In their latest episode of the VALUE: After Hours Podcast, Tobias Carlisle and Mike Meixler discuss:
- The Cockroach Theory: Investing in Companies That Withstand Economic Recession
- Avoiding Value Traps with Capital Cycle Theory
- Why Every Investor Should Hold Gold In Their Portfolio
- Modern Examples of The Power of Buybacks
- Are We Facing a New Era of Brazilification in Markets?
- How Free Cash Flow Yield Can Guide Value Investing Decisions
- The Value of Mineral Rights: How America’s Unique System Drives Energy Investments
- AutoNation Is a Hidden Gem Despite Its Boring Reputation
- Why Sky Harbour’s Airplane Hangars Offer High Returns on Investment
- Good Assets That Are Not Making Any Money
- Capital Cycle Theory: Why Coal Companies Are Worth Watching
- Royalty Companies vs. Miners – When Should You Own the Miners?
- The Competitive Edge of Large Land Banks in Mineral Rights
- Are We Stealthily Going Back To Some Gold Standard?
- Why Natural Resource Partners is the Ultimate ‘Indestructible’ Investment
- How 5% Interest Rates Could Derail the US Budget
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Transcript
Tobias: [laughs]
Mike: Should I not mention the vaxx [Tobias laughs] or Ivermectin? [laughs] Don’t want to get that in the future?
Tobias: I think that stuff’s all okay now, but here we go. Hi, I’m Tobias Carlisle. This is The Acquirers Podcast. My special guest today is Mike Meixler from Meixler Investment Management. He is a concho farmer. How do you say that, Mike? What is that, concho?
Mike: A concho farmer. Yeah.
Tobias: What’s a concho?
Mike: Concho is, I think it originally meant shell. But actually, the Spanish settled this area in the 1500s, and they found shells in the creek. I don’t know, if that’s because Arizona was once underwater and their shells, but they settled the area and built irrigation ditches, like you see in New Mexico. There’s a lot of little, small farms.
Tobias: They found shells?
Mike: Yeah.
Tobias: All the way in Arizona?
Mike: Yeah.
Tobias: Must be ancient shells.
Mike: Arizona was [crosstalk] apparently at one time.
Tobias: Wow.
Mike: But–
Tobias: Maybe again in the future. You might have some ocean front property there at some point. [chuckles]
Mike: San Andreas goes were– Yeah. Actually, my office is in show low Arizona, which is about three and a half hours northeast of Phoenix. So, we’re in an area called the Mogollon Rim. I live up at 7000ft. So, in Phoenix is 110, we’re 80. So, it’s pretty nice climate.
Tobias: That does sound nice. Tell us a little bit about Meixler Asset Management. How long have you been running? What’s the strategy? What’s going on there?
Mike: We just celebrated 30 years–
Tobias: Congrats.
Mike: So, we’ve seen a lot of calamities over the last 30 years from– You think about like the dotcom bubble, bursting to 9/11, to the real estate financial crisis and COVID. You and I were talking about– When you buy real estate, you have to read the fine print to see if you’re in the 100-year flood zone. I like to say, “In the stock market, we get that 100-year flood every 7 to 10 years, something happens.” So, I run an RIA. It’s a 100% discretionary, and 100% separate accounts for each client.
My main mission is to navigate these people through mostly their retirement years or a small business owner prepping them for retirement. And so, how do you make sure somebody is like survivable through any scenario that you can envision and ones that you can’t?
I would say it’s a little bit different than managing like a hedge fund or a pooled capital, because I meet with my clients regularly, face to face. I can’t tell you how many 75 or 80 year olds need $50,000, because they bought a house when they were 50 and now they need a new roof. So, people have their lives that they have to live.
Or, you may have a newly retired person who has half a million in their 401(k) and they need $2,000 a month of income to supplement their Social Security and pension, so how do you get people income, and protect them against inflation and get them through the next 20 or 30 years.
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The Cockroach Theory: Investing in Companies That Withstand Economic Recession
Tobias: What is your solution for that? How have you been dealing with that?
Mike: Well, clients laugh. I tell them about the Meixlery and cockroach theory. You’ve probably heard that before, but I can’t– [crosstalk]
Tobias: I haven’t, but I like it.
Mike: Huh?
Tobias: I haven’t, but I like it.
Mike: You want to own things that are so tough and resilient that when the nuclear blast detonates, only the cockroach survives, and then the cockroach actually reproduces and multiplies. So, maybe you have a company with such a strong balance sheet that when the recession hits where competitors are failing and going out of business, that real strong war horse type of company picks up the remains and coming out of the cycle does even better.
I would say I spend as much time looking at balance sheets, and resilience and survivability as I do the income statement.
Tobias: What are you looking for on the balance sheet? Cash? Holding cash?
Mike: Not much leverage, or leverage that could easily be paid off. And then, I like tangible. I being a part time hobby farmer, I like lots of tangible assets that I think are valuable. So, yeah, survivability. Will this business be around in 20 years? Will it be paying dividends to your great grandkids?
