FRMO - FRMO Corp.

[Liberty]

FRMO stock price has slid approx 20% from all time high (on very small volumes). Anyone buying (more) at this level?

 

Yes.

 

Am I the only one that finds it absurdly priced at 50x revenue and 90x earnings? 

 

Probably not. But I'm not sure you're looking at the right metrics.

[Hielko]

FRMO stock price has slid approx 20% from all time high (on very small volumes). Anyone buying (more) at this level?

 

Yes.

 

Am I the only one that finds it absurdly priced at 50x revenue and 90x earnings? 

No. Wrote a SA article about the stock more than a year ago so it's now gone behind their paywall, but at the time I thought fair value was roughly between 3 en 4 dollar/share. But to value this I think you have to do a sum of the parts valuation, value their cash, investments, their horizon revenue stream and their horizon stake.

[tripleoptician]

A sum of parts valuation loses the strongest attribute of this company. The "intellectual capital" that can create earnings with no Capex or fixed costs that can then compound in the hands of strong capital allocators makes this a compelling investment for a long term investor. Combined with strong  insider ownership and solid corporate governance, it appears overvalued on current revenue streams, but this is more a growth stock in the hands of value investors. Not the typical value investment for sure though.....

[Liberty]

From the 2011 report:

 

http://i.imgur.com/Xgf1JlN.jpg

 

Since then the equity went up to 98.5m. Without capex or even salaries to any employees. And they've started a new phase of capital deployment and new financial products launches...

 

See's Candies wasn't worth book either.

 

I'd be surprised if someone holding this for 10 years wasn't pleased at the end.

[Fowci]

"Since then the equity went up to 98.5m"

 

Got to be careful because they raised some equity right? So it didn't compound from 2012 to 2015 like that...

[Liberty]

"Since then the equity went up to 98.5m"

 

Got to be careful because they raised some equity right? So it didn't compound from 2012 to 2015 like that...

 

Share count did go up, though not nearly at same rate as equity. There's been a huge split at some point too iirc. What matters in the end is the per share number, of course. But yes, my last message had no detail, so you could add some precision to every single sentence.

[Tim Eriksen]

"Since then the equity went up to 98.5m"

 

Got to be careful because they raised some equity right? So it didn't compound from 2012 to 2015 like that...

 

There was also a $10 million one time gain on exchange of revenue interest in 2013.  My point is that their performance is good but there are cheaper asset managers with similar or better performance. 

 

Revenue has actually decreased since 2009 so I wouldn't be too quick to call it a growth stock. 

Year    Revenue

2009 $11,448,074

2010 $ 4,423,653

2011 $ 8,712,404

2012 $ 5,485,092

2013 $17,667,237 ($10 million one time gain)

2014 $ 7,600,971

 

full disclosure - I've owned the stock before and did fairly deep research in 2007.  This is not to say they aren't incredibly smart, and haven't done very well, what I am saying is that it is very expensive.  Paying 3.5x book for a stock with a 20% ROE doesn't excite me.

[racemize]

"Since then the equity went up to 98.5m"

 

Got to be careful because they raised some equity right? So it didn't compound from 2012 to 2015 like that...

 

There was also a $10 million one time gain on exchange of revenue interest in 2013.  My point is that their performance is good but there are cheaper asset managers with similar or better performance. 

 

Revenue has actually decreased since 2009 so I wouldn't be too quick to call it a growth stock. 

Year    Revenue

2009 $11,448,074

2010 $ 4,423,653

2011 $ 8,712,404

2012 $ 5,485,092

2013 $17,667,237 ($10 million one time gain)

2014 $ 7,600,971

 

full disclosure - I've owned the stock before and did fairly deep research in 2007.  This is not to say they aren't incredibly smart, and haven't done very well, what I am saying is that it is very expensive.  Paying 3.5x book for a stock with a 20% ROE doesn't excite me.

 

I agree.  Maybe the optionality of what they are doing these days justifies the high price over the long term, but it is just too expensive for my tastes.

