Black Bear Value Partners recently released its Q4 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -6.5% (net) in 2020, underperforming its benchmark, the S&P 500 Index which returned 18.4% in the same period. You should check out Black Bear Value Partners’ top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the Q4 2020 Investor Letter, the fund highlighted a few stocks and Texas Pacific Land Trust (NYSE:TPL) is one of them. Texas Pacific Land Trust (NYSE:TPL) is a publicly traded land trust. In the last three months, Texas Pacific Land Trust (NYSE:TPL) stock gained 92.6% and on March 8th it had a closing price of $1,258.00. Here is what the fund said:
“TPL entered our top 5 in the 3rd quarter and has continued to increase in size as the stock price has moved up. Since year end, the corporate conversion to modern corporate governance is complete. While the price has moved up dramatically, I am still attracted to the high-quality nature of the business which I describe below. TPL stands to dramatically outperform in an inflationary environment.
TPL is a publicly traded land trust that is one of the largest landowners in Texas and one of the oldest listings on the NYSE, having been formed in 1888 and listed in 1927. Most have not heard about TPL as they are not in passive indices due to their corporate structure (they are a trust with unique corporate governance – though this has changed due to the above-mentioned corporate restructuring).
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. Think of them as a franchisor of fast-food energy and the drillers and/or midstream as the actual restaurants.
If you drill oil on their royalty-land you pay a portion to TPL. Need a road to drive to the site? You pay a fee/easement. Need water? Need a pipeline? Need electricity transmission lines? I think you get the picture. If you want access to the assets underneath the ground or to travel on top (oil/natural gas/water) you must pay TPL.
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+%.
Longer term some of the cheapest to deliver hydrocarbons are in the Permian basin. Some are concerned that the long-term push towards renewable energy will harm them. I see it a bit differently. First, change takes time and while there are increasing amounts of electric vehicle (EV) or solar power discussions, it is going to take a while for it to become a large part of our everyday lives. Secondly, and probably more importantly, renewable products require commodities and/or compounds that need to be extracted and/or heated (Silicon, silver, copper, lithium etc.). Their production requires hydrocarbons. To get to a lower hydrocarbon long-term future, we will need hydrocarbons. The cheapest place to get these are in the land owned by TPL.
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 4-5% free cash flow yield with massive upside.”
Pixabay/Public Domain
Black Bear Value Partners has been a long time Texas Pacific Land Trust (NYSE:TPL) bull. In October 2020, we shared Black Bear Value Partners’ bullish TPL’s thesis in this article.
In Q3 2020, the number of bullish hedge fund positions on Texas Pacific Land Trust (NYSE:TPL) stock decreased by about 7% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t believe in TPL’s growth potential. Our calculations showed that Texas Pacific Land Trust (NYSE:TPL) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
