Covid Boom

In 2020-2021 we had historic levels of money printing, people were locked at home, and rates were the lowest in history.

Investor speculation caused home prices to experience the most rapid rise in history. Home prices relative to incomes, rose to levels higher than the previous real estate bubble. Why people haven’t been calling it a bubble this time? I am not sure.

During this time, social media became flooded with real estate “gurus” telling people to buy real estate for passive income and financial freedom.

One of the most popular gurus during this time was Brandon Turner, the host of BiggerPockets. Brandon had a huge influence on a whole generation of mom and pop investors to pile in to single family, multifamily, and short-term rental real estate.

Recently, he lost $15M of investor capital. It is quite symbolic when the guru who inspired a whole generation of investors to get in, is losing his investors’ money.

Foreclosure Suppression

There is another reason the housing market has looked healthier than it really is. For five years, foreclosures were artificially suppressed. This is something so massive yet it never got any attention from the media.

During Covid, the CARES Act let borrowers pause mortgage payments through forbearance, and federal moratoriums blocked foreclosures outright. When those expired, the government kept these going through “loss mitigation” programs. This was extended and extended till it finally sunset in October, 2025.

This was extended far beyond what it was originally intended for. Relief from the pandemic lockdowns turned into kicking the can down the road to deal with the foreclosures years later.

It is now years later. Foreclosure filings hit about 228,000 properties in the first half of 2026, up 21% year over year. Five years of delayed distress is hitting the market with no demand to absorb it.

DSCR Loans and the Airbnb Bust

People love to say that there could never be a subprime mortgage crisis, because there aren’t NINJA loans that exist today. What those same people have never heard of are DSCR loans which are not too far off.

DSCR (Debt Service Coverage Ratio) loans are loans for investors who use the property’s projected rental income to qualify the property, rather than a person’s liabilities and income. As long as the lender sees that the projected cash flow of the property can cover the debt service by a certain amount, then the property qualifies.

On the surface, this may not seem too bad. But where this gets crazy is the fact that you can use AirBnB “projected rental income” to qualify a property.

If you aren’t sure why this is problematic, let me show you why:

Let’s say an investor wants to buy a property with a DSCR loan and the property earns $2,000 in projected rent, but has $2,000 in expenses. Well it wouldn’t qualify with a normal DSCR loan. But let’s say short-term projected rental income is used to qualify it. With aggressive occupancy assumptions, that $2,000 rent is now $4,000 and can qualify any property.

People were sold the dream of financial freedom by the gurus, and flooded to Airbnb investing. A wave of supply hit the market due to everyone piling in, and occupancy tanked. Now there is a wave of underwater Airbnbs that are trying to sell when there are no buyers.

Below is an example of one of the most popular areas the gurus suggested investing in (Joshua Tree, CA).

Sales Have Collapsed

Pending sales are now lower than the great financial crisis. Sellers have been in denial over prices as demand has evaporated. Now, we are entering the phase where sellers are forced to face reality and lower prices to be able to have a chance of selling the property.

Homebuilders Lead the Decline

The housing market has been frozen for a while but many think home prices haven’t crashed yet. If you look under the hood, the downturn began long ago.

In the process of the downturn, the builders lead. They have a business that they must sell what they build. They do not have the luxury of being delusional for years. They have to face reality and are forced to lower prices to move inventory.

Median home prices have been masked by price cuts being hidden through incentives. The builders don’t want to lower prices so it doesn’t seem as bad on the surface, so instead they offer things such as mortgage rate buy downs, closing cost assistance, flex cash, design center credits, and move-in packages.

Lennar, the second-largest builder in the country, has average selling prices down 24% from the peak, back below pre-pandemic levels. That is much worse than a mild correction.

Where are we now?

After prices got to historically elevated levels, we got the sales collapse. Builders already accepted reality and average selling prices are crashing.

Now inventory is sitting, and we are entering the phase of forced sales driving downside. Through the wave of foreclosures beginning, underwater investment properties, and people having life events forcing them to sell, lower prices follow.

Commercial Real Estate

Commercial Real Estate is the other part of the story. This part could be a whole article in itself but I will keep it short and sweet for you to see what’s going on here.

Commercial Real Estate is different than housing in the sense that it’s simply math. It has revenue (rent), operating expenses (maintenance, property management, taxes, insurance), and interest expense.

Most of the industry operates the same way when modeling investments. Assume X% rent growth, slightly lower growth in expenses, with no assumption on interest rates.

Because interest rates were so low, this caused a similar boom that the housing market experienced from investors. The problem is that the math ended up looking a lot different than what was assumed when purchased.

• Rent did not grow as assumed (in many cases declined)

• Expenses grew much more than anticipated

• Cost of debt skyrocketed

Take S2 Capital, a $400M multifamily fund that lost every dollar of investor capital.

On average, operating expenses were up 16%, rents down 24% and interest expense up 50%

This is not just one fund that made bad decisions. This is widespread across the asset class.

This was a multifamily fund. Most people think it’s only office that’s under stress, but office was just the first to go. Now multifamily, retail, and hotels are under stress.

The Data

CMBS (Commercial Mortgage Backed Securities) are the best way to get a real time pulse on the CRE market. CMBS 30+ Days marked as delinquent just spiked to 7.86%

This alone is alarming, but what is even more alarming is when you look at the special servicing rate. The special servicing rate is the percentage of total outstanding CMBS loans that have been transferred to a special servicer due to distress, default, or anticipated default:

The Maturity Wall

The entire industry was built on the assumption that rates fall forever. The real estate industry has been saying for years “rates will come back down” yet they have continued to rise.

Right as the asset class grew to a gargantuan scale, we are finding out what happens when yields rise and remain elevated for a sustained period of time.

The reason why this is problematic is because most commercial real estate loans have balloon payments, where 5 years after the loan begins, the entire balance comes due, and the borrower has to refinance into a new loan or sell the property to pay off the previous loan.

When you have to refinance from historically low rates into much higher rates, the math no longer makes sense.

As you can see, in the graphic above, office is a small portion of the maturity wall, which already has a double digit default rate. The maturity wall is hitting multifamily and the rest of CRE.

This is why commercial real estate is a ticking time bomb. Some commercial real estate has been in this situation or worse for years, and lenders have allowed the can to be kicked down the road by offering loan modifications, hoping that conditions will improve soon.

“Extend and pretend” - exactly what was happening in the great financial crisis.

See for Yourself

Nightingale Associates on X has been posting the stress in the commercial real estate market, daily, for years now. If you want to see firsthand, what is going on in the market, have a scroll through his account, and you will be astonished.

Where are we now?

CRE is further along than housing. Office went first. Multifamily, retail and hotels are in it now. Delinquencies and special servicing rates are already at extremely alarming levels, and we are entering a massive maturity wall.

Why does this all matter?

There is $87 trillion in this asset class. That is almost 3x GDP. A downturn does not stay in real estate. It has many downstream effects. An obvious example is the wealth effect. Households are sitting on $53 trillion of it, and the top-end consumer cuts spending when that marks down. Even if you do not care about real estate directly, this affects everything.

The large banks have about 13% of their balance sheets in commercial real estate. The regionals have about 44%. The big banks originated this stuff and sold it. The regionals originated it and kept it. So when the 2021 debt comes due, and the borrower can’t refinance because the 10-year never came back down, it is not JPMorgan eating it. It is the bank down the street, whose whole business was local CRE.

The slice that did leave the banks went into private credit, which does not mark to market and will tell you everything is fine until it isn’t. Fitch has private credit defaults at a record 6%. The large banks are still in that trade: they just relabeled it as credit lines to the funds.

Regionals stop lending, CRE can’t refinance, homebuilders already have to cut prices to move inventory, and $53 trillion of household real estate starts working in reverse.

The can has been kicked since 2022. This is the part where there is no more road.

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If you are an accredited investor interested in investing in Avian Capital, please fill out the contact form at aviancap.com

Disclaimers:

This is for informational and educational purposes only. It is not investment advice, a recommendation, or an offer to buy or sell any security.

As of the date of publication, Avian Capital and/or its principals hold short positions in real estate related securities, including Lennar (NYSE: LEN), and may benefit if those prices decline. Positions may be increased, reduced, covered, or otherwise changed at any time without notice, and may have changed after this was published.

This reflects my views as of the publication date. Those views are subject to change. I have no obligation to update this post.

The analysis relies on publicly available information believed to be reliable. I make no representation that it is accurate or complete. Forward-looking statements involve assumptions that may be wrong. Actual results may differ. Short selling involves substantial risk, including theoretically unlimited losses. Past performance does not guarantee future results.

This the Avian Capital book as of August 14th, 2026.

Some of these are short-term trades and positions are subject to change.

For informational purposes only; not an SEC Form 13F, investment recommendation, offer, or solicitation.

I do not believe in being bullish or bearish. I also can be bullish and bearish at the same time.

This is a collection of charts and what they look like right now. No words, Just charts. You can come to your own conclusions.

Before, I want to add some context with whats going on right now:

• Many companies that are reporting stellar earnings are dropping 10-20%+

• We are still at war with Iran

• Yields skyrocketing globally

S&P500 (Perspective)

HYG - Junk Bonds

XLY - Consumer Discretionary

IGV - Software

KRE - Regional Banks

FXI - Large Cap China

MEME - Fintwit Faves

SOX - Semiconductors

TLT - Long Duration Treasuries

QQQ

Gold

BTC - Bitcoin

XBI - Biotech

XHB - Homebuilders

XLRE - Real Estate

Bonus Chart - New Home Prices

This report is published for informational and educational purposes only. It is not, and should not be construed as, investment advice, a recommendation, an offer to sell, or a solicitation of an offer to buy any security.

If you are an accredited investor and interested in investing in Outlier Capital, please reach out at matt@outliercapitalmanagement.com or on the contact form on the website.

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In November of last year, I posted all the things in macro I was worried about. I did not go full bear mode. Just acknowledged what was going on that made me cautious... the market has chugged along since then and has made many think that none of this stuff matters anymore and the market will go up in a straight line forever.

There is a reason many people who successfully called crashes are usually wrong for years before they end up being right. Macro is slow, and certain issues build up for a while before it finally falls apart.

The way I operate is just to acknowledge and follow these things to be ready for when they eventually become a problem. Or they improve.

These are the issues I warned about in November:

• Consumer struggling

• Labor market deteriorating

• Inflation still above target

• Private Credit

• Yields

• Bubbly behavior from retail investors

• Real estate market and CRE downturn

• Margin debt at all time highs

The Signs Have Been Building Up

On October 10th last year, we saw a massive leverage unwind, especially in crypto. This happened when Trump put out a tweet and the indices experienced a sharp drawdown in a matter of minutes. You may have forgotten already, but leading up to October, everyone was piling into Bitcoin and crypto.

The S&P 500 dropped 2.71% and Nasdaq slid 3.56%. The market was at all time high at the time, and so was crypto.

That day was the largest single-day liquidation event in crypto history, $19 billion wiped out in 24 hours. 1.6 million traders liquidated.

I will never forget my feed. Seeing a ton of people tweeting that they lost it all.

This day had a ton of signal. People don’t open their eyes and take note of what was going on. People were acting like this was normal. But it wasn’t.