[Tim Eriksen]

I would also note that there are no reports for 2005 to 2008 so we lack a great amount of detail on the largest stock issuances.  Performance was exceptional due to the revenue interest from the Kinetics hedge fund which grew from $83 million in AUM on 6/2003 to about $2.8 billion at the end of 2006,  and Kinetics Paradigm mutual fund, which I think was 3 times larger than it is today.

 

Further the last page of the 2009 report presents results for FRMO's subsidiary Fromex (which I used to try and track) and it shows some massive investment losses which were allocated to minority interest.  Why?   

[elevensecsrt4]

starting to look into this company more and wanted to subscribe to the thread for future discussion. I'm a fan of murray's owner operator style.

[oddballstocks]

I would also note that there are no reports for 2005 to 2008 so we lack a great amount of detail on the largest stock issuances.  Performance was exceptional due to the revenue interest from the Kinetics hedge fund which grew from $83 million in AUM on 6/2003 to about $2.8 billion at the end of 2006,  and Kinetics Paradigm mutual fund, which I think was 3 times larger than it is today.

 

Further the last page of the 2009 report presents results for FRMO's subsidiary Fromex (which I used to try and track) and it shows some massive investment losses which were allocated to minority interest.  Why? 

 

Tim,

 

All great points.  As to the "why?" for Fromex...I think the appropriate answer is "because they can."  I owned this for a few years and it seemed as if almost magically FRMO would suddenly own more of Horizon Kinetics each quarter.  There were these mysterious swaps happening and the ownership percentage would suddenly jump.  There was nothing anywhere that would indicate how this could happen in the annual/quarterly reports.

 

My conclusion on FRMO was this.  It's a vehicle for Stahl and Bregman to backdoor IPO Horizon Kinetics.  They are swapping some intangible IP for real shares somehow.  For them it's moving ownership from one pocket to the other.  There is zero visibility into any of this.

 

I sold out about a year ago because it appeared clearly overvalued.  But it's only overvalued based on the financial statements.  If Stahl keeps pulling rabbit's out of a hat then maybe it's cheap.  I just don't know how many more rabbits are in his hat at this point.

 

Nate

[Jurgis]

I sold out about a year ago because it appeared clearly overvalued.  But it's only overvalued based on the financial statements.  If Stahl keeps pulling rabbit's out of a hat then maybe it's cheap.  I just don't know how many more rabbits are in his hat at this point.

 

I agree with Nate's assessment. I hold some shares in FRMO.

[Liberty]

Doug Kramer from Horizon Kinetics has joined twitter @HorizonKinetics

 

Not sure if he's the only one posting from the account or if others will use it too, but thought it might interest people who like FRMO to know about it.

[Sportgamma]

Seems like Murray Stahl is joining the Winland BoD:

http://www.winland.com/documents/WinlandElectronicsInc2015ProxyStatementFinal.pdf

[Fowci]

Seems like Murray Stahl is joining the Winland BoD:

http://www.winland.com/documents/WinlandElectronicsInc2015ProxyStatementFinal.pdf

 

I find that very odd.. Winland is a $5m market cap company right? Is this really a good use of Stahl's time?

[oddballstocks]

Seems like Murray Stahl is joining the Winland BoD:

http://www.winland.com/documents/WinlandElectronicsInc2015ProxyStatementFinal.pdf

 

I find that very odd.. Winland is a $5m market cap company right? Is this really a good use of Stahl's time?

 

I believe they already had a guy on there from HK.  Maybe he quit and Murray took his spot?  Winland is an interesting situation, I spoke with another BoD member about it.  The value is foggy for me, but the BoD guys all seem to see it clearly.

[Sportgamma]

Matt Houk is still a board member and he and people associated with him are owners of about 20% of the company I believe.

[Fowci]

Seems like Murray Stahl is joining the Winland BoD:

http://www.winland.com/documents/WinlandElectronicsInc2015ProxyStatementFinal.pdf

 

I find that very odd.. Winland is a $5m market cap company right? Is this really a good use of Stahl's time?