Things like that, you put a lot of thought into the company. Obviously, if you had invested in newspapers the last 20 years, it was a terrible long-term investment, because Craigslist and eBay and other things just ate their lunch. But had you owned something like a Lamar that owns 220,000 billboards–
The internet hasn’t disrupted that business. The billboard business was a pretty good business. If you can put up a billboard for 100,000 and rent it for $2,000 a month, that’s a pretty sustainable, durable type of asset. So, I think a lot about sustainability. How can you farm a farm for 100 years without losing all your topsoil and have to put more and more chemicals on it, right?
Tobias: How do you distinguish between something like a newspaper or even the Yellow Pages, which was a great business at one point, and so I guess you would call them value traps-
Mike: Right.
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Avoiding Value Traps with Capital Cycle Theory
Tobias: -and other kinds of businesses that are just temporarily cheap and might not have that secular decline in them? How do you tell the difference?
Mike: I don’t think it’s easy. I read a great quote recently that said, “An expert is someone who’s made every mistake you can make in a very narrow field.” [laughs]
Tobias: I like that.
Mike: I was talking to a friend who’s an electrician. He’s like, “Yeah, every master electrician has shocked the shit out of himself into a near death experience.” [chuckles] So, I think part of avoiding value traps is– In some ways like that whole thing about capital cycle theory, I think has a lot of validity.
Even in my small town, I remember, 25 years ago, there was a guy that was making money hand over fist on many storages. And of course, he tells all his buddies. And then, suddenly, there’s 10 mini storages in town and there’s 50% vacancy rates. Some of them are selling for the bank debt. And then, in another 10 years they’re all leased up and doing fine.
This is interesting. It’s one of the plays in my playbook. But sometimes a company that has really good assets can be losing money, and that can be a great time to buy if the assets are good. I used to, not so much anymore, but–
The refineries were good examples, because we hadn’t built a new refinery in 40 years. There would be times when the crack spread turns negative and they’re losing money, and Wall Street is downgrading, and people are selling. And then, you just know that those assets are irreplaceable, we’re not building anymore. At some point, the crack spreads are going to turn positive, they’re going to make money. So, I think things like that.
My friend, Colin Peterson, who– He writes a great blog, Credit Bubble Stocks. We joke about sum of the parts analysis that you get with value traps. He came up with a great quip is that, “Sum of the parts is when some of the parts aren’t very good.”
Tobias: That’s great. Yeah, sum of the parts go to zero.
[laughter]Mike: Yeah.
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The Value of Mineral Rights: How America’s Unique System Drives Energy Investments
Tobias: Christian [unintelligible [00:09:15] who’s a Nordic oil and gas investor, he has that same approach to buying the oil and gas assets. He said, “You want them when they’re losing money. Good assets when they’re losing money, because they’re damn cheap.”
Mike: I have found that true. One of our largest holdings is a company called Dorchester Minerals. We’ve had that for, I think, 25 or 26 years. I would say, in the mid-1990s, I had got interested in supply side economics. A lot of people don’t know it, but Reagan toyed with getting us back on the gold standard. Nixon took us off the gold standard. Was it 1971 or 1972? 1980, there were still people thinking about getting us back to the gold standard.
Of course, it was a huge decade of inflation. In the 1970s, I think, gold went from 35 an ounce to 800 ounce, and oil went from $3 a barrel to $30. But I read this book by a guy, I think his name was Jude Wanniski, and it was The Way the World Works. He asked the question like, “Why is it in the United States of America that there are literally hundreds of oil drilling, oil technology, oil service companies and no place in the world has the amount of public companies involved in energy?” He’s like, “Why did that occur?” His answer, which I found fascinating was, America, and Canada as well as Australia are some of the few places on the planet where the individual can own the subsurface mineral rights, where a farmer or rancher that owns these subsurface mineral rates can wildcat can explore.
If you look at Mexico, Pemex, the government owns 100% of everything subsurface. The politicians bleed the thing dry with its profits and starve the thing of reinvestment capital. So, that got me very interested back in the day about mineral rights. Like, “How does one acquire mineral rights?” It seems like it would be a good asset to hold. I think Paul Getty said, “The meek shall inherit the earth, but not the mineral rights.” So, [Tobias laughs] pretty biblical.
So, I found this company, it was called Dorchester Hugoton, that had recently come public. And so, I was fascinated. I called the company, and I got ahold of the CEO on the first call. They only had 27 employees, but they had over two million acres where they owned royalty and mineral right interests. The guy is brilliant. His name was Casey McManemin. He was at Colorado School of Mine Spread and didn’t want to be working on a rig. So, he figured royalty interests would be a better thing.
But I said, “Casey, I can’t even figure where my cows are half the time only 200 acres.” I said, “How the hell do you keep track of what’s going on two million acres?” And he said “Mike, we’re getting screwed every day. It’s my job to find them.” [chuckles] So, I appreciated the honesty and the candor, we ended up making an investment.
I think from a little $300 million, $400 million market cap company as of last quarter they’ve paid out $1.2 billion in dividends to the stockholders. Even in the Armageddon scenario, where oil went negative and with COVID, I think they still wound up paying a 64 cents dividend. So, I would say something like that is a good cockroach. It is battle tested. The management is really ethical, honest, very reasonably compensated. But by their indenture, they basically have to pay out all the earnings as cash for the shareholders.
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Royalty Companies vs. Miners – When Should You Own the Miners?
Tobias: When you look at something like a royalty company versus the actual miners, what circumstances would you actually want to go and own the miners? Because it seems that the royalty company, that’s a much better business. But there must be a reason for owning the miners in some instances.
