GWOX - Goodheart-Willcox Company Inc

Goodheart-Willcox is a publisher of career, technical, health and physical education textbooks. Over the past decade it has been growing its capital light e-book division very quickly, so that now the business requires minimal capex and consistently throws off cash. In fiscal 2025, it generated $23M in free cash flow. On a market cap of $193M, that is a 12% cash yield. Historically it has distributed 45% of free cash flow as dividends while the rest of the cash builds up on the balance sheet. Occasionally once cash is too high they announce a special dividend (last in 2021) or tender offer (last tender was April 2019 at a 50% premium to the stock price).

This situation reminds me a lot of Disney in the 1980’s when they found a new format to monetize their content library at essentially no extra cost (VHS), and benefited greatly. Here the new format is ebooks. Because all their pre-publishing and content writing costs have already been spent on creating the print textbook, they have very little cost to digitize these. Now they only have to spend a minimal amount to occasionally update their books when they release a new edition. This is a great business model, and the business transformation has been significant. Over the past 5 years revenue compounded at an annual growth rate (CAGR) of 16%, which with operating leverage has meant that free cash flow has grown at a 46% CAGR.

This is a pretty incredible deal. Why is it cheap? Well for one it is very illiquid, no major fund can buy this. Second, the stock price has not moved much in the past few years, and investors today have very short time horizons. Third, on its books is a 69M non-cash deferred revenue liability related to the future performance obligation they have to deliver textbooks to their customers. This isn’t a financial obligation in the traditional sense (not debt-like), so its net cash position is understated. Fourth, it is majority owned by an employee stock ownership plan (ESOP) - many investors do not touch controlled companies. Fifth, it is very hard to get financials for this company. It is the only company I have run into that does not show up in my stock screener (TIKR), nor in Capital IQ. It is totally obscure and illiquid.

What makes this company so interesting to me is that before the last buyback in 2019, there were around 60,000 shares in the ESOP plan, and today there are around 50,000. A tender offer (buyback) appears due. Even if there is no tender and the company maintains a 10% topline growth and its 46% payout ratio, then we are looking at $100M in dividends received over 4 years, and $200M in cash on the balance sheet at that time, plus the value of the ongoing operating business which you are buying today for ~$200M.

CHCI - Comstock Holding

CHCI is an idea I got from Will Harvey. Will is an accomplished real estate investor that has done well applying his knowledge in the public markets. CHCI is a former homebuilder turned asset light property manager in the DC area. Led by Dwight Schar, founder of NVR, the idea is to build a scaled property manager. It has a good balance sheet, and has a steady source of revenue, yet it is cheap - trading at an eps earnings yield of 11%.

Over the next 5 years they have in their pipeline a growth of 150% of their underlying management square footage. That implies a 15% CAGR in revenue. In addition, we can project out the recent average 6% growth in revenue per managed square foot in the past few years - driven by property values and rents increasing. When we consider the growth in additional fees (incentive fees, parking fees), the additional upside of externally managed properties being added to their platform, or multiple expansion, and this looks like a 20-25% compounder over 5 years.

Why is it cheap? Founders own over 60% of CHCI. It is controlled, and relatively illiquid. The core of the portfolio is the “anchor portfolio” which shares management overlap. A key risk is if the anchor portfolio does not renew their contract with CHCI, but this is very unlikely. This arrangement has turned what was a cost center for the anchor portfolio - “management fees” into a co-owned marketable security. What is to gain in ending that relationship? I also trust this management team based on their track record. To own a business alongside Dwight Schar at such a low price is a great gift. Like Norbert Lou buying NVR in 2001.

BURCA - Burnham Holdings

Burca trades at a 10% normalized FCF yield. On a $120M market cap it has 10Mn in net cash and is asset backed by its owned land and buildings which have around ~60M in value. They recently sold off a poorly performing division and invested in a new product line with their High-Efficiency Boiler production line. Headcount and factory size have recently increased by about 33%, and 25% respectively so we can expect significant cash flow growth to come online in the coming years.

Typically a company’s cash flows during a growth investment phase are understated due to capital investments, and such times make a great entry point before the growth shows up on the income statement.

Furthermore, the management team is top-notch, recently removing significant off-balance sheet liabilities, specifically their asbestos and pension exposure.

With this company we are getting a reasonably priced company with a top notch management team, likely growth, and good exposure to the housing market upcycle. It is also a likely PE target.

I heard about this and MAAL from Dirt Cheap Stocks, I suggest you check him out.

OTEC - Otello Corp

Otello is the Norwegian company behind the Opera browser, which they divested in 2018. Today their only asset is a significant stake in Bemobi Mobile Tech S.A., a Brazilian technology company which “develops and manages digital payment solutions for multiple B2B and B2C service providers.” Bemobi was listed on the BOVESPA B3 stock exchange in 2021. Otello’s owned subsidiary Otello Technology Investment AS, owns 32,719,588 shares of Bemobi. In the last reporting quarter, the company had 150M NOK in cash on hand, cash burn was 15M NOK, 75M NOK in dividends were received and 50M NOK was spent on stock buybacks.

Bemobi trades at BRL 23.06, which at 32 719 588 shares at (1.87 NOK/BRL) is worth 1.41B NOK. Otello’s market cap is 1.22B NOK. This means you could buy the all of Otello’s stock for 1.22B, liquidate the company and receive 1.66B NIK in value (+36%)

The underlying is also slightly underpriced. It has been growing earnings (net income) at a 17% CAGR since 2021. It trades at a 7.5% earnings yield.

Putting this all together, you have a company with a holding that grows at 17% a year, and that buys back 10% of its stock each year. If it also re-rates to the value of its cash and investments, we will achieve a 145% return over 3 years.

MCEM - Monarch Cement

Monarch Cement is a cement producer in Kansas. The nature of the cement industry is that cement can not be transported over long distances so needs to be produced at scale locally. Making most cement plants effective monopolies, and makes MCEM an excellent, well protected business. Earnings per share have grown at a 18% CAGR for 10 years. And the book value of their investment portfolio has grown at 16% over that time. Here you have a defensible operating business with a strong local moat that throws off cash and is able to reinvest capital at 16%. Over the long run you will do well owning this company. Today, it trades at a 8% yield on normalized earnings.

TSE:DR - Medical facilities Corp

Medical Facilities Corp is a Canadian listed company that owns American surgery centers. Surgery centers are very profitable in the American medical system, a defensive market. Today, DR trades at a 15% FCF yield. They have been slowly liquidating their facilities in piecemeal sales. They recently sold off 1 facility in 2025, and have 3 remaining. Historically these are sold in the private market at around 9x EBIT. Assuming the remaining facilities are sold at that multiple, we arrive at a $20/share value vs $12/share today.

Also consider their history of accretive stock buybacks, which can add additional upside.

I think I first heard about this from Dan Smoak, again, someone I highly recommend you follow.

MTYFF - MTY Group

MTY is a franchised, cash-generative business trading at ~6–7x EBITDA while undergoing a formal strategic review. The market overstates leverage due to IFRS lease accounting (with many screeners not properly accounting for sublease receiveables). With multiple bidders reportedly involved (with bids starting at $52 CAD/share) and meaningful founder ownership, the risk/reward skews favorably over the next 3 months.

Even with a deal break, the company is attractively priced here; it currently trades at 25% levered FCF yield, and is generally underlevered compared to peers.

MAAL - Marketing Alliance

MAAL is an online insurance platform, connecting buyers with brokers. It trades at a 9% earnings yield with 30% of its market cap in cash. It recently announced a buyback program to deploy that cash, which should be about 10% of share a year. Shares are illiquid and the business is majority owned. The shift from dividends to buybacks proves there is a good management team conscious of shareholders and focused on unlocking shareholder value.

HYNE - Hoyne Corporation

I wrote up HYNE on ValueInvestorsClub in November. It is a recent bank demutualization. You are buying the equity of the bank for 66% of its value, and as their commercial lending program ramps up we should expect it to re-rate to 100%. Over 90% of their market cap is covered by their strong net cash position and they also own significant real estate. Buybacks would likely be accretive here. We also have recent insider purchases near the current price.

Considering you are buying a bank for almost nothing here, it’s a good deal. There are many ways the business can create value here, we just don’t yet know how or when.

LYC:CA Lycos Energy

I covered this previously on SumZero. Lycos sold 66% of its producing assets and returned the proceeds to shareholders. What remains are high quality multi-lateral Alberta oil wells with low breakeven prices. Based on management commentary and because Lycos is subscale, we should expect the rest of the company to sell this year. There is commodity risk inherent here so I have significantly scaled down this position based on the poor oil outlook for the year. Chances of a sale are reduced with lower WCS prices, but are not entirely eliminated. Once clean post-divesture earnings print in April, I expect a re-rate.

Each of these owned businesses is illiquid, and trade at what I estimate to be under half of their intrinsic value. As I discuss in my investing philosophy statement, each of these businesses is creating shareholder value independent of market pricing. All are backed by significant assets and cash, and should do well in a downturn. I feel very comfortable owning this group of businesses heading into 2026.

Disclaimer: The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.

I own a position in these securities.

The portfolio was started on March 5, 2025. Through December 31, the portfolio is up 25% vs. the S&P500’s 18%, while maintaining effectively zero correlation (0.0028) to the S&P.

On the General Market

Based on historic long term returns in the S&P500, at these prices, you should expect an annualized return of -2 to 2% per year over the next 10 years. This makes it an unattractive investment.

Source: https://www.forbes.com/sites/michaelfoster/2025/12/20/this-flawed-stock-chart-could-be-bad-news-for-investors-in-2026/

In investing, you are buying pieces of businesses. With the S&P500, I am not confident in those underlying businesses. 30% of the S&P500 is made up of companies that are betting heavily on AI, which means that if you are investing in the S&P500 you are betting that these AI investments will pay off. I am not so sure. Historically, overinvestment in innovative technologies (autos, radio, airplanes, internet) has not been a successful bet. I may be wrong, but I don’t know enough to make that bet.

Today, you are also buying some outrageous companies like Palantir and Tesla, which provide very little earnings for owners, have uncertain prospects for growth, and of which few people would want to be an owner if they were buying these companies alone (not packaged within the index). I don’t want exposure to these companies; I consider it risky, and mostly, I don’t like owning what I don’t know deeply. That’s why I prefer finding and buying mispriced companies that I understand on discount.

This year, I bought companies that I could understand at a price below their intrinsic value (at least 33% off). That is how I generated excess returns.

My portfolio heading into 2026 is positioned even better. It is now made up of companies that I own for at least 50% off their intrinsic value. I feel much more comfortable owning these than the general market.

Summary of Investments and Results

This year, I wrote up 14 businesses. I looked at over 300 to find these few worth writing about. In today’s market there is not much low hanging fruit. On average, each pick returned 22%, and since I held most of them for less than a year, the annualized return is higher. The benefit of owning companies whose value is unlocked by specific events is that once the event is passed, you can recycle your capital into other opportunities.

See here for full data of my results, links to my analysis, and a short note on each: https://docs.google.com/spreadsheets/d/1O12UjLJzzisZ9umTSHacyJhZhYx4TsDGG-opjS6ZAKY/edit?usp=sharing

Best Performers

In absolute terms, EVC, LPRO, and TROX were my best performers. These fall in the bucket of general undervaluations. In case you missed them:

EVC, as covered on my Substack, was a broadcaster with significant “hidden assets” that were not being appreciated by the market. I valued each of its component parts: $200mn for the media assets, $100mn for its owned spectra, $200mn for its adtech platform Smadex, and $90mn in debt at face value. All together, $410mn in value was selling for $170mn (market cap). The market has since revalued the company for 73% more, closing the gap. However, I have also come to realize that my valuation for the hidden assets was likely overly optimistic (what is the value of something that does not generate cash flows and is unlikely to be sold?). Still, I bought it so cheap that I had a significant margin of safety to make an error in my valuation.

LPRO was a subprime auto lending platform that was a “disaster of the week” type situation. I covered it on SeekingAlpha. In Q1 it had to write down a significant chunk of its loan book, which was made in 2021-2022. The writedowns were so significant that the company stated a negative revenue for the quarter. Lawsuits were filed. The market was pessimistic. When I first looked at it in April, it was selling for $100mn, but had $110mn in net cash. It was like buying a house for $100mn and finding $110mn sitting inside—it was far too cheap. Further, when considering the context and extent of the writedowns, it was clear that future losses and writedowns of a similar magnitude were incredibly unlikely. It was shortly revalued by the market for 60% more.

TROX was a levered equity at the bottom of its cycle that I covered on VIC. Commentary on VIC seems to suggest that analysts were expecting it to breach its debt covenants by Q4 of 2025. What caught my attention was that management was buying shares on the open market. When I dug in more and read their debt agreements, it was clear to me that the terms of their debt were generous (very wide adjustments given for EBITDA), that they were currently in compliance with covenants (so could even raise more debt), and they had significant hidden levers to play to drum up cash, (at the time I focused on ability to make loans on working capital), all of which made a default outcome unlikely.

My thesis was soon confirmed by a $400mn debt offering by the company, and the stock repriced up 50%. I sold.

I still like this idea. TROX’s industry is at the bottom of its demand cycle, and when end market demand picks up, TROX will benefit significantly. They are vertically integrated into mines and moving into higher-quality ore deposits. They have recently been offered very attractive loan terms to better develop their rare earth mineral deposits, which provides them even more upside and potential liquidity. Here, you are waiting for end market demand to return to normal. If TROX makes it through to the upside of the cycle (likely when interest rates lower), you will do quite well here. However, India’s anti-dumping duties against TROX’s biggest competitor (LB Group) are no longer going into effect, and only one of another competitor’s (Venator) six plants appear to be fully closed. Additional competitor plant closures would have been more beneficial to the thesis.

I will also briefly highlight the NESR warrant exchange. When I published my Substack article on that, you could buy an NESR warrant for $0.50 and exchange it for 0.1 shares of NESR, which were $5.72 each (or $0.572 in exchange value). The underlying stock was also attractively cheap, selling at a PE of 5-6. By the time the exchange closed 3 weeks later, NESR was $6.33 a share. Total return was 27%, and IRR was 539%.

Biggest Mistakes & Lessons Learned

The most important thing I can do is reflect on my mistakes over the year, and four come to mind.

Magnera (MAGN)

David Bastian at Kingdom Capital had excellent coverage of MAGN this year. The situation is relatively simple. Magnera is a paper products company, formed from a combination of Berry’s paper division with Glatfelter Corporation. The paper industry was at a cyclical trough, and management was in the meantime successful in finding post-merger synergies. Assuming management’s expected future synergies were found and valuing the company on their expected mid-cycle cash generation (net operating profit of $350M a year), the stock was worth $18.97 / share. I bought at $12.59, but set a stop loss at $9. I never set stop losses, but in this case, the high level of debt made me concerned about the downside. If bad news about liquidity or debt hit, I would want out immediately, so I set a stop loss. Shortly after the stop loss was hit, MAGN had a good earnings season, and the stock appreciated to $15. The lesson here is to either avoid highly indebted companies entirely, or be so confident in your analysis that you don’t set a stop loss, and become comfortable in riding out downturns. Generally, I will lean towards the former.

Sunlink Health (SSY)

This was a merger arbitrage written up by Oliver Sung. It was a risk free 66-140% return in one month, easily the biggest no-brainer of the year. I only found out about it on Oliver’s follow-up post, which he made after the deal closed. I am a broke college student that can only afford one Substack subscription at a time, so subscribing to his Substack is not an option for me right now (but you should).

Instead, I built a web app to scrape SEC Edgar filings of all common special situation filings (DEF-14(s), SC14D9A, Form 10, SC-13E3, S1, and S4), and email me the key deal terms. In my special situations publication, I only post the situations that have not been arbitraged out yet, and so have found two or three interesting situations this year. The Sunlink Health deal terms were announced in a DEFM-14A filing, so I have paid particularly close attention to those. The only good deals thus far have been with companies that have very small market caps. I may have to better filter out filings to focus on those.

Moro Corporation (MRCR)

This was another no-brainer, and I don’t know why I missed it. Dirt covered it earlier this year at a 20% free cash flow to market cap yield, and priced at $2.60 a share. This week it was announced that the company was bought by a PE firm, Blackford Capital, Inc. for a 9% free cash flow to market cap yield, or for $5.59 per share.

Futurefuel (FF)

This one really made a lot of sense at the time. It was asset backed and selling below liquidation value, and seemed to be facing temporary problems with biodiesel production and regulatory uncertainty that should clear up. Regulations were clarified, and biodiesel production was restarted, but cash flows did not materialize as I expected. This industry is highly complex with many moving parts and many things that can go wrong. It is a government created industry, many government policies at many different levels have to work in concert for the end markets to be profitable for biodiesel producers. This administration has made some choices that are friendly to biodiesel and some that are not, and the regulations made by different federal departments have been contradictory. The economics of feedstocks and oil prices have moved in an unfriendly way this year. The market for RINs appears oversupplied. The company doesn’t seem like it will be able to transition production to a new product, so we are stuck with the challenge of handicapping the complexities of biodiesel policy and economics going forward.

In investing, we often refer to the engineering concept of “margin of safety”: If you want to build a bridge to withstand 100 expected tons of traffic, you should build in an additional margin of safety to withstand, say, 150 tons. I think a similar engineering concept applies here, and that is “complexity reduction.” A simple system has fewer things that can go wrong, and fewer things to control for. Over the long run, a simple system will be more reliable than a more complex one. I think it is much the same in investing. Going forward, I will avoid industries as complex as biofuels. My winners have been very simple ideas, and I should find success in sticking to simplicity.

Conclusion

I feel good about the year. I outperformed the S&P500 with zero correlation. I recently wrote an article about why beating the S&P500 is so difficult, and why so few fund managers are able to do it, and I would recommend you read it for context on this.

More importantly, I learned a lot this year, and knowledge compounds. Each company you look at adds to a web of knowledge that you can pull on as you continue to read and learn about each additional company.