“Coincidentally”, this happened to be the top in many of the momentum names before they fell 50, 60% + . Recognizing that we were at all time high margin debt, and keeping my eyes peeled for any red flags, gave me the confidence to go heavier on shorting many of the momentum names such as quantum and the pre-revenue nuclear company OKLO at the top. Which I also spotted in the technicals coinciding with this.

Then, after the crypto crash. Everyone, (including many ex-crypto bros) started piling in to gold and silver.

It was obvious seeing commodities going parabolic, that it would not end well. There were signs such as people lining up outside stores in Asia, to speculate on physical gold. I warned of this just days before we saw something historic.

At the end of January, we saw the sharpest single day drawdowns for gold and silver in history. Gold experienced a 16.4% drawdown and Silver collapsed 38.8%. These are multi-trillion dollar assets. Trillions of dollars evaporated.

This was probably the biggest red flag I noticed. I continued posting about it. Shocked that nobody was discussing what we had just witnessed. People again simply acted like it was normal.

3rd Time’s the Charm

Around the time of the metals crash, Claude Opus 4.6 released, and OpenClaw began to become extremely popular. This was when AI truly began (in my view) that made people discover what agentic AI really was realize it was more than just a chatbot.

Around the same time, we began the war in Iran, which prompted a local top in the markets. Many became bearish at the lows and we proceeded to have a low volume “lock-out rally” where the S&P500 rallied over 20% in about a month and a half.

It’s important to note what the chart looks like. Low volume, RSI divergence, and lower highs. The market seems exhausted. This was/is an obvious local top.

A large portion of the market performance was due to investors piling into AI stocks. Semiconductors, memory stocks, and other hype momentum stocks.

This time, it was taken to an even further extreme than the last two. Funny enough, it was also the same crowd piling in. The ex-crypto bros, who suddenly pivoted to AI. But it wasn’t just them this time.

The most concerning thing I have observed since last time I posted what I was worried about is the bubblish behavior of retail investors. Many people I encountered in real life have become interested in the stock market that never have before. Countless stories of people who just began trading, thinking they can become full time traders. It’s the classic “taxi drivers giving you stock tips”. This is very similar to the 2021 cycle.

My guess as to why this is happening is because people see the market going straight up, they aren’t in great financial situations, and they see it as an escape. Potentially many of them are even at home since they have no jobs, so they decided to become traders. At least that’s what I feel from what I see and talking to people.

I even put together a thread for when we get the “who could’ve seen this coming” to showcase the new talent of professional traders.

You know how I keep talking about leverage? Well yeah... Levered ETF’s are getting released left and right. All the popular retail stocks have levered ETF’s.

Even SPCX. The largest IPO in history, IPO’d with leveraged ETF’s launching at the same time.

What was most alarming was Korea. Because memory stocks were flying, and memory chip stocks Samsung Electronics and SK Hynix make up over 50% to 60% of the total market value of South Korea’s KOSPI index, everyone in the country began piling in to the market on leverage.

This is an entire country being leveraged. People in their youth, elderly people, everyone. The herd behavior of everyone piling into these stocks on leverage, caused the KOSPI to go parabolic. But then, the reversal happened...

As of July 13, more than 1.2 million leveraged retail trading accounts in South Korea triggered margin calls. It is estimated that 3.4% of the adult ⁠population, have received margin calls. The KOSPI is down around 15% since then. So it is safe to assume that this number is even higher since then.

It’s not just Korea getting margin called though... The past week I have seen many traders in the US getting margin called as well.

Take for example what is currently going viral. A GoFundMe for a smart guy, who got drunk of the euphoria in the bull market with space stocks, and got liquidated from buying options on these high flyers with margin.

Keep in mind, these mass liquidations are happening when the S&P500 is down around 2.5% and Nasdaq is down around 8%. It’s scary to imagine what would occur when the indices experience a more severe drawdown.

People have gotten used to buying every single dip and it has proven to work out. This is the trap that causes euphoria to wipe people out.

Semis and AI Bubble:

When I posted my worries about macro, it was at a time when the debate was AI bubble or not. My point at the time was this was noise and there are other more concerning issues at play. This seems to be still the only topic of discussion so let me touch on this.

In my opinion, many semiconductor companies are not investable. You can trade them. But you are playing a game of musical chairs at this point.

A lot of people invested in these are tech people. They see the buildout, they understand the tech which is real. And that makes them bullish. Many of these people don’t understand or discuss the durability of the earnings going out beyond the years that everyone agrees on. The default is just simply to assume that AI is accelerating, there’s a ton of demand and it’s still early (which I agree with). However this doesn’t mean that all the question marks should be ignored.

Semis and the AI buildout have been priced to perfection. Although many are in denial about them being cyclical, these are by definition cyclical companies that are contingent on companies spending on the AI buildout to maintain lofty valuations with exceptional growth and margins priced into the future.

Everyone knows the AI buildout is happening. People mistakenly believe that this is this is a secret or not understood. That’s not the problem here. The problem is that these cyclical companies are priced for extreme growth and high margins far into the future. And the fall off is not priced.

The cycles peak when analyst estimates are sky high. Analysts simply raise their targets and estimates until after cycle peaks. The game is not understanding if the buildout is happening or not, it’s deciding how far into the future it will go. Everyone knows NVDA will have great numbers.

Every leg higher in these stocks, is more risk building up in my view. The law of large numbers is part of this equation. It’s harder for a 5 trillion dollar company to grow (and maintain their margins) versus a 5 billion dollar company. The capital has to come from somewhere and it’s hard to consistently have the world spending trillions of dollars on the AI buildout forever. And that spend being concentrated on the same names. There is also the physical limitation of building data centers which is something to consider.

You can see the fragility in the trade with the recent drawdown. We see the pressure on the hyperscalers. Now we have pressure on the economics of frontier labs with open source models being just as good for the tasks of most people (and will get better). This is causing people to question if the biggest spenders are in a race to the bottom.

Being bullish on memory, and most of the winners that have been winning, in a way is being bearish on innovation. When there’s a handful of companies making juicy margins and having the most quality companies on the earth in a chokehold, it invites competition and incentives for companies to create alternative solutions. Buying memory stocks is a bet that there will be no innovative solution to this problem.

You see it already and how the whole trade can unwind in the blink of an eye. NVDA was the first signal of how this can happen. NVDA had a chokehold on GPU market. What came from that? Hyperscalers coming up with their own custom chips. New companies such as Cerebras.

Cyclical companies making juicy margins and printing money, invites competition and innovation. Economics 101.

To be clear, before people try to nitpick and dunk on me, I am not necessarily definitively saying this is a top in semis. It’s just to point things out to make you realize what’s going on and not get stuck on one narrative. I said it’s musical chairs. There can be another leg higher. It may not top for years. But the higher it rises, the more risk there is in my view.

Although the tech is real and it’s early, the economics are definitely a question mark. I could keep going and discuss the circular financing, off balance sheet debt, and other red flags, but I don’t want to make this too long. I’ll let you look into that.

GFC? Dotcom?

Even though this cycle often gets compared to the dotcom bubble. I think it looks more like 08. There are many issues in the credit markets and real estate market which are eerily similar, just in a different form. Of course there are similarities to the dot com bubble as well, so in a way it seems like a mix of both cycles combined.

In the GFC, homebuilders then financials/consumer discretionary topped first in the cycle. Below are charts of the homebuilders and consumer discretionary today.

XHB (Homebuilders) - Jul 2026

XLY (Consumer Discretionary) - Jul 2026

Homebuilders topped in November 2024, and have been in a downtrend since. Consumer discretionary topped in January of this year, and have been in a downtrend since.

War, Oil, and Yields

I pointed out all the risks in November, and they have continued to get worse. Usually when these macro forces are piling up, there is one catalyst that brings it all down. A match that ignites the flame.

The recent development of the war, is something to consider and how it fits into the whole picture.

Historically, every recession is preceded with a spike in Oil. If you think about why this occurs is there is usually fragility in the system of some sort, ready for something to bring it down.

Recently, oil spiked and was coming back down. Because oil fell and the market continued to go higher, people viewed this as an all clear.

But now Oil broke out again. And now the war seems to be escalating. With the consumer already being weak. This is quite alarming if this trend continues. But even if it reverses, a lot of damage has already been done.

Yields are even more alarming. The 10-year Treasury yield is breaking out. Not only is this happening in the US, but globally.

The financial system cannot handle higher yields. Even at these levels is a huge amount of stress for the financial system. If the 10Y breaks above 5%, I would view it as the explosion of the financial system.

We have entire industries built on the assumption that rates go lower for decades. These industries are also built upon insane amounts of leverage. Now we are facing what rising rates actually look like, for the first time in a generation. The clock just started ticking on a massive maturity wall.

The Nasdaq

QQQ (Nasdaq) just made a diamond top. The entire run has been a tired run. Low volume. You can see in the technicals

We made a local top. The question is: is there the liquidity and the ability of momentum to come back in the market?

I’ll leave that one up to you.

Leverage Galore

A lot of the discussion in this article has been on the discussion of margin debt. Which alone is a serious issue. But it’s deeper than just margin debt.

I worry for how bad the eventual bear market can get because of how much leverage is in the system. Not only margin debt, but credit card debt. Student loan debt. Auto loan debt. Buy now, pay later debt. Real estate debt. Government debt. And the best of all, private credit.

You know, private credit. Where you can get equity like returns “without the risk”

Since the GFC, the private credit space has exploded, due to the regulation on banks that came from the financial crisis.

An industry that was tiny, has grown into trillions. Without going too deep, just think logically for a second. What happens when an industry whose tagline is: equity like returns “without the risk” grows into a scale so large?

The executives in the company need to do more and more deals to get paid.
Eventually there are only so many deals with lower risk. And more and more risk is taken to get those juicy bonuses for executives. It may look fine while the economy is booming, but when there is stress in the economy, and higher rates, the private credit catch phrase begins to be tested. And we have started to see the cracks show up.

So What Now?

The point of this article is not to call a top. It’s to make you open your eyes and be on your toes. It’s also to show you what intuition looks like. It’s pattern recognition. Taking mental notes.

Reading the macro environment is not about calling tops. Reading macro is paying attention to everything and how it’s trending. To be prepared for what’s coming. Markets can remain expensive, concentrated, and leveraged for longer than what seems reasonable. Momentum can return, yields can reverse, and indices could go back to make new highs.

I am bullish on technology. Bullish on humanity. However I am real about the risks I see. The way I navigate is by being Long/Short and adjusting exposure as I see fit. Being long companies that can prosper off this revolution. Being short companies with deteriorating fundamentals and technicals.

Everybody has their own way of navigating. This buy the dip culture has caused many to get fully liquidated when the market is barely a few % off highs. I do not believe that this is the time to take additional risk.

I believe in this technological revolution. But I believe that we will experience pain before prosperity.

The feeling of this market feels like the beginning of 2022. This is what my intuition is telling me from all the datapoints I’ve observed and collected in my head.

Nothing is ever certain. I use TA to tell me when I am wrong. I do notice that I did feel similar near the lows from a couple months ago. So the same thing could happen again and we rip right back to all time highs. But with the recent wipeout of more leverage, with the war heating back up, global yields spiking and oil rising, I am much more skeptical of that.

