Purchasing Bexil at a discount through Winmill

I've never had a reader email me asking what I consider an oddball stock.  Maybe my posts do the talking for themselves.  I find most of the companies I research and write about are not all that odd, they're just not mainstream mid/large cap names that most investors are familiar with.  

Many investors appear to be drawn to complexity.  There is a certain intellectual challenge to a complex situation.  Complexity doesn't interest me that much, I prefer simplicity, but what I really enjoy are things that are hidden.  Complexity is good for experts, hidden things are good for individuals, professionals (most) can't be bothered to look.  I enjoy researching stocks where information is very hard to find.  The research process is like a treasure hunt, each piece of knowledge I pick up is either discarded as useless, or exceedingly valuable.  Anyone can go on these treasure hunts, but most would rather not waste their time.  Some of my favorite stocks are very simple investments, but very hidden.  For many outside investors this process appears complex, it's not complex, just different.

The stocks I want to talk about in this post might appear complex, but keep in mind the above paragraph.  The investment story is very simple, it's unraveling the details that's difficult.  Winmill (WNMLA) and Bexil (BXLA) are hidden, but not complex, what they are is utterly fascinating.  This post might seem complicated, but I would encourage you to read to the end, I think the reward is ample.

I was alerted to Winmill & Co almost exactly one year ago by a reader.  I read their website, and eventually ended up on the Bexil website.  Recently another reader suggested I take a look at them.  I look at a lot of stocks, but if I find myself drawn into a story, and spending an inordinate amount of time reading and researching an idea, I will usually write it up.

Winmill & Company is an investment advisor to a number of mutual funds, both open and closed end.  The company's funds pursue very narrow strategies, such as gold funds.  Of the Midas Funds, one invests in the Harry Browne perpetual portfolio.  A second one, the Midas Magic held 25% of its assets in Berkshire Hathaway, and 20% of its assets in Mastercard.  Incredibly 45% of the funds assets are in two stocks, which by the way are both holdings of mine as well, although I'd never recommend anyone make 45% of their portfolio out of those stocks.

When visiting Winmill's website, one might get the impression the company focuses on asset management.  This might actually be the second impression a visitor might get, the first is the feeling that they were transported back to the information superhighway circa 1996.  The only thing missing from Winmill's site was some blinking text and little animated gifs of spinning dollar bills.  This is a complete total digression, but I'd love it if some finance researcher did a study on the stock performance of companies that have dumpy websites vs companies with slick websites.  My gut says that the dumpy website companies would come out ahead.

The value of Winmill's asset management business is unknown, but what is known is their stakes in two much larger companies, Bexil and Tuxis Corporation.  All three companies are controlled to various degrees by members of the Winmill family.

Tuxis is a self-storage and real estate company located in Connecticut.  They are non-reporting, but as of 2007 they had an equity value of $7m.  As of 2007 Winmill owned 25% of Tuxis, I haven't been able to find further details, but given the Winmill family's tight reign on this operation I would presume the stake hasn't shrunk.

The much more interesting Winmill holding is Bexil Corporation.  Bexil is a holding company that is engaged in securities trading, investment management, and mortgage banking.  Winmill owns 222,644 shares of Bexil.

The company trades securities on their own account, and manages a dividend and income closed end fund.  Close to 50% of the company's revenue is attributed to their trading and investment management activities.  

Bexil's annual report will be a familiar read for investors who have read the Berkshire Hathaway annual report.  Bexil considers themselves successful if they are able to grow book value per share over the long term.  Because so much of the company's results are due to trading gains, and the sale of subsidiary companies, management feels that book value is a justifiable measure.  I agree with a few caveats, the first is that while book value has been growing the share count has been growing almost as fast.  The second caveat is there appears to be some wiggle room as to what the company's exact book value is due to the nature of their operations.  This isn't necessarily a bad thing, but just something to watch out for.