Four specific takeaways stand out to me:

The first is that complexity should be reduced as much as possible. If the situation is too complex and relies on too many moving parts, your confidence in arriving at the right conclusion should be reduced. I had enough great simple ideas this year that cutting out the most complex ones wouldn’t have had much of an impact.

The second is that excessive leverage should be avoided, and once leverage is avoided, stop losses are not necessary.

The third is to focus on illiquid stocks. In public markets, your returns are based on your competition. If you go up against the best hedge funds in the world with the smartest talent, better information, and better technology, you are much less likely to succeed against that competition. However, there are parts of the market where you can compete against no hedge fund. That happens in tightly held and thinly traded securities.

For example, say a small hedge fund manages $300M in capital. An average position is 5% of the portfolio or $15M. Now say there is a company that trades $100,000 worth of shares per day. In order to build a position without moving the market, you would need to buy less than 20% of the shares a day, and it would take you 750 trading days or 3 calendar years to enter the position. As you can imagine, no fund would do this—and none do.

Some of the most interesting ideas of the year fell into this category: NESRW, Sunlink health, and Moro.

There are a few more considerations about investing in illiquid names that I think are important and that I will write about shortly.

Overall, portfolio management and position sizing was a weak spot this year, but the quality of the average position was enough to overcome that. Going into 2026, I feel much more confident in my “value investing” philosophy: That you can generate satisfactory returns if you buy what you know for less than the value of its future cash flows.

Also, a post detailing my current positions will be released soon, stay tuned.

“The answer would be, in my particular case, it would be going through the 20,000 pages [of stock information]. And since we were talking about railroads—you know, I went through the Moody’s Transportation Manual a couple of times. That was 1,500 or 2,000 pages—well, probably 1,500 pages—and I found all kinds of interesting things when I was 20 or 21.”

I’ve known this advice since it was asked a year and a half ago, and haven’t actually followed it yet. I have most often leaned on screeners: Insider buys, EV/EBITDA, EV, High FCF yields, and maybe occasionally look through an entire industry, but never got around to the “read about every company A-Z” method. I still don’t have the time to do it now, but I will anyway.

I actually met the guy who asked the question prompting the quote above, and he also hasn’t followed this advice. Instead his take away was that he needs to re-read Ben Graham’s old books again. Maybe there is some cognitive bias against turning over every stone, and hoping the screener will give you a shortcut. Maybe we just assume that Buffett did it because he didn’t have a screener, but the problem is that everyone else is doing the screener method, so what would be your edge doing so?

I say all of this is to introduce my new series:

Looking through every public company headquartered in Minnesota A-Z. I will look through each company and publish the ones I find interesting or with potential.

Company #13: Ameriprise Financial

Fargo Clip: https://getyarn.io/yarn-clip/e6f589e2-2ea1-4a3b-85bb-071906eb5d17/gif#ebOYbIcf.copy

Amerprise was founded in 1894 as Investors Syndicate, then rebranded as Investors Diversified Services (and built the IDS tower which went on to star in the movie “Fargo”). Then they were bought by Alleghany Corporation, who sold them to American Express.

This company was actually briefly mentioned in Joel Greenblatt’s book “You Can Be a Stock Market Genius.”

“Investors Diversified Services (IDS), had been growing its earnings at a 20-percent rate for almost ten years. This business consisted of a nationwide group of financial planners who provided clients with overall investment and insurance plans based on the client’s individual needs. The planners often recommended and sold many of the company’s own product offering, such as annuities and mutual funds. Since the financial planning business is largely relational business dominated by single or small group practitioners, IDS (now american express advisors) was able to provide the comfort, resources and depth of financial products not easily found in other organizations. The ability to provide services all in one package had allowed IDS to grow its assets under management at a very fast rate. Its revenues were largely derived from the annual fees generated from the investment and insurance products sold to its customers. The bottom line was: IDS also seemed like a valuable and fast-growing niche business.”

Greenblatt focused on the spin off of Lehman Brothers from American Express, but had you also followed the spin off IDS in 2005, you would have done quite well, it grew at a 15% CAGR. It was the top performing stock in the S&P 500 Financials Index in that time.

Today, 60% of AMP’s revenue comes from wealth management (Advice & Wealth Management), with the remaining split between Asset Management, and other products (grouped under Retirement & Protection Services) which includes life insurance.

All revenues are from the US. Historically earnings growth has come exclusively from the wealth management segment.

Earnings growth has been driven by three engines: growth in the value of the underlying securities portfolio (AUM), growth in new product uptake, growth in their client base (notably not from advisor headcount growth).

AUM Growth

Margin Growth

The above data is defined as revenue/underlying asset value, which I use as a proxy for their take rate. As you can see, the wealth management division and asset management divisions are very capital light and productive divisions, (which makes sense, as they are service businesses).

Wealth management AUM is the fastest growing segment, so it seems that AMP is advising on larger client portfolios, both from underlying asset growth and from increasing the amount of the client wealth they are advising (and generating fees) on. From the annual report: “Fees at wealth management includes advisory fees on managed/wrap accounts, financial planning fees, distribution fees, transaction and other fees, and net investment income (earned spread).”

Interestingly, AMP yields an impressive 59.6% ROE, has achieved a 3 year EPS growth of 15% and an LTM PE of 12.4. Making a price-earnings-growth rate of 0.83.

EBITDA has grown at 8%, but significant buybacks pushed earnings growth to 15%.

The wealth management division is based on a flexible cost structure – as employees are generally compensated on some variable payment scheme and management can trim lower-performing advisors during an economic downturn.

There is a lot of concern in the industry around the shift towards passive investments and its implications for the asset management industry, but the advisory business has adapted as it has moved from a commission-driven business model to a “wrap-fee” business today where the advisor and client’s interests are better aligned.

In the latest annual report management highlighted a couple of interesting things as well:

“Wealth management is now the primary driver of earnings and caters to lower AUM clients, a segment that is underserved, sticky, and benefitting from advisors leaving wirehouses… Wealth management’s earnings are driven by management or wrap fees and are less reliant on product sales.”

Risks

There are a few notable risks to be aware of and track with this company. Advisor departures are a real risk in this business, per the Q3 2025 Earnings Call “Two practices went RIA... But overall, it’s fine for them. We’ve recruited very strongly.” The company seems to walk a good line between supporting their advisors and allowing them enough independence where advisors feel it is in their best interest to stay with the company. Also, fee compression pressure will likely continue, but Ameriprise has been navigating this well so far. Furthermore, while mass-affluent clients are underserved, they are also more sensitive to cyclical drawdowns. If there is a major market drawdown, Ameriprise would be more impacted than ultra-high net worth focused providers.

Summary

Ameriprise Financial is a well run financial services provider. By owning all the major functions of wealth management: Advisory, asset management and in-house insurance products, they are able to provide a one-stop-shop for their clients. Further, because they focus on lower AUM (mass affluent) clients, they are competing in a space where they have less competition from the likes of JP Morgan, Goldman Sachs and Morgan Stanley. Furthermore, with their independent advisor model, they attract advisors leaving the major wirehouses who are seeking to “own” their book of business. They have found success and appear to be positioned well in a world moving towards passive indexing products. With growing earnings, boosted by a significant share buyback program, and a current slight undervaluation, Amerprise is a quality compounder that you can hold for the long term.

Disclaimer: The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.

I do not hold a position in these securities.

The only other fund I have found who has ever covered this copmany is Dave Waters at Alluvial Capital (who last wrote about it in 2012). Dave provides an interesting origin story on this odd security:

“SPH ran into trouble in 2008, when the financial crisis caused the value of many of its holdings to drop precipitously. Facing huge requests for redemption, but believing many of its holdings to be too under-valued or illiquid to sell without doing harm to continuing investors, Steel Partners Holdings hit upon a novel solution: going public. Many investors objected to this plan and pressed for a full liquidation, but Lichtenstein prevailed in court. Steel Partners executed a reverse merger into WebFinancial, a tiny pink sheets-traded financial concern operating in Utah, and then distributed the newly-created units to investors in the Steel Partners partnership. The LP now trades under the ticker SPNHU on the pinks. Many objecting shareholders opted to receive cash and in-kind securities instead, so the total assets of the partnership are much smaller than in 2007, when the partnership had $1.2 billion in assets.” Dave Waters

This transaction allowed SPLP to own a bank charter. They found an innovative way to monetize that bank charter. “After originating a loan for a client, WebBank holds it for no more than a few days before selling it back to them, creaming a fee off the top and earning interest for the period it holds the loan.” As the Financial Times put it, “one likened it to the jeweler Tiffany’s, while others called it the “gold standard” of correspondent banking, or charter renting to put it plainly.” (FT)

So, in 2008 SPLP ended up with a number of illiquid industrial investments and holding companies stuffed into a public OTC bank. With some asset management fees paid to the investment managers on top.

WebBank

Notably, WebBank has a capital structure made up of short maturity obligations as its loans are quickly sold to its “marketing partners”. It is also significantly overcapitalized and underleveraged compared to most banks. Tier 1 leverage ratio is the ratio of the bank’s “cushion” (equity and reserves) vs its total assets (loans, etc). WebBank has a very conservative Tier 1 leverage ratio of 18.6% (vs the regulatory minimum of 4%).

Typically, a Bank with a 30% ROE, compounding book at 8%, conservatively financed would be labelled an exceptional one and command a high premium. This would be a bank with 38%+ yield on equity/book, and if the market yield on equity is 8%, should command a 5x price to equity book premium. Thus a fair intrinsic value of the bank alone would be $1.9B.

The Industrial Conglomerate

This segment includes diversified industrials:

• Joining materials (Lucas Milhaupt)

• Tubing (HandyTube, Indiana Tube)

• Performance materials (JPS)

• Electrical products (MTE, MTI)

• Specialty films (Dunmore)

• Kasco blades & services

• Oil & gas service operations

• Steel Sports youth businesses

• ModusLink logistics / e-commerce fulfillment.

Add the bank and conglomerate together and we get an EV of 4.9B. The company is currently selling for an EV of $0.76B….

Management Fee Layer

Cash management fees are included in the above numbers.

SPLP’s controlling “Manager” (an affiliate corporate group) is entitled to a management fee equal to 1.5% of total partners’ capital, payable quarterly regardless of SPLP’s profitability in the 2024 10-K, the annual management fee was reported as $15,056,000. (steelpartners.com) In addition, the Manager (via an affiliate) holds “incentive units” that, if vesting criteria are met, convert into “Class C” common units granting the Manager a claim on 15% of the increase in stock price per common unit YoY. On top of those structural fees and dilution mechanisms, SPLP also reimburses the Manager (and its affiliates) for corporate-overhead costs, legal, accounting, compliance, travel, and other expenses tied to running the business — in 2024 those reimbursements to the Manager (for e.g. executive travel and overhead) were a few thousand dollars, but the broader indemnification and expense-reimbursement provisions give discretion to the Manager to charge many such costs back to the partnership. The vast bulk of compensation flows through the fee + carry + affiliate-entity structure, which is controlled by the Manager rather than by public unitholders.

For minority unitholders, this compensation structure means the effective “cost of control” is baked in - a recurring 1.5% annual drag on assets, and potential dilution via incentive units when equity-value triggers are met. That reduces the amount of cash flow and value accruing to public units; it also aligns incentives to grow or acquire “partners’ capital” rather than maximize distributions. In effect, minority units are economically subordinate: they receive residual returns after the controlling Manager and its affiliates take their fixed fee and carried interest for themselves. Furthermore, pay is mostly not paid through a shared reimbursement channel (like dividends) bypassing minority shareholders.

Now why is this company so mispriced at a 85% discount? Will it Re-rate?

1. Very illiquid - Institutions can not touch this. With only 3M in free float shares, and less than 2k shares traded per day on average, very few people are in the market for this security. In May of 2025, the security was delisted from the NYSE and is now only available on the OTC markets. As a publicly traded limited partnership with small float, few institutions can invest in this.

2. The most interesting aspect of this company is that it is majority controlled by Lichtenstein who controls 83% of stock outstanding and is compensated primarily via the holding company layer (not via dividends or share price appreciation).

So now the interesting part. What happens when you have a company with limited liquidity, only 3M/20M shares of free float, where the company that seems to be the only market participant and is buying 1M shares a year? I don’t know. I have never seen this before.

I do think that over 3 years if the remaining free float is bought out in buybacks, supply exhaustion would eventually occur. SPLP would hit a point where it is not able to buy shares at the current price as it finds no willing sellers. Here they either:

A. Increase the bid price to buy out the rest (still at a significant discount).

B. Stop the buyback program, leaving the market with no buyers, and minority stockholders orphaned. Stuck with stock in an illiquid market and no buyers.

C. Buyback the remaining shares at a minimal premium (10%), or execute a reverse stock split to force out small holders.

A few examples I found from history of similar situations.

Pendrell Corp (PCO) was a microcap with a single majority owner (Eagle River Holdings) who had 65% of the shares outstanding. In 2017, they went private with a 1-for-100 reverse stock split, squeezing out the public shareholders. 15% stock premium.

Two micro-cap industrials Handy & Harman (HNH) and SL Industries (SLI) are also interesting to consider. Both were majority owned by SPLP. In 2017 HNH was taken out by an exchange offer of HNH stock to SPLP stock at a modest premium. SLI management offered to buy out minority holders at a 28% premium. Steel partners did this seemingly to reduce their costs of multiple public holdings.

BGI has been majority owned (84%) with low float since 2010. In the 2010s buybacks stopped and minority shareholders were orphaned.

At RWWI minority shareholders resisted a lowball buyout offer, stayed public, and eventually shares appreciated.

Steel Partners is trading at a massive discount, which is unlikely to be realized by minority shareholders

In summary, when considering the majority ownership and incentive structure, supply exhaustion leading to increased buyback prices is unlikely. This market has no forced buyers, and little demand from buyers generally. The only significant buyer is the company itself who can essentially set their buyback price. I think it is mostly likely that minority shareholders are orphaned, SPLP has no real reason to buy them out. It has little to gain from doing so. In fact in many ways they have already orphaned minority shareholders. They delisted from the NYSE in April of 2025, and are now only traded OTC. Buybacks also effectively stopped around this time.

I would encourage any of my more experienced readers to leave their thoughts. Have you ever seen a situation like this before? Is there any value in a security like this? Let me know what you think.

Disclaimer: The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.

I do not hold a position in these securities.

This is a tale about Outdoor Holding Company (POWW)

Background

Steven F. Urvan is a serial entrepreneur. He has been involved in starting over 15 companies. One (POWW) has been demonstrably cash flowing, the others have little disclosure and not not appear to be profitable.

They include:

BitRail - a fintech founded in 2018 that provides an infrastructure to allow 3rd party partners to offer a regulatory compliant payment system to their customers including payments, loyalty and rewards, and optionally cryptocurrency.

GunBroker.com - America’s largest online marketplace for firearms. With 3x the sales of guns.com.

Outdoors.com Digital Media - “a digital media platform focusing on outdoor lifestyle content.” Probably blogs and content marketing stuff.

App Cohesion - “integrated software solutions for the firearms retail industry.” This seems to be POS, ERP for firearms retailers.

Gemini Southern which has subsidiaries:

TVP Investments, LLC (TVP) - a holding company.

IA Tech, LLC and its wholly owned subsidiaries (IA Tech):

Media Lodge, Inc. (until May 2019) - A digital media company specializing in content for outdoor and shooting sports enthusiasts. Filed for Chapter 11 bankruptcy on November 10, 2020. It Previously claimed to reach over 40 million people monthly through digital content.

Cloud Catalyst Technologies, LLC - analytic platform for gun retailers. Owns trademarks “gun genius” and “gunbroker.com gold” which might be a market insights software.

S&T Logistics, LLC - logistics company.

Enthusiast Commerce, LLC - Involved in firearm and knife gun and auction service. (I think it is a seller on the gunbroker.com website)

Outdoor Liquidators, LLC - unclear. I think its an entity to buy wholesale products to resell on gunbroker.com

RightFit Direct, LLC - unknown

Outsource Commerce, LLC - unknown

GDI Air - unknown

Sources: [1] [2] [3]

He did have some notable debt with his holding company:

“During 2019 the Company entered into a note payable agreement (Note Agreement B) with a financial institution dated May 31, 2019 which provided the Company with $65,000,000 and bears interest at a rate of 8% plus the greater of 90-day LIBOR or 2% (10% at December 31, 2020). The 90-day LIBOR resets every 90 days. Payments on Note Agreement B are payable as follows:

(i) fixed quarterly payments of $1,750,000; and

(ii) an annual variable prepayment equal to 75% of the prior fiscal year free cash flow as defined by Note Agreement B.

The note matures May 31, 2024 and is due and payable in full on the earlier of the maturity date or upon the occurrence of an event of default as defined by Note Agreement B. The note is collateralized by all of the Company’s consolidated assets.”

All of that being said, the core of his business empire was gunbroker.com, which earned 99% of the holding company’s stated 14.5M in operating income in 2019 (which I consider baseline).

GunBroker.com - A Potentialy Great Business

Gunbroker.com is a relic from the dot-com boom. Since 1999, it has been the leader in online gun sales. I like the gunbroker.com business a lot. Though it faces new competition from new entrants like guns.com. The types of guns they sell are:

- New guns

- Used modern guns

- Collectible guns

It has somewhat of a moat, as major online retailers like ebay and amazon can not sell these products. And so gunbroker.com has been the largest platform for guns online in America.

I do not believe they have a moat for new guns. During covid, major sellers like Walmart, cabelas and bass pro shop began implementing their buy online, pick up in store model. These are now stable purchasing avenues that gunbroker has to compete with. Also generally it is cheaper to buy in person. gunbroker.com charges a $50 transfer fee (fee for transferring a firearm from another state) to pick up a gun at a participating gun store, and an additional 1% for compliance (state sales tax + background check). Guns.com charges a flat background check and sales tax, so it is slightly cheaper. Better yet are in-store gun purchases which typically include a free background check.

I don’t think that they have any moat for used or new guns as their prices are generally higher than other outlets, with similar selection. They do have a wider selection than in store.

