Navigating Market Dynamics: A Candid Look at Performance and Lessons Learned

Remarkable Gains in the Second Quarter

During the second quarter of 2025, Atai Capital recorded an impressive 32.8% net gain after all fees. This performance notably surpassed the S&P 500's 10.9% increase, the Russell 2000's 8.5% gain, and the Russell Microcap's 15.5% rise for the same period. While acknowledging this strong short-term success, the firm emphasizes the importance of maintaining a long-term investment perspective, recognizing that a concentrated strategy in Micro and Small-Cap investments will naturally lead to periods of both significant outperformance and underperformance relative to broader market indexes.

Key Portfolio Adjustments and Market Positioning

The quarter's leading contributors were strategic positions, with further details available upon client request. Other notable positive impacts came from holdings in Bel Fuse, Haivision, and Allient. AstroNova, however, continued to be the largest detractor year-to-date. Significant portfolio rebalancing included the complete exit from Cable One and a substantial reduction in AstroNova holdings. A smaller position in Allient was also liquidated as it approached fair value estimates. Conversely, minor additions were made to Bel Fuse, Haivision, and Enad Global 7, while a tracker position was closed. Atai Capital's cash position has increased to approximately 17%, reflecting a cautious stance in a market environment where attractive new investment opportunities are scarce, especially within the U.S. markets. The firm continues to prioritize patience and stringent selection criteria, particularly for international investments. Currently, about 66% of the portfolio comprises businesses with market capitalizations under $500 million, with the top five positions accounting for approximately 60% of the total portfolio.

Acknowledging and Learning from Investment Errors

Investment setbacks and the resulting capital losses are an inherent aspect of any investment approach. While every effort is made to prevent them, their occurrence is inevitable, and more are anticipated in the future. A strong belief in self-reflection as a cornerstone of successful investment strategy drives this transparent review of past mistakes and the valuable lessons derived from them.

A Deep Dive into the Cable One Investment Error

Our initial investment in Cable One, detailed in the Q1 2023 letter, was based on the premise that its rural Hybrid Fiber-Coaxial (HFC) network would withstand competition from fiber and fixed wireless access providers, allowing for continued growth in subscribers, revenue, and EBITDA. However, over the subsequent two and a half years, this hypothesis proved incorrect. The proportion of Cable One's HFC network facing overbuilding by competitors escalated from approximately 30% to over 60%. This competitive landscape emerged as Cable One's Average Revenue Per User (ARPU) became sufficiently high to justify competitive infrastructure investments by companies like AT&T and Lumen in previously less competitive rural areas. The perceived strength of Cable One's footprint paradoxically became a vulnerability, forcing them to compete against technologically superior, lower-maintenance fiber lines that could undercut their pricing. This has led to ongoing subscriber attrition and potential future price reductions, impacting their top and bottom lines despite an increase in homes passed. Compounding these issues, Cable One's balance sheet is highly leveraged, exceeding four times, which, combined with declining EBITDA and accelerating subscriber losses, has caused its equity to trade more like a "stub," significantly impacting its share price. Despite these challenges, the initial position was conservatively sized due to an awareness of potential risks, never exceeding a mid-single-digit portfolio allocation. The firm fully exited the position at approximately $250 per share when the initial thesis was definitively invalidated by accelerating subscriber losses. In retrospect, the decision to invest in Cable One violated a core principle: avoiding investments in companies with substantial debt, a rule that was improperly set aside due to a misjudgment of business quality and a misplaced reliance on joint venture assets. This experience served as a crucial reminder that high leverage, when combined with declining operational performance, can severely undermine equity returns.

Revisiting the AstroNova Investment: A Hard-Earned Lesson

Our thesis on AstroNova, first outlined in the Q1-2023 letter, posited it as a low-risk, under-earning entity with clear potential for significant earnings normalization. The initial premise, focusing on AstroNova's core business recovery, largely held true, indicating that the investment could have been successful on that basis alone. However, the unexpected acquisition of MTEX in May 2024 for approximately $26 million (20% of AstroNova's market cap at the time) dramatically altered the landscape. While MTEX was projected to contribute $3 million in EBITDA, it is now projected to incur an annual EBITDA loss of approximately $4 million, marking a catastrophic misjudgment. Further revelations from an activist investor have cast doubt on the acquired "technology" and the company's persistent investment in a cash-burning, low-margin business. While one might argue the investment could have succeeded without the MTEX deal, the true lesson lies in the gross overestimation of the prior management team's competence and alignment, and a failure to adequately weigh persistent red flags regarding transparency. Management's evasiveness in multiple interactions, their reluctance to disclose key metrics, and vague assurances should have prompted a significant reduction in the position. The original rationale—that the thesis didn't rely on managerial excellence but merely the avoidance of severe value destruction—proved inadequate when the former CEO, Greg Woods, initiated the MTEX acquisition. Our initial analysis mistakenly relied on the board's experience, particularly the leadership of former chairman Dick Warzala, and the significant shareholding of Alexis Michas, believing these would safeguard against poor capital allocation. However, we underestimated the impact of interconnected personal and professional relationships among key board members and likely distractions or disengagement of crucial directors. It appears financial misalignment (the former chairman's small stake) and external pressures (his focus on Allient's destocking issues) may have contributed to a lack of rigorous oversight. Similarly, Alexis Michas, likely nearing retirement and with a small stake, may have been disengaged. This perceived collegial trust likely led to an insufficiently scrutinized approval of the MTEX deal. Despite Greg Woods's repeated underperformance, a competent board's action was significantly delayed, only occurring after a 70% write-down of MTEX and strong activist pressure. The severe consequences for shareholders were evident as AstroNova's share price plummeted. Our decision to retain a partial position post-earnings pre-release was influenced by an activist campaign led by Samir Patel of Askeladden Capital, whose strong case for change and subsequent endorsements from proxy advisors ultimately led to significant corporate shifts, including Greg Woods's forced resignation and a new strategic direction focused on preparing the company for a potential sale. The market's positive reaction to these developments further validates the activist's impact. The AstroNova experience underscored that competent and aligned management is crucial for any investment thesis, and the failure to significantly reduce our position immediately after the MTEX acquisition, despite clear warning signs, was the ultimate error, missing an opportunity for a slight gain and reallocation to better prospects