Mike: Yeah. We own a gold royalty company. We’ve done very little in the miners, but I do think right now with diesel being cheap and gold being high, you could argue some–[crosstalk]
Tobias: I can make some money.
Mike: -on some of these miners. People look at the runs like that the miners had in the 1970s where they were like dotcoms. And so, I see why people want to own some miners.
We don’t own just royalty companies. I have a handful of companies up in the Canadian oil sands. I think these companies, I think they’re showing up on your screener now. But if you look at the free cash yields, they’re from 10% to 15%. Most of the companies have got to the point where they’ve deleveraged and paid for their mines, their upgraders, their infrastructure. And so, most of them are between 50% and 100% of the cash that they generate is going to buybacks now. I think things like that in this market are decent. You and I discussed Einhorn writings how value-
Tobias: Yeah.
Mike: -thing has changed. I really like it when a company is taking matters into their own hands. They have enough cash to reward the shareholders, because the indexes aren’t going to buy those companies, or CalPERS for ESG reasons is not going to buy a heavy Canadian oil company. But the companies themselves, if you look at how much stock they’re buying back, there’s not going to be a lot of stock left in 5 or 10 years.
Tobias: Did you ever take a look at ? I had the CEO on my–
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The Competitive Edge of Large Land Banks in Mineral Rights
Mike: Yeah, that was a great podcast, by the way. It caused me to call Spencer.
Tobias: Yeah.
Mike: I was at a mining conference in Florida, got to meet with him and have dinner. He’s as sharp as they’ve come. The company is very young. It’s very early in what they do, but it seems like they’re very disciplined in their approach.
Tobias: I think they developed that database themselves too while they were employees, but they certainly know that intimately that whole space they know very well. I think– [crosstalk]
Mike: Yeah. Everybody knows the story of Franco-Nevada, right?
Tobias: Yeah.
Mike: They bought that royalty, I think, for $2 million out of a newspaper ad, and it’s returned over $2 billion in cash. [chuckles]
Tobias: You only need a few of those in your life, and you’d be okay.
Mike: Yeah. I think with these royalties, in some senses– When we bought Dorchester, it may be a little pricey now, because it looks like there’s a lot of acquisitions of mineral rights in the Permian, like TPL. Just a big deal. Dorchester has done a deal. But in the old days, you were buying stuff from individual– The Texas Landman passed away, and the mineral rights interests went to the kids. I would say, Dorchester had an advantage, because they had a publicly traded company, and they could go to the family and say, “Hey, well, you sell us your mineral rights at a discount, and we’ll give you shares and the family members who want to hold can hold.” It was a tax-free type of exchange. But like I–
Tobias: And you get more of a portfolio of flows rather than being tied to the single head or whatever it is.
Mike: Yeah. I think the thing that I underestimated was, normally, when you have a company that pays a 10% or 12% dividend, that’s in the energy business, you expect that to deplete over a decade. Eventually, if you invested in an oil well, you’re paid out and it’s done. You spent a million drilling an oil well, and you got $3 million or $4 million back, and now it’s zero, and you got to take the cash and go do another oil well.
But I think the thing that’s been a real positive surprise is their reserves may be higher or as high today as they were 25 years ago, because we really didn’t know the oil that was at different layers that could be accessed because of the technology. When you have a big land base like that too, only a small portion of it was actually being produced upon.
You can have pleasant surprises like that when you have a large land package. There’s one up in Canada. We’ve only had for a few years, and it was the Dorchester investment that led us to it, but it’s called PrairieSky. You talk about corporate history, they’ve got, I think 17 million acres, so makes it much bigger than anything. Maybe the largest private assemblage of mineral rights in North America. But it was a land grant from the King of England to the Hudson Bay trading Company in 1671.
And then, I think it was owned by the railroad for a while, and then it was sold, I think, to Encana and then Encana, or spun it off, where it just became a pure play mineral rights and royalty interest company. I find that fascinating.
There’s some competitive advantages too to having a large land bank like that, because they made some huge acquisitions in 2021, I think, near a billion dollars. Obviously, oil was still reeling from COVID and all the dislocations. But because they have this huge land bank, if a big well pops off on their property, they know about it before anyone else. So, they were able to make acquisitions and some of the better conventional areas of Canada that have proven real successful.
There’s also some funny things too. They did very expensive seismic studies on all their property, which are really expensive. They’ve resold that same seismic study 10 times to the companies that were interested on their areas. So, there are things like that are sometimes pleasant surprises.
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Why Natural Resource Partners is the Ultimate ‘Indestructible’ Investment
Tobias: I’ve got two tickers for you. Have you ever looked at Black Stone minerals?
Mike: I haven’t.
Tobias: Yeah, you’ve got Natural Resource Partners though.
Mike: Yeah.
Tobias: Do you want to talk a little bit about Natural Resource Partners?
Mike: Yeah. Natural Resource Partners. I think I would classify that as an indestructible type of cockroach. Not to call a company, a cockroach, because it’s a good– [crosstalk]
Tobias: All the good qualities of the cockroach.
Mike: Yeah, the good qualities. But the company is different in that the royalties that it owns are mostly on coal, which obviously– Even talking to people about coal five years ago or three years ago, you’re like, “You’re a crazy craving lunatic.” But about half their royalties are on most of the best metallurgical coal mines in the United States. As you know, that kind of coal you have to make steel.
