I try to look at as many companies as I can, under the theory that simply ingesting a lot of information is likely to lead to occasional insights and epiphanies1. And it works! One interesting setup I keep stumbling upon is the “European company with a listed Indian subsidiary.”

In recent years, the Indian stock market has shown strong performance. The MSCI Index is up 15.4% annualized over the last 5 years. The Indian market features high participation by retail investors, who are willing to pay lofty multiples for companies with open-ended growth profiles. Sound familiar? A strong 2025 notwithstanding, European stock markets have not rewarded investors in the same way, and valuation multiples for mature companies are low.

Let’s say you’re in charge of a mature, profitable European company. Think an industrial, a retailer, a consumer staples business, or anything else that has little or nothing to do with AI or aerospace/defense or any other hot sector. The market is likely pricing your shares at less than 15x earnings. But let’s say you have a subsidiary in India. This subsidiary is a fairly small part of your business, but it is profitable and growing at 20% or higher. You could do nothing and hope the market eventually recognizes the value of this high-growth asset, or you could do an IPO and sell 25-50% of your Indian subsidiary. You’ll have a nice cash windfall, and hopefully, your subsidiary will trade at 30-40x earnings or more, highlighting the value of the shares you continue to own. As time goes on, you can place more subsidiary shares, benefitting your own shareholders. Maybe the market will credit your company for the observable value of the now-public Indian subsidiary, and your shares will zoom.

I think the logic of Option 2 is airtight, and that’s what multiple European companies have elected to do. Whether or not the market is rewarding these companies as hoped is unclear. Let’s take a look at 3 companies that have listed Indian subsidiaries.

F.I.L.A.

While “FILA” may bring to mind the Korean sportswear company, this FILA is an acronym for “Fabbrica Italiana Lapis ed Affini.” The Italian Factory of Pencils and Related Products, Google tells me. And that’s exactly what FILA is. FILA was founded in Florence and has been stewarded by the Candela family since 1956. For most of the 20th century, FILA supplied Italy with pencils, pens, markers, and other school, office, and fine art supplies. Beginning in the 1990s, the company expanded its offerings to other European companies and then overseas.

While FILA’s story is not well-known here in the States, one of FILA’s products is iconic.

There is hardly an American schoolchild who is not familiar with the Dixon Ticonderoga HB2 pencil. FILA purchased the Dixon Ticonderoga Company in 2005.

FILA is a frequent acquirer. Its biggest acquisition to date was the 2018 acquisition of Pacon, which FILA bought for $325 million and placed under Dixon Ticonderoga. Unfortunately, the substantial debt that FILA took on to fund the Pacon purchase caused stress in the COVID era, when school and office closures caused demand for FILA’s products to plunge. But the company muddled through, spending years working through the acquisition debt and restoring its balance sheet.

In 2023, FILA chose to perform an IPO of its Indian subsidiary DOMS Industries Limited. DOMS is a producer of stationery and art supplies, primarily targeting the lower-end Indian school and consumer markets. With India’s growth in populatoin, wealth, and educational achievement came surging demand for DOMS’ products, and DOMS revenues doubled from fiscal 2021 to fiscal 2023. The IPO was a success. FILA performed a follow-on offering in late 2024, and now holds 26.01% of DOMS Industries shares.

Today, FILA has a market capitalization of Eur 496 million and net debt of Eur 203 million for an enterprise value (pre-DOMS) of Eur 699 million. Twelve trailing month EBITDA was Eur 105 million and EBIT, Eur 72 million. At an EV/EBITDA ratio of 6.7x and an EV/EBIT ratio of 9.7x, I would declare this mature, somewhat levered consumer goods manufacturer in the neighborhood of fairly valued.

But of course, there is DOMS Industries! In Euro terms, the DOMS shares that FILA owns are worth Eur 396 million, or 57% of FILA’s enterprise value! Backing out the value of the DOMS stake, the market is valuing FILA’s core operations at only 2.9x EBITDA and 4.2x EBIT. Suddenly, the valuation looks a great deal more interesting.

But even at this discount, I don’t find FILA all that compelling. The company’s track record on mergers and acquisitions can generously be described as “uninspiring,” and the company clearly intends to do more. I think it’s unlikely that the DOMS stake will be monetized in the near future. The company describes its remaining stake as strategic and must maintain various ownership thresholds to preserve certain voting rights. But more important, DOMS Industries is likely to be materially overvalued. Shares trade at an eye watering 75x trailing earnings and 36x forward EBITDA. Perhaps not an issue were FILA willing and able to monetize the entire stake tomorrow at close to market value, but very relevant when FILA intends to hold these shares at least for the intermediate term.

SSP Group Plc

Moving on, we have SSP Group plc. SSP is a British restaurant, bar, and café owner that operates primarily in hospitals, airports, train depots, highway rest stops, shopping centers, and similar. A concessionaire, more or less, selling food and beverage to a captive audience.

This is not a business model that I like very much. Margins are thin, capital intensity is high, and customers are liable to complain about prices and selection. Do too well, and the lessor demands more at renewal. (The fact that I once took an ugly loss in an Italian concessionaire likely introduces some bias on my part.) A look at SSP’s long-term stock chart reveals nothing but pain: shares are down by a third over the last decade. Shares have livened up lately, as SSP revealed a plan to shutter loss-making units in Germany and cut costs throughout the system. Maybe it’s a new day at SSP? There are also rumors of an activist investor attempting to put together a buyout.

Being pretty skeptical of SSP’s operating model and lackluster track record, I haven’t delved too deeply into the enterprise and I have no view, at least for now, on whether or not the turnaround will be successful. But SSP falls squarely into our “valuable Indian subsidiary” bucket thanks to the mid-2025 IPO of “Travel Food Services Limited.” Travel Food is a joint venture between SSP and the Kapur Family via K Hospitality Corp. Travel Food Services, which started in the Mumbai Airport, has grown rapidly and now operates in 14 Indian airports, plus 3 in Malaysia. SSP acquired a 49% stake in 2016, paying GBP 58 million.

SSP did not offer shares in the IPO, actually increasing its stake to 50.01% before the offering. Following the IPO, SSP’s stake is worth GBP 640 million. That’s a cool 11x in 9 years. If only the rest of SSP’s business had performed so well.

SSP has a market capitalization of GBP 1,601 million, so Travel Food Services is material to the investment thesis at 40% of market capitalization. The outcome of SSP’s turnaround attempt is likely to be the biggest factor affecting SSP’s share price in coming years, but investors cannot ignore a major asset like Travel Food Services. Like FILA, it seems unlikely that SSP will seek to dispose of its Indian subsidiary, but it could become an interesting catalyst down the road.

Koninklijke Vopak N.V.

Vopak is a fun one. Vopak is a liquid storage company, operating in dozens of major ports and terminals around the world, and offering storage for an incredible variety of products. Think oil and gas and their derivatives, fuels, and chemical feedstocks and finished products. The company was founded in 1616 in the port of Amsterdam. For its 400th anniversary, the company commissioned a history that can be found here.

I can hardly think of a piece of infrastructure more critical to global industrial supply chains than liquid storage, nor an operator more venerable and successful than Vopak. And yet, shares have languished in recent years due to investor worries about long-term demand for traditional fossil fuels. Vopak has responded to the threat by pivoting its portfolio toward natural gas and low-carbon fuels storage, and by shifting customers from short-term agreements to 10-20 year contracts with inflation-linked pricing.

While investors have yet to reassess Vopak’s prospects, Vopak seems to believe its shares are attractively priced, repurchasing 6.3% of shares outstanding in 2024 and another 1.8% through June 30, 2025. Vopak’s capacity to repurchase shares is limited by its small float: more than half of the company is owned by Dutch investment holding company HAL Trust NV. (HAL Trust, the corporate descendent of Holland-America Line, is well worth its own post. Someday.) Vopak shares trade at just 11x forward earnings, and I can’t help but feel as if this extraordinary company is all but forgotten by the market. But not by all! For Alluvial’s part, Vopak is a component of our Tactile Fund, and I am excited about the company’s future.

Vopak has numerous joint ventures around the world, but one of the most significant is Aegis Vopak Terminals. “AVT” is a joint venture with Indian logistics giant Aegis Logistics, and operates 20 tank terminals at 6 Indian ports. In June 2025, AVT performed a successful IPO. Following the IPO, Vopak continues to hold a 42.2% interest in Aegis Vopak Terminals, worth Eur 1,095 million.

Vopak’s interest in Aegis Vopak Terminals is worth 25% of market capitalization and 15% of its enterprise value. If we adjust Vopak’s valuation for its interest in AVT, Vopak is trading at something like 6.7x 2026 proportional EBITDA. I find this ratio far too low for a company of this quality.

The Upshot

In each of these cases, a mature company performed a nifty maneuver that resulted in a valuable subsidiary being highlighted with an observable market value. But were these transactions effective in achieving a better valuation? So far at least, the answer appears to be “no.”

I suppose that’s the risk in IPOing a subsidiary or pursuing other strategic transactions to highlight value. What if you do it and the market just doesn’t care? Credit for trying something, I suppose. As long as the Indian market continues to value growing companies so highly, I expect other companies with Indian subsidaries will consider listings. And who knows, maybe this is the year that companies that do so will get credit for it.

Happy New Year and thanks for reading!

Alluvial Capital Management, LLC holds shares of Koninklijke Vopak N.V. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com

One that seems to escape attention is Mario Gabelli’s GAMCO Investors, Inc. GAMCO owns the Gabelli asset management empire with $33.4 billion in assets under management across numerous strategies as of June 30, 2025.

Mario Gabelli likely needs no introduction for many readers, but for those unfamiliar, he is one of the towering figures of value investing. Mario Gabelli grew up in humble circumstances in the Bronx and elbowed his way into the Blue-Blooded world of Wall Street through wits and work ethic alone. Gabelli was one of the first to understand the value in companies that reported accounting losses but nevertheless produced prodigious free cash flow due to their long-lived assets, in insight he applied to the nascent cable television industry. Gabelli launched a broker-dealer in 1976 and then began managing money for clients. Those were fruitful days for value investing, and the firm prospered. Gabelli Asset Management IPOed in 1999, and the firm continued to thrive in the early years of the 21st century.

More recently, times have been tougher for GAMCO, with two big headwinds causing AUM to plateau and then decline. First, the rise of passive investing took its toll. Hundreds of billions in investor capital has flowed from active managers into passive index-tracking ETFs and mutual funds. And who can really blame investors? Why invest in an actively-managed mutual fund that more than likely would not beat its benchmark when all but zero-cost ETFs are right there? Gabelli funds were generally good performers, but still suffered outflows in favor of passive management. The second and perhaps more important factor is that “value investing,” at least as traditionally understood and practiced, hasn’t worked very well for some time now. Gabelli’s strong focus on asset value and cash flows has not been rewarded by the market, which has shifted its focus almost entirely to growth stories and future tech. (Please note I am not saying the market is entirely wrong here. A lot of “value investors,” including, upon occasion, your humble author, have over-fixated on current cash flows and failed to appreciate the declining terminal values of many mature industries being disrupted by emerging technologies.)

GAMCO managed the decline well, remaining profitable when numerous other active managers failed and liquidated. But revenues, which peaked in 2014 at $422 million, have declined to $233 million for the twelve trailing months. Operating margin peaked in 2018 at a whopping 54.7%, but has trended downward to 32.8% as fixed costs eat up a greater portion of revenue. Facing the likelihood of continued revenue decline and a lack of investor interest, GAMCO delisted from the NYSE in 2022 and deregistered its shares shortly thereafter.

Today, GAMCO trades over-the-counter with the ticker GAMI. The company continues to provide quarterly and annual reports in timely fashion. Operationally, there are some encouraging signs. Assets under management appears to have troughed in 2022, though the subsequent increase is due entirely to market appreciation. Recently, assets under management have continued to experience net redemptions of about 5% annually. Here’s a look at AUM movement in 2024, 2023, and 2022.

The first half of 2025 was strong for GAMCO, with net outflows reaching the lowest level in years. Could we perhaps be reaching the tail end of migration from active strategies to passive? I think it is possible that most of the capital that can move to passive strategies already has, and what remains will be “stickier.” I am not calling a bottom here, but I do think it is likely that GAMCO’s historical rate of AUM depletion will decline to 2-3% annually from 5%, which makes an enormous difference in intrinsic value.

At the current GAMI ask price of $24.60, GAMCO has a market capitalization of $550 million. (The market capitalization shown on OTCMarkets.com and possibly elsewhere is incorrect, as it excludes the value of the “B” shares held by insiders.) GAMCO has balance sheet cash and securities of $183 million. The liability side of the balance sheet is very clean, with zero debt. Excess cash and securities is likely around $150 million, leaving an enterprise value of $400 million. For our $400 million, we get trailing operating income of $70 million. Run-rate operating income as of the quarter just ended is $77 million at an EBIT margin of 32.5%. So, depending on which figure you prefer, the market is valuing GAMO at 5.2-5.7x trailing operating income. Assuming GAMCO’s AUM is stable, that could be a pretty cheap valuation.

However, it should be obvious that I am making a big assumption here: that the $150 million or so in excess cash and securities is worth exactly that. And that only holds if the company uses this horde in a way that is worth at least $150 million to shareholders. This is a mistake I see a lot of investors make. Excess cash is great, but what’s it worth if the company has zero plans to give it back or use it productively? A lot less than its face value.

Fortunately, this is not an issue with GAMCO. I say this because GAMCO is in aggressive return of capital mode. The company uses every cent it earns and then some for massive share repurchases and dividends. In 2024, the company returned 19% of current market capitalization. Year-to-date, it has returned 3.5% of market cap, including share repurchases made after quarter’s end. This is a slowdown from 2024, but the company also dedicated around $10 million (in present value terms) to acquire $1 billion in assets under management, a very productive use of capital from my vantage point.

What intrigues me most is that if GAMCO continues repurchasing shares at the rate of 500,000-1,000,000 shares per year, it will very soon run out of public shares to buy. GAMO has a dual-class share structure. A shares are owned by insiders and the public. At June 30, 2025, there were 3.37 million A shares outstanding, of which 2.37 million were in the public float. The company’s B shares are owned almost entirely by Mario Gabelli himself. There are 18.98 million of these. As it stands, assuming GAMI’s share price does not move up substantially, there is only 2-5 years of A share “supply” remaining in public markets. Even if Horizon Kinetics and Neuberger Berman, who collectively own 785,000 A shares, sell into the buyback, we are looking at A shares becoming an endangered species by the end of the decade.

Something’s got to give. Either GAMI shares rise and the pace of the buyback slows dramatically, or the number of A shares outstanding dwindles to nothing.

There’s another factor here that cannot be ignored: Mario Gabelli himself. Through his ownership of the super-voting B shares, Mr. Gabelli is in the driver’s seat. It’s possible that Gabelli could choose to have GAMCO pursue some huge and ill-advised takeover, or cease its repurchase program and hoard cash, but I don’t think it’s likely. I have been involved in a few Gabelli-controlled companies over the years, with greater or lesser degrees of success, but they all follow a fairly simple and sensible strategy of making low/medium risk productive investments when they are available and returning capital to shareholders when they are not.

The bigger question is what happens after Mario Gabelli. Gabelli is 83, and while he seems quite vigorous for a man his age, at some point he will no longer be at the helm of GAMCO. Now, I don’t think that GAMCO will be adrift without Gabelli. The firm has a strong culture and numerous portfolio managers and executives trained in the GAMCO way. But a very interesting thing will happen to GAMCO’s profits when Mr. Gabelli exits stage right. For its entire existence as a public company, Mario Gabelli’s employment contract has stipulated that he is to receive 10% of the firm’s annual pre-tax profits. Quite generous, but he did build the firm. Here is Mr. Gabelli’s GAMCO compensation for the last decade. Keep in mind the firm currently earns about $70 million in pre-tax income after these payments.

Yes, I promise this is accurate. Straight from GAMCO proxy statements. From 2015 through 2024, Mr. Gabelli received compensation averaging $41.5 million per year and totaling $415 million, a figure that exceeds GAMCO’s current enterprise value. Not bad work! Adding this compensation back to GAMCO’s reported results and arriving at an adjusted valuation is simple math, so I won’t belabor the point.

In GAMCO, we have a situation where an already low-multiple is likely to get much cheaper in a few years, and where shareholders will see intrinsic value rise as cheap shares are gobbled up by the company. But of course, there are numerous risks. The company’s recent improved AUM retention trends could reverse, and the ice cube could melt more quickly than expected. EBIT declines could outpace AUM losses thanks to operating leverage. The market itself could experience a deep downturn, which would cut deeply into GAMCO’s revenue. GAMCO’s equity strategies tend toward the defensive, but they would not be immune to a severe market drawdown. GAMCO could prove so effective at buying back shares that the already low liquidity of their shares could all but vanish, leaving investors stuck in a highly illiquid security and awaiting an uncertain catalyst.

That’s the story. This is an optically cheap company that is rapidly buying back shares. The earnings trajectory seems to be stabilizing, and there is a potential upside earnings catalyst from a future leadership transition. On the other hand, the active asset management industry continues to experience headwinds, the company’s results are highly levered to stock market performance, and GAMCO is a controlled company, for better or for worse. Happy diligence.

Alluvial Capital Management, LLC does not hold shares of GAMO Investors Inc. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com

There are numerous examples. Føroya Banki dominates the banking sector of the Faroe Islands, a Danish autonomous territory situated north of Scotland and home to 54,000 intrepid souls. Over 8,000 miles to the southwest, the Falkland Islands are home to a single public company, FIH Group plc. Granted a British royal charter in 1851 as the “Falkland Islands Company,” FIH accounts for 60% of retail sales on the islands and is traded in London. It is also a major landowner. And who could forget the North West Company, which operates general stores in isolated outposts in Northern Canada, the Caribbean, and the South Pacific?

As remote and obscure as these places and companies may be, I recently spent time looking at the stock market of a place that may be even more so: Papua New Guinea. Could there be some crown jewel of the Pacific waiting to be discovered?

“PNG” is not exactly a tourist destination. Nor is it an easy place to live for most. The island nation is impoverished and violent crime is common. Economic growth is hindered by rough terrain and poor infrastructure, and governance is made difficult by the sheer number of spoken languages (over 800) and people groups, some of which are embroiled in ethnic conflicts stretching back many generations. Corruption is rampant, with some estimating that 20% of annual government spending is lost to graft and waste. Indeed, even the members of PNG’s Independent Commission Against Corruption (consisting of two Australians and a New Zealander) are levying charges of corruption against each other.

The country, independent since 1975, does have abundant natural resources. But developing these resources in a manner that balances the competing interests of mining concerns and local populations is an unresolved problem.

Despite its numerous issues, Papua New Guinea does have a small stock market, located in the capital, Port Moresby. The exchange has just a handful of issuers. And like most frontier markets, almost all trading takes place in just a few of these names. Still, just for fun, here’s a look at each of the stocks that trades on the PNGX.

BSP Financial Group Limited - BSP

“BSP,” known of Bank of South Pacific until 2021, operates in 9 different countries in the South Pacific and Southeast Asia. The company proudly notes that 97.8% of its shareholders are local to the region. A PNG government entity owns 24.8%. BSP faces the unique challenge of operating in 9 different currencies, but it manages the challenge well. Indeed, BSP is strikingly profitable. Despite operating on thinly-populated islands spread across thousands of square miles of ocean, BSP regularly posts a return on equity in the mid-20%s.

At present, loans make up 44% of BSP’s assets, with securities representing another 27%, cash and equivalents 23% and the remaining 6% physical premises and minor miscellaneous assets. BSP earns a good rate of return on its cash, loans, and securities, recording a 6.1% yield on average earning assets in 2024. Against this BSP paid only 0.4% on its deposits and borrowings. That’s a nice spread. I guess you can get away with that when you’re the only bank in town. This strong net interest margin explains the bank’s consistently high return on equity.

BSP has been a nice returner for shareholders, up 55% since June 2023 and yielding almost 7%. While BSP is listed on the PNG Exchange, it also has a much more liquid listing on the Australian Stock Exchange, should anyone be interested in doing some more work on this company.

Credit Corporation - CCP

Credit Corporation is another major PNG finance company with an estimated market share in loans and leasing of 33%. Credit Corporation was founded in 1978 with assets of 500,000 Kina, the equivalent of $120,000 at today’s exchange rates. The company was profitable from the beginning and was an early investor in Bank of South Pacific. Credit Corporation still owns a 5.7% stake in BSP. Shares of Credit Corporation are thinly-traded, but at the bid/ask midpoint, the company has a market capitalization of 1,558 million Kina. Interestingly, Credit Corporation’s investment in BSP is worth 1/3 of its market capitalization.

