Greenstone Value Opportunity Fund, LP   


September 2010 
Dear Partner, Greenstone’s estimated, unaudited performance through September 30, 2010 is presented below:
2008 2009 2010 + 0.54% + 0.22% + 6.20% + 4.00% - 5.25% - 6.38% + 4.24% + 0.30% + 3.17% Month Ending 9/30/2010 Greenstone VOF* S & P 500 Nasdaq Composite Russell 2000 + 3.17% + 8.92% + 12.18% + 12.46% Quarter to Date + 7.71% + 11.29% + 12.62% + 11.29% Year to Date + 6.83% + 3.88% + 5.17% + 9.11% Last 12 Months + 11.71% + 10.15% + 12.74% + 13.34%

January + 2.81% February - 2.93% March + 9.04% April + 5.36% May + 4.03% June + 0.42% July - 0.12% August + 5.96% September + 2.18% October + 1.47% - 1.35% November + 1.87% + 1.00% December - 0.87% + 4.88% YTD + 2.46% + 36.46%

Cumulative Since Inception + 50.29% + 2.00% + 15.34% + 2.53%
S&P 500 7.10% 0.14

+ 6.83%

Standard Deviation Sharpe Ratio (0.50%)

3.60% 1.76

*Returns are net of all fees and expenses for the fund as a w hole. Individual returns may vary due to timing and other differences. Inception date is October 1, 2008.


For the month of September, Greenstone returned +3.17% net of fees and expenses, which compares to the S&P at +8.92%, the Nasdaq at + 12.18%, and the Russell at +12.46%. We feel the Fund’s riskadjusted performance for the month was acceptable considering a net long exposure of around 52%, and a reasonable cash position. Our Sharpe ratio improved to 1.76 (from 1.52 at the end of Q2) versus the S&P at 0.14. During the third quarter, the S&P was up +11.29%, the Nasdaq was up +12.62%, and the Russell was up +11.29%, which compares to Greenstone at +7.71% net of fees and expenses. If we could sum up the third quarter in one word it would be ‘sentiment’. As managers and custodians we try, and hopefully manage, to remain relatively emotionless, which is important considering our view that the market could remain range-bound for the next several years. In contrast, the third quarter proved to have wild swings in market sentiment. Investors have flipflopped dramatically, from a fearful and anxious little boy one minute (August) to an exuberant girl skipping through the fields without care the next minute (September). Even the financial press has coined a new phrase to describe the market action: risk on/risk off. In other words, like flipping a light switch, investors either want risky assets (stocks, risk on), or they don’t (fixed income, risk off). These wild swings, with little to no room for a middle ground, are a little too exaggerated for us. With a market that is either extremely bullish or extremely bearish (i.e. no middle ground), it appeared to us as though we entered a period of being short-term oversold during the quarter. We’ve expressed it before, but high frequency trading and the sheer number of quantitative participants in the market have helped exasperate these wild swings in the broad indices, which has in turn impacted the underlying sentiment. We tried to take advantage of these volatile swings over the quarter, picking up companies trading at low multiples of free cash flow or tangible assets. We may not know 3949 Maple Avenue, Suite 480, Dallas, Texas 75219

when the market will eventually recognize the value for many of our investments, but we do feel very strongly about knowing where the downside is. This allows us to price in the appropriate upside/downside risk in order to take a position. More recently, as the markets rallied hard in September, we began trimming some of our long positions that had incredible upside moves, and we have been adding new short positions. Going forward we will continue to decrease our long exposure if the market heads toward earlier year highs of 1218 on the S&P. We’d likely bring the Fund’s net long exposure down toward zero as the S&P approaches this 1200-ish level. In spite of the chatter about the Fed’s plans to implement QEII, and how this might continue to drive up the prices for risk assets, and in spite of how good the technicals may look, it does not make fundamental sense to us that the market should trade at a premium to the long-term average P/E multiple in the current environment. At the end of the day, we are in a global economic environment of slow growth, high unemployment, and historic uncertainty, and valuations for stocks must come back to some multiple of earnings or cash flow. Above 1200 on the S&P, it is our opinion that stocks will be trading at a significant premium to historical averages, and we plan to position the portfolio accordingly.

