The Perfect Stocks Portfolio: June 2025 Update

Welcome once again to the Perfect Stocks monthly update.

Our portfolio continues to impressively outperform the U.S. domestic markets, which remain the key focus of most of our audience. For the month, the S&P 500 recovered from some of the tariff-related body blows it took in April and May, gaining 1.6 percent over the past month. However, it is up only 1.86 percent year-to-date.

The Perfect Stock portfolio is up 3 percent for the month of May and over 15 percent year-to-date. This performance comes with much lower volatility in most of our holdings outside of the United States, proving once again that the international version of Ben Graham remains correct.

Graham’s original ideas were not even developed a hundred years ago. They started to be developed in the late twenties and through the thirties, but even after almost a century, Graham’s central concepts of deep value investing, strength of balance sheet, and margin of safety continue to be proven correct time and time again.

This continues to be the case with the Perfect Stock portfolio.

Market Recovery Masks Underlying Weakness
As markets have recovered from the body blows of the trade wars, there has been an acceptance that this situation will continue. U.S. stocks have recovered off the lows, with investors displaying a willingness to overlook what is happening in the economy.

The economy is not the market; they are not necessarily always connected.

The S&P 500 continues to trade near all-time highs, recovering nicely, driven primarily by mega-cap tech and what I will call artificial intelligence daydreams. We will have a conversation about this another day, but the biggest profits in AI may come from the beneficiaries of AI, not the developers of AI.

Consider how crowded this space already is, and you can see that at some point, this may become commoditized.

 As I said, that is a conversation for another day.

Beneath the surface of large-cap stock performance, the market has deteriorated once again. The equal-weight S&P 500 is flat over the last month and has underperformed dramatically year-to-date.

This really is not a rising tide lifting all markets, but rather traders selectively bidding a handful of stocks to the moon.

Credit Markets Remain Eerily Calm
On the credit side, conditions have been calm, almost eerily calm, given the shift occurring in economic data. We added to all of that data flow this week with developments between Iran and Israel.

We do not yet have the real impact of that situation, but we know that ordinarily Treasury bonds would have received a strong bid under these circumstances, and they did not.

Credit spreads remain much tighter than you would expect even in this environment.

Economic Data Shows Emerging Weakness
When we examine the economic data itself, jobless claims are starting to drift upward. We are finally starting to see the Challenger Gray Report suggest that many layoffs lie ahead, coming not just from government sources but from private industry. Continuing claims are hitting cycle highs, and we are starting to see weakness in areas around Washington, D.C. and parts of California that have large federal government presence beginning to show up in the numbers. This will accelerate as employment agreements that have delayed laid-off employees from becoming part of the unemployed statistics and the Deferred Retirement Act (which does not kick in and remove these people from payrolls officially until September and October) begin to take effect. It is starting to show up and will accelerate.

We are all overlooking the fact that we are definitely entering at least a soft patch. I do not think we have the material for a recession yet, but the economy is clearly weakening in the United States when you look past the headlines. Smaller companies and real asset plays have gone absolutely nowhere this year. The Russell 2000 has lagged significantly.

This will eventually create opportunities for us in the Perfect Stock portfolio.

Inflation Data Provides Relief, But Energy Concerns Loom
We did see excellent CPI and PPI reports.

Month over month, the inflation numbers came in brilliantly. CPI was flat month to month, and year over year was approximately 2.8 percent. PPI had a similar result, with headline producer prices surprisingly flat and even slightly down.

The important thing to remember is that energy prices remained weak right up until Thursday afternoon when Israel first attacked Iran. Energy prices have shot up sharply since that point.

If we had experienced higher energy prices in May, we would have had much higher, much stickier inflation than the headlines actually showed. We are starting to see a rebound in gasoline prices even before this happened. You have this situation in the Middle East that could potentially cause energy spikes, creating problems here in the United States.

The jobs reports have been good again, with a 4 percent unemployment rate. We did see many foreign legal workers drop out of the workforce. Many people are saying, “I have changed my mind. I do not want to work here after all.” Potentially (and we have discussed this repeatedly), losing the legal non-U.S.-born foreign workforce could eventually create a labor problem in the United States.