Unfortunately for Credit Corporation, it manages only a middling return on equity, ranging from 2.8% to 11.1% in recent years. Despite this, Credit Corporation trades at a premium to book value. The company does have assets that do not currently contribute much in the way or earnings or cash flow, like real estate and CreditBank PNG, a digital-first bank launched in 2024. Still, Credit Corporation shares don’t look interesting to me from a valuation perspective.

PNG Air Limited - CGA

What would an Asia Pacific nation be without a national carrier? Papua New Guinea is no exception. In operation since 1987, PNG Air’ fleet of 15 aircraft provides service to 23 domestic destinations, plus Cairns Airport, Australia. PNG also has among the best liveries I have ever seen. Witness:

Sadly, that’s where the good ends. PNG Air is chronically unprofitable with its last operating profit recorded in 2019. The company has been unable to produce audited financial statements for the last several years. A recapitalization plan was approved in late 2023, but the success of the plan is difficult to assess without current financial data. Safe to say PNG Air is not much closer to financial stability, given there are currently zero shares bid or offered on the exchange.

CPL Group - CPL

CPL (“City Pharmacy,” historically) is a pharmacy and general retailing group with numerous locations across PNG. Its 2024 annual report opens with perhaps the most quintessentially Frontier Markets statement I have ever read.

Believe me, I have had a lot go wrong at companies I have invested in in my time as a professional investment manager. But I am relieved to say none of our investments has ever suffered losses due to mass looting and arson.

While 2024 was especially difficult for CPL, operating results had been trending negatively for a few years running. Profits peaked in 2020 at K0.07 per share, falling to K0.029 per share in 2023 and to losses for 2024. The company has released a restructuring plan intended to streamline operations and improve profitability.

There are no bids for CPL shares on the exchange, but shares are offered at K0.7. This represents 87% of book value and 10x 2020 peak earnings. Looks like wishful thinking by the seller.

Kina Asset Management Limited - KAM

“KAM” is an investment firm which owns a diversified portfolio of domestic and international equities. 32% of the portfolio is allocated to PNG securities, 37% to Australian securities, 20% to US and global securities, and the rest to cash. I went through the list to see if there were any interesting private or difficult-to-buy securities in the portfolio, but it’s a fairly vanilla roster with a large allocation to PNG and Australian banks. NAV at the end of May was K2.01 per share. The exchange website shows no shares offered, while the best bid stands at 1.80. I know a few US and UK closed-end funds that would love to trade at only a 10% discount to NAV.

Kina Securities Limited - KSL

Kina Securities is the third and final bank/finance company on the list. I promise. And Kina Securities, like BSP, has a much more liquid and active listing in Australia. Kina Securities is PNG’s fourth-largest bank and largest wealth manager. It also handles more than 60% of trading volume on the PNG stock market. I guess I’ll be calling Kina if I ever decide to get involved.

A look at Kina Securities’s financials reveals PNG’s second-best business after BSP. Kina regularly earns a mid-teens return on equity. Revenue grew at a 17% annual pace from 2016 to 2024, and operating income expanded at a 15% annual rate. Despite this, Kina shares have gone mostly sideways over the last decade, albeit with a nice dividend yield along the way.

Newmont Corporation - NEM

Yes, this is the NYSE-listed gold mining giant with a $64 billion market capitalization. I guess you could try buying it on the PNG market, but there is no liquidity. Anyway, even trying would make you a real sicko.

NGIP Agmark Limited - NGP

NGIP Agmark is a cocoa producer, and by far the most intriguing stock on the entire exchange. If you’ve seen any headlines about cocoa prices in the last year, you’ll very quickly grasp what this means for profits at a company like NGIP Agmark. Indeed, profits increased sixfold, from K0.11 per share to K0.67 per share. The company chose to reward shareholders with a K0.16/share dividend.

2025 is looking like another incredible year for NGIP Agmark, with cocoa prices remaining extremely robust.

Despite the strong outlook, NGIP Agmark shares trade at just K1.00, or 1.5x trailing earnings and one-third of book value. Now, volume is very light, but the shares do occasionally change hands. And that means that someone out there is willing to let go of these shares at absurdly low prices. And my question is simply “why?” The seller(s) either see(s) something the rest of the market does not, or they do not know what they own. Maybe they cheer for a different rugby team, not the one that NGIP Agmark sponsors.

Niuminco Group Limited - NIU

Niuminco is a junior mining company, hoping to strike it rich. In other words, not so very different than the dozens of junior resource plays traded in Vancouver and Sydney. Niuminco has been at it by various means since 2011. I suppose there’s always a chance it works, but the base rates are unflinching.

Steamships Trading Company Limited - SST

Steamships, also traded in Australia, has the most colorful history of any PNG stock. Steamships is a conglomerate with operations in shipping, real estate, retailing, manufacturing, and IT. Steamships also owns 50% of Colgate Palmolive PNG. The company was founded in 1918 when a retired sea captain, the wonderfully-named Algernon Sydney Fitch, launched a salvage business in what was, at the time, an almost ludicrously remote part of the world, at least from a Westerner’s perspective. As the 20th century progressed, Steamships expanded into nearly every sector of the PNG economy. To celebrate 100 years of operations, the company commissioned a lovely book entitled “Steamships Trading Company 1918-2018.” Obviously I have purchased this work for my collection of obscure corporate hagiographies, but the company also kindly provides a PDF copy of the 239-page tome.

Steamships has enjoyed a lot of good years in its long history, but unfortunately, recent years have offered little to smile about. Operating margins have been pinched by sagging revenue and surging costs, and the resulting lack of free cash flow combined with heavy investment has caused leverage to rise. Perhaps this is a prelude to a recovery, but in many ways Steamships appears to be a typical underperforming conglomerate: an unfocused collection of good and bad businesses, with the sub-par assets sapping both capital and management attention from the gems. Despite its grand history, I think Steamships would be better off letting go of a few of its segments and refocusing on those it knows and likes best. Whether or not that happens is entirely up to its majority owner, Hong Kong conglomerate Swire Pacific.

Santos Limited - STO

Santos is a large liquid natural gas-focused company, also listed in Australia. Santos shareholders are a long-suffering bunch, but it appears that Santos will be bought by a consortium led by Abu Dhabi National Oil Company. So long!

And there you have it. An entire frontier markets stock market. 11 names, two of them just local listings of huge multi-nationals. And only 3 or 4 with both a bid and ask. Still, while there might not be much opportunity for investors today, I like to check in with these markets now and again. You never know what could happen. Thanks for reading!

Alluvial Capital Management, LLC holds shares of North West Company and Føroya Banki for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com

So without further ado, I present:

1. Meritage Hospitality Group - MHGU. I’m not a big fast food guy, but now and then you just need a burger and fries, right? Maybe a Frosty to dip those fries in? Wendy’s has you covered. And Meritage Hospitality owns 374 Wendy’s units, mainly in the Midwest and Southeast regions, making them one of the Wendy’s system’s largest franchisees. Alluvial once owned a good bit of Meritage, but we sold over concerns related to leverage and operating cost pressures in the post-COVID environment. That turned out to be prudent as Meritage has struggled in recent years. But the Meritage’s valuation on a per-restaurant basis has fallen to around $1.9 million, lease liabilities included. That is well below the cost of a newly-built Wendy’s unit, so maybe Meritage is worth a look here?

2. Bonal International - BONL. I’m always intrigued at just how many niche industrial processes and equipment it takes to make the world run. Bonal International sells machines that use vibration to reduce stress in metals. Not many of them, mind you. Even in a good year, Bonal manages less than $2 million in revenue. But they do eke out a profit and at last trade, were valued at less than net current assets. Anyone want to own a tiny Michigan manufacturer?

3. Tofutti Brands Inc. - TOFB. Tofutti makes vegan food. I am told the company has a loyal fanbase, but I can’t recall seeing their vegan ice cream sandwiches in the freezer aisle. Sadly, the fanbase seems to be shrinking and revenues are down by one third since 2022. There are more options for the vegan community than there used to be, and perhaps that is why Tofutti is suffering. Still, gross profits were $2.3 million in 2024, and the IP might be valuable to some larger food company. Tofutti trades at 1.2x net current assets.

   

4. Avoca LLC - AVOA. If you daydream of owning Louisiana marshland, this is the company for you. Avoca owns 16,000 acres, nearly the entirety of Avoca Island.

   Avoca Island is apparently good for duck hunting, and the Avoca Duck Club holds a lease expiring in 2029. Otherwise, Avoca LLS generates some revenue from oil and gas royalties and environmental remediation credits. Frankly, I am a little surprised to see Avoca trade at a $10 million market cap. There does not seem to be much long-term development potential or other potential revenue sources. Interestingly, Hancock Whitney Corporation, a bank, (ticker: HWB) is the majority shareholder.

5. Prologis Inc. Series D preferred - PLDGP. Pricing gets wonky on the OTC markets, and this is a prime example. Prologis is a massive and sophisticated self storage REIT, yet this series of preferred shares trades OTC for some reason. This pref is callable in November 2026 at $50 per share. Seeing as Prologis has called every other series of preferred stock it has, including those with much lower coupons, it seems highly likely that Prologis will call the series D preferred, resulting in an IRR of less than 4%. Not a terrible place to park cash, I suppose, but not great.

6. Decker Manufacturing - DMFG. Nuts and bolts hold the world together. Decker Manufacturing produces both, as well as the best vibes on the entire OTC markets. Just look at this quarterly statement, clearly a scanned version of the printout from an accounting system installed in the 1990s.

   

7. McRae Industries - MCRAA/MCRAB. McRae makes boots. Army boots, and also Western-style boots with the fancy tooled leather. Most of the time, boots are a fairly good business. McRae makes plenty of money, but unfortunately they allow most of the cash to sit on the balance sheet or they use it to buy real estate. If they would just give it back, this could really be a nice little opportunity.

8. Boss Holdings, Inc. - BSHI. Another serious oddball, Boss Holdings offers pet products, party balloons, and those questionable phone chargers and the like that you find at gas stations and rest stops. Previously, Boss had a line of work gloves and protective wear, but it sold this business a few years ago. Things have gone rather poorly since. The latest incident was a cyber-attack that cost the company $2.5 million. Thankfully, $2 million was covered by insurance, but the incident caused a significant operating loss for the 3rd quarter of 2024. On the plus side, the company has a substantial balance in cash and treasuries, which gives them breathing room as they try to right the ship.

9. George Risk Industries - RISKIA. George Risk makes security products, mainly access control and alarm systems. These are used to secure commercial facilities, pools, etc. It’s a good business and the company is quite profitable. Unfortunately, rather than distribute or reinvest their profits, George Risk has built a substantial cash and investment portfolio equal to half its market cap. The company does pay a good dividend, but the lazy balance sheet has probably cost shareholders returns over time. I will say the company has a fantastic Mid-Century Modern logo and I hope they never change it.

   

10. BAB, Inc. - BABB. BAB is a franchisor of “Big Apple Bagels” stores, plus a few others. They have 65 units across 18 states, but I can’t say I have ever seen one. This is one of these companies that I check in on yearly or so and every time I think “I can’t believe they are still in business.” But being a franchisor is a fairly high margin, capital light business, and though BAB doesn’t really grow, it does produce a reliable $600k or so in operating earnings every year. The company pays out nearly all its earnings as dividends. Could be worse!

11. The Stephan Co. - SPCO. Stephan is a fun little company that acquires barbering supply businesses. They are attempting to drive margins through scale, but so far profits and sustained top-line growth have been a little hard to come by. Results did improve in 2024, and the company eked out a $6,000 profit. Sales were down 6%, but gross profit rose 8% thanks to operating efficiencies. I am rooting for this business, but it goes to show just how hard it is to be a tiny public company.

12. Mike Lindell Media Corp. - MLMC. Yes, it’s the My Pillow guy. Famous for his political involvement and now his legal troubles. I’m not a fan, but it’s fascinating that he managed to get his media business merged into an OTC shell company. The board of directors includes such luminaries as Rudy Giuliani and former Cleveland baseball player Rob Rogers. The company’s OTC markets disclosures are highly amusing. Just check out this one, which includes allegations of threatening text messages by a former COO/director and theft of intellectual property.

13. Marketing Alliance - MAAL. Marketing Alliance is an intriguing little holding company. Its main business is in insurance agencies, while it also has a construction business and owns securities. The company once owned a children’s entertainment center business, but it failed during COVID. In recent years, the insurance business has been in slow decline, with profits under pressure from falling revenue and rising costs. But the segment remains profitable. I will be watching to see if the insurance business can recover and if the construction business, now only marginally profitable, can be a real contributor.

14. Portsmouth Square - PRSI. Portsmouth Square is part of a convoluted complex of related businesses, but the more notable feature is the real estate the company controls: the 544 room San Francisco Financial District Hilton. It’s a large and valuable property. Unfortunately, the hotel is not currently profitable and is quite indebted, making it doubtful that Portsmouth Square will ever realize much value from owning it. In fact, the company nearly lost the hotel to foreclosure earlier this year before managing to refinance the hotel subsidiary’s debt. Still, things look dicey.

15. Reeds, Inc. - REED. There are plenty of examples of businesses with good products, but the company just can’t figure out how to make money. Take Reed’s. Reed’s brand ginger beer is delicious, in your Dark ‘n’ Stormy or by itself. At least, it was last time I had some several years ago. I should buy some more. Maybe I am part of the problem? Reed’s manages $38 million in annual revenue and gross profit of $11 million, but its operating costs are out of control. They really should sell the brand to a larger consumer company. No idea why they haven’t after all these years.

    

16. First Acceptance Corp. - FACO. How do you make money selling insurance to bad drivers? Well, you had better charge them a lot. Auto insurers have been hit hard in recent years by rising repair and replacement costs, but First Acceptance has thrived. The company has grown quickly in the non-standard (read: risky) auto insurance sector, nearly doubling its annual premiums received since 2021. Now, a rapidly growing insurer can be a dangerous thing. After all, anyone can write a ton of policies just by under-pricing them. But so far, First Acceptance has kept its combined ratios well below the magical 100. The company’s investment portfolio is standard for an insurer, dominated by treasuries, corporate bonds, and agency debt. First Assurance’s leadership has a good track record at larger insurers. Maybe there’s something here?

17. Looksmart Group, Inc. - LKST. I’m showing my age here, but a generation ago a host of Web 1.0 search engines competed for users. Google, of course, won out, leaving competitors like Lycos, Altavista, and AskJeeves only footnotes in the history of the internet. Looksmart was one of these search engines. In fact, in 1999 it was the 12th most-visited website. It IPOed in August 1999 and by October had achieved a $2.5 billion valuation. But it all ended in tears. Looksmart bounced through various owners, finally merging with a subsidiary of Pyxis Tankers (of all things) in 2015. Today, Looksmart somehow persists as a programmatic advertising seller. Are they profitable? No. Do they have a positive tangible net worth? Also, no. Yet, somehow this relic of a bygone era persists.

18. Scheid Vineyards - SVIN. Watching Scheid for years is how I learned that while owning vineyards and leasing them to someone else can be quite lucrative, being a vintner is a tough, tough business. Scheid is (mostly) the latter. Scheid makes mass consumption wines. In other words, cheaper wines for the less discerning or more budget-conscious consumer. Mass market wine is a highly commoditized business, and higher-cost producers like Scheid really struggle against their bigger competitors. Scheid has tried to muddle through by selling off excess land and cutting costs, but I fear the company’s rising debt load will prove its undoing.

19. Huntwicke Capital Group - HCGI. Here is another true eccentric of the OTC markets! Huntwicke is $25 million market cap company that dabbles in securities brokerage and portfolio management, real estate, brewing, and a soccer skills academy. You might ask what the synergies are among these businesses and believe me, I am wondering the same thing. Whatever the logic or lack thereof, I am glad that the OTC markets can still be a home for truly odd constructions like this.

20. Federal Screw Works - FSCR. Maybe it’s because I am from Pittsburgh, but I have such a soft spot for old-line industrial companies. Federal Screw works is a Michigan manufacturer with a $9 million market cap. For 108 years now, the company has sold its screws and fasteners to the automotive industry. Federal Screw is an inconsistent earner, and carries substantial debt and post-retirement liabilities. It amazes me that the company’s gross property, plant, and equipment is carried at $143 million and only $28 million net of accumulated depreciation. It should be noted that Federal Screw owns buildings with square footage of 347,000 on 25 acres. The land and buildings are carried at essentially $0 on the balance sheet, but could have significant value in a sale. Unlikely, but possible.

Thanks for reading and I hope you enjoyed learning about a few more of the OTC markets oddities that still exist. There are fewer and fewer as time goes by, but they still offer great entertainment potential for us real nerds, as well as occasional investment opportunities. Happy to discuss!

Alluvial Capital Management, LLC holds shares of Decker Manufacturing Corp. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com

I miss boring markets. It’s not normal for developed market stock indexes to soar or plunge 4-5% intraday based on one man’s harebrained proclamations. While the market is soaring today, I’m not convinced the crisis is over. We’re always just one headline away. I don’t envy businesses trying to make decisions in this environment. As we all try to make sense of this new tariffying reality (did I just make that up? I want credit if politicians and media figures start using this) I thought I would share a few thoughts on things I am seeing in the market, and a few securities worth a look.

When “Being Your Own Bank” Goes Bad

I have never come around on cryptocurrencies. One of the arguments for crypto that makes the least sense to me is the idea that users can “be their own bank.” I get that banks can be annoying, with fees and waiting periods and restrictions on payments that live in the gray area of legality, if you’re into that kind of thing. I don’t like getting pitched on CDs and financial planning when I walk in to do a wire transfer, either. But the safety and security banks provide is more than worth the occasional hassle. I like knowing that if I mess up a financial transaction somehow, there’s a reasonable chance it can be caught and corrected. Not so with crypto! I make a hobby of monitoring the SEC filings and press releases of a variety of uninvestable, OTC-traded cannabis companies. These companies, being mostly scams themselves, have an extraordinary ability to fall for scams perpetrated by others. So it was no shock to me when I read this filing. https://www.sec.gov/ix?doc=/Archives/edgar/data/0001391135/000109690625000425/lsfp-20250401.htm

The company invested $350,000 of its cash into a stablecoin, likely to facilitate the purchase of a cannabis-related product from a supplier not in the good graces of the US banking system and/or government. And the entire balance was promptly stolen. The company talks about cooperating with law enforcement to recover its funds, but let’s be real. Never gonna happen. The funds could have been stolen by anyone, but my money (US Dollars, not “USD Coin”) is on an employee.

This seems to happen to some business, somewhere, almost monthly! Running a business is already tough, with plenty of risks to address. I don’t know why a business would choose to add an extra dimension by converting its precious cash to unregulated, difficult-to-safeguard digital alternatives. But I am suppose I am getting old.

There Are Cheap Deposits and There Are CHEAP Deposits

I think about bank deposits as the raw materials that fuel a bank’s lending and investing activities. The less a bank has to pay for its deposits, the better. Deposits have a direct cost component in the interest that banks must pay to induce customers to make and keep deposits with the bank, and an indirect cost component in the marketing and customer service that must be performed for the same reasons. Bank analysts focus on “net interest margin,” the spread between a bank’s interest income less its interest expense, divided by earning assets employed. Maximizing this spread (on a risk-adjusted basis) is every bank’s task, and it is a tricky one! Push too hard on loan pricing, and you risk depressing loan demand or sacrificing credit quality. Push too hard on deposit costs and you risk losing deposits to competing banks.

So anyway, the other day I decided to go looking through OTC banks to see which were paying the least on deposits. In theory, these banks should have a serious competitive advantage against other banks that must pay more. I found quite a few banks that enjoy seriously low-cost deposits. Most are either small business-focused banks that attract a lot of non-interest bearing checking accounts, escrow accounts, etc. Others operate in some strange niche, geographical or otherwise, like a rural area with an older population and little competition, or in a small university town where student groups, faculty unions, and even the university itself keep funds on deposit with local banks. One bank with nearly $120 million in deposits paid an unbelievable $45,000 in interest on those deposits last year! There are people paying more interest than that on their mortgage! (Not me!) As the cost of a liability approaches zero, the economic value of a liability does the same. Can a case be made that a deposit base that is costless is effectively not a liability at all, provided it is highly stable? In that case, the “economic” book value of the bank in question would look wildly different than GAAP tangible book value.