The company also had a near death experience in the 1990s and first part of the 2000s is they had taken on a lot of leverage to make acquisitions, and then they really got into trouble with lower thermal coal prices. So, really, what I like about it is the last decade, having had that near death experience, they’ve paid down their debt from over a billion dollars to– I think this next quarter they’re be under $200 million.
It shows up on your screener as a good free cash flow yield, maybe in the 16%, 17%, 18% range. If you just read their filings about what they’re planning to do, they plan on being debt free in four to six quarters, and then they plan to be like a Dorchester is just to dividend up the cash.
If you look back the last 10 years or 20 years, even in a bad year where it was like Armageddon for coal, they still made $90 million, $100 million. So, that’d be, what, a 9% or 10% on today’s enterprise value. If you’re mildly bullish or just think like met coal will stay where it is, in a year or two, you should have a debt free company that has a multi decade pathway to paying out stuff to its shareholders.
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Why Every Investor Should Hold Gold In Their Portfolio
Tobias: Let’s talk a little bit about gold, because I know you’ve got a holding in gold, and I had the Seawolf guys who were the guys from the big-short on a few weeks ago, and they have a big chunk of their portfolio in gold. Talk to me a little bit about how you see the opportunity there, and why you hold it.
Mike: Sure. I was a paper boy at 10. Was raised by a single mother. Back then, you had to actually put the paper in the front door and not chuck it in the yard, like they do– [crosstalk]
Tobias: Oh, wow.
Mike: But I would get tips, Christmas or Thanksgiving. When you get something like that– Can you see that?
Tobias: Yeah.
Mike: That’s a $20 bill from-
Tobias: Is it backed by gold?
Mike: -1922, and it’s payable in gold coin.
Tobias: Wow.
Mike: Of course, everybody has seen, we had up until the 1960s, the silver certificates. Didn’t Buffett talk about arbitraging silver at one point? We still had dollars that you could be payable to the bearer on demand in a silver dollar as late as the 1960s.
We haven’t really been off the gold standard for very long, really, just since the 1970s. There’s a great book, if you ever get a chance to read it, Murray Rothbard on the Great Depression. Rothbard was an Austrian economics professor and Mises and Hayek, but he talked about one of the reasons–
Everybody thinks we got out of the Great Depression because of Keynesian spending programs, but Rothbard thought that after World War I, going back to a $20 gold, was very deflationary. It was very hard money, very tight money. And so, of course, we had the boom in the roaring 1920s and the bust.
What people don’t realize is FDR in 1933 confiscated gold. And then, 11 months after confiscating it, it changed the price from $20 to $35. So, that was in effect a 75% devaluation of the dollar. So, if you had $100,000 in the bank, it’s now worth 25 grand. But that also was a big debt relief, because the debt was also payable in gold as well.
I was funny how I got interested in gold. I became aware that gold in the late 1990s, I was reading articles in the Wall Street Journal, that the miners were struggling with $350 gold, because the mining cost was like $500. Newmont was shutting down mines, and Agnico Eagle was shutting down mines and I just thought, “This is an interesting opportunity. You can buy gold for a lot cheaper than what it costs to actually produce gold.”
Tobias: Yeah.
Mike: So, we bought gold and then suffered for the next couple of years, because the price kept going down. What was especially bad about that time period is the dotcom stuff was just booming. But eventually, we had the bursting of that bubble, and then gold had a real run. I would say, today, you don’t want to have mission creep, but we still hold gold and it’s a top five position for us. Not because it’s below the mining cost. People say the mining cost may be $1,000 or $1,200 or $1,500 or depending on the mine, but it looks to me like just the debts in the United States.
Right now, Social Security, Medicare, the Military and interest on the debt exceed 100% of the tax revenue. And so, the politicians aren’t going to cut Social Security, they’re not going to cut Medicare, they’re not going to cut the Military. What did they do? They just cut interest rates. Why did they cut interest rates? I actually have stopped paying attention to all the Fed pronouncements of this state.
Tobias: There’s so many.
Mike: Yeah, there’s so many. It’s like, people trying to game the bond market, and what’s the Fed going to do? I think at this point, it’s almost useless to pay attention to that, because the Fed has a third secret mandate that they never talk about. They talk about inflation. They talk about full employment. But at this point their, main mission is to fund the machine, right?
Tobias: Yeah.
Mike: When you have the interest cost more than the military budget, they got to get that down, somehow. So, there was an interesting time period after World War II, where the debt to GDP was 130%, I think, and the Fed went into 10-years of, what they called, yield curve control, and that was by buying bonds, they pushed the rate down to 2.5% for an entire decade, and they let inflation rip at 6%.
Now, during that time period, gold didn’t do anything, because we were still on the gold standard and it was pegged at $35 an ounce. But I think if you eliminate the noise from the Fed and all the generations, it seems to me that they have to keep interest rates below the inflation rate for a long period of time. So, I think– [crosstalk]
Tobias: Yeah. Sorry, keep going.
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Are We Stealthily Going Back To Some Gold Standard?