However, I do think that gunbroker.com will remain the top source for collectible guns. 32% of Americans own a firearm, with half of that number owning 1-2 guns. 3% of Americans own 17+ guns. These are gun “collectors.” They collect guns that are fun to shoot (i.e. machine guns) or historically notable guns (like the M1 Garand from World War II). For this market segment gunbroker.com is the best option. They have #1 search position for top collectible guns like the M1 Garand. They have 3x the sellers for collectible guns compared to guns.com. Rockville Auctions is the other major competitor for collectible guns, and they made $111M in gross auction sales for 2024, while gunbroker.com made ~$800M in 2024.

The Collectible Business Model Is Great

An old gun collector dies. His estate or heirs liquidate his guns at the local gun shop. The gun shop sells it on gunbroker.com. They buy, die and the cycle repeats. GB gets its 6% cut of the sales price and only really has to pay for web hosting fees.

The Rest of the Business is Not

Interestingly, used guns don’t seem to lose much value on re-sale. These and new guns make up over 90% of sales. Here gunbroker doesn’t have any advantage. Doing some market research I found that they are not the lowest cost seller (after including their fees), but they do have a wider variety than most in-person stores. Consider newer entrants like guns.com and other e-commerce sellers, and any competitive advantage disappears for the bulk of their sales.

And Neither is the Website

I signed up for gunbrokers.com. In order to see the full final price you have to register (no guest checkout) and set-up 2 factor authentication. You have to copy the code they email you back into the registration page to get to the checkout. Sign-up takes probably 10 minutes in total. At some point during checkout the loading screen took over 5 minutes. The privacy banner pops up randomly even after you decline it. The UI is from 2004. The search function is broken unless you type the title exactly. Basically they are doing everything they can to make the user experience and SEO poor and they still are the #1 website for gun sales. That is because if you are the only or best game in town, people will put up with a lot of nonsense.

This website experience basically tells me that the business is good, but the management has a troubled past

Selling Gunbroker to AMMO, Inc.

On April 30, 2021, GDI executed an agreement to merge with Ammo, Inc. (Ammo) and SpeedLight Group, I, LLC (SpeedLight), a wholly owned subsidiary of Ammo. As a result of the completion of the arrangement, the separate existence of GDI will cease and Ammo will continue its existence as the surviving company in the merger. The purchase included cash and stock in the surviving company. The value of the transaction was 240 million. On 14M in normalized EBIT that seems to have been a good sell for Urvan. He also got to keep a position as strategy director of gunbroker.com after the purchase which entails pay and benefits. He sold it at its peak when covid inflated online orders, which was very smart on his part. However he sold it for a majority stock deal, which turned out to be a bad call.

Now who did he sell to?

Corporate Entities involved in the sale of GunBroker.com:

• AMMO, Inc. – Public company that acquired GunBroker.com.
  

• Speedlight Group I, LLC – A wholly owned subsidiary of AMMO, formed specifically for the merger.
  

• GunBroker.com, LLC / IA Tech, LLC / Gemini Direct Investments, LLC – The Urvan-controlled entities being acquired.
  

• Steven F. Urvan – Founder and owner of GunBroker.com; became AMMO’s Chief Strategy Officer and largest shareholder after the merger.

• Stephen Verska (GunBroker’s Chief Technology Officer under Urvan) & SharkDiver Consulting, Inc. (Verska’s company)

AMMO Directors and Executives:

1. Fred W. Wagenhals – AMMO’s Chairman and CEO; officially led merger negotiations.
   

2. Christopher D. Larson – Co-founder and VP of Finance; barred by the SEC from holding officer/director roles due to prior fraud but acted as a de facto officer. Larson was part of a market manipulation scheme. In 2020, the SEC obtained a final judgment against Larson for his role in manipulating the market for Crown Dynamics stock. The SEC’s complaint alleged that: Larson obtained control of Crown Dynamics, a shell company, and transferred shares to nominees. He paid $400,000 for a “call center” to promote Crown and placed manipulative trades in his own account to create the appearance of market interest. As Crown’s stock price became inflated due to these efforts, Larson’s nominees sold shares and wired the sale proceeds—at least $865,000—to him.
   

3. John P. Flynn – Disbarred attorney serving as AMMO VP and legal point person in the deal.
   

4. Jessica M. Lockett – Board member, shareholder, and Audit Committee participant.
   

5. Richard R. Childress – Board member and shareholder; involved in the merger.
   

6. Harry S. Markley – Board member and shareholder.
   

7. Russell William Wallace, Jr. – Board member and Audit Committee member.
   

8. Robert J. Goodmanson – President, board member, and affiliated with an investment firm holding AMMO shares.
   

9. Robert D. Wiley – Chief Financial Officer, participated in the merger.

So these are the players. Let me again restate that Urvan (the seller) has been involved in many ventures, only one has been successful. At the acquirer, Ammo, The “VP of finance” was barred from the SEC for holding any high level positions in a public company. This means that the VP position is the highest he is legally allowed to have. However, in Urvan’s complaints, Larson seemed to have operated as a Tony Soprano type character - an underboss who really runs the operation while the official boss is only a figurehead.

I’ll also restate that person serving as counsel for the deal was disbarred.

At the time the only major business that AMMO owned was an ammunition manufacturing facility in Wisconsin. In earnings calls since the acquisition, management has since stated that the cost of producing the ammunition was higher than the sales price of the ammunition. So basically Ammo owned a money burning factory.

In 2020 Urvan had $50m in debt coming due, so he started looking for buyers for his profitable business - gunbrokers.com. In 2021 AMMO expressed interest in the company (seeing the newly inflated covid sales numbers). Meetings and negotiations occur between Urvan and AMMO executives (notably Wagenhals, Larson, and Flynn).

Urvan alleged that during the negotiations, Ammo made misrepresentations including:

- Not disclosing the criminal history of its executives. (This was very easy for me to find, I am not sure how he didn’t check this)

- “AMMO touted the construction and capabilities of its ‘state-of-the-art’ manufacturing facility in Manitowoc, Wisconsin. AMMO represented to Urvan that the facility was nearly complete, would be operational imminently, and would be a reliable and profitable asset.” This was not true, the facility was not completed and would need significant investment to get it up to speed.

- “AMMO stated that the machinery at the facility was ready for operation and would produce high volumes of ammunition quickly.” Also untrue. Key equipment was missing including calibration equipment. There were no staff.

-“AMMO did not disclose the actual capital requirements needed to finish and operationalize the factory…The misrepresentation about the factory caused AMMO’s projections—upon which Urvan relied—to be materially inflated.”’

- “Urvan also later learned that AMMO’s factory was operated in part by a family member of a member of AMMO’s senior management team. AMMO did not disclose this related-party relationship either, in breach of its representation in Section 5.11(b) of the Merger Agreement.”

So he meets this shady management team, but Urvan still needs the money (and it’s a good deal) so it goes forward.

AMMO forms Speedlight Group I, LLC to serve as the merger vehicle. The merger closes for $240M. Urvan receives $50M cash, up to 20M AMMO shares, and Speedlight assumes $52.3M in debt. Urvan becomes Chief Strategy Officer for gunbroker.com and joins the AMMO board.

Shortly after, the Verska Agreement is signed, a post merger compensation agreement with gunbroker.com’s CTO Stephen Verska. He is to be paid $1m a year for 3 years. His previous salary was $250k a year. This was done allegedly to maintain Urvan’s control of GunBroker.

Urvan’s relationship with the Ammo team quickly deteriorates. He learns that Kathleen Hanrahan, a former AMMO board member and audit committee chair, filed a whistleblower complaint with OSHA in 2019. She alleged that AMMO executives: Retaliated against her for raising concerns about financial reporting. Committed violations of the Sarbanes-Oxley Act (SOX). OSHA issued a finding of “reasonable cause” to believe AMMO violated SOX. That’s a serious designation suggesting the agency found credible evidence of corporate misconduct.

This lawsuit was ongoing during the time of the GunBroker merger but was not disclosed to Urvan. AMMO settled the case after the merger—a fact Urvan learned only after the transaction closed.

Around this time he is denied access to internal data. (that could possibly be used to benefit his other businesses).

“Urvan also lacked access to financial and operational data for the business he had built and sold. He alleges that AMMO’s executives and IT staff restricted his ability to access GunBroker.com’s back-end data, violating his rights as a director and impairing his ability to evaluate the business.”

In Aug 2022, Urvan initiated a proxy battle to replace AMMO’s board and spin off GunBroker.com. Nov 2022 the proxy contest settles. Board expands to 9 members. Urvan appoints 2 nominees, the CEO resigns and Urvan joins the CEO succession committee.

Spin-off of the ammunition business.

In January 2025, AMMO, Inc. announced it would sell its money losing Wisconsin ammunition factory to Olin Winchester for $75 million, closing the deal in April 2025. As part of the broader restructuring, AMMO issued Series A Preferred Stock in late 2024 to insiders including Chairman Christopher Larson, ex-CEO Fred Wagenhals, and CFO Michael Paul.

Steven Urvan alleged in his lawsuit that the preferred stock issuance was self-dealing, lacked board disclosure, and diluted common shareholders’ value and voting rights.

On April 18 2025, AMMO Inc. completed the sale of its ammunition manufacturing facility to Olin Corporation for $75 million. After fees and tax, I estimate the cash proceeds to be $55.8 million. That number is also referenced in the St. Louis business journal and Olin’s 10-Q for Q 1 2025

Urvan’s lawsuit

Urvan sues AMMO to unwind the merger, citing fraud and misrepresentations. The claims that Ammo overstated the production and value of its ammunition production. AMMO countersues over indemnity and post-merger disputes.On May 29th, 2025. Ammo settles with Urvan. Urvan is appointed CEO and Chairman of the board. He received the following in compensation: 7 Million warrants a strike price of 1.81. And $51M in interest bearing notes.

So what have we learned?

In my mind there are 3 options here:

1. He did not check out the AMMO management team, company or business he was selling to. Most of this was relatively easy to verify. You could google the people involved in the company, or visit the AMMO plant. If this is true I would chalk that up to incompetence or ignorance.

2. He did check out the team, and knew this, but planned on waiting until the moment was right to capitalize on that information. That would be malicious on his part.

3. The AMMO management team had an intricate scheme where they hid key individuals from the internet, and created some diversions so that details about their business were obscured during the sales process.

What are we left with?

AMMO now has Urvan in charge.

Its latest filing says that it had $32M in cash on the balance sheet as of March 31. It should receive $55.8M from the ammunition business sale. It has to pay out (to Urvan) $51M for the settlement. It has one remaining lawsuit (for now) that is seeking $100m in damages for a contract violation. Let’s assume that settles for $20M. That leaves us with $17M in net cash.

Operating profits were $14.5M in 2019.

Gross profit in the last 3 quarters was ~$10M/quarter.

Let’s assume that sustainable gross profit ends up at $30M.

In 2019 (with Urvan in charge) G&A was $11M. However today, the business has additional costs:

- $3.1M in dividend payments on the preferred. These have a liquidation preference at $24, so it would cost $35M to remove this cost.

- Public company compliance fees ~$2M

- A hungry board of 9 to feed. ~$1M

After all of that we are left with 13MN in the owner’s income. At a 10x multiple that is $130.

Operating business: $130M

Net cash: $17M

= Est. market cap value = 147M

Current market cap = 175M

I would want a higher margin of safety working with Urvan, when considering the future legal fees that this company will generate. Urvan also hasn’t managed the website very well, instead focusing on his other projects. I think that will likely continue.

Overall Urvan was dealt a 14M/year EBIT website with $50M in debt. He sold it to AMMO Inc for $240M. He received $50M in cash and 17M in stock. He later sued Ammo to get $51M in cash and 7M warrants. He likely received at least $500k in compensation since 2021. And he runs the website once again. He and his legal team have come out well on this, I am not sure that us as investors will.

What do you think?

Appendix

See gemini investment portfolio: [3]

sold ammo division for 70m gross, maybe 55m cash

https://www.sec.gov/ix?doc=/Archives/edgar/data/0001015383/000164117225005369/form8-k.htm

Other warrants

As of December 31, 2024, we had 1,721,256 warrants outstanding. Each warrant provides the holder the right to purchase up to one share of our Common Stock at a predetermined exercise price. The outstanding warrants consist of (1) warrants to purchase 100,000 shares of Common Stock at an exercise price of $0.01 per share until December 2026; (2) warrants to purchase 911 shares of Common Stock at an exercise price of $1.65 per share until April 2025; (3) warrants to purchase 1,234,034 shares of our Common Stock at an exercise price of $2.00 per share consisting of 1% of the warrants that expired on August 2024, and 99% until February 2026; and (4) warrants to purchase 386,311 shares of Common Stock at an exercise price of $2.63 until November 2025.

The MN Action

On January 18, 2024, Innovative Computer Professionals, Inc. d/b/a Digital Cash Processing (“DCP”) filed a civil action in Minnesota state court against Outdoors Online, LLC d/b/a GunBroker.com (“GunBroker”) for breach of contract (the “MN Action”). In the MN Action, DCP alleges that GunBroker.com breached a May 2021 contract, pursuant to which DCP was to provide specified digital payment processing services, and it alleges $100 million in damages. On February 7, 2024, GunBroker.com removed the MN Action to the United States District Court for the District of Minnesota. On February 14, 2024, GunBroker moved to dismiss the MN Action.

To be clear the price of the stock is 38% of its instrinsic value. 1-2x upside.

Lycos Energy (TSXV: LCX) is a Canadian heavy-oil microcap entering a short-duration special-situation window with an unusually high return on capital at risk. The stock now trades at C$1.50 ( C$78.8M market cap) and on November 28, 2025 the company is set to distribute C$0.90/share as a Return of Capital—representing 60% of today’s share price and creating a highly asymmetric setup. (This applies tor shareholders as of record date November 20, so buy before then.)
This leaves us with a stub with a market cap of C$31.52M.

Management has already sold ~60% of its oil production for C$60M, eliminated nearly all debt, removed most long-term abandonment liabilities, and now returning the rest. Pro-forma, Lycos retains ~1,700 bbl/d of Mannville heavy-oil production, minimal ARO, access to a C$50M credit facility, and C$52M in NOL. Volume is small, and this stock is obscure, contributing to the mispricing.

The remaining business is extremely cheap on both asset and cash-flow metrics. Comparable transactions in Mannville generally occur at C$30k–60k per flowing barrel; at 1,700 bbl/d, valuing Lycos at the mid point of that range implies an value of $76.5 M for the operating business.

Lycos also carries C$65 million in Canadian non-capital loss carryforwards, which are highly valuable in an asset sale because Canadian tax rules allow these losses to be transferred without limitation so long as the acquirer continues operating in the same line of business. For an Alberta-based E&P company facing a combined federal–provincial tax rate of roughly 23%, these NOLs have an undiscounted tax value of approximately C$15 million. I discount this by 50% to reflect timing and commodity-price uncertainty, implying a transactional realizable value of C$7.5 million. This represents a meaningful incremental value to Lycos’ stub and should be considered in any sum-of-the-parts or takeout valuation.

Even in a downside scenario where management elects to continue operating rather than selling, the remaining assets generate sufficient cash flow to support a strong risk-adjusted return, albeit over a longer time frame. Given management’s prior history of building and monetizing successful E&P companies and the signal of returning 60% of market cap upfront the probability of a full wind-up or asset sale remains high.

It seems you must own this by Nov 20th, but there is a grace period until the final conversion date (ex-date) of Dec 1.

What is left?

The remaining Lycos production after the 2025 sale are their Alberta assets

• Swimming (AB)

• Wildmere (AB)

• Viking Kinsella (AB)

These all correspond to the Alberta Mannville multilateral heavy-oil program, which includes: Multilateral horizontal wells (6-leg, 8-leg, and hybrid “half-fishbone” multilaterals). These are not CHOPS.

Decline Rates

The Q3 filings (sept 30) states that bbl/d production was 2,958. By the time of the asset sale disclosures, 940 bbl/d were sold and 1,700 bbl/d remained. Implying a 10.75% decline rate for the remaining assets over 2 months.

Well vintages appear to be a mix of 2021-2024 drilling programs and older legacy wells. I use an average well age of 4 years and average well life expectancy of 10 years in my model.

I use decline rates of 30%,25%,20%,15%,10%+ starting in year 1.

ARO

Pre-sale ARO was $14.7M, assuming 64% of production retained equals a similar amound of ARO, leaves us with $9.4M.

Q2 MD&A states that decommissioing liabilties accrued at ~900k a year. Again, assuming accrual is proportional to production rates, future annual accrual should be 576k

Capital Efficiency

Relevant slides from the investor presentation: https://lycosenergy.com/wp-content/uploads/2023/06/LCX-JUNE-2023-FINAL-PPT-002.pdf

Based on the above the Alberta assets seem to have a best case capital efficiency of $6.8k/flowing, but a typical efficiency of $15-20k/flowing. Based on an avg decline curve of 26% or 442 bbl/d, I would estimate maintenance capex to maintain production to be $8.8M CAD a year.

When I do so and stress test a few oil prices, and maintenance capex costs, I get the following valuations for lycos’ enterprise value (for the operating business).

Catalysts

• C$0.90/share ROC distribution in 3 weeks

• Potential sale of remaining assets within 6–12 months

Appendix A: Tax Pool Benefits

Lycos has the following tax benefits.

In Canada the Non-capital loss carry forwards can be acquired without limit, so I focus on those. But my writeup above does not include a valuation for the other 100M in tax benefits. By my estimate, if fully used at relevant Canadian tax rates, these tax benefits should drive C$39M in value, but in an M&A context the realistic value is discounted to C$15–20M.

Appendix B: The Northern Asset disposition

This closed on October 16th.

Sale assets were older, lower-quality Lloydminster heavy oil with higher operating expense, lower netbacks, and a lower reserve life index.

Pro-forma earnings should be:

~27M in operating netback/net operating income

~23M in Adjusted Funds Flow / OCF.

