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Why Texas Pacific Land Trust (TPL) Stock is a Compelling Investment Case

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Black Bear Value Partners recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -22.3% (net) in the first nine months of 2020, underperforming its benchmark, the S&P 500 Index which returned 5.6% in the same period. You should check out Black Bear Value Partners' top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Black Bear Value Partners highlighted a few stocks and Texas Pacific Land Trust (NYSE:TPL) is one of them. Texas Pacific Land Trust (NYSE:TPL) is engaged in managing land, including royalty interests, for the benefit of its owners. Year-to-date, Texas Pacific Land Trust (NYSE:TPL) stock lost 41.2% and on October 13th it had a closing price of $459.65. Here is what Black Bear Value Partners said:

"TPL is a publicly traded land trust that is one of the largest landowners in Texas and one of the oldest listings on the NYSE, having been formed in 1888 and listed in 1927. Most have not heard about TPL as they are not in passive indices due to their corporate structure (they are a trust with unique corporate governance).

TPL is a royalty company with 100% of their acreage located in the Texas Permian Basin. In a nutshell they make money when drilling activity occurs but DO NOT have the capital needs as they simply provide access to land. Think of them as a franchisor of fast-food energy and the drillers and/or midstream as the actual restaurants.

If you drill oil on their royalty-land you pay a portion to TPL. Need a road to drive to the site? You pay a fee/easement. Need water? Need a pipeline? Need electricity transmission lines? I think you get the picture. If you want access to the assets underneath the ground or to travel on top (oil/natural gas/water) you must pay TPL.

The incremental amount of work on TPL’s part is minimal as the extraction and movement of the oil/natural gas is undertaken by others. They are merely a toll collector with Returns on Capital of 80+%.

TPL is undergoing a corporate structure change as the result of constructive activism from Horizon Kinetics. They will be converting to a corporation with modern corporate governance over the coming months. This could result in index inclusion which could provide a non-fundamental catalyst for the stock price to rise.

Longer term some of the cheapest to deliver hydrocarbons are in the Permian basin. Some are concerned that the long-term push towards renewable energy will harm them. I see it a bit differently. First, change takes time and while there are increasing amounts of electric vehicle (EV) or solar power discussions, it is going to take a while for it to become a large part of our everyday lives. Secondly, and probably more importantly, renewable products require commodities and/or compounds that need to be extracted and/or heated (Silicon, silver, copper, lithium etc.). Their production requires hydrocarbons. In order to get to a lower hydrocarbon long-term future, we will need hydrocarbons. The cheapest place to get these are in the land owned by TPL.

In an inflationary environment, businesses that have lower capital intensity both in capital assets and people stand to benefit. In other words, if oil goes up a lot, the incremental cost to TPL is close to 0 so it’s all incremental profit. This is a business that should benefit in a massive way if we were to see energy inflation. In the meantime, we likely own it at a 5-7% free cash flow yield with massive upside."

Pixabay/Public Domain

In Q1 2020, the number of bullish hedge fund positions on Texas Pacific Land Trust (NYSE:TPL) stock decreased by about 18% from the previous quarter (see the chart here), so a number of other hedge fund managers don't seem to agree with TPL's growth potential. Our calculations showed that Texas Pacific Land Trust (NYSE:TPL) isn't ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.