 

I believe they already had a guy on there from HK.  Maybe he quit and Murray took his spot?  Winland is an interesting situation, I spoke with another BoD member about it.  The value is foggy for me, but the BoD guys all seem to see it clearly.

 

Sure, but even if it's priced at $5m and worth $20m (huge discount to value), how much does FRMO own? (rhetorical, I can look it up)

 

I would have thought Stahl's time had a higher opportunity cost.

[Sportgamma]

Maybe they offer a clue in the latest earnings call. Maybe this is the beginning og something.

[Sportgamma]

Winland is a very small publicly traded company. At the current share price of about $1, it has roughly a $3.9 million market cap. This past November, FRMO Corp. bought a 15% stake in it, at a price about $0.81 a share.

[…]

An employee of Horizon Kinetics, Matthew Houk, and another party, identified this company, bought shares, got themselves on the board, and ultimately invited FRMO Corp to purchase shares. If you look at the ownership structure of Winland, you’ll find that those parties are not officially related in any fashion, but you’ll see that there are three sets of ownership that are fairly substantial. Consequently, we consider our investment in Winland to be relatively secure in terms of how it’s being overseen and managed.

 

Winland is an unusually profitable company. Relative to the cash flow it produced in 2014, on its cash flow statement, it would seem that its net cash provided by operations is something like $380,000. I personally look at it without respect to the changes in current assets and liabilities. I just look at the net income plus depreciation and amortization and less the very minimal depreciation expense for property, plant, and equipment. I think of it more as $300,000, FRMO’s 15% share being about $45,000. Relative to FRMO’s cost of about $460,000, it looks as though we paid about 10x free cash flow.

 

But Winland also has cash on the balance sheet that it doesn’t need at all for operating purposes. If you were to exclude cash, the remaining current assets exceed all the liabilities of the company by 2.3x. So, if you look at what we paid, less the cash—because they can pay the cash out — maybe we paid something like 6x free cash flow. I just mention this to give a sense of what we paid for this investment. It also has a deferred tax asset valuation allowance of about $2.6 million, which means that, presently, the company doesn’t pay any taxes.

 

In terms of what might be done with it in the future, there are a number of possibilities. I’ll leave Murray to talk about that aspect. But it’s another vehicle and, although it’s small, the history of FRMO Corp. from its very beginning demonstrates that initial size is really not indicative of what might occur in the future.

 

http://www.frmocorp.com/_content/letters/2015_Q3_FRMO_Transcript.pdf

[Fowci]

Winland is a very small publicly traded company. At the current share price of about $1, it has roughly a $3.9 million market cap. This past November, FRMO Corp. bought a 15% stake in it, at a price about $0.81 a share.

[…]

An employee of Horizon Kinetics, Matthew Houk, and another party, identified this company, bought shares, got themselves on the board, and ultimately invited FRMO Corp to purchase shares. If you look at the ownership structure of Winland, you’ll find that those parties are not officially related in any fashion, but you’ll see that there are three sets of ownership that are fairly substantial. Consequently, we consider our investment in Winland to be relatively secure in terms of how it’s being overseen and managed.

 

Winland is an unusually profitable company. Relative to the cash flow it produced in 2014, on its cash flow statement, it would seem that its net cash provided by operations is something like $380,000. I personally look at it without respect to the changes in current assets and liabilities. I just look at the net income plus depreciation and amortization and less the very minimal depreciation expense for property, plant, and equipment. I think of it more as $300,000, FRMO’s 15% share being about $45,000. Relative to FRMO’s cost of about $460,000, it looks as though we paid about 10x free cash flow.

 

But Winland also has cash on the balance sheet that it doesn’t need at all for operating purposes. If you were to exclude cash, the remaining current assets exceed all the liabilities of the company by 2.3x. So, if you look at what we paid, less the cash—because they can pay the cash out — maybe we paid something like 6x free cash flow. I just mention this to give a sense of what we paid for this investment. It also has a deferred tax asset valuation allowance of about $2.6 million, which means that, presently, the company doesn’t pay any taxes.

