Here’s Why Black Bear Value Partners Became Very Optimistic in Berkshire Hathaway (BRK-A)

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 Berkshire Hathaway Inc. (NYSE: BRK-A), and shared their insights on the company. Berkshire Hathaway Inc. is an Omaha, Nebraska-based multinational conglomerate company that currently has a $637.2 billion market capitalization. Since the beginning of the year, BRK-A delivered a 20.36% return, extending its 12-month gains to 53.34%. As of June 16, 2021, the stock closed at $425,645.00 per share.

Here is what Black Bear Value Partners has to say about Berkshire Hathaway Inc. in its Q1 2021 investor letter:

“Below is an updated snapshot of our “Berkshire on a Napkin” valuation. This is by no means perfect but provides a very rough idea of how things look at a 10,000-foot view.

While Berkshire’s operating businesses saw their profits decline by ~10% in 2020, their long-term positioning at the cross-section of American business remains intact if not stronger.

Berkshire bought back $9B of stock in the 4th quarter and $25BB during 2020 shrinking the sharecount and increasing our ownership by 5%.

•  Cash of ~$104,000 per class A Share
  o Down/Base/Up marks cash at book value to a 10% premium
• Investments of based on December prices ~$194,000 per class A share
  o Presume a range of stock prices that result in:
   Down = $116,000 per class A share (-40%)
   Base = $165,000 per class A share (-15% – assumes portfolio is overpriced)
   Up = $223,000 per class A share (+15%)
• Operating businesses that should generate ~$15,000 of pre-tax income per Class A share per year
   Down = 9x = $135,000 per share – equates to ~8% FCF yield
   Base = 12x = $180,000 – equates to ~6% FCF yield
   Up = 12x = $180,000 – equates to ~6% FCF yield
• Overall
  o Down = $355,000
  o Base = $454,000
  o Up = $465,000

Berkshire is very cheap for owning such high-quality businesses and will continue to grind higher and compound value for us.”

Krista Kennell/Shutterstock.com

Our calculations show that Berkshire Hathaway Inc. (NYSE: BRK-A) 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, Berkshire Hathaway Inc. was in 111 hedge fund portfolios, compared to 110 funds in the fourth quarter of 2020. BRK-A delivered a 9.13% 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.