Whitney R. Tilson phone: 212 277 5606
Managing Partner WTilson@KaseCapital.com
April 3, 2013
Our fund is off to a solid start to the year, rising 6.7% in the first quarter vs. 10.6% for the S&P
and 11.9% for the Dow.
The fund s returns were driven by nice gains across most of the long portfolio, with a special
mention for Netflix, which more than doubled. Here is the Q1 performance of all 11 long stock
positions in the fund as of the beginning of the year (disclosed in the 2012 annual letter), plus
two new stocks I bought during the quarter (ranked in descending order of current size):
1. AIG 10.0%
2. Berkshire Hathaway 16.6%
3. Howard Hughes 14.8%
4. Deckers 34.9%*
5. Citigroup 11.8%
6. Goldman Sachs 15.4%
7. Netflix 104.4%
8. Canadian Pacific 28.4%
9. dELiA*s -15.4%
10. Iridium -10.3%
11. Grupo Prisa (B) 16.0%
12. Sears Hometown & Outlet Stores -5.2%*
13. Spark Networks -9.7%
* Performance since the position was established. Note that this excludes two private placements in Spencer Holdings and the
Japan side fund.
The two headwinds to the portfolio during the quarter (both discussed below) were cash, which
comprised about a third of the fund, and the short book, which averaged approximately 20% of
the fund. The fund is currently 66% long and 22% short.
Two New Long Positions: Deckers and Sears Hometown & Outlet Stores
I m pleased that I was able to identify two compelling new stocks to add to our portfolio during
the quarter a satisfactory pace in light of the complacent market in which the major indices are
near all-time highs.
Deckers is best known for its UGG brand, which accounted for 95% of sales last quarter. The
brand has been around since California surfers started wearing UGG boots in the late 1970s, but
UGGs really became a fashion trend (some would say a fad) a few years ago, which resulted in
the stock soaring nearly 10-fold from early 2009 to late 2011, peaking at close to $120. And then
Carnegie Hall Tower, 152 West 57th Street, 46th Floor, New York, NY 10019
the bottom fell out. The company reported steadily worse results as 2012 progressed and the
stock plunged to under $30 by the end of last October.
Even at its low point, however, the company was not only profitable, but had double-digit profit
margins, high returns on equity, and a strong balance sheet, so the question for investors was: are
UGGs a fad that will largely disappear (think Heelys), as the many people who are short the
stock believe (short interest was 40.5% of the float as of 3/15/13), or will UGGs prove to be an
enduring brand that s simply encountered some short-term turbulence? If so, then the stock
which was around $40 when I was analyzing the company two months ago trading at just over
10x depressed earnings, was a bargain.
The company attributed its weak results to three primary factors:
1. One of the warmest winters ever in 2011;
2. The price of sheepskin (the primary raw material in UGG boots) rising 80% due to floods
in Australia that decimated sheep herds; and
3. The economic weakness in Europe.
These are all true statements but was the company just making excuses to cover up the fact that
the fad had passed and nobody wanted to wear UGGs anymore? To answer this question, I
designed a survey (click here to see it) and sent it out to my various email lists. The 274
responses (posted here) I received were very revealing:
60% of respondents owned UGGs classic sheepskin boots, 48% owned more than one
UGGs product, and 78% had owned an UGGs product for at least two years.
When asked how highly they would recommend UGGs to a friend (on a scale of 1-10),
25% gave UGGs a perfect 10 and an additional 45% rated UGGs 7-9. 70% said they were
certain (25%) or likely (35%) to buy UGGs again. These are satisfied customers.
When asked whether they view their Uggs more as a fashion product or a
utilitarian/functional product, 74% said the latter, and when asked how their views
about Uggs changed over the past year, 65% said no change, 20% said more positive,
and only 15% said more negative. These responses are not consistent with a fad product
that s going away.
The comments in the open response part of the survey also reinforced my thesis that most
customers love their UGGs and would continue to buy, wear, and recommend them.
The survey was the final piece of evidence that confirmed my investment thesis that, while
UGGs may have become faddish for a while, the core brand and products were strong and
Deckers was mostly suffering from short-term issues, so I purchased the stock, which has risen
34.9% in the two months since then.
