letter I also said things like…

• “The best leaders think and act like owners, meaning they are hard-wired to do what is best for shareholders over the long-term.”
• “The best leaders excel at both operating the business and allocating financial and human capital. They insist on maintaining a healthy balance sheet and have a deep understanding and appreciation for return on invested capital (ROIC) and the other drivers of intrinsic value growth. They understand that a self-funding business with a strong balance sheet, profitability, and free cash flow (FCF) generation build resilience and optionality.”
• “They build and nurture cultures based on continuous improvement, adaptability, and resilience. They never settle, are never satisfied, and never rest on their laurels by thinking shareholder capital is safe behind a legacy moat. Rather they invest to defend and widen existing moats and to build new moats and profitable growth streams over time…the purpose is to extend the competitive advantage and longevity runway of the business, and to maximize long-term shareholder value.”
• “Every decision these leaders make is focused on identifying profit cycles, building longevity and survivorship, and maximizing long-term intrinsic value per share. They try to ride long profit cycles and extend the duration of growth rather than maximize the rate of growth in the short-term because they understand base rates and the math of compounded returns… These leaders understand that bigger is not always better, that focus can be a superpower, that FOMO is a deadly disease, and that sometimes shrinking (selling off underperforming assets) is the best way to grow at the per-share level.”

There’s more in that Q4:2025 letter, including a case study of Scott Strazik, one of the CEOs that I admire most and have the most confidence in, so I encourage you to read it. 

In this letter, I want to briefly discuss the other three pillars of my four-point investing framework. If the first pillar is superb management, the other three are a high-quality business, a long-term growth engine, and a reasonable valuation. 

What is my definition of a high-quality business? 

Businesses of the highest quality have superb management, a compelling value proposition, strong balance sheets, sometimes with net cash and healthy interest coverage ratios, high and/or rising returns on invested capital (ROIC), leading market share that is stable or rising, limited competition, limited risk of disruption or obsolescence, high barriers to entry and wide sustainable moats to protect future returns on invested capital, stable or growing free cash flows (in other words self-funding), and a long runway of per-share growth. Other qualities I look for are some degrees of recurring revenue and pricing power, both of which can come in a variety of forms. One common source of recurring revenue in the portfolio are companies that have a large and growing installed base of hardware (often times infused with software) with a higher-margin services business attached. As the installed base grows, so does the annuity stream of higher-margin monitor, maintenance, repair, and replace revenue. Common sources of pricing power in the portfolio are superior value propositions (often saving the customer time and/or money) and selling a mission-critical product or service where the cost of failure is high, but the cost of the product or service is a very small percentage of the overall project cost. As my friend Nick Lieb (analyst at Morningstar) says, this dynamic “psychologically shifts the customer’s focus away from price.”

The very best businesses are earned monopolies, duopolies, or oligopolies meaning they are almost beyond compare. In the rarest of cases, they are one-of-one, but usually one-of-two or one-of-three leaders with much longer-than-average runways of profitable growth. I think that each of our top ten holdings, and in fact nearly all of our positions are in stocks of businesses that meet nearly every one of these checks. For those that don’t operate in an oligopoly or duopoly, they are mostly market share leaders with an acquisition engine (more on that below) operating in a highly fragmented industry, providing opportunities for long runways of profitable growth through both market share gains (organic growth) and consolidation/M&A (inorganic growth). I think that if the name of the strategy was not “Bastion Industrial and Infrastructure” that an appropriate alternative name would be the “Bastion Monopoly, Duopoly, and Oligopoly” portfolio or the “Bastion Market Leaders” portfolio. I love our current name and description, but I think these would also work!

All of these qualities (and it’s not an exhaustive list) simply serve to help me identify businesses that I have high conviction will have higher earnings per share (EPS) five, ten, and twenty years (plus) into the future. An extra-long runway of EPS growth is ultimately what we are after as business owners, and I think these qualities are the drivers of long-term EPS growth.

In Warren Buffett’s 1996 letter he referred to businesses with similar qualities as those that I just listed as “The Inevitables.” 

Buffet wrote that The Inevitables will likely “dominate their fields worldwide for an investment lifetime” and that “their dominance will probably strengthen.” Buffett also said of The Inevitables that “Though some industries or lines of business exhibit characteristics that endow leaders with virtually insurmountable advantages, and that tend to establish Survival of the Fattest as almost a natural law, most do not.  Thus, for every Inevitable, there are dozens of Impostors, companies now riding high but vulnerable to competitive attacks.”