Needless to say, other banks want these low-cost deposits and may find buying them a more effective use of capital than attempting to woo them away. Banks with good quality deposits make great acquisition targets.

All this is to say, I think targeting banks with structurally attractive deposit bases is a pretty attractive niche strategy, and I would love to compare notes with other investors doing the same thing. This is hardly a new idea, but I don’t think it has been applied with any vigor to OTC-traded banks, which are rarely investable for institutional capital. Please reach out if you are doing serious work.

Five Quick Pitches

And I do mean quick! Here are brief summaries of five stocks I think are worth a look in this downturn. Assume my firm owns all five for clients and could buy or sell shares at any time. I am not recommending anyone buy these. Do your own due diligence.

CBL Properties

CBL Properties is a mall owner that restructured and emerged from bankruptcy in 2021. Since, the company has paid off additional debt, sold non-core properties, and returned a lot of cash to shareholders. The company will continue to pursue these three objectives. Shares have tumbled as fears over consumer spending and leverage grow. In my view, shares now trade for the value of CBL’s cash and unencumbered properties, completely ignoring the substantial value in the company’s joint ventures and properties encumbered by the term loan. At year-end, CBL had $9 per share in cash and unencumbered properties that produced $66 million in 2024 net operating income. Valuing these properties at a 15% NOI yield gives another $14 per share in value.

Titan Cement

I am long-term bullish on cement, believing the world is underinvested in raw materials production. Titan Cement is a global producer with operations in Southern and Eastern Europe, Egypt, Turkey, Brazil, and the United States. Shares are traded in Brussels and Athens. After observing the huge gulf in valuations for US cement producers vs. all others, the company wisely chose to IPO its us operations as “Titan America SA,” ticker TTAM. Their timing was good, as there is no way the IPO could go off now. Titan America shares are well off the IPO price and worth a look, but my interest is in the parent company. There are two ways to think about Titan Cement’s value.

1. Valuing TTAM at market value and determining where the European “stub” trades versus peers. By my calculations and including the proceeds that Titan Cement received in connection with the Titan America IPO, the market is valuing Titan’s ex-US operations at around 3.8x EBITDA.

2. Calculating Titan Cement’s enterprise value and EBITDA less the non-owned portion of Titan America. Adjusted for the recent transactions, Titan Cement has an enterprise value of just under €3 billion, or 5.7x 2024 EBITDA. This reads fairly cheap for a cement company with more than half its EBITDA derived from the US part of of the business.

Cement companies will suffer if this trade war continues, but I continue to believe the industry will exhibit long-term pricing power and sustained earnings growth. I think investors could do worse than buying quality cement assets with good management at mid-single digit EBITDA multiples.

Seneca Foods

I started buying Seneca Foods in 2023, when fears over swelling inventory and falling margins lead many investors to steer clear. Perhaps more than any other company in the Alluvial portfolio, Seneca benefits from trade tensions and a weakening consumer. Reduced agricultural imports are supportive of higher veggie prices, and a more precarious economy results in consumers trading down to canned vegetables rather than fresh or frozen. What’s more, Seneca maintains its own can production facilities, cushioning the blow from metals tariffs. Despite these factors, Seneca shares are still down 6% or so this month. The company’s trailing free cash flow yield is extremely robust thanks to working capital release. While this pace of inventory reduction won’t be sustained, Seneca is very well-situated to continue generating free cash flow and returning it via share repurchases. Boring and cash generating are just how I like them.

4Imprint Group Plc

I am looking closely at 4Imprint Group as a very, very good business facing some near-term headwinds. 4Imprint is fundamentally a US business, but it is listed in London. If you have ever gotten a water bottle from a charity 5k race, or a backpack or tote bag with a corporate logo from a company event, there’s a very good chance that 4Imprint provided it. 4Imprint is good at it, and they make a lot of money doing it. Company revenue grew nearly 60% from 2019 to 2024, and operating income nearly tripled. The company is also remarkably capital efficient. Unfortunately, last month the company revealed that orders are down year-to-date on customers’ economic concerns. Shares plunged and are now off 50% from their 2024 highs. Bit of an over-reaction? Could be. 4Imprint shares now change hands for around 8x trailing operating income. The company has net balance sheet cash.

Everyone tread with caution out there, and try not to get swept up in the alternating euphoria and despair. The future is never certain, but history shows that those who keep their heads when emotions run high are far more likely to come out on top. Thanks for reading!

Alluvial Capital Management, LLC may hold shares of any securities mentioned for client accounts it manages. Alluvial Capital Management, LLC may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com

Tactile Fund LP has launched! Alluvial’s newest investment offering, focused entirely on global companies with extraordinary physical assets, commenced operations with $6.3 million in assets. I am eager to spread the word about this unique strategy. With that in mind, I have launched a sister Substack for Tactile Fund. I get that you have enough people trying to sell you something already, so I don’t plan to talk about Tactile Fund all that often here on the Alluvial Substack. So if you’d like to follow Tactile’s progress or learn more, please sign up for the Tactile Substack.

Back to it! I built my reputation by profiling unlisted, OTC-traded securities. But I no longer do much writing or talking about that segment. Why? Sadly, the OTC market is just not what it once was. Why?

• The number of good quality OTC-traded companies has declined. Many profitable, cash-flowing, dividend paying industrial and consumer goods companies have gone private or been bought by competitors or private equity. Their ranks have not been replenished by good new companies joining. This isn’t unique to the OTC world. development. The ranks of public companies of all kinds have been in steady decline for decades now. Many companies did the math and realized the costs of being public didn’t make up for any valuation uplift they experienced (or didn’t, as was the case for many small, more mature companies.) Plus, there are now plenty of financing alternatives. Private equity is swimming in deployable cash. Why offer shares to the public and take on onerous filing requirements when Percy Chadingham IV has raised $60 million from his father’s Wharton ‘92 classmates to deploy in select opportunities in mid-market Midwestern manufacturers and distributors?

• The SEC cut the market in two with its 2020 changes to Rule 15c2-11. Previously, investors were free to buy or sell any OTC security, no matter what level of public disclosure the company chose to provide. And some chose very little or none. Fine by me. I rather liked the game of buying a handful of shares and reaching out to the company for financials. Their response, whether friendly or hostile, was an important tell. But post rule change, companies that do not publish their annual results through OTCMarkets.com are relegated to the “expert market,” where no mainstream retail-oriented brokers will execute buy orders. So another 10 or 20 good quality OTC companies became unavailable to new investors.

With fewer “investment grade” OTC companies out there, finding value is just more of a slog than it used to be. But that doesn’t mean it isn’t out there! The OTC market is still home to intriguing companies, some of which are well worth examining. I challenged myself to draw up a list of 20 OTC-traded businesses with real assets and earnings, further challenging myself to stick to businesses I don’t own. Harder than it sounds! All of these companies have shares trading at some tier of the OTC Markets, expert market excluded. It almost goes without saying, but I’ll say it anyway: most of these are very illiquid, offer only limited financial disclosures, and many have a controlling shareholder whose motivations may differ from minority shareholders. No one should transact in any of these without extensive due diligence and I am certainly not recommending anyone do so. For those who may be newer to the world of unlisted stocks, OTCMarkets.com is the clearinghouse for the financial reports and press releases that these companies produce.

Here goes!

1. Paul Mueller Company - MUEL. Mueller is a Missouri-based manufacturer of large stainless steel tanks and systems. Think giant vats for the dairy, beverage, and pharmaceutical industries and more. The company’s results have been frustratingly inconsistent over the years, but the last three quarters saw Mueller record $18.5 million in profit and a soaring backlog thanks to orders from pharmaceutical companies. This time, can the good times last?

2. American Biltrite Inc. - ABLT. I love the eclecticism on display here. Founded in 1908, American Biltrite makes rubber floor coverings, pressure-sensitive tapes, and…fashion accessories. Seriously, AmBilt is a major manufacturer behind the cheap jewelry from places like Anthropologie, Ross Stores, and Stitch Fix, plus some higher-end retailers. Problem is, they don’t make money. American Biltrite’s annual revenues are nearly $200 million and gross profit exceeds $50 million, but it somehow all disappears in overhead and facilities expenses. This has been the state of affairs for at least a decade now. Between the ongoing lack of profits, pesky asbestos liabilities, and a controlling family that seems content with the company’s floundering, there may not be much here to attract investors. Nevertheless, I enjoy tracking this true oddball.

3. Alaska Power & Telephone Co. - APTL. The OTC markets were once home to dozens of local telephone companies and utilities. Now there are only a handful. Alaska Power & Telephone Co. is both. APT has served the hardy citizens of Alaska since before statehood. Today, the company continues to invest in bringing clean hydro-power to communities once served only by diesel generators, and connects isolated communities to the world outside with broadband. It’s a difficult and capital-intensive business, but APT is consistently profitable and pays dividends. Employees are big shareholders.

4. Dimeco, Inc. - DIMC. I am an absolute sucker for old-timey sounding businesses, and this bank named after a coin fits the bill. Subsidiary “The Dime Bank” has served tiny Honesdale, PA, outside of Scranton, since 1905. Shareholders have been well-served also, with Dimeco shares returning >10% including dividends over the last 30 years. Today, Dimeco trades at 90% of tangible book value and at 7.5x trailing earnings.

5. ACMAT Corp. - ACMTA. ACMAT is an insurer, offering surety bonding to contractors and construction firms. The odd part is the company doesn’t seem to do much actual bonding. Annual premiums are only about $1.2 million, compared to equity of almost $30 million. The firm holds $45 million in cash and securities, mainly bonds. Over the years I have heard that ACMAT is conservative almost to a fault, writing nearly zero business when it believes underwriting conditions are lackluster, than expanding greatly when a hard market comes along. True? I don’t know. Seems more like a bond portfolio with a tiny underwriter attached so that management has something to do all day.

6. Endo Inc. - NDOI. The legal fall-out of America’s opioid crisis forced many opioid manufacturers into bankruptcy, including Endo’s predecessor, Endo International. Endo re-emerged with substantially less debt and without the specter of continued opioid litigation. The company’s suite of pharmaceutical products still includes opioids, presumably with strict guardrails around how these products are marketed and delivered. Post-bankruptcy situations are one of my favorite hunting grounds, but pharma is pretty far outside my wheelhouse and I have not been able to reach a conclusion on Endo’s merit. With a $2 billion market capitalization, Endo is not your usual OTC minnow.

7. Southern Realty Company - SRLY. The “Southern” in Southern Realty refers to Southern California, not “The South.” Southern Realty is one of the stock market’s last vestiges of “Old California",” owning mineral rights to 40,000 gross acres (17,000 net) in the Central Valley. Any surface acreage the company once owned was sold long ago. These days, the company earns money in sporadic fashion by leasing its acreage to solar developers. The prospects of any kind of operating business being established seem remote. Anyway, gotta love a company with no website in 2025.

8. Gould Investors LP - GDVTZ. There were once many public real estate partnerships and MLPs, but tax law changes and the generally dismal performance of the asset class resulted in nearly all of them liquidating or being merged away over time. Gould Investors LP (and listed company New England Realty Associates LP) survived. Gould owns a collection of properties, loans, and affiliated public REIT securities. Gould Investors LP occasionally distributes these securities to holders. The company’s structure is fun to tease apart, with the requisite minority interests and cross-holdings.

9. Pardee Resources - PDER. Long a favorite in crusty value investor circles, Pardee owns a huge portfolio of natural resource assets, including timberlands, oil & gas rights, and coal. These assets were assembled generations ago, and the company leases them to operators, collecting royalties. The company once offered a sumptuous lunch to attendees of the annual shareholders’ meeting in Philadelphia. I never attended, and it seems this perk has gone away as the company has become better-known. In recent years, the company made some sub-par investments in solar developments, grape farming, and almond groves in Portugal, the latter causing some speculation over whether executives simply wanted an excuse to take a sunny annual trip to “check on their investment.” But the company continues to pay dividends and the breadth of its portfolio is truly impressive.

10. Detroit Legal News - DTRL. True to its name, Detroit Legal News publishes nine newspapers that communicate legal notices to the Michigan legal community. The company also does a lot of contract printing. One might imagine both businesses are in steady decline, and one would be correct. Still, Detroit Legal News is a fighter, and the company keeps coming up with new ways to carry on. The company also has a knack for selling hidden assets, like a parking lot, and dropping a big special dividend on shareholders. It might be worth perusing some property records to see what else the company may own.

11. The Reserve Petroleum Company - RSRV. Reserve is an Oklahoma-based oil & gas company with assets in several states. Reserve is a bit plodding, but makes good money most of the time and keeps its balance sheet in pristine condition. Reserve is obligated to file quarterly and annual reports with the SEC due to its large number of shareholders. Not surprising, as the company got its start by approaching farmers and landowners and trading share certificates for their mineral rights in the 1930s. Presumably there are share certificates gathering dust in safety deposit boxes, some lost in fires and floods, and others simply forgotten. Because of this, Reserve long had trouble figuring out who held some of its shares, and dividends owed to these mystery owners would simply accumulate as a liability on the balance sheet. The issue seems to have been resolved, but I always got a kick out of seeing that line in the financial statements.

12. Exchange Bank - EXSR. Some community banks are owned by their founding families, others by local business leaders or community members. Exchange Bank is owned by a community college. Well, at least by a trust established to provide scholarships for one. The Frank P. Doyle Trust owns 50.44% of Exchange Bank of Santa Rosa, California. The trust receives nearly $4.5 million in dividends annually from its ownership, most of which it uses to provide scholarships to students at Santa Rosa Junior College. The trust has paid out over $103 million in scholarships since it was established in 1948 when Mr. Doyle passed and left his majority interest in Exchange Bank to the trust. What a legacy.

13. Burnham Holdings Inc. - BURCA. Lancaster, Pennsylvania-based Burnham is makes heating and cooling equipment. The company is known for its variety of boilers, but it also manufactures heat pumps and air conditioning equipment. Burhnham pays generous dividends, but it also carries a generous debt load. At around 5x EBITDA, Burnham seems like a company that would fetch a meaningful premium if it ever decided to sell.

14. Capital Properties, Inc. - CPTP. I have never been to Rhode Island. If I ever do find myself in Providence, I will have a look around for the parcels that Capital Properties owns. Capital Properties owns 16 parcels in the Capital Center area, most of which are on ground lease to the city parking authority, awaiting development. This would presumably cause a large uplift in the rents that Capital Properties receives. For now, the company trades at a cap rate of around 7.8%, though corporate overhead eats up a good bit of that yield. Might be worth kicking the tires if you’re long-term bullish on downtown Providence.

15. Ferrellgas Partners LP - FGPR. Ferrellgas is a propane distributor, one of the nation’s largest. The company grew rapidly by acquiring mom & pop operators and plugging them into its superior logistics network, raising margins and increasing debt capacity to do the same thing all over again. Unfortunately for Ferrellgas, the company fell into distress a few years back and went through bankruptcy. Ferrellgas exited bankruptcy in typical fashion, shedding debt and onerous contracts. But the new entity is still very capital-intensive and carries high financial leverage. One has to imagine that the company will eventually seek to uplist to a major exchange again, perhaps once its post-bankruptcy capital structure simplifies.

16. Winland Holdings Corporation - WELX. Winland offers water intrusion monitoring systems, humidity sensors, et cetera. Perhaps more notably, Winland was an early mover in Bitcoin mining. Mr. Stephen Bregman of FRMO Corp. and Horizon Kinetics, major proponents of Bitcoin and “inflation-resistant” assets, owns 40%. Magical imaginary internet money isn’t my thing, but maybe Winland’s crypto exposure is interesting. Someone else can figure that out.

17. Bowlin Travel Centers - BWTL. This one is fun! Bowlin owns a collection of gas stations and rest stops in New Mexico and Arizona. But it also owns THE THING. I really must insist you follow the link. Who could put a price on that? It’s like trying to value Shakespeare’s sonnets.

18. ITEX Corp. - ITEX. ITEX operates a barter network where businesses can exchange surplus inventory and capacity. The networks used to be a lot more prominent than they are now thanks to some favorable tax treatment (what else) but they seem to be in steady decline. Members of ITEX’s barter network exchange “ITEX Dollars” with ITEX taking a 6% cut of every exchange. ITEX Corp. carries a lot of cash, but its operating results have been in decline. For reasons inscrutable to the author, Sardar Biglari’s “The Lion Fund, LP” is a 19% owner here.

19. Blue Dolphin Energy Co. - BDCO. Running an oil refinery that sits solidly in the top quartile of the breakeven cost curve is a tough way to make a living, but it’s never boring, and neither is Blue Dolphin Energy. Sometimes, crack spreads widen to the point where the company gushes cash. Just as often, the company struggles to manage its strained balance sheet and stay afloat until next time the cycle turns. Perhaps not one to hold long-term, but the company is capable of earning more than half its market cap in a particularly good year. Blue Dolphin is majority-owned by Lazarus Energy Holdings, a fact I enjoy because Blue Dolphin does seem to rise from the dead time after time.

20. Moro Corp. - MRCR. Moro Corp. is a residential builder and HVAC contractor in Upstate New York. Moro Corp. openly declares itself a “value investor” on its company website, but its results have been only mediocre, growing book value at 8.5% annually this last decade.

There it is: 20 examples of the unusual and obscure companies that still populate the OTC markets. I could easily list 20 more and I probably will, some time. Does anyone have experience with any of these, as an investor, competitor, or customer? I would love to hear some anecdotes. Thanks for reading!

Tactile Fund LP is a Rule 506(c) public offering open to accredited investors only.

Here is a one-page summary of the strategy.

And here is a pitch book with more of the nitty-gritty.

Tactile Fund LP launches January 1 and is accepting subscriptions from limited partners now. If you would like to know more, please reach out to me directly via email or use the new Tactile inbox at info@tactilefund.com. You can also visit Tactile’s website at tactilefund.com.

I would be absolutely delighted to tell you more about Tactile Fund. I could not be more excited.

A Visit

I am happy as can be in my little town outside Pittsburgh, but it’s been too long since I visited New York. So I’m making the trip next week, November 18-20. Please let me know if you’re interested in meeting up. I have to prioritize meetings with current clients and partners and those potentially interested in Tactile Fund, but it would be wonderful to meet some blog readers as well and chat about investing!

And As Advertised, A Stock Pitch

What’s the worst kind of stock pitch? For my money, it’s “sum of the parts.” We have all run across situations where a company appears to trade at a large discount to the value of its assets, whether those assets are operating companies, real estate, or a mysterious third thing. Quite often the thesis goes something like:

“ABC Corp. has an enterprise value of 4X. I think the company’s mature, cash-flowing business is worth 3X, while its fast-growing new segment is worth 2X. The company also has excess cash and securities worth 1X, so the business is worth 6X and its shares have 50% upside.”

If it were only that simple. Most of the time, if a company trades at a discount to the value of its parts, there’s a very good reason. Perhaps the parts aren’t truly independent and rely on some common infrastructure or key staff. Perhaps the fast-growing asset is actually being subsidized by the mature asset and if separated, its growth would slow rapidly. And then there are scenarios where a company really does have independent, separable assets worth far more than its enterprise value, but management has absolutely no intention of engaging in sales or spin-offs to unlock value.

Pitfalls like these are why I typically dismiss sum of the parts stock pitches out of hand, unless there is a firm catalyst like a pending asset sale or management initiatives to highlight value. With that, I present Cementos Argos SA.

Cementos Argos SA is a Colombian holding company with interests in cement and aggregates companies in South and Central America and the Caribbean Basin, as well as financial investments and a large strategic holding in NYSE-listed Summit Materials. Cementos Argos shares trade well below asset value, but there are multiple upcoming catalysts that could cause shares to move higher. Cementos Argos trades in Bogota with good daily volume of USD $1-3 million. There is also an extremely illiquid OTC-traded ADR, ticker CMTOY, with each ADR share representing 5 local common shares. (Please be extremely cautious if you attempt to trade in the ADR. Though there is more liquidity than appears in the public order book, it is still a very illiquid instrument.)

Cementos Argos made headlines in 2023 when it agreed to sell its US assets to Summit Materials for cash and stock. The deal closed in January 2024 with Cementos Argos receiving cash and 54.7 million Summit shares. Cementos Argos used the cash proceeds to pay down debt and retained the Summit Materials shares as a strategic holding. Cementos Argos shares trade for less than the value of its Summit Materials shares, let alone its substantial non-US operating businesses and investments.