 

In terms of what might be done with it in the future, there are a number of possibilities. I’ll leave Murray to talk about that aspect. But it’s another vehicle and, although it’s small, the history of FRMO Corp. from its very beginning demonstrates that initial size is really not indicative of what might occur in the future.

 

http://www.frmocorp.com/_content/letters/2015_Q3_FRMO_Transcript.pdf

 

This was a really great read, thanks. Didn't see an earlier Seeking Alpha transcript.

 

Basically they're saying that they want to turn into a Berkshire Hathaway model. I think that's good for shareholders. These guys seem smart, and giving them the resources to buy whole companies opens up a lot of options.

 

I thought the discussion of their shorting of structurally unsound ETFs was interesting. Basically they're saying that the proceeds from the short sales are like "float" which they can invest in money making ventures, while the float actually earns money because the ETFs are going to zero. (Incidentally, it made me think they've probably picked up the same types of issues that Chris DeMuth Jr. has picked up with VIX and XIV. Chris is long XIV to pick up strong roll yield, but FRMO might be short VIX to do the same).

 

Still a very happy shareholder, but the company is richly valued. I've basically decided to close my eyes and hold unless there's a "FRMO bubble" and I just have to sell.

[HJ]

I very much enjoy reading their letters and conference call transcripts.  The one problem I have is that when I look into the mutual fund performances across all of the Horizon Kinetics funds, they don't show meaningful outperformance against the respective indices.  Many show underperformance.  I don't necessarily think it detracts from the wisdom he shares, just shows you how hard it is to outperform against the "good old S&P", and make you ponder what are the right strategies to follow if one's goal is to generate outsized returns.

[Fowci]

I very much enjoy reading their letters and conference call transcripts.  The one problem I have is that when I look into the mutual fund performances across all of the Horizon Kinetics funds, they don't show meaningful outperformance against the respective indices.  Many show underperformance.  I don't necessarily think it detracts from the wisdom he shares, just shows you how hard it is to outperform against the "good old S&P", and make you ponder what are the right strategies to follow if one's goal is to generate outsized returns.

 

Not sure what you're talking about. I look at their GIPS compliant performance presentations on their website. I pulled together all of them. Here's what I found:

 

[HJ]

I very much enjoy reading their letters and conference call transcripts.  The one problem I have is that when I look into the mutual fund performances across all of the Horizon Kinetics funds, they don't show meaningful outperformance against the respective indices.  Many show underperformance.  I don't necessarily think it detracts from the wisdom he shares, just shows you how hard it is to outperform against the "good old S&P", and make you ponder what are the right strategies to follow if one's goal is to generate outsized returns.

 

Not sure what you're talking about. I look at their GIPS compliant performance presentations on their website. I pulled together all of them. Here's what I found:

 

 

I just went to their mutual fund website:

http://kineticsfunds.com/funds/paradigm-fund/

10 yr 8.05%, S&P 8.01%

 

http://kineticsfunds.com/funds/small-cap-opportunities-fund/

10 yr 8.76%, Russell 2k 8.82%

 

..., ...

 

Interesting to see the discrepancy, which I guess is mostly the difference in start date.

 

For what it's worth, I used to work at a place where quite a few people signed on to Horizon to run their separate account before the crisis, largely on a stellar performance.  A bunch of them were distributed in kind during the crisis, and some still have positions like Cemex, Beijing Airport, the exchanges, etc, the favored names from before the crisis.  The conclusion I'm reaching is that from late 90's leading up to the crisis, they performed great.  Since the crisis, they more or less matched the index.  But the thesis in the late 90's is different from the thesis today.  Is there enough leg in the current thesis to carry performance going forward?

 

 

 

[Jurgis]

Yeah, their outperformance recently has been lacking.