T2 Accredited Fund Letter to Investors-Nov 11

8/3/2019 T2 Accredited Fund Letter to Investors-Nov 11

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The GM Building, 767 Fifth Avenue, 18th Floor, New York, NY 10153

Whitney R. Tilson and Glenn H. Tongue phone: 212 386 7160

Managing Partners fax: 240 36

www.T2PartnersLLC.com

December 1, 2011

Dear Partner,

Our fund fell 0.6% in November vs. -0.2% for the S&P 500, +1.2% for the Dow and -2.3% forthe Nasdaq. Year to date, its down 25.0% vs. +1.1% for the S&P 500, +6.7% for the Dow and-0.5% for the Nasdaq.

On the long side, our three winners of note were Grupo Prisa (B shares) (18.9%), Iridium (stock11.8% and warrants 4.0%), and AB InBev (8.2%). These gains were more than offset by Netflix(-21.4%), Sears Canada (-16.7%), Citigroup (-13.0%), Goldman Sachs (-12.5%), and dELiA*s

(-10.7%).

Our short book did well during the month and is now in the black on the year (meaning that all ofour losses are on the long side). Our biggest winners in November were Career Education(-56.2%), Green Mountain Coffee Roasters (-19.4%), Nokia (-14.0%), Lululemon (-12.0%), ITTEducational Services (-11.3%), and Salesforce.com (-11.1%). Our only loser of note wasInterOil (+15.1%).

Tax Estimates

Tax estimates through the end of October will soon be available, so if you would like to receiveyours please email or call Kelli [email protected] (212) 386-7160.

Iridium

Iridiums stock jumped after the company reported very strong earnings on November 8th. Thecompany soundly beat analysts estimates and its own guidance for revenue, margins, EBITDA,and subscriber growth, with particular strength in both the machine-to-machine and legacycommercial voice product lines. Operational EBITDA margin hit a new high of 53.5% andmanagement raised its 2011 outlook for subscriber growth (up 25% year over year) andoperational EBITDA (up 20% year-over-year to ~$190 million). As an added bonus, thecompany said it would pay negligible cash taxes from 2011 to approximately 2020.

We think this earnings report should assuage the concerns weve heard from investors and

analysts, and are optimistic that it will prove to be a turning point for the stock, which we believeis deeply undervalued.

Grupo PrisaGrupo Prisa received a boost in November when Mexican billionaire Carlos Slim acquired a3.2% stake (see article in Appendix A). We think the stock will receive another boost in the nextfew weeks when the company announces that it has successfully refinanced its debt.
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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As background, this is what we wrote in ourSeptember letter:

Spain and Portugal are going through a crisis similar to the one the U.S. went through in late2008, so its not surprising that the stock of a company with 77% of its revenues in these twocountries is suffering. Its also not surprising that the companys operating performance has beenaffected by the deep recession in its primary markets, though the company is holding up

remarkably well in light of this: in the first half of 2011, revenues were down only 1.2%, adjustedEBITDA rose 3.6%, and the companys restructuring and cost-cutting is on track.

Prisa, however, needs to refinance its debt to give it breathing room to get through the currentcrisis. Our discussion with management and othersplus our own experienceleads us to havea high degree of confidence that Prisa will be able to do so successfully, but the uncertainty isweighing heavily on the stock.

Netflix and Green Mountain Coffee RoastersA couple of weeks ago we sent you an article we published entitled Why Were Long Netflixand Short Green Mountain Coffee Roasters, which is attached in Appendix B. Since then, both

stocks have moved against us, making them even more attractive in our opinion.

InterOil

Though we havent discussed it in some time, InterOil remains one of our largest short positions.Our bearish thesis is being validated as the company continues to miss deadlines on itsunrealistic promises, which will likely never be fulfilled, yet the company still has a $2.6 billionmarket cap. We believe intrinsic value is zero.

The government of Papua New Guinea appears to finally be waking up to this giganticpromotionbecause its demanded that InterOil find an internationally-recognized LNG[liquefied natural gas] operating partner, which is highly unlikely ever to occur, for

reasons that are well articulated inthis article, and will certainly not happen anytime inthe near future. InterOil bulls are hoping for apartnershipsimilar to the one between OilSearch and Exxon Mobil, but this deal tookfive years to reach final investment decision(FID). Real energy companies do not quickly make multi-billion dollar commitments inone of the worlds poorest, mostcorruptcountries, so even if InterOil has discovered amajor natural gas field (which we highly doubt), it will take years to sign a deal with aninternationally-recognized LNG operating partner, yet InterOil has promised this in thevery near future.