My back of the napkin pro-forma model is here: https://docs.google.com/spreadsheets/d/1d1sowZoKnZTQFWKJSriI3EJfz6mQN9gqNuJx8ElnJXM/edit?usp=sharing

Disclaimer: The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.

I do hold a position in these securities.

After studying a history of the for-profit college industry for the past month, notably my recent coverage of the failure of Corinthian College, it’s clear that regulatory risk is the biggest risk in the industry. And LGCY has enough regulatory risks to keep me away. That is to say, I am not personally invested in this, nor do I recommend it, but some of my more risk-tolerant readers may find this situation interesting.

I don’t invest in things where I have limited or no minority shareholder rights, or where I don’t hold the actual security. For that reason, I don’t invest in Chinese ADRs or corporations not incorporated in Delaware. LGCY went public last year, choosing to list in Nevada, making it a no-go for me. Others may not be as conservative as me on this, and that’s fine. But they should still read on to be advised of all the other risks of investing in this stock.

Favorable Macro

Source: https://data.hrsa.gov/topics/health-workforce/nchwa/workforce-projections

This is a chart of the supply and demand for medical sonographers (a program at all LGCY schools). Labor shortage in allied health professions is the same across the board for most of LGCY’s other programs. As shortages grow and unemployment grows, enrollment increases. This is what makes LGCY an interesting countercyclical play.

Measuring Education Regulatory Risks

When investing in this industry, understanding the downside thoroughly is key.

When we check the regulatory metrics of LGCY and other key leading indicators of business failure, we see that LGCY raises some red flags.

Accreditation And PPA Status.

3 LGCY colleges (HDMC, CCC, CCMCC) are accredited by ACCET (Accrediting Council for Continuing Education and Training). Integrity is accredited by ABHES. And no colleges are currently on “warning,” “show-cause,” or probationary status by the Education Department. (LGCY 10-K)

In order to receive title IV loan funds (over 80% of revenue), colleges must be part of a Program Participation Agreement (PPA). When colleges are acquired they are put on a temporary month-to-month PPA during which time oversight is higher and certain activities are limited (Requires prior ED approval for new programs and locations). During this time the Education Department is supposed to review the program to approve it for the long term. HDMC and CCC have standard PPAs. However Integrity (acquired 2020) and CCMCC (acquired 2024) are participating under temporary provisional program participation agreements (TPPPA). (LGCY 10-K)

Any “change in ownership and control,” puts a college on temporary PPA and triggers an automatic review by the ED.

Ironically, defunding/reduced staffing at the ED will further extend the timeline for approval of these programs and add headwinds to growth.

In early September 2025 the Education Department shared a proposal to engage in negotiated rulemaking to provide institutions flexibility to change accreditors and “remove other burdensome requirements that erect barriers to entry for new accreditation agencies.” (LGCY 10-K) Which undoubtedly will allow for-profit colleges to choose their auditor, create their own accreditation processes, etc.

This change will not benefit LGCY, since it is already accredited, but it will benefit its unaccredited competitors as it lowers the barrier to entry.

Student Success Metrics

The student retention rate is 86%. (LGCY 10-K)

Typical for the industry.

Average placement rates post graduation are dropping slightly:

Source: LGCY Sec filings 2024-2025

Cohort default rates and Composite Scores

CDRs are low, which has been a benefit of the recently ended tuition payment freezes. We should expect rates to normalize closer to the 2019 rate of 4%, which is well below the 30% limit set by regulators. With composite scores of 3/3, LGCY is rated as financially sound, and above the cutoff of ⅓. (LGCY 10-K)

Title IV Compliance

90/10 rule compliance: A majority of LGCY’s tuition revenue comes from federal loan programs, receiving over 90% means that funding would be limited. In 2024 the rule on federal Title IV funding was expanded to include GI Bill funding.

The 2024 fiscal year was the first one calculated under the stricter rule 90/10 that includes GI BIll funds in the federal funding portion. So the company has stood up well to that update.

Notably, on January 30, 2024, due to a failure to timely return unearned Title IV funds to ED, Integrity was required to submit an acceptable form of financial protection for 25% of the refunds that were made for the fiscal year ended June 30, 2023 in the amount of $18,828. This is a major concern for me. Regulatory compliance is key, failure to stay on top of regulations (intentionally or unintentionally) is a major red flag. (LGCY 10-K)

Borrower Defense to Repayment

LGCY is party to the Sweet v. Cardona settlement, which entailed seven active BDR applications. (LGCY 10-K)

Notably, the OBBBA delays the effective date of the 2022 version of the revised borrower defense to repayment regulations and closed school loan discharge regulations for ten years, until July 1, 2035. This should protect them from future BDR claims. (LGCY 10-K)

Exposure to Private Student Loans and Credit Risk

LGCY extends credit for tuition with the “TuitionFlex” program which provides a flexible tuition credit plan for students. In association with this program, the company reported long-term accounts receivable of $1,966,137. The company does not break down whether this is gross, or net of allowance for credit losses. However YoY from 2024 to 2025 the proportion of the credit losses account to net accounts receivable increased from 5% to 10%. The proportion of accounts receivable that was classified as “long term” also grew from 9.6% to 11.6%. (LGCY 10-K)

Customer acquisition costs (CAC)

At a for-profit college facing strain, CAC’s rise. However here CAC’s are declining, which is a good sign.

Security Regulatory Risks

This point is the final nail in the coffin.

When LGCY went public, the company decided to incorporate in Nevada. This means the management has weaker fiduciary duties, litigation and appraisal rights are limited, and fewer shareholder rights generally.

The last point bears repeating, in Nevada, shareholders have fewer rights to inspect corporate documents, and have a higher bar to request them. As compared to Delaware, shareholder rights are less developed and proven. (Snell & Wilmar)

This is already a morally gray business, and history shows these businesses have many incentives to inflate financial records. Now add in a management that is less accountable and more able to inflate financial figures and you get a very dangerous situation.

The latest 10-K, includes management’s conclusion that internal control over financial reporting was not effective.

(LGCY 10-K)

Conclusion

On the surface, LGCY should be an attractive investment, sporting an attractive valuation, but the red flags here are too many.

The first red flag is that two of LGCY’s colleges are on a temporary program participation agreement (PPA) which stifles enrollment growth. Recent regulatory changes will make it harder for these programs to get fully accredited, and any future acquisitions will face a similar problem.

The second red flag is that LGCY is sloppy with its regulatory compliance, with its recent failure to timely return unearned Title IV funds to ED. This also includes the fact that the company has insufficient internal controls over their financials.

The third red flag is the existence and growth of its in-house student loan program “TuitionFlex”. With a growing proportion of accounts receivable being part of this program, and growing allowance for credit losses on these loans, I am worried about the quality of their underwriting on these loans, and the perverse incentives this creates.

The final (and most important to me) red flag is that LGCY went public last year as a Nevada corporation. Limited shareholder rights, and transparency in the state raise questions to me about management’s intentions. Consider also that management is not buying stock. With only a year of track record here, I am not confident that management won’t abuse public investors or alter financial statements going forward.

Disclaimer:

The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.

Today, for-profit colleges operate in the context of worker shortages, a weak labor market, and a chronically underfunded public education system. Furthermore, enrollment and profits boom during economic downturns and technological dislocations, making them a good counter cyclical play (stay tuned).

For-profit enrollment booms during recessions.

Source: https://nces.ed.gov/programs/digest/d23/tables/dt23_303.20.asp

That’s why I looked through all the publicly traded for profit colleges (operating or not). This list included: PRDO, UTI, STRA, APEI, ESIN.Q, NAUH, ATGE, LINC, LGCY.

In my research I found that these investments have a history of blowing up suddenly and spectacularly. To list a few you may have heard of: ITT Technical Institute (ESIN.Q) , National American University (NAUH) and Corinthian Colleges (COCO).

In this write-up I will talk about the dynamics of this industry, and then review the corporate history of COCO specifically, which should highlight the major risks in this industry that anyone considering investing in the space should appreciate.

Background of the for-profit college industry

In theory, the idea behind for-profit education is simple. If there are skill gaps in the economy, for-profit colleges can attract capital to build education programs to fill that gap. Competition should make sure that the best survive. However, in practice, it is not quite that simple.

For profit colleges are easy to set up. You develop a curriculum, lease a space, hire teachers and advertise your product. You may want to become an accredited program to increase the odds of graduate placement and increase student entry rates, but colleges can and have started without accreditation (Trump University for one). You also compete with established non-profit or public schools that have established programs, better reputations, larger employer networks, no profit requirement, and lower student acquisition costs. Community and public programs are of course subsidized. In-person programs compete with online offerings nationally. This is to say that non-profits have serious competitive advantages over for-profits, which is demonstrated by their lower tuition cost/post grad salary ratios (and associated lower default rates).

Profits in the industry structurally tend to be fleeting, as either non-profit schools expand offerings (attracting the higher performing students, leaving lower performing students in for-profit schools, which in turn decreases post grad outcomes and payment), or other for-profit operators quickly scale up their offerings, capping your growth. For this reason you can think of for-profit schools as marginal producers, high on the cost curve.

Some for-profit colleges work with employers to offer tuition reimbursement, and may offer promotions, discounting on these programs, but there are few discounts/scholarships beyond that. Most funding (~90%) comes from the federal government, mostly from Title IV funds. This number was at one point close to 100%, but during the Obama administration, regulations were passed that capped total Title IV federal funding at 90% of total tuition. Naturally for-profit schools try to get as close to that number as possible.

In such an environment a moral hazard develops:

If the person using the service isn’t the one to pay for it, and you as the supplier are incentivized to make tuition and enrollment as high as possible, you tend to get perverse incentives. Add in that many loan programs include living stipends (GI BILL) and you get targeting of the communities with access to those programs - which will often include false advertising.

These loans post a significant cost to taxpayers (typically a bi-partisan issue), and so from time to time the federal government cracks down on the industry.

“Every decade or two since WWII, lawmakers have loosened oversight of federal aid to career colleges run by for-profit companies only to be disappointed by rampant abuses. The scandals prompt regulators to clamp down, only to later be convinced by industry executives that the schools have cleaned up their act.”(The Century Foundation)

A few major regulations have developed over time.

Key regulations in the for-profit education industry

The 90/10 Rule

• Description: This rule is a market viability test. It mandates that a for-profit college must get at least 10% of its total revenue from sources other than federal student aid (Title IV funds). The goal is to ensure that the education is valuable enough for someone—a student, a state, or an employer—to pay for it without federal subsidy.

• Key Metrics: Look for the 90/10 ratio itself, which is a required disclosure. A ratio approaching 90% is a major risk factor, as violating the rule for two consecutive years results in the loss of all federal funding.

• Legal Status: No changes yet.

Gainful Employment (GE)

• Description: This Obama-era regulation aimed to protect students from low-performing career education programs that result in high debt burdens. It measured whether graduates earned enough money to reasonably pay back their student loans. Programs that consistently failed the debt-to-earnings test would lose access to federal student aid.

• Analyst Metrics: When active, analysts focus on a company’s percentage of programs that are failing or at risk of failing the debt-to-earnings metrics. This represents a direct threat to future revenue streams.

• Legal Status: This rule is a political football. The first Trump administration rescinded it. The Biden administration reinstated it. A Trump 2.0 administration would almost certainly begin the process to rescind and replace it again with a more institution-friendly transparency rule. This has not been done yet.

Cohort Default Rates (CDR)

• Description: This is one of the oldest accountability measures. The Department of Education tracks the percentage of a school’s former students who default on their federal student loans within three years of entering repayment.

• Analyst Metrics: The official 3-year Cohort Default Rate. If a school’s CDR exceeds 30% for three consecutive years or is above 40% in a single year, it risks losing eligibility for federal aid. Analysts watch for any upward trend in this rate.

• Legal Status: This is active, It is broadly supported and would remain in effect and unchanged.

Borrower Defense to Repayment (BDR)

• Description: This rule allows students to have their federal loans forgiven if their college misled them or engaged in other misconduct (like making false promises about job placement). The Department of Education can then hold the institution financially liable for the discharged loan amounts.

• Key Metrics: The dollar value of pending BDR claims against the institution and any related liabilities recorded on the balance sheet. Also look for required letters of credit the school must post as collateral.

• Legal Status Under Trump 2.0: The first Trump administration replaced the Obama-era rule with a much stricter version that made it harder for students to receive forgiveness. No change in the second term yet.

Incentive Compensation Ban

• Description: This rule prohibits schools from paying commissions, bonuses, or other incentive payments to their admissions and recruitment staff based on their success in securing student enrollments. Its purpose is to prevent predatory, high-pressure recruiting tactics.

• Key Metrics: Monitor lawsuits, whistleblower claims, and government investigations related to recruiting practices. High marketing and admissions expenses as a percentage of revenue can also be a red flag for aggressive tactics.

• Legal Status: This is a core part of the Higher Education Act. It is active, but enforced by the department of education, which may no longer exist.

Financial Responsibility Standards

• Description: The Department of Education uses a set of financial ratios to calculate a single “Composite Score” from 0 to 3, which measures the school’s overall financial health.

• Key Metrics: The Composite Score is the single most important metric here. A score below 1.5 triggers heightened cash monitoring and oversight. A score below 1.0 means the school is not considered financially responsible and may need to post a significant letter of credit to continue receiving federal aid.

• Legal Status: It is active, but enforced by the department of education, which may no longer exist.

Program Participation Agreements (PPA)

• Description: A PPA is the master contract between a school and the Department of Education. To receive any federal student aid, a school must sign a PPA, agreeing to comply with all applicable laws and regulations. The Department can place a school on a provisional PPA, indicating heightened scrutiny.

• Analyst Metrics: The status of the PPA (fully certified or provisional). A provisional PPA is a major red flag, as it can restrict growth and signals the Department has serious concerns.

• Legal Status: Active, no changes to law yet.

Accreditation

• Description: Accreditation is a non-governmental, peer-review quality assurance process. An institution must be accredited by a recognized agency to be eligible for federal student aid. It is the foundational “license to operate.”

• Key Metrics: The accreditation status of the institution and its programs. Look for any “warning” or “show-cause” status from an accreditor, as this can signal serious operational or quality issues that could threaten the school’s existence.

• Legal Status: The requirement for accreditation would remain. However, the first Trump administration created a more permissive environment for accrediting agencies themselves. This trend will likely continue.

In summary, the main forces that for-profit colleges face are the business cycle (high employment is bad for business), free competition, and periodic government crackdowns.

A Post-Mortem of Corinthian College

Corinthian Colleges is a prime example of these cyclical patterns. It was founded in 1995 and went public in 1999. From 1999 to 2010 it bought 85 colleges and acquired 33. By 2010, it had 118 schools, $1.8B in revenue growing at 30% YoY and operating income by 180% YoY. And 5 years later it was bankrupt.

The corporate history of Corinthian Colleges has 4 phases. Growth (1999-2004), Stabilization (2004-2007), Recession (2007-2011), Death (2012-2015).

All COCO financial data from S&P Global. Unfortunately a few years are missing.

Growth (1999-2004)

Corinthian went public in 1999 with the express purchase of acquiring and improving for-profit schools. Naturally, during these early years, Corinthian College grew its campuses at a decent clip, typically at ~10x EBITDA, while also increasing attendance at its older campuses.

Campus changes

On January 18, 2000, we acquired substantially all of the assets of Harbor Medical College, which operated one college in Torrance, California, for approximately $300,000 in cash.

On April 1, 2000, we acquired substantially all of the assets of the Georgia Medical Institute, which operated three colleges in the greater Atlanta, Georgia metropolitan area, for approximately $7.0 million in cash.

On June 1, 2000, we acquired substantially all of the assets of Academy of Business College, Inc. which operated one college in Phoenix, Arizona, for approximately $1.0 million in cash.

On October 23, 2000, we acquired substantially all of the assets of Educorp, Inc. which operated four colleges in California, for approximately $12.6 million in cash.

On November 1, 2000, we acquired substantially all of the assets of Computer Training Academy, Inc. which operated two colleges in northern California, for approximately $6.1 million in cash. We closed one campus in April 2002 and combined the second campus with another campus in close proximity in June 2004.

On February 1, 2001, we acquired all of the outstanding stock of Grand Rapids Educational Center, Inc., which operated three campuses in Michigan and Illinois, for approximately $2.8 million in cash.

On April 1, 2002, we acquired all of the outstanding stock of National School of Technology, Inc., which operated three campuses in the greater Miami, Florida area, for approximately $14.4 million in cash.

On July 1, 2002, we acquired all of the outstanding stock of Wyo-Tech Acquisition Corporation, which operated two colleges in Laramie, Wyoming and Blairsville, Pennsylvania. The cash purchase price was $84.4 million and was funded through cash on hand and approximately $43 million provided from our credit facility. [This purchase price was 9.5x EBITDA

On January 2, 2003, we acquired substantially all of the assets of Learning Tree University, Inc. and LTU Extension, Inc., which operated two training centers in southern California, for approximately $5.3 million in cash of which $2.0 million was deferred subject to achieving certain operating performance criteria. We closed the two LTU training centers in May 2004.

On August 1, 2003, we acquired all of the outstanding stock of Career Choices, Inc., which operated 10 campuses in California, Washington and Oregon, for approximately $56.3 million, financed through a combination of available cash and borrowings from our credit facility. We combined one of the campuses in Washington with other campuses in close proximity in June 2004.

On August 6, 2003, we acquired substantially all of the assets of East Coast Aero Tech, LLC, which operated one campus in Massachusetts, for approximately $3.2 million plus or minus certain balance sheet adjustments, financed through a combination of available cash and borrowings from our credit facility.

On August 19, 2003, we acquired approximately 89% of the outstanding shares of common stock of CDI Education Corporation (“CDI”) through a tender offer to acquire all of the outstanding shares of common stock. As of October 7, 2003, we had acquired all shares of CDI for approximately $42.1 million and the assumption of approximately $10 million of debt and other liabilities. We funded the acquisition with available cash and borrowings from our credit facility. CDI operated 45 post-secondary colleges and 15 corporate training centers throughout Canada. In October 2003, we completed the acquisition of CMA Careers, Inc. located in Kitchener, Ontario, Canada. The intent to acquire this campus by CDI had been agreed to prior to our acquisition of CDI. We combined one of the CDI campuses with another campus in close proximity in April 2004. Subsequent to year ended June 30, 2004, we announced the expected closing of 10 campuses during fiscal 2005.

