Third Point has initiated a position in Alphabet (GOOGL) during the first quarter, taking advantage of market fears regarding the potential negative impact of AI and ChatGPT/MSFT on Alphabet's business. The hedge fund recognizes Alphabet as a leader in AI, with the company's recent product developments in Search, Maps, Gmail, Workspace, and Cloud offerings demonstrating significant progress. Third Point is also encouraged by Alphabet's efforts to reengineer its cost base to deliver sustainable and consistent margin expansion. While these efforts will be most visible from 2024 onwards, early signs of change can already be seen in the company's latest financials, such as a decrease in reported headcount additions and a slowing growth in operating costs. The fund believes there's significant potential for Alphabet to further optimize its cost base, which currently totals around $170 billion (excluding traffic acquisition costs), with $70 billion attributed to full-time equivalent salaries and bonuses. They have expressed their views to Alphabet's management, who seem open to considering further efficiencies and better deployment of capital.

The author maintains a buy rating for Pegasystems (PEGA) due to strong ACV growth and its successful penetration of its current base of large customers. The primary growth indicator for future quarters, the backlog, also increased by 14%, significantly above 4Q22 growth. The company's transition to Pega Cloud is expected to drive future expansion. Despite revenue and profitability coming in below consensus, the author believes this to be an optical issue related to the transition to Pega Cloud. PEGA's competitive advantage lies in its AI capabilities and its proactive approach to mitigating potential challenges related to increasing automation. The revenue and profit shortfall compared to consensus is not seen as a concern as it's largely due to the shift to Pega Cloud. PEGA's valuation is seen as appealing, and the author retains a buy rating based on 1Q23 results, highlighting strong ACV growth and a successful transition to Pega Cloud.

GSI Technology is developing the Gemini Associative Processing Unit (APU) for AI and high-performance parallel computing. The Gemini-II APU offers more processing power and memory density than the previous version and is built with TSMC's 16nm process. GSI Technology aims to address large language models (LLM) for natural language processing with future APU versions. Their APUs provide reduced power consumption for AI search applications in data centers. While Nvidia faces competition in the data center AI inference and edge server market, GSI Technology's APU architecture, which combines SRAM and 2 million bit-processors for in-memory computing, outperforms other processors. Gemini-I is suitable for large database search applications, and the upcoming Gemini-II will support generative AI applications like ChatGPT. GSI Technology is expanding its work on vector search engine applications and plans to leverage that in Gemini-II for LLM in natural language processing.

Diamondback Energy is a Permian pureplay company focused on oil and natural gas exploration and production in West Texas. The company has identified numerous economic locations in the Permian Basin and owns mineral interests through its majority stake in Viper Energy Partners. Diamondback Energy has a strong midstream infrastructure and a shareholder-friendly approach. The company's results are influenced by oil prices, but it has hedged its natural gas production. It expects its oil production to increase and costs to decrease. Diamondback Energy plans to divest non-core assets and use free cash flow for stock buybacks, dividends, and maintaining low debt levels. The main risks for the company are energy prices and basin risk. The author is bullish on oil in the medium term and considers Diamondback Energy a solid Permian pure play with a strong balance sheet. Once natural gas constraints are resolved, the Permian is expected to drive significant oil production growth, positioning Diamondback Energy well. The author recommends buying the stock at current levels.

The author prefers Real Estate Investment Trusts (REITs) over physical properties for building a diverse portfolio due to their ability to offer exposure to commercial real estate. The article focuses on Automotive Properties REIT, which owns car dealership real estate in Canada. The REIT's portfolio includes 76 properties, mostly located in Canada's six largest metros. It also has long lease terms and inflation-linked leases. Despite the potential decline in new car sales, the auto industry's reliance on service, repair, and parts makes it an attractive sector for rental business. The company consistently acquires new properties using a combination of debt and equity, but this has not led to an increase in per share profitability. However, it trades at a 12.2x AFFO multiple and offers an 8%+ earnings yield. The company has a stable payout ratio of under 90% of AFFO and offers a 7.2% yield. The author owns shares in the REIT and is considering adding more if the price falls another 10-20%.