The story with Bexil became much more interesting late in 2012.  The company decided that they wanted to enter the mortgage origination business.  Mortgage origination is a business where a company finds a borrower, lends them the money for their mortgage, then sells the mortgage to the government.  The originator can service the mortgage and make a profit on servicing.  Bexil wanted to enter this market, but didn't have the resources to do it on their own.  They formed a subsidiary Bexil American Mortgage and funded it partially themselves, and partially with outside investor money.  The outside investor is Alex B. Rozek, a name that probably isn't familiar to most.  Alex is Warren Buffett's great nephew, the B in his name stands for Buffett.  Alex manages a hedge fund in Massachusetts called Boulderado Partners LLC.  A side note is that Alex proposed to his then girlfriend at the end of a Berkshire shareholders meeting a few years ago.  Alex not only provided seed capital for the mortgage origination business, but he's also a significant shareholder in Bexil.

Attached to Bexil's 2012 annual report is a two page discussion by Alex explaining why he believes mortgage servicing and mortgage origination are the perfect businesses to be entering right now.  The short summary is there are few companies qualified to do this business, and government barriers to entry are so high it takes years to complete an application to compete.  Bexil American already has all of the required certifications and approvals to operate.

Bexil's balance sheet is hard to parse due to the consolidation with their mortgage origination business, the CEO even states this in his annual letter.  The important parts worth noting are that Bexil has $30.7m in equity, and $15m in cash and securities.  They have a lot of debt, but it's warehouse borrowing related to the mortgages they originate.  A balance sheet is a snapshot in time, and the mortgage subsidiary's books are always fluid with loans moving in and out quickly.  So the snapshot preserved for the annual report most likely bears no resemblance to their current balance sheet.

Bexil American isn't profitable yet, but if an investor believes the story that Alex and management are promoting it should be profitable soon, and when it is the company will be gushing money.  Alex states that a mortgage originator can expect 100% returns on their capital if they do things right.

When examining Bexil through the filter of their latest results, they don't look that cheap at current prices.  The company has a market value of $49m against a book value of $30.7m.  The company has consistently lost money, and until recently was steadily growing book value per share.

The twist in this investment comes with Winmill, they own 222,644 shares of Bexil which at current prices is worth $11.187m.  They also own 25% of Tuxis, which is worth about $400k.  An interesting side note, Tuxis might be worth a look, they are trading at 18% of their 2007 book value.  Both of Winmill's public subsidiaries are worth $11.5m in total.  Winmill's own market cap is $3.045m, meaning they are trading for less than the value of their subsidiary stakes alone.  The market is valuing their investment management business at less than zero.  Winmill also historically had some cash and securities on their balance sheet, let's call it $2m.  Their historic liabilities were close to zero.

When you add all of the holdings up, and toss back in Winmill's presumed cash and securities the investment starts to look like a dollar selling for $.22.  Investors are able to purchase Bexil at a steep discount by purchasing Winmill.  Additionally if the Bexil mortgage origination business does as well as management thinks it will both Bexil and Winmill will benefit.


Disclosure: Long Mastercard, Berkshire Hathaway

20 comments:

  1. Great find.

    Indirectly through Midas Securities Group, a wholly-owned sub, Winmill owns 638,588 shares of Foxby Corp. (See Winmill Form 3 filed on 7/20/11 and Midas Securities Group Form 5 filed on 7/20/11.) At $1.60/share, that stake is worth about $1 million.

    Winmill directly owns 127,869 shares of Global Income Fund. (See Winmill Form 4 filed on 8/2/12.) At $3.85/share, that stake is worth about $500,000.

    On the other hand, the AUM of the Midas Fund has collapsed in the last two years (from $140MM to $45 MM) along with the share prices of precious metals miners. (See pg. 17 of the Midas Funds 2012 Annual Report.)

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    1. Winmill on sale today. Someone should just buy whole company already.