Effective August 4, 2004, subsequent to year end, we acquired substantially all of the assets of AMI International Training Center (“AMI”) for approximately $11 million, plus the assumption of certain liabilities of approximately $0.5 million. We funded the acquisition with available cash. AMI operates one campus in Daytona Beach, Florida that offers accredited diploma programs to prepare students for jobs as motorcycle, marine, and personal watercraft technicians. AMI’s specialized motorcycle technician and dealership management programs prepare students for positions with well-known dealerships such as BMW, Harley-Davidson, Ducati, Honda, Kawasaki, Suzuki, Triumph, and Yamaha. AMI had approximately 210 students as of July 30, 2004.

By 2005, Corinthian had 148 campuses, including 10 campuses in Canada scheduled to close during fiscal 2005, and 15 training centers, with more than 64,800 students, in 22 states and 7 Canadian provinces.

Key financials (2004)

• Revenues $804,283

• Gross profit: $385,003

• Operating income: $135,290

• Gross margin 47.8%

• Operating margin , 16.8%

• Diluted shares out 94.2M

• EV $2.2B

• EV/EBIT LTM 17

• EBIT Growth 15%

Regulatory Updates

• Federal Funding: Approximately 81.0% of the company’s revenues (on a cash basis) were derived from federal Title IV financial aid programs in fiscal 2004.

• 90/10 Rule: No institution received more than 90% of its revenue from federal student aid programs in fiscal 2004; the highest was 86.5%.

• Financial Responsibility: For fiscal 2004, all schools exceeded the DOE’s requirements for financial responsibility, with composite scores ranging from 1.8 to 3.0. The company’s consolidated score was 2.07.

• Cohort Default Rates: For federal fiscal year 2001 (the last year with final published rates), default rates for Corinthian institutions ranged from 2.7% to 21.2%. An institution may lose eligibility if its rate exceeds 25% for three consecutive years. Additionally, twelve institutions had Perkins program default rates over the 15% threshold for the 2002 award year.

Legal Updates

Notable legal proceedings during this period included:

• A putative class action lawsuit (Montoya v. Corinthian Schools, Inc.) was filed by a former instructor alleging that instructors were improperly classified as exempt from California’s overtime laws.

• Three putative class action lawsuits were filed by current and former students of Florida Metropolitan University (”FMU”) alleging that FMU concealed its accreditation status and that its credits were not transferable to other institutions.

• In 2004, various putative class action lawsuits were filed against the company and certain executives, alleging material misrepresentations and failure to disclose material facts about the company’s business, causing inflated stock prices.

• In July 2004, company representatives voluntarily met with the California Attorney General’s office and provided information regarding three previously settled lawsuits.

• A Qui tam lawsuit by a former employee was filed later in 2004, but the DOJ declined to intervene.

Corporate Restructuring and Strategy Shift (2005-2007)

As of June 30, 2007, Corinthian Colleges operated 110 schools in 24 states and Ontario, Canada, with a student population of over 62,115. The company’s facilities totaled approximately 4.8 million square feet.

From fiscal year 2005 to 2007, Corinthian Colleges began to run into issues with integrating its recent acquisitions, and began seeing brand image tarnishment due to its aggressive sales practices and associated lawsuits. During this period, the company shifted its strategy from rapid acquisition-based growth to focusing on operational efficiency and brand consolidation. The company significantly slowed its acquisition activity and new branch openings to better utilize the capacity it had built in previous years.

• Divestitures:

  • In November 2005, the company completed the sale of its corporate training division, CDI Education, which operated 14 locations in Canada.

  • By the end of fiscal 2005, the company had closed 11 CDI campuses and one training center in Canada as part of a “teach-out” process that began in July 2004.

  • During the fourth quarter of 2007, Corinthian decided to divest all CDI campuses located outside of Ontario, Canada, as well as the WyoTech campus in Boston. These locations were classified as “held for sale,” with the sales expected to be completed in fiscal 2008.

• Branding: The company began consolidating its various school brands under two national names: Everest and WyoTech. As of June 30, 2007, 65 of the company’s 110 schools were operating under the Everest brand and seven under the WyoTech brand. This process led to an impairment charge of $4.5 million in the fourth quarter of fiscal 2007 for trade names that would no longer be used.

Campuses:

Key financials (2007)

• Revenues $919,224

• Gross profit: $385,229

• Operating income: $26,198

• Gross margin 41.8%

• Operating margin 2.7%

• Diluted shares out 85.8M

• EV $1.4B

• EV/EBIT LTM 37

• EBIT Growth -40%

Regulatory Update

• Federal Funding: In fiscal year 2007, approximately 75.2% of the company’s revenues (on a cash basis) came from federal Title IV financial aid programs.

• 90/10 Rule: All institutions complied with the requirement that no more than 90% of revenue comes from federal aid; the highest institution received 87.2% of its revenue from these programs.

• Financial Responsibility: For fiscal 2007, all schools met the U.S. Department of Education’s (ED) financial responsibility standards, with composite scores ranging from 1.5 to 3.0. The company’s consolidated score was 1.7.

• Cohort Default Rates: For federal fiscal year 2004 (the last year with final data), student loan default rates for Corinthian institutions ranged from 3.7% to 17.5%. Additionally, 11 institutions had Perkins program default rates above the 15% threshold for the 2005 award year.

• Accreditation Issues: As of June/July 2007, four campuses were under heightened scrutiny from accreditors:

  • Everest College in San Francisco, CA was placed on
    probation by its accreditor (ACCSCT).

  • Everest Institute in Houston, TX was placed on
    probation by its accreditor (ACCSCT).

  • NST campuses in Miami and Hialeah, FL received a
    Show Cause order from their accreditor (ABHES).

  • In total, 20 colleges were on “reporting” status with their accrediting agencies, primarily concerning student completion and placement rates.

Legal Update

Corinthian faced several significant legal and regulatory challenges during and prior to 2007. The company established an aggregate reserve of approximately $7.2 million for all disclosed legal matters as of June 30, 2007.

• In 2005, The education department completed a report finding misrepresentation to students, breaches of fiduciary duty, intentional evasion of 90/10 requirements. Steve Eisman launched a short campaign here.

• California Attorney General (CAG): An investigation that began in June 2004 was settled on July 31, 2007. Without admitting wrongdoing, Corinthian agreed to a settlement totaling approximately $6.5 million, which included payments and debt forgiveness for former students. The company also agreed to stop enrolling students in 11 programs at nine California campuses.

• Florida Attorney General (FL AG): An investigation into Florida Metropolitan University (”FMU”) was resolved on August 21, 2007. The company denied any wrongdoing and made an immaterial payment to the FL AG’s office; no fines or restitution were required.

• Securities Class Action: A consolidated class action lawsuit filed in 2004 alleging material misrepresentations was dismissed by the district court in April 2006. However, the plaintiff appealed the dismissal to the Ninth Circuit Court of Appeals.

• Student Lending Inquiries: The Attorneys General of Illinois and Arizona requested information from the company regarding its relationships with private student loan providers as part of broader inquiries into student lending practices.

• Stock Option Review: A review by the SEC into the company’s historical stock option grants, which began in August 2006, was completed in July 2007. The SEC staff recommended no enforcement action. This review led to several derivative lawsuits against current and former directors and officers, which were consolidated in state and federal courts.

Growth, Acquisitions, and Restructuring (2008-2011)

As of June 30, 2011, Corinthian Colleges operated 122 schools across 26 states and Ontario, Canada, with a total student population of 93,457. Online education was a significant growth area, with student course registrations increasing by 27% in fiscal 2011 and serving approximately 26,100 exclusively online students.

During this period, Corinthian Colleges shifted from organic growth to a major strategic acquisition, while also divesting several campuses. The company significantly expanded its student loan programs to fill funding gaps left by the changing private loan market.

• Heald College Acquisition: On January 4, 2010, Corinthian acquired Heald Capital, LLC (”Heald”) for $395 million in cash. Heald operated 12 regionally accredited campuses, adding approximately 17,566 students as of June 30, 2011. The acquisition was funded with existing cash and $224 million in borrowings. [This was 9.5x Adj. EBITDA]

• Divestitures:

  • In February 2008, the company sold 12 Canadian schools located outside of Ontario.

  • In May 2008, the company completed the sale of the WyoTech Boston campus.

• Organic Growth: After a pause, the company resumed expansion by opening one new branch campus in fiscal 2010 and six new branch campuses in fiscal 2011.

• Private Loan Programs:

  • In fiscal 2008, after private lenders like Sallie Mae stopped offering subprime loans, Corinthian created a new “discount loan” program with Genesis Lending Services, Inc. (”Genesis”). Under this program, Corinthian acquired the loans and assumed the credit risk.

  • On June 29, 2011, Corinthian entered into a new agreement with ASFG, LLC (”ASFG”) to fund approximately $450 million in new student loans over the next two years. Under this program, Corinthian is obligated to repurchase any loan that becomes over 90 days delinquent.

Campus Changes:

In 2010 Corinthian acquired Heald Capital, LLC

Key financials (2011)

• Revenues $1,784,000

• Gross profit: $737,557

• Operating income: $143,491

• Gross margin 41.25%

• EBIT margin 7.87%

• Diluted shares out 84.7M

• EV $525M

• EV/EBIT LTM 4

• EBIT Growth -33%

Goodwill Impairment: In the second quarter of fiscal 2011, the company recorded a goodwill impairment charge of $203.6 million due to a decline in its market capitalization below its book value, driven by regulatory uncertainty.

Regulatory Update

The 2008-2011 period was marked by a dramatic increase in regulatory oversight and new rulemaking by the U.S. Department of Education (ED) and Congress, which significantly impacted the entire for-profit education sector.

• New ED Regulations (2010-2011): The ED introduced sweeping “program integrity” rules, with the most significant being:

  • Gainful Employment: New rules effective July 1, 2012, require educational programs to meet specific debt-to-income and loan repayment rate metrics to remain eligible for Title IV funding. Programs that fail for three out of four years will lose eligibility. The company noted it could not predict which programs would fail but expected downward pressure on tuition and potential limits on enrollment.

  • Incentive Compensation: The elimination of 12 “safe harbors,” effective July 1, 2011, broadly prohibits basing employee compensation, in any part, on success in securing student enrollments. This forced the company to change its compensation practices for admissions and other staff.

• Increased Scrutiny:

  • Starting in 2010, Corinthian became the subject of investigations and document requests from the Attorneys General of
    Florida, California, Massachusetts, New York, and Oregon regarding its business practices.

  • The Senate HELP Committee launched a series of hearings and broad information requests to approximately 30 for-profit education companies, including Corinthian, starting in June 2010.

  • The Government Accountability Office (GAO) conducted an undercover investigation that included two Corinthian campuses and issued a report in August 2010 that characterized some recruiting practices as “deceptive or otherwise questionable,” a characterization Corinthian disputed.

• Federal Funding (90/10 Rule): For fiscal 2011, approximately 80.2% of the company’s U.S. revenue was derived from Title IV funds under temporary relief rules. Without that relief, the figure would have been
  88.5%, with nine institutions exceeding the 90% threshold. To ensure compliance, the company delayed drawing down $87.0 million in Title IV funds at the end of fiscal 2011.

• Accreditation Issues:

  • Everest College Phoenix was placed on probation by its accreditor (HLC) in May 2009, and this was elevated to a “Show-Cause Order” in November 2010, requiring the school to prove why its accreditation should not be removed. A final decision was pending a November 2011 board meeting.

  • Everest Institute in Decatur, GA was also placed on a “Show Cause” order by its accreditor (ACCSC) in December 2010 for failing to meet student achievement outcomes.

  • As of June 30, 2011,
    25 colleges were on “reporting status” with their accrediting agencies, primarily for student completion and placement rates.

Legal Update

Intensified regulatory scrutiny coincided with a wave of new litigation from shareholders and students.

• Securities Litigation: A new putative class action lawsuit was filed on August 31, 2010, against the company and several current and former officers, alleging material misrepresentations about the business between 2007 and 2010. This was followed by related shareholder derivative complaints.

• Qui Tam (False Claims Act) Lawsuits: Of three lawsuits filed in 2007 alleging improper admissions compensation practices, two were dismissed. However, in August 2011, the Ninth Circuit Court of Appeals reversed the dismissal of the third case (
  U.S. ex rel. Lee v. Corinthian) and sent it back to the district court, allowing the plaintiff to amend their complaint.

• Student Class Actions: The company faced an “unprecedented increase” in putative class action lawsuits by former students during fiscal 2011. These lawsuits, filed across the country, generally alleged misrepresentations regarding accreditation, transferability of credits, and job placement outcomes, often citing the ongoing government hearings and investigations. The company’s legal strategy was to compel these cases into individual arbitration based on enrollment agreements.

• Later in 2010, the company was subpoenaed by the state attorney general of Florida, California, New York, Oregon and Illinois. Around this time they also received negative comments from one of its accreditors, closing 10 campuses.

Restructuring and New Student Loan Program (2012-2013)

As of June 30, 2013, Corinthian operated 111 schools in 25 states and Ontario, Canada, with a student population of 81,284, a decrease of 10.5% from the prior year. The decline was largely attributed to the elimination of federal aid for new “Ability to Benefit” (ATB) students who lack a high school diploma. Online education remained a key area, serving approximately 27,740 students.

During this period, Corinthian Colleges focused on managing its existing schools rather than expansion. The company continued to divest underperforming campuses and launched a new, large-scale private student loan program to ensure students had access to funding.

• Campus Divestitures and Closures:

  • In fiscal year 2013, the company completed the “teach-out” (closure) of six campuses across the U.S. and Canada, including locations in Arlington, VA; Decatur, GA; and London, Ontario.

  • Also in fiscal 2013, Corinthian completed the sale of four Everest schools in California to BioHealth College, Inc., paying the buyer $2.3 million to assume operations.

  • The WyoTech campus in Sacramento, CA, was taught out after a sale did not materialize.

• Acquisition: In August 2012, Corinthian acquired QuickStart Intelligence Corporation, an IT corporate training company, for $13.3 million in cash. The primary goal was to adopt QuickStart’s short-term courses to provide additional non-Title IV revenue sources to help schools comply with the 90/10 rule.

• New Student Loan Program:

  • During the second quarter of fiscal 2012, the company fully transitioned to a new private loan program managed by ASFG, LLC (now Campus Student Funding, LLC).

  • The agreement with ASFG commits the firm to purchase up to $775 million in new student loans through June 2015.

  • Under the program, Corinthian is obligated to repurchase any loan that becomes over 90 days delinquent, exposing the company to significant credit risk. Total losses on these loans are estimated to be approximately 50% of the amount funded.

Campus Changes

Key financials (Q3 2013-Q2 2014)

• Revenues $1,514,000

• Gross profit: $587,420

• Operating income: $36,561

• Gross margin 38.77%

• EBIT margin 2.37%

• Diluted shares out 88M

• EV $261M

• EV/EBIT LTM 7

• EBIT Growth -50%

Regulatory Update

Intense regulatory scrutiny from federal and state agencies continued to define Corinthian’s operating environment, with a particular focus on student outcomes, financial responsibility, and recruiting practices.

• Intensified Investigations:

  • Since October 2010, the Attorneys General of eight states, including California, Florida, Massachusetts, and New York, have requested extensive documents regarding the company’s business practices.

  • In June 2013, the
    Securities and Exchange Commission (SEC) began an investigation, requesting documents related to student recruitment, attendance, placement, loan defaults, and compliance with Department of Education (ED) financial rules.

  • In April 2012, the
    Consumer Financial Protection Bureau (CFPB) served the company with a Civil Investigative Demand to determine if it was engaging in unlawful practices related to private student loans.

  • ED’s Office of Inspector General (OIG) subpoenaed the company’s Jonesboro, GA campus regarding employment and placement rates in April 2011. This matter is being supervised by an Assistant U.S. Attorney focused on False Claims Act cases.

• Financial Responsibility Score:

  • On August 16, 2013, the ED notified Corinthian that its fiscal 2011 “composite score” was 0.9, below the 1.0 minimum, largely due to ED treating a $203.6 million goodwill impairment as an operating expense. A score below 1.0 can trigger a requirement to post a letter of credit.

  • ED determined the company’s fiscal 2012 score was 1.5, meeting the minimum, but stated it was still reviewing certain debt related to the company’s student loan program.

  • The company’s lenders granted a waiver for the fiscal 2011 score, which could have been considered an event of default under its credit facility.

• “Gainful Employment” Rule: The most punitive parts of the rule, which would have tied Title IV eligibility to graduates’ debt-to-income ratios, were struck down by a federal court on June 30, 2012. However, the disclosure requirements remained, and ED announced its intent to re-introduce the rule through a new rulemaking process beginning in September 2013.

• 90/10 Rule: In fiscal 2013, two of the company’s 37 institutions exceeded the 90% threshold for revenue from Title IV programs. Since it was the first time for these schools, they did not lose eligibility but were placed on provisional certification for two years. Overall, the company derived approximately 84.8% of its net U.S. revenue from Title IV programs.

• Cohort Default Rates: The company showed significant improvement in student loan default rates. The draft three-year Cohort Default Rate for the 2010 cohort was 19.0%, a substantial decrease from the 28.0% rate for the 2009 cohort. No institutions exceeded the 30% threshold for the 2010 cohort.

Legal Status

Corinthian continued to face a number of lawsuits from former students, employees, and shareholders.

• Qui Tam (False Claims Act) Lawsuit: In a case alleging the company violated the incentive compensation ban, the U.S. District Court dismissed the First Amended Complaint with prejudice on April 12, 2013. The plaintiffs (relators) have since appealed this dismissal to the U.S. Ninth Circuit Court of Appeals.