Here is a laundry list of what InterOil has promised by year-end:

- Secure FID with Mitsui for condensate stripping plant (CSP)- Secure FEED [front-end engineering design] and FID with Energy World Corp.

for modular LNG plant- Secure FEED and FID with Flex LNG on floating LNG plant- Sign definitive agreement with Noble Group for offtake of 1MTPA [million tons

per annum]- Secure internationally-recognized LNG operating partner- Sign additional Heads of Agreement for 1-2MTPA offtake
http://www.tilsonfunds.com/private/monthlyletter-sept11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-sept11.pdfhttp://www.tilsonfunds.com/private/monthlyletter-sept11.pdfhttp://seekingalpha.com/article/307654-3-problems-interoil-has-with-finding-a-major-partnerhttp://seekingalpha.com/article/307654-3-problems-interoil-has-with-finding-a-major-partnerhttp://seekingalpha.com/article/307654-3-problems-interoil-has-with-finding-a-major-partnerhttp://www.oilsearch.com/Our-Activities/PNG-LNG-Project.htmlhttp://www.oilsearch.com/Our-Activities/PNG-LNG-Project.htmlhttp://www.oilsearch.com/Our-Activities/PNG-LNG-Project.htmlhttp://cpi.transparency.org/cpi2011/results/http://cpi.transparency.org/cpi2011/results/http://cpi.transparency.org/cpi2011/results/http://cpi.transparency.org/cpi2011/results/http://www.oilsearch.com/Our-Activities/PNG-LNG-Project.htmlhttp://seekingalpha.com/article/307654-3-problems-interoil-has-with-finding-a-major-partnerhttp://www.tilsonfunds.com/private/monthlyletter-sept11.pdf


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With less than a month to go in the year, the only one of these that IOC has delivered on is thelast one, announcing recently that it had signed a Heads of Agreement (HOA) with GunvorSingapore Pte. Ltd., for the supply of one million tonnes per annum (mtpa) of liquefied naturalgas (LNG). However, Gunvor, according toWikipedia, has unsavory ties:

Following the majorWikileaksrelease of USState Departmentcables in November2010, it was reported by the LondonDaily Telegraph[17]that the wealth of Russian PrimeMinisterVladimir Putinis linked to a "secretive Swiss-based oil trading firm" calledGunvor. It said thatJohn Beyrle, theUnited StatesAmbassadorto theRussian Federationstated that close connections exist between Gunvor and the Russian Government and thathe reported: "its secretive ownership is rumoured to include prime minister Putin."

The whole point of an offtake agreement is so lenders will provide the billions of dollars that thisproject would costbut we question whether anyone would lend such a large amount of moneyagainst an agreement with a firm like Gunvor.

For the most in-depth expose of InterOil, see thisarticle, which links to 12 pages startinghere.For a more recent take, see thisarticle.

ConclusionThank you for your continued confidence in us and the fund. As always, we welcome yourcomments or questions, so please dont hesitate to call us at (212) 386-7160.

Sincerely yours,

Whitney Tilson and Glenn Tongue

The unaudited return for the T2 Accredited Fund versus major benchmarks (including reinvesteddividends) is:

November Year-to-Date Since Inception

T2 Accredited Fundnet -0.6% -25.0% 113.9%

S&P 500 -0.2% 1.1% 27.9%

Dow 1.2% 6.7% 76.8%

NASDAQ -2.3% -0.5% 24.2%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.
http://en.wikipedia.org/wiki/Gunvor_%28oil_trader%29http://en.wikipedia.org/wiki/Gunvor_%28oil_trader%29http://en.wikipedia.org/wiki/Gunvor_%28oil_trader%29http://en.wikipedia.org/wiki/Wikileakshttp://en.wikipedia.org/wiki/Wikileakshttp://en.wikipedia.org/wiki/Wikileakshttp://en.wikipedia.org/wiki/State_Departmenthttp://en.wikipedia.org/wiki/State_Departmenthttp://en.wikipedia.org/wiki/State_Departmenthttp://en.wikipedia.org/wiki/Daily_Telegraphhttp://en.wikipedia.org/wiki/Daily_Telegraphhttp://en.wikipedia.org/wiki/Daily_Telegraphhttp://en.wikipedia.org/wiki/Daily_Telegraphhttp://en.wikipedia.org/wiki/Vladimir_Putinhttp://en.wikipedia.org/wiki/Vladimir_Putinhttp://en.wikipedia.org/wiki/Vladimir_Putinhttp://en.wikipedia.org/wiki/John_Beyrlehttp://en.wikipedia.org/wiki/John_Beyrlehttp://en.wikipedia.org/wiki/John_Beyrlehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Ambassadorhttp://en.wikipedia.org/wiki/Ambassadorhttp://en.wikipedia.org/wiki/Ambassadorhttp://en.wikipedia.org/wiki/Russian_Federationhttp://en.wikipedia.org/wiki/Russian_Federationhttp://en.wikipedia.org/wiki/Russian_Federationhttp://www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4http://www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4http://www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4http://www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4#the-background-1http://www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4#the-background-1http://www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4#the-background-1http://seekingalpha.com/article/307939-has-interoil-turned-into-a-full-blown-scamhttp://seekingalpha.com/article/307939-has-interoil-turned-into-a-full-blown-scamhttp://seekingalpha.com/article/307939-has-interoil-turned-into-a-full-blown-scamhttp://seekingalpha.com/article/307939-has-interoil-turned-into-a-full-blown-scamhttp://www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4#the-background-1http://www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4http://en.wikipedia.org/wiki/Russian_Federationhttp://en.wikipedia.org/wiki/Ambassadorhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/John_Beyrlehttp://en.wikipedia.org/wiki/Vladimir_Putinhttp://en.wikipedia.org/wiki/Daily_Telegraphhttp://en.wikipedia.org/wiki/Daily_Telegraphhttp://en.wikipedia.org/wiki/State_Departmenthttp://en.wikipedia.org/wiki/Wikileakshttp://en.wikipedia.org/wiki/Gunvor_%28oil_trader%29


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T2 Accredited Fund Performance (Net) Since Inception

T2 Accredited Fund Monthly Performance (Net) Since Inception

Note: Returns in 2001, 2003, and 2009 reflect the benefit of the high-water mark, assuming an investor at inception.

-40

-20

0

20

40

60

80

100

120

140

160

180

200

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

(%)

T2 Accredited Fund S&P 500

T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P

AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 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

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

March 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

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

May -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

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

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

Augus t 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

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

Octobe r 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

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

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

YTD

TOTAL31.0 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 -25.0 1.1

20112005 2006 2007 2008 2009 20101999 2000 2001 2002 2003 2004


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Appendix A

WSJ,DEALS & DEAL MAKERS NOVEMBER 18, 2011, 9:50 A.M. ET

Slim Buys Stake in Spain's El Pais

ByDAVID ROMANAndANA GARCIA

MADRIDA company owned by Mexican billionaire Carlos Slim has acquired a 3.2% stake inSpain's media groupPromotora de InformacionesSA, in an unexpected move into one of theeconomies at the forefront of the euro zone's debt crisis.

Mr. Slim, one of the world's richest men, bought the stake through Inmobiliaria Carso SA de CV,a firm which he controls, according to regulatory filings released Friday. Mr. Slim has also used

Carso to build up a 8.1% stake inNew York TimesCo., the publisher of the New York-baseddaily.

Inmobiliaria Carso didn't disclose how much it paid for the stake. At current market prices, it isworth 12.5 million (about $17 million). The shares of Prisa, as the Spanish company is known,jumped on the news of Mr. Slim's purchase, and they last traded up 13% at 0.85, valuing theentire company at 383.2 million.

For Madrid-based Prisa, the country's largest media group, Mr. Slim's move is a much-neededshow of backing. The company, owner of Spain's best-selling newspaper El Pais, has beenrestructuring and shedding assets in recent years as it seeks to reduce its heavy debt load.

As in the case of the New York Times Co., Prisa's share price has struggled recently. El Pais hassuffered a dip in sales, as well as a revenue squeeze owing to lower advertising. El Pais sellsaround 370,000 newspapers a day.

Late last year, Prisa announced a plan to lay off 2,500 staff through the first quarter of 2012. Thiscame after U.S. investment fund Liberty Acquisition Holdings Corp. bought a majority stake inthe firm for some 650 million.