Sears Hometown & Outlet Stores
I also added Sears Hometown & Outlet Stores (SHOS) to the portfolio during the quarter. Last
October, Sears Holdings spun off SHOS, which is comprised of four divisions:
Sears Outlet: 127 warehouse style stores, all but three of which are company owned,
selling mostly scratched, dented, refurbished and old model appliances at steep discounts;
$564 million in sales and $42.1 million in operating income in 2012;
Sears Hometown Stores: 943 stores, all but one operated by franchisees, selling mostly
appliances, lawn & garden, and tools, typically in small, rural markets (average store
size: 8,500 sq. ft.) in all 50 states, Puerto Rico and Bermuda;
Sears Hardware Stores: 90 stores in 16 states, 33 company owned, 57 franchised,
selling similar merchandise as Hometown stores, but in bigger markets (average store
size: 28,000 sq. ft.), similar to ACE Hardware;
Sears Home Appliance Showrooms: 85 stores in 22 states, 27 company owned, 58
franchised, selling strictly appliances in a 5,000 sq. ft. showroom.
The latter three, under the Sears Hometown and Hardware segment, had sales of $1.9 billion and
operating income of $57.4 million in 2012.
This might not sound like a good business, but keep in mind that 85% of the company s 1,245
total stores are franchised, meaning the franchisees put up the money and do the hard work,
while the SHOS simply collects a royalty on all this effort an excellent business.
SHOS has strong growth potential management has indicated that the company could more
than double its store count to 3,000 stores. As an independent company, management now has
appropriate incentives, and SHOS is also benefitting from Sears closing large numbers of its
mainline stores (it closed 1,462 stores in FY 2012, 36% of its total). In fact, given that Sears s
controlling shareholder and CEO, Eddie Lampert, owns a 62% stake in SHOS (larger than
Lampert s 56% stake in Sears itself), it appears that Lampert may be quietly adopting a strategy
of closing unprofitable full-size Sears stores and effectively transferring to SHOS the sales (and
profits) of Sears s best businesses, its appliances and other hard goods sold under top brands like
Kenmore and Craftsman. If so, this will provide a substantial long-term tailwind to SHOS, as
Sears had $40 billion in sales in 2012 vs. only $2.5 billion for SHOS.
If SHOS is such an attractive company, why is it only my 12th largest position (approximately
2%)? The answer is valuation. By the time I discovered this investment, the stock had run up
from under $30 at the time of the spinoff to over $40, leaving less margin of safety. At its current
price of $40, the company has an enterprise value of around $1 billion vs. 2012 operating income
of $99.5 million and adjusted EBITDA of $109.8 million. I think earnings will grow
substantially in years to come, so 9x trailing EBITDA is a reasonable multiple, but it s not cheap
enough to make it a full position so I ve established a starter position and am hoping the market
gives me the opportunity at some point to buy a lot more at a better price.
Here is the first quarter performance of the three shorts I disclosed in my 2012 annual letter:
1. InterOil 37.1%
2. K-12 18.0%
3. Nokia -17.0%
Their performance was quite representative of the 10 stocks that comprise our current short book
while a few worked, most ran up along with the market. I remain highly confident that every
one of our short positions is vastly overvalued and there are catalysts that will cause the stocks to
tumble, but over a short period when the market is ripping upward and complacency abounds,
our short book is going to be a headwind.
Thoughts on Q1 Performance, Risks, and the Sustainability of Corporate Profit M argins
In the first sentence of this letter, I describe our Q1 performance as solid. In light of the fact
that our fund trailed the major indices, some might challenge this view, so allow me to explain.
First and foremost, my goal is to preserve capital and, secondly, to earn a satisfactory rate of
return. I achieved both of these objectives in Q1 hence the word solid. In general, our fund
will likely not keep up with the market when it is rising rapidly because I usually hold some cash
and always have a decent-sized short book.
This is not an ideal environment for a value investor like me because to find wonderful bargains
it helps to have some distress in the market or at least some area of the market but there s
very little of this today. The major indices are at or near all-time highs and, for example, the
VIX, a volatility measure of the S&P 500, dropped 30% during the first quarter. Nevertheless,
I spend almost all of my time doing bottoms-up analysis of companies and industries, but as I
construct the overall portfolio and determine how aggressively or conservatively to position the
fund, I am guided by Buffett s simple maxim: Be fearful when others are greedy and greedy
when others are fearful.
ck market bubble (the bond market is
another matter!), but our fund is quite conservatively positioned right now because valuations are
full, complacency is high, and bargains are scarce and there are plenty of things that could
change this. In addition to the usual risk factors (a tepid economy recovery in the U.S., possibly
dependent on unsustainable money printing and deficit spending; the ongoing recession in
Europe; a potential mother-of-all-real-estate/infrastructure bubbles bursting in China; and a
bankrupt Japan), who was even thinking about the risks associated with Cyprus or war breaking
out on the Korean Peninsula until very recently? Donald Rumsfeld
The critical question for U.S. stocks is whether corporate profit margins can remain at today s
all-time-high levels. This chart shows profit margins (before depreciation, interest, and tax, as a
percent of output) going back to 1929:
As you can see, historically, when margins have peaked, they ve soon reverted to the mean. If
this happens again, stocks could be in for some rough sledding. If so, I believe we are well
positioned to take advantage due to our significant cash balance and relatively low market
Appendix A. In addition, our latest Form ADV is posted at: www.tilsonfunds.com/ADV.pdf.