• Securities Class Action: A class action filed in 2010 alleging misrepresentations about the company’s business was dismissed with prejudice on August 20, 2012. The plaintiffs appealed the dismissal. A new securities class action was filed on June 20, 2013, covering the period from August 2011 to June 2013.

• Student Litigation: The company continued to defend against numerous putative class action lawsuits from former students alleging misrepresentations regarding programs, accreditation, and job prospects. Most of the lawsuits filed in fiscal 2011 had been dismissed, but several remained active, with the company seeking to compel them to individual arbitration.

• In 2012, the education department began restricting Corinthian’s access to Title IV funds and in 2013, Vice President Harris, then CA attorney general, accused Corinthian of securities and consumer fraud, and won a $1.1 billion judgment three years later (2016).

• In 2018, an FTC lawsuit was announced.

Summary

When I consider the rise and fall of Corinthian Colleges, I see 2 interesting inflection points. The first is the end of the growth narrative. Once growth fell below the historic 30% in Q2 of 2005, the market cap of the company halved. The second moment is the company’s bankruptcy, when the equity value went to 0. An understanding of these moments and the quarters preceding them is key to be able to understand the downside risks of this industry.

Inflection Point 1: The End of Growth — Why Did Growth Stop, and Could We Have Seen It Coming?

Corinthian’s first major inflection point came in Q2 2005, when revenue growth slipped below its historical 30% trajectory. On the surface, the company was still expanding, but the underlying economics had already begun to break down. The easy growth of the early 2000s—driven by acquisitions, rapid campus openings, and aggressive enrollment tactics—was no longer sustainable.

Declining enrollment growth vs. higher advertising / recruiting spend

Enrollment peaked in the mid-2000s (roughly ~64.8k students reported around FY2004) while corporate marketing and admissions spending increased. This indicated that new enrollments were harder to acquire, that there was diminishing incremental yield per marketing dollar.

That’s why key metrics in this industry include quarterly marketing & recruiting spend / net new students (CAC per enrolled student) and marketing & recruiting spend / revenue.

In COCO’s case, CAC per enrolled student was rising >20% YoY while enrollment growth fell below management’s historical target ( <30%). Marketing/recruiting spend as a percent of revenue rising 2-3% YoY was also a warning.

Rising dependence on Title IV (approaching the 90/10 cap)

In the early 2000s Corinthian’s Title IV share of revenue was already very high (~81% in FY2004) and some campuses reported 85–87%+ at times. Filings around this time show management delaying draws at year-end to stay under the 90% test—an administrative sign of constraint.

A key metric to look out for is Title IV receipts / total revenue companywide and by campus every filing period, and always monitor the 90/10 calculation notes in MD&A. Is the calculation getting more generous, etc.

Early lawsuits and multi-state AG investigations (reputational/regulatory signalling)

By 2004–2005 Corinthian was the subject of multiple state investigations and student class actions (e.g., inquiries from California and Florida AG offices). These early legal actions were not yet massive dollar events, but they were a clear sign of systemic recruiting problems.
Litigation and AG attention are high-signal: they predict future regulatory scrutiny, accreditors’ actions, and borrower claims (BDR).

An analyst should always scan company 8-K filings for legal updates, read the legal-proceedings note in 10-K, and note any related state AG press releases. Are investigations single-state vs. multi-state? Also look out for material increases in legal reserves (+1-2% of revenue)

Accreditation warnings, show-cause orders, and program closures (quality erosion)

Starting in mid-2000s, a growing number of COCO campuses moved onto “reporting” status with accreditors; over the next few years some campuses received probation or show-cause notices for low completion/placement rates. Accreditation problems began to show as early warning notes in filings and accreditor communications.
An analyst should always review accreditor notices, the 10-K accreditation section, and campus-level disclosures (transferability, placement metrics). Track the count of campuses in “reporting/probation” status, and where they end up. Look out for any campus on probation or show-cause; >10% of campuses in reporting status; accreditors requesting teach-outs or program suspensions.

Inflection Point 2: The End of the Company — Why Did It Fail, and Could We Have Seen It Coming?

The second inflection point came in the years leading up to Corinthian’s 2015 bankruptcy. By that point, the company had lost the confidence of its regulators, accreditors, and investors. The same forces that fueled early growth now became liabilities.

As scrutiny intensified, the Department of Education placed Corinthian under heightened cash monitoring, delayed Title IV disbursements, and eventually froze funding altogether. The company’s financial responsibility composite score fell below the 1.0 threshold in 2013, signaling distress. In parallel, lawsuits and settlements eroded liquidity and investor trust. The company’s pivot to self-financed private loan programs, where default rates exceeded 50%, was a desperate attempt to replace lost federal cash flow.

The company didn’t fail because demand for education disappeared, it failed because its business model was predicated on regulatory tolerance and an unsaturated end market. When either disappears, the economics of the model collapse.

An analyst should be tracking a Composite Score < 1.5 or increasing letters of credit. Take note of increasing Provisional Program Participation Agreements (PPAs) and probationary accreditation. Track mounting legal reserves. Measure exposure to private student loans or loan buyback obligations. Check for any federal funding delays or restrictions.

In this case, once federal funds slowed and the Department of Education signaled noncompliance, Corinthian’s fate was sealed. The company could not survive without access to Title IV funding, and no private market would refinance it under those conditions. And yet at each step equity investors remained optimistic, far into these mounting regulatory pressures.

Conclusion

The for-profit education industry can look attractive at times, but as Corinthian’s story shows, high returns are transient. Eventually one or more of those cycles turns, and tailwinds at your back quickly turn against you.

Corinthian’s collapse shouldn’t be a surprise. It was due to occur, because for-profit colleges live and die by three forces: macro-economics, competition and regulatory action. A wise analyst must analyze all three of these forces to understand this industry.

I hope this write up provides you with a better understanding of the for-profit industry at the company level. I always find post-mortems of failed companies very illustrative of the downside risks to be aware of, and perhaps for a few of you, it might lead to some attractive short opportunities as you notice similar leading indicators of a firm’s decline and collapse in the future.

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The Contran Group is made up of parent company VHI, which has inter-related subsidiaries NL, COMPX, and KRO. Valhi is majority-controlled by the Contran Corporation, a privately held investment vehicle which owns 91% of the stock (25.9M shares). Harold Simmons created this strange corporate structure over the course of the 90s-early 2000s. He died in 2013, leaving his shares to a trust. Control of the trust ultimately resides with heirs of the founder Harold: namely, Lisa K. Simmons and related family trusts. Successor trustees are bound to vote with Lisa (age 63) through April 22, 2030 at which point they are unbound.

The ownership structure of VHI is complicated. So I recommend starting at the bottom and working your way up.

On Seeking Alpha I have previously covered and set price targets for CIX (PT: $23.78, now $23.65) and KRO (PT: $5.55, now 6.23).

VHI's land development subsidiaries: Basic Management, Inc (BMI) and Landwell

BMI and LandWell are involved in the land development of the Cadence master-planned community in Henderson, Nevada, which is approximately 2,100 acres. They have very little land left for sale. As of June 30, 2025, 20 saleable acres in the community remain. A contract for the remaining 20 acres is currently in escrow with a home builder, and the sale is scheduled to close by the end of 2025. Adjacent to Cadence, Landwell owns 15 salable acres (in 2 parcels) for commercial and light industrial use. These 2 parcels are also under escrow and expected to close in the third quarter and fourth quarter of 2025.

Valhi's balance sheet lists Landwell's land held for development at a value of $5.9 million. These are marginal values in the overall valuation, so the value of Landwell is essentially already reflected on the balance sheet, which includes the future recovery of a TIF with the city of Henderson. Per the 10-Q, "The maximum reimbursement (labelled as OPA) is $209 million. We have collected $39.3 million to date and expect to reach the maximum over the next 7 to 10 years." In the latest 10-Q, Valhi levels this under "Note receivables - OPA" under the "Other noncurrent assets" section of the company's financial statements. As of June 30, 2025, the value of these receivables was $102.8 million. So it appears that the land development subsidiaries' value is accurately reflected on VHI's balance sheet.

NL Industries Valuation

NL is essentially a holding company that holds shares of CIX, VHI, KRO.

NL is the corporate remnants of Dutch Boy Paint, which was an American paint producer that manufactured lead paint from 1907–1978. NL continues to be burdened by Dutch Boy's environmental pollution.

In order to value NL and VHI, I think the best approach is a deconsolidated net cash position. That means consolidating the balance sheets and seeing what the NL and VHI holding companies actually own. Consider the off-balance sheet liabilities and capitalize the corporate costs (quite high at both for being just holding companies).

Deconsolidated valuation of NL.

In order to find a figure of net cash (or debt) at the parent level, we deconsolidated by subtracting out what was listed on CIX's balance sheet from NL's stated balance sheet, leaving us with the relevant cash and debts to state a net cash figure. Accrued liabilities are effectively debts, so I include those, including pensions and environmental liabilities.

Thus, deconsolidated net cash for NL is $17.1 million.

Consider the Off-Balance Sheet Liabilities at NL.

The balance sheet includes $108 million in environmental liabilities for ~30 sites. This includes a ~$30 million allowance that the company is holding for future claims or settlements for the existing sites that may or not be owed.

However, it also has 5 additional sites that we can expect future cash liabilities for, but it is not "able to quantify the expected value" of these claims. These claims could be massive. Management does not disclose what these sites are, so you could stop there. However, after some research I have found what these 5 sites may be. These sites have active litigation but not confirmed settlement payments yet.

Based on publicly available legal and regulatory records, here are five sites that are likely among NL Industries' unquantified liabilities.

One site is a Colorado mine where a plant leaked sulfuric acid into a nearby river. The mine operated before 2000 and the contamination involves sulfuric acid and heavy metals such as arsenic, manganese, lead, and zinc. Cleanup costs for similar mine sites can range from millions to hundreds of millions of dollars. I will ballpark this to $25 million.

Another potential liability is a former titanium dioxide facility on the Raritan River in Sayreville, New Jersey, which ceased operations in 1982. A federal court has found the company responsible for contributing to the pollution. The expected contamination includes arsenic, copper, lead, nickel, and zinc in the riverbed sediments. A similar NL New Jersey site involving lead had a global settlement had a total cost of nearly $152 million (of which $52 million was NL's share). TiO2 isnt nearly as dangerous as lead, so I would discount this to $12 million.

A third site is a former secondary lead smelting facility on Penns Grove-Pedricktown Road in New Jersey. The facility operated from 1972 to 1982, recycling lead from spent automotive batteries. The site contains an on-site landfill with slag and contaminated soils. Cleanup costs for similar secondary lead smelter sites have ranged from approximately $6.4 million to $21 million.

There is also a former plant in Colonie, New York, that made products for military use with uranium, lead, and other chemicals between 1958 and 1982. A project is currently underway to address health concerns for former employees and nearby residents. Cleanup costs for similar sites with uranium and lead contamination have ranged from approximately $63 million to $125 million.

Finally, the company's legacy as National Lead Company includes a former secondary lead smelting facility in St. Louis Park, Minnesota, which operated from approximately 1934 to 1981. The site was first investigated by the EPA for contamination of the soil and groundwater with lead in 1980. Cleanup costs for similar secondary lead smelter sites have ranged from approximately $6.4 million to $21 million.

Obviously costs vary based on the extent and nature of the contamination, which makes it hard to ballpark without knowing more, but let's just take the midpoint of historic costs for similar sites ($25M + $12M + $13.5M + $94M + $13.7M). When we do this, we should find a ballpark figure of $158.2 million, which I use in my model or you could use a range of $50-250 million.

Backing out the income statement. NL parent averages excess corporate costs of 11.8 million typically. Capitalized at 8%, That adds 147.50M in negative enterprise value.

Then they have their equity holdings

10.8 million shares of CIX

35.65 million shares of KRO

1 million shares of parent company VHI. (This is a circular relationship, but here I used the share price that I derived later).

At the prices I have established earlier, we get the following:

Assuming my fair values above are correct, we arrive at a fair value of $3.66 for NL. At a current share price of $6.28 it is trading at a 71% premium to fair value.

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Valhi Deconsolidated

The low valuation of NL further compounds on VHI. Once we account for the fair value of NL, we can work out the fair value of VHI.

Based on deconsolidated balance sheets of VHI - NL - KRO, we find that parent VHI has net cash of 128M.

Add in the 58 million shares of KRO, 40.4M shares of NL, and ongoing annual corp expenses of 23.4 million capitalized at 8%, and we can find the intrinsic value of VHI shares.

VHI shares are 55% overpriced.

In conclusion, while NL and VHI appear cheap on many value screens (like PE), once we consider NL's off balance sheet environmental liabilities, ongoing corporate expense at the parent level, and the intrinsic value of their shares held, any apparent discount disappears. There isn't even an opportunity for major shareholder action to unlock value until 2030. Buyer beware.

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Disclaimer: The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.

As of 9/19/2025, I do not hold a position in these securities.

The stiffest competition that you could compare yourself to as an active money manager is the S&P500. With the S&P you can own a piece of the top 500 publicly traded American business, and so you are entitled to their future cash flows. It is a bet on the rising average productivity of the overall American economy. It's a good bet. It's one that Buffett recommends for 90% or more of investors. It’s performed very well historically, and is by definition diversified, reducing your risk as an investor.

"In my view, for most people, the best thing to do is to own the S&P 500 index fund," - Buffett

"Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees."- Buffett

From 1928 through 2023, the S&P 500 annualized nominal return (including reinvested dividends) is ~10% per year. This 10% is nominal, not including inflation or fees. After factoring in 3-4% inflation, real returns average closer to 6–7% historically.

However, beating the index is incredibly hard. 90% of money managers fail to do so.

I was talking with my Mom about this, and she asked "Why is that?"

3 reasons why money managers fail to beat the index so regularly:

1. Most active money managers run diversified funds. These funds are so diversified (20+ stocks) that they are roughly equivalent to an index fund. However, they also have an annual fee of 0.5-2% on all money under management. For example, if they were to just invest in a snp500 equivalent, fees alone would reduce your gross returns from 10% to 8%.

Over 40 years, this creates a huge gap in compounding.

• 8% CAGR (investing with AUM 2% management fees) : $10,000 grows to $217,245

• 10% CAGR: $10,000 grows to $452,593

A 2% fee more than halves your final investment value - a strong argument for avoiding high-fee investments and maximizing consistent returns.

This broadly means that any fund that charges AUM fees and that is broadly diversified will not beat the index over any significant period of time.

“Diversification may preserve wealth, but concentration builds wealth.” - WEB

2. Active money managers over manage.

Clients expect money managers to drive high returns. Clients expect that this is done by making many stock purchases, and like to see that their money manager is "busy". After all, the more work done, the higher the return, right? Many money managers oblige (consciously or subconsciously) and buy and sell stock frequently. However, transaction costs are a significant headwind.

Jack Bogle (2014) estimated total transaction costs of 1.44% annually for actively managed funds, broken down as:

• 0.5%–1.0% from trading costs

• 0.5%–1.0% from hidden market impact and timing costs

These transaction costs partially exist because the stock market is rigged against traders. On most exchanges, every time you make a trade, you lose a little of your investment, because it is front run by your brokerage who is profiting off of your trade. (This is a major reason why one should not day trade).

It’s a shame that we allow this type of rent seeking on such a massive scale, and people seem to be fine with it. But I digress.

In addition, over the past 10 years, the average actively managed large-cap mutual fund experienced a tax cost of 2.09% annually.

In total these costs add an average of 3.5% in drag on most funds being actively managed.

“It's like Babe Ruth at bat with 50,000 fans and the club owner yelling, 'Swing you bum!” - WEB

3. Over any 10-year period, less than 20% of individual stocks outperform the broad market index. This is the Pareto Principle at work.

An index fund by definition will always include these high performers. If hand-picked funds are created randomly (essentially true), then 80% of these hand picked funds will underperform, because they do not include sufficient concentration in the high performing stocks. This is generally what we see in fund results.

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So, let's invert.

If I wanted to find an investor that I was sure would not beat the index, what would I look for?

1. A money manager with a broadly diversified portfolio, and fees that are based on AUM, and not performance.

2. A money manager who trades often. Not holding any given investment for at least one year.

3. OR a money manager who is highly concentrated, but makes the wrong choices.

90% of fund managers fall into one or more of these categories.

What to look for in a money manager

Okay, now let's in-invert (???).

If we wanted to find a successful money manager what would we look for?

1. A money manager with a concentrated portfolio, and fees that are not based on AUM, but on performance.

Michael Burry did not take fees of any kind (I wouldn't expect to find this again).

Warren Buffett only took 25% of any performance he made above 6%, essentially the excess he made above the snp500 benchmark. (Few fund managers choose this route, but the ones that do drive results or starve.) This is the fee structure to look for when choosing a money manager.

2. One that trades infrequently.

I have found that concentrated portfolios tend to force the investor to invest for the long run. If they had to choose a handful of companies, they better be ones that will exist 10 years from now.

3. A money manager who is concentrated, and makes the right choices.

This is easier said than done. But you can see this through historical performance. If you don't have that you can also anticipate this based on their investing philosophy. If they try to buy securities for less than they are worth (value investing) that is a good sign. If they try to understand the business they are investing in deeply, that is essential.

In short, you are looking for someone that has internalized these 4 principles:

1. A stock is part ownership of a business.

2. Price is what you pay, value is what you get.

3. A bird in the hand is worth two in the bush. - Aesop

4. The value of a stock is in the cash flows it will produce between now and judgement day (discounted to present value).

Beyond that there are many different temperaments that can do well. Long term investors that understand competitive forces extremely well, for example. Or contrarian investors that can see when the market is pricing a security wrong. There are many paths to value, but a few core principles to look for.

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In this article I cover 11 names: KRO, CC, TROX, DOW, LYB, HUN, OLN, WLK, MAGN, SLVM, MERC

The story for the industry since 2014 has been one of massive growth of Chinese production capacity, which has been brutal for western producers. Chinese companies have been able to make a major impact on western industry due to their strong government support, vertical integration, cheaper labor and cheaper oil (coming from Russia).