Portfolio In terms of diversification within the fund, no industry makes up more than 18.5% of AUM, only three industries are above 10% (Energy, Technology, and Industrials), and our largest individual position is no more than 9.5% of AUM. It is also interesting to point out that our top ten positions (which are 68% of our long portfolio) generate more than 50% of their underlying individual company revenues in countries outside of the mainland United States. Large cap and mid cap companies make up roughly 25% of the long portfolio. At quarter’s end we had net long exposure of approximately 52%. We have approximately 70% gross long equity exposure, with short equity exposure of 18% (delta adjusted). We have been asked by several people, mainly institutions, why we sometimes hold such high levels of cash (approximately 30%)? Our response is generally shaped like this: “We like holding a cushion of cash, leaving ample room to participate in a market correction.” This is because a) we think the environment requires it, b) we want to take advantage of new opportunities without having to sell other positions or lever the fund, and c) even though we now have a two-year track record, our style and personality deem it preferable for us to provide some margin of safety for us and our limited partners. In short, while we may underperform in an up market, it is our goal to outperform in declining markets, and which should allow us to outperform over the long-term. Basically, we do not view it as a sin to hold cash.

3949 Maple Avenue, Suite 480, Dallas, Texas 75219

Largest Positions: Our 5 largest positions at September 30th, as measured by absolute value of capital deployed at market, are presented in the following table:
Security China Ceramics Co. Ltd. Ticker CCLTF % of NAV 9.50% Comment Chinese manufacturer of ceramic tiles for Tier II & III housing. Stock trades for < 2X FCF and EV/EBITDA, and around 1X earnings. 20%+ growth potential. Warrants exchanged 4:1 for common stock in Sep. Offshore driller with 60 rigs. Stock trades at 5x EV/Ebitda and 7.5x Mkt Cap/FCF. Pristine balance sheet, stock buyback program in place. Recent acquisition of Frontier Drilling strengthens deepwater program. Parent of Hawaiian Airlines. Trading at < 2X Ebitda & 3.7X FCF. Company has net cash, and a reasonable fuel hedging program. Recently implemented a stock buyback program. Expanding destinations to Asia/Pacific. Company operates a fleet of double hull crude tankers. Stock trades at less than tangible book value. Significant cash position, and will use FCF to enhance balance sheet or make acquisitions. 10% dividend yield. An ETF that tracks market volatility with short-term futures contracts on the CBOE Volatility Index (VIX). Generally trades in an inverse relationship with the S&P, and is a position that mirrors short exposure.

Noble Corporation



Hawaiian Holdings, Inc.



DHT Holdings Inc. iPath S&P 500 VIX Short-Term Futures





Credit We currently hold no long credit positions. As fixed income securities have been bid up by investors looking for the “safety” of yield, prices have risen to levels where there is more downside than upside, in our view. While the Fed’s plan for further quantitative easing to stimulate the economy may generate continued demand for yield securities, potentially for quite some time, we feel the music will stop at some point and prices could come crashing down as everyone heads for the door at once. In addition, dividend yields on solid, mid and large-cap equities are in many cases equal to, and sometimes exceeding, the yields on the same issuer’s bonds. When this happens, we believe the equity instruments generally offer a superior risk/return proposition for investors searching for income. Because of the current yield environment, we have started putting on some small short positions in the credit space, primarily on 10 and 20-year Treasuries.

Equities Greenstone expects to generate profit from Companies in our portfolio because they produce free cash flow in their underlying businesses. This in turn will eventually be reflected in a higher share price, or distributed as dividends to us as holders. The greatest challenge for us is to maintain the requisite patience, discipline and judgment to buy only when prices and multiples are attractive and to sell when they reach their predetermined intrinsic value. While this is a straightforward strategy, it requires a great deal of hard work, unusually strict discipline, and longer-term investment horizon than other investors.

