Black Bear Value Fund commentary for the second quarter ended June 30, 2017.
“The areas of consensus shift unbelievably fast; the bubbles of certainty are constantly exploding.” – Rem Koolhaas
To My Partners and Friends:
Black Bear Value Fund, LP (the “Fund”) returned approximately 1.1% in the 2nd quarter of 2017 (1) bringing the year-to-date net return to 0.3%. This compares to 2.6% for the S&P 500 in the quarter, bringing its year-to-date return to 8.2%.
As many of you already know a substantial amount of the Fund’s capital is my own. Whereas new fund managers spend most of their time raising money, I spend most of my time focusing on compounding my capital and my LP’s capital over the long-term.
A fundamentally-driven and concentrated investment portfolio should outperform various market indices over a long-term horizon with reduced risk of permanent capital impairment. Each investors’ return will vary depending on the timing of the investment.
Brief descriptions of the top 5 long positions follow and remain the same as in the 1st quarter.
Alphabet Holdings (GOOGL)
Alphabet is the holding company for Google (Advertising/Search) and Other Bets (Ex: Waymo, Nest, Google Fiber). Alphabet is a cash-machine with 40+% returns on capital and a fortress balance sheet (no net debt). Ex-cash and other-bets, Alphabet is trading ~6% free-cash flow yield and grows 15+%. Other Bets obscure the cash-generative abilities of the company as they currently lose money and burn cash. While pricing per click (the price Alphabet gets) has been in decline, the number of clicks (the volume) is growing as more and more people are glued to their mobile devices. Mobile is a lower price point but much higher volume. Think of this the next time you ask your friend or family member to put their phone down – they could be clicking and making you money as an Alphabet shareholder.
The media has made much ado about the “run-up” in the prices of tech stocks. I am cautious about painting broad brushstrokes among very different companies, valuations and long-term fundamentals. Alphabet has been growing like a weed and it is likely to continue. There is limited value in these short term predictions and worrying about them can lead to a lot of wasted time.
