Black Bear Value Fund's latest quarterly update reveals a period of underperformance compared to major market benchmarks. Despite these recent challenges, the fund maintains a steadfast commitment to its core philosophy: investing in businesses with strong long-term prospects that are currently undervalued by the market. This strategy often involves navigating turbulent periods, but the fund believes its disciplined approach to identifying and holding fundamentally sound companies will yield substantial returns as market conditions improve and these businesses realize their true potential.
Detailed Investment Performance and Strategic Holdings
In the third quarter of 2025, Black Bear Value Fund recorded a return of -1.0%, bringing its year-to-date performance to -12.7%. This contrasts with the S&P 500's robust 8.1% gain for the quarter and 14.8% year-to-date, and the HFRI Index's 5.9% quarterly return and 13.7% year-to-date. The primary factor behind this divergence was the underperformance of the fund's short positions, particularly in technology-related sectors, which experienced a speculative surge. Conversely, the fund's long positions demonstrated resilience, contributing approximately 2% growth.
The fund's investment strategy is characterized by a private market mindset, prioritizing intrinsic value over transient market sentiments. This quarter's letter highlights five key holdings that exemplify this approach:
- Builders FirstSource (BLDR): A prominent manufacturer and supplier of residential building materials in the USA. Despite a slowdown in the homebuilding market, BLDR generates significant free cash flow, which it strategically uses for stock buybacks. The company's focus on value-added products and its strong position to capitalize on the structural housing shortage present a compelling long-term growth story.
- Flagstar Financial (FLG): This institution, a merged entity of Flagstar Bank, New York Community Bank, and select assets from Signature Bank, is undergoing a rigorous turnaround. With new leadership and substantial capital infusion, FLG is de-risking its balance sheet and focusing on becoming a stable regional bank. Trading at a significant discount to its tangible book value, the fund anticipates considerable upside as the bank normalizes its operations.
- Lanxess (OTCPK:LNXSF)(OTCPK:LNXSY): A German specialty chemicals company, Lanxess is strategically divesting cyclical businesses and expanding into higher-margin, less capital-intensive segments. The company's efforts to reduce debt and its upcoming cash inflow from a joint venture put option are expected to unlock significant value, positioning it for strong free cash flow generation.
- Tidewater (TDW): As a leading provider of offshore support vessels (OSVs), Tidewater is poised to benefit from the long-term resurgence in international offshore energy markets. With limited newbuild capacity in the OSV sector and an aging global fleet, Tidewater is expected to experience strong pricing power and high utilization, translating into robust free cash flow and potential share buybacks.
- Warrior Met Coal (HCC): A top metallurgical coal producer, HCC is nearing the completion of a major capital project. This development is expected to dramatically increase its free cash flow generation from 2026 onwards. Despite current headwinds from compressing coal prices, the company's strong contracted sales and cost discipline underscore its long-term potential for substantial cash returns to shareholders.
The consistent narrative from Black Bear Value Partners emphasizes patience and conviction in its investment choices. While acknowledging the short-term discomfort caused by market fluctuations, particularly with its short positions, the fund's management remains confident in the inherent value of its long-term holdings. The current market environment, characterized by what the fund describes as 'delusional' valuations in certain sectors, is seen as presenting abundant short opportunities that, although painful in the short run, will ultimately prove prudent. The fund's strategy is a testament to the belief that disciplined, value-oriented investing, focused on fundamentals and long-term trends, will ultimately prevail over speculative market enthusiasm. For investors aligned with this philosophy, the coming years are anticipated to bring significant rewards as the market eventually recognizes the true value of these carefully selected businesses.