3949 Maple Avenue, Suite 480, Dallas, Texas 75219

Currently, several of our larger equity positions have yet to prove out our underlying theses (see discussion of patience in the above paragraph). In fact we feel our top five positions have not even begun to work. But if Greenstone can follow a consistently disciplined and rigorous approach, we feel comfortable over time the underlying theses will play out, and the returns will come. Outside of our top five positions, we did have several investments work for us over the course of the third quarter: • Sauer-Danfoss (SHS) – we sold our whole position, primarily because of the quick run up of the stock. Farm equipment and machinery should continue to do well (1. see 2010 outlook for crop yields and prices, 2. historically high farmer cash receipts and low debt/asset levels), and is definitely at or near the trough of the business cycle. Having said this, we are not sure how sticky the shareholder base is (i.e. other hedge fund holders) outside of Danfoss’s majority position. In addition, our cost basis was well below Danfoss’s $14 bid earlier this year, and we felt the need to take the profits given to us. Superior Industries (SUP) – we have halved the position. Given our fundamental diligence and conversations with management, we believe the company should report good 3Q10 earnings, and Alcoa earnings last week reaffirms a positive outlook for the auto/aluminum wheel rim sector. However, the position was getting large and we like to take profit considering a 40%+ gain in a relatively short period of time. Lynas Corporation (LYC.AX) - Rare earth mineral gem (pun intended) that we’ve traded around since our inception. It is interesting to now see Morgan Stanley and JP Morgan own 20%+ of the company. We sold down 50% of our position in the recent run up, and because the company recently presented in NYC. Given the company’s cash needs before full production, perhaps there is a future financing in the cards, which might offer another opportunity to get back in at lower levels.

Along with the above, we initiated several new positions over the quarter, such as TTT, BSQR, NOOF, and MSFT, to name a few. Some of these positions are particularly small and illiquid, but please know that all but one of our small/illiquid positions is sized appropriately in the portfolio. We also feel the net cash/share for TTT, BSQR, and NOOF give some underlying floor to these micro names. Microsoft (MSFT) does not fit into the small/illiquid category, and is a position we would feel very comfortable taking to 5%+ of AUM at the right purchase price. We talked about the upgrade cycle and Windows 7 extensively in our July 2009 letter (if you want to see this, let us know). In David Letterman style, here are our top 10 reasons why we like MSFT: #10 #9 #8 #7 we still believe the upgrade cycle has barely begun, and we could see a software tax credit. the valuation is roughly 6X Ebitda and FCF (consensus 2010 estimates of $25 billion in FCF). a dividend yield of approximately 2.5%, and this could see further increases once the dividend taxation levels become clearer. the company has a phenomenal balance sheet. 3949 Maple Avenue, Suite 480, Dallas, Texas 75219

#6 #5 #4

Xbox Live membership is now over 25 million subscribing members. with the YHOO search relationship, MSFT has realized it is the only natural public buyer and can continue collaborating without being forced to “pay up.” Windows phone 7 is getting great reviews and we expect Windows tablets in 2011 will get similar reviews and demand as we shift to being a more handheld and tablet-focused world. enterprise and PC spending continue to grow. ex-CFO and ‘Kiwi’ Chris Liddell built out a world class finance team and we’ve been impressed by the opportune tapping of the credit markets; with the recent issuance of $6 billion in long-term debt we could see an increase in the pace and size of the stock buyback and dividend programs.

#3 #2

and, drum roll, please……………… #1 We’d also argue that the stock has some margin of safety in a declining market with funds hiding in the balance sheet/name (think XOM during the 2008-09 crisis).

Shorts: Greenstone is structured as a long / short fund primarily because we are risk averse, and preservation of capital is the cornerstone of our investment philosophy. We try intently to avoid losses; consequently we have the responsibility to structure the portfolio and position ourselves to survive and even prosper under any market direction. As a result, we have begun increasing our number of short positions and our overall short exposure as the market has crept upwards through the 1150 level on the S&P. VXX, which is a new “short” position we put on late in the third quarter, offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied forward volatility of the S&P 500 index. Essentially we’re betting that volatility has some floor in this environment, and that it is highly likely that we get a reasonable spike in volatility going forward. If we look at a 4-year chart of the VIX, we see spikes from 20 to 30, or essentially a 50% return when volatility begins to increase. With this form of protection, we feel there is some downside protection, because volatility is clearly not going to zero given the current environment we are in. In comparison, outright short positions theoretically have unlimited upside (i.e. downside risk). We feel a position in VXX, or in VXZ (the medium-term futures ETF), while not perfectly correlated to the VIX, will provide us some downside projection when fear creeps back into the market, and the market turns south again. Some individual shorts currently on the books include CPTS, CDZI, MTN, FXY, TLT, and IWM. Vail Resorts (MTN), which operates ski resorts and luxury hotels, is a new short that we have recently put on. This is primarily due to what we found in the last several years of 10-Ks (last K filed 9/23/10), where we note 40%+ increases in defaults on new units, real estate sales were off 80% in 2008, and 60%-70% on 2009, and real estate held for sale is up 50%+ year-over-year. The company also has high fixed costs, labor, and maintenance capex, primarily because of weather and 3949 Maple Avenue, Suite 480, Dallas, Texas 75219