I don’t think in absolutes. I think in terms of probabilities. I look at the facts, assign probabilities, and keep an open mind and look for signals that make me change my view. It is important to stay flexible and adapt when there is new information.

I wrote this article quickly so I could get it out over the weekend. There’s a lot more I could have fit into here and could have gone deeper into. I just wanted to put this out to give people perspective and see the risk that exists in the market.

Hopefully this helps people out there. It’s sad to see the pain some people are experiencing with the mass liquidations we have seen in recent times. Don’t let that be you.

Disclosures and Disclaimer

This article reflects the author’s opinions and analysis as of the date of publication. Opinions, estimates, market observations, and forward-looking statements are subject to change without notice as market conditions and underlying information evolve.

This material is provided solely for informational and educational purposes. It does not constitute investment, legal, tax, or accounting advice; a recommendation to buy, sell, or hold any security or financial instrument; or an offer or solicitation to purchase an interest in any investment product, fund, or advisory service. Readers should conduct their own research and consult their own professional advisers before making investment decisions.

Investing involves substantial risk, including the possible loss of principal. Short selling, options, leverage, leveraged exchange-traded products, digital assets, commodities, and concentrated investments involve additional risks and may result in losses greater than the amount initially invested. No investment strategy can guarantee a profit or protect against loss.

The author and Outlier Capital, its affiliates, clients, or related persons may hold long or short positions, options, derivatives, or other economic interests in securities and instruments discussed in this article. These positions may change at any time, without notice, and may be inconsistent with the views expressed here. The author and related parties may transact in such securities before or after publication.

References to specific securities, issuers, asset classes, market events, charts, or trading strategies are included to illustrate the author’s analysis. They should not be interpreted as a complete description of any position, portfolio, investment process, or risk-management practice. Any discussion of past trades or market calls is selective and should not be interpreted as representative of all investment decisions or future results.

Past performance is not indicative of future results. Historical market relationships, technical patterns, anecdotes, and comparisons with prior cycles may not repeat. Hypothetical, estimated, or forward-looking outcomes are inherently uncertain, and actual results may differ materially.

Information and data have been obtained from sources believed to be reliable, but their accuracy, completeness, and timeliness are not guaranteed. Unless otherwise indicated, the author has not independently verified all third-party information. Charts may use different sources, time periods, methodologies, or pricing conventions and are presented for illustrative purposes.

If you are an accredited investor and interested in investing in Outlier Capital Holdings, please reach out via the contact form on outliercapitalmanagement.com or email matt@outliercapitalmanagement.com

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Bank OZK is known in commercial real estate circles as one of the country’s most aggressive and concentrated large-project lenders. Its Real Estate Specialties Group finances construction and transitional projects whose repayment depends on successful lease-ups, sales or long-term refinancing. The size and concentration of those loans made OZK look exceptional during the boom. They now make individual project failures capable of moving the bank’s quarterly earnings.

A large part of the remaining loan book was underwritten when interest rates were much lower and developers expected higher rents and property values at completion. Those projects now face the opposite environment. Yields remain elevated for far longer than anticipated by the entire commercial real estate industry and the labor market continues to get weaker and weaker.

The market has been under stress for years. OZK and its borrowers responded by extending maturities, adding owner-funded reserves and waiting for lower rates, stronger rents and a better transaction market. Those conditions have failed to arrive. Several owners have stopped putting in money, potential buyers have failed to close and estimated property values have moved closer to the amount OZK is owed. Loans have stopped paying normally, the bank has taken ownership of more properties and losses have followed.

Management says the bank is late in a long property downturn and expects a few more problem projects over the next 12 to 18 months. OZK has described the cycle as being near its end for years. My view is that the repeated extensions are finally reaching their limit. The weakest projects now need real buyers or long-term lenders before owner support and property values give way.

How the Can-Kicking Works:

1. OZK finances a large construction or transitional project.

2. The project misses its original leasing, sale or refinancing timeline.

3. The owner contributes more cash to cover interest and operating costs.

4. OZK extends the maturity and may reduce the amount it still promises to lend.

5. The loan continues paying while the owner searches for tenants, a buyer or a long-term lender.

6. If the owner stops contributing before the project finds an exit, the loan stops paying normally, the bank may take the property and losses can follow.

Over 16 quarters, project owners and their partners provided approximately $1.4 billion of additional support. That included $923 million set aside to pay interest and operating costs and $522 million of early repayments. During 2Q alone, owners made $91.5 million of early repayments and set aside another $19.5 million.

The question is how long owners can keep funding projects that have already missed their original plans. OZK has called the downturn late-stage for years, yet 37 more loans were changed in 2Q. With 243 current large property loans, those changes equal 15% of the current loan count. The cumulative 661 includes loans that have repaid, but it still shows how often the original timeline failed.

The strategy depends on time eventually producing better economics. Interest rates remain high, rents and tenant demand have weakened in the most troubled markets, and transaction activity remains thin. At some point, people run out of money to keep these assets alive. That point has already arrived for several projects now sitting in foreclosure or on the bank’s problem-loan list.

Giving a healthy project more time can work. Trouble starts when every delay requires more money from the owner and still leaves the project without a buyer or long-term lender. Eventually the owner stops paying to wait.

Five Numbers That Matter

The Final Stage is Becoming Visible

The reported numbers have moved from early warnings into realized losses:

OZK wrote off $49.3 million on four office and life-science loans during 2Q. Project owners had stopped contributing to the San Carlos life-science project and the Atlanta office. Buyers withdrew from the Seattle office and life-science transactions before the bank took ownership.

Management expects several loans on its early-warning list to return to normal after extensions or new owner funding are completed. The same group could produce the next troubled loans if the deals fail to close or owners stop contributing.

The bank is already losing money on some projects. The remaining question is how many additional large projects follow the same path.

How OZK Reports the Deterioration

These are the company’s formal categories. They are stages in one continuous process.

Detailed Movement Through the Categories

Management said the Seattle office and life-science losses had been substantially reserved in prior quarters. It expects the allowance to drift lower if the economy remains resilient and believes the remaining reserve is adequate. That view is questionable in my opinion.

Four Projects Show the Progression

The four examples below are best understood as different stages of one process.

IQHQ is the clearest current test of whether the extension strategy still works. OZK, the project owner and a junior lender are negotiating a multiyear extension and new financing. Management expects a successful outcome and continues to treat the loan as normal because the talks are constructive. The final terms, new owner contribution and amount of cash left to pay expenses remain undisclosed.

The progression is the core of the short thesis. IQHQ remains alive because reserves are paying the bills. Boston shows what happens when the owner stops contributing. Seattle shows what happens when a planned buyer walks away. Atlanta shows the end state when the bank owns a vacant property and has almost no room between its book value and the latest estimate of what the building is worth.

Other Disclosed Troubled Loans

Properties OZK has Already Taken

When OZK takes a property, accounting rules require it to use the lower of the loan balance or estimated value after selling costs. Any further deterioration requires another write-down. A 20% decline in the value of all bank-owned property would equal approximately $59 million before tax, or $0.42 per share after tax. The reality is some of these properties could be worth half or even worse as many CRE properties (especially office) have been going for pennies on the dollar.

The Reported Values May be Way Too High

The ten disclosed troubled projects total approximately $540 million on OZK’s books. The latest company-cited property values total approximately $600 million, leaving an apparent gap of only $60 million

The chart shows why the reported gap offers little comfort. Nine of the ten projects are recorded at 86% or more of the latest estimated property value. Six are recorded at 95% or more. Atlanta and Seattle Pioneer Square are recorded at 100%.

Those estimated values are appraisals, not completed sale prices. The current market has already produced vacant properties, failed sales, withdrawn buyers and owners who stopped funding projects. Higher financing costs and lower rent assumptions reduce what a buyer can pay. The likelihood that every troubled property can be sold near 90% to 100% of its cited value is low.

If the appraisals are too high, the loss can be far larger than the reported $60 million gap suggests.

Concentration Risk

Management emphasizes that its average property loan equals only 46% of the project’s estimated value. That figure covers the entire portfolio and assumes every loan is fully funded. The troubled projects look very different:

• Healthy projects are often measured using their expected value after completion and leasing, while troubled projects rely on their value today.

• Transaction costs and future holding costs can consume the remaining gap.

• One $147 million condo loan moved from 90.4% to 105.6% of estimated property value after a new appraisal.

• Large successful loans pull down the average and hide what can happen inside a few failures.

The portfolio also contains unusually large individual loans.

Twenty loans of at least $250 million represent $7.52 billion, or 29.3% of OZK’s total large-project lending promises. Eight loans of at least $375 million represent $4.08 billion. A 10% loss on one average $500 million-plus loan would equal approximately $75 million before tax, or roughly $0.53 per share after tax.

A healthy average across all loans can hide a few large and dangerous projects. Because these loans are so large, one or two setbacks can materially change quarterly earnings.

Large-Loan Concentration

Property Mix

Repayments Reduce Risk and Pressure Earnings

The strongest bull argument is that OZK’s large-project property loans are shrinking quickly:

• Repayments were $2.92 billion in 2Q and $9.95 billion over the last four quarters.

• Funded large-project property loans declined to approximately $15.5 billion, or 47.6% of total loans.

• Management expects repayments to remain elevated through 2027.

• OZK expects its newer corporate banking business and large-project property business to become approximately equal in size during 2027.

The newer corporate banking business is a credible source of growth. It spans more than seven business lines and 42 industries. Management said the interest margin on new corporate loans exceeded the older corporate loan book by more than one quarter of a percentage point in 2Q. These relationships also bring deposits and fees.

The transition still creates an earnings gap. Total loans fell $414 million in 2Q despite rapid corporate-loan growth. Earnings before setting aside money for loan losses declined 5.6% year over year, operating expenses increased 11.4% and management now considers exceeding 2025 interest income a stretch goal. The cost of attracting deposits has likely passed its low point.

Rapid repayments lower the bank’s future property risk, but they also remove interest income. The new corporate business needs to replace that income before the old property loans create more losses.

Valuation and Price Target

What Could Prove the Short Wrong

The thesis would weaken materially if the next two quarters produce the following sequence:

• Boston’s buyer obtains financing and closes.

• Seattle Pioneer Square receives new owner funding and resumes normal payments.

• Wauwatosa and Los Angeles sell near the values on OZK’s books after transaction costs.

• IQHQ completes a well-capitalized extension that reduces OZK’s risk.

• Improvements materially exceed new problems among loans on the early-warning list.

• Corporate banking replaces the income lost as property loans repay.

• Troubled loans and bank-owned properties decline through completed sales and long-term refinancing.

OZK has shown that favorable outcomes are possible. Its largest troubled loan in 1Q26, totaling $156.4million, returned to normal after the owner brought in new financing during 2Q. Similar outcomes across the remaining projects would challenge the short.

Near-term Tests

1. IQHQ’s August maturity: Final extension terms, new owner capital and the amount of cash left to pay expenses.

2. 3Q project resolutions:Management expects progress on one bank-owned property and three troubled loans.