Mike: Yeah. The other thing I think is interesting about gold is the Basel III accord made gold a tier 1 asset for banks. If you actually look at what’s going on right now, the Central Banks, the whales in the global financial system, like the Bank of China or the Bank of Russia, they’re buying a lot more gold than they’re buying treasuries.
Personally, I don’t think there’s a worry about the dollar in terms of the reserve currency. It still has an enormous market share. But it looks to me like treasuries, the way by which our government finance its debts and deficits, is definitely losing market share as a reserve asset. So, I asked the question, “Are we stealthily going back to some gold standard they just haven’t told anyone yet?”
Finally, I think this is fascinating, I like to measure things in gold terms. I’m still a little sore at Charlie Munger for calling me a barbarian. I don’t know if you remember that.
[laughter]Anyone that holds gold as a barbarian. But I personally believe the peak in the stock market in the United States was around $2,000, because when Clinton left office, she had about 11,800 on the Dow and gold was around 300. So, let me see, at that point in time–
Tobias: Like, 33 or something?
Mike: Yeah, 33 ounces. Today, you’ve got the Dow a little over 40,000 and gold at 2,600. So, back then, it took 33 ounces to buy the Dow. Today, it takes 15 ounces.
Tobias: Yeah. Yes, it’s halved.
Mike: Yeah. If I was holding on to gold, I could buy twice the amount of Dow. Now that doesn’t account for dividends. The Dow’s done better than just the raw price. But when you have extreme financial crisis or loss of confidence in the paper– Really, if you look at gold, the supply of gold grows at let’s say 1%. It’s really hard to increase the supply. But the supply of paper and the money supply around the world may be growing at 7% or 8%.
So, like you look at that, with logic, you say gold shouldn’t do more than 5% or 6%, but every hundred-year flood, there are these times when there’s loss of confidence in the paper systems because of sovereign debt crisis, and then gold goes up a lot. It’s shocking when you look at it.
In 1933, when FDR revalued it from 20 to 35, the Dow fell from 100 down into the 30s. So, it was 1 ounce bought you the entire Dow. And then, in recent times, Reagan’s first term, we had a recession, the Dow was in the 800s, and gold during the 1970s went up to 800 from a starting point of 35. So, as late as 1980, you had a one-to-one ratio.
I think it’s fascinating, because you talk about that, it doesn’t sound possible with the Dow at 40,000 and gold at 2,600. But what would the world look like if the Dow was at 20,000 and gold was at 20,000? It sounds impossible, but it’s happened twice before. So, it’s not outside the realm of possibility.
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How 5% Interest Rates Could Derail the US Budget
Tobias: Do you think Volcker sticking rates up the way that he did around that in the 1980s acted like a return to the gold standard a little bit?
Mike: Yeah. You could argue that. It definitely instills the discipline of a cost of capital into the system where only, really good projects get funded. There’s no trading of monkey JPEGs and hard money like wildlife [chuckles] speculation. But I think Volcker was able to do that, because the debt to GDP was 26%. So, he was able to raise interest rates a lot.
I don’t think there’s any way in hell that they could do that today with $35 trillion in debt. I don’t even know if a 4% or 5%. I think the 10 years around four. Maybe T-bills are in the three and a half. I don’t see–
My friend, Luke Gromen, he said the US is engaged in payday loan financing, because they’re having to roll like 15– I can’t remember the numbers. Not $15 trillion, but it’s like $15 billion a week in T-bills.
Tobias: Yellen seems to say, “That’s a strategy to pull everything down to short-term finance everything.”
Mike: Right. Yeah.
Tobias: What do you think about that?
Mike: I think they’ve got to get that down. Interest cost, if rates were to stay at 5% for a couple years, interest would be 20% of the budget. 30%, what point? I don’t think the math works. But maybe if they can keep interest rates below the inflation rate for a decade or a decade and a half, and then maybe they tariff, pick up tax revenue with tariffs and have more jobs, move to reindustrialization, maybe they can–
I think even Biden kept quite a few of Trump’s tariffs in place. I think under a gold standard, you don’t have the deindustrialization offshoring nonsense that we’ve had the last 40 years. It’s almost like we lost World War III. When you lose a war, your industry is destroyed, and then the winner gets to sell stuff. After World War II, everyone’s industry was destroyed and the US was intact.
I think we’ve voluntarily given our industrial base to overseas. The CEO of Raytheon said in a speech a year ago, “There was like 700 components in the military industrial supply chain that they had no supplier other than China.” So, it’s like borrowing money from China to make stuff made in China that you need to protect yourself from China, [Tobias laughs] it’s just not a good business plan.
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Tobias: Let me give a little bit– I know it’s late today, but can I give a little shoutout to the folks who are listening at home. Santo Domingo, Dominican Republic. What’s up? Petah Tikva, Israel. Bendigo, Victoria, Early start for you. Hamish, good job. Andhra Pradesh, India. Tomball, Texas. How is it, Tyler? Vestavia Hills, Alabama. Savonlinna, Finland. Valparaiso, Indiana. How are you, Mac? Jupiter, Florida. Breckenridge, Colorado. Pittsburgh. Brandon, Mississippi.
Saludame por favor. Mendocino, California. Winter Park, Florida. Lausanne, Switzerland. Sacramento. Bangalore. Tampa. Bellevue. South shore, Massachusetts. Tenerife, Grand Canaria. Nashville. Dubai. Tallahassee. Thanks, everybody. It’s good to have you here.
