A Forgotten Microcap Trading Below Liquidation Value
A 120-year-old net-net that’s buying back shares
Key Metrics:
40% discount to NCAV
Active share buybacks
43 consecutive years of dividends
Buffett compounded his money at about 50-60% a year.
During a Q&A with students at the University of Kansas in 2005, he said he earned these kinds of returns before starting his partnership, and explained how he did it.
Notes by Professor Hirschey, University of Kansas ( May 6, 2005 )
By the time he was running his partnership he had annual returns of 30% a year. His returns were lower each decade.
So it’s clear that Buffett did his best work in the early 1950s, when it was just him, with a small pile of cash, and a simple approach.
And no, he wasn’t buying Coca-Cola or Apple back then.
He was buying cigar butts. Net-nets. Distressed companies trading below net cash.
Names like Union Street Railway, Genesee Valley Gas, and Greif Bros.
It may have been fortuitous for him that net-nets were much more common in his time. Almost 10% of all U.S.-listed companies were trading below liquidation value.
But you’d be wrong to assume the time of net-nets has passed.
The downside is that net-nets won’t win you friends at cocktail parties.
Tell someone you bought a distressed industrial trading at 40% of NCAV and they’ll probably think you’re a little weird.
That’s fine. 20%+ annual returns over decades speak for themselves.
The question is, where do you find these ideas? Charlie Munger reminds us to “fish where the fish are.”
For net-nets, the biggest pools now are Japan, South Korea, Hong Kong, and the U.S. OTC/pink sheets. Personally, I avoid South Korea and Hong Kong, so I cross those off the list. But the other markets are relatively accessible.
You’ll need to flip through the modern version of the Moody’s Manual to find them, and you have to do your own research.
To quote Buffett:
„You have to turn over a lot of rocks to find those little anomalies.“
But if you do, it pays off.
Today’s stock is one that has been almost completely ignored. It has never been mentioned on VIC, Seeking Alpha, or even Reddit. There is only one guy who has ever really mentioned it on twitter.
The business itself isn’t exciting, but it’s essential. It’s been around for 120 years and will likely be here for many more.
It has been very consistent, both in profitability and in dividends. They’ve paid a dividend every year for 43 years, except in 2008 and 2009.
Recently they even started buying back shares.
Looks like they know the business is undervalued, trading at just 60% of net current asset value with substantial hidden assets.
Let’s get into it.