The author recommends buying Dover Corporation (DOV) based on better-than-expected segment profit performance and strong March order trends in certain segments. Despite a backlog cancellation in one segment, the author has confidence in the FY23 guidance and expects backlog to exit the year above normal levels. DOV's portfolio is under-appreciated, and its management team has a strong track record of execution. The company expects growth to recover in the second half of 2023, with growth platforms such as biopharma, clean energy, digital, and thermal management continuing to grow. DOV's strong market position in the biopharma sector reduces cyclicality and secures recurring revenues. The company's exposure to regulatory-driven sectors is expected to grow regardless of macroeconomic conditions. DOV's cost-saving initiatives have resumed, and the current valuation of the company is considered attractive, with a forward PE below its historical average. The author predicts a re-rating of the stock based on faster sales growth and margin expansion, which is not fully reflected in consensus estimates for FY24 and FY25. The author reiterates their Buy rating for DOV, citing better-than-expected segment profits and strong order trends as reasons for confidence in the FY23 guidance. The company's exposure to regulatory-driven sectors provides stability amid cyclicality concerns.

The fund initiated a position in Credit Suisse just before its takeover announcement by UBS, then shifted capital from Credit Suisse bonds into UBS stock as it appeared a more compelling investment. The takeover of Credit Suisse is seen as a transformative deal for UBS, which will become the second-largest global wealth manager and third largest European asset manager. The deal is expected to bring significant synergies, rationalizing 50% of Credit Suisse's expenses, and add geographic and product diversification. UBS was able to acquire $35 billion of Credit Suisse's tangible book value for $3.5 billion of stock, due to the imminent risk of insolvency facing Credit Suisse. There is downside protection provided by the government, which is providing a $10 billion backstop for Non-Core Unit asset write-downs. The fund anticipates significant upside as UBS integrates Credit Suisse and realizes cost synergies.

Grupo Mateus is a significant retail company in Brazil, focusing on the underserved Northeast region. It is financially disciplined, expanding its wholesale retail brands, and is financially healthy with no leverage. Grupo Mateus operates in various segments, including supermarkets, wholesale, furniture, home appliances, baking, logistics/distribution, and e-commerce. Management is keen on regional dominance through continued expansion and financial discipline. The company saw a notable increase in revenue and profitability in 2022, with a strong balance sheet and valuation metrics. The founder and his family own 79% of the company. While it doesn't pay a dividend, it has found success with the wholesale model in the Northeast region. The author believes Grupo Mateus can continue to expand and consolidate its regional leadership position, making it a solid choice for investors betting on the wholesale business model in Brazil.

Bath & Body Works (BBWI) holds a strong position in the bath and body, home fragrance, and soap and sanitizer markets, displaying steady financial performance, and retaining a strong brand image. The company is expected to average 3% sales growth from fiscal 2023-2027, and plans to stimulate higher sales conversion by remodeling locations, launching a new customer loyalty app, and exploring growth in areas such as skincare and haircare. Despite concerns about a shift from mall retailing due to COVID-19 and rapid changes in consumer trends, BBW has consistently demonstrated an ability to maintain or gain market standing. The company's operating margin was 18% in 2022, and they have lifted their full-year adjusted EPS outlook to $2.68-$3.08. BBW is rated as having a narrow economic moat and a standard capital allocation rating. Activist firm Third Point has taken a 6% stake in BBW and plans to nominate candidates to the board of directors. While there is concern about this causing distraction, the potential for improved long-term returns is also acknowledged. The company's new CEO, Gina Boswell, is recognized for her extensive leadership and business development experience. BBW's dividend and share buybacks, suspended during COVID-19 to preserve cash, have been reinstated.

Home Depot, the leading player in the US home improvement market, is likely to grow its EPS at 10%+, despite a 29% share drop from its peak. The company's core customers, the affluent US homeowners, along with rising home prices and aging housing stocks, provide long-term tailwinds for the market. Home Depot's strong financial track record, broad product range, and comprehensive ecosystem for professional customers have allowed it to grow faster than the market. However, future growth may be impacted by difficulty in estimating post-COVID earnings and potential risks from a major U.S. recession. Despite this, under conservative assumptions that imply an EPS CAGR of 8.4% from FY19-26, the company could provide a total return of 47% (11.4% annualized) by January 2027. As such, Home Depot is assigned a Buy rating.