Mike: Tobias, your global reach is astounding. It’s amazing.
Tobias: I’m as equally amazed. Temecula, California. There we go. Close by.
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Modern Examples of The Power of Buybacks
Tobias: The last 10 years or 15 years have really been characterized by flows to large caps, I think, and it’s starved a lot of the small and micro and value. Is there some capital cycle theory going on there? What do you think is happening there?
Mike: Well, if you listen to the Mike Green stuff, it’s pretty horrifying, that indexers control so much of the money. Obviously, the amount of money in value is a lot lower than the index funds. So, it’s the stuff we’ve talked about is how do you not get stuck in a value trap for a long period? Yes, you find this value. I think the company’s worth $30 and it trades for $15, because it’s got these great sum of the parts. But a lot of times, unless the company is doing something like buying back shares or maybe spinning off a company that would get a higher multiple, you got to have a lot of patience.
Everybody knows about cannibals and companies. A lot of buybacks are done bad. I think one of my heroes is Henry Singleton, right?
Tobias: Yeah.
Mike: He had the balls to buy back 90%. Nobody does-
Tobias: Amazing.
Mike: -anything like that today. They’re so cautious. Everybody knows, like AutoZone or O’Reilly. they have been just– You could have almost just bought those 20 years ago and just gone to sleep and they just– I think what worked is it’s not a sexy or glamorous business. It’s a retail auto parts business. But when you have that combination of a low multiple, a reasonable multiple, and then they’re not doing a bunch of crazy buybacks at high prices to only make up for the options they’re giving to management. But there’s lots of interesting companies I see.
I had a couple here. That’s natural resource. Everybody knows about AIG, the big insurance company. They’re infamous because of their role in the derivatives and the financial crisis, but it’s interesting over the last decade–
Tobias: Well, Hanks not there anymore. You think that was Hanks–
Mike: What’s that?
Tobias: Hanks not there anymore.
Mike: Yeah. They’ve cut their share count from $1.4 billion to $689 million. I think from what they’ve said, they’re going to buy back another 15% to 17%, the next couple of years, undemanding multiple. It looks like they’re trying to make themselves more like a Chubb insurance, like shedding like they’re non-core and becoming more Chubb like which I think Berkshire has been buying Chubb.
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AutoNation Is a Hidden Gem Despite Its Boring Reputation
Here’s a boring company, AutoNation. It’s not a sexy business. It’s car dealerships. Because it’s car dealerships, and the cyclicality of car sales, it never gets a great multiple. But they’ve cut their share count the past decade from $118 million shares down to $42 million. They’ve bought back about 30% of the company just since 2021. The businesses do better than you think because of the service side of the business. Generates cash.
I was looking at AutoNation. Their operating income has been positive every single year, the last decade. Here’s another one. It’s called Arrow Electronics. The company hasn’t grown that much. 10 years ago was $22 billion in revenue. Today, it’s $29 billion. They’ve been profitable every year. They had one down year in the last 10, but their share count from $98 million to $54 million.
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Good Assets That Are Not Making Any Money
Mike: I watched the Seawolf, you guys were talking about Joe of Value Cap.
Tobias: Yeah.
Mike: It gets a lot of heat, because Berkowitz owns much of it. But actually, if you look at the last decade, their performance has been good. They’ve cut their share count from $92 million to $57 million. Obviously, there’s a whole range of outcomes there with what’s it really worth, and how much are they going to monetize, and how much recurring revenue and how quickly. I think in a market where you can’t rely on the inflows,-
Tobias: Yeah.
Mike: -you want the companies take being active participants.
Tobias: You benefit if they don’t ever push that price up, because they can keep buying them cheaply. It’s a good thing.
Mike: It also gives you some comfort during the downtimes, because they’re buying back more shares for cheaper.
Tobias: The thesis Joe, and I tell the story all the time, but I was sitting in the audience at the Value Investing Congress in New York beside– I’m going to forget his name. Cheap stocks. He’d had this email correspondence with Einhorn. He was long. Joe–
Einhorn’s short thesis was that they will only ever make enough money to pay their administrative, the costs of running it, and they’ll, over time, just eat away at the value there. I think you’ve said that is the risk, but what do you think about the reality of that? They certainly seem to have done– If they have cut down those shares, they’ve have returned some capital over time.
Mike: Their operating income bottomed out in 2016, and it’s been $60 million, $90 million, $86 million, they’re making money. The way I understand it is they’re having more and more recurring revenue with hotels, and commercial leases and taking these assets that generate no income and getting them to generate income.
I bought the building that my office is in. It’s an old bank branch. Wells Fargo was forced to sell it, because they were merging with First Interstate. So, I got a really good deal. But the shopping center behind me, it was anchored by a Walmart. Walmart vacated the shopping center and built a super Walmart two miles up the road. For about five years, it was like the Bermuda triangle of business behind me. Everything folded. I’m out here next to Denny’s and Taco Bell on the highway.
Whatever firm had a bunch of leverage on that thing, they ended up selling it, the whole center behind me. The guy who bought it was brilliant. I think he bought it for less than a million bucks, less than what was owed on the note. So, it was a good asset, but it was temporarily not making any money. He hired a couple sharks, commercial, real estate brokerage sharks, who went out. He paid them well, and they pounded the pavement and he got that thing– it’s completely full.
