Black Bear Value Partners, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of +13.6% was delivered by the fund for the first quarter of 2021, outperforming the S&P 500 Index that delivered a +4.4% return for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Black Bear Value Partners, in its Q1 2021 investor letter, mentioned Texas Pacific Land Corporation (NYSE: TPL), and shared their insights on the company. Texas Pacific Land Corporation is a Dallas, Texas-based land and resource management, and water services and operations businesses operator that currently has an $11.7 billion market capitalization. Since the beginning of the year, TPL delivered a 107.69% return, extending its 12-month gains to 141.95%. As of June 17, 2021, the stock closed at $1,509.87 per share.
Here is what Black Bear Value Partners has to say about Texas Pacific Land Corporation in its Q1 2021 investor letter:
“We continue to own TPL despite the stock rising 200+%. While it doesn’t scream cheap it still looks very reasonable to me with very asymmetric upside if energy inflation takes hold.
Some people have asked why own this if the Biden administration is making it more cumbersome for energy companies and making a push towards renewables? Please note we are very supportive of a renewable future and a lower associated carbon footprint. As we have discussed before, to get to a renewable future we need hydrocarbons to bridge the gap. This is many decades in the making. Additionally, as permits on federal lands are reduced, the demand remains and will migrate to the areas where it’s still possible to operate (the Permian).
As a reminder TPL is a royalty company with 100% of their acreage located in the Texas Permian Basin. In a nutshell they make money when drilling activity occurs but DO NOT have the capital needs as they simply provide access to land.
The incremental amount of work on TPL’s part is minimal as the extraction and movement of the oil/natural gas is undertaken by others. They are merely a toll collector with Returns on Capital of 80+%.
In an inflationary environment, businesses that have lower capital intensity both in capital assets and people stand to benefit. In other words, if oil goes up a lot, the incremental cost to TPL is close to 0 so it’s all incremental profit. This is a business that should benefit in a massive way if we have energy inflation. In the meantime, we likely own it at a 3-4% free cash flow yield with massive upside.”
Our calculations show that Texas Pacific Land Corporation (NYSE: TPL) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the first quarter of 2021, Texas Pacific Land Corporation was in 17 hedge fund portfolios, compared to 11 funds in the fourth quarter of 2020. TPL delivered a -9.88% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