Thank you for your confidence and support. If you have any comments or questions, please call
me anytime on my cell phone at (646) 258-0687.
The unaudited return for the Kase Fund versus major benchmarks (including reinvested
Q1 Since Inception
Kase Fund net 6.7% 124.7%
S&P 500 10.6% 65.7%
Dow 11.9% 121.6%
Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The Kase Fund
was launched on 1/1/99.
Kase Fund Performance (Net) Since I nception
(% ) 80
Jan-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 Jan-13
Kase Fund S& P 500
Past performance is not indicative of future results.
Kase Fund M onthly Performance (Net) Since I nception
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P Kase S& P
Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500
January 7.8 4.1 -6.3 -5.0 4.4 3.6 -1.8 -1.5 -5.5 -2.6 4.7 1.8 1.1 -2.4 1.9 2.7 2.4 1.7 1.9 -5.9 -3.6 -8.4 -1.6 -3.6 -2.8 2.4 12.6 4.5 4.5 5.2
February -2.9 -3.1 6.2 -1.9 -0.6 -9.2 -1.1 -2.0 2.9 -1.6 7.0 1.5 2.1 2.0 -3.1 0.2 -3.3 -2.1 -6.9 -3.3 -8.9 -10.8 7.3 3.1 4.1 3.4 -0.8 4.3 0.8 1.4
M arch 4.1 4.0 10.3 9.8 -2.6 -6.4 3.0 3.7 1.4 0.9 3.9 -1.5 3.9 -1.7 3.9 1.3 -0.8 1.1 -2.3 -0.5 2.9 9.0 4.6 6.0 -4.1 0.0 10.9 3.3 1.3 3.8
April 2.1 3.7 -5.1 -3.0 5.1 7.8 -0.2 -6.0 10.5 8.2 2.4 -1.5 0.6 -1.9 2.2 1.4 4.4 4.6 -0.9 4.9 20.1 9.6 -2.1 1.6 1.9 3.0 1.3 -0.6
M ay -5.7 -2.5 -2.8 -2.0 1.8 0.6 0.0 -0.8 6.6 5.3 -1.4 1.4 -2.6 3.2 1.8 -2.9 2.5 3.3 7.9 1.2 8.1 5.5 -2.6 -8.0 -1.9 -1.1 -13.6 -6.0
June 2.2 5.8 4.1 2.4 4.6 -2.4 -7.3 -7.1 2.9 1.3 0.1 1.9 -3.1 0.1 -0.2 0.2 -3.0 -1.5 -1.2 -8.4 -5.0 0.2 4.5 -5.2 -2.4 -1.7 0.5 4.1
July -0.7 -3.2 -3.6 -1.6 -1.1 -1.0 -5.0 -7.9 2.3 1.7 4.6 -3.4 0.5 3.7 -0.9 0.7 -5.4 -3.0 -2.5 -0.9 6.8 7.6 3.5 7.0 -4.6 -2.0 0.2 1.4
August 4.1 -0.4 5.4 6.1 2.5 -6.3 -4.3 0.5 0.4 1.9 -0.9 0.4 -3.2 -1.0 2.9 2.3 1.7 1.5 -3.3 1.3 6.3 3.6 -1.5 -4.5 -13.9 -5.4 -7.2 2.3
September -3.3 -2.7 -7.2 -5.3 -6.1 -8.1 -5.4 -10.9 1.7 -1.0 -1.6 1.1 -1.5 0.8 5.0 2.6 -1.1 3.6 15.9 -9.1 5.9 3.7 1.7 8.9 -9.3 -7.0 0.0 2.6
October 8.1 6.4 -4.5 -0.3 -0.8 1.9 2.8 8.8 6.2 5.6 -0.4 1.5 3.5 -1.6 6.3 3.5 8.2 1.7 -12.5 -16.8 -1.9 -1.8 -1.7 3.8 7.0 10.9 1.6 -1.9
November 2.8 2.0 -1.5 -7.9 2.3 7.6 4.1 5.8 2.2 0.8 0.8 4.0 3.1 3.7 1.9 1.7 -3.6 -4.2 -8.9 -7.1 -1.2 6.0 -1.9 0.0 -0.6 -0.2 -4.5 0.6
December 9.8 5.9 2.3 0.5 6.5 0.9 -7.4 -5.8 -0.4 5.3 -0.2 3.4 -1.3 0.0 1.4 1.4 -4.3 -0.7 -4.0 1.1 5.5 1.9 0.5 6.7 0.1 1.0 0.1 0.9
31.0 21.0 -4.5 -9.1 16.5 -11.9 -22.2 -22.1 35.1 28.6 20.6 10.9 2.6 4.9 25.2 15.8 -3.2 5.5 -18.1 -37.0 37.1 26.5 10.5 15.1 -24.9 2.1 -1.7 16.0 6.7 10.6
Past performance is not indicative of future results.
