Black Bear Value Partners, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of -1.5% was recorded by the fund for the second quarter of 2021, trailing the S&P 500 Index, and the HFRI Index that delivered a +8.3% and +6.2% return respectively for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Black Bear Value Partners, the fund mentioned Nintendo Co., Ltd. (NYSE: NTDOY), and discussed its stance on the firm. Nintendo Co., Ltd. is a Kyoto, Kyoto-based consumer electronics company, that currently has a $68.4 billion market capitalization. NTDOY delivered a 19.37% return since the beginning of the year, extending its 12-month revenues to 47.29%. The stock closed at $72.10 per share on July 12, 2021.
Here is what Black Bear Value Partners has to say about Nintendo Co., Ltd. in its Q2 2021 investor letter:
“Nintendo is a Japanese consumer electronics and video game company that was founded in 1889. Many of their characters and intellectual property are well known around the world (Mario and Luigi, Zelda etc.) Historically the video game business had very high peaks and very low lows. As new consoles would come to market there would be a rush to purchase them along with new games to play. As those consoles got older the demand would decline and the companies would enter a fallow period until their new batch of consoles/games came out. As a result, many analysts/investors tried predicting and investing based on their forecasts of console/game sales over the short term. This seems like predicting the unpredictable. However, this kind of cyclical boom/bust hit-driven business model had very little appeal to me, and I harbored much of that negative bias as I began to poke around the idea. As I discovered, some things have changed and improved for Nintendo.
The biggest and most durable change is the increase in digital adoption. The physical hardware market is low margin…digital is the opposite. As customers start using more and more of their digital product the margins increase dramatically. This could be morphing into a very high-margin razor/razor blade model as customers continue to purchase new games digitally on a more mature console. The net result of this is higher and more stable earnings. Add in the possibility for more of a subscription model to gaming and you could have a much more enduring high-margin business model as opposed to a boom-bust console driven business model.
Other areas of potential upside include using their IP for non-gaming ventures such as Super Nintendo World at Universal Studios in Japan. Nintendo also has underlying equity interests in businesses that are on their balance sheet but not accounted for on a free-cash-flow valuation basis (Pokemon).
Nintendo earns 20+% returns on capital, has no debt and a healthy amount of cash. We own it somewhere around a 6-8% cash-flow yield with a lot of upside levers working on their behalf. The strength of their balance sheet allows us to sleep at night in the meantime.”
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Based on our calculations, Nintendo Co., Ltd. (NYSE: NTDOY) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. NTDOY delivered a 0.91% 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.
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Disclosure: None. This article is originally published at Insider Monkey.