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T2 Accredited Fund Letter to Investors-April 2012

T2 Accredited Fund Letter to Investors-April 2012

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Published by Devon Shire

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Published by: Devon Shire on May 03, 2012
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05/03/2012

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The GM Building, 767 Fifth Avenue, 18
th
Floor, New York, NY 10153
Whitney R. Tilson and Glenn H. Tongue phone: 212 386 7160 Managing Partners fax: 240 368 0299www.T2PartnersLLC.com
May 2, 2012Dear Partner,Our fund rose 1.5% in April vs. -0.6% for the S&P 500, +0.2% for the Dow and -1.4% for theNasdaq. Year to date, our fund is up 25.8% vs. 11.9% for the S&P 500, 9.0% for the Dowand 17.2% for the Nasdaq.On the long side, we were having a lousy month thanks to Netflix (-30.3%), SanDisk (-25.4%),Grupo Prisa (B shares) (-23.7%), Goldman Sachs (-8.0%), and Citigroup (-7.4%)
 – 
until the lastday when Barnes & Noble jumped 51.7% (discussed further below). Other winners on the longside included AIG (10.4%) and dELiA*s (10.0%).Our gains for the month came entirely on the short side thanks to Nokia (-33.5%), First Solar(-26.5%), and Tesla (-11.0%), partially offset by Interoil (17.6%)
Barnes & Noble
You might be scratching
your head, asking, “Weren’t
 
you guys short Barnes & Noble?”
Yes, wewere for quite a while, but last week we covered our short position and bought a 2% stock and2% call option position
 – 
only the fifth time in our 13+ year investing history in which we wentlong something we were previously short (given how well it worked out the four previous timeswith Fairfax, Wells Fargo, General Growth Properties, and Netflix, we should do it more often!).
In the past, there’s been some period of time between our switc
h, but in this case we covered ourshort in the morning and then, after further thought, went long in the afternoon.Allow us to explain our rationale: w
e’d made a little money this year being short Barnes &
Noble and were already thinking of covering when two things caught our attention: 1) we sawthat Jana, a firm we know well and respect greatly, took a large (11.7%) stake in BKS; and 2) weread a write-up (attached in Appendix A) on our favorite value stock idea website, ValueInvestors Club, which made a compelling case that BKS was deeply undervalued. The crux of the argument was that the superstore and college bookstore businesses were worth almost theentire stock price of $11, meaning that investors were getting a nearly free call option on theNook, which is doing remarkably well. The clincher for us was the realization that with morethan 2/3 of the stock controlled by insiders, 67% of the float was sold short (87% if you include
Jana’s new stake)
, so even a hint of good news could trigger the mother of all short squeezes.The key to both the bull and bear cases on Barnes & Noble is the Nook. A major pillar of ourinvestment thesis on the short side was that it would fail to gain traction in the marketplace andsimply burn cash and destroy value. T
o Barnes & Noble’s credit
, however,
that hasn’t happened
:while the Nook is still losing money, it is an excellent product that elicits rave reviews fromcommentators and customers and hence has come out of nowhere to take 27% of the eReader
 
-2-
market
 – 
an incredible accomplishment, given the
ferocious competition from Amazon’s Kindle.We can’t say for sure how much it’s worth, but it clearly has significant value, as Microsoft’s
investment showed.Such a rapid shift in opinion on a stock is unprecedented for us, but when we encounter new
data/analyses that convince us we’re wrong, we throw our pride and usual stubbornness out the
window and act quickly.
We don’t claim to be infallible, but do try our best t
o seek out contraryopinions, keep an open mind, and be willing to identify and fix mistakes.
Netflix
Netflix tumbled in April, but is still up 15.7% year to date and is our 4
th
biggest winner this year(after Howard Hughes, Iridium and Barnes & Noble). Our view on the company
hasn’t changed
much since we first bought it last October
 – 
 