This is Mr. Slim's first foray in Spain's media sector, which until recently was flushed with cashowing to the country's long-running property bubble. The sector is now in dire straits because

large corporate and government advertisers have cut down on investments sharply, just asInternet competition and a drop in spending by highly indebted households has lowered demandfor newspapers.

Prisa, haunted by a series of bad investments, has been Spain's largest media company fordecades. Besides El Pais, it also owns Cadena Ser, Spain's largest radio network by audience,and the profitable publisher Santillana, which has a large foothold in Latin America.
http://professional.wsj.com/public/page/news-wall-street.htmlhttp://professional.wsj.com/public/page/news-wall-street.htmlhttp://professional.wsj.com/public/page/news-wall-street.htmlhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=PRIShttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=PRIShttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=PRIShttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=NYThttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=NYThttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=NYThttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=NYThttp://professional.wsj.com/public/quotes/main.html?type=djn&symbol=PRIShttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/article/SB10001424052970203699404577045943521378770.html?ru=yahoo&mod=yahoo_hs&mg=reno-secaucus-wsjhttp://professional.wsj.com/public/page/news-wall-street.html


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DISCLAIMER: THIS LETTER IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUEDTO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION,RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR PRIVATE FUND MANAGED BY T2 PARTNERS.

SUCH AN OFFER WILL BE MADE ONLY BY AN OFFERING MEMORANDUM, A COPY OF WHICH IS AVAILABLE TO QUALIFYINGPOTENTIAL INVESTORS UPON REQUEST. AN INVESTMENT IN A PRIVATE FUND IS NOT APPROPRIATE OR SUITABLE FOR ALLINVESTORS AND INVOLVES THE RISK OF LOSS.

INVESTMENT FUNDS MANAGED BY T2 PARTNERS OWN CALLS AND ARE LONG THE STOCK OF NETFLIX AND OWN PUTS ANDARE SHORT THE STOCK OF GREEN MOUNTAIN COFFEE ROASTERS.

WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THEINFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALLLIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED INTHIS PRESENTATION.

T2 PARTNERS MANAGEMENT LP IS A REGISTERED INVESTMENT ADVISOR. A COPY OF T2S DISCLOSURE STATEMENT (PART IIOF FORM ADV), WHICH CONTAINS MORE INFORMATION ABOUT THE ADVISOR, INCLUDING ITS INVESTMENT STRATEGIESAND OBJECTIVES, CAN BE OBTAINED BY CALLING (212) 386-7160.

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Appendix B

Why Were Long Netflix and Short

Green Mountain Coffee Roasters

November 13, 2011

T2 Partners LLCThe GM Building

767 Fifth Avenue, 18th FloorNew York, NY 10153

(212) [email protected]


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Netflix and Green Mountain Coffee Roasters are former market darlings whose stocks havecollapsed in recent months, wiping out a combined $23.2 billion in market capitalization from theirpeaks ($11.7 and $11.5 billion, respectively). By many metrics, both stocks appear cheap and theterrible headlines are attractive to value investors like us, who like to buy when others are selling ina panic. For example, BP was one of our biggest winners in 2010 (clickhereto read our analysis atthe time). The company, its CEO and the stock were all universally hated, with endless negative

headlines (similar to Netflix today), which provided a wonderful opportunity to buy the stock farbelow its intrinsic value. We love situations like this as long as were convinced that theres agood company and a cheap stock once one cuts through all of the noise.

So are Netflix and Green Mountain similar opportunities today? Yes and no. Weve analyzed bothcompanies carefully and concluded that Netflix is an attractive investment at todays price, so fundswe manage own the stock, but Green Mountain isnt, we remain short it. Allow us to explain why.

Similarities

The stocks of both Netflix and Green Mountain over the past three months have suffered similardeclines, as this chart shows:

In addition, the companies are remarkably similar in revenues and profitability over the past 12months:

Yet here the similarities end. Lets take a look at both companies.