Note: I don't invest in China, so those companies are not covered here.

In terms of the Western producers. Macroeconomics have been very poor lately, basically all of these companies have been hit by a triple-whammy:

1. Higher interest rates in the US. This has slowed industrial production and more importantly the construction sector. Titanium oxide is used heavily in exterior home paints. Chemicals like polyols, epoxy and PVC are used heavily in siding and insulation.

2. The Chinese economy has slowed as well (especially the construction sector).

3. The war in Ukraine has increased energy and feedstock prices in Europe. western sanctions on Russia have pushed cheap oil supply to India and China. Oil is a key feedstock for Chinese chemical production (specifically epoxy), while natural gas is preferred in the West.

For all these reasons, pessimism is very high for most of the chemical sector and there seems to be no sign of improvement. In my experience, when things seem hopeless, that's a good time to buy the bottom of the cycle. The cycle eventually turns.

Titanium Oxide (TiO2)

I have previously written up the titanium dioxide market so I won't spend too much time on background here. My write-up on Value Investor’s Club is a good place to start. Briefly, titanium oxide is the opaque pigment that is in all things white. In comes in varying chemical structures and quality. Western producers create a higher quality pigment using a higher quality process and higher quality ore. Notably, these higher quality ores have been in short supply in recent years.

KRO, CC - HOLD

KRO takes titanium ore and processes it into titanium oxide pigment. It is essentially a refiner. I don't see much upside for KRO when the cycle turns, as historically ore prices rose with final titanium oxide pigment prices proportionally, limiting margin improvement for refiners like KRO. This short report on KRO was very clear on this point, and the market has been overly optimistic and has historically ignored this (and in retrospect, under-estimated Chinese competition). I highly recommend you read it.

CC is also a refiner of titanium oxide, but it is more diversified than KRO, also having divisions to do with refrigerants, and performance materials. This report on CC is a good starting place. It points out major regulatory changes in the refrigerant business (switching from Freon to other chemicals) and the data center tailwinds that would benefit CC going forward. However coming with that segment is significant environmental liability. This one is similar KRO, I don't see much upside for the TiO2 segment. And don't know enough to intelligently underwrite the refrigerants business.

TROX - Speculative Buy

TROX is the most interesting of the bunch. I wrote-up an article on VIC about it (DM/ Email me for the full article).

Here is my thesis:

1. TROX is vertically integrated, and has operating and financial leverage, providing a significant benefit when the cycle turns. This is not appreciated enough.

2. Significant anti-dumping measures and tariffs are targeting Chinese dumping. These are taking effect in Europe, India and Brazil.

3. These measures are making a significant impact. Chinese TiO2 exports were down 25% year over year in June. Industry analysts report that supply rationalization is now taking place in China.

4. Western producers have rationalized over the past 10 years, there now is a much smaller production base in the west.

5. TROX is beginning to mine into a higher quality ore deposit, reducing their production costs and ending their recent history of high capex spending to develop that deposit.

6. Management is also executing a turnaround plan, targeting 385Mn in EBITDA-capex for 2026 and by my estimate 215Mn in net income.

7. Meanwhile the market is pricing in a high bankruptcy risk due to low liquidity and high debt. However there are no major covenants in breach (covenant light) and it looks like they should be cash flow positive over the next 2 quarters.

8. Based on returning to the midcycle EBIT (445Mn) alone, I am underwriting a 185% equity appreciation. There are also other upside optionalities to consider:

• (a) Reaching full utilization of production lines.

• (b) Monetizing their rare earth byproducts by EOY 2025.

• (c) A repeat of the 2022 boom, pent up supply + limited supply base.

Risks:
- Highly levered, but covenant light.

- Maturities are due in a wall in 2029. About half are variable rate, so there is interest rate risk on those.

- Chinese subsidies for industry, loosening anti-dumping measures

- Recession (though it feels like chemicals have already been in one for some time).

Because it is a highly levered cyclical at trough earnings, this is my most speculative investment. I have a stop-loss in place here.

Chemicals

DOW - HOLD

DOW is involved in plastics, Industrial Intermediates and performance materials.

Midcycle EBITDA should be 7Bn. With an average capex spend of 2Bn, D&A of 2.8Bn, working capital costs of 0.5Bn taxes of 21%, and the structural benefits of their headcount reductions, portfolio optimizations of 0.5Bn, I think midcycle adj. EBIT is around 4Bn. EV is 31Bn. M/C is 17.8Bn. So that's about a 50% upside. Based on management's guidance, it will take 2 years to get there as this trough is dragging on much longer than any in recent history with no end in sight. After cutting their dividend, they have sufficient liquidity to get through to the other side.

Management is doing a few things to improve the company, which is where I get my 0.5Bn in portfolio optimizations.

Closure of 3 underperforming European plants.

Reducing headcount.

Closing unprofitable production lines.

Selling non-core JV - DowAksa.

Also consider that they have:

Deferred 1Bn in 2025 capex.

Raised 2.4Bn from asset sales (USGC infra deal with Macquarie).

All in all it is a reasonable cyclical bet, but doesn't meet my hurdle rate.

LYB - HOLD

LYB is similar to DOW. It is involved with petrochemicals like Olefins and Polyolefins, styrene. propylene oxide, polymers.

Average big corporate management, they are doing a very similar playbook: Taking portfolio actions, including asset sales and deferred capex investments. Management guides to an incremental $1.1 billion in cash flow from here through 2026. About half of that seems to be permanent cost reduction.

Midcycle EBITDA has been 6Bn. Capex 2Bn, D&A, 1.2Bn, taxes 0.8Bn, portfolio optimizations of 0.5Bn. This all gives us a midcycle adjusted EBIT of 3.7Bn. EV of 29Bn, MC of 19Bn. I see 40% upside.

Huntsman - HOLD

Huntsman has great management with high insider ownership.

They have been moving downstream to higher margin and value businesses. I like this strategy, it makes them more profitable, and "stickier" with their customers. They sold their Titanium Dioxide business via IPO in 2017, sold their commodity chemical intermediates and surfactants business in 2019, and sold its textiles business in 2023. With the proceeds it paid down debt and bought back stock.

The company is now involved in polyurethane (foam) which is used in products (i.e. A/C) or insulation (like in homes). As well as in Performance Products, Advanced Materials, and Textile Chemicals (dyes, etc.).

Valuation:

With a midcycle EBITDA of 700Mn, Capex of 200Mn, a 21% tax rate, I arrive at a mid cycle adj. EBIT of 395Mn, on a 3.4Bn EV and 1.9Bn M/C, that would be a 27% appreciation.

OLN - BUY

Is a sort of marginal/merchant producer (and the largest North American producer of) Chlor-Alkali Products (“CAP”) namely Chlorine and sodium hydroxide

"Simplistically, Cl2 demand is tied to housing and NaOH demand is exposed to general industrial production. Since Cl2 and NaOH are produced in fixed ratios, strong housing markets historically lead to PVC production increases which in turn lead to an oversupply of NaOH. However, in a weak housing market, as PVC volumes go down CAP production is curtailed to reduce the surplus of Cl2 (a toxic gas that is difficult to store and transport), which constricts NaOH supply."

" In 2021-2022 OLN began articulating a “value over volume” strategy. OLN reduced its output to keep Cl2 and NaOH prices higher in the cyclical trough. So it has significant operating leverage available when the cycle turns.

OLN also has an epoxy business. This makes sense, because key ingredients for epoxy are derived from Cl2 and NaOH. However Epoxy too is in a downcycle.

OLN also owns Winchester, which makes up ~35% of all US ammo sales. Guns and ammo are also in a down cycle, with a Republican president in the White House.

I highly recommend this write-up for more information.

Valuation:

With a midcycle EBITA of 1500Mn, capex of 275Mn, working capital expenses of 150Mn, a 21% tax rate, I find a midcycle EBIT of 817Mn, with an EV of 5.4Bn, and market cap of 2.6Bn, I see over 100% upside to the equity. However, keep in mind there are 3 cycles we are dealing with here, so it may take longer for these to align beneficially.

WLK - BUY

Westlake has some of the lowest debt in the industry, and some of the highest quality management. It is ~72.3% owned by the Chao family. It is significantly vertically integrated from ethylene and chlor-alkali through to PVC and building products, and so is cost advantaged in its production.

It trades at a PE of 9, and historically compounds at a 15% CAGR through the cycle. In my mind, I don't value it like a cyclical, instead I think it is a fairly priced compounder. If you think the bottom of the cycle will go on longer, or you expect a recession soon, then WLK would be in a good spot to take advantage of its highly levered competition.

For more information, I recommend this short write up.

Honorable mention for a Materials Play - Magnera - Speculative Buy

Magnera was formed on November 4, 2024, through a merger between Glatfelter Corporation and the nonwovens & films business of Berry Global (HHNF), structured as a Reverse Morris Trust transaction. It began trading on the NYSE on November 5, 2024

The company is the world’s largest specialty materials and nonwovens firm, with over 46 manufacturing facilities and serving over 1,000 customers.

Kingdom capital has covered this one best, you can read their work on seekingalpha, it is very good.

The short story is that this is a cyclical company with a short track record (and recent historical results have been poor).

This gets us 440Mn in EBITDA from the HH&S segment, plus 100Mn in contribution for the Glatfelter segment. They are also aiming for 55Mn in synergies by 2027. D&A averages about 120Mn. Capex as well. Tax rate of 21%.

Based on that I think midcycle operating income should be 330Mn, at an EV of 2.3Bn and a market cap of 473Mn. All together it is now selling at 7x midcycle EBIT. and 3x net debt to midcycle EBIT. I find the upside for the equity to be about 2-3x once the cycle turns. '

Even through the cyclical trough the company is cash flow positive, and has 500Mn in liquidity. Also its maturities are spread out longer than TROX, but there are tougher covenants and less optionality on the upside.

Just Like TROX this is a highly levered cyclical so tread with caution.

Dishonorable mentions - SELLs

A couple more in the paper industry. SLVM had insider selling and an active buyback, which is a red flag for me. Mercer also didn't have enough upside, it's midcycle EBITDA was too low, and I didn't see signs of that changing. Also Mercer has a lot of debt.

Conclusion

I hope one of these piques your interest, whether you like growth, cyclicals, turnarounds or levered equities, there are many interesting options in the chemicals space right now. If you feel I missed a great deal or a particular materials subsector, let me know!

The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.

As of 9/19/2025, I hold positions in Magnera and Olin.

Executive Summary of Industry

• Buyers of TiO2 have inelastic demand, and demand is lower than usual, suggesting a future upswing in demand.

• Producers of TiO2 are essentially refiners of Titania ore, 50-77% of production cost is the cost of ore.

• The feedstock market for TiO2 pigments made using chloride production (rutile) is tight with increasing depletions and little capacity coming online, providing benefits to titania miners and vertically integrated titania producers (TROX).

• Chinese producers are low cost producers with significant competitive advantages, they have been the only producers to add capacity since 2014 and have significant excess capacity today. However, western nations have protected their markets with antidumping measures.

• The entire TiO2 market has excess production capacity, reducing pricing power for the industry. However there has been global excess capacity since 2015 and producers have maintained profitable margins throughout that time.

• If you believe that Chinese production can be protected against or mitigated in the west, then expect western producers to maintain historically similar utilization and margins over time. (Miners may be the more interesting opportunity.)

• If so, all global titanium oxide producers (KRO, CC, TROX) appear to be fairly priced.

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Background on the TiO2 industry

TiO2 is a quality of life product, so its demand closely tracks GDP.

The titanium oxide industry has 3 major market segments: ore miners, titanium oxide producers and end users. I will go over these starting with the last and working my way to miners. Overall, ore miners and titanium oxide producers are highly consolidated with increasing consolidation over recent years, while end users are fragmented.

This is a low margin, mature industry with a history of bankruptcies: TROX in 2009 (largely due to litigation liabilities inherited in its spin off), and Venator in 2023 (highly leveraged at peak cycle 2021, before industry downturn in 2023).

The market can be divided into 2 geographic segments: The West and China, with Chinese producers consistently outperforming analyst expectations. The west has recently implemented protectionist measures, further splitting the market.

The market also contains varying qualities of TiO2 in a gradient from low quality pigments produced using sulfate and unconcentrated ore to high quality pigments using chloride and concentrated ores.

The market contains unintegrated producers like KRO and CC who are effectively price takers of ore miners, limiting their profitability and vertically integrated producers like TROX who are not limited by this.

The industry has significant global excess capacity, a key bottleneck to production appears to be limited feedstocks.

End uses of TiO2

Titanium Oxide (TiO2) is a pigment used in practically every product that comes in white - paints, papers, plastics and more. Making it a "quality of life" product.

Source: LB Group annual report.

https://www.lomonbillions.global/wp-content/uploads/2025/06/LB-Group-2024-Annual-Report-ENGLISH.pdf

Production Methods

Quality and price of TiO2 varies greatly depending on chemical quality and granule size. Per Chemours "Quality and performance of products differ considerably across market segments and applications." Source: https://seekingalpha.com/article/4007885-chemours-company-cc-ceo-mark-vergnano-hosts-september-investor-meetings-slides

TiO2 is produced using two different production processes: chlorination and the sulfate method. The chlorination process is simpler, uses less energy, and produces TiO2 of higher quality and price.

1) The Sulfate Method:

Production methods for TiO2.

Source: LB Group annual report.

https://www.lomonbillions.global/wp-content/uploads/2025/06/LB-Group-2024-Annual-Report-ENGLISH.pdf

Some producers like LB Group are able to use byproducts of the production process for other materials like lithium ion batteries. Which offers them an advantage.

Waste products of the TiO2 process.

Source: LB Group annual report.

https://www.lomonbillions.global/wp-content/uploads/2025/06/LB-Group-2024-Annual-Report-ENGLISH.pdf

TROX is able to upgrade fuel stocks to increase the range of feedstocks for its production processes: TROX investor presentation. https://s1.q4cdn.com/960380961/files/doc_presentations/2025/May/30/Tronox-Investor-Presentation-2025.pdf

Overall, the industry is capital intensive and generally low returns on assets ~ 5%. It appears to me that KRO is a mature commodity-like industry with slow growth.

Consumers/Buyers of TiO2

Demand for TiO2 is relatively inelastic with no signs of demand destruction

TiO2 has been used commercially since 1916, and has no substitutes that match it in its opacity. It is unlikely to be disrupted by new entrants, but western producers face stiff competition from LB Group - the low cost producer.

In the Q3 2011 earnings call when TiO2 was priced at all time highs. KRO management has pointed out a few interesting aspects of the market. They made these comments when TiO2 was priced at the top of a cycle. At that time they noted that customers need their product so there is little price sensitivity. There is no real substitute for TiO2, so TiO2 consumers are able to pass the costs on to their consumer

"So the idea that customers can either pass it through or absorb it or make up the difference on their margins in a different way is very real… prices have to go up …They would prefer this – a lot of our customers won’t like this statement, but I think they’d prefer a higher price than a lack of availability…The volume is whatever it’s going to be and it’s not as price sensitive…TiO2 products are used worldwide. It’s an easy product to ship, low cost to ship. It packs very easily."

- Steve Watson, Kronos CEO, 2011

However in Q3 in 2017, Michael McGarry CEO of major paint producer PPG did suggest that there was significant thrifting in 2011. Warning pigment producers of that fact.

"I would tell you, TiO2 is up more than we expected. I’ve cautioned some of the TiO2 suppliers, don’t forget 2011, where they -- there was demand destruction." -Michael McGarry

I take this to mean that demand destruction is possible at extreme prices, either through the use of extenders or some similar method, but this is uncommon historically.

Pent up demand for TiO2 is apparent.

KRO management has said that demand for TiO2 is correlated with activity generally. (KRO 10-K) So we can expect long term growth in line with global GDP 2-3%.

In the US and EU, consumption of TiO2 has lagged GDP. Suggesting pent up demand for TiO2 in the west. This appears to be related to the economic and housing slowdown due to higher interest rates.

Left Axis, Blue Line = GDP in $ Mn according to US FRED.

Right Axis, Red Line = Consumption apparent, US in metric tons, according to USGS, equals production + imports - exports.

Over this period, US GDP has gone up 56%, while apparent consumption of TiO2 has gone down 7%.

Europe presents a similar story:

Right Axis, Black Line = nominal GDP in EUR Mn according to EUROSTAT. Left Axis, Purple line = Consumption apparent, EU in metric tons, according to EUROSTAT's Production figures and Trade figures , equals production + imports - exports.

All figures in metric tons. Data from EUROSTAT's Production figures and Trade figures

Source: https://www.pricepedia.it/en/magazine/article/2024/06/24/the-case-of-titanium-between-abundance-and-criticality/

The trough in apparent consumption in 2010-2014 is due to greatly decreased imports from China. Considering that TiO2 industry profits peaked in 2010-2014, and 2017-2018, the biggest levers of profitability in the industry appear to be increased domestic demand and reduced foreign supply.

Producers (Refiners) of TiO2.

Competition in TiO2

Market share of the top 5 TiO2 producers.

Source: KRO 10-K

Chemours is an American company that was spun off from Dupont in 2015. They specialize in TiO2, but have other operating divisions like refrigerants, and significant legal liability due to historic Dupont PFAS production. 44% of revenues come from TiO2.

Tronox is an American company that is vertically integrated in its TiO2 production, with mines providing resources for both the sulfur and chlorine methods. Tronox (mostly through its mining operations) produces products other than TiO2. 77% of revenues come from TiO2.

LB Group CO. LTD is Chinese, vertically integrated and the lowest cost producer. 66% of revenues come from TiO2.

Venator is based in the UK and recently sold a 50% interest in their american plant to Kronos. Venator went bankrupt in the 2023 downturn. 100% of revenues come from TiO2.

Kronos specializes in TiO2 and also owns an ilmenite mine to fuel its sulfate process. 100% of revenues come from TiO2.

TiO2 production and production processes.

