Nate Tobik has a terrific blog post about shareholder composition over at Oddball Stocks called "Could Value Investors Be the Reason a Stock's Cheap?" I've often found companies with unusual shareholder composition to be interesting opportunities. That's not exactly the point of Nate's post. He wonders - correctly, I think - whether the sort of catalyst a value stock like George Risk (RSKIA.OB) requires is something that gets folks other than value investors interested in the stock.
A change in the perception of what kind of stock a company is can have a huge influence on where it trades. If you look at Village Supermarket (VLGEA), it went from being a regional grocer valued at a discount to the big guys to being seen as a predictable stalwart of sorts. The increase in the ratio of price-to-earnings, price-to-book, and price-to-sales has been magical. The business has improved. But then Mr. Market has also valued improvement in the business at about 3 times more than he did just 10 to 15 years ago.
Who Owns a Stock Matters
I think shareholder composition often helps explain why a stock is cheap. However, it's not always just a matter of whether the folks who own the stock are value investors, growth investors, etc.
Shares Are Sometimes Spread Around in Weird Ways
Sometimes - like at Solitron Devices (SODI) - shareholders are former creditors.
I read a recent blog post where someone had commented wondering why Solitron is a public company. That's easy. Solitron was once a big public company. It went bankrupt. It just never went private.
The company you see today bears little resemblance to the company that went public. Instead, it's the company that emerged from bankruptcy in the 1990s.
Other times, shareholders have become "lost" over the years. They've forgotten they own the stock. And they don't trade it. This was the situation at George Risk.
And George Risk has made a point in its SEC filings of saying that paying a dividend on the stock helped remind "lost" shareholders about the stock - and helped them get these shareholders to offer shares on the open market. Where the company is a buyer of its own shares.
I once read an interview with the CEO of a family controlled, thinly traded bank. When asked why the company went public he said they wanted local businessmen to have a stake in the bank. They went public as something of a local PR ploy.
Warren Buffett Made Money on Stocks With Oddly Distributed Shares
Two of Warren Buffett's big successes - National American Fire Insurance and Blue Chip Stamps - were stocks with very oddly distributed shares.
Warren Buffett and National American Fire Insurance
I told the story of National American Fire Insurance in "How Warren Buffett Made His First $100,000":
This company was controlled by Howard Ahmanson. It's a strange story. The original stock was pretty much worthless. It ended up being taken over as part of Ahmanson's empire. Ahmanson was from Omaha. Although he's most associated with California.
Basically, Ahmanson's father had owned an insurer in Omaha. Ahmanson got started very young (he was a financial services prodigy) and got extremely rich underwriting insurance in California during the Great Depression. He then bought National American Insurance Company (in Omaha) because it was his Dad's old company. He was retaking control of the family company.
Through this weird coincidence, National American Fire Insurance ended up with some terrific assets. The Ahmansons were very private. And these assets were controlled through different holding companies, trusts, etc.
Anyway, here's Warren Buffett explaining what he found when he looked into what NAFI really was:
"I found National American Fire Insurance…NAFI was controlled by an Omaha guy, one of the richest men in the country, who owned many of the best run insurance companies in the country. He stashed the crown jewels of his insurance holdings in NAFI. In 1950, it earned $29.02. The share price was $27. Book value was $135. This company was located right here in Omaha, right around the corner from (where) I was working as a broker. None of the brokers knew about it."
What's weird about this story is that on the surface the stock looked insanely cheap. It was selling for less than 1 times earnings. And about 20% of book value. But that really understates how cheap the company was. The deeper you delved into the story, the cheaper the stock looked. This was a personal holding company for one of the smartest investors in the insurance business. If you look at the book value and the earnings per share in 1950, you can see the company must have had something like a 20%+ ROE. Why would a company with a 20% return on equity ever trade for one-fifth of book value?
Read The Snowball to find out. Basically, it was a super illiquid stock that had once been worth a lot more. The shares ended up spread thinly across a lot of different individual investors. They remembered when the stock was worth $100 a share. That's where a lot of them bought. And many of them didn't want to sell until the stock got back to $100 and made them whole. But, because the stock had burned them so bad, they also had no interest in buying more shares. They just clung to what they had.
What's really neat about this story is that Buffett kept buying the stock - going door to door when he had to - even when he was paying 3 to 4 times more than what the stock had originally traded at. It's a great illustration of Ben Graham's Mr. Market Metaphor. It was a bargain even at 300% of the last trade price. And Buffett knew it.
What about Blue Chip Stamps?
Warren Buffett and Blue Chip Stamps
Blue Chip Stamps was a monopoly in California. It faced antitrust action. And agreed to a consent decree. Blue Chip had to sell 45% of the company to the retailers who gave away the stamps.
This is where Buffett got a lot of his shares from. He bought shares "from Lucky Stores, Market Basket, and Alexander's Markets...he also bought five percent of the stock of Thriftimart Stores, one of Blue Chip's largest shareholders. Buffett figured he could eventually get Thriftimart to swap the Blue Chip it owned for its stock."
This all reminds me of Joel Greenblatt's advice that buying a spin-off makes sense because some of the sellers are folks who got a stock they never wanted. That was literally true at Blue Chip Stamps. And Buffett knew it.
Can You Screen For Stocks With Strange Shareholder Composition?
That's what I tried to do. It's far from a perfect screen. But I think it'll turn up some names you might not know. And I know some of them do have strange shareholder composition.
I used StockScreen123 for this screen.
I just searched for the combination of oldest public companies with the lowest floats - in terms of shares outstanding rather than market cap. This is critical. I've found a lack of stock splits combined with high insider ownership to be a good gauge of how uninterested a company is in pleasing Wall Street.
Here are the top 30 stocks in terms of the likelihood of their shares being strangely distributed:
- H&E Equipment (HEES)
- DVL (DVLN.PK)
- American Biltrite (ABL)
- LICT (LICT.PK)
- J.W. Mays (MAYS)
- Helios & Matheson (HMNY)
- Seaboard (SEB)
- Scope Industries (SCPJ.PK)
- TNR Technical (TNRK.PK)
- The Hallwood Group (HWG)
- AMCON Distributing (DIT)
- The Flamemaster Corporation (FAME.PK)
- LiveDeal (LIVE)
- The InterGroup Corporation (INTG)
- Chicago Rivet & Machine (CVR)
- PrimeEnergy (PNRG)
- Daily Journal (DJCO)
- Income Opportunity Realty Investors (IOT)
- Daxor (DXR)
- Good Times Restaurants (GTIM)
- Micropac Industries (MPAD.PK)
- Isramco (ISRL)
- Birner Dental Management Services (BDMS)
- Paragon Technologies (PGNT.PK)
- Arden Group (ARDNA)
- New Concept Energy (GBR)
- Jewett-Cameron Trading (JCTCF)
- Gyrodyne (GYRO)
- Solitron Devices (SODI.OB)
- Value Line (VALU)
Some of those companies are going through stuff right now. So watch out. There are some messy situations in there.
That's kind of the point.
Weird Stocks Like These are More Likely to Be Misunderstood
Some of those 30 stocks are probably misunderstood.
Of course, there's probably no catalyst. And you'll probably just be joining a bunch of other value investors in the stock.
There are worse fates.