Buck Hill Falls: a ridiculously cheap oddball

Long time readers know that I have a strong affection for unknown and unloved stocks.  Sometimes these companies make great investments, but no matter the quality of the company I love the process of researching these companies.  For some reason I find it enjoyable to go hunting for hard to find information.  At times the destination is worth the journey, but mostly the journey is enjoyable on its own.

I enjoy a good hunt, some people enjoy hunting down certain vintages of wine, for others parts for old cars, and for others memorabilia.  I enjoy collecting annual reports for unlisted companies that are hard to obtain.  The process is never the same, but usually follows a general flow.  I purchase a single share with my broker.  Then I contact the company and ask for a copy of the annual report, sometimes I'm ignored, other times I receive something in the mail a few days or weeks later.  I usually need to furnish proof of shareholding, and other times I've had to register shares in my own name.

My hunt for the Buck Hill Falls annual report was as unusual as this company is.  I purchased a share, but when I tried to contact their investor relations contact I was met with a full voice mail box.  I found another number allegedly assigned to them, but it was disconnected.  I didn't do anything further for months.  Then out of the blue I received a letter from the company and a proxy voting form, but no annual report.  I wrote a letter to the Chairman and sent a copy of my proxy as proof of shareholding, days later I was holding the annual report.

Buck Hill Falls is a private 4,500 acre resort community in the area of Pennsylvania called The Poconos.  The Poconos are beautiful mountains, I've driven through the area, and vacationed there as a child.  The area is close to New York, Philadelphia, and Scranton, but yet remote enough that it feels far away from civilization.

From the company's website their community looks very nice, they have a golf course, a pool, fishing, hunting, and hiking, as well as on site restaurants.  The resort is completely private, which means they have to pave their own roads, and provide their own water service.  I believe this is why the resort is public, they went public to raise capital for community improvements.  There is a blurb in the 2002 Walkers Manual that mentions the company sold shares to residents and shareholders for $20 apiece.

From an investment perspective the company does appear interesting.  They have a book value of $3.1m, which has just about doubled since 1998, which implies book value growth of 4.6%.  The company is trading at a steep discount to book value, their market cap is $1.19m. The company trades for 30% of book value.  Suddenly that 4.6% growth looks reasonable at a 70% discount, becoming 15% growth on an investment at today's prices.

The company has two classes of shares, Class A and Class B.  The Class A shares were issued during a stock offering in the late 1990s at $20 a share.  The shares are non-transferable unless they are converted into Class B stock.  A resident or shareholder in 1997 who purchased stock at $20 has to convert their shares to Class B to liquidate at the current price of $9, quite a hassle to lock in a loss.  My guess is most of the liquidity for this stock is coming from residents and former shareholders finally liquidating their positions.

The company earned a small net income of $54k last year, and $90k in 2012, but my sense is that the company isn't being run to maximize income, or shareholder value.  Rather the purpose of the company is to support its residents.  The company has a few million dollars in debt all related to infrastructure improvements.  They are re-paving roads, re-paving parking lots, upgrading the swimming pool, and upgrading their sewer infrastructure.  The problem for shareholders is none of these expenses do anything to actually increase profits.  At the most these expenses are required maintenance to keep the value of the property stable.  At worst they're frivolous expenditures that benefit residents and destroy shareholder value.

As I read and thought about the company I realized that while this is attractively priced it might never make a good investment.  Even though the company has public shares, and public shareholders, the company's true owners are the residents.  The company provides a way for the residents to own a piece of where they live and vote on certain matters.  It's like a publicly traded homeowners association (HOA).  I'm sure my realization isn't original, that's most likely the reason the company trades at such a depressed valuation.

An investor squinting very hard might see value in the company's water utility, or in the 4,000 acres of undeveloped timberland held on the books at pre 1940s prices.  The question I ask is what good is 4,000 acres of timber if the company never plans to develop it, and only harvests a small portion each year?  The company's assets might be valuable, and if they were all priced today the company might be selling at a ridiculous valuation of 5-10% of book value, but does that matter if the company never does anything with them?  For me Buck Hill Falls will remain a fascination, but it's unlikely I will ever increase my one share position, and unless I continually write letters I might not even receive another annual report.

Disclosure: One share of BUHF

19 comments:

  1. Nate,

    I love reading your blog. This article just blew my mind--I grew up in Buck Hill Falls. Could you direct me to where you purchased the share? I never even knew it was publicly traded...by the way, I could provide plenty of anecdotal evidence as to why it's a bad investment, but I would love to see the numbers.

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    1. Send me an email, someone else requested an annual report, I'll work to scan it. Would love to hear about the place as well.

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  2. how did you find the company originally?

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    1. The company was originally listed in the 2002 edition of Walkers Manual. They also appear if you do a screen for "No Information" companies on OTCMarkets.

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  3. Interesting article.
    Do you find that you have to request annual reports for dark companies... Is there a way to receive them automatically when they are released by the company?

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    1. There is almost always a manual step to getting information on these companies unfortunately. Often that's why they're so cheap.

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  4. Great article! Another problem with BUHF is that the trading volume is miniscule...

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    1. The understatement of a century, it took me almost a year to get a share, and I paid up for it. My bid was a few dollars higher than the ask and it still took that long!

      Nate

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  5. Nate--

    Any idea what the ownership of this is? Who owns what?

    Jim

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    1. Jim,

      I don't have an idea, my guess is a lot of the home owners hold the majority stake.

      Nate

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  6. What Would Buffett Do?

    Hi, Nate --

    Obviously time to go activist! You already own a share, why not buy a house and start stirring up the pot?

    Yours,
    RP

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  7. Interesting little company, but I'm a bit puzzled that you don't like the investment. I get it isn't a typical company but don't you always say that a company should sell for less than the true value of its assets - liabilities?

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    1. Great question, the issue I have is that management isn't working for shareholders, they're working for homeowners. I question some of the capital allocation decisions, money spent on various things that are nice for the community but ultimately destroy value for shareholders.

      The company is strange, as I mention in the post it's really a traded HOA. Management has also worked to shut out shareholders, they delisted and have made is very hard to get information. Maybe someone will buy up the lot and take them over, but it's not something I'm going to wait for.

      While the value gap is large there are also some very active forces working to keep it that way.

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  8. Nate, I'm reminded of when Buffett had to go door to door to buy shares of some company (Sanborn?) in the 1950s. The capital allocation decisions here are atrocious. Spending $200K per year in capex to get $200K in operating cash flow?

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    1. Yes, there is the allure of acquiring shares by hand in a situation like this.

      The capex is even worse then that, they company said in their letter that they've taken out a large credit line that they intend to use on improvements over the next year. The line hasn't been drawn down yet, but they plan on using the entire thing. So that's another ~$2m spent on items that return nothing.

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  9. Hi Nate, great research! Would you mind sending me the annual report?

    Does it has anything to do with the abandoned Buck hill falls inn? They say it's haunted....that would make a good reason for the discount(lol)... I want to check if it's on the books...

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  10. fascinating! Do class B shares vote? If you were able to scan the annual report, I'd love to read as well.

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  11. Buy a HOME in Buck Hills Falls and those over $10,500 ( yes you read correctly) HOA fees will kill your bank account. No wonder so many gorgeous estately homes are for sale. And they are for sale dirt cheap too!!! Just type "Buck Hills Falls, PA homes for sale" if any of your readers don't believe me.
    Buck Hills Falls homes' HOA---Run FROM the Hills !!!

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  12. Don't know if anyone still tracks this but 2016 FY earnings of 140k. Not bad.

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