Kimball Brooker on Finding Value in Global Holding Companies
Q: Why do you prefer to own a holding company’s stock rather than the basket of individual stocks in its portfolio?
In many cases, it wouldn’t be possible to precisely replicate a holding company’s investments by acquiring interests in publicly traded securities because many holding companies have investments in private companies, limited partnerships, real estate, or other assets which are not publicly traded. But with that said, there still may be reasons to own shares of a holding company rather than the basket of the individual stocks in its portfolio.
I suppose the first reason is the potential to acquire the assets within the holding company at a discount to their intrinsic value. For a variety of reasons holding companies can periodically trade at substantial discounts to the value of their underlying assets, even if those assets have readily ascertainable values.
An additional reason for investing in holding companies is the alignment of interests many holding companies afford to minority investors. Many holding companies have a high degree of inside ownership which results in a direct economic alignment with outside shareholders. Very often the time horizon of the principals is more consistent with long-term investing. Like First Eagle, they’re not all that focused on the next quarter. Instead, they may be more willing to make decisions based on the longer-term interests of the businesses they have owned for generations.
Q: Why are holding companies generally under-appreciated by the market?
They tend to fall through the cracks for a variety of reasons. Sometimes the liquidity in the holding company stock is not high enough for some investors. Often, there’s not a lot of sell-side research coverage and most holding companies don’t make a huge effort on the investor relations front. Very often the corporate structure is very complicated and many investors don’t have the inclination to take the time and effort to understand those structures and related tax implications in their country of domicile. Once you overcome these hurdles you still have to put in the time to value the component pieces. This can be complicated depending on the kinds of businesses they’ve invested in, whether they’re private or public and so on.
Separately, some investors believe that because a holding company’s discount can persist, they may not generate a positive return on such a position. If a holding company can increase its economic earnings, however, even if the market multiple remains the same the investor may realize meaningful gains.
This doesn’t mean they’re neglected by all institutional investors. They aren’t. But they tend to be owned by value investors like us.