I think he sold it to another group at a 6% or 7% cap rate, and got $4 million or $5 million. So, it was a good example of a good asset, but not making any money.
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Why Sky Harbour’s Airplane Hangars Offer High Returns on Investment
Mike: Yeah. I guess we could compare that to this Sky Harbour.
Tobias: Well, I was just about to take you there. Yeah.
Mike: Yeah. That was a SPAC. I always look at the SPACs once a month, because it’s almost like the clockwork. They come public at 10:00 and then they go to 05:00. [Tobias chuckles] almost everyone. I thought that one was very interesting just because of the business that they were in. I started reading about it. It was airplane hangars.
I was actually really intrigued, because I like niche real estate. I had tried to buy a hangar at my local airport. It was selling for a 20% cap rate and I’m like, “Why is the cap rate on this so high when every other real estate is 6% or 5%?” I know of a group who bought a mobile home park at a 2.5% cap rate, and they’ve lost their butt on it. But at a 20% cap rate, owning real estate can be really positive.
Well, the reason it was trading so cheap is there was five years left on the lease. Typically, those airplane private hangars are on the municipal airport land. Anyway, so when Sky Harbour came public, I looked at it. it looked terrible. The financials are a mess, because it’s a publicly traded construction project. They’re building luxury airplane hangars from Miami to Dallas to Phoenix, New York.
Apparently, this is a really constrained type of area, because a lot of the private planes, like guys, Eric Schmidt from Google, fly the tail heights are too tall to get in to a hangar. So, if you’ve got a $500 million aircraft, you don’t want it parked outside in the elements. So, the management seems really sharp.
I think the CEO is ex-Israeli fighter pilot. Their CEO’s and ex-Goldman Sachs, very sharp. But what’s interesting is they were able to finance municipal bonds at long-term rates in the 4.5% to 5.5% range. And then, the cap rates on these buildings that they build, they’re almost instantly leased with waiting lists, and it looks to me like they’re getting 14% to 16% cap rates.
So, it’s a little tricky to figure out, because it’s a moving thing. They’ll be break even probably by their next hangar or two, and then you can just– If you can get a cap rate of 15% and borrow money at 5%-
Tobias: Yeah, that’s a good business.
Mike: -the return on equity is– Yeah, phenomenal. But it’s risky. Any business I’ve ever seen that’s a publicly traded construction company has blow ups. It has cost overruns and things like that. Although, I think they did some smart things. They actually bought the metal building fabrication company that made their hangers. And so, they control that company and have devoted them to just building specialized– because it is a little specialized. You have fire suppression systems, you have wind load, you’ve got special doors that are easy to get up and down so that the planes can get in their hangar.
Tobias: That’s the life of a hangar. They’re pretty robust, because they’re just– [crosstalk]
Mike: Metal. The steel buildings. Yeah. I guess the thing you may not like is the land on which they build is not land that they own. They go for a 50-year lease. Some cases, it’s a 30-year lease. They have a whole team dedicated to working with the municipal airports. That’s a little bit of a competitive mode too, because they may be working on a deal for two or three years before they get the lease signed. It’s not that easy to get.
I heard about a private equity firm wanted to get into that business, because the returns are so high, and they just said, “Sky Harbour was too far ahead,” so they decided not to do the project. It’s also nice when your customers are billionaires.
Tobias: Yeah.
Mike: If you need to pick up the phone and raise some capital, you could probably do it.
Tobias: When you were looking at the private deal that had five years left to run, how hard is it to renew your lease on something like that?
Mike: I had done some research on people whose lease had come up. The local city wasn’t trying to screw up. There were some increases, but not as much as you thought. So, I think they’re a publicly traded REIT trying to maximize the ground lease. They know that there needs to be these facilities for all the private aircraft. Yeah.
Tobias: Presumably, that does just grow over time. They’re less likely to remove yours and just let someone else build one next to yours.
Mike: Right. Yeah. They say a lot of the land– If you have these deals, it’s going to be very tough for any new ones to come in. So, it’s very niche real estate. But because it’s such a niche, maybe the returns on capital will be much higher than almost any real estate you could think of right now.
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Are We Facing a New Era of Brazilification in Markets?
Tobias: When you look at the markets as they stand now, what do you think? What are you worried about? What are you excited about?
Mike: Well, we got an election– Are we going to have an election?
[laughter]Mike: The last election we had COVID, right?
Tobias: Yeah.
Mike: Of course, a lot of suspicious circumstances with the Wuhan Virus Institute and who funded it and things like that. It seems to me like we’re getting more of Brazilification, not the term, Brazil. I’m sure it’s a great country. But when you look at stuff like that bridge that collapsed in Baltimore, I don’t think they’re anywhere close to fixing. It seems to me like China could have built three bridges in the time that we’re farting around. So, I think we’re having a lot of dysfunction in our political and financial system, and we ought to be very careful. Stocks and emerging market economies get 6 to 8 multiples, not 20 to 30 multiples. So, I think that’s a concern.