As we walk through what Cementos Argos owns today, I’ll use US Dollars. Cementos Argos operates in multiple regional currencies and reports in Colombian Pesos, but provides USD-equivalent figures in its English language investor materials. Ordinarily I would be cautious about owning anything denominated in an inflationary frontier market currency like Colombian Pesos, but the risk is effectively mitigated by Cementos Argos’s large USD investment in Summit Materials.

Summit Materials

Cementos Argos owns 54.7 million shares of Summit Materials, a mid-cap cement and aggregates producer with production sites and terminals in the US Southeast. At $50.30 per share, this investment is worth $2,887 million to Cementos Argos. The company indicates it intends to hold these Summit shares as a long-term strategic investment, but the choice may not be up to Cementos Argos. Summit Materials has been approached by the largest US producer of packaged concrete, Quikrete. If Quikrete is successful in acquiring Summit Materials, Cementos Argos would suddenly receive a gigantic cash windfall. Alternatively, Quikrete could acquire Summit using stock or allow Cementos Argos to roll its stake into the combined entity, but there are no indications Quikrete wishes to be a public entity or expand its ownership.

There is no guarantee that Quikrete acquires Summit. If it does not, Summit shares likely head back to the $40s. Still, knowing that Summit Materials is open to being acquired could invite another bidder.

Operating Companies

Cementos Argos owns a variety of operating assets in Colombia, Panama, Honduras, Guatemala, the Dominican Republic, and the Antilles. These businesses serve a mix of local customers and export markets.

Cementos Argos expects these businesses to produce 2024 EBITDA of USD 253-264 million. I think a fair multiple for frontier market cement producers is 6x EBITDA, a >40% discount to US valuations. That would value the company’s operating businesses at $1,551 million using the EBITDA midpoint.

Financial Investments and Cash

Cementos Argos has an 8.9% ownership interest in another listed Colombian holding company, Grupo de Inversiones Suramericana S.A. “Grupo Sura” is broadly diversified with interests in insurance, asset management, and banking. Funnily enough, it also holds an indirect interest in Cementos Argos as a large shareholder of Cementos Argos’s largest shareholder. Who doesn’t love a South American analogue of notable byzantine French conglomerate Bolloré? Wait, don’t answer that.

Grupo Sura itself trades at a big discount to the value of its holdings and is taking steps to unwind the discount. But at current trading prices, Cementos Argos’s stake in Grupo Sura is worth $289 million.

Cementos Argos has corporate cash of $475 million.

Liabilities

Cementos Argos used the sale of its US assets to reduce debt. High leverage had been a drag on the company for years, particularly in Colombia’s high interest rate environment. Following the pay down, Cementos Argos has total debt of $1,030 million. Importantly, 97% of the company’s debt is denominated in Colombian Pesos.

Valuation

Putting it all together, I arrive at a valuation of $4,172 million. This works out to COP 13,807 per local share, or $15.85 per USD, 66% upside from current trading prices.

I include this chart as an illustration of the components of Cementos Argos’s net asset value. Summit Materials is by far the largest determinant of value, so anyone poking around this situation must form a view on the value of those shares. The value of the company’s operating businesses is also significant. Taken together, the net value of the company’s financial investments, cash, and debt add only modest leverage to changes in net asset value.

In Sum

OK, so it looks like the value of Cementos Argos’s assets exceeds its trading value. So what? Companies trading below NAV are a dime a dozen, especially in frontier markets. A discount to NAV is nice, but I’m really only interested if there are reasons to believe a company’s management is actually interested in closing the gap. In Cementos Argos’s case, I believe this to be true for three reasons.

• The company is committed to returning capital. Through the first nine months of 2024, Cementos Argos repurchased COP 300 billion of shares and paid COP 380 billion in dividends, 30% higher than last year. For the full year, the company’s distribution yield will exceed 8%. If the market is not valuing a company’s assets fairly, putting those assets into shareholders’ hands via returning capital is a great move.

• The company is making its shares more investable. Earlier this year, holders of preferred shares converted nearly all their shares to common shares, collapsing the dual share class structure. The company hired a market maker to reduce trading spreads and improve share liquidity, and the company successfully positioned itself for inclusion in multiple global equity indexes, entering FTSE and MSCI indexes in August and September. The resulting increase in trading volume makes it easier for larger buyers enter and exit positions in the stock, opening up ownership to a bigger pool of global investors.

• More broadly, the Colombian stock market seems to be in the early stages of important reforms and structural changes that will invite more attention and foreign investment. Two of the exchange’s largest components are diversified conglomerates with Japan-style crossholdings, but they are evaluating moves to increase independence and unwind their interlocking structure. See “Colombian conglomerates Argos, SURA begin to study possible ownership split.” from Reuters. And yes, both of these companies are in Cementos Argos’s ownership structure. I believe that reducing the complexity of these and other Colombian companies will have a positive impact on corporate governance and valuations. Also, the Colombian Stock Exchange is taking steps in cooperation with the Peruvian and Chilean exchanges to create a unified regional trading platform.

Bottom line, the Cementos Argos of the future will have better assets, a less levered balance sheet, more liquid shares, and a higher profile than the company of yesterday. If Quikrete buys Summit Materials, the company will be sitting on a mountain of cash. In any case, I think Cementos Argos shares are primed to trade closer to net asset value over the next 12-18 months.

Alluvial Capital Management, LLC holds shares of Cementos Argos S.A. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com

Peakstone Realty Trust trades at less than half my estimate of asset value, offers an exceptional free cash flow yield, and will benefit from simplification and repositioning. Peakstone owns 16.6 million square feet of industrial and office real estate. Their properties are 96.3% occupied with a weighted average lease term of 6.6 years and produce $187 million in annual net rents. Peakstone’s current enterprise value of $1.43 billion yields an implied cap rate of 13.1%. Shares trade around $12.50 as I write, but I believe a conservative estimate of asset value puts fair value at no less than $25.

There are multiple reasons that Peakstone trades so cheaply. The biggest is its high exposure to office, the most challenged real estate sector. Peakstone was also a private REIT until last year and has yet to attract much institutional attention given its small size and short track record as a public company. As the office segment begins to turn the corner and as Peakstone builds credibility, I think the discount to fair value will diminish.

Assets

Peakstone divides its properties into 3 segments: industrial, office, and other. I will tackle each in order of its quality. First, industrial.

Peakstone’s industrial assets consist of 19 properties, located mostly in the Mid-Atlantic, Midwestern, and Southeastern markets. These properties are distribution centers, warehouses, and light industrial/R&D focused. The majority of tenants are investment grade lessees.

Industrial is a hot sector. Rents are up nationwide, with in-place rents averaging $8 per square foot and newly-signed leases exceeding $10 per square foot. Newer properties in the most supply-constrained areas are regularly trading with 5 handle cap rates. Peakstone’s industrial properties are bringing in just $5.49 per square foot, indicating plenty of potential for increased rents on re-leasing. And that is exactly what has been happening. In the second quarter, Peakstone signed a one year extension on a property in Columbus, OH at $6.50 per square foot, a 63% premium over the previous lease. It also secured a lease renewal on a Jacksonville warehouse at a 28% premium. So while Peakstone won’t be capturing premium rents from its industrial assets, I believe we can expect to see industrial rents increasing at a mid-single digit annual pace as below-market leases gradually renew. Peakstone’s industrial properties currently produce annual net rents of $49.3 million. Valuing this segment at a 6.3% cap rate would value the industrial portfolio at $789 million. Just as a sanity check on that cap rate, investment grade industrial REITs are trading at cap rates of 4-5%.

Next, office. Peakstone owns 36 office properties in many different metro areas nationwide. These properties are largely suburban. The challenges facing the office sector are well-known so I won’t spend time laboring the point. Fortunately for Peakstone, its office portfolio is better situated than most office REITS.

• Long average lease terms - the weighted average lease term on Peakstone’s office properties exceeds 7 years. Only 5% of lease revenue rolls off in the next 3 years. This lack of short-term lease expirations means Peakstone is not stuck trying to secure lease renewals in the current depressed office market and can wait until better times arrive (hopefully.)

• Large percentage of “critical” facilities - most of Peakstone’s office properties are home to company headquarters or house resources like company data centers that make moving costlier or more disruptive to operations.

• Relatively new buildings - the weighted average age since construction or last renovation for Peakstone’s office portfolio is 13 years. Not gleaming new, but not likely to require extensive capital expenditures prior to re-leasing.

These 36 properties produce $112.4 million in annual net rents. So, what’s that worth? I have, of course, gone through each property and applied what I believe is a conservative cap rate to each. Feel free to check out the results here. I arrive at a fair cap rate for the portfolio of 9.5%, valuing the collection of $1,176 million. As a reality check, office REIT peer (and large Alluvial holding) Net Lease Office Properties has been selling properties with 6-8 year leases at 8-10% cap rates.

Last, there is the “other” bucket. This is is a collection of 14 non-core properties that Peakstone is in the process of divesting. For the most part, these properties are part of non-recourse loan pools. The first of these pools is the “AIG Loan” bucket. The AIG Loan has a principal balance of $91.2 million. There are 4 office properties in this pool. While a couple have decent tenants and loan terms, I don’t think the asset value here exceeds the loan value and I ascribe zero value to Peakstone from these assets.

The second pool is “AIG Loan II” bucket. This loan has a principal balance of $105.6 million. There are 7 properties in this bucket, with 4 having decent tenants and remaining lease terms. There may be some value to these properties, depending on if Peakstone can secure good lease renewals or new tenants for the buildings with leases expiring in <12 months. Still, I don’t see the net value of these properties to Peakstone exceeding $23 million. Could be less.

Last, there are 3 unencumbered properties in the “other” category. Only 1 has a decent tenant. The others are vacant or nearly so. Valuing those properties at $50/square foot and the occupied property with a normal cap rate yields value of $47 million.

That yields total value of $70 million for the “others.” Keep in mind this value is squishy and depends a lot on leasing activity and/or successful divestitures. It could be higher or lower. Regardless, it’s not a major determinant of value here.

Liabilities

Now to the liability side of the picture. Thanks to the well-timed sale of some office buildings in 2022, Peakstone is flush with cash. The REIT recently paid down a portion of its term loan and pushed the maturity on term loan and its revolving credit agreement to 2028. The term loan has a $210 million balance and the revolver has a $400 million balance. Peakstone has another term loan with an April 2026 maturity and a $150 million balance. There is also a $250 million mortgage due 2028 backed by certain properties. (These properties are worth well more than the mortgage balance, so I include this mortgage in enterprise value.) Finally, there’s a small $17 million mortgage against a single industrial property. This sums to $1,027 million in debt. Pro forma for the term loan pay-down, Peakstone has $257 million in unrestricted cash for a net debt of $770 million, a very comfortable 4.8x the net rents of the core office and industrial properties. This analysis excludes the non-recourse debt associated with the “other” segment. Total annual cash interest expense, pro forma for the refinancing and including the non-recourse debt, is $48 million.

Thanks to a well-timed rate swap, the interest on $750 million in borrowings is fixed at a low rate until July 2025. With the Federal Reserve poised to begin cutting rates, Peakstone appears set to continue enjoying moderate borrowing costs.

Value

Putting it all together, I arrive at net asset value of $1,265 million, or $31.90 per diluted share. Below is a sensitivity table of per-share value at various office and industrial cap rates.

Readers can apply their own opinion of fair cap rates for office and industrial properties, but I think any reasonable figures create asset values for Peakstone in the high-$20s to mid-$30s. It almost goes without saying that the actual trading price around $12.50 implies cap rates grossly divorced from on-the-ground market prices.

Now, what about overhead? A valuation based on assets and liabilities alone is incomplete. After all, it costs money to run Peakstone, and that overhead directly reduces the value that Peakstone shareholders receive. In my experience with REITs, the market is basically willing to ignore the drag that company overhead produces, provided that 1. the overhead is reasonable, 2. the company management team creates value in the long run, and 3. annual overhead grows no faster than inflation or the rate at which the REIT balance sheet grows, whichever is higher. If there’s currently a knock against Peakstone (other than them having the audacity to own offices) it’s that overhead is too high at around $40 million annually. Despite owning fewer properties now than in years past, the company retains a cost structure more appropriate to a larger REIT. There are early signs of progress. Second quarter 2024 general and administrative costs were down 24% year-over-year and down $500k from the first quarter to a $36.4 million annual run rate. I hope the company continues making progress, but for now it’s reasonable to apply some sort of discount to adjust for the top-heaviness of the REITs operations. Assuming two thirds or $24 million of Peakstone’s overhead is pure drag and valuing that at 10x reduces Peakstone’s value by $240 million, equal to $6.05 per share. In sum, I combine net asset value of $31.90 per share, less the value of overhead drag of $6.05 per share, to arrive at a fair value of $25.85 per share.

Cash Flow

Asset value is nice, but at the end of the day, it’s cash flow that drives returns. I am not adverse to investing based on discount to asset value, but I’m a LOT more comfortable with the prospects when I have a fat free cash flow yield to collapse the discount. Peakstone has cash flow in spades. Peakstone collects net annual rents of $187 million. $36 million goes out the door to keep the corporate entity’s lights on and employees coming back. Peakstone is currently paying $48 million on its borrowings and earning $12 million in interest income for net cost of $36 million. Capex is nearly a non-factor at maybe $5 annually. That nets to $110 million in annual free cash flow or $2.77 per share. Not bad on a $12.50 share.

Management

Peakstone’s management team is experienced and clearly capable of managing a public REIT. They successfully steered the REIT through the beginnings of the downturn in office real estate, executing a timely sale to the joint venture that brought in substantial cash and reduced exposure. I am less convinced management is optimally incentivized given their minimal stock ownership. Management compensation is variable and depends on achieving certain concrete goals, but there is no substitute for ownership to drive outcomes. This would be more of an issue for me in a less discounted “compounder” type investment where forward returns depend more on capital allocation decisions and less on mean reversion. I am more willing to overlook lack of alignment in a severely dislocated stock like Peakstone. Management is a neutral factor here.

Strategy

Peakstone’s strategy is simple and achievable. The REIT will continue selling properties from the “other” segment and paying off related debt, and using the cash flow from its core office and industrial segments to reinvest in industrial properties. As the number of properties in the troubled “other” segment declines, the balance of value shifts from office to industrial, and the office segment bottoms and begins to inflect, I think the market will re-evaluate how it categorizes Peakstone and stop assigning a punitive valuation framework. I expect this process will take another 12-24 months to play out, but the company is actively working toward this goal.

In Summary

So, how does Peakstone get from $12.50 today to a more reasonable value in the mid-$20s? The answer is probably as simple as “time.” With each passing quarter, Peakstone will continue selling non-core assets, generating substantial cash, and maybe even picking up a solid industrial asset or 3. The office sector will gradually lose its stigma, if only for the fact that the net square footage of office space is likely to decline for years to come and at some point, the market will clear. In the mean time, shareholders will enjoy a 22% free cash flow yield. At some point, Peakstone’s highly fractured, largely retail ownership will begin to consolidate into institutional hands as small holders who bought the private REIT run out of shares to sell. I wish I knew exactly how long this process will take, but I’m willing to wait around when my investment is supported by such strong asset value and corresponding cash flow.

Alluvial Capital Management, LLC holds shares of Peakstone Realty Trust for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com

First, I really enjoyed this presentation from Tim Eriksen at the MicroCap Leadership Summit. I have a lot of respect for Tim as an investor. Tim focuses on the same wild and wooly world of micro-caps and special situations that Alluvial does, and he does it well. Tim also has the rare distinction of being a successful operator, leading Solitron Devices through a difficult period of accounting restatements and now trying his hand over at PharmChem. I have watched many investment managers try to follow in Buffett’s footsteps and run a public company, and so far only Tim has proven equal to the challenge.

Could ECIP recipient banks soon(ish) repurchase the preferred shares issued to the treasury? For those not familiar, in 2022 the Treasury Department injected $8.6 billion in a collection of community banks on wildly favorable terms for those banks. About a dozen public banks participated, issuing preferred stock that paid a maximum of 2% annual dividends, with the potential to pay less based on their lending activity. These investments were intended as an economic support for low-income communities as the nation recovered from COVID, but of course they were also a tremendous windfall for investors in these banks.

I’ve heard through more than one grapevine that this program, while enacted by Congress, was never popular with the Treasury. The Department found it onerous to administer and of questionable benefit. Rumors have circulated that the Treasury would wind down the program as soon as practicable by selling preferred shares back to the issuers or even cancelling them outright. Well, the Treasury is now seeking comment on procedures around the disposal ECIP preferred shares and their valuation. Interestingly, the Treasury comments that as of March, the fair value of these securities is likely to be somewhere between 7% and 28% of face value.

A repurchase by the issuing banks at say, 20% of face value, would be extraordinarily accretive to book value and earnings. Take United Bancorporation of Alabama, one of the strongest and most successful ECIP recipient. “UBAB” has a GAAP tangible book value of $128.4 million, or $36.25 per share. If UBAB were to repurchase its $123.75 million in ECIP preferred shares at 20% of par, the after-tax gain would be around $74 million and tangible book value per share would rocket to $57.20. The math is similarly tantalizing for other ECIP recipients. In order to repurchase the preferreds, ECIP banks do have to meet thresholds for “deep impact” and/or “qualified” lending over a certain period of time. But I expect more than one of the better-capitalized ECIP banks will be eager to extinguish its preferreds at a steep discount in coming years.

Surprisingly, the “Wolf of West Virginia” wasn’t on the up and up. Maybe it’s me, but I would hesitate to invest with a guy whose Instagram handle is @thelivinglegend.tm and whose TikTok pitch promises “…ROI in excess of twenty f***ing percent” for those committing at the “f*** it, let’s go” level. I guess I’m old-fashioned. But at least one person did. Mr. Miller is alleged to have misappropriated those funds and now he is facing federal charges.

I am astounded that Mr. Miller has over 100,000 TikTok followers for what seems to be an obvious charade. Then again, he’s certainly not the biggest social media star to overstate his material wealth and business prowess for fame and attention. More broadly, I am both fascinated and alarmed by just how heavily Mr. Miller’s pitch, as gleaned from his company website and other social media accounts, associates masculinity with the willingness to invest in high-risk real estate ventures. “Are you ready to invest with me like a MAN, or are you a WIMP?!” is not even subtext but rather than openly stated message here. I suppose “You’re not a REAL MAN unless you…"-type messages are everywhere, but social media allows fraudsters to go after the insecure and impressionable more directly than ever. At least it seems the Wolf of West Virginia is out of the game.

Anybody else watching Hawaiian Electric? Hawaiian Electric appears close to arriving at a dollar figure for its liabilities related to the disastrous 2023 Lahaina fire, agreeing to pay $1.77 billion in multiple installments. Despite the good news of a resolution approaching, Hawaiian Electric Industries shares traded off this week on a “going concern” warning in its 10-Q. I don’t think there is any serious risk that Hawaiian Electric will wind up in bankruptcy. The company has to disclose that it is in need of financing and has not yet secured it, but this is far from a suggestion that this financing will not be achieved. I’ve watched turnarounds unfold at other utilities like FirstEnergy, and I think they often present opportunities. Utilities are like banks in that the distribution of returns has a long left tail. Meaning, these businesses can and sometimes do go to zero, but their potential returns and earnings are limited by industry structure and regulators. So investors rightly focus on the existential risks, knowing there are no offsetting right tail events that could result in sudden windfalls. As these potential risks are eliminated or at least become quantifiable, equity value increases.

So here’s where I am asking for some help from my readers. Hawaiian has common shares, multiple series of preferreds, corporate debt, and even utility muni bonds. Is there a part of the capital structure that sticks out to you as offering the best risk/reward here? I can’t wait to dig in.

Thanks for reading! I’ll be back soon with the promised REIT pitch.

Alluvial Capital Management, LLC holds shares of United Bancorporation of Alabama, Inc. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com

I am long-term bullish on Mexico. The country’s problems with lawlessness, corruption, and the illicit drug trade are well-documented. Less well-known is the fact that despite these issues, Mexico’s per capita GDP is up 53% this century. Millions of Mexicans have achieved middle-class status in the last decade, and Mexico itself is now a “middle-income” economy. The population is both young and better-educated than ever, and this will translate to continued growth in discretionary income.

While I see positive trends at work in the economy, the Mexican stock market is another story. For years, the exchange has suffered from a dearth of new listings, declining volumes, and some notable departures from buyouts and mergers. The ten-year (price only) annual return for the main Mexican stock index is a woeful 2.2%. While the Mexican government and the exchange are working on initiatives to encourage IPO activity and make it easier to raise capital, it could be a while before any positive impact is felt. Interest rates are another confounding factor. With no point on the Mexican yield curve offering less than 9.5%, it is difficult to convince investors to come off the sidelines and buy equities.