NFLX GMCR

Revenues $2,925 $2,651

Operating Income $393 $369

Net Income $238 $201Operating Margin 13.4% 13.9%

Net Margin 8.1% 7.6%

All figures are in millions, over the trailing 12 months
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Netflix

When Netflix fell 35% in one day last month to under $80, we purchased it aggressively, not as ashort-term trade, but with a multi-year horizon. Over the next few quarters, the company will likelylose money as it invests in international growth and struggles to overcomes its missteps over thepast few months. Ultimately, however, we think Netflix is an excellent company and that themarket has overreacted to all of the recent negative news, thereby providing us the chance to own it

at a cheap price, for reasons we discussed in our Octoberletter to investors.

Green Mountain

In contrast, we are not only still short Green Mountains stock, but it remains our largest shortposition, even after last Thursdays 40% decline. Our reasons are superbly articulated in the 110-slidepresentationthat Greenlight Capitals David Einhorn gave on the company at the ValueInvesting Congress last month. Even if you dont have a position in the stock, its worth studyingas a brilliant piece of analytical work and its a must-read if you have a position. Although wewere already short Green Mountain, after seeing Einhorns presentation we concluded that it was aneven better short than we realized and increased the size of our investment, which has paid offhandsomely.

Theres a saying that pigs get fed and hogs get slaughtered, so why dont we cover our short andtake our profits? After all, the stock, at $43.71, is now trading at only 16.8x the midpoint of thecompanys guidance for next year, and at 12.5x Einhorns estimate of the companys long-termearnings power of $3.50 (see page 66 of hispresentation).

The answer is that we think only the first shoe has dropped and there are more to come.

Netflix vs. Green MountainHere is a summary of our concerns about Green Mountain, with a comparison to Netflix:

Green Mountain gave strong guidance for next quarter and year, which we think, in light of thecompanys performance last quarter, is too high and will need to be reset downward. Analystsremain bullish. In contrast, Netflix has given very poor and, we believe, conservative guidancethat we think the company can exceed, and analysts are significantly more bearish.

Though it has similar revenues and profits, Green Mountains market cap, at $7.0 billion, is nearly50% higher than Netflixs $4.7 billion, which means theres more downside and less likelihood of anacquisition.

Green Mountains business is highly dependent on two key patents, both of which expire onSeptember 16, 2012. Contrary to the companys and bullish analysts views, we believe that soonafter these patents expire, there will be significant competitive pressures that will meaningfullyimpact Green Mountains profitability and growth. Netflix faces no patent risk though it, too, facesmany competitive threats.

There is an ongoing SEC investigation at Green Mountain and we think Einhorns presentationprovides a detailed roadmap that will, in our opinion, likely lead the SEC to uncover variousaccounting shenanigans. Netflix faces no such risk.

Green Mountain has spent $1.4 billion in cash on three richly-priced acquisitions over the past twoyears, which raises questions about organic growth and earnings quality. Einhorn notes: The very
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high allocations to Goodwill raise suspicion about subsequent earnings quality. (See page 53 of hispresentation.) In contrast, Netflix has made no acquisitions in recent years.

Green Mountain inventories and cap ex have been growing much faster revenues: last year, on a 95%revenue increase, inventories rose 156% from $262 million to $672 million, while cap ex rose 125%from $126 million to $283 million. The result has been severely negative free cash flow and asignificant worsening of the balance sheet over the past two years, which raises questions about how

the company will fund its cap ex plans for next year. The trends at Netflix are precisely the opposite.

Netflix vs. Green Mountain: A Comparison of Balance Sheets and Cash Flows

The last bullet point warrants further discussion because, while the two companies have similarincome statements, their balance sheets and cash flows diverge massively. Netflix has a healthy netcash position of $166 million, while Green Mountain has $561 million in net debt. And Netflix hashealthy operating cash flow, which substantially exceeds both net income and cap ex, resulting infree cash flow of $201 million, whereas Green Mountain is the reverse, with free cash flow ofminus$282 million. This chart shows the data for both companies over the past 12 months:

The balance sheet and cash flow numbers are critical because both companies are making largeinvestments to grow their businesses: in Netflixs case, signing deals for streaming content andgrowing internationally and, in Green Mountains case, primarily to increase our portion packpackaging and expand our physical plants. Both companies (and stocks) are at risk if they runinto trouble financing these investments.

Given Netflixs strong balance sheet and free cash flow, we think its highly likely that the companywill be able to fund its growth, even if it loses more subscribers than the company (and we) expect(within reason). In contrast, Green Mountain is at much higher risk, both because of higher plannedexpenses and also a far weaker balance sheet and cash flow statement.