3. Early-warning loans: Completed improvements versus new problems within the $616 million pool.

4. Realized sale prices: Cash proceeds after transaction costs versus the values on OZK’s books.

5. Earnings replacement: Corporate-loan growth, deposit costs and underlying profit trends.

Conclusion

For years, OZK and its borrowers waited for lower rates, higher rents and a stronger transaction market. Those conditions have failed to arrive. The 10-year Treasury has matched its 2026 high, hiring has slowed, buyers remain scarce and several owners have stopped contributing. The remaining extensions are approaching the point where the projects must sell, find long-term financing or produce losses.

My view is simple: this is a can-kicking story reaching its final stage. OZK can absorb losses, while shareholders remain exposed to falling profits and investors no longer treating the bank as an exceptional lender. As the last extensions mature and the weakest projects face real buyers and long-term lenders, the stock can reprice toward the $34.57 blended value across the four scenarios.

Disclaimers

This analysis is based solely on public information and is for informational purposes, not investment advice. Readers should conduct their own diligence. Outlier Capital’s position disclosure and full disclaimer appear at the end of this report. Updated July 23, 2026 after reviewing Bank OZK’s full 2Q26 management comments, financial supplement and earnings call. Scenario losses, probabilities and targets are author estimates.

As of the publication date, Outlier Capital holds a short position in Bank OZK (NASDAQ: OZK) and may benefit if the price of OZK securities declines. Outlier Capital may buy, sell, cover, increase, reduce, hedge or otherwise change its exposure at any time, for any reason and without notice. Its position may have changed after this report was published.

This report reflects the opinions of Outlier Capital as of the publication date. Those opinions, estimates, price targets, scenarios and probabilities are subject to change without notice. Outlier Capital assumes no obligation to update this report or announce subsequent changes in its views or positions.

This material is provided solely for informational and educational purposes. It is not investment, legal, tax, accounting or other professional advice; an offer or solicitation to buy or sell any security; or a recommendation that any person enter into any transaction. Readers should conduct their own independent research and consult their own professional advisers before making investment decisions.

The report relies on publicly available information believed to be reliable. Outlier Capital makes no representation or warranty, express or implied, regarding its accuracy, completeness or timeliness. The analysis may contain errors or omissions. All forward-looking statements, forecasts and model outputs involve assumptions and uncertainties, and actual events or results may differ materially.

Investing in securities involves substantial risk, including the possible loss of principal. Short selling involves additional risks, including theoretically unlimited losses, borrowing costs, dividend obligations, recalls and short squeezes. Past performance, where referenced, does not guarantee future results.

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It’s no secret that society is dealing with a mental health crisis.

There hasn’t been a great solution to this problem. Antidepressants help some patients but leave many with residual symptoms, side effects, or no meaningful benefit, especially in treatment‑resistant populations.

Fortunately, there have been discoveries that show clinical data that we have never seen in the mental health space.

Those discoveries are psychedelics.

These therapies are not talked about as much as they should be because there is a stigma that surrounds them. If there was no stigma surrounding these compounds, everyone would be discussing how we found something revolutionary to tackle the mental health crisis.

Psychedelics such as Psilocybin, LSD, and MDMA are showing incredibly strong evidence that they are an effective treatment for conditions such as treatment-resistant depression, generalized anxiety disorder, PTSD, and more.

The History

Before diving into the current investable landscape, it’s useful to understand how we got here.

1943: The Discovery

Albert Hofmann synthesized LSD at Sandoz Pharmaceutical Laboratories in Basel. He accidentally absorbed LSD through his fingertips just before he biked home and was amazed at what he discovered on his ride home.

Sandoz began distributing LSD to psychiatric researchers worldwide under the brand name Delysid, marketing it as an experimental tool for psychotherapy.

Over the next fifteen years, more than 1,000 peer-reviewed articles on the clinical use of LSD appeared in medical and scientific publications, involving roughly 40,000 patients.

Throughout the 1950s and early 1960s, LSD was used with reported clinical success to treat alcoholism, anxiety in terminally ill patients, and trauma. Researchers described it as “compressing years of psychotherapy into a single, intensive, self-reflective session.”

1957-60: Into the Mainstream

In 1957, Life magazine published the article “Seeking the Magic Mushroom,” introducing the Western public to the Mazatec ceremonial use of psilocybin in Oaxaca. Sandoz then isolated and synthesized psilocybin for research use.

By 1960, a Harvard psychology lecturer named Timothy Leary had launched the Harvard Psilocybin Project studying psilocybin in contexts ranging from prisoner rehabilitation to religious experience.

1966-70: Counterculture and Shutdown

Leary’s project went off the rails by 1962 due to inadequate medical oversight. Undergraduate students dosing each other off-protocol, and Leary’s increasingly evangelical posture (”turn on, tune in, drop out”) turned what had been a credible research program into a symbol of the broader counterculture.

Leary and Richard Alpert were dismissed from Harvard in 1963, and LSD use spread rapidly through anti‑war and hippie movements.

In 1970, as a result of the counterculture movement, President Nixon signed the Controlled Substances Act, which placed LSD, psilocybin, mescaline, and DMT on Schedule I, the legal category reserved for substances with “no currently accepted medical use and a high potential for abuse”.

The classification was a political one, made over the explicit objections of researchers who pointed to the existing body of clinical evidence.

Schedule I status made clinical research effectively impossible. Funding evaporated, IRBs refused to approve studies, and DEA licensing became prohibitive.

By 1971, psychedelic clinical research, a field that had produced 1,000+ publications in the prior decade and a half was over.

1986–2006: The Underground Keeps the Data Alive

Throughout the 1970s, 80s, and 90s, an underground network of therapists, guides, and clinicians continued to administer psychedelics to patients quietly. Ibogaine clinics opened in Mexico and the Caribbean to treat opioid addiction. MDMA was used in couples therapy by hundreds of underground practitioners before its 1985 emergency scheduling.

In 1986, Rick Doblin founded the Multidisciplinary Association for Psychedelic Studies (MAPS) with the explicit goal of getting MDMA and other psychedelics back into FDA-sanctioned clinical research. It took MAPS another decade to even begin moving the regulatory needle.

The academic reopening came from Johns Hopkins. In the late 1990s, a team led by Dr. Roland Griffiths began navigating the FDA and DEA approval process to study psilocybin in healthy volunteers. In 2006, they published a landmark paper in Psychopharmacology showing that psilocybin can occasion “mystical‑type experiences” with substantial and sustained personal meaning for participants.

That single paper is widely credited as the spark that re-ignited the global psychedelic research renaissance.

2006–2018: The Renaissance Becomes Investable

What followed was a careful rebuilding of the clinical evidence base. NYU and Hopkins ran trials in cancer‑related anxiety and depression, showing large, sustained effects. Imperial College London opened the first university psychedelic research center in the UK. Compass Pathways formed in 2016 around a synthetic psilocybin candidate for treatment-resistant depression.

The regulatory inflection point came in 2017, when the FDA granted Breakthrough Therapy designation to MAPS’s MDMA-assisted therapy for PTSD. The following year, in October 2018, the FDA granted Breakthrough Therapy designation to Compass Pathways’ COMP360 psilocybin for treatment-resistant depression. The first time a classical psychedelic had been formally recognized by the U.S. federal government as a credible therapeutic since the Controlled Substances Act. Psilocybin for major depressive disorder received a second Breakthrough designation in 2019.

Anecdotal Evidence

Beyond trials, anecdotal data is everywhere. If you spent a couple of hours looking through Reddit, YouTube, or X, you’d find thousands of stories of people running underground experiments on themselves, reporting incredible results.

Netflix even has a mini-series called “How to Change Your Mind” which highlights the history and application of these medicines. I highly recommend watching if you are interested in this sector.

In this series, you see real stories of veterans with PTSD and how one session completely saved them from a condition that was destroying their life. Witnessing it gives you perspective on what this treatment would look like and somewhat of an understanding of how they work.

Current Clinical Data

Across more than two decades of academic and industry trials, three compounds: psilocybin, LSD, and MDMA have produced consistent, large-effect results in indications where current treatments fail most patients.

Psilocybin has produced roughly 50–60% remission at 12 months in major depressive disorder and 60–80% sustained response several years out in cancer‑related distress in specific trials, as well as about 40% six‑month smoking abstinence versus ~10% on nicotine patch in a randomized study. A Phase 2 study of LSD-assisted therapy in patients with anxiety reported significant reductions in anxiety in the Swiss Liechti trials. MDMA produced 67% loss of PTSD diagnosis versus 32% on placebo in MAPP1.

The effect often appears 2–3x larger than conventional psychiatric medications, with durability measured in months to years from a single dose rather than weeks of daily dosing. That is truly unlike anything we have seen before in psychiatry.

My Favorite Names

The companies in the space that I follow closest are DFTX, ATAI, CMPS, and CYBN. The aim here is not to recommend specific names, but to get you curious enough to do your own deep work on each.

The data from each company’s trials is quite promising, however my favorite in the space is DFTX.

DFTX

DFTX has a strong, diversified pipeline. The company recently read out trial results that put them at the top of the sector for me.

Phase 3 EMERGE - Major Depression

Randomized, double-blind, placebo-controlled trial of a single 100 µg dose in 149 adults with DSM-5 confirmed MDD and severe baseline depression (MADRS ≥26):

• Primary endpoint hit: −13.3 MADRS change for DT120 vs −5.2 for placebo at week 6. 8.1-point placebo-adjusted reduction, p<0.0001

• Speed of effect was the stunner: 14.2-point placebo-adjusted MADRS improvement at week 1, larger than the week 6 number

• Durability held: 7.3-point placebo-adjusted reduction maintained at week 12 (p<0.0001), all from one dose

• Response rate: 35% vs 7% placebo

• Remission rate: 24% vs 3% placebo

• Safety: 99% of adverse events mild to moderate, no SAEs, no suicidality signal, average clinic clearance time 5.8 hours

For context: typical SSRIs produce ~2–4 points placebo-adjusted on MADRS in acute trials.

Phase 2b - Generalized Anxiety Disorder

Phase 2b in 198 patients with moderate-to-severe GAD, single dose, no psychotherapy:

• 100 µg dose: 21.9-point HAM-A reduction at week 12 vs 14.2 for placebo (−7.7 placebo-adjusted, p<0.003, Cohen’s d=0.81)

• 65% response rate, 48% remission at 12 weeks - described in trial readouts as “no detectable anxiety” three months after one dose

• Onset visible by day 2 on the CGI-S severity scale

• Comorbid depression also improved: 18.7-point MADRS reduction at week 12 (6.4 placebo-adjusted, p<0.01) - supports a dual GAD/MDD label

• FDA Breakthrough Therapy Designation granted March 2024 for GAD

Upcoming Catalysts (the next 90 days)

Catalysts are important in biotech and

$DFTX

has plenty, from their diversified pipeline:

• VOYAGE (Phase 3, GAD, n=214) - early Q3 2026

• PANORAMA (Phase 3, GAD, n=200) - late Q3 2026

• ASCEND (Phase 3, MDD, both 100 µg and 50 µg arms) - readout 2027

• HAVEN (Phase 3, PTSD) - initiating 2027

The Asymmetry

Pause for a second. When have you ever seen in the history of biotech, a drug in development, where you have tens of thousands of anecdotes and seventy years of clinical literature showing that it works?