we’re comfortable with a 5
-6% position size
 – 
but
the stock price has been extremely volatile, ranging from $62 to $129 in the six months we’ve
owned it,
so we’ve done much
more trading than we normally do, first trimming aggressivelyand banking a lot of profits as the stock skyrocketed earlier this year, and then adding to ourposition recently after it fell sharply.The company reported very strong Q1 earnings a week ago: revenues grew 21%, domesticstreaming subscribers jumped by 1.7 million to 23.4 million, international subscribers grew by1.2 million to 3.1 million (up 282% year over year), and total unique subscribers grew by 2.9million to 29.1 million (including the DVD-by-mail business).So why was the stock down so much?
 Netflix’s guidance for Q2 was weaker than expected: a
projected gain of only 190,000-790,000 domestic subscribers and 385,000-935,000 internationalsubscribers. Bears see this as the beginning of 
the end of Netflix’s subscriber growth, but we see
it as typical second quarter seasonal weakness combined with the company being veryconservative in its guidance, setting a bar that should be easy to clear. We believe what thecompany wrote in its earnings release
 – 
 
We see nothing new or particularly concerning thisquarter to date in our member viewing, acquisition and retention. All are healthy.
” – 
and have no
reason to doubt Netflix’s guidance of “about 7 million...domestic streaming net adds” for al
l of 2012.On the competitive front, there is no shortage of announcements and activity from variouscompanies like Hulu, HBO, Verizon, Comcast and Amazon, but we are not seeing any impact on
 Netflix’s business – 
for now.
We’
re keeping a close eye on this.Speaking of Hulu, we read with interest the news last week that one of its original owners, Providence Equity Partners, is selling its 10% stake to current owners ABC and News Corp. forabout $200 million, which would value Hulu at approximately $2 billion. According to the
article, Hulu “
has become a profitable business with tens of millions of users and two millionpaying subscribers
.”
 Subscriber-based businesses are often valued and compared to one another based on marketvaluation per paid subscriber, so for Hulu the math is easy: a $2 billion valuation divided by 2million paid subscribers = $1,000/sub.
 
-3-
Netflix, in contrast, has 27.1 million paid subs and has a market cap of $4.64 billion, or$164/sub.
Are Hulu’s subs really worth
more than
six times
 
 Netflix’s?
Not a chance. In fact,we
’d argue that Netflix is a
 far 
better business and its subs should be worth
more
.
SanDisk
SanDisk reported poor Q1 earnings, with revenue down 6.8% and earnings per share down 50%,and gave weak guidance for Q2 as well. Down to $37 with more than $15/share in net cash, thestock appea
rs cheap, but we haven’t bought more as we continue to analyze the situation.
If we
develop conviction that the company’s problems are short
-
term in nature, we’ll add to our 
position; but if we conclude that our investment thesis is wrong and that this historically cyclical
commodity business will remain so, then we’ll exit.
 
Grupo Prisa
There was no company-specific news about Grupo Prisa last month, but there was plenty of terrible country-specific news as more evidence emerged
that Spain (Grupo Prisa’s p
rimarymarket) is going through a severe and likely long-lasting recession
 – 
unemployment is now at
24.1%, even higher than Greece’s! Shame on us for not recognizing this risk, which of course
appears completely obvious in hindsight (which is always 20/20).Like SanDisk,
Grupo Prisa’s stock 
appears very cheap, but we are neither buying nor selling atthis point.
The company’s management and board have done an excellent job navigating the
crisis and refinancing its debt, so we think the stock has multi-bagger upside potential if Spainstarts to turn around, but we also recognize the many risk factors present, so we think the current3% position size is just right.
Presentation
We gave a presentation last Friday (posted at www.tilsonfunds.com/T2pres-4-12.pdf )at the Nexus conference in Dallas entitled:
 An Overview of the U.S. Economy and Housing Market,
Our View of the Stock Market, Why We’re Short Homebuilders, Our Top Holdings, and Our In
- Depth Analysis of Our Three Largest Positions: Berkshire Hathaway, Iridium and Howard  Hughes Corp
. Pages 21-28 are our most up-to-date slides on the housing market and pages 30-38
are why we’re short four homebuilders plus the ITB (though, to be clear, it’s not
super highconviction: all five are cumulatively less than a 5% short position, with SPF nearly half of it).Also new are the slides on South Street Seaport (pages 105-110), which is going to be a grandslam for Howard Hughes.
Conclusion
 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 Tongue

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