Still, I am excited by the value that Mexican equities offer. Today, I would like to present a family-owned consumer packaged goods manufacturer with incredible brands, multiple partnerships with blue chip American food companies, solid capital allocation, and a bright outlook.

Grupo Herdez, founded in 1914, is a major Mexican food company. Herdez has a dominant position in several different grocery store categories, including mayonnaise and pre-made salsas. The company’s market capitalization is MXN 15.2 billion, or USD $900 million.

Grupo Herdez is lead by Héctor Hernández-Pons, grandson of the company founder. CEO Magazine did a brief profile of Mr. Hernández-Pons in 2021. The interview touches on one of Mr. Hernández-Pons’ signature achievements: the 2009 establishment of MegaMex, now a significant contributor to the company’s earnings. Here’s another interview in Spanish in Forbes México.

Grupo Herdez conducts its business mostly through partnerships. The company’s major earning assets are:

• A 50% interest in McCormick Mexico. The remaining 50% is owned by who else but McCormick & Company, the stalwart spice and seasoning company. The partnership was established in 1947.

• A 50% interest in Barilla Mexico. Barilla is the ubiquitous blue-boxed pasta brand. Barilla is privately-held by the founding Barilla family.

• A 25% indirect interest in MegaMex, a 50%/50% joint venture with Hormel. MegaMex exports Mexican foods to US markets. Pre-prepared guacamole is a major product of theirs, as are tortillas and many other Mexican specialties.

Besides these top-flight joint ventures, Grupo Herdez has a wholly-owned “Impulsos” division that operates retail storefronts offering ice cream and other frozen treats. Unfortunately, this business was severely impacted by COVID and is still struggling to regain its former profitability. Grupo Herdez is working on a number of pricing and product strategies to improve results, and it is making progress. As is, Impulsos is something of a call option. The division operates just under breakeven but could be worth a substantial figure if it manages to restore margins to prior levels.

Here’s a look at just some of the brands that Grupo Herdez offers in the United States and Mexico, from a company presentation. Recognize any? I bet you do!

It’s difficult to overstate just how dominant Herdez’s brands are. The company has huge market share in Mexican supermarkets. Herdez is number 1 or 2 in 10 different categories of popular, frequently-purchased items.

Clearly, Grupo Herdez occupies a strong competitive position. Grupo Herdez’s products are household names. Most of these brands are past their high-growth eras, but they will be reliable sellers for a long time to come. Consumer staples businesses like Grupo Herdez usually trade at some premium to the market in general, based on the perception of strong and predictable profitability and defensive characteristics. Customers may opt for cheaper items in a downturn, but everyone needs food.

Grupo Herdez’s partners are valued highly by the market. McCormick & Company trades at 27x trailing earnings and 18x EBITDA. Hormel trades at 24x earnings and 16x EBITDA. The 500-pound gorilla that is the Kraft Heinz Company is a comparative bargain at 15x earnings and 10x EBITDA, but Kraft’s troubles with tired brands and consumer pushback on pricing are well-known.

McCormick has a 5-year revenue growth rate of 4.7% and EBIT margins averaged 16.9% over the period. Hormel’s revenue growth was 4.9% and its EBIT margin averaged 10.4%. Kraft Heinz’s revenue was essentially flat, but at least its EBIT margin averaged a healthy 21.0%.

For its part, Grupo Herdez recorded five-year annual revenue growth of 11.5% and an average EBIT margin of 12.5%. This EBIT margin figure includes the losses of the Impulsos division. Excluding Impulsos, the 2023 EBIT margin was 16.9%.

Despite much better revenue growth and comparable profitability, Grupo Herdez shares trade at only 11.6x earnings and 5.8x EBITDA. For both ratios, I have adjusted the figures for the non-owned portions of McCormick Mexico and Barilla Mexico. MegaMex is equity-accounted, so the actual EV/EBITDA ratio would be lower using proportional consolidation. Return on equity hovers in the mid-20s despite a significant corporate cash buffer.

Here is Grupo Herdez’s fourth quarter 2023 report. It was a great year for Herdez, despite the continued losses in the Impulsos segment. Every segment saw increases in revenue and operating results. The company paid down debt and benefited from the late 2022 acquisition of Mediterraneo, a producer of Lebanese snacks and dips. Free cash flow generation was excellent. Both strong earnings and normalizing working capital levels contributed.

I also recommend checking out this English language presentation which gives a more qualitative overview of the company’s product line, operations, and strategy. The company also conducts its quarterly earnings calls in English.

I think Grupo Herdez shares are way, way too cheap. A more reasonable price/earnings ratio of 18x would put shares at MXN 71, 55% higher than today’s MXN 46. An 8x EBITDA multiple would put shares at MXN 75.

My valuation assumes no change in the status of the loss-making Impulsos segment. If this segment’s profitability improves or Grupo Herdez chooses to wind it down, the benefit to earnings would be substantial.

I know what you may be thinking. The financials might look good and the valuation may be compelling, but this is an emerging markets company. And emerging markets companies are notorious for mistreating shareholders, particularly when they are controlled by a single person, family, or entity, like Grupo Herdez is. Cash flows, profits, assets, they’re all wonderful. But they may as well not exist if shareholders don’t see the benefits. Just ask anyone who has sent their money to languish on the Hong Kong or Singapore stock exchanges, myself included.

Fortunately, Grupo Herdez has a long history of treating shareholders well. The company rewards its owners with steady dividends and share repurchases. Acquisitions and investments are performed only when they conform to sound financial logic, not out of vanity or for empire building. Since 2013, Grupo Herdez’s share count is down 24%. Recently, the company has hit the pause button on repurchases, opting instead to pay down debt. Entirely sensible when doing so earns a risk free pre-tax return of 10%. If and when interest rates decline, the company will return to buying back shares.

Now for the risks. I don’t think it’s right to discuss a stock without mentioning the negatives and the risks, whether actual or merely possible. Among them are:

• Currency fluctuations. The Mexican Peso has been very strong against the US Dollar lately. This reduces the profits that Grupo Herdez earns from exports and from the MegaMex segment. On the other hand, a weaker Mexican Peso would increase these profits. Herdez’s substantial US-derived revenues and earnings provide a natural hedge for USD-denominated investors.

• Commodities fluctuations. Grupo Herdez may have difficulty passing through increases in inputs costs. Additionally, some segments are particularly sensitive to changes in the cost of agricultural products. The company identifies avocados as a large input cost for MegaMex, causing profits to decline when avocado prices surge.

• Changing consumer behavior. Marketers and economists have long pointed out how Mexican consumers are unusually loyal to national brand names, preferring them over store brands or generic label products. If this were to change, it would be to Grupo Herdez’s detriment.

• Political risk. Mexico is a relatively well-functioning Western democracy, but its politics can be “colorful.” The election of an anti-corporation and/or “anti-elite” populist government would be a negative.

• Controlled company. Insiders own about 70% of Grupo Herdez shares. They call the shots. They have called them well over time, but shareholders have little recourse if management goes off the rails.

Despite these risks, I think Grupo Herdez represents a compelling opportunity. Buying dominant consumer franchises with healthy balance sheets, good growth potential, and capable management at <12x earnings typically works out well over a reasonable time frame. Grupo Herdez shares trade at low volumes but relatively consistently on the Mexican Stock Exchange. It could take time for investors to rediscover “off the run” Mexican equities. As I noted above, it is difficult to make the case for Mexican equities when Mexican bonds are yielding 10%. But Grupo Herdez will continue growing its earnings, making the occasional smart acquisition, and returning capital to shareholders. At some point the market will take notice.

Alluvial Capital Management, LLC holds shares of Grupo Herdez, S.A.B. de C.V. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com

I like royalties and royalty-like cash flows. I understand this is a bit like saying “I like ice cream” because honestly, who doesn’t?1 A good royalty investment offers an attractive current yield, potentially higher future cash flow, and tax benefits, all without any need for capital expenditures or other annoyances. Today, I want to look specifically at royalties derived from music and other media. Lately, a number of trading venues and fintech companies offering royalty investments have sprung up. But first, let’s look at one of the most venerable musical royalty trusts out there: Mills Music Trust.

Mills Music Trust ,“MMT,” traded under the ticker MMTRS, was created in 1964 to own the rights to certain royalty income of a huge catalogue of songs with copyrights held by Mills Music Inc. Mills Music has its own fascinating history stretching back to the early 20th century and composer Irving Mills. MMT owns the rights to over 25,000 tunes, but only a handful continue to earn any meaningful royalties. The trust helpfully provides a list of their top-grossing tracks. Here are the top 20. Recognize any?

Two classic holiday tracks and two variations on the most popular earned a large majority of the trust’s total 2022 revenue. In a way, MMT can be thought of as a royalty on holiday nostalgia.

Trust units have experienced some large swings in valuation, ranging from $15 to $60 over the last decade as interest rates rose and fell. Units currently yield 8.5%. Is that enough to reward investors sufficiently? Possibly not, and here’s why. See track number 3 above? “Stardust.” It’s a lovely tune. And unfortunately for Mills Music Trust, it is now in the public domain. “Stardust” royalties accounted for about 6% of the total royalties earned by the top 50 songs in Mills’ catalogue. Most other high earners have copyrights expiring in 20+ years, but with 3% contributor “It Don’t Mean A Thing (If It Ain’t Got That Swing)” entering the public domain in 2027, it seems likely that Mills Music Trust distributions will be charting a downward path from here. Perhaps if Mills Music Trust were yielding 12% or so, I could see a path to realizing a 10% IRR or something from here, but with multiple significant tracks ceasing to produce royalty revenue, I think the best holders can hope for is high single digits. And maybe that’s enough! This is, after all, a nice non-correlated investment that should not see its cash flow stream affected by the vicissitudes of the economy. But personally, I would only become interested if these units trade down to the mid-$20s.

On to more modern royalties! I enjoy perusing the Royalty Exchange at Royaltyexchange.com. While I have yet to pull the trigger on actually bidding, I am endlessly intrigued by the sheer variety of royalty assets available. There’s everything from movie soundtracks to Swedish hip-hop to punk and indie rock. And the royalties come in several flavors. Some are “life of rights,” others limited-term, domestic vs. international or otherwise carved up and parceled out. In other words, it’s a rich marketplace for someone with some knowledge and work ethic. (I could do the work but the knowledge isn’t there for me at this juncture, hence my wallflower status2.) The reason why so many music royalty assets are available is a 2006 change to the US tax code. Specifically, amendments to Section 1221(b)(3) allow sellers of self-created musical works to take capital gains treatment on the sale rather that pay taxes at personal income rates. The reason music royalties were being taxed at personal income rates in the first place is thanks to President Eisenhower, who successfully used a tax loophole to save on taxes related to selling the rights to his World War II memoirs3.

Royalty Exchange currently has over 700 different royalty listings. The highest-earning collection produced royalty income of $139,171 in the last 12 months.

At the other end of the spectrum, the lowest-earning royalty asset brought in just $163 in the last year.

The seller rejected an offer of $1,950 last year. Given the current earnings rate and the remaining life of the rights (5 years) this seller may be a bit delusional. But that’s the fun of this marketplace!

Beyond music, Royalty Exchange also occasionally auctions off other royalties. The most notable, so far, was a portion of the royalties relating to the sale of Listerine. The history of this royalty asset goes all the way back to 1881 when the Listerine inventor sold the rights to a distributor. Ever since, pieces of the royalty have changed hands occasionally, often accompanied by litigation and strife. Interestingly, the royalty is not based on the total sales volume of Listerine but the actual liquid volume of product sold. The listerine royalty auctioned on Royalty Exchange changed hands in 2022 at $1.8 million, or 15.7x trailing cash flow. I have to imagine that given the move in interest rates since, the asset would fetch a lower valuation today.

Finally, various fintech companies are trying to get into the royalties game by packaging up royalty assets and offering them to the platform users. I view most (ok, virtually all) fintech companies with suspicion. I have yet to see one that truly offers a service most people couldn’t access at lower all-in costs from an existing brokerage or bank. But hey, if people enjoy using a sleek app to buy marked-up financial assets, who am I to stop them?

One such platform is “Public.” The company offers users the ability to buy traditional stocks, bonds, and ETFs, plus cryptocurrencies and now, a royalty asset. Enter everyone’s favorite grouchy green ogre: Shrek.

Public purchased a 25% royalty in the musical scores of the various Shrek films. Now, Public offers its users the ability to purchase an interest in the royalty. The company provides a good bit of info about the royalty structure, including a pitch deck, podcast, and even a hub where holders can track the performance of their royalty invest and discuss its prospects.

Deck: https://public.com/documents/royalties-investment-deck

Podcast: https://public.com/live/alternative-assets/deep-dive-shrek-royalties

Hub: https://public.com/alts/SHREKROYALTIES?m=royalty-onboarding

And for the real nerds, the offering circular: https://www.sec.gov/Archives/edgar/data/1947158/000194715823000007/f253g2091223_publicshrekroya.htm

Lots to talk about here. I have so many issues with how this investment is being structured and marketed, I don’t quite know where to begin. First, while Public is careful to highlight the risks of investing in alternative assets, its users are clearly buying into the Shrek royalty with the idea that the value of their interest will rise, both quickly and significantly. “Number go up.” And that’s not how a typical royalty investment functions. Sure, it’s always possible that royalty revenues experience an unexpected increase and their present value increases materially, but in most cases these are wasting assets. The return stream is the current cash flow, which will tend to decline over time before eventually vanishing with zero terminal value. So when I see the trading price of these Shrek royalties nearly doubling since they were issued, it tells me somebody does not understand what he or she is buying.

This should not happen! Outside a collapse in interest rates and/or rate expectations or a giant increase in Shrek’s popularity, the value of this royalty should be relatively constant, not up 80% since issuance. Public’s users have pushed up the price of this royalty to the point that it yields just 5.6% on trailing results, a valuation that is sure to disappoint those buying in at this level.

Then there is how Public characterizes the risk profile. In the pitch book, they state that “The asset has low correlation with traditional markets—for example, its performance is not tied to interest rates.” This is, at best, a half-truth. While the cash flows of the royalty may not be directly affected by the movement of markets and interest rates, the value of the royalty itself absolutely is. The value of every risk asset is! A royalty is nothing more than the contractual right to a series of cash flows, and the value of those cash flows is inextricably tied to the level and movement of interest rates.

Finally, there’s the typical layering of fees atop the royalty asset. Public gets 5% of the royalty distributions, and 10% of the proceeds if the royalty is ever sold. Yes, Public is providing a service and should get paid accordingly, but this is just excessive.

For my money, I think investors should stick to places like Royalty Exchange. After all, that’s where Public acquired the Shrek royalty in the first place. No middleman required.

Anywhere else I should be looking for royalty assets? I know the world of energy-related royalty assets is huge, but that’s not a market for beginners. But if anyone knows of other platforms offering royalties related to music or consumer products or film or pharma or whatever else, I’m all ears!

If I were to organize a popularity contest amongst all the various investing styles, “quality investing” would be the runaway winner. It’s easy to understand why. Who doesn’t want to own companies with predictable and growing revenue, strong margins, high returns on capital, good management alignment, and expanding end markets? What’s more, the recent returns accruing to companies like these have been extraordinary, leaving more pedestrian companies in the dust. And of course, “quality investing” has the stamp of approval of Mr. Buffett himself, who constantly exhorts us to “buy wonderful companies at a fair price.”

I do think many high-quality companies were under-appreciated by investors until recently. Truly superior companies deserve lofty valuations. A lot of money has been made by investors who identified a high-quality company, bought it at an “average company” price, and held on as the combination of earnings growth and multiple expansion yielded annual returns of 20-30% or more. However, I will sound a cautionary note. There is a limit to how high multiples can go before they become irrational, and today’s high-quality companies are not always tomorrow’s. Possibly the worst thing a “quality investor” can do is to pay a very high multiple of earnings exactly as a company’s financial and operational virtues are at their zenith. Once investors broadly recognize an enterprise as a “wonderful business!” the best of shareholder returns are often behind it. But not always! For instance, Visa Inc. has been considered extraordinary for the duration of its existence as a public company, but it has earned investors 18% annually over the last decade. In Visa’s case, the company was actually wonderfuler than most investors realized.

Even with those caveats, “quality investing” is a valid strategy. I think investors will continue to do well paying high but not stratospheric prices for the world’s truly exceptional businesses. While many of these businesses are household names with widely-held shares, there are numerous lesser-known enterprises that are no less commendable. Allow me to present a few.

Rand Worldwide trades over the counter with the ticker RWWI. The company has a market capitalization of $544 million and an enterprise value of $565 million. I have held shares of Rand Worldwide for several years. My only regret is not owning more of them. Rand Worldwide is a software reseller, mainly vending Autodesk products and providing training, integration, and support to its customers. Autodesk software is the gold standard in many industries. I often describe Rand Worldwide as a “Autodesk revenue royalty” because it’s true. As such, Rand Worldwide enjoys phenomenal returns on capital and cash conversion.

From the fiscal year ended June 30, 2018 to the fiscal year ended June 30, 2023, Rand grew its revenue by 163% from $116 million to $306 million. Its EBITDA grew 790% from $5.6 million to $50 million. Great results, but the growth alone is not the most impressive part. Incredibly, Rand Worldwide actually employs less total capital and less equity now than it did 5 years ago! Back in 2018, Rand had total assets of $53 million and equity capital of $25 million. At fiscal year end, Rand now employs $95 million in total assets and just $19 million in equity. How many businesses manage to nearly triple revenue while employing less capital?

Rand’s business requires essentially zero reinvestment, allowing it to distribute virtually all its earnings without hindering its growth. Over the time period in question, Rand declared a total of $4.25 per share in dividends, equal to 26% of today’s market price. Rand’s share price followed suit, rising from $3 in 2018 to over $24 earlier this year. Happy shareholders! However, the last few months have been less sanguine. From their summer peak, Rand shares have fallen by a third to $16. The reason is silly, but it still seems to have taken investors by surprise. From December 2018 through March 2023, Autodesk offered incentives for customers who bought 3-year subscriptions instead of annual software licenses. This was a major windfall for Rand, which was able to book the entire sales commission as revenue at the time of purchase. With this promotion over, Rand’s customers have returned to purchasing only annual subscriptions. Furthermore, many of Rand’s customers are working through their existing subscription terms and will not need to purchase licenses again until expiry. This created a revenue and earnings “air pocket” that Rand will need to work through over several quarters until their customers’ purchasing habits return to normal. The end of the Autodesk promotion was disclosed and discussed in every Rand Worldwide earnings report in recent years, but investors are still treating the reduced sales and profits of Q4 fiscal 2023 and Q1 fiscal 2024 as a permanent reduction in earnings power. For my part, I have zero doubt that Rand Worldwide’s operating results will resume their upward trajectory in due course.

At $16, Rand Worldwide trades at 11.9x trailing EBITDA and 11.1x annualized Q1 2024 EBITDA. (I am well aware of the pitfalls of substituting EBITDA for actual earnings, but in Rand’s case, EBITDA is almost exactly equal to operating income because of its minuscule capex needs.) The company continued to grow its revenue year-over-year, excluding 3-year subscription income. Q1 run-rate cash earnings per share are just over $1, a figure that is borne out by Rand’s recent special dividend of $0.25 per share.

All signs point to Rand continuing to distribute all its earnings. At $16, Rand shares yield 6.3% and have a P/E ratio of just under 16. Again, this is a for a business with zero investment needs, high single-digit organic growth through the cycle, and an industry-standard mission critical product offering. I happen to think a large premium to the market average valuation is warranted. Keep in mind my potential bias as a long-time and very satisfied Rand Worldwide shareholder, but I think Rand is one of the cheapest, highest quality opportunities in the market today.

I should note that Rand Worldwide is a controlled company, with notable investor Peter Kamin, his affiliates, and company employees owning a majority of the shares. Kamin’s usual modus operandi with his controlled companies is to manage them for long-term success and pay generous special dividends from excess cash flow. Betting on Kamin’s stewardship has worked out well for long-term investors in Rand Worldwide and other companies, but investors wary of investing in a controlled company should look elsewhere.