That is the asymmetry. Efficacy risk appears materially lower than in a typical early-stage biotech, with the remaining challenge being regulation and stigma, which is going in the right direction.

Current FDA Stance

The agency has been signaling the reversal in increments, and 2025-2026 is when the signaling became policy.

Breakthrough Therapy Designation is the tell. Breakthrough is the FDA’s most aggressive expedited-development pathway. To qualify, a sponsor must show “preliminary clinical evidence that the drug may demonstrate substantial improvement over existing therapies on a clinically significant endpoint.”

The FDA has granted Breakthrough Therapy designation to several leading psychedelic programs:

• Psilocybin for treatment-resistant depression - Compass Pathways, 2018

• Psilocybin for major depressive disorder - Usona Institute, 2019

• MDMA for PTSD - MAPS/Lykos, 2017

• LSD for generalized anxiety disorder - MindMed (MM120), March 2024

• 5-MeO-DMT for treatment-resistant depression - atai/Beckley (BPL-003), October 2025

• Methylone for PTSD - Transcend Therapeutics, 2024

• Ibogaine for opioid use disorder - first US IND cleared in 2026

The Commissioner’s National Priority Voucher program is the clearest signal of the new FDA posture. The program, launched under FDA Commissioner Marty Makary in 2025, targets review decisions within 1-2 months after filing of a complete application for drugs aligned with U.S. national health priorities. On April 24, 2026, following President Trump’s April 18 executive order on serious mental illness, the FDA issued National Priority Vouchers for three psychedelic-related mental health programs: psilocybin for treatment-resistant depression, psilocybin for major depressive disorder, and methylone for PTSD.

The Makary posture matters. Makary has stated publicly that mental illness is one of the FDA’s defining priorities, that the existing SSRI paradigm has failed treatment-resistant patients, and that the agency intends to be a partner, not an obstacle, for sponsors with credible psychedelic programs.

Schedule I rescheduling is now on the table for the first time since 1970. The Trump executive order of April 18, 2026 directs the Attorney General to initiate rescheduling reviews for any Schedule I psychedelic that completes Phase 3. If COMP360 is approved, psilocybin moves out of Schedule I. That alone unwinds a chunk of the stigma in a way no marketing campaign could. Pharmacy benefit managers, hospital systems, and insurance committees use Schedule I status as a procurement-killing flag. Removing it changes everything downstream.

The agency has granted Breakthrough designation to multiple leading programs, prioritized several psychedelic-related mental health programs through the CNPV pilot, and created a product-specific rescheduling pathway tied to Phase 3 success and FDA approval.

Risks

Biotech is inherently risky. Instead of underwriting mature cash‑flow streams, you’re underwriting binary clinical and regulatory outcomes that can move a stock 50% in either direction overnight. In psychedelics, I’d frame risk buckets as follows:

Regulatory risk.

Everything in this article assumes the FDA maintains its current supportive posture. That can change with a new administration, a new commissioner, or a single high‑profile safety event. Lykos’ MDMA rejection in August 2024 illustrates this: despite Breakthrough designation, two positive Phase 3 trials, and strong public support, an advisory committee raised concerns about trial conduct, potential unblinding, and safety, leading to a Complete Response Letter and a demand for more data. A similar setback in any program could reset sentiment across the sector.

Schedule I and rescheduling risk.

Until rescheduling actually happens, Schedule I remains a structural overhang. The executive order directs DEA to begin reviews but does not guarantee outcomes or timelines. An approval without rescheduling would still face friction at PBMs, hospital formularies, and insurers.

Clinical risk.

Large Phase 3 trials can fail even after strong Phase 2 data. DFTX’s VOYAGE, PANORAMA, and ASCEND programs all remain binary events.

Company‑specific risk.

Most sector names are pre‑revenue, cash‑burning, and reliant on capital markets. Dilution, down‑rounds, or strategic pivots can materially impact equity holders even if the science works.

Stigma and political risk.

The 1970s classification was political; the next reclassification will be too. A change in administration, a high‑profile recreational‑use tragedy, or a shift in media narratives could slow or reverse momentum that currently looks inevitable.

Position sizing matters more here than in most sectors. The asymmetry is real, but asymmetry is not certainty. Any allocation to psychedelics should be sized within a diversified book, with the assumption that individual names can go to zero even if the category wins.

Conclusion

It’s quite clear that psychedelic medicines work. The anecdotal and clinical evidence is robust, the trials are positive, the FDA has designated them as breakthroughs, and the President has signed an executive order accelerating them.

The only thing standing between this category and a multi-tens-of-billions revenue opportunity is a stigma manufactured by a 1970 political compromise that even the FDA no longer believes. We do not get many setups in biotech where the science is this settled, the catalysts are this dated, and the equity market is still pricing the 1971 narrative. This is the hidden asymmetry.

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Disclaimers

General information only

This article reflects the personal opinions of the author and is provided solely for informational and educational purposes. It does not constitute investment advice, medical advice, a recommendation to buy or sell any security, or an offer to provide investment advisory, brokerage, or medical services. Readers should not rely on this article as the basis for any investment, treatment, or healthcare decision.

Not medical advice

Nothing in this article is intended to be, or should be construed as, a substitute for professional medical advice, diagnosis, or treatment. The author is not a physician and does not provide medical services. Patients should consult with qualified healthcare professionals before making any decisions regarding diagnosis, treatment, or the use of psychedelic or other medicines.

Positions and conflicts of interest

The author and Outlier Capital may hold positions in the securities discussed, including DFTX, ATAI, CMPS, and CYBN, and those positions may change at any time without notice. The author and Outlier Capital have no obligation to update this article or to disclose subsequent changes in positions, views, or circumstances.

No guarantee of accuracy or completeness

All information is based on sources believed to be reliable as of the date of publication, but accuracy, completeness, and timeliness are not guaranteed. Clinical trial data, regulatory developments, and company‑specific facts can change rapidly. Past performance, including clinical trial results or stock performance, is not indicative of future outcomes. Forward‑looking statements, including projections about FDA timelines, rescheduling, market opportunity, and company prospects, are inherently uncertain and may not materialize.

Investment risk

Investing in biotechnology and small‑capitalization equities involves a high degree of risk, including the risk of total loss of capital. Psychedelic‑focused companies may be subject to additional regulatory, political, clinical, and financing risks. Readers should conduct their own independent research, review primary sources (including SEC filings and peer‑reviewed publications), and consult with a qualified financial advisor before making any investment decision.

No warranty and limitation of liability

The information in this article is provided “as is,” without any representation or warranty, express or implied, including any warranty of accuracy, completeness, timeliness, or fitness for a particular purpose. The author and Outlier Capital disclaim any liability for any direct or indirect loss or damage arising from the use of, or reliance on, this article or its contents.

Sources:

https://hopkinspsychedelic.org

https://www.hopkinsmedicine.org/news/newsroom/news-releases/2022/02/psilocybin-treatment-for-major-depression-effective-for-up-to-a-year

https://pure.johnshopkins.edu/en/publications/five-year-outcomes-of-psilocybin-assisted-therapy-for-major-depre

https://pmc.ncbi.nlm.nih.gov/articles/PMC10072288

https://clinicaltrials.gov/ct2/results?term=psilocybin

https://drkumardiscovery.com/posts/psilocybin-nicotine-patch-smoking-cessation-pilot-randomized

https://pmc.ncbi.nlm.nih.gov/articles/PMC12412041

https://pubmed.ncbi.nlm.nih.gov/36266118

https://clinicaltrials.gov/study/NCT05407064

https://maps.org/mdma/ptsd/mapp1

https://news.va.gov/press-room/va-launches-mdma-assisted-mental-health-therapy-trial

https://www.biospace.com/drug-development/FDA-Rejects-Lykos-MDMA-Assisted-PTSD-Therapy-After-Negative-Adcomm

https://www.fda.gov/news-events/press-announcements/fda-accelerates-action-treatments-serious-mental-illness-following-executive-order

https://www.aha.org/news/headline/2026-04-24-fda-fast-tracks-development-psychedelic-medications-following-presidents-executive-order

https://www.nccih.nih.gov/health/psilocybin-for-mental-health-and-addiction-what-you-need-to-know

https://nida.nih.gov/research-topics/psychedelic-dissociative-drugs-medicines

https://www.pbs.org/newshour/politics/trump-signs-order-to-speed-review-of-psychedelics

https://en.wikipedia.org/wiki/Legal_status_of_psychedelic_drugs_in_the_United_States

https://pmc.ncbi.nlm.nih.gov/articles/PMC11907663

https://www.nature.com/articles/s41386-026-02335-z

https://ir.definiumtx.com/news-events/press-releases

Introduction

For those of you who don’t know me, my largest short ever was on Lennar (LEN), one of the nation’s largest homebuilders. I chose Lennar because of their exposure to markets which were struggling the most. Margins have continued to decline, the markets have continued to deteriorate, and the thesis has played out.

The real estate industry has spent the last few years propping up a “housing shortage” narrative. The real shortage is affordability. In this housing cycle, total cost of homeownership relative to income had eclipsed the 2007 peak. Combine that with management teams who keep promising the inflection is one quarter away, and you get a sector that has fooled a lot of people who don’t bother to look at the data.

I was interviewed for a piece last year because I was the only short the journalist could find. Institutions were quoted bullish, Warren Buffett (Berkshire) bought the stock, and I was called an idiot. Since that interview, the stock is down roughly 45%.

I still have a short position in Lennar both personally and in the fund. But what I’ve found at KB Home looks like an even better setup. The combination of the narrative, lazy sell-side modeling, and a series of financial gimmicks by management has created an opportunity for anyone willing to look under the hood.

Unless I am missing something, this is one of the cleaner short setups I have seen.

The Setup

KBH is concentrated in the markets that were hottest in 2021, and those are the markets deteriorating the most today. The result has been serious margin compression.

Like the rest of the industry, KBH management keeps insisting the weakness is temporary, yet every quarter it gets worse.

What’s interesting about KBH specifically is they’ve dug a hole that I don’t think is widely understood, and it creates a uniquely mechanical short.

The Hole

KB Home is a clean example of what the homebuilding industry does at every cycle peak: kick the can down the road.

The logic is always “things are bad now, but they’ll get better soon”, with no real analysis of the future. So as fundamentals deteriorate, KBH cut land acquisition and ramped buybacks.

Buybacks juice EPS, so the deterioration looks milder than it is. But two things are now true at once: they’re running out of cash to keep buying back stock, and they have less land in the pipeline to convert into future revenue.

In Q1 FY26 the company posted negative free cash flow of $138.6M and still deployed $50M in debt-financed buybacks. In Q3 FY25, KBH slashed land acquisition. Investments in land and land development fell 38% YoY in Q1 FY26.

The land deals didn’t pencil, so management chose to buy back stock instead. As a homebuilder, if you don’t buy land, you can’t generate revenue. That trade-off is the foundation of the short.