So, when I talk about business quality in the purest sense, that is what I am looking for…a business that has so much economic power that leads me to think its future success is almost inevitable. I want to stress “almost” because the word “inevitable” seems too sure for me, and nothing in investing is sure, and I’ve made lots of mistakes in my assessment of quality in the past and I’ll surely make more mistakes in the future. But at a high level, that is the name of the game for me…owning something that is as close to one-of-one as I can find. Beyond compare! As I said, I’ll make mistakes, but if I remain disciplined enough to only buy what I think are the highest quality businesses run by the most exceptional managers, then I avoid littering our portfolio with a bunch of lower-quality, less exceptional businesses that may be currently “riding high but vulnerable to competitive attacks.” And the more litter there is in the portfolio, the more I have to rely on my ability to trade in and out of positions, and I don’t want to do that. So, I am constantly reminding myself to avoid the litter so I’m not always taking out the trash. 

What do I mean by a reasonable valuation?

Honestly, I feel like I’ve written about valuation too much. If it’s a topic of interest, please read here, here, and here. As a quick review, I spend a lot of time using the total shareholder return (TSR) formula, balancing my estimates of EPS growth against potential P/E multiple compression (or occasionally multiple expansion). Other tools I use are justified P/E ratios, normalized free cash flow (FCF) yield plus expected growth in FCF, and peer buyout multiples (when available and appropriate). 

As I’ve written before, I don’t think I have an edge in valuation! So if you’re looking for someone that lives in their models all day, I am most surely not the manager for you. If I do have an edge in investing, I think it’s mindset (long-term patient outlook, emotional composure, an inborn aversion to FOMO and dilution, an obsessive compulsion to only invest in what I think in the very best businesses and to only partner with the very best management teams, and a willingness to consider an advantaged corporate culture as a source of sustainable moat). Regarding valuation specifically, if I maybe do something differently, it’s that I try to identify companies that I think can maintain per-share growth longer than the average company and longer than the market expects. And hopefully, much longer! Recall that duration of profit-cycle growth is far more important to me than rate of growth. A lot of value investors (far more skilled and experienced than me) aren’t willing to assume a company can grow at above market rates beyond their model (projection) period of say three to ten years. Rather, they want to buy current earnings power and get the growth for free. And that’s a fine formula. But, for better or worse, when I think it’s warranted, I’m a value investor that is willing to assume longer-duration growth and, in some cases, willing to give my companies time to grow into their multiples (in other words valuing the companies on out-year numbers). If I’m going to pay a rich multiple, I usually need to believe that the P/E will drop to at least a market multiple by year five, and preferably to a P/E of 10x on five-year out numbers. Those are not strict rules, but something I spend a lot of time thinking about. Finally, the shareholder value that superior, owner-operator management teams can add, as well as optionality, are very hard to put a value on. I give some companies credit for those attributes as well. You (and I) can’t model Elon Musk. Period. 

So that leaves us with a long-term (profitable) growth engine…

As I’ve stressed probably a dozen times by now in letters, podcasts, and other medium, the rate of current growth is less important to me than is my expectation for the duration of profitable growth. And I am biased to four types of long-term growth engines: (1) Businesses powered by long-term secular tailwinds (ex: electrification and AI), (2) a product/service beloved by consumers/users with strong unit economics early in the product rollout (ex: iPhone upon launch, Netflix early in its rollout of streaming, or Home Depot or Wal-Mart early in their buildout when they were opening hundreds of high-return stores each year), (3) a high-quality business that seems to almost always trade at an unjustifiably-low P/E that buys back lots of stock every year (think AutoZone, O’Reilly, or NVR), and finally (4) a company that operates in a highly fragmented industry and truly excels at acquisitions has almost unbounded growth. I find this fourth type of profitable growth engine as the most reliable and efficient with the longest runway, but also rare, and this is why companies that have built an acquisition machine into their corporate DNA often trade at high P/Es (think Amphenol, Installed Building Products, Heico, and Cintas). 

It’s fair to ask “well don’t all high-quality businesses also have superb management and a long-term growth engine?” I think the answer is yes and no. The best-of-the-very best businesses definitely have superb managements and a long-term profitable growth engine. But, there are other times when a high-quality business is run by inadequate management or when the original growth engine runs out of gas. GE and Intel are examples of high-quality businesses that had periods of poor management in the fairly recent past but are now run by superb leaders. So the underlying quality of the business was still there, but the businesses were struggling under the wrong leadership. Pepsi may be an example of a high-quality business without a long-term growth engine. I’m not saying it won’t grow…only that I can’t personally see a clear engine that powers growth higher than GDP over the next five, ten or 30 years . 

So, for this reason, I like to hyper-focus on the quality of the business, but also separately on the quality of the people running the business and the source of and amount of gas left in the tank of the growth engine(s), and what the company is doing to find and/or build the next growth engine.