I typically spend my time analyzing small cap, underfollowed stocks. But I’ve been drawn to closed-end funds for a long time, so I wanted to write a quick post on Central Securities Corp, where we are getting a blue-chip stock portfolio PLUS a top notch insurance company for free.
Most investors have crossed passed with closed-end funds: They’re alluring because they can trade at discounts to NAV, meaning if they liquidated tomorrow, many would result in 10%+ returns just from the discount narrowing (i.e. I can buy a dollar for 90 cents). Unfortunately, discounts often persist without a clear catalyst.
However, there’s one closed-end fund that I’m not buying for a discount to narrow over the next year or even 10 years. I’m owning the Central Securities for (i) the manager who has a great track record, (ii) who owns great companies with low turnover (personally, I get Akre / Phil Fisher / Buffett vibes), and (iii) a hidden insurance asset on the books that makes the discount even more steep.
I think I’m literally “being paid to wait” through an outstanding manager while its largest asset compounds at what I expect will be better than market.
The really interesting thing about CET’s performance is that they own a concentrated fund and the turnover is very, very low. Check out these holdings from the report.
I have to admit – It would be extremely difficult for me to hold Motorola for this long. Or Analog Devices. But at the end of the day, these are largely blue chip stocks. Other top holdings include Charles Schwab, Berkshire Hathaway, Intel, Capital One, Liberty Latin America, Kennedy Wilson, and so on.
Who is this manager? Central is one of those closed-end funds that started back in the 1920’s. However, the track record is owed to Wilmot H. Kidd III and he’s been at Central for almost 50 years. His son, Kidd the IV, also works at Central. Eventually the baton will be passed on (Kidd the III is 77) and that may be a catalyst for Central in one way or another.
But I want to focus on that top holding, a private company called The Plymouth Rock Company.
Plymouth Rock is a P&C insurer, providing home & auto insurance. However, the manager of the insurer makes me just as excited as Kidd the III. Despite being a private company, they have a financial information section of their website.
Here you’ll find the annual letters from Jim Stone, the chairman and founder of Plymouth. Now this is some Buffett-esque letters. Plymouth, like Geico, invests its float in equities. And their track record is also amazing.
Below are some of the comments in the 2019 letter. I personally can’t wait for the 2020 letter.
Here’s the track record of Plymouth book value over time — it’s a 13% CAGR over 23 years!
One thing you’ll notice about this table is that the value is discounted for “lack of marketability”. The value is appraised by a third party, Shields & Company, as “the price at which the relevant shares would change hands between a willing buyer and a willing seller, both in the possession of reasonable knowledge of all relevant facts, with neither party being under any compulsion to act or not act.” That is the value presented in the table above which is then discounted.
This is where it gets interesting: Central DOUBLE Discounts.
I pulled the Plymouth Rock values from Central Securities and then compared it to the appraisals from Plymouth. Central is valuing Plymouth Rock at an extreme discount.
Central provides reasoning. They use market comps as well as a massive discount to the appraised value. I’m not sure a 30-40% discount makes sense…
It seems pretty clear to me that CET is just using 1.2-1.3x Book Value for valuing Plymouth. (Note, we don’t have the valuation yet for 2020)
Honestly, paying 1.3x book value for a company that has compounded capital so greatly seems cheap, but currently this is roughly where P&C insurers are trading (Allstate, Travelers, though Progressive is 3x for its growth).
CET trades at 18.7% discount to NAV. Given Plymouth Rock is ~22% position (based on CET’s valuation), we are almost getting all of Plymouth Rock for free.
As of 9/30/2020, the value of Plymouth on CET’s books was $206MM. This foots to a price of ~$7,250/share for Plymouth Rock (down about 5% from 2019 value of $7,600). This also means that Plymouth is worth about $8/share to CET’s NAV, again 22%. But CET trades at a significant discount to NAV. So if we invert and say Plymouth is worth the reported value, then at the market price Plymouth is worth 25% of NAV.
Appraised value is obviously more compelling: If we assume the discount is about what the average has been since 2015 (36%), that means Plymouth would be appraised at $11,316/share, or $322MM vs. what CET reported at $206MM. This means Plymouth actually makes up 31% of NAV or nearly 40% of market price.
So invert what I just said before: you believe in the value of Plymouth then you are getting a lot of blue chip stocks for free!
How will Plymouth Rock asset be monetized? I frankly don’t care – I’m fine owning it for 10+ more years if it can compound BV at its current rate and am currently getting it for free. (In the meantime, I also own other blue chip stocks under Will Kidd’s management.)
However, I think insurance will continue to consolidate over time, so it’s possible they do sell it eventually. A strategic would likely pay in excess of 1.5x due to synergies. I don’t think an IPO is likely given its been private for 30+ years.
CET has sold shares in Plymouth in the past. However, with hindsight, those have been mistakes in my view given Plymouth has continued to compound book value at such a high rate.