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T2 Accredited Fund Letter to Investors-Feb 2012

T2 Accredited Fund Letter to Investors-Feb 2012

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Published by Devon Shire

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Categories:Business/Law, Finance
Published by: Devon Shire on Mar 02, 2012
Copyright:Attribution Non-commercial


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The GM Building, 767 Fifth Avenue, 18
Floor, New York, NY 10153
Whitney R. Tilson and Glenn H. Tongue phone: 212 386 7160 Managing Partners fax: 240 368 0299www.T2PartnersLLC.com
March 1, 2012Dear Partner,Our fund declined 0.9% in February vs. gains of 4.3% for the S&P 500, 2.9% for the Dowand 5.5% for the Nasdaq. Year to date, our fund is up 11.5% vs. 9.0% for the S&P 500, 6.5% forthe Dow and 14.0% for the Nasdaq.On the long side, winners included Citigroup (8.5%) and SanDisk (7.8%), offset by Netflix(-7.9%), Grupo Prisa (B shares) (-7.4%), and J.C. Penney (-4.7%).On the short side, we profited from First Solar (-23.6%), which just reported dismal earnings andguidance, Interoil (-10.4%), and Boyd Gaming (-8.7%). These gains were offset bySalesforce.com (22.6%), which is growing rapidly but trades at 8.7x revenues and has a $19.6billion market cap despite being unprofitable. In addition, Green Mountain Coffee Roasters,which we think is likely to be the next Krispy Kreme (for those of you with long memories), rose21.8%.
Berkshire Hathaway
Last Saturday, Berkshire Hathaway released its latest earnings report,as well as Warren Buffett
s widely anticipated annual letter.Neither disappointed. Here
s our quick take:a)
Berkshire has never been stronger. Its balance sheet is awash with cash and the companyhas a diverse and robust collection of exceptional businesses that are collectivelygenerating more than $1 billion per
for Buffett and Munger to allocate.b)
The company is firing on all cylinders. As Buffett writes:
Our major businesses did welllast year. In fact, each of our five largest non-insurance companies
BNSF, Iscar,Lubrizol, Marmon Group and MidAmerican Energy
delivered record operatingearnings. In aggregate these businesses earned more than $9 billion pre-tax in 2011.Contrast that to seven years ago, when we owned only one of the five, MidAmerican,whose pre-tax earnings were $393 million. Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping$10 billion.
We have increased our estimate of intrinsic value to more than $178,000/share, based on$98,366 in investments/share plus applying a 10 multiple to our estimate of normalizedpretax operating earnings of $8,000/share.
Given the diversity of Berkshire
s businesses, the company
s performance is a goodindicator of the overall strength of the U.S. economy (outside of the housing sector,which Buffett says remains in a
At many points in his letter, Buffett shows the wide gap between book value and intrinsicvalue, concluding that book value is a
considerably understated
proxy for intrinsicvalue. However, we think he is being too conservative when he writes:
Over time, thedivergence will likely become ever more substantial in absolute terms, remainingreasonably steady, however, on a percentage basis as both the numerator anddenominator of the business-value/book-value equation increase.
As Berkshire
s valuehas increasingly shifted in recent years from its investment portfolio, which is valued atmarket (i.e., book value), to operating businesses like GEICO and Burlington Northern,we think Berkshire
s intrinsic value is becoming a
percentage of book value
yetthe stock is currently trading near the
premium to book value in the past twodecades.f)
Buffett makes it very clear that he believes that Berkshire
s stock is significantlyundervalued and that he
s eager to buy it back, up to a price equal to 1.1x book value, or$110,000/A share as of 12/31/11 (Buffett
s limit price is likely higher today, as book value has almost certainly risen this year). We think the share repurchase program puts afirm floor on the stock price only a few percentage points below today
s level of $118,000.g)
Berkshire is our largest position because of its asymmetric return profile: only a fewpercentage points of downside vs. 50% upside, with intrinsic value growing at roughly10% annually.h)
On the first page of the letter, Buffett did his best to put the succession issue to rest,writing:
Your Board is equally enthusiastic about my successor as CEO, an individual towhom they have had a great deal of exposure and whose managerial and human qualitiesthey admire. (We have two superb back-up candidates as well.) When a transfer of responsibility is required, it will be seamless, and Berkshire
s prospects will remainbright.
We don
t have a strong view on who the successor is, but don
t care because wethink it
s highly likely that Buffett will be running Berkshire for at least five more years,maybe even 10. In addition, our estimate of intrinsic value doesn
t include any Buffettpremium.Since Berkshire reported earnings, the stock is actually down a bit so we took advantage and,though it was already our largest position, we added to it.Whitney was on CNBC on Monday, commenting on Buffett
s letter and how cheap we think Berkshire
s stock is (plus a few comments on Dell at the end). To watch the video, click  here,  and a transcript is attached in Appendix A. We have also updated our Berkshire Hathaway slidedeck, which his posted here and also attached in Appendix B.
As always, we will strive to have the K-1 tax forms to you by late March. If you would like us tosend a copy of your K-1 to anyone other than yourself (such as your accountant), please emailKelli at KAlires@T2PartnersLLC.com. 
Privacy Policy
Attached in Appendix C is our privacy policy, which we are required to send you once a year.
 Thank you for your continued confidence in us and the fund. As always, we welcome yourcomments or questions, so please don
t hesitate to call us at (212) 386-7160.Sincerely yours,Whitney Tilson and Glenn TongueThe unaudited return for the T2 Accredited Fund versus major benchmarks (including reinvesteddividends) is:February Year to Date Since InceptionT2 Accredited Fund
net -0.9% 11.5% 138.9%S&P 500 4.3% 9.0% 40.8%Dow 2.9% 6.5% 91.3%NASDAQ 5.5% 14.0% 40.9%
Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2Accredited Fund was launched on 7/1/04.
T2 Accredited Fund Performance (Net) Since Inception
-40-20020406080100120140160180200Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
T2 Accredited Fund S&P 500

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