As noted above, in last weeksearnings release, Green Mountain said For fiscal 2012, we currentlyexpect to invest between $630.0 million to $700.0 million in capital expenditures to support theCompanys future growth. Thats a huge amount of money for a company that only had $201million of net income last year and less than $1 million of operating cash flow.

Our question is, where are they going to get the money? Theyve guided to $2.55-$2.65 in EPS inthe next 12 months, but we are highly skeptical that the company will meet this guidance, and italso excludes some very real cash expenses like acquisition-related transaction expenses; legal and

NFLX GMCR

Cash & Cash Equiv* $366 $13Debt $200 $574

Net Cash (Debt) $166 ($561)

Operating Cash Flow $349 $1

Cap Ex** $148 $283

Free Cash Flow $201 ($282)

* For GMCR, excludes $28M of restricted cash

** For NFLX, cap ex includes "Acquisitions of DVD content library"

All figures are in millions, over the trailing 12 months
http://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.htmlhttp://investor.gmcr.com/releasedetail.cfm?ReleaseID=622448http://investor.gmcr.com/releasedetail.cfm?ReleaseID=622448http://investor.gmcr.com/releasedetail.cfm?ReleaseID=622448http://investor.gmcr.com/releasedetail.cfm?ReleaseID=622448http://valueinvestingletter.com/david-einhorns-presentation-from-the-7th-annual-new-york-value-investing-congress.html


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accounting expenses related to the SEC inquiry and the Companys pending litigation. In addition,the companys balance sheet is consuming huge amounts of cash: due mainly to the rise ininventories and, to a lesser extent, accounts receivable, operating cash flow over the last 12 monthswas a mere $785,000 basically zero. Nor was this an exception: in the prior year, the companyhad $80 million in net income yet operating cash flow ofminus $3 million. On top of this arenumerous richly priced acquisitions, which consumed $908 million in cash last year and $459

million the year before.

To summarize, over the last two years, Green Mountain has generated $281 million of net income,yet lost$2 million of operating cash flow, plus spent $410 million on cap ex and another $1,367million on acquisitions a total cash burn of$1.8 billion! This chart shows the companysaccelerating cash burn over the past three years:

So how has Green Mountain funded these huge cash flow deficits? By using cash, taking on debt,and issuing stock. Over the past two years, the company has seen its net cash position go from+$164 million to -$561 million, a swing of $725 million, plus its raised $990 million by sellingstock, as this chart shows:

In summary, we question how Green Mountain will fund its $630-$700 million cap ex plan over thenext 12 months. Even if one believes the midpoint of the companys guidance of $2.60/share, thisonly translates into $414 million of net income, plus the balance sheet is likely to continueconsuming cash. We think investors will not look kindly on more debt, nor issuing stock atdepressed prices, yet the company almost certainly will have to do one or the other.

ConclusionWere long Netflix because we think the bad news is out, we like the companys balance sheet andcash flows, and see few red flags. In contrast, with Green Mountain, we think there is much morebad news to come, are very concerned about the companys balance sheet and cash flows, and seemany red flags.

GMCR ('09) GMCR ('10) GMCR ('11)

Operating Cash Flow $38 ($3) $1

Cap Ex $48 $126 $283

Free Cash Flow ($10) ($129) ($282)

Acquisitions $41 $459 $908FCF Minus Acquisitions ($51) ($588) ($1,190)

GMCR ('09) GMCR ('10) GMCR ('11)

Cash & Cash Equiv* $242 $4 $13

Debt $78 $354 $574Net Cash (Debt) $164 ($350) ($561)

Issuance of Common Stock $395 $9 $981

* Excludes restricted cash


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T2 Accredited Fund, LP (the Fund) commenced operations on January 1, 1999. The Funds

investment objective is to achieve long-term after-tax capital appreciation commensurate withmoderate risk, primarily by investing with a long-term perspective in a concentrated portfolio of

U.S. stocks. In carrying out the Partnerships investment objective, the Investment Manager, T2

Partners Management, LLC, 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 theInvestment 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 stocks.

There is no assurance that any securities discussed herein will remain in the Fund s portfolio at

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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

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Past results are no guarantee of future results and no representation is made that an investor willor is likely to achieve results similar to those shown. All investments involve risk including the

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T2 Accredited Fund Letter to Investors-Nov 11