Moving on we have OTC Markets Group Inc., ticker OTCM. OTC Markets Group operates what else but the US OTC markets, my primary hunting ground for the last decade. Despite the over-the-counter markets’ reputation for being the home of pipe dream companies, stock promotes, and failures to launch, the owner of the market itself, OTC Markets Group, is the picture of financial health and success. OTC Markets’ 5-year compounded revenue growth is an impressive 14%, with EBITDA expanding at the same rate. EBIT margins have averaged north of 30% and the company’s return on equity is pushing toward 80% despite the presence of a large slug of excess cash. Much like Rand Worldwide, OTC Markets has very limited investment needs and chooses to share its earnings in the form of dividends.

OTC Markets Group’s successes have not escaped the notice of investors, who have bid shares to 23x trailing earnings. While this looks high to me coming from my world of all-but-forgotten companies, it is roughly a market multiple for a company that is significantly above average on every conceivable financial metric. OTC Markets continues its efforts to improve access to OTC-traded securities, creating market tiers with higher disclosure requirements and working to make it easier for non-listed companies to raise capital and attract investors. If the company meets with success, its P/E multiple will compress rapidly in coming years.

That said, I see a few suspicious clouds hovering on the horizon for OTC Markets Group. Despite the good efforts of the company, I expect the number of “investable” OTC-traded companies will continue to decline. By this I mean companies with well-established and profitable businesses that produce cash flow. There are far fewer now than in years past, the result of buyouts and mergers. As the Magnificent 7 and the almighty NASDAQ 100 continue to suck capital away from everywhere else, I don’t see the environment becoming easier for small public companies. Their cost of capital seems to move ever upward. I honestly don’t know why a small company would choose to go public any more, considering the cost of capital and the annoyances of reporting and compliance versus accessing private capital. I dearly hope I am wrong and that the US finds a way to make public existence more tenable for small-cap and micro-cap companies, ushering in a great small-cap value renaissance, but I doubt it.

If the number of small public companies continues to decline, that obviously has ramifications for OTC Markets Group’s terminal value. The higher a multiple of current earnings and cash flows an investor pays, the more that terminal value matters. I worry that investors could start to shift their view on OTC Markets if the vibrancy of the US small-cap and micro-cap ecosystem continues to decline. On the other hand, these issues are not new, and OTC Markets has grown its top line at mid-teens rates anyway. The balance sheet is robust as could be and they have a high degree of recurring revenue. An enviable position from which to address any challenges.

Finally, let’s jump across the Atlantic to some of my long-time favorite companies, the Swiss alpine railways! These are a different kind of quality. Rand Worldwide and OTCM Markets earn world-beating returns on capital offering specialized services. Very profitable but also completely intangible. The Swiss alpine railways are the total opposite. Their businesses are very capital intensive and they don’t earn very impressive returns on all that capital. On the other hand, their assets are unique to the extreme and totally immune from new competition. They have the moat to beat all moats: inimitable physical assets. It is simply impossible to build a new and competing system of railways and high altitude tourist attractions in the Swiss Alps. Just imagine the outcry over the disruption to such an ecologically sensitive area. At most, existing railways and facilities will be permitted to add capacity.

The biggest of these public companies are Jungfraubahn Holding AG and BVZ Holding AG. There are others, but I will leave the fun of finding them to you. Jungfraubahn has an enterprise value of right around CHF 1 billion, while BVZ is about half that size. Jungfraubahn employs little debt, while BVZ has taken advantage of some very low-cost debt offered by the Swiss government to finance its rolling stock. Jungfraubahn’s claim to fame is offering transit to the “Top of Europe.”

The website has a great overview of the various attractions and activities in the area. And guess what? You aren’t driving up the mountain or otherwise self-transporting. If you want what the mountaintops have to offer, you are taking a train or a cable car operated by Jungfraubahn or another company.

BVZ Holding AG has its own collection of railways. If you happen to sprechen Deutsch, their semi-annual magazine is worth checking out for the updates. If not, the pictures are still worth a look.

I have gone on long enough and there are Christmas cookies downstairs with my name on them, so I will spare you an in-depth examination of these companies’ finance. Suffice to say each is consistently profitable (outside of years affected by global pandemics) and each will likely be taking tourists to the various mountaintops for another 125 years. One of my central investing beliefs is that humans actually change very little over time. I consider it a near lock that in 2123, humans, or whatever cyborgian successors we may have, will still enjoy looking at pretty mountains and eating fondue.

This is a different kind of quality, but one I think is worth including in a portfolio. A company like Jungfraubahn is unlikely to be anyone’s top performer over long periods of time, but it is also highly unlikely to experience catastrophe due to technological obsolescence, changing consumer tastes, or mismanagement. (I’m not saying it’s impossible to lose money operating a world-class tourist attraction, but it’s difficult even for the dimmest.) In other words, companies like these may not be “get rich” investments but they are most definitely “stay rich” investments.

I don’t begrudge any investor who is satisfied to stick with the tried and true names of quality investing. The Costcos, Microsofts, and Visas of the world. But for anyone who wants to look further afield, there is no shortage of amazing little companies out there! Thanks for reading, and my best wishes for a happy, healthy, and prosperous New Year.

Alluvial Capital Management, LLC holds shares of Rand Worldwide Inc. and Jungfraubahn Holding AG for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

You will notice a theme. It’s no secret I prefer low profile, little known companies doing something unexciting but essential. I don’t require a rosy growth outlook, but in the absence of organic growth, a company has to have a plan to generate value through accretive acquisitions or aggressive return of capital. If there are growth opportunities, wonderful, I just don’t want to pay much for them. I typically end up owning companies that are robust cash generators and have a few growth opportunities, internal or external, but are valued as if they are intractably stagnant or in long-term decline.

Let’s start with a Canadian company. Supremex Inc. manufacturers envelopes and packaging. It has operations in the US and Canada. The envelope industry is in long-term decline, but still extremely profitable for Supremex. The company is managing the decline in volumes through a combination of opportunistic acquisitions in the envelope industry and strategic acquisitions of packaging producers, with the goal of achieving 50% packaging revenue and earnings by late 2025.

COVID and the ensuing supply chain disruptions created a whiplash effect for Supremex. In 2021 and 2022, customers over-ordered, worried about the availability of product. This heightened demand, combined with price increases, helped Supremex earn a record $1.09 per share in 2022. However, as supply chain concerns began to ease, Supremex’s customers found themselves over-supplied and reduced their orders. This “air pocket” has cut into Supremex’s profits this year. Investors have punished the stock, sending shares down 50% from their peak in February 2023.

For its part, Supremex believes that inventory de-stocking is very close to bottoming and the market is normalizing, which should benefit revenues and earnings in coming quarters. The recovery is happening a little more slowly than the company had originally projected due to interest rate pressures and lingering inflation, but it is happening. The market being forward-looking, cyclical stocks typically trade at a high multiple of current earnings at cyclical lows and a low multiple of earnings at cyclical peaks. If a fair multiple for Supremex on mid-cycle earnings is 8-10x (pretty conservative in my view) then investors might expect shares to trade at 6-7x earnings at cyclical peaks and 12-13x earnings at the lows. And yet, Supremex shares are trading at just 6x annualized depressed Q3 earnings. As it becomes clear that earnings lows are behind us, I think the market will change its assessment.

Here’s what Supremex CEO Stewart Emerson had to say about its revenue and margin outlook on the third quarter earnings call.

On envelope volumes: “Envelope business continues to be affected by customer inventory destocking, although we feel the worst of that is behind us and more predominantly by the effects of inflation on fundraising and direct mail, and the impact of high interest rates on credit card solicitation mail. That said, conditions are improving…”

On packaging segment margins: “…the absorption rate as the market bounces back these facilities that we have remaining can produce a voracious appetite for volume. So as the market bounce back higher absorption rate will also lead the margin expansion. It will be a progressive increase in the -- we think the 9 [% EBITDA margin] number that we posted this month is the bottom and it's only upward from there.

Management referenced some version of “improving conditions” multiple times on the call, though they cautioned investors not to expect an immediate return to the boom times of 2021 and 2022. I think a useful barometer for assessing the market’s optimism or pessimism around a company’s prospects is the ratio of enterprise value to invested capital, measured across time. Five years ago, in November 2018, Supremex had an enterprise value of $117 million and invested capital of $67 million for a ratio of 1.7x. At peak valuation in February 2023. the ratio was 2.6x. Today, Supremex’s enterprise value is $176 million (including leases) and its invested capital is $138 million, a 1.3x ratio. Despite management’s projections of a recovering market, investors appear more gloomy on Supremex’s prospects than they have for several years.

By mid-2024, and with a rebound in volumes in packaging and steady performance in envelopes, I think Supremex is capable of producing EBITDA of around $50 million, earnings of 75 cents per share, and free cash flow of $1.01 per share, adding back non-economic intangibles depreciation. It’s always important to reality check projections, and I think mine are very reasonable. $50 million in EBITDA is 36% of net working capital plus fixed tangible assets, below the post-2018 average. Supremex’s operations have become more profitable over this time period thanks to a greater contribution from the packaging segment.

At under $4, Supremex shares sure look like a bargain to me. Company management seems to agree. Supremex has repurchased a healthy number of shares this year and insiders have also been buyers. If I had to speculate on the reasons for the current depressed valuation, I would point to tax-loss selling as a contributor, as well as the company’s return to stodgy mature manufacturer status after a moment of stardom.

Shifting back to the US, consider LICT Corp. Investors may recognize this one as one of the market’s highest-priced stocks. At a price of $18,000 per share, OTC-traded, and non-SEC reporting, it’s pretty unlikely that LICT will become a meme stock or Robinhood favorite any time soon. But I believe LICT offers incredible value and an upcoming catalyst will cause earnings to jump in 2024.

LICT Corporation is a collection of rural incumbent telcos in several Midwestern and Western states. Over time, LICT has transitioned from mostly offering traditional telco services like land lines to being mainly broadband services. The company has invested tens of millions in upgrading old copper lines to fiber optic, and has also made the foray into fixed wireless access. Famed value investor Mario Gabelli is LICT’s controlling shareholder. Gabelli was among the first to understand and appreciate John Malone’s strategy with respect to the communications business, and there are similiarities in how Gabelli has chosen to run LICT over the years. Like Malone’s companies, LICT eschews dividends. Instead, LICT has opted to buy back huge numbers of shares over the years and occasionally spin off assets. But unlike Malone, who routinely employs generous leverage, LICT has opted to pay down nearly all its debt in recent years. This nearly unlevered capital structure is very unusual for a telecom, but it does give LICT an exceptional amount of flexibility.

LICT’s most recent move was the spin-off of its Michigan assets into a company named “Mach Ten.” While there is a lot to like about Mach Ten, I think the parent company looks cheaper.

At $18,000 per share, LICT’s market capitalization is $309 million. It has net debt of $21 million, offset by a promissory note from the recent spin-off of its Michigan operating businesses (MachTen Inc., ticker “MACT” and still holds MachTen stock worth $4 million, putting LICT’s enterprise value at $311 million. Prior to the spin-off of MachTen, LICT was on pace to produce 2023 EBITDA of around $60 million. Adjusted for MachTen’s contribution, annual EBITDA is roughly $52.5 million, so LICT is trading at a normalized EV/EBITDA ratio of 5.9x. That seems pretty fair for an incumbent rural telco. Currently, LICT’s business is roughly half unregulated broadband services and half regulated phone services, though the mix is rapidly shifting toward the broadband side of things. If we assume traditional telco is worth 4x EBITDA and broadband is worth 8x (conservative if you ask me) then LICT is trading right in line. I happen to think LICT deserves a slightly higher multiple given its strong balance sheet and limited competition, but the valuation is in the range of reasonable.

However, a recent change in federal subsidies will create a major uplift in LICT’s EBITDA and earnings. Enhanced A-CAM replaces the previous “Alternative Connect America Cost Model” plans, increasing annual payments to telcos in return for commitments to provide higher speeds in their service areas. LICT is set to begin receiving an additional $13 million in annual revenue for 15 years beginning 2024. I don’t expect the increased subsidy rate to create major additional capex obligations for LICT. The company is already well into the process of rolling out high speed broadband access to all customers in its coverage area.

As a result of Enhanced A-CAM, run-rate EBITDA will hit at least $65 million in 2024. Capitalizing the increase at 6x would mean additional equity value of $78 million, or $4,500 per share. Besides Enhanced A-CAM, LICT will also benefit from multiple other state and federal subsides designed to ensure broadband access for all Americans. When the original A-CAM funding program was enacted, LICT shares doubled in the ensuing three years. I don’t expect shares to do the same this time around, as Enhanced A-CAM is less incrementally beneficial than the original and LICT is much less levered than it was back in 2017. But I do expect the market to wake up to the step change in LICT’s EBITDA and earnings in 2024.

Finally, there is Monarch Cement. The thesis here is pretty simple: cement producers are decent businesses that in many cases have strong economic moats and enjoy barriers to entry. US Cement producers typically trade around 10x mid-cycle EBITDA and sometimes higher in buyout transactions. Monarch Cement is a well-run Kansas cement producer with annual capacity in excess of 1 million tons. Monarch is a family company, controlled by the founders for over 100 years. The company treats shareholders well, repurchasing stock and paying dividends while improving the technical capabilities and output of its plant. Monarch Cement trades at a large discount to peer valuations thanks to its small size and relatively illiquid stock.

This week CRH Plc, a major global cement producer, announced the purchase of cement assets in Texas. CRH will pay Martin Marietta Materials $2.1 billion for these assets, a 12.4x multiple of 2023 EBITDA before any synergies. Were Monarch Cement to be sold at the same multiple, it could fetch $280-300 per share. Pretty good upside from the last trade of $147.50. Now, it’s pretty unlikely that Monarch Cement goes up for sale any time soon. But these small family-controlled industrial companies have a way of maintaining they are not for sale under any circumstances, right up until they sell for a huge premium when nobody expects it. It happened a few years back with another cement producer, Ash Grove. I am happy to hold Monarch Cement until that day arrives, if it ever does.

The market environment has been pretty hostile for small-cap value stocks for a while now, and I don’t know what it will take for that to change. Still, the values are compelling if you just turn over some rocks. It’s lonely out here but I will keep looking for value in the market’s obscure and overlooked companies. Thanks for reading and happy Thanksgiving!

Alluvial Capital Management, LLC holds shares of Supremex, LICT, and Monarch Cement for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

First, here is my Q3 letter. I am having a reasonably good year despite the melancholy environment for, well, pretty much everything outside a narrow set of tech stocks. I do wish I could turn back time and tell myself to be more cautious on banks going into 2023, but I continue to think the medium-term outlook for several community banks is very strong. Like many others, I had hoped the return of actual interest rates would cause investors to esteem assets, earnings, and cash flows once again, but so far that remains a dream deferred. I own numerous companies trading at discounts to tangible asset value and at mid-single digits earnings multiples, but today, metrics like these are as inscrutable and irrelevant as the venerated baubles of some ancient and forgotten tribe. Maybe in 2024?

Thrift Conversion Blues

Investing in thrift conversions, mutual banks undergoing partial or full conversion to shareholder-owned banks, has long been a popular niche strategy. The appeal of investing fresh capital into a bank, then getting all the bank’s existing capital for free, is easy to appreciate. Historically, participating in thrift conversions has been good for a healthy first day return of say 15-30%. Many quality banks would go on to reward shareholders with accretive buybacks under tangible book value and eventually, sell to a larger bank at a nice premium. I personally know half a dozen investors who have made millions on thrift conversions. I don’t know Peter Lynch, but the Magellan Fund invested in hundreds of thrift conversions during his tenure.

Thrift conversions are not as common as they once were thanks to the dwindling numbers of mutual banks in existence. But they still happen. However, recent conversions have fallen flat. Instead of trading above the offering price (typically $10) multiple conversions have ended the first day of trading down 10-15%. Bitter medicine for those that expected to flip their shares for a quick gain. The five most recent thrift conversion transactions have produced an average return of -5% to date, with only one trading above the offering price. So what’s to blame? Probably nothing more than the exceedingly gloomy atmosphere that banks and bank investors find themselves in. There is very little appetite for bank stocks, so it’s no surprise that thrifts coming to market are priced accordingly.

But if you are one of those people (like me!) who thinks that the woes facing banks will eventually subside, some of these recently converted thrifts look awfully cheap. I don’t have data in front of me, but my impression is that newly-converted thrifts have tended to trade at 60-70% of tangible book value including newly-raised equity. But because recent conversions have traded down from their offering prices, this most recent crop trading much lower. PFS Bancorp is the worst-performing recent thrift conversion. PFS, parent of Peru Federal Savings Bank in Peru, Illinois, sold 1.725 million shares at $10. Shares change hands at $8.65, giving PFS a market capitalization of $15 million. Post-offering, PFS has tangible equity capital exceeding $31 million and common equity to total assets of 17%. Share repurchases done at these levels would be wildly accretive, so hopefully the company steps up.

I expect the lackluster performance of recent thrift conversions will make it less attractive for the remaining mutual banks to convert to stock ownership. The machine appears (temporarily?) broken. It used to accept $10 bills and spit out $11.50 to $13 or more. Now it leaves you worse off.

One more data point that interests me before we move on to something a little less dry than community banks. Due to the big move in short-term interest rates, the profit uplift that converting thrifts can achieve just by plunking the proceeds from their equity offerings is meaningful. Typically, investors don’t fixate on current profitability when buying into thrift conversions. Mutual banks aren’t managed for the purpose of earning a profit and it takes time for ROE to reach a competitive figure. The trajectory of earnings per share post-conversion matters much more. Aggressive share repurchases are very helpful to this end, as shrinking the capital base is often an easier task than generating sufficient incremental quality loans and deposits to grow into the new, larger equity base. But back to PFS Bancorp. Just by investing its $16 million or so in net proceeds into treasuries at 5%, PFS can earn 60 cents per share, after tax. At a share price of $8.65, that’s not nothing! Obviously, the long-term goal of the offering is to grow the bank’s balance sheet and earnings, not just clip 5% in interest income. But the current interest rate playing field does do a lot to support the earnings stream of these conversions coming to market.

For anyone interested in learning more about thrift conversions, my friend Jim Royal maintains a website and database of recent and upcoming conversions. Check it out.

Chicanery and Skullduggery

I read just about every single report posted by OTC-traded companies at OTCMarkets.com. As >90% of the thousands of OTC companies are and always will be worthless, most of the reports are good for entertainment at most. And let me tell you, sometimes there is no better entertainment! A few years ago I stumbled across Original Sixteen to One Mine, a company in possession of decades-defunct gold mine. Nothing unusual so far, right? OTC markets and junior exchanges are littered with failed exploration companies. The difference with Original 16-1 was management’s absolute faith that the mine would surely be a big producer again with just a little bit of attention and capital. In the mean time, the company eked out an existence offering tours, with management covering the company’s minimal overhead. It all seemed rather harmless, if a bit deluded, but the situation has devolved into accusations of securities fraud, environmental crimes, and now a lawsuit seeking $125 million in damages. Anyone wanting to know the whole story should start with the company website here and then read the complaint.

Stuff like this is why I love the OTC market. Yes, I absolutely think that regulated exchanges should maintain strong listing standards and that investor protection is a serious responsibility. But I also think that if they so desire, investors should have access to a place where they can place their bets on companies looking for Bigfoot (Bigfoot Project Investments, now Lord Global Corporation,) attempting to revive the American Basketball Association (American Basketball Association, Inc.,) seek treasure in sunken Spanish galleons (Treasure & Shipwreck Recovery, Inc..) or even prospect for gold in mines abandoned a century ago. What would America be without its cranks and dreamers?

Seeking Info

I am very deeply interested in non-traditional markets and exchanges. Think company-run bulletin boards, qualified matching services, OTC markets, and the like. I am interested to the degree that I am considering launching a private vehicle just for ideas like this. So here’s my proposal: if you e-mail me and inform me of a trading venue like this that I don’t already know of, I will happily pay you $50 or donate $100 to a qualifying charity of your choice. Let’s say it has to be legally and functionally accessible to an American investor. As fascinating as the Bhutanese Securities Market is, I can’t get there. Thanks in advance!

Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

Not A Bingo

For years I have held shares in Four Corners, Inc., a Texas-based supplier to charitable bingo events. Four Corners is a nice little business. From 2018 to 2022, revenues grew at a high single digit pace and earnings soared thanks to good operating leverage. The business was very capital light and lacked meaningful reinvestment opportunities, so it simply paid out nearly all its earnings in dividends, most recently paying $0.20/year. Shares hovered between $2.00 and $2.20 or so for most of the past year, offering shareholders a nice cash yield and an underlying valuation of 6x earnings for a business with zero debt and decent prospects. Having bought in around $1.50, I was pretty pleased with the company’s performance and also with myself for owning it.