The Mechanical Problem

To open communities and produce homes, a builder has to option lots roughly 18–24 months in advance. Management confirmed this lag on the Q1 call and guided that community count peaks in Q2 FY26 and steps down in the second half. The lot position has already deteriorated.

The pipeline collapsed in the most recent quarter alone:

That’s in a single quarter. On a YoY basis it’s worse: aggregate purchases have dropped from $2.53B (Q1 FY25) → $1.90B (Q1 FY26), or −25%.

This is not lots getting cheaper. This is a drop in volume. Management itself disclosed in the FY25 10-K that option lot count fell 27% YoY, and explicitly attributed the drop to “abandonment of 24,596 previously controlled lots that no longer met our underwriting criteria.”

Those decisions are made. You cannot retroactively acquire lots you walked away from. That fixes the FY27 community count at roughly 218–245 versus 276 today.

Run that community-count decline through to deliveries, and the volume line falls to roughly 6,600-8,900 homes in FY27, against a Street still modeling 10,500-12,500. FY26 management guidance is now 10,000 to 11,500 deliveries, already cut from the original 11,000 to 12,500 guide issued at Q4 FY25

The Real EPS

The volume decline is locked in. Only the magnitude is in question. Take management’s own delivery math and walk it down to earnings, base case, ~7,920 deliveries at the current average selling price produces about $3.58B of revenue.

Net income lands near $103M, or about $1.65 per share on the current count. Being conservative and allowing for some buybacks, let’s call it $2.00.

At a p/e of 10, that’s a $20 stock.

Consensus is Wrong

So why is the Street still modeling $4–6+ for FY27? A few reasons:

• They’re extrapolating the Built to Order mix-shift margin story. Management has been vocal about a 300–500bp gross-margin improvement from a higher Built to Order mix, and analysts are running that through their models without adjusting the volume line down enough.

• Community count is a non-standard KPI. Most sell-side models are revenue/EPS-driven; they don’t build bottom-up from lots → communities → deliveries.

• Guidance anchoring. Full-year revenue guidance of $4.8–5.5B gives analysts a range to cluster around. Nobody wants to be 40% below the company’s own guide until the company cuts again.

Volume is going lower. The only debate is the magnitude. Even a generous bull scenario lands EPS around $2.40 vs. the $4–6 consensus. The stock is priced for a business that the lot pipeline structurally cannot deliver.

The Acquisition Case (Biggest Risk)

Here is the strongest argument against this short, and it is a real one. Book value provides a floor.

In 2026, Berkshire Hathaway agreed to acquire Taylor Morrison. This shows it’s possible for capital to be deployed into public homebuilders at premiums to where they trade, not where they’re worth. A similar bid for KBH at any premium to stated book wipes out the short overnight. That is the single largest risk to this thesis.

The whole short comes down to one thing: is book value actually the floor everyone assumes it is?

I don’t think it is.

Book “Value”

The book is lower quality than it looks. More than half of the entire inventory sits in West Coast land, California-led, the most expensive and affordability-stressed region in the country, currently earning a 14.4% gross margin and falling. The single largest concentration of the company’s capital is its lowest-returning, most cyclical asset.

The book is overstated. In Q1 FY2026, KB Home flagged 16 communities with $196.1 million of carrying value for impairment review, up from 11 communities and $154.1 million one quarter earlier. The at-risk pool is growing fast. Impairment charges taken: zero.

Under GAAP a community is only written down when carrying value exceeds its undiscounted future cash flows, so a community can earn a 13% margin, far below the cost of capital, and still pass the test. The land is not worth what it is carried at on any return basis, but the rules do not force the markdown until cash flows actually turn negative. Management even hedges in the filing that results “could differ substantially... especially in periods of volatile housing market.”

Haircut the land for the gap between carrying value and what it can realistically earn and economic book falls fast. A realistic 15% to 20% land haircut puts economic tangible book in the high-$40s to low-$50s, against a stated $61.53.

The second leg of the short isn’t just that book is overstated, it’s that book actively erodes between now and the end of FY27. The usual protection for a cheap-on-book stock is that book compounds while you wait. That mechanism has reversed.

Book value per share grew ~10% in FY25, but only because buybacks retired 13% of the shares. Total equity actually fell ~4% in FY25. In Q1 FY26, book value per share went flat-to-down for the first time, to $61.53, because earnings collapsed 70% and no longer cover the payout.

From here, the equity trajectory bifurcates based on a single question: do FY26 H2 and FY27 generate net income, or net losses? The whole bear thesis (margin compression, ASP rolling, lot starvation feeding through to delivery shortfalls) implies the latter.

Similarities to 2008

The technical picture looks like 2008. So do the financials. Margin compression, ASP rolling, backlog falling, optioned-lot abandonment. The peak-to-trough cadence on every operating metric is tracking the FY07 trajectory roughly one quarter lagged.

In the last cycle, KBH equity went from $2.92B at FY06 peak to a trough of $377M at FY12, an 87% drawdown. Over $2.5B of equity vaporized through exactly the combination of mechanisms above: cumulative net losses of ~$2.3B FY07 to FY11, a $514M DTA valuation allowance in FY07, and continued dividends until the cut. Book did not go negative, but it lost 87% of its value while the stock lost 90%. That is the calibration point for how much room there is below today’s $61.53 BVPS if the cycle plays out even a quarter of the way to the FY08 trough.

CFO Departure

The bear thesis on KB Home has so far been mechanical: lot starvation, buyback exhaustion, economic book below stated book. The CFO departure is the behavioral leg of the same argument. It is the kind of signal that, in this sector, has historically preceded the cycle’s worst impairments by 6 to 18 months.

CFO Robert R. Dillard resigned in April, roughly 13 months after he took the role in March 2025. He came in from Sonoco Products at a top-tier compensation package. CFOs in the homebuilding sector do not voluntarily walk away from that kind of seat 13 months in for “personal reasons” with the cycle visibly rolling over.

The resignation was disclosed two months before a guided-down Q2 print, a quarter that management itself has telegraphed as the peak community count, with deceleration into H2.

The 2006 KB Home precedent:

In November 2006, three KB Home executives (CEO Bruce Karatz, head of HR, and Chief Legal Officer) departed in the same 48-hour window. Three weeks later, KBH disclosed a $235 to 285M Q4 2006 inventory impairment charge.

In this cycle, KBH also transitioned its CEO. So the company has now turned over both its CEO and its CFO inside a 70-day window heading into the worst quarter of the cycle.

The Technicals

Here are the technicals if you are into that. I think they are looking quite bearish on every timeframe.

Daily

Weekly

Monthly

Price Target

Consensus price target of ~$55 is built on a Street EPS model that ignores lot starvation.

Earnings multiple - Apply a 9 to 12x multiple to my $1.65 FY27 EPS = $15 to $20. The market won’t fully discount to trough EPS, so I weight this lightly.

Economic book - Stated BVPS bridges to ~$47.50 combined with ~$450M of cumulative losses = ~$37.50 economic BVPS. At 0.7 to 0.8x P/B: $26 to $30.

The $35 target is slightly above where the 200-month moving average will be in about a year. This target is a ball park to be directionally correct and weighs the EPS method, BV method, and the technicals to arrive at this number.

Risks to the Short (Bull Case)

1. Acquisition / Takeout

This is the biggest tail risk which was discussed above. Even if TBV is overstated, all it takes is someone else to overpay.

2. Mortgage Rate Shock Down

If the 30-year fixed drops from ~6.8% to ~5.5%, demand snaps back fast. KBH’s BTO model means a sudden demand surge would flow quickly into orders and then closings.

3. 45L Tax Credit Expiry Creates a One-Time Pull-Forward

The 45L energy efficient home credit ($2,500–$5,000 per home) expires June 30, 2026. KBH builds to Energy Star standards and qualifies. Any closings pushed into Q2 to beat the deadline would boost Q2 revenue and margin, and management likely knows this. It won’t rescue FY2027, but it could make Q2 look better than expected and squeeze shorts near-term.

Conclusion

KBH is a compelling short when you stack the pieces together: margin compression, the optioned-land collapse, shrinking community count, the buyback engine running out of runway, the CFO departure, and the technical setup. It is looking eerily similar to 2008, with less magnitude.

I will reassess the thesis after the earnings print. I am always open to changing my mind when new data presents itself.

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If you are an accredited investor and interested in investing in Outlier Capital, please reach out at matt@outliercapitalmanagement.com or on the contact form on the website.

Disclaimers

This report is published for informational and educational purposes only. It is not, and should not be construed as, investment advice, a recommendation, an offer to sell, or a solicitation of an offer to buy any security.

As of the date of publication (June 22, 2026), Outlier Capital Management and/or its principals, affiliates, partners, and clients hold a short position in KB Home (NYSE: KBH), directly or through derivatives such as put options. We may increase, decrease, cover, or otherwise change our position at any time without notice and without any obligation to update this report.

This report is based on information believed to be reliable, including KB Home’s SEC filings (10-K, 10-Q, 8-K), press releases, earnings transcripts, and other public sources cited inline or referenced in the appendix. We make no representation or warranty, express or implied, as to the accuracy, completeness, or timeliness of the information presented. SEC filings, market data, and third-party sources may contain errors or be superseded by subsequent disclosures. All figures, dates, and citations were current as of the date of publication and may be stale by the time of reading.

This report contains forward-looking statements, projections, opinions, estimates, and scenario analysis, including but not limited to FY26 and FY27 earnings, delivery, community-count, gross-margin, impairment, book-value, deferred-tax-asset, and price-target estimates. These are based on assumptions that may prove incorrect. Actual results may differ materially from the estimates presented. No representation is made that any scenario, projection, or price target will be achieved. Past performance and historical analogs are not indicative of future results.

This report reflects our views as of the date of publication. We have no obligation to update, revise, correct, or supplement this report based on new information, changes in market conditions, errors discovered after publication, or any other circumstance. Our views and our position in KBH securities are subject to change at any time without notice.

Throughout my career, I have seen many multibaggers. Some of which I caught, and some of which I missed and later thought “man this one was obvious I can’t believe I missed it”

Yet few stocks I have studied have looked as obvious to me as LMND.

This article will show from a high level, why I think so. This is not investment advice, these are just my thoughts and how I’m looking at it.

The thesis is simple. It’s pretty much: a superior user experience & brand with better pricing than competitors, the company has incredible operating leverage, and a massive TAM to grow into.

What is Lemonade

Lemonade is an AI native insurance company which was founded in 2015. They have spent 11 years of upfront work to quietly disrupt the entire insurance industry. They currently offer car, renters, home, pet, and term life insurance.

Lemonade is still a tiny company sitting inside a massive market. The company is currently at $3.95B market cap. For context, Progressive is a $119B company.

Insurance may sound boring to you, yet that is exactly why I love the stock so much. Because it’s a boring, simple industry, begging to be disrupted by AI.

At its core, insurance is simply collecting premium, in exchange for a promise to pay the customer out. No physical product with a supply chain, inventory, etc. Just a promise with some math behind it. That’s it.

This is the most perfect business for AI to come in and disrupt.

The industry is dominated by dinosaurs stuck on the old way of doing things. Not only that, most people hate the legacy insurance companies due to them fighting customers when it comes time to pay them out, and by making the entire process of getting claims paid a nightmare.

