Black Bear Value Partners LP letter to investors for the third quarter ended September 30, 2019.
“They haven’t repealed the laws of arithmetic…. yet, anyway.” -John Malone
Q3 2019 hedge fund letters, conferences and more
To My Partners and Friends:
- Black Bear Value Fund, LP (the “Fund”) returned -2.2% in the 3rd quarter and +2.0% YTD.
- The S&P 500 returned +1.7% in the quarter and +20.6% YTD.
- The HFRI index returned +0.6% in the quarter and +9.8% YTD.
- We do not seek to mimic the returns of the S&P 500 and there will be variances in our performance.
- The companies we own are significantly underrepresented in the S&P 500. Our entire portfolio adds up to ~3% of the S&P 500.
The businesses we own have gotten cheaper and our shorts more expensive. This leads to underwhelming year-to-date performance. Our returns do not move in a straight line and can be lumpy. Black Bear has the structural advantage of a longer horizon with no portfolio leverage. This type of setup allows for the patience to wait for negative narratives to change (for our longs) or complacency to be replaced by fear (for our shorts). In the meantime, we remain both disciplined in our beliefs but balanced in our analysis. The portfolio is quite cheap and while the timing of revaluation is unpredictable, I tend to think 3-5 years out it will have appreciated significantly with a low risk of losing money.
Considering the above, I have significantly added to my LP interests in the Fund. At the portfolio level we have continued to add to our highest conviction themes. Short term pessimism is our friend and we are more concentrated in our top ideas.
Each investors’ return will vary depending on the timing of the investment. I would caution those reading that our portfolio is shown at a point in time and can change for a variety of reasons.
Performance Summary
(1) Performance figures represent actual performance from inception.
Top 5 Businesses We Own (Alphabetical)
The top 5 names/themes have not changed since Q2. Our concentration in those names has increased from ~71% in the top 5 to ~75% in the top 5 as of Q3. We have continued to add to these themes in Q4.
Airlines: Alaska and Delta
Our investments in Alaska and Delta should benefit from the increased credit-card cashflow and higher associated multiple. Eventually, the stickiness of the credit card business will become better appreciated. It has been and will likely continue to be a bumpy road as investors jump on and off the train based on the short-term news. I tend to put recession-prediction and geopolitical forecasting in the same “hard to know” camp, yet these market fears can be powerful in the short-term. It is important to take a longer-term view of a business and to acknowledge risks will always be present as a business owner. Delta has been actively buying back shares at discounted prices. Once Alaska completes their deleveraging, they should begin to do the same. Each business is independently a top 5 position on its own.
Please refer to past presentations and/or letters which discuss the thesis on the airlines. These can be found on our website behind a password protected wall. These are only intended for accredited investors.
Auto Dealers
A lot of attention is being paid to new car selling rates (SAAR) and less attention is being paid to the growing car park and opportunities in parts and service. Selling new cars has long been a lower-margin business. Car dealerships have resilience as car buyers migrate to used vehicles (higher-margin). Historically, the new car customers received more of the focus both on the sale and the subsequent warranty and service work. Over the coming years, the used-car and parts/service businesses should generate meaningful cashflow.
Berkshire Hathaway
Berkshire Hathaway remains in our top 5. We have owned it continuously since the inception of our Partnership in varying sizes. The combination of a fortress balance sheet, a relatively cheap equity portfolio and healthy/growing operating businesses with sustainable moats allows me to sleep at night. Berkshire has recently been buying back their stock and has allocated capital in a thoughtful manner since inception. If we encounter any periods of distress in the marketplace, Berkshire can capitalize.
The Q2 letter laid out a summary “valuation on a napkin”. Our thoughts have not changed so please refer to that for more detail.
Media-Content Basket
Our media investments have seen their stock prices drop significantly over the last quarter and continuing into Q4. We have increased our allocation to these names as the thesis does not appear impaired despite the market’s reticence in owning these businesses.
CBS and Viacom announced a long-anticipated merger which should close in the next few months. The synergies laid out by management underwhelmed the investor base with both stocks declining 20+% in a months’ time. As the two companies merge a number of positives (not included in the synergy number) should become self-evident, such as increased affiliate pricing and distribution.
The fears about cord-cutting continue and will likely persist a while. Bad news is reflected in the stock prices which trade anywhere from 12-20% free-cash-flow yields. Our businesses produce unique content that has advertising value, consumer loyalty, and an engaged customer. Methods of media consumption will inevitably change over time. What will remain the same is a need for content to attract the consumers.
Shorts
We remain short credit in large size in the Fund. We have small equity shorts as well. I have discussed the short-credit thesis at length in previous letters. Please check out our past letters and/or presentations as our feelings have not changed. Our idea was recently discussed in the October 4th issue of Grants Interest Rate Observer which I plan on sending around later this month (once I get clearance from Grant’s).
Recently there have been some liquidity issues regarding the short-term funding market for US treasury bills. The Fed had to step in to provide liquidity as banks sat on the sidelines. There have been several speculations as to why the problem exists and why the Fed had to help. I don’t have the answers, but I do have questions… If US treasuries can become illiquid, what of corporate debt? Will these same banks step in to provide liquidity? At what cost?
Our credit short helped our partnership in 2018 but has been a drag thru 2019. I am not stubbornly wedded to the thesis and remain open-minded. However, I have not seen compelling data that has changed my mind. The asymmetry from shorting still exists and we continue to hold and wait.
Stock Price Influence and Ways to Combat It
It is important to not allow stock price movements to inform your decision making. We focus on the fundamental performance of our businesses and the capital allocation decisions of the management. Thousands of years of evolution have created a “Fight/Flight” response when encountering perceived danger (think of the headlines and hysterics on business TV). The logic of buying cheap (aka a stock that’s going down) can get overwhelmed by the flashing red lights and commotion caused by an auction-driven market. It can also overwhelm to the up with some feeling a need to buy something as the price goes up versus the rational approach of either doing nothing or selling. There are several ways to mitigate/minimize these risks that I list below for those interested. This is not an all-encompassing list.
- Do less and do not be in a rush to act.
- Have an appropriate long-term investment horizon so you are not playing the same short-term
guessing game as a lot of others. - Don’t look at your stock screens ESPECIALLY when making an investment decision.
- Try to wait until after market hours to make investment decisions – this may strike some as
counterintuitive…how can you trade if the market is closed? The market serves you! You can make
your decisions when it’s quiet and there is no call to action and put the orders in for the next day.
These tricks are behaviors I have witnessed or learned from successful long-term investors. I have found them particularly useful and would recommend to all of you in your own personal investing endeavors.
Cash
We have approximately 7% of our assets in cash/T-bills (ignoring the cash we get from our shorts). We do not target a cash balance.
General Partnership Business
As mentioned earlier, I have added significantly to my LP investment in the partnership. Some of our other LP’s have added as well. The combination of a long-term horizon and like-minded LP’s is a powerful combination. Our companies continue to make progress despite some lagging stock prices. In time valuations should catch up to business fundamentals, and we stand to benefit. It has been said that the money is not made in the buying and selling, but in the waiting. Our disciplined and contrarian approach should ultimately be rewarded.
Thank you for your trust and support.
Black Bear Value Partners, LP