As I mentioned, we are not seeing government layoffs have a meaningful impact yet, but we are seeing the Challenger Gray report suggest that there will be more layoffs from private industry, and continuing claims suggest that jobs are getting somewhat difficult to find.

Consumer Stress Remains Concentrated
Consumer stress is not really a broad problem. We receive many headlines about how credit card and auto loan delinquencies are increasing. However, it is almost entirely subprime borrowers and people under thirty-five who are struggling. They are the first to feel the pain of inflation and economic slowdown, and it is beginning to show up there. It will not show up in the banking system in a meaningful way.

Retail sales are just acceptable: flat in April, slightly weaker when adjusted for inflation in May. The top end of the income distribution curve is fine. The bottom quarter is beginning to struggle.

Housing activity is not recovering with mortgage rates near 7 percent, and housing affordability and inventory continue to be major problems for the United States. We do not see that improving much.

Commercial real estate is definitely showing signs of putting in a bottom as we move deeper into 2025.

Right now, the major variables are what will happen with tariffs going forward in June and July, and what will happen with Iran for the rest of the summer. We have no idea how long this situation will continue, how much bigger it will get, or what other nations might become involved.

Japan: A Value Investor’s Paradise
Looking at our international exposure, we have substantial exposure to Japan. The Japanese economy is cranking along steadily. Technically, it was in a recession earlier this year but is stabilizing. The stock market has paused slightly, but only slightly. The central bank is pulling back from the emergency policy it maintained after a decade of ultra-accommodation. We are seeing somewhat higher interest rates in Japan, but the market remains stable and cheap. Inflation is very moderate by global standards.

A significant percentage of the markets there are still trading below book value, and the Tokyo Stock Exchange has made it clear that if your stock trades below book value, you must take steps: grow your earnings, buy back stock, sell your company, eliminate your cross holdings, whatever you must do to begin unlocking shareholder value. We are seeing buybacks, and activists and private equity companies are beginning to achieve positive results in Japan. More than 40 percent of listed firms have announced either buybacks or expanded shareholder returns through combinations of debt repayment, dividends, and dividend increases.

This is the first real reform of how business is conducted on the Tokyo Stock Exchange that I have witnessed in my career. Approximately half of the companies on the exchange trade under book value. Dividend yields are attractive compared to global markets. Balance sheets are among the cleanest in the world, and capital allocation is improving rapidly by decree.

For Ben Graham-focused value investors, this is what we would call rare air: companies producing substantial cash, minimal leverage, trading at eight to twelve times earnings, a fraction of asset value, with improving return on equity, largely ignored by the massive passive flows from U.S. investors.

This is changing slightly.

 Remember, the Japanese are huge players in factory automation, robotics, technology, machine tools, and automobiles. Japanese banks have established positions throughout all of the Asian growth markets, making them major players in what will be the fastest-growing part of the global economy.

Japan is definitely a market that we want to remain part of.

 We would like to expand our holdings further in the Japanese market, and as opportunities present themselves, we will do so.

Europe: Grinding Through Structural Constraints
Europe has entered a new phase over the past month. The European economy is less about full-blown crisis mode and more about grinding through some of the structural economic constraints that have been in place for some time. We are seeing signs that they will address some of the problems left over from weak financial discipline, overly cautious central bankers, political risk, and (to be blunt) really poor energy policies.

The eurozone is growing again. They avoided an official recession earlier in the year, but just barely. Latest GDP estimates show anemic growth of just 30 basis points (0.3 percent) quarterly, pulled up by France and Spain, while Germany still walks on the knife’s edge of a stagflationary environment with modest inflation, concerns about tariffs, and a manufacturing complex that remains under significant pressure. Germany is caught between tariffs, global inventory drawdowns in advance of tariffs, and weak demand from both Chinese and U.S. markets.

Germany is paying the biggest price because their energy costs are among the highest, if not the highest, in the entire world. They are certainly the highest in the developed world because of poor energy policy decisions that will take time to reverse.