Lemonade aims to change all of that. Their entire foundation is built on AI. They use AI to price customers more effectively, but for many other parts of their business as well. They use it to process claims, for fraud detection, for operations, for marketing, sales and more. This is what allows them to have lower costs, a better user experience, and incredible operating leverage.

User Experience & Brand

Lemonade is developing a brand that people love, which is rare in the insurance industry. They do this through their giveback program and user experience.

The giveback program is their attempt to develop trust that has been broken by legacy insurers by fighting customers when it’s time to pay up. Lemonade’s idea is to develop trust by flipping the incentive.

How it works: people are placed into cohorts and select a charity of their choosing. If that cohort claims come in under expectations and there is leftover, that surplus of the customer’s premium is donated to charity.

This is a tiny price to pay for the value of being an insurance company customers can finally trust. It can be looked at as a form of marketing spend, to strengthen their brand, while also having a positive impact on the world.

What is more important though, is the user experience. Their user interface on both the app and website is super easy to use. What is unique to Lemonade though, is the claims payout process.

Roughly half of all claims are paid out instantly (3 seconds), with the long-term goal of getting to 90%. They use AI to run 18 different anti-fraud algorithms, and when a claim is more complex or is flagged for potential fraud, then a human gets involved.

This is an incredible experience for the consumer that is the complete opposite of dealing with legacy insurance.

To give you an example of my experience with filing a claim with State Farm, I had to have multiple lengthly phone calls during work hours, dealing with them not answering the phone and only being able to speak when convenient for them. The process went on for 2 weeks to get paid out. It was a nightmare.

To be able to go on your phone, and get claims paid instantly is an incredible improvement in the traditional experience of getting claims paid.

TAM

Lemonade offers renters, homeowners/condo, car, pet, and term life insurance. They don’t just operate in the US, but in Europe as well.

The total TAM for US insurance for Lemonade’s core products (car, pet, and renters insurance) is roughly $398 Billion. Their market share is roughly 6.7% for renters (estimated), 7.9% for pet, and 0.06% for car. With a total market share of roughly 0.28%. This is excluding homeowners and life insurance.

In 2030, the TAM is expected to grow to $540.9 Billion. At a high level, if you assume LMND can go from 0.28% of market share to 0.5% on their core products in the US market, in 2030 they would have $2.7B in IFP. At 1.0% market share, they would have $5.4B in IFP.

This is quite an achievable feat for them, and that’s excluding life and homeowners insurance, and Europe.

In Europe, Lemonade currently only operates in the UK, Germany, the Netherlands and France. The TAM for their core products there is roughly $168.7B with Lemonade having a market share of roughly 0.04%.

The market is expected to grow to $215B in 2030. Combined with the US, the TAM for Lemonade’s core products, is $755.9 Billion.

With LMND currently at 0.18% of market share of their core products in the US + Europe, assuming they could get to 0.5% would take them from 1.3B in IFP to about 3.8B of premium. And that is excluding life and home insurance and any new insurance lines they offer.

This is to show you that Lemonade just needs to continue scaling and taking a tiny bit of market share. Although they do things better than the rest of insurance companies, they don’t need to dominate the industry for it to grow a ton from here.

As you can see in the graphs above, car insurance is by far the largest insurance market, which Lemonade currently has a tiny market share of. They currently operate in only 10 states for car insurance, which leaves plenty of growth ahead of them as they expand into new states.

In Europe, they are currently live in 4 countries with plans to expand to Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Norway, Poland, Portugal, Republic of Cyprus, Romania, Slovakia, Slovenia, Spain, Sweden, and Switzerland.

Clearly, plenty of room to grow in Europe as well.

Growth

Lemonade has had 10 consecutive quarters of accelerating IFP growth (in force premium). An amazing achievement which I believe will be hard to continue, however I believe they can continue to compound growth at around 30% for a long, long time.

Part of the LMND thesis which management brilliantly thought of in the early days of the company, was to attract a younger customer base through renters and pet insurance, and as they got older and earned more income, they would add more policies such as car, home, and life.

As they have grown customer count, they have gone from $379 of premium per customer in Q1’24 to $424 Q1’26. Showing that the thesis is playing out.

Why Incumbents Won’t Catch Up.

A common thing people say when they don’t understand Lemonade is “Why can’t they just slap on an LLM and use AI”

If you have ever seen what the inside of a century old Fortune 500 company looks like, then you’d know it looks like they are still operating in a completely different universe than the modern companies today.

They have bloat everywhere in the company. Tech debt. Using old systems that don’t work. You can’t just slap on an LLM and think that you will be anywhere near a company whose entire foundation is built on AI.

For these companies to become anything close to what Lemonade is, they would have to cut most of the company, rip out the old systems used, restructure and rebuild from the ground up. That’s not going to happen. And if it does, it would take a long time to rebuild.

I highly recommend reading Why Incumbents Won’t Catch Up by Daniel Schreiber, LMND CEO. It’s an excellent article where he goes into more detail on this subject.

At Berkshire Hathaway’s annual meeting just about a month ago, Ajit Jain, who oversees Berkshire’s insurance operations, including GEICO, described their approach to AI as “wait and see.” The individual operations “dabble” with AI, he said, but there has been no “conscious big-time effort.”

So one of the largest insurance companies is saying they are dabbling with AI, and Lemonade has an 11 year head start building their foundation on it. They cannot simply become what Lemonade is.

That’s how disruption happens. The disruptor is ignored until it’s too late.

Gross Loss Ratio

Gross loss ratio (GLR) is just the percentage of premium an insurer pays back out in claims. Collect $100 in premium, pay out $70 in claims, and your gross loss ratio is 70%. Lower is better. It means you priced the risk well and you’re keeping more of every premium dollar. It’s the cleanest single measure of whether an insurance company actually knows how to underwrite.

This used to be the entire bear case on Lemonade. “They’re growing fast, but they’re a tech company playing insurance. Their loss ratios will blow up.” Bears assumed the AI-pricing story was marketing, and that real claims experience would expose them.

As you can see, they have done an excellent job of getting GLR down from 88% to 61%.

Management has said Gross Loss Ratio can be a lever they pull and they aim to have 70% as their max target. Right now they are sitting at 61%, meaning if they really want to fire up growth, they can lower pricing and go back up towards 70%, and give customers even better pricing than they already do.

Operating Leverage

This is what makes the Lemonade opportunity truly unique. Because insurance is just a promise and math. LMND’s operating expenses can stay relatively fixed as they scale, and more of the top line can go directly to the bottom line.

Legacy insurance companies such as State Farm, or Progressive, have variable costs that go up as they grow. They need more insurance agents, claims adjusters, underwriters, call centers, etc. Lemonade does not.

The true magic with Lemonade will be seen when they become profitable. Their profit will grow much faster than anyone has ever seen in insurance.

Since Q4 2022, LMND has doubled their In-force premium, and headcount declined 6%. This would be impossible for State Farm, Progressive and the like to achieve.

LMND now has gone from $0.36M in IFP/employee to now $1.03M with the goal of getting to $4M/employee and beyond.

Hidden Inflation and Recession Hedge

One of the many reasons why I really like LMND is due to the nature of their business being quite immune to macro forces. Their business can be resilient in inflationary or recessionary environments. There is even an argument that their business does even better in a recession, as more people look to save money on their insurance premiums and Lemonade being able to offer the best prices.

Insurance premiums rise with inflation as the cost of what they are insuring goes up. Unlike something like a restaurant, where margins get compressed/and or prices rise which can lower demand and slower growth, insurance is something that is pretty much necessary.

Valuation

LMND’s market cap is currently $3.95B

Trading at 4.68x sales, 3.28 forward

PGR (Progressive) $119B - 1.33x sales, 1.35 forward

KNSL (Kinsale) $7.1B - 3.68x sales, 3.69 forward

Kinsale was included to show what a multiple for a more profitable insurance company can look like. They are a specialty insurer with higher margins. Their business model isn’t the same, but the aspect of higher profitability earning a higher multiple shows what that would look like.

So if you compare LMND to PGR it looks expensive. On a TTM basis, compared to KNSL, it’s more expensive, but fwd p/s is cheaper.

Depending on how you look at it, some may say this is expensive for LMND, however I believe it is too cheap.

Why? Growth.

As of Q1 2026, PGR grew top line 8.7%, and KNSL grew 10.2%

LMND grew 71%, and grew IFP at 32%

The gap in revenue growth to IFP growth is due to a reinsurance change they made recently, now that they achieved the scale to keep more of the premium, where previously they were ceding more premium to reinsurers. Eventually revenue growth and IFP growth will converge, but still. IFP growth is at 32%.

Both Progressive and Kinsale have decelerating growth, while LMND’s is accelerating. If you look at FWD P/S, both PGR and KNSL have higher forward multiples than trailing, where LMND’s is much lower.

So when considering LMND’s growth, TAM, and operating leverage, I’d argue that the multiples LMND is trading at is actually cheap. It shouldn’t be the same multiple as a $119B dinosaur that’s barely growing. It should be much higher.

Risk/Bear Case

I constantly search for bear cases, however I struggle to find any that are compelling these days. These are the last standing bear cases, as many of the previous ones when LMND was much younger have been eliminated.

Bear Case #1 - They’re Unprofitable

This is an extremely lazy one, yet it’s the most common I see these days. A long/short fund pulls up the screen, sees a net loss, and slots it into the short book without putting any effort into understanding the company.

Every profitable company was once unprofitable. The real question isn’t “are they profitable today,” it’s “is there a clear path to profitability, and is the unit economics trend pointing the right way.” For Lemonade the answer is yes on both: loss ratios are improving as they scale, operating expenses are staying roughly flat while premium compounds, and management has guided to adjusted-EBITDA profitability for FY 27 and GAAP profitability following shortly after.

This would be a legitimate bear case if you valued stocks on the past, not the future. The chart above is roughly what I believe LMND’s profitability is going to look like in the future.

Bear Case #2 - Valuation

I detailed this in the valuation section, however this is the most legitimate bear case. In an irrational market, a “cheap” disruptor can always get cheaper. Multiples compress, disruptors get mislabeled as overvalued by people anchoring to legacy comps, and you can sit underwater for a while even when you’re right. That’s a real risk to the stock, not the business.

A valuation compression further than what has already occurred would simply present an even better buying opportunity ahead of profitability in my opinion.

Bear Case #3 - Dilution

This is not a bear case in my opinion. It’s something to account for when modeling the numbers but does not break the thesis at all even though bears would like to say it’s a bear case.

Bear Case #4 - Catastrophic Event

Being an insurance company this will always be a risk. A bad hurricane, wildfire, etc could spike claims and create a bad quarter but this would just be short-term volatility risk, not a thesis-breaking risk. LMND still has reinsurance to cap their exposure and to make sure they are solvent in the case of such an event.

Price Target

This is my back of the napkin price target for LMND in 2030:

I think they can do around $3.5B in revenue for FY 2030. Which assumes they compound 30% off of 2027 estimates (which I expect them to beat). This is very achievable.

Applying KNSL multiple of 3.68x sales would bring it to a $12.88B market cap.