Imagine my dismay last month when I saw the fateful news: Four Corners had agreed to a transaction in which it would sell virtually all its assets to another Texas bingo supplier for the equivalent of $1.9847 per share. The headline price was bad enough, giving away the company at a discount to its open market value, but the structure was the real killer. By doing an asset sale, Four Corners would be liable for taxes at the corporate level and with a cost basis substantially below that of most shareholders. End of the day, shareholders would be lucky to receive value equal to 80% of the undisturbed Four Corners share price.

I briefly considered trying to mount some resistance to the proposed sale, but the deal was done. Insiders had locked up >80% of the vote before the announcement. But why, oh why, would anyone agree to this abysmal deal? I had some suspicions, and some of them were confirmed in the proxy statement the company sent out. Sure enough, two members of the Four Corners executive team had secured continuing employment with the acquirer. No skin off their back.

So what’s the lesson here? As always, management matters, especially for tiny companies, ESPECIALLY when that tiny company is controlled by a small number of shareholders. The motivations and incentives of those shareholders may not align with those of outside investors, and when they prove detrimental, those outside shareholders may have precious little recourse. I had thought that Four Corners’ reasonable capital allocation policy and lack of the objectionable related-party transactions that plague micro-cap companies was evidence of good faith and stewardship. It was not.

My saving grace in this situation was position sizing: tiny. Despite how much I liked the business, I was reluctant to go big on the very illiquid shares of a niche business in a limited geography with relatively few customers. As an outside investor in public companies, you will never have a complete picture of what is truly going on, for better or for worse. In my time, I have had the opportunity to observe the inner workings of a couple of small public companies, including sitting in on board meetings. Comparing what I had seen, heard, and learned with what investors were saying on social media and in message board posts made me wonder: were we discussing the same company? I think this perspective is helpful in avoiding hubris. I do not and can not know everything about a company as an outsider, so tread carefully.

In this case, conflicted management turned what should have been a great investment outcome into a merely satisfactory one. I am perfectly capable of leaving money on the table through my own bad decisions. I don’t need company management to compound my errors, which is why this one hurts worse.

From The Vault

I was looking through some ancient files and I found a presentation and stock pitch I did in August, 2016. Feels like an eternity ago! I was practically a baby! The stock in question was Wilh. Wilhelmsen Holding ASA, a venerable Norwegian holding company active in the specialty shipping and offshore services industries. Here’s a link to the pitch.

Wilh. Wilhelmsen Holding ASA Quick Pitch - Alluvial Capital Management, LLC August 2016

At the time, the company was trading at NOK 160, a gigantic discount to net asset value. Reading my old stock pitch (which wasn’t bad, though I’ve made a lot of progress since!) lead me to check on how the idea actually performed. Pretty well, it turns out. Since August 2016, Wilh. Wilhelmsen HoldingsASA stock has produced a total return of 135%, or about 13% annualized. This exceeds the S&P 500 Index and beats the pants off of any European benchmark. But here’s the interesting part. My pitch, as with most involving a deeply-discounted conglomerate, was based on the company performing some type of value-unlocking transaction, like a spin-off, tender offer, or divestiture, that would cause the market to “wake up” and narrow or close the discount to asset value. Well, it’s been 7 years. The company took a few steps in that direction, merging its main shipping asset with a competitor and doing some repurchases and tender offers for its own shares and those of a subsidiary. But on the whole, the company looks much like it did in 2016. Maybe it was the distraction of an inter-family power struggle, or perhaps the Wilhelmsens simply like this complicated structure, but the hoped for transactions, by and large, never occurred.

Today, just as in 2016, Wilh. Wilhelmsen Holding ASA shares trade at a >50% discount to asset value. But shareholders still realized a good return because the value of the underlying assets grew at a healthy rate. This is where I think most sum-of-the-parts/discount to asset value investment ideas go wrong: too much emphasis on the current discount to NAV, too little actual analysis of the underlying assets and whether they are likely to grow in value. Most companies that trade at big discounts to asset value deserve the discount. Either their assets are crummy and unlikely to perform well, or management is incompetent or dishonest and will destroy value or siphon it away. Wilh. Wilhelmsen ASA, on the other hands, owns good assets and manages them well, despite the internecine squabbling, and that is why investors have enjoyed good returns.

When you own deeply-discounted quality, you can be unconcerned with the pacing of a value-unlocking event. The assets are working for you. But when you own deeply-discounted garbage, every day that goes by before a value-locking event costs you the what you could have earned from owning a good asset. Better hope and pray that event comes along quickly!

One more item that caught my eye looking through my old stock pitch. I argued that Wilh. Wilhelmsen Holding ASA shares were worth in excess of book value because they had a track record of out-earning their cost of capital, with a 10-year average ROE of 14%. In the long run, an investor’s rate of return from owning a business will converge with that business’s return on equity multiplied by the earnings retention ratio, plus the average shareholder yield (dividend yield +/- net share issuance yield.) That is almost exactly what has happened with Wilh. Wilhelmsen Holding ASA shares, and it mattered far more than the discount to asset value that so fascinated me in 2016.

Looking Backward

Being a massive stock and business nerd, I enjoy reading up on the history of various companies I either own or find intriguing. Because I tend to invest in stodgier businesses and industries, many of them have been around for many decades and have some stories to tell. A few weeks back I snagged this corporate history published by one of my holdings, Monarch Cement.

The books consist mostly of media items on Monarch and its community. I could go on for hours about the fascinating news items, but here are a couple items of interest just from the first few pages.

Raising capital in 1908 sure seems like more fun than it is today. I love the image of people physically lining up outside a company to buy shares. I also love the “ticking” feature where you get a full bonus share if you buy now, but only 3/4 tomorrow and presumably less not too long after that. Everybody hurry down! It’s probably for the best that public offerings are so much more heavily regulated today, but something of the magic has been lost. I wish there remained some mechanism by which a company could easily offer securities to community members.

Credit to the company for not shying away from the troubling parts of local history. Here they include a news item that describes local men running off members of an ethnic minority who were looking for work at the plant. The Allen County Herald headline even includes what appears to be a pun on an ethnic slur, though the slur is being applied more broadly than is typical. Perhaps the reporter was not overly concerned with the details of the ancestry of the job-seeking men? While shocking to those of us reading today, its worth remembering just how prevalent these prejudices were in the early 20th century. I can remember my own grandfather describing the ethnic hierarchy of his Pennsylvania coal town in the 1930s. Though they were all as poor as the dirt they dug, those of Western European descent held themselves above those of Eastern and Southern European ancestry. (People of other racial and ethnic backgrounds were rarely encountered, let alone esteemed.) While racism and prejudice are alive and well today, good riddance to this particular corrupting strain.

Et Cetera

It’s been a little while since I wrote here, so I thought I would post my Q2 letter. In addition, Alluvial has some cool stuff in the works that I hope to be able to discuss soon. I am always looking for more investment ideas and/or just plain weird investment stuff to discuss, so please don’t hesitate to e-mail me or message me on Twitter. I make every effort to respond to all the e-mails I get, but I get a lot so sorry in advance if your message slips through the cracks. Just give me a nudge. Thanks for reading!

Alluvial Capital Management, LLC holds shares of Four Corners, Inc. and Monarch Cement Co. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

Going Nuclear Again

Back in March I wrote about a special situation in a Nuveen closed-end fund involving illiquid shares in a nuclear power generator. Funny enough, there’s another nuclear power company that just emerged from bankruptcy: Talen Energy. the company’s crown jewel is the Susquehanna Steam Electric Station, a nuclear power plant with gross capacity of 2,495 megawatts that can power 2 million homes. Talen owns 90% of this facility, plus a collection of interests in natural gas and coal-powered generation assets in the Northeast and Texas. All of the coal-fired plants are in the process of being retired or converted. (One of them, the Conemaugh Generating Station, is just a few miles from my childhood home.) New Talen is a complicated situation, but there seems to be good strategic interest from other operators looking to acquire Susquehanna or combine with Talen. Talen intends to uplist its shares in the near term, and to return excess capital to shareholders. Nuclear power generation is a major beneficiary of the Inflation Reduction Act, granted a medium-term price floor. Here’s a recent presentation that the company released. I will leave it to readers to evaluate Talen’s investment prospects, but I wanted to remark on the company as it is one of the most significant situations in post-reorg equities in public markets.

A Takeover in Jersey?

First Real Estate Trust of New Jersey Inc. “FREIT” is an OTC-traded real estate trust with interests in multi-family and commercial properties. The firm has been in semi-liquidation mode for a few years, slowly selling off its commercial properties and attempting to sell multi-family assets. The would-be buyers of some of the apartment complexes were the rather high-profile Kushner family. Unfortunately, the deal devolved into litigation that is still ongoing. Now the Kushners have made public an offer to acquire FREIT for $22/share. The Kushners framed the offer as a friendly approach, but indicated they may go hostile with a public tender offer if they are rebuffed by the board of directors. I have looked fairly closely at FREIT’s multi-family assets, and less closely at their commercial properties. In my view, $22 is a fair offer if you assume that commercial property in general has a tough road ahead. The market seems to be skeptical of the Kushners’ offer, as shares continue to trade around $19, a 14% discount to the offer value.

Shareholder Meetings: More Than a Formality

I mentioned on Twitter the other day that I am seeing small companies struggle to achieve a quorum for shareholder meetings, even when failing to do so has dire consequences for shareholders. My example was Calithera Biosciences. Calithera is one of a host of unsuccessful biotech companies that made the correct (if belated) decision to liquidate and return whatever cash can be salvaged to shareholders. In this case, it first looked as if little-to-nothing would be available for distribution. But Calithera struck an exceptionally good deal with the owner of its preferred shares under which common shareholders would receive $0.40 per share in return for the transfer of a contingent value right and all other net assets to the preferred shareholder. Incredible! $2 million in value created for common shareholders. However, the deal was subject to approval at a special shareholder meeting to be held before June 30. Last week Calithera announced the cancelation of its special shareholder meeting for lack of a quorum and little hope of achieving one. Instead of getting $0.40 per share, shareholders will almost definitely get zero, all because not enough of them could be bothered to vote! Many of us are accustomed to thinking of shareholder votes as a foregone conclusion in these liquidation scenarios, but this is a good reminder that they are a legal requirement and if they cannot be held in accordance with a company’s bylaws, any remaining shareholder value can be lost. Examine that shareholder list and be sure the vote will actually take place!

Gloom And Doom

I am always amazed at how badly investors will punish even the best quality companies for disappointing near-term guidance. The effect seems most severe with smaller companies with high retail investor participation. Take Somero Enterprises. Somero is an odd company, traded in London but headquartered in Florida. But it’s also an exceptional company with world-beating returns on capital, solid long-term revenue growth, zero debt, and a generous capital return policy. Somero sells concrete leveling systems. Basically, if the huge concrete slab at your local Costco looks nice and flat, there’s a good chance a Somero product was involved. There is some cyclicality to the business, with demand depending on commercial construction activity. But time and time again, investors show themselves completely unable to anticipate the turns in Somero’s results. They bid Somero shares way up, even as revenue growth slows and profits show signs of reaching a short-term peak. Then they trash the shares when the downturn arrives and don’t buy them again until the upswing is back. It’s just silly.

Well, shares have been trashed again. A few weeks back the company confirmed that 2023 revenue would be down about 10% year-over-year. Investors responded by sending shares down 20% to a multi-year low. Somero’s enterprise value is now £121 million, or $154 million in USD. The company’s 5-year average EBIT is $33.6 million. Somero shares now change hands at 4.6x 5-year average EBIT. I’m not saying Somero shares won’t go lower, but buying quality companies at this kind of valuation has a way of working out. But who knows? Maybe this time is different? That’s what the marginal Somero shareholder seems to believe. There are returns to be had in fading peak euphoria and peak fear in fundamentally sound companies, and we may be seeing that here.

As always, thanks for reading! I am always happy to discuss little-known securities, so please reach out if you’d like to chat.

Let’s start at the beginning. FirstEnergy solutions was an Ohio utility operating multiple nuclear power plants and coal-fired power generation stations in Ohio and Pennsylvania. The company filed for bankruptcy in 2018, a casualty of excess debt and slumping power markets. As part of its plan to emerge from bankruptcy, FirstEnergy proposed decommissioning three nuclear facilities, two in Northern Ohio and one in Western Pennsylvania.

The Ohio congressional majority and governor were aghast at this plan, and passed legislation subsidizing Ohio nuclear and coal-fired power plants to the tune of $1.3 billion, Ohio taxpayers be damned. FirstEnergy reversed course on the closures and emerged from bankruptcy as “Energy Harbor Corp.” in early 2020. FirstEnergy’s major creditors were the large fixed-income focused investment manager Nuveen Asset Management and private equity/distressed investor Avenue Capital Group. Following the restructuring, the majority of Energy Harbor shares were held by Nuveen and Avenue.

Then, a scandal broke. It turned out the $1 billion and change that certain Ohio lawmakers so generously bestowed on Energy Harbor was not given purely out of a desire to protect the jobs of hardworking Ohioans. Rather, it was a quid pro quo for $61 million in donations that FirstEnergy had given to an organization controlled by Ohio Speaker of the House Larry Householder. The organization, called “Generation Now,” spent lavishly on the 2018 election favoring candidates friendly toward coal-powered generation and nuclear subsidies. And what an “investment” it turned out to be, paying off >20x! But the scheme came crashing down in June 2020, and five members of the Ohio Congress were indicted by US Attorneys. In March 2021, Ohio repealed the nuclear subsidies. Just weeks ago, Larry Householder was convicted of racketeering. A good summary the entire affair can be found here.

I first became aware of Energy Harbor in late 2020 when I noticed a strange new security trading over-the-counter with the ticker ENGH. I purchased a token number of shares. At the time, shares were trading in the $20s. There wasn’t any public investor relations site, just an inbox were one could request access to a company dataroom. Which of course, I did. The dataroom revealed a profitable and cash-generating company with a great deal of cash on hand. At say, $27, the company was trading at an EV/EBITDA ratio of around 3x, and it been busy repurchasing blocks of shares. The only worrying aspect was the company’s language around the nuclear subsidies it had been receiving. If, as expected, the subsidies went away in short order, the company’s profitability would be materially reduced. I spent a few months thinking about Energy Harbor, but ultimately decided not to buy more shares. I couldn’t come to a firm conclusion about the company’s long-term prospects or normalized profitability, so I held off. The September 2021 SEC rule change on non-reporting securities caused Energy Harbor shares to fall to the expert market, making transacting in the shares far more difficult. Shares traded rarely, but they gradually trended upward. The passage of the Infrastructure Bill, with its price floors for nuclear power generation, heartened investors and sent Energy Harbor shares into the $70s.

The strong performance of Energy Harbor shares actually wound up creating a headache for Nuveen. Many of Nuveen’s muni bond CEFs continued to hold Energy Harbor shares received following the bankruptcy proceedings. Last month a Bloomberg article came out detailing the potential risks. The article pointed out how unusual it was for these stodgy closed-end municipal bond funds to hold such a large allocation to a highly illiquid equity security and the difficulty that Nuveen might encounter in attempting to sell its Energy Harbor holdings.

Back to Energy Harbor. Earlier this month, Vistra Energy announced it would acquire Energy Harbor, creating a power generation giant with a national fleet of renewable power assets. Energy Harbor would be acquired for a combination of cash and stock in a new Vistra subsidiary, “Vistra Vision.” Nuveen and Avenue would receive a combination of cash and a 15% interest in Vistra Vision, while all other Energy Harbor shareholders would receive around $85 per share in cash.

Here’s where the special situation comes in. Once Vistra buys Energy Harbor, Nuveen CEFs holding Energy Harbor shares will receive cash and their proportional interest in Vistra Vision. So Nuveen will achieve a partial monetization of its Energy Harbor holdings. (While Energy Harbor shares are functionally impossible for Nuveen to sell, Vistra Vision interests are even less liquid as interests in a private business. However, they will likely produce yearly cash flow as Vistra Vision distributes earnings back to the parent company and minority holders.) I don’t know why Nuveen couldn’t negotiate to be paid entirely in cash rather than receive a partial interest in a private company. It doesn’t seem to leave Nuveen investors much better off. At least with Energy Harbor there was always hope of an eventual IPO or cash buyout to achieve liquidity. With Vistra Vision, it could be a decade or longer before they can cash out. Unless, perhaps, Vistra intends to list a portion of Vistra Vision at some point? They have not indicated they will, but it’s a possibility.

Anyway, there are two Nuveen CEFs that are liquidating in short order. Each has a meaningful proportion of its assets in Energy Harbor shares, and each trades at a discount to liquidation value. Let’s take a look at each.

Nuveen Intermediate Duration Municipal Term Fund - NID

“NID” is a Nuveen CEF with a market value of $605 million. The fund will liquidate at the end of March. Reported NAV is $13.55 and shares last traded at $12.89 for a discount of 4.9%. The last day of trading for NID is this Friday, March 24. As of February 28, shares of Energy Harbor made up 11.6% of NID’s assets. Nuveen valued these shares at $76.58, indicating the fund holds around 962,000 Energy Harbor shares.

Of NID’s $13.55 per share in net assets (the “net” is superfluous as the fund has paid off all borrowings) Energy Harbor shares account for $1.57 in value. Shareholders should expect to receive the non-Energy Harbor portion of NID’s value just days into April. Accounting for maybe 0.5% in trading slippage, that’s $11.92 in cash. Energy Harbor shares will be transferred to a non-traded, non-transferable liquidating trust for the benefit of NID holders. Vistra’s acquisition of Energy Harbor is currently projected to close on October 31, with Nuveen receiving $21.31 in cash per share, plus interests in Vistra Vision valued at $63.69 per share. This works out to another 44 cents per NID share. That’s $12.36 in proceeds. Assuming the $63.69/Energy Harbor share Vistra Vision value is reasonable, that’s another $1.30 per share in value per NID share for total value of $13.66, 6% higher than today. Given the swift (one-weekish) return of 92% of one’s investment, that’s an impressive IRR of 172%.

“But Dave,” you say, “that’s a ridiculous claim. It’s not like anyone can actually sell their interest in the liquidating trust in October. Not for $1.30 per share, not for anything! It’s totally illiquid! Investors are stuck waiting around for the Vistra Vision investment to be sold or acquired!”

And you’re right, of course. Thanks for keeping me humble. Instead, let’s model out the IRR under 3 scenarios: baseline, optimistic, and pessimistic.

Baseline: Vistra Vision is listed on a major exchange/sold back to Vistra/sold to a third party/otherwise disposed of in 5 years. Its value appreciates 5% yearly and it pays a distribution of 6% of its value at the end of each year representing distributable earnings. In this case, total distributions are $14.47 and the IRR is 29%.

Optimistic: Vistra Vision is listed on a major exchange/sold back to Vistra/sold to a third party/otherwise disposed of in 3 years. Its value appreciates 6% yearly and it pays a distribution of 8% of its value at the end of each year representing distributable earnings. In this case, total distributions are $14.26 and the IRR is 40%.

Pessimistic: Vistra Vision is listed on a major exchange/sold back to Vistra/sold to a third party/otherwise disposed of in 7 years. Its value appreciates 2% yearly and it pays a distribution of 3% of its value at the end of each year representing distributable earnings. In this case, total distributions are $14.15 and the IRR is 18%.

Of course, there’s also the disaster scenario under which something goes horribly wrong at Vistra vision and both the potential interim distributions and ultimate realized value are badly impaired. I don’t view this as all that likely given the business model here (baseline power generation and renewables, and all the government support and social zeitgeist behind each) but it is of course a risk.

As with any liquidation play and especially those that rely on a large return of capital very early on, the going-in price is incredibly important. For instance, paying up by 3% versus the current NID trading price crashes the IRR in the baseline scenario to 17%. Taxes are also a consideration. Typically, the transfer of property to a liquidating trust is treated as a taxable distribution, with future distributions of principal exempted from tax up to the value of the property originally transferred to the liquidating trust. But I am NOT a tax advisor so don’t take my word for it.

For investors willing to hold a completely illiquid liquidating trust for a period of up to several years, NID appears to be attractively priced, assuming Vistra Vision is at least middling in its economic performance. Many investors will look at the prospect of holding some weirdo trust and say “Not for me!” and that’s also fine! In fact, it’s what creates the opportunity for the willing.