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    2. Looks like Robotti/ Ravenswood is making progress in their activist suits against Winmill ("WNMLA"), and wont have to sign a no trading agreement...this could be very good! Think they own more stock in other pockets...
      http://www.potteranderson.com/pp/experience-484.pdf

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  3. I've looked at Winmill a few times over the years and while I came to the same conclusion as you about their discount to NAV, I'm less certain about the potential to realize that NAV. They are small and closely-held and have shown no particular willingness to reward outside shareholders or ability to compound BVPS. When you're dealing with a company this small, margins of safety (or profits margins) can vanish quite quickly into overhead. It's true of any small company, of course...

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  4. Great find Nate!

    A few questions:

    (i) Is an annual report available for Winmill? I'd like to see if there are any liabilities (debt) encumbering the value of the equity positions in Bexil and Tuxis.

    (ii) What's holding you back from investing in Winmill given what appears to be a very attractive risk/reward profile?

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    1. There is no annual report available, if you google their site creatively you can find annual reports for various years, the last is 2009.

      The reason they don't have an annual report is because management doesn't feel like distributing one. There's a hedge fund that sued them under the Delaware section 220, which is a records request. The company is vigorously fighting the request.

      So why haven't I invested? Management is what's holding me back. In the Delaware lawsuit the hedge fund alleges that management purposefully is withholding information so they can drive the share price down. I don't want to partner with management that is not only hostile to shareholders, but actively working against them.

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    2. Thanks for the reply Nate.

      Winmill appears to be ridiculously cheap and someone might end up with a multi-bagger, but it won't be me. I agree with your comment about partnering with a management that is hostile to shareholders, particularly when said management controls all of the voting shares.

      I second Jimmy's comment about really enjoying the blog. In addition to the great investment advice, I thought your post on advice to graduates was wonderful; keep up the great work!

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  5. Winmill has been written up on the VIC over the years repeatedly over the years. As far as I know, the family will not provide financials to outside shareholders. Robotti had a lawsuit with the company over this very matter: http://courts.delaware.gov/opinions/download.aspx?ID=184290.

    WSJ article from 1998' to get a picture of the Winmills: http://online.wsj.com/article/SB888361324322654500.html.


    Clearly looks very cheap, but posts on VIC date back to 2001 on it... it has been cheap for a long while.

    I really enjoy the blog Nate.

    Jimmy

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    1. Jimmy,

      This is indeed cheap, someone sent me some of the VIC write-ups, and I think it's been cheap for ages. Someone mentioned in one of the write-ups from the early 2000s that it had been cheap for 10 or 20 years. So we're going on possibly thirty years of undervaluation unfortunately. With management working against shareholders I'm not sure when it might change.

      Nate

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    2. Jimmy,

      Thanks for the links to the articles and additional color on Winmill - very helpful. Notably, the WSJ article was from 1998 so the issues at Winmill are not new.

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    3. I wrote this up in 2001. It's amazing how little it has changed, including the website (it's different but not by a lot). Thanks for writing this up. It was interesting to read what they are up to now twelve years later. Needless to say, this was not one of my better ideas!

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    4. Charlie, maybe not much has changed but your buy price of $1.70 in 2001 looks good to me. The shares tripled in 3 years and went even higher by 2007, and never traded much lower than your initial price, even in 2008. Since your thesis was based on cheapness vs. asset value I would think you would want to take profits at some point. Seems like a successful cigar butt investment to me.

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  6. I don't like super exotic, microcaps with little to no trading volume in general. How do you leave the trade?

    In this case guys, take a run for your money:

    http://www.scribd.com/doc/75684107/Case-Study-4-Clear-Investment-Thesis-Winmill-cash-Bargain

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  7. Nate,

    I saw mention on the website of Winmill B shares. Do you or anyone else know how many B shares are in existence? What others sources of dilution exist? Stock options, preferred shares, notes owned by insiders?

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  8. QFamily, There are 1,643,052 Class A shares and 20,000
    Class B shares of Winmill outstanding; voting rights are vested solely in the
    Class B shares. (Ravenswood v Winmill Feb 2011)

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  9. Stuff is starting to happen with Bexil (BXLC)...interesting quarterly call.

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    1. I own a bunch of WNMLA and am starting to see large bids coming in...stock could easily double.

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  10. Crazy sale on WNMLA today?!

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