At the same P/S LMND is trading at now, the market cap would be roughly $16B

In 2030, the operating leverage will be kicking in and the exponential curve of profitability will be happening, deserving them a premium multiple as they continue to have strong growth, so there is an argument for 5-6x sales.

The point of this is not to nail exactly what the price will be, but just to be directionally correct. This is just a ballpark. The point is to show the asymmetry and opportunity ahead.

I know some LMND bulls may say I am being too conservative, and the bears will say I am too aggressive and it should trade the same as PGR, however I do believe I am being somewhat conservative here. There is the real possibility that they have stronger growth and/or have a multiple re-rating post-profitability, similar to what happens with many disruptors when the market realizes it.

With that being considered and accounting for some dilution, my rough 2030 price targets are:

$140 bear, $200 base, $250 bull (current price $51.46)

Zoom Out

Zoom Out.

The stock will move around in the short term. That is unavoidable.

The market will react to quarterly loss ratios, catastrophe headlines, dilution fears, profitability timing, growth deceleration, and whatever multiple investors are willing to pay for unprofitable growth at that moment.

But if the company keeps executing like they have been consistently, I think the asymmetry is still very attractive and the company will look very different in 2030 than it does today.

Contact

If you are an accredited investor and want to learn more about Outlier Capital, please reach out to my email: matt@outliercapitalmanagement.com or the contact form at outliercapitalmanagement.com

Disclaimer

The content in this article is for informational and educational purposes only. It reflects my personal opinions and analysis as of the date of publication, and it is not investment advice, a recommendation, or a solicitation to buy or sell any security. Nothing here is tailored to your individual financial situation, objectives, or risk tolerance. Do your own research and consult a licensed financial advisor before making any investment decision.

I, and/or Outlier Capital and its affiliates, may hold a position in the securities mentioned, including LMND, and may buy or sell at any time without notice. I have no obligation to update this article if my views or positions change.

This article contains forward-looking statements, estimates, and projections — including revenue forecasts, market-share assumptions, and price targets. These are inherently uncertain, rely on assumptions that may prove incorrect, and are not guarantees of future performance. Actual results may differ materially. Price targets are illustrative “back-of-the-napkin” scenarios meant to frame potential outcomes, not precise predictions.

Information herein is drawn from sources I believe to be reliable, including company filings and public data, but I make no representation or warranty as to its accuracy or completeness. Figures may contain errors or become outdated.

Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. You are solely responsible for your own investment decisions.

This communication is not an offer to sell or a solicitation of an offer to buy any interest in any fund managed by Outlier Capital. Any such offer would be made only to qualified investors through formal offering documents containing complete terms and risk disclosures.

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Carvana represents one of the most asymmetric short setups in the market today. There are variety of reasons which are all converging to make the probabilities of it having a severe drop very likely.

Before I dive in to the short thesis, I think it is important to lay out that I actually like what Carvana is doing. They are an innovative company and are doing a lot of cool things to tackle an extremely difficult problem in making an e-commerce car buying model a great experience for consumers.

While I do like what they are doing, the reality of it is, they are a subprime loan machine disguised as a car retailer (more on this later).

Macro Context

The current macro environment is critical to understanding the risks facing Carvana. Stress in the subprime auto loan market is rising rapidly.

• Subprime auto delinquencies are at all-time highs.

• Auto repossessions are at the highest level since 2009

The labor market is also in a tough spot. Unemployment continues to trend higher with no signs of stabilizing, and announced layoffs have spiked meaningfully. This combination is not good for the auto industry.

Valuation & Carvana’s Profitability

At the time of writing:

• Carvana: 3.96 P/S, 74 P/E, 132 P/FCF

• CarMax: 0.20 P/S, 10.22 P/E, 7 P/FCF

CarMax is down ~56% YTD as it struggles through a difficult auto retail environment.

So why hasn’t Carvana sold off the same way?

Two reasons:

1. Passive flows artificially supporting the stock (explained later)

2. Higher reported gross margins (20% vs. CarMax’s 10%)

But it’s critical to understand why those margins are higher.

They frame it to look like it is because they have done all this infrastructure investment, have better processes, etc. And while that may be true, the reality is that they achieve this margin from selling subprime loans. A large portion of profit comes from “Gain on Loan Sales”

This “Gain on Loan Sales” hits the “Other sales and revenues” line which significantly contributes to achieving that gross margin. $1.21 Billion dollars of profit YTD came from loan sales.

I took this screenshot from their website to show you what you need to qualify for the loans they sell (they recently raised this from $4k annual income). That tells you everything to know.

When the Music Stops

Carvana’s entire model depends on originating subprime loans and selling them either to banks, credit funds, or through securitizations.

So what happens if banks stop buying?

Carvana would be forced to hold the loans it originates.

This is catastrophic because:

• Carvana doesn’t have the capital

• The balance sheet is already strained

• Holding loans drains liquidity

• Losses rise as delinquencies increase

• Mark-to-market hits compound rapidly

If the securitization market stalls, Carvana:

• Cannot recycle capital

• Cannot offload credit risk

• Must drastically slow retail sales

This is exactly what happened to subprime lenders during the 2008 mortgage collapse and again during the 2015 subprime auto tightening.

Worst-case: Liquidity crisis → Bankruptcy risk

This is not hypothetical. It almost happened in 2022–2023.

Carvana only survived because:

• Borrowers accepted extremely high loan rates

• Investors bought securitizations again

• Used car prices rose

• Credit markets reopened

If banks step away again, especially in a recession, Carvana could face existential pressure.

Credit Tightening

How likely is it that banks cut back on buying these loans soon? In my opinion, very likely.

Just recently, we have seen multiple subprime auto lenders face issues, One of them being PrimaLend who entered bankruptcy just a month ago.

Tricolor, a major subprime auto lender recently went bankrupt as well. What triggered this was JP Morgan cutting it’s credit to them. Tricolor was forced to halt loan originations, cut off dealers, and move into liquidity survival mode.

This is exactly the kind of dependency CVNA has.

JP Morgan CEO Jamie Dimon was recently quoted saying:

“When you see one cockroach, there are probably more. And so everyone should be forewarned on this one”

Dimon’s warning is a signal to investors and the broader market to be cautious and prepared for potential further defaults or credit issues, especially if the economy were to weaken.

If more issues begin to arise, and the data does not improve soon, buyers for Carvana’s subprime loans will dry up.

Institutional Ownership

Carvana’s ownership breakdown is key to this story. About 98% of the float is owned by institutions.

The top 4 holders of the float are passive institutions (about 21%). This is why Carvana stock has held up well because of the strength in the broader market. Passive flows into these funds have contributed to keeping the stock elevated and at a high valuation.

The next 3 largest holders who are the largest active funds are FMR, Greenoaks Capital, and Cas Investment Partners. These institutions key to the thesis because they own such a large % of the company. As you can not only are they selling, but the other active institutions have been as well.

Because they are the largest active holders of the company. They would be first to act in anticipation of a credit event.

Looking at CAS and Greenoaks, they are both heavily concentrated in the stock. Carvana makes up 82.26% and 64.77% of their portfolios respectively. They have both been selling the stock, which may seem like normal profit taking on a large position, but they are forced to have minor trims. If they sold a large portion of their position, because the float is so limited, there would be no natural buyers to absorb the supply and the stock would fall sharply.

Cliff Sosin (CAS Investment Partners)

If you don’t know who this is, this is Cliff Sosin (CAS Investment Partners). He is known for having this legendary trade on Carvana, buying near the lows at when he bought it was when the stock was priced for bankrupcy and ended up with an incredible gain on the position.

When doing research for this article I discovered two podcasts he went on and discovered a lot about Carvana and Cliff.

First of all, I just want to say Cliff is a legend for this trade, and seems like an extremely intelligent guy and is very likable.

This is why he is key to this story. In the podcasts he mentions multiple times that the biggest issues in his journey with Carvana was macro forces which were out of his control. He has experience with macro making Carvana’s business extremely tough and is very knowledgable about the financing part of Carvana’s business.

After watching these podcasts, it would be highly unlikely that Cliff is not aware of the macro and credit risks I highlighted earlier on in the article. The fact of the matter though is that he is stuck. He has been lightly trimming his position, because if he unloads a large portion of the position, he will tank the stock price, not only because of the size of his position in the company & the float, but also because he is the face of the turnaround story.

It will be very interesting to watch what Cliff does with CAS Investment Partners’ position in the company.

Fraud?

It is important to note that there have been multiple accusations of fraud. This is not the point of the article but is important to note that if fraud ends up being discovered, this would obviously also tank the stock.

There is currently a class action lawsuit against Carvana which is moving forward in court.

Conclusion

The macro reasons and valuation alone is enough of a reason to be bearish on the stock alone. The data of subprime delinquencies and subprime lenders going bankrupt all point to a credit event happening soon. It is very likely that banks stop or at least slow the purchasing of these loans which would be a catastrophe for the company and the float which is largely held by hedge funds seems like it is a game of musical chairs now.

This is why I am short the company as I believe the stock has a high probability of unwinding soon and is great hedge to macro deterioration.

Would love to hear your thoughts. Think I got something wrong or missed something? Let me know!

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To reiterate for the people who are new to my content, I am neither a bull nor a bear. I asses the environment in front of me and like to listen to both sides to make the best decision for myself which is why I believe I have performed so well being both long and short.

A common take from bears is that AI is in a bubble and is not a useful technology (essentially just chatbots). I do not agree with this at all. AI is definitely useful as I use it in my own life and business and see companies transforming their business with AI. This is a transformational technology which we are in the early stages of. Is there overspending? Sure. I think AI won’t accelerate/integrate fast enough to justify this capex spend in the short-term, but long-term, the technology will get significantly better and completely change the world.

Where bulls get this all wrong is they boil down the entire market/economy into thinking everything’s fine because bears are wrong about the AI bubble. The fact of the matter is there are much more fundamental issues in the economy to worry about.

-The consumer is struggling, auto loan defaults & credit card defaults are skyrocketing.

-The labor market is deteriorating

-Inflation is still above target and fed has to pick between which one to worry about (they have said they are leaning towards labor market because it’s so bad)

-A recent development is Japan and the Yen carry trade start to play out (which could be a huge factor in recent sell off)

-Private credit could be a ticking time bomb and recently there have been multiple cases start to show the cracks in the system (Tricolor being the first and highest profile)

-Commercial real estate is in real trouble and regional banks have heavy exposure to it. Concerns about regional banks have started to pop up and their stocks have shown weakness

-Valuations in a lot of areas of the market are elevated

-Lots of bubblish behavior with retail investors

-Companies outside of big tech are struggling

-The real estate market downturn has begun. Rents & prices starting to collapse.

-Margin Debt at all time highs

-& much more which I am probably not thinking of off the top of my head

I could write individual posts on each point here and will if you guys would like me to.

To sum it all up, the red flags are too strong to ignore. I am always open to changing my view and if the data somehow starts to improve I will change my stance.

I understand going short/hedging is not for everyone, so my broad (NFA) advice is to be cautious right now and consider raising some cash and getting out leverage (margin/call options).

Thanks for reading, and if there’s something you want me to discuss on a deeper level, let me know.

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