The European Central Bank cut rates by 25 basis points in early June. The cut was widely expected, and there will be more easing. Christine Lagarde’s message was cautious. Inflation is down. Service inflation remains somewhat sticky. Wage growth is running ahead of productivity in many member states. They are being careful because they do not want to trigger another inflationary spike by loosening too aggressively or too quickly. Their statements reflect this caution.

However, with the political environment becoming increasingly volatile due to trade policies, this week’s G-7 meeting will be extremely interesting. We have snap elections in France. The German elections showed a rise of right-wing populist parties once again. Fiscal credibility is on the table and being discussed. We are witnessing a re-rating of political risk in Europe.

While we are seeing some weakness in bank shares and sovereign bond markets despite gently easing inflation, stocks remain much less expensive than their U.S. counterparts. Inflation is much lower. We have many European stocks that we are holding at this point, but there is nothing we want to sell. Most of our European stocks are still trading below tangible book value. There is no need to rush to sell anything right now.

Monthly Performance Highlights
Looking over the last month, our biggest performers include Hello Kitty SNROF, MOMO – (the Chinese internet company that had strong earnings performance), and Rohm Company ROHCY – the Japanese conglomerate specializing in electronic components for automotive, transportation, healthcare, digital power, and computer systems. They manufacture integrated circuits, amplifier switches, and components for various electronic businesses and industries. That stock was up solidly this month at 21 percent.

China continues to climb higher. It is now up 118 perc China Yuchai International Ltd with a 15 percent gain in May alone. This is actually a Bermuda company that is a subsidiary of a Singapore-based Hong Kong company. They manufacture diesel engines for trucks and cars, as well as construction, agricultural, marine industries, and power generation equipment.

Most of its revenue comes from Chinese markets.

Magellan Aerospace is a Canadian company operating in defense and aerospace. Like all defense and aerospace companies doing business outside of the United States, particularly in Europe and Canada, it has taken a rocket ship chart pattern. The stock is up 14 percent in May alone and 87 percent year-to-date.

The fact that the U.S. is removing its defense umbrella from Europe is causing enormous amounts of money to be spent and planned for spending across European defense markets. This will be significant.

The Great Dollar Recycling Shift
Looking at Japan, Europe, and China, there is something occurring that you need to understand. It is a development that will continue to make foreign markets more attractive than U.S. markets.

 All of the cash that companies have earned from selling products to the United States has been recycled back into U.S. assets and U.S. stocks.

Over the last five years, foreign buying has been one of the major sources of funds powering the Magnificent Seven stocks higher as the U.S. sprinted ahead in AI and other areas of the technology market.

However, given the hostility created by the tariff situation, global trade discussions, and concerns (particularly between the U.S. and Europe), there will be a recycling of dollars.

Europe and the U.S. are not close to a deal, and it does not appear they will move close to a deal anytime soon. Dollars that would have flowed into U.S. markets, into the Magnificent Seven stocks, and into U.S. Treasuries are now being redirected, particularly to Europe and some to Japan.

There is a recycling of these dollars looking for a new home, and they will land in the undervalued market opportunities that Ben Graham himself would have loved across Europe, across Asia, and selectively in Latin America.

We will continue to look for these opportunities to add to the Perfect Stock portfolio. We are buying companies that trade at a discount to tangible book value, that have strong balance sheets, that are profitable, and that pay dividends. This has been a winning strategy for almost one hundred years for patient, aggressive investors.

 I maintain that it will continue to be a winning strategy for patient, aggressive investors, particularly if we pack all our value tools in our kit, put them in the suitcase, and take them around the globe as we have done with the Perfect Stock Portfolio.

The fundamentals of value investing remain as sound today as they were when Ben Graham first articulated them nearly a century ago. While the U.S. market chases the latest AI darling at increasingly stretched valuations, real opportunities continue to present themselves in overlooked markets around the world. Our international focus continues to deliver superior returns with lower volatility, exactly what Graham would have predicted.

Thank you, everybody. Have a fantastic month. We will return with another update in a few weeks.