So that was NID. There’s also:

Nuveen Intermediate Duration Quality Municipal Term Fund - NIQ

“NIQ” is another smaller yet similar Nuveen muni CEF with a market value of $164 million. NAV is $13.01 and recent trading was at $12.48. Energy Harbor shares made up 4.4% of NIQ’s net asset value as of February 28. NIQ will liquidate at the end of June. This liquidation is simpler than NID, given the much smaller allocation to Energy Harbor shares. But since the liquidation date is still >3 months away, it has some interest rate risk that NID doesn’t. The same liquidating trust structure will apply to NIQ’s energy harbor shares. Using the same assumptions I did with NID, I get the following prospective IRRs assuming no change in the value of the NIQ bond portfolio between now and liquidation.

Baseline: total payout of $13.32, 15% IRR

Optimistic: total payout of $13.24, 16% IRR

Pessimistic: $13.20, 12% IRR

Not so juicy due to the lower exposure to Energy Harbor shares, but considerably less uncertainty. As for which situation is “better,” well, that’s a question for each investor to answer for himself or herself. Please keep in mind that my projections around the ultimate disposal of Energy Harbor/Vistra Vision are highly conjectural. It’s possible, if unlikely, that Energy Harbor is somehow disposed of all at once and in short order. It’s also possible that Energy Harbor neither distributes income nor is disposed of for a decade or longer, obliterating IRRs. My assumptions here could be wildly inaccurate. In other words, make your own.

Now for the some recommended reading! Several other Nuveen CEFs hold Energy Harbor shares. Some hold lots of them. No other Nuveen CEFs have yet shared plans to liquidate, but it certainly could happen. Thanks for reading and happy searching.

That’s why I spend most of my time looking at securities where liquidity, measured either by average daily trading volume or by the dollar value of free-floating shares as a percentage of total market capitalization, is as dry as the Mojave.

The drawbacks to investing in illiquid securities are many. Most are easier to buy than to sell (the “Hotel California” effect.) Many have severe governance issues that outsiders are powerless to address. I doubt this is news to anyone reading this. But for the enterprising investor with a skeptical eye and a reasonable tolerance for volatility, I submit there is no better opportunity set.

Introduction complete. Let’s take a look at a high quality, illiquid, and cheap European healthcare provider. Clinica Baviera (“CB”) is the operator of over 90 ophthalmology centers offering surgical treatments for common eye problems and diseases like cataracts, myopia, presbyopia, etc. Clinica Baviera, ticker “CBAV,” operates mainly in Spain and Germany, but has a growing number of centers in Italy and one in Austria as well. CB has a market capitalization of €293 million, but it trades less than €100k worth of shares daily and only €15 million worth of shares are tradable in the public float.

Spain is a tantalizing market. Despite the size of the Spanish economy, the Madrid market has a reputation as a sleepy, dusty marketplace dominated by a few large enterprises. But there are over 250 issues traded in Madrid, three-fourths of them valued at less than €1 billion. Few attract any attention from investors outside Spain.

Back to CB. The company was founded in 1992 by Dr. Julio Baviera and grew steadily to the point that it caught the attention of giant Chinese eye health company Aier Eye Hospital Group Co Ltd. Aier launched a takeover attempt in 2017 and ultimately purchased just under 80% of Clinica Baviera shares. A couple of investment funds own a further 15%, leaving just 5% of CB’s shares in public hands.

Clinica Baviera performs elective and/or non-emergency eye procedures, so it exists outside the national healthcare systems of the countries where it operates. The company has agreements in places with dozens of private insurers and mutuals. The eye surgery market is a good place to be for the long run. As Europe’s population ages, the need for procedures like cataract correction will only increase. There’s also evidence that rates of eye problems like myopia are on the rise. As a long-established company with hundreds of thousands of patients and procedures performed, CB is well situated to capture a large percentage of the market’s growth.

From 2011 through 2021, Clinica Baviera grew its revenues at a 6.4% annual rate. The company benefited greatly from increased scale over time, allowing it to grow its operating margins from 8.6% in 2011 to 22.0% over the twelve trailing months. For the twelve months ended September 30, 2022, CB reported operating income of €42.4 million and free cash flow of €39.3 million, including investments in new centers. The company maintains a strong balance sheet with minimal debt and cash in excess of the company’s total capital lease obligations.

There is good reason to believe Clinica Baviera’s results will continue to improve as its newer centers reach maturity and contribute fully to operating results. The company’s German and Spanish operations each report EBITDA margins in the low 30s, while the newer Italian operations are still scaling up. I expect that the Italian market is less structurally profitable than the Spanish and German markets, but I still expect the Italian segment’s EBITDA margin to reach the lower 20s as Clinica Baviera increases its unit count there.

And Clinica Baviera should increase the number of eye surgery centers it operates, because the economics are phenomenal. For the trailing five full years, CB recorded an average return on equity exceeding 50%, all without significant debt financing. I don’t expect these excess returns to be competed away any time soon. Eye surgery requires highly trained and specialized surgeons, doctors, nurses, and other medical staff. The medical field is highly regulated. It’s just not that easy to open an eye surgery center. The difficulty in attracting qualified staff is probably why Clinica Baviera hasn’t expanded more aggressively. The company adds only 2-3 new units annually. On the plus side of things, this measured pace allows the company to focus on ensuring each new unit is properly staffed, trained, and supported, rather than racing on to the next opportunity. Because only a portion of its free cash flow is reinvested in expansion, CB has lots of capacity to return capital to shareholders. Buybacks are not realistic due to the tiny number of shares in the free float, so the company is generous with its dividends.

Despite steady growth, a healthy outlook, excellent returns on capital, and a sensible capital allocation policy, Clinica Baviera trades at just 9.7x trailing earnings. Just over 8x excluding the company’s balance sheet cash. The enterprise value/EBIT multiple is just 7x.

Why? A company with identical economics, but US-listed and with liquid shares would trade at 25-30x earnings easily. But of course, Clinica Baviera is not US-listed and its shares are not liquid. They’re difficult to acquire and there’s always the risk that the 80% Chinese owner could either attempt to buy the rest of Clinica Baviera at unfair price, or could seek to sell all or some of its position and create a temporary share overhang, depressing the share price. I think each of these concerns is overwrought, but nonetheless, they will keep investors from considering Clinica Baviera.

This brings me back to my original point about illiquidity and returns. I think illiquidity is a great friend to investors buying into a high quality company like Clinica Baviera. In this case, the illiquidity allows investors to buy in at a valuation well below what Clinica Baviera would fetch in a liquid market. Investors can allow the company to work for them, building value year after year and perhaps someday achieving full value in a sale or with a more liquid listing. I have observed that a good company’s shares tend to become more liquid with time as the company’s results attract increased attention from investors and as productive investments increase the value of the company itself. On the other hand, I have seen the illiquid shares of many marginal companies become even more illiquid with time as investors give up hope and the company’s terminal value diminishes.

The lesson here? Investors with a truly long-term investment horizon and a tolerance for volatility should not fear illiquidity as long as their illiquid investments are in high quality securities. Venturing beyond into speculative illiquid opportunities is a great way to learn a difficult lesson that I have had to learn the hard way more than once.

As a belated holiday gift to you, dear reader, let me offer a few thoughts on opportunities in a market where I have been spending a lot of research time of late: the Dominion of Canada. Apologies in advance: this gift cannot be returned or exchanged.

Looking North

I like Canada. I think a lot of Americans under-appreciate the economic and cultural dividends that the close relationship between the two countries creates. Sure, sometimes we spat over tariffs, but it really says something that the two countries trust each other enough that the world’s longest national border is also completely undefended. I’ve spent a few days in Toronto and Montreal, and a few weeks camping in Algonquin Provincial Park. Eventually I hope to visit the Maritime provinces, British Columbia, and the Canadian Rockies. I sometimes wonder just how far north I could drive in a normal passenger vehicle. Lake Athabasca seems doable, seasonally. What about Great Bear Lake?

Naturally, I also enjoy checking out Canadian companies. The Canadian market is dominated by a small roster of blue chips in the banking, telecom, tech, and consumer sectors. These get the lion’s share of investor attention. But below this there are numerous mid-cap and small-cap businesses, some of them very successful. Then of course there are the thousands of speculative micro-caps, laregly in the resource exploration industry. These are mostly listed on the TSX Venture segment or one of the other junior exchanges like the Canadian Securities Exchange and NEO. I’m a little young to remember the glory days of the Vancouver Exchange with its host of shady characters and con artists, but trust me, not much has changed. While there is value on the Canadian junior exchanges, be prepared to wade through a lot of dreck to find it.

Rather than poke around in the muck, I think most investors would be better off examining some of the good quality mid-cap and small-cap Canadian companies that fly below the radar. I especially like companies that are mid-sized, operationally speaking, but trade like forgotten micro-caps because of small floats and illiquid shares. Here are three of my favorites.

Algoma Central Corporation

Shipping may be the world’s worst industry. I can hardly think of a shipping company which merits consideration as more than a cyclical trade. These are not buy and hold stocks. Trading sardines, not eating sardines. The only exception is the rare shipping company that occupies some profitable niche. Maybe some kind of specialized and difficult to acquire/operate vessel, or a unique operating geography where other shippers can’t operate. Algoma Central fits the bill. Algoma, traded as “ALC,” is one of the largest owners and operators of dry-bulk and tanker vessels on the Great Lakes and the Saint Lawrence Seaway. These tricky, environmentally sensitive inland operations (cue Gordon Lightfoot) require a high degree of expertise. Founded in 1899 and listed as a public company in 1958, Algoma has decades of experience in these markets.

Now, Algoma is not immune to the realities of the shipping industry. The business is still cyclical and capital intensive. But Algoma has been able to exceed its cost of capital through market cycles and has been a responsible steward of investor capital. Over the last few years, Algoma divested its portfolio of Sault Ste. Marie commercial property. The temptation for most shipping companies is to own ever more ships, economics be damned, just as the temptation for every oil and gas executive is to drill more wells, confound the returns. But Algoma Central has paid multiple large special dividends while still managing to make well-considered additions to its domestic fleet and ocean-going pool.

Algoma shares popped recently on the announcement of another special dividend. But in between positive announcements, shares tend to return to baseline valuation of 7-8x normalized shipping profits. I think that’s a good entry point, one that is likely to provide low-teens annualized returns over several years. Algoma Central is not the kind of company that will supercharge anyone’s portfolio, but you can do a lot worse than buying a well-financed, competitively advantage company at a single-digit multiple of earnings.

Senvest Capital

Now for a real weirdo. Senvest Capital Management, LLC is one of the world’s most successful, lowest-profile hedge fund managers, and investors can effectively buy into its managed funds at a huge discount via the parent company, Senvest Capital. The parent company trades under ticker “SEC.” Established in 1972 as a distributor of anti-theft devices for retailers, the company pivoted over time into a holding company and eventually, an investment advisor. Today, Senvest has nearly $3 billion in assets under management across three funds. Their flagship, Senvest Master Fund LP, has returned 6,242% since inception. The last decade’s returns have been more subdued, but still, let he who has multiplied his investors’ capital >63 times over cast the first stone. Senvest’s technology-focused fund has returned 2,260%. The only blemish on Senvest’s record is its small Cyprus Recovery Fund, down 77% since inception. Senvest is not in the business of minimizing volatility. The managers freely express their interest in maximizing long-term returns, gladly accepting whatever short-term volatility this may entail.

Senvest’s most recent claim to fame is their Gamestop coup. Counter to Melvin and other funds that famously lost billions shorting Gamestop, Senvest took the long side of the trade and when all was said and done, walked away with $700 million.

Senvest’s principals do not seek out media attention and so good info can be hard to find. Still, here are a few media pieces from recent years.

Oddballstocks 2013 Write-Up

The Hedge Fund Journal profile

Institutional Investor interview (paywalled)

Senvest Capital shares are down this year, likely because Senvest Master Fund, LP was down 31% year-to-date as of September 30. Still, at $315, Senvest shares trade at a 46% discount to last reported book value. Book value is likely up substantially since September, as Senvest Master Fund rose 25% in October and November and Senvest Technology rose 11%. Senvest’s current discount to NAV is in all likelihood well in excess of 50%.

Anyone interested in owning Senvest should be aware that the performance of Senvest’s hedge funds will continue to be volatile, and there’s no guarantee of future outperformance. Furthermore, while I am in no way a tax advisor, the company appears to be a PFIC, which could complicate an American investor’s tax returns. (Personally, I think investors are a little too scared of PFICs, but nobody likes extra forms or current tax liabilities.)

Logistec Inc.

Finally, a few words on an “old friend.” I have watched and owned Logistec (tickers LGT-A and LGT-B) for several years, always waiting for a day in the sun that never quite seems to arrive. Logistec owns a large network of terminals and port assets along the Great Lakes, Saint Lawrence Seaway, and Canadian and American Eastern and Gulf coasts. These are phenomenal assets. Totally irreplaceable. The ports and terminals segment prints money year after year. More when commodities are hot and harvests are large, but every year without fail. From time to time, Logistec acquires additional port assets or adds capacity at existing terminals.

Logistec also owns an environmental services business that performs site remediation and water main upgrades/restoration. This segment is, frankly, not as good as the ports division and I wish they would sell it or spin it off. But it does make money and will probably develop just fine as municipal water infrastructure continues to age.

Logistec’s marine ports and terminals division is probably worth 20-23x earnings and its environmental services unit should trade at 12-14x. But Logistec shares languish at just 10x trailing earnings, for all the typical reasons. Logistec has two share classes, neither of which is liquid at all. The company is 2/3 owned by the daughters of the founder. (One of them, Madeleine Paquin, has served very capably as president and CEO since 1996.) And finally, the combination of marine ports and terminals and environmental services is just odd and attractive to absolutely zero investors.

The company is aware of the persistent gulf between the price of its shares and their intrinsic value, and recently put out an investor presentation for the first time. Did it help? Sigh…no.

Despite its moribund share price, Logistec has made a lot of money for its investors over the years, and I expect it will eventually resume doing so. Logistec has the amazing distinction of having recorded positive net income for 53 consecutive years running, and it has a decent shot of repeating the feat.

Thanks for reading! These are hardly the only little-known opportunities in Canada. I welcome your input on what other high-quality Canadian enterprises I should examine. I happen to be accumulating shares of another, which I look forward to describing in due time.

Blessings to you and yours as we move into 2023. I look forward to many more productive conversations in the New Year.

In lieu of a traditional quick analysis of some interesting security or trend, I thought I would present several news items that have caught my eye as well as some recent Alluvial projects.

Q3 Letter! For anyone who hasn’t seen it, here’s Alluvial’s Q3 letter. I’ll be the first to admit I am not having fun this year. The market and I are fundamentally at odds on many of our holdings. I’m proud that Alluvial has managed to out-perform indexes, both this year and since inception, but 2022 has been a slog from the beginning. The market mood seems less gloomy than earlier this year, but this cheerier outlook hasn’t yet flowed down to the small and off-the-run securities where I spend most of my time. Many securities remain at or near their 2022 lows. All the same, these doldrums are producing the healthiest crop of special situations, deep value opportunities, and attractively-priced high quality businesses in quite some times. For anyone willing to look ahead 1-3 years, I think there is plenty to buy today.

We.Connect SA analysis! We pulled together a presentation on one of my favorite small companies. We.Connect is a French IT distributor with a focus on consumer technologies. Despite an extraordinary track record, We.Connect remains almost completely unknown and deeply under-valued, trading at a mid-single digit multiple of earnings. Please enjoy the analysis but mind the disclaimers: We.Connect is a tiny company with highly illiquid shares. It’s not at all appropriate for short-term investment and I’m not recommending anyone go out and buy shares.

Subsidies on Subsidies. Rural telecoms have been major beneficiaries of federal and state subsidies designed to increase access to broadband internet for rural households and businesses. My favorite, LICT Corporation, receives over $30 million in annual support designed to subsidize the build-out of modern fiber infrastructure in its service territories. And now, here comes another giant wave of grants! Thanks to the Department of Agriculture’s ReConnect program, LICT will receive another $128 million. That’s $7,300 per share and 35% of LICT’s market capitalization. I don’t expect a material short-term uplift in revenues or profits from the resulting fiber expansion, given the sparsely-populated areas targeted by the program. But I do like that LICT will be the sole provider of fiber-based broadband internet in these areas, now and in all likelihood, forever. The market seems completely unaware of the upcoming windfall.

Selling When the Selling is Good. I have a lot of respect for management teams that can look around and say “Wow, our assets sure are in demand right now. Can you believe these prices? Let’s sell.” It’s pretty rare. But two different OTC-traded real estate companies have come to the same conclusion this year: Tower Properties and Maxus Realty Trust. Both have long-tenured management teams that have seen cycles come and go, and each is taking advantage of the red-hot market for multi-family properties. Earlier this month, Tower Properties completed the sale of a 208 unit apartment complex in Kansas, realizing net cash proceeds of 20% of the company’s market capitalization. Often Tower will sell a property and then use a 1031 exchange to buy another property, deferring taxes, but this time management doesn’t seem to see anything worth buying. I suspect a large special dividend is on the way. Maxus is taking things a step further, looking to sell up to all of its substantial multi-family holdings. Thus far Maxus has sold 11 properties and is under contract to sell another 11. At this pace, Maxus will have sold its entire multi-family portfolio by early next year. Maxus has realized selling prices of 15x gross rents on average, or cap rates of 4% assuming net operating income of 60% of gross rents. To me, these valuations appear wildly high, but what do I know? I am a lifelong resident of the Rust Belt. If Maxus can sell its remaining properties at similar valuations, shareholders ought to be sending lovely holiday gifts to company HQ.

The Question of Over-Earning. Looking at the broad investment landscape, it’s apparent that companies in many industries are over-earning. In the post-COVID environment of high inflation and lingering supply chain issues, producers of commodities and basic materials have experienced an earnings bonanza. Question is, how long will it last, and what should we be willing to pay for businesses whose earnings will almost certainly decrease to normal or sub-normal at some point in medium term? Despite what some super bulls may say, commodities prices always revert to the mean at some point. The cure for high prices is high prices. Persistently high commodities prices result in commodities producers earning excess profits, which always attracts a wave of investment and new supply, which inevitably results in prices collapsing, often to below-trend levels. And then the process repeats in reverse. Tale as old as time.

A classic “value investor” mistake (of which I am not innocent) is to buy a cyclical company at a cheap multiple of trailing net income or cash flows, say 6-7x, not realizing the company’s profitability has peaked and is about to plunge. That highly attractive P/E multiple is actually a not so lovely 18-20x mid-cycle earnings. OK, so the lesson is “Don’t pay mid/high single digits multiples of trailing net income for cyclicals at peak earnings.” Easier said than done, but a valid principle. But what about cases where we know a company is over-earning, but shares can be bought for 1-2x trailing results and 6-7x mid-cycle profits? Especially if a few more quarters of super-profitability will bring enterprise value down another 20-30%? In these cases, I think there is a case for owning shares despite the certainty of decreasing profits.

A good example is Arctic Paper SA. Arctic is a Polish/Swedish producer of paper and wood pulp. Arctic is a fairly good paper company, but still a paper company and subject to the cyclicality of paper and pulp pricing. From 2015-2019, the company averaged zł 230 million in annual EBITDA and an EBITDA margin of 7-8%. Then came 2021. Paper and pulp prices exploded and suddenly Arctic Paper is producing EBITDA of zł 900 million in EBITDA at a 19% margin. The company has used this windfall to flip from a position of moderate leverage to a strong net cash position. Now, Arctic Paper is trading at just 2.3x trailing EBITDA (accounting for minority interest) and 3x trailing net income (just 2x annualized Q3 results.) With wood pulp prices setting new highs, it is likely Arctic Paper will record incredible profits for at least the next few quarters before declining. Let’s say the party continues for another year. Maybe that’s aggressive, maybe not. But if it does, that would take Arctic Paper’s enterprise value down by half and leave it trading at around 3.3x normalized EBITDA, which the company pegs at zł 300 million with its current facilities. Is that cheap enough? I don’t have a complete answer yet. It probably depends on the company’s skill with capital allocation. Will it use its windfall profits to return capital to shareholders and fund high return internal projects, or will it fund a variety of marginal projects just because it suddenly can?

This is just one example, but similar dynamics are playing out in natural gas, coal, base metals, and all manner of other commodity and base materials producing businesses. My point is: investing in a cyclical company at 6+ times peak earnings is a bad idea. But at 3x? 2x? At some valuation shares are attractive, even if future earnings will certainly trend downward. In my view, the market is discounting many of these temporary over-earners too sharply.