Black Bear Value Partners, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of -3.7% was recorded by the fund for the third quarter of 2021, trailing the S&P 500 Index, and the HFRI Index that delivered a +0.8% and -0.3% return respectively for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Black Bear Value Partners, in its Q3 2021 investor letter, mentioned AutoNation, Inc. (NYSE: AN) and discussed its stance on the firm. AutoNation, Inc. is a Fort Lauderdale, Florida-based automotive retailer with an $8.4 billion market capitalization. AN delivered a 69.25% return since the beginning of the year, while its 12-month returns are up by 95.05%. The stock closed at $118.12 per share on October 8, 2021.
Here is what Black Bear Value Partners has to say about AutoNation, Inc. in its Q3 2021 investor letter:
“Auto dealers have been over-earning on car sales due to a lack of inventory because of the semiconductor shortage. They have been able to increase prices despite lower volumes and benefit from reduced operating expenses. It seems obvious that when the semiconductor shortage is resolved, more cars will become available and unit profitability will be reduced. In short, their earnings will likely decline in the 12 months following the inventory shortage and then resume their rise. Our longer-term horizon allows us the ability to own the business and not focus on a short-term issue. The semiconductor issue is likely to persist thru 2022 though this is a guess. Ultimately our long-term thesis on the business remains intact. If the business can extend its moat, maintain their pricing power, and remain important to both their customers and suppliers we will do fine.
AutoNation can generate a range of $6-$8 in free cash flow per year. This implies a 5-7% yield to us presuming limited growth. Additionally, if AutoNation achieves modest levels of success with AutoNation USA (new used-car supercenters) it could add another $5-$10 of per share value to the business. Note that at current prices, very little in the way of AutoNation USA success is priced in.”
Photo by Obi Onyeador on Unsplash
Based on our calculations, AutoNation, Inc. (NYSE: AN) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. AN was in 24 hedge fund portfolios at the end of the first half of 2021. AutoNation, Inc. (NYSE: AN) delivered a 14.42% 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.
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this biotech stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.
Disclosure: None. This article is originally published at Insider Monkey.