I guess I’m shocked. I thought with the computer revolution and stock screenings and ChatGPT, it can read a filing a thousand times faster than then we can read it. It seems like all of the bargains in the market by this point in time would be arbitraged away, and it would be hard to find reasonable things. But I think if you look outside the sexy stuff, I think your fund does a great job, because with the screens you do, it eliminates a lot of the noise and you’re able to focus. But did you ever think you’d be finding stuff like this cheap at this point in time?
Tobias: Well, they talk about– I forget whose it is, because I always think of it as– I’m just having a blank. The three sources of advantage are informational. You just got better information than anybody else. Analytical, you’re better at analyzing it. Really, those have gone away because information is just ubiquitous. Everybody can analyze everything using a spreadsheet. You can download from the internet.
So, the last one is behavioral. I just don’t think that behavioral is ever going away. I think that’s just part of being human. You can look back thousands of years and read stories from thousands of years ago, and we haven’t changed at all. We’re still exactly the same people that we were. So, I assume that we’re going to be that way thousands of years– [crosstalk]
Mike: People having tulip manias. I think Barton Biggs had that book, Wealth, War and Wisdom, talked about all the calamities and panics. This is a very under heralded book. I love Dr. Marc Faber. He will dispense your investment advice with an accent like Arnold.
[laughter]Mike: He talks a lot about just this money sloshing around the globe, and the boom and busts that it cost. What’s interesting, there’s a chart on page 33 that talked about the returns on different asset classes in the 1970s. Stocks were the worst asset class. I think they did 6%, but the inflation rate was 8% for that entire decade.
Tobias: Negative 2% real.
Mike: Yeah.
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How Free Cash Flow Yield Can Guide Value Investing Decisions
Tobias: How do you think value does in a period like that? Like, not to talk my own book too much, but what do you think? Does it make it through the other side?
Mike: Yeah. One of the good books about the 1970s, I think, was John Neff, because he was managing the Windsor Fund, which was a big fund at the time.
Tobias: Yeah.
Mike: I would say he was always looking for value with a catalyst. Isn’t that what Einhorn’s doing right now looking for value but some kind of catalyst? I think your screen is interesting. I look at it every couple of weeks and see what’s on there. But obviously, you have a lot of companies that had peak earnings, and now their earnings are declining, so you’re like, “Are you buying a value trap like General Motors before it went bankrupt,” or something like that?
I think you have to use your judgment about the business, the prospects, the industry. You got this company with a high free cash flow yield, and a low enterprise value and then figure out like, “Hey, it’s not going to be that bad. Maybe these earnings are sustainable.” You and I had talked about that Encore Wire company. And of course, its earnings came down because the COVID construction boom. But if you thought about it logically, the demand for copper wire, it was growing with all the infrastructure and all the stuff connecting to the–
Tobias: EVs.
Mike: Yeah. So, here, you had a company making something critical to that, and they were buying back a ton of stock into that downturn in their business. I think that worked out well for both of us, I think.
Tobias: Yeah. I was sad to see them catch the bid. Honestly, I’d have been happy to keep on holding.
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Capital Cycle Theory: Why Coal Companies Are Worth Watching
Mike: Yeah. So, it was an outlier kind of company the way they did the business. I think it’s funny too. I watch every company that comes out of bankruptcy, and I still look at every spinoff to see. I still look at insider buying. I look for like clusters of insider buying. Whenever I come across a company I’ve never heard of, you try to figure out why like, “What are the insiders seeing where 10 of them have all bought their company stock?” But you find interesting ideas that way.
I remember like looking at the coal companies, American Metallurgical, we talked about that. I said, “How can you have this company that just emerged out of bankruptcy, got rid of its debt?” They’re telling you they’re going to earn their market cap in the next 12 months, like that to a gravel pit. If you could buy a gravel pit for a million bucks and you’re going to make a million, your first year, and you got 30- or 40-years’ worth of reserves, I’d like to find more stuff like that.
Tobias: Yeah. Me too.
Mike: Yeah. But coal had done bad for so long, the capital cycle theory. Everyone went bankrupt. All the debts got crunched. And then, the big banks like J.P. Morgan were saying, “We’re not going to fund coal. It’s not ESG.” So, the companies had to give it… of cash and be their own banks. I love stuff like that. [crosstalk] [laughs]
Tobias: I’m not a competition. No competition coming online.
Mike: Yeah.
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Tobias: Hey, Mike, sadly, we’ve made it to the end of the hour. If folks want to follow along with what you’re doing or get in contact with you, how do they go about doing that?
Mike: I don’t really– [crosstalk]
Tobias: What’s your Twitter handle?
Mike: @conchofarmer. And I don’t– [crosstalk]
Tobias: I tagged you in there.
Mike: I don’t use it more than to shitpost on politics, and economics and keep in touch with some friends who are money managers. But my website, I have Meixler Investment Management website. Get in touch with me. I’ll call you back.
Tobias Carlisle Good stuff. Well, Mike Meixler, Meixler Investment Management, thank you very much, sir. It was fascinating today.
Mike: I enjoyed it, Tobias. Thank you for all you do. I subscribe to your screener. I think it’s fantastic. I think you’re doing a great job, and more people should take a look at that because you do come up with some very interesting ideas. So, thank you for what you’re doing as well.
Tobias: I appreciate the kind words. Thanks, everybody. We’ll be back next week, same time, same channel. Jake will be back too. He’s flying over the Atlantic somewhere. Otherwise, he would have been here.
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