"I don't throw darts at a board. I bet on sure things." - Gordon Gekko
In November 2015, GAMCO—an investment management and advisory company owned and managed by famed value investor Mario Gabelli—moved a substantial portion of its cash, investments, and 4.4m of their own shares into a newly created company named Associated Capital. As of this writing, Associated Capital currently has a market value of $770m, which seemingly indicates that the company’s stash of cash and investments is being fairly valued by Wall Street.
Yet in addition to the spin off of cash and investments, GAMCO also created a five year $250m promissory note (i.e., loan), payable to Associated Capital at 4% interest.
Despite the note representing a very real economic benefit to Associated Capital, its true worth is obfuscated by the GAAP accounting because it’s a “related party loan”—i.e., a loan between two companies controlled by the same person—thus excluding it from the asset side of the balance sheet. But as the note matures, Associated Capital will receive payment from GAMCO, thereby increasing the company’s cash balance by an additional $9.83 on a per share basis.
Additionally, Associated Capital’s downside risk is relatively low because its other assets are highly liquid and thus easy to value: cash can be taken at face value, and many of AC’s investments have market quoted prices. And Mario Gabelli—who owns 75% of both companies—has a proven track record of creating long-term value. Recognizing that Associated Capital is trading at a discount, the Board of Directors has authorized a buyback of 500k shares, which will help to close the gap between value and price.
With 25% of its value not yet realized by the market, a value-centric owner in Mario Gabelli, and a highly liquid asset base, Associated Capital makes for an attractive opportunity with very limited downside. An investment in the company would be like buying a house worth $500k for $500k, and then a month later discovering that there’s shoebox buried in the yard stuffed with $125k. The GAMCO note—much like the shoebox—represents hidden value not yet appreciated by Wall Street.
It’s very likely this accounting quirk has created an opportunity for prudent investors to almost literally buy $1 of assets for $.75, which, according to both common sense and Warren Buffett “is a very good thing to do.”