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.

Talk to Nate

Disclosure: Long Mastercard, Berkshire Hathaway