October 10, 2024
“In politics, forget the truth, The focus is to win;
It’s not what’s needed to be done, It’s how to make it spin.”
-Art Buck
Dear Fellow Shareholders,
I am pleased to report a successful third quarter in the Intrepid Capital Fund with returns of +4.70%, which brings the results for our fiscal year ended September 30, 2024 to +18.26%. These results were driven by my preference for what I generally refer to as “founder-led firms.” This would be juxtaposed to companies led by more mercenary professional management teams, often times with not enough “skin in the game” in my opinion.
In my last communication I described one of the Fund’s founder-led holdings in Copart (CPRT), founded by Willis Johnson and now run by his son-in-law, Jay Adair. I will describe a few others we hold in a moment. The underlying theme in these businesses where we hold shares is:
- a family started a business as a private company and through hard work, chutzpah, and sometimes good luck took it public, and
- they treat the business like a family heirloom and tend to be conservative in how they manage the company’s affairs.
One of my favorite business quotes is actually from race car driver (coincidentally, notorious for wrecking) Mario Andretti, who said: “To finish first, you must first finish!”
Well, these businesses are not only built to finish first, they are built to last with a balance sheet in many instances void of debt. As I like to say “the bankers get to eat first” – but without any debt to be repaid, we can fully benefit from all of the cash flow a business generates as common shareholders. These businesses are also large, but not too large…so if a private equity firm or strategic buyer were to appear with an offer to buy out the company, there could be a number of suitors.
The negatives that I will hesitantly point out are a couple that come to mind. First, if the founding family likes their position in life too much, it will be difficult, if not impossible, to replace them when there are two share classes. Often those with two share classes maintain control not on an absolute basis (i.e. 51% of the equity), but rather by the share class they hold having superior voting rights. The offset to this minority position we find ourselves in is that these families often have hundreds of millions, if not billions tied up in the equity values of the companies they lead.
Here are a few examples of the Founder-led companies we hold in the Fund:
- Jefferies (ticker JEF) is a $12 billion market cap financial services firm that handles brokerage for stocks/ bonds/commodities and investment banking services. I have followed this company for over twenty years back to when it was a mini-Berkshire Hathway conglomerate called Leucadia National, with holdings in beef processing, real estate, etc. One of the founders of Leucadia, Joe Steinberg, is still the largest single shareholder with a 10% stake. The CEO of Jefferies, Rich Handler, is an 8% holder. Together, their combined holdings are worth roughly $ 2.2 billion. Over the past five years, JEF shares have generated an annualized return of 32.48%. The current dividend rate is 2.28% on these shares.
- Garmin (ticker GRMN) is a $35 billion market cap company that has captured the market for GPS tracking devices. The name is almost synonymous with tracking, whether it’s a handheld device, wristwatch, boat, airplane, or dog. For a pretty balance sheet, look no further than Garmin with almost 10% of the equity market capitalization held in cash (roughly $3.4 billion). The founding families of Kao and Pemble each own a little over 9%, which equates to over $6.5 billion combined in equity value for these families. The shares have appreciated an annualized 18.55% over the 5 years ending September 30, 2024. The current dividend rate is 1.66%.
- Skechers (ticker SKX) is a $10 billion market cap company. The company has two share classes, which as I have mentioned is not my preference but not uncommon in founder-led companies. The father/son duo of Robert and Michael Greenberg lead the third-largest shoe brand, behind only Nike and Adidas. The Greenberg’s class B shares have 10 votes per share and are worth $1.3 billion. The company’s balance sheet holds $1.4 billion in cash and virtually no “net debt.” The shares have returned 12.36% annualized over the last 5 years. There is no dividend currently.
- Watsco (ticker WSO) is a $19 billion market cap company led by Al Nahmad and son Aaron. They distribute air conditioning, heating and refrigeration equipment, primarily in the SunBelt. This company, too, has no “net debt” with cash exceeding debt. There are two share classes here as well, and the Nahmad family holds $2.6 billion through Class Bsharesthatpossess 10 votespershare. Theshareshavegeneratedanannualized 27.63% return over the 5 years ending September 30, 2024. The shares currently have a 2.18% dividend.
These are just a few examples of the founder-led businesses we have committed capital to in the Fund. Warren Buffett has a myriad of sayings that contain a large share of his 90+ years of investment wisdom. One is to imagine that the stock market closes down for an extended period and, by extension, you are unable to sell any holdings for a long time. In this scenario – to paraphrase Will Rogers – my concern is more for the return of my capital versus the return on my capital. The examples above would give me enough comfort that I think you could potentially have both!
I bring up the markets being closed for an extended period to change your perception of holding periods in a world where the average portfolio manager turns over 100% of his portfolio annually…taxes be damned! We are now in the “silly season” where the politicians offer promises they can’t keep and market participants on each end of the political spectrum promise to liquidate if the other party wins. Just say “no” and stay invested! This fall I am sure we will see market volatility around the election in early November. Stir in the war in the Middle East and Ukraine, along with saber rattling by North Korea and China and you have a potential “volatility cocktail” of high potency!
Thank you for your continued support! If there is anything we can do to serve you better, please don’t hesitate to call.
All the best,
Mark F. Travis, President
Intrepid Income Fund Co-Portfolio Manager