If I Had To Marry One Company
Every week my coworker and I host a podcast called Chit Chat Money, and at the end of each episode I name 3 stocks and he has to choose which one to fuck, marry, or kill. Most often we choose to marry the best overall company of the 3. This got me to thinking about the actual concept of marriage in the investing industry.
Pretty much all investment advice in the world today encourages diversification in one way or another. Whether it’s through ETF’s, index funds, or just buying stock in multiple companies, it is almost always advised to diversify your portfolio. However, what if you could only choose one company to invest in for the rest of your life? Who would it be and why?
Before I dive into my answer, let me set some ground rules as to what I would need from the perfect company.
Small to Medium Cap: Marrying a large-cap stock limits growth, simply due to the law of big numbers. The company must have room to grow, while still having the capital and the resources to do so.
Strong Management: This one may be the most important. Not only do I need management that is focused on long-term goals, but a group that is honest and transparent in their communication with shareholders.
Timeless Business: A company with only one source of revenue can quickly fall out of favor in the market. Multi-faceted businesses will have an easier time adjusting to changes in the market and consumer tendencies.
Strong Economics: I see no advantage in marrying a company that appears to be in financial trouble or in an industry that can’t generate strong cash flow.
While there are always more to look at while evaluating a company, it is safe to say that if I’m going to be investing my life’s income in one company, they better be able to hit these benchmarks.
So, who’s the lucky woman? Boston Omaha (BOMN)
Boston Omaha is a financial holding company with a business model similar to that of Berkshire Hathaway. Boston Omaha went public in 2015 and has two Co-CEO’s Adam Peterson and Alex Rozek. Both Alex and Adam control more than 50% of the outstanding stock, which means if the company goes down, so do they. Having an executive team with skin in the game is typically a good sign because they likely have the company’s long-term growth in mind.
The Boston Omaha shareholder letter is well worth a read for all investors and they convey very clearly where they like to allocate their capital. Their current capital allocation is as follows
$172.8 Million in Billboards (52%)
$94 Million in Cash (28%)
$35.6 Million in Insurance (11%)
$29.8 Million in Minority and Other Investments (9%)
Any company that I intend to hold for the rest of my life, should always have a sufficient amount of cash to fund future endeavors and operations. For Boston Omaha, billboard advertisements and the Surety business makeup 63% of their capital allocation and have proved to be major cash generators. 2018 revenue from billboard operations grew 166%, and the Surety side generated revenue growth of 57% from underwritten premiums.
Having a generally large liquid position for a holding company should be viewed as desirable, considering that the goal of the business is to simply buy other businesses.
Billboards – Boston Omaha owns 2,900 billboard structures and has roughly 5,900 advertising faces (even more if you count digital ad faces as multiple). These assets are held thanks to the $178 million that they have invested solely in billboards. Their billboard investments are held through their ownership stake in Link Media Holdings, and they have stated that their primary attraction to the billboard advertising business is that billboards generally earn a favorable return on tangible equity capital.
There is more room to grow in this space not only by adding to their current number of billboards but increasing their digital billboard position since digital allows for multiple advertisements in the same space and require less manual labor to operate. However, digital ad boards can also bring about unsold inventory to the balance sheet which not only lowers top line revenue but also incurs the same depreciation expenses.
Insurance – General Indemnity Group (GIG) provides Boston Omaha exposure to insurance operations, specifically through the surety business. A surety bond or “Surety” is a 3 party agreement in which the surety is a guarantor that promises to pay a certain amount if one of the parties fails to meet certain obligations set forth.
General Indemnity Group (GIG) and surety in general offers loss ratios far below any other forms of insurance, which makes GIG a consistently safe cash generator. Revenue generated from underwritten premiums by GIG grew 57% from the year prior.
Other Investments – Minority investments only makeup about 10% of Boston Omaha’s business and are comprised of Logic Commercial Real Estate, Dream Finders Homes, and Crescent Bank & Trust.
Logic is one of the larger real estate brokerages and property management firms in Las Vegas but recently announced expansion plans to Reno, Nevada as well. Logic continues to operate strong operating cash flow for Boston Omaha, as Boston Omaha owns 30% of the business.
Dream Finders Homes is a finished lot builder, which means they focus their expenses and capital on finishing homes that have already been bought by individuals. Boston Omaha’s stake in Dream Finders Homes (DFH) could potentially double if DFH is unable to meet certain pre-tax earnings requirements by 2019.
Boston Omaha owns a stake in CB&T Holding Corporation as well. This is only a very small portion of Boston Omaha’s business but has shown a very strong return on assets and return on equity (0.7% and 6.5%) in 2018, which are some of the most important metrics when it comes to evaluating banks.
Conclusion: Now I know almost 50% of marriages end in divorce, but Boston Omaha really looks like the one. Management appears to be stable and intelligent with my best interest at heart. I’m looking forward to our lives together.
Disclosure: The author is not a financial adviser and may have an interest in the companies discussed.