the location of their plant and property. We also don’t feel that the company has a high degree of pricing power in the sale of tickets, no matter how you package the sales programs. The current valuation is more than 9X Ebitda, 18X FCF, and the company has a tangible book of less than $30/share. When discussing valuation, we also note that forward Ebitda estimates from analysts, and even the company’s Ebitda guidance, are below the $221 million 3-year average we use in our model. The risk to our short is the run-off in the company’s construction capex, or increased real estate sales. Given these risks, we plan to scale into the short in several transactions. However, even though borrowing rates are at unprecedented lows, we wonder how many people are thinking about adding a vacation home, given near-term macroeconomic uncertainty and a 26-year high in unemployment.

Housekeeping We’re visiting New York and Baltimore next week, meeting with existing and potential new limited partner investors. As we’ve mentioned in past, word of mouth is our best form of introduction. If you feel there is anyone we should meet on our East Coast travels, please let us know. As for an update on our offshore fund, we had our first New Zealand institution commit to the fund starting November 1. We are extremely happy to have them on board. Both New Zealand and Australian currencies have had a great run against the US dollar and are at yearly highs, with the Australian dollar at almost par with the United States. We’d encourage others who have been contemplating investing in the offshore fund to use these multi-year currency highs to your advantage. And, finally………………GO RANGERS!!!!!!!!! Once again we thank you for the trust your investment in Greenstone represents. If you have any questions, comments, or ideas you’d like us to look at, please feel free to call Tim Stobaugh at 214780-0975, or Chris White at 214-780-0986. Greenstone Value Opportunity Fund, LP is a long-biased, deep value fund that focuses on bottom-up fundamental research across capitalizations and asset classes. Our goal is to acquire securities trading at very low multiples of tangible assets or visible free cash flow.

3949 Maple Avenue, Suite 480, Dallas, Texas 75219

This report is provided to you on a confidential basis for informational purposes only. This report is not intended as an offer or solicitation for the purchase or sale of any interest in any fund sponsored by Greenstone Capital Management Partners, LP, including Greenstone Value Opportunity Fund, LP (the “Fund”). Such offer could only be made pursuant to the terms of a Confidential Private Placement Memorandum describing such offer. Interests in the Fund have not been filed or registered with, or approved or disapproved by, the Securities and Exchange Commission. The interests will be offered pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”), and applicable state securities laws for non-public offerings. Offerings and sales of interests in the Fund will be made solely to “accredited investors” as that term is defined in the Act. An investment in the Fund involves substantial risks and is suitable only for those persons who can bear the economic risk of the loss of their entire investment and who have limited need for liquidity in their entire investment. There can be no assurance that the Fund will achieve its investment objective. Past performance is not a guarantee of future results. This presentation is incomplete and does not include all of the information necessary for a decision to invest in the Fund. Historical performance and statistical information contained within this presentation is obtained and/or derived from sources thought to be accurate, but not guaranteed as to accuracy. Performance numbers are estimated based on a theoretical investment in Greenstone Value Opportunity Fund, LP. The return on the investment is calculated from the first day of each respective period until the last day of the respective period. All returns are compounded and include reinvestment of dividends and all other earnings. The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. It is weighted by market value, and its performance is thought to be representative of the stock market as a whole. The index selects its companies based upon their market size, liquidity, and sector. The index can not invest in short positions. The Nasdaq Composite is a stock market index of all of the common stocks and similar securities (e.g. ADRs, tracking stocks, limited partnership interests) listed on the NASDAQ stock market, meaning that it has over 3,000 components. It is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. Since both U.S. and nonU.S. companies are listed on the NASDAQ stock market, the index is not an exclusively U.S. index. The Russell 2000 Index is an index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 2000 Index offers investors access to the small-cap segment of the U.S. equity universe. The index can not invest in short positions. The returns and volatility of the indices displayed may be materially different than those of the Fund, and the Fund’s holdings may differ significantly from the securities that comprise the indices. The indices are disclosed to allow for comparisons to well-known and widely recognized indices, and may or may not be appropriate for performance comparisons. Investors cannot invest directly in indices. 3949 Maple Avenue, Suite 480, Dallas, Texas 75219