Note: Returns in 2001, 2003, and 2009 reflect the benefit of the high-water mark, assuming an investor at inception.
PRI VACY POLI CY
Investment Manager (collectively, the Partnership ) collect, utilize and maintain nonpublic
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information includes name, address, nationality, tax identification number and financial and
investment qualifications; and transactions within the Partnership, including account balances,
investments and withdrawals.
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To service providers in connection with the administration and servicing of the
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Upon consent of an investor to release such information, including authorization to
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If you elect to opt-out and do not want us to share your non-public personal information other
than when required to perform normal services or when required by law, please contact us at:
Carnegie Hall Tower, 152 West 57th Street, 46th Floor, New York, New York 10019, Ph: (212)
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The Partnership s policy is to require that all employees, financial professionals and companies
providing services on its behalf keep client information confidential.
The Partnership maintains safeguards that comply with federal standards to protect investor
information. The Partnership restricts access to the personal and account information of investors
to those employees who need to know that information in the course of their job responsibilities.
Third parties with whom the Partnership shares investor information must agree to follow
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may disclose nonpublic personal information about a former investor to the same extent as for a
The T2 Accredited Fund, LP (dba the Kase Fund) (the Fund ) commenced operations on January 1,
1999. The Fund s investment objective is to achieve long-term after-tax capital appreciation
commensurate with moderate risk, primarily by investing with a long-term perspective in a concentrated
portfolio of U.S. stocks. In carrying out the Partnership s investment objective, the Investment Manager,
T2 Partners Management, LP (dba Kase Capital Management), seeks to buy stocks at a steep discount to
intrinsic value such that there is low risk of capital loss and significant upside potential. The primary
focus of the Investment Manager is on the long-term fortunes of the companies in the Partnership s
portfolio or which are otherwise followed by the Investment Manager, relative to the prices of their
There is no assurance that any securities discussed herein will remain in Fund s portfolio at the time you
receive this report or that securities sold have not been repurchased. The securities discussed may not
represent the Fund s entire portfolio and in the aggregate may represent only a small percentage of an
account s portfolio holdings. The material presented is compiled from sources believed to be reliable and
honest, but accuracy cannot be guaranteed.
It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will
prove to be profitable, or that the investment recommendations or decisions we make in the future will be
profitable or will equal the investment performance of the securities discussed herein. All
recommendations within the preceding 12 months or applicable period are available upon request. Past
results are no guarantee of future results and no representation is made that an investor will or is likely to
achieve results similar to those shown. All investments involve risk including the loss of principal.
Performance results shown are for the Kase Fund and are presented net of all fees, including management
and incentive fees, brokerage commissions, administrative expenses, and other operating expenses of the
Fund. Net performance includes the reinvestment of all dividends, interest, and capital gains.
The fee schedule for the Investment Manager includes a 1.5% annual management fee and a 20%
incentive fee allocation. For periods prior to June 1, 2004 and after July 1, 2012, the Investment
Manager s fee schedule included a 1% annual management fee and a 20% incentive fee allocation. In
practice, the incentive fee is earned on an annual, not monthly, basis or upon a withdrawal from the
Fund. Because some investors may have different fee arrangements and depending on the timing of a
specific investment, net performance for an individual investor may vary from the net performance as
The return of the S&P 500 and other indices are included in the presentation. The volatility of these
indices may be materially different from the volatility in the Fund. In addition, the Fund s holdings differ
significantly from the securities that comprise the indices. The indices have not been selected to represent
appropriate benchmarks to compare an investor s performance, but rather are disclosed to allow for
comparison of the investor s performance to that of certain well-known and widely recognized indices.
You cannot invest directly in these indices.
This document is confidential and may not be distributed without the consent of the Investment Manager
and does not constitute an offer to sell or the solicitation of an offer to purchase any security or
investment product. Any such offer or solicitation may only be made by means of delivery of an approved
confidential offering memorandum.