Black Bear Value Partners LP 3Q17 Letter To Investors

(MENAFN- ValueWalk)

Black Bear Value Partners LP .

'What is right is not always popular and what is popular is not always right.' - Albert Einstein

To My Partners and Friends:

Black Bear Value Fund, LP (the 'Fund') returned approximately 3.0% in the 3rd quarter of 2017 (1) bringing the year-to-date net return to 3.3%. This compares to 4.4% for the S & P 500 in the quarter, bringing its year-to- date return to 14.2%. We opened to new investors as of March 1, 2017 and have returned 5.0% as compared to 7.6% for the S & P 500 in that period. We have maintained more than 25% cash balances during this time as well as a large short position across fixed-income related ETF's.

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 (many of the descriptions are similar to last quarter as not much has fundamentally changed). While Interactive Brokers is no longer a top 5 position it remains a meaningful position to the Fund at quarter-end. My feelings about the quality of IBKR's business, management and overall trajectory have not changed, only the price we have to pay for the stock.

Alphabet Holdings

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.

The world is getting more connected every day and should be a persistent tailwind. It's hard to know where Other Bets goes…. but ascribing ingenuity and creativity a negative value seems short-sighted. In other words, if Other Bets never take off and we own Alphabet at a 4-5% yield + growth of 10+%, we'll be ok. I tend to think they may surprise us.

Berkshire Hathaway

Describing Berkshire in a simple manner is a challenge. Allan Mecham did an admirable job describing BRK as a 'meat grinder that relentlessly piles up value year over year (and decade over decade).' Berkshire is trading ~1.5x book value which underestimates its true intrinsic value. We own BRK at a 20+% discount to the combined value of their stock portfolio and their operating businesses (at a 10x multiple). Add in the benefits of investing free money (the float from insurance) and a business compounding at high single digits with wide moats and you get the aforementioned meat grinder.

Insurance is a core business for Berkshire. Concerns are being voiced by some sell-side analysts about the impact from recent natural disasters. Without sounding callous, these kinds of events and their costs are short-term in nature for Berkshire. Losses can impact their competitors both through inadequate reserves and weak balance sheets. Berkshire typically benefits both by having the most stable balance sheet (ability to pay insurance claims) and write new policies that are priced better (a price more reflective of the risk). These natural disasters have a long-term impact on the people involved and we would prefer not to make money based on others misfortune but this is the nature of insurance at times.

Liberty Sirius XM Group

Liberty Sirius XM Group is a tracking stock for Liberty Media's ~70% stake in SiriusXM. We own SiriusXM at a ~20% discount to where the underlying SIRI stock trades. Sirius operates satellite radio in the US providing 140+ channels to their 31mm subscribers for monthly subscription fees. SIRI is a sticky subscriber model with high margins (high 30's) trading ~6% free-cash-flow yield. At our discount, it is closer to ~8% free-cash-flow yield. Management has used free-cash-flow to shrink their share count by ~20% over the past few years. This investment suffers from multiple avenues of negative investment sentiment.

• Tracking stock: Tracking stocks are hard to understand
• Auto: We are at peak auto so there will be less of these systems sold every year
• Technology: Who needs satellite radio when people have all sorts of ways to listen to music

From a high level, it seems like the headlines/concerns ignore or lose focus of some key points.

• Tracking stock: John Malone and Liberty have been terrific partners across a variety of businesses and intend on closing the 20% gap between the tracker and the underlying stock
• Auto: We are likely at peak auto but there are opportunities for increased volume from used cars and increased price due to unique content (Howard Stern, ESPN, CNBC etc.)
• Technology: Terrestrial radio is their biggest competitor and while new technology is easy to use, so far, they lack the content the Sirius listener wants. This is something to keep an eye on.

Phillips 66

Phillips 66 is a vertically integrated downstream refiner with varied businesses across midstream (pipelines transporting oil/gas), chemicals and gas stations. Their dependence on refining will be greatly reduced over the next 24 months as new midstream and chemical projects contribute more stable cashflow. Many investors want to see the cashflow from new projects before paying for it. We are comfortable buying today and being patient. Over the next 2 years PSX should be generating free-cash flow in the low teens on today's stock price.

This is largely due to a double benefit of exiting capex cycles (less money out the door) and new projects contributing cash (more money coming in the door). Management continues to buy back stock at cheap prices (15% bought back over the last 3 years) and takes a mindful approach to capital allocation within their business units. A more stable/sticky stream of cash should translate into a more fairly valued company. In the meantime, we encourage management to keep buying back more stock.

21st Century Fox

21st Century Fox is a diversified media conglomerate across cable networks, film and television studios. We own Fox ~7% free cash flow yield with an ability to grow earnings

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