TiO2 made using the sulfate method requires: Ilmenite (a less rich titania ore) or titania slag (made from ilmenite), sulfuric acid and energy. Most TiO2 producers have some level of vertical integration with ilmenite production (KRO is completely sustained by owned ilmenite mines), so I don't focus on the behavior of Ilmenite producers in this write up.

TiO2 made using the chlorination process requires: chloride ilmenite, or to a lesser extent, leucoxene, slags, and natural and synthetic rutiles, in addition to chlorine, calcined petroleum coke, and energy.

Kronos and Venator are the only pure play TiO2 producers. Of their tio2 production, TROX, KRO and CC are primarily TiO2 producers using the chloride process method.

TiO2 as a percent of total revenue and Chloride process production as a percent of total TiO2 production. Source.

Most of the major producers heavily use the chlorination process, while LB Group mostly uses the sulfate process.

Production Curves of TiO2 producers

The cost production curve of the industry in 2024. COGS is for the TiO2 segment of each company. To arrive at the production cost per ton of TiO2 (using the chloride method), we multiply segment COGS by the percent of production volume using the chloride method. LB Group appears to have a competitive advantage over the rest.

Chemours investor presentation. Highlighting Chinese cost advantages. Source. https://seekingalpha.com/article/4007885-chemours-company-cc-ceo-mark-vergnano-hosts-september-investor-meetings-slides

Refiners Production Capacity

CC 10-K. TiO2 producers globally have about 25% excess production capacity. Typically a bad sign for refiner pricing power.

KROX states its utilization was at 98%, Venator states 81%, LB Group states 79%, CC and Trox were backed into.

Backing into Chloride capacity utilizations. Production estimates were arrived at by taking the stated revenue * chloride process percent / USGS titanium oxide price. Utilization estimate takes the production estimate divided by the nameplate capacity * chlorine process percent. For Venator this was using 2023 annual report data and subtracting Lake charles chloride process 75k production, and Duisburg sulfate process 50k production to arrive at pro forma 2024 production capacity and process split. Source.

In the coming years, LB is adding some capacity while other competitors are reducing their production. Meaning that near term TiO2 supply in the west is likely to be flat to down.

Per KRO's 2024 annual report: "Chemours has approximately one-half of total North American TiO2 production capacity and is our principal North American competitor. LB Group previously announced its plans to add an additional 200,000 tons of chloride process capacity which we expect will be added incrementally over the next several years. However, several of our competitors have recently closed or announced plans to close facilities or otherwise reduce capacity, including Chemours which closed its Taiwan facility with an estimated 160,000 tons of chloride process capacity in 2023 and Venator which announced plans in 2024 to close its Duisburg, Germany facility with an estimated 50,000 tons of sulfate process capacity. In addition, in 2024 we closed our sulfate production line in Varennes, Canada. The TiO2 industry is characterized by high barriers to entry consisting of high capital costs, proprietary technology and significant lead times required to construct new facilities or to expand existing capacity. Therefore, over the past ten years, we and our competitors increased industry capacity through debottlenecking projects; however, this increase only partly compensated for the shut-down of various TiO2 plants throughout the world. Other than through debottlenecking projects and the LB Group expansion mentioned above, we do not expect any significant efforts will be undertaken by us or our principal competitors to further increase capacity and we believe it is unlikely any new TiO2 plants will be constructed in Europe or North America for the foreseeable future. If actual developments differ from our expectations, the TiO2 industry and our performance could be unfavorably affected."

Chinese Producers of TiO2

China is the elephant in the room. As mentioned above they have significant competitive advantages.

LB Group appears to have a competitive advantage over the rest. It has:
- 50% of the production costs of competitors. Lower labor, environmental, litigation costs.

- A dominant position in the asian market.

- Production co-located near mines and with lower transportation costs to Asian markets.

- Lower Chinese energy costs.

Western TiO2 producers have steadily been losing market share to Chinese producers. This is due to their competitive production costs.

"According to recent customs data, China's cumulative titanium dioxide export from January to December 2024 reached approximately 1,901,700 tons, increasing by about 260,000 tons or 15.84% over the previous year. The Others 9% Ink 4% Papermaking 7% Plastics 22% Paint 58% Industrial coating 9.28% Building coating 23.78% Auto coating 8.12% Protective and packaging coating 16.82% Full Text of 2024 Annual Report of LB Group Co., Ltd. 18 export destinations were concentrated in Asia and Europe, with Asia accounting for about 55%, the Middle East and Africa for about 15%, and Europe for about 12%. China's titanium dioxide export in 2024 was expected to maintain steady growth, with Southeast Asia, India, and the Middle East being the core incremental markets, driven by regional economic vitality and infrastructure demand while reinforcing China's pivotal role in the global supply chain." - LB Group annual report 2024.

Most Chinese exports go to destinations that are not in Europe or North America so protectionism in those countries seems to be working for now.

Capacity in 1000 metric tons according to USGS reports 2015-2024

KRO and CC are competitive because western governments have pursued antidumping duties against LB Group. LB Group specifically faces an EU duty of €0.74 per kg (740 euros per tonne) reuters.com, equivalent to roughly $800 per ton tariff; Brazil and India have similar policies.

Notably, in the United States, the core protection for TiO₂ is the 6% MFN tariff, in addition Section 301 tariffs implemented in 2025 add an additional 22%.

Also of note, in 2014 Charles Liew stole Dupont's (now Chemours) chloride production method for TiO2, since then Chinese companies have built chloride production plants. Before 2014 China had virtually no production using the chloride method. Now they produce 700k tons a year.

In recent earnings calls CC and TROX have mentioned significant potential tailwinds from this policy. However, China does continue to gain market share in non-protected markets.

All western TiO2 producers have stated that China is not a major competitive threat to their operations due to being primarily producers of low quality TiO2 produced using the sulfur method, and so far they have held up pretty well all things considered .

A few recent quotes by industry management on China.

"So our view is high grade imports into China are not necessarily being substituted by Chinese producers, but the demand is being impacted by where those products go into in terms of high end furniture and laminates for export, which are also down – tied to both a weaker economy in Europe and weaker construction in North America."

-Chemours CEO Q2 2023

"Analyst: Lomon has added a few hundred thousand tons of chloride-based TiO2 capacity. Do you think that that's going to the overall Asian markets? Or will it stay in China? Or how do you see the industry being affected by a new chloride-based TiO2 competitor in size?

Denise Dignam (CEO): It's true. We see in the numbers, the exports of -- the China exports are increasing. One of the things to note is the weakness of the domestic market. And I think that gives customers pause, relative to long-term reliability, stability of supply. That is still a very, very key value proposition is the trust and confidence of customers that you're going to be able to service them day in, day out, reliably with high quality."

--Chemours CEO Q4 2023

"Analyst: And have you seen any idling capacity in China yet?

John Romano (CEO): I would say, yes. We've seen some plants pull back. Like, when John mentioned sulfur prices had gone up 40%, that was largely focused on Europe, I mean, China. And we have an asset over there. So, we have a very good window on what's happening in China, because we have an asset. It's not a large one. China is only 5% of our volume globally, and the majority of what we produce there, we sell in China.

But, I think that, there has been some move. Long-term closing of sulfate plants, I wouldn't say, there's been a lot yet, but there's been other reductions in volume. And I think it's important to kind of look at that. Normally, when you go through a downturn, you'll get to the bottom of the downturn and the market recovers before you see a lot of assets close. This market has been a lot different than that. The tail has been much longer.

We continually say that, although the tail's been long, definitively, we can say the market will recover. There's been no paradigm shift. But, there's been a lot more assets that have closed. We closed the plant. Most of our western competitors have closed either one or multiple plants. There's two Japanese plants that have been outlined as closing to 80,000-ton sulfate facilities in late in '25 and early in '26. So as the market recovers, it's not only China's volume that could be impacted. It's the overall volume that won't be available to supply the demand.

So, again, we're not looking for a demand to recover back to where we were in 2021. But getting back to 2019 levels, we believe is very doable, and there'll be a smaller base to support it, which would help with our margins."

- John Romano (CEO) Tronox earnings call, q1 2025

"We also believe that Chinese capacity, while publicly announced, will not only (sp?) materialize in years ahead. This belief is based on Chinese producer awareness around the overcapacity and the challenges as to where these producers can sell products with key markets pursuing more fair trade regulations.

This is further supported by a combination of other factors such as plant idling and shutdowns, a persisting weak domestic market, along with impacts from higher sulfate pricing. To this, we are anticipating Chinese lower production levels in 2025, breaking a 10-year trend of increasing output. As we continue to pursue opportunities in this transitioning global TiO2 landscape, it brings back the importance of driving our low-cost TiO2 position globally.

In TT, (titanium technologies) we don't expect much impact from tariffs considering that TiO2 is excluded, but continue to pursue efforts to protect U.S. TiO2 production and the markets we sell into.

We also do not see any significant impact to TT raw material pricing due to tariffs."

- Denise Dignam, CEO Chemours, q1 2025

Unit Economics of TiO2

To give you a tangible example of the unit economics of TiO2 production (using the chlorine method), I examined Kronos.

Fixed costs

2022-2024 KRO did not operate at full capacity, and stated the unallocated fixed costs those years. Using that data we can work back to estimate the fixed costs of running the plants. Unabsorbed fixed costs / unutilized % = total fixed costs.

So fixed costs are about 20% of COGS.

Variable Costs

On a pure chemical basis, the ratio of titanium in 95% rutile to titanium in TiO2 should be about 1:1, but we should account for processing inefficiencies. According to an industry review: ~3.5 million tonnes of TiO₂ are produced globally by the chloride route. This production consumes about 4.5 million tonnes of titania feedstock (like rutile, synthetic rutile, or titania slag) annually. From these figures we find that the implied feedstock-to-product ratio is roughly 4.5 / 3.5 or 1.3 tons of feedstock per ton of TiO₂.

Chlorine gas is used to convert titanium in the ore to titanium tetrachloride (TiCl₄), and by molecular mass approximately 0.4 tons of chlorine are required per ton of TiO₂ output. Petroleum coke serves as a reductant in the chlorination reaction, consumed at a rate of about 0.15 tons per ton of TiO₂. Once TiCl₄ is refined, it is oxidized using oxygen to produce TiO₂ and regenerate chlorine. This step consumes about 0.15 tons of oxygen. In addition to raw materials, significant energy is required throughout the process — for high-temperature chlorination, oxidation, and post-processing (drying, milling, packaging). Total energy should be 1.5-2.5 megawatt-hours per ton, depending on plant efficiency.

All together for 1 ton of TiO2 output we need the following inputs:

Note: Iluka's 2024 annual report (titania ore supplier) stated an average sales price of rutile of $1694/ton. The difference in my estimate and the actual COGS is likely a more efficient rate of titania feedstock conversion than I assumed in my model ~1.25.

Analysts say that feedstock ores across all companies and methods account for 30-40% of total TiO2 production costs. This is most likely true for vertically integrated producers like Tronox. Source: https://pmarketresearch.com/chemi/tio2-market/

TiO2 Producers Compared

Their lower production curves explain the improved margins of LB Group.

The EBITDA margins of the major TiO2 producers over time.

TROX has decent adjusted EBITDA margins but these have been reduced by restructuring charges, a damaged plant, high capex costs associated with the mines.

EBITDA of the major TiO2 producers over time.

2017-2018 was peak cycle, 2023-2024 was trough cycle. Considering that this is a mature industry with steady average margins, we can value these companies based on average adj ebitda over that time period. We can argue about whether these are cycles or just temporary margin pressures, where input increases and contracted selling prices are steady, or vice versa.

Valued using Greenwald's EPV ((EBITDA-CAPEX)*(1-tax rate)/WACC), with a WACC of 10%. (You can also think of this as a midcycle EBIT at a 10x multiple) All of the companies are fairly valued at best (KRO) and overvalued at most. Note that for CC this is just valuing the TiO2 division. There is roughly 200mn EBITDA-capex in the remaining company. That adds 1,600Mn to the market cap. And LB is pricing in its historically high growth rate of 30%.

If we apply a DCF to this, adding in changes in net working capital (average 24mn a year), a 2% growth rate, 15% discount rate, a terminal multiple of 10, then the market cap values calculated above should be roughly halved.

Feedstock Miners for TiO2

TiO2 is essentially process/enriched titanium ore. 90% of mined titanium goes into TiO₂ pigment. So you could think of the TiO2 industry as refiners of titanium.

TiO2 ore deposits are bountiful around the world.

Major mining operations are located in Australia, South Africa and China.

Source: https://www.lneg.pt/wp-content/uploads/2022/07/CG22-04-2202-Subasinghe-and-Ratnayake.pdf

The cost of feedstocks used in the chlorination process have risen quickly from 2017-2023 due to constrained supply.

Source: https://www.tipmcconsulting.com/wp-content/uploads/2017/08/TiPMC_Feedstock_Forecast_Feb_2023.pdf

Rutile is being depleted:

Source: https://www.tipmcconsulting.com/wp-content/uploads/2017/08/TiPMC_Feedstock_Forecast_Feb_2023.pdf

With little additional rutile supply expected to come online, suggesting that feedstock prices will remain high for the foreseeable future.

Source: https://www.tipmcconsulting.com/wp-content/uploads/2017/08/TiPMC_Feedstock_Forecast_Feb_2023.pdf

KRO buys its resources mostly from 3 suppliers.

Rio Tinto doesn't break out its titanium slag product revenues in its financial statement so I can not see pricing for that, but I can see changes in production. However Iluka Resources discloses its Rutile production and prices.

Low rutile ore availability means that even if end consumer demand increases, TiOs production volume may not be able to ramp up due to a supply constraints on ores, suggesting that any increase in end user demand would benefit TiO2 (rutile) ore miners more than TiO2 pigment producers.

Conclusion

Key takeaways for the industry:

1. TiO2 producers are essentially titania ore refiners, with most of their cost being ore.

2. TiO2 consumers have inelastic demand for the pigment. So the margins of the producers are stable over time, and they can earn consistent profits. That means as ore prices rise they can pass these costs to the consumer (with some lag time).

3. Significant excess capacity exists among TiO2 producers both globally and in the West. Even if demand for TiO2 caught up to GDP growth in the west, much of that demand would be buffered by that excess capacity, diminishing TiO2 producers upside.

4. Chinese competition is a major threat, as the low cost producer, they have strong margins and much growth potential. Among Western TiO2 producers, market share has slowly been whittled away, lost to Chinese competition. The only thing holding these competitors back is western anti-dumping measures, and occasional Chinese environmental crackdowns.

So if you accept that:
1. Western countries' anti dumping measures against Chinese competition will continue (limiting the existential competitive threat of Chinese production).

2. And due to excess capacity among producers upside is limited, as they will not be able to exercise pricing power.

Then you can value these companies as having a steady earnings power over the next 5-10 years with little risk. EPV is a good valuation method for that.

In valuation, the titanium segment of all of the western unintegrated companies (KRO, CC) is a slow, low earnings, boring businesses, that appears to be fairly valued. Because they are demand takers of ore prices, they have limited upside in a demand rebound. LB Group with its competitive advantages is growing at 30% a year, and so is priced at a premium, if western protectionism is effectively enforced then LB Group's multiple may contract. TROX and Iluka present interesting opportunities on a demand rebound.

Further Reading:
https://www.pcimag.com/articles/100036-a-review-of-global-supply-and-demand-for-titanium-dioxide#:~:text=However%2C%20the%20last%2010%20years,in%20a%20few%20short%20years

https://www.pricepedia.it/en/magazine/article/2024/06/24/the-case-of-titanium-between-abundance-and-criticality/#:~:text=The%20comparison%20between%20these%20prices,reveals%20the%20following%20facts

A great write-up on KRO https://valueinvestorsclub.com/idea/KRONOS_WORLDWIDE_INC/6847802931

Interesting context for TROX

https://valueinvestorsclub.com/idea/TRONOX_HOLDINGS_PLC/3670542007

Considering the value of CC's refrigerant business considering regulatory changes and data center potential. https://valueinvestorsclub.com/idea/CHEMOURS_CO/2642600503

"Bargains have not vanished entirely from the less-recognized growth sector. Many stocks of home builders feature price-earnings ratios more than 75% below going market multiples… Lust for one's own piece of turf still beats heartily in virtually all Americans who will either buy homes for the first time or move up to more luxurious homes. Thanks to the advent of large regional and some national home builders, housing may turn out to be considerably less cyclical, and multiples will expand in tandem with greater earnings. These publicly owned home builders enjoy at least three basic advantages over fragmented, mom-and-pop home builders (1) better availability of credit even if credit tightens, (2) enough clout to compel price concessions from suppliers, and (3) sufficient resources to exploit expensive technology… And don't forget that big home builders can command the loyalty of plumbers, carpenters, and electricians as markets become more competitive for these tradespeople.

These are some of the several indications that home builders behave less like cyclicals and more like less recognized growth stocks… I'm among the minority who think that these stocks will behave more like less recognized growth stocks than like cyclical stocks. Not everyone agrees. Therein lies the opportunity"

If you had taken his advice and invested in the top 5 homebuilders by market cap at that time: DHI, LEN, Kaufman & Broad (KB Homes), Centex Corp (Bought by Pulte) and Pulte, you would have returned double the CAGR of the S&P 500.

Fig 1. ROI of homebuilder stocks 2000-2025

Note that this return is even after CTX got caught up in the mortgage bubble with large financial liabilities in its financing division. And still, even after losing half of its value from 2000-2009, you still grew your investment 5x. This is because CTX was bought by PHM using company stock in 2009, and PHM appreciated 10x (My value for CTX in the table above is in reference to its converted PHM price, not actual CTX price).

History has validated John Neff here. Homebuilders have been neglected growth stocks.

Notably, this list does not include NVR who pioneered an asset light model where homebuilders don't buy and speculate on plots for homes, but instead have option contracts with land developers for prospective home plots. In this model the land developers have land on their balance sheets and are stuck with the slow work of preparing the plots for home building, while builders focus on building. Since 2000 the industry has heavily moved towards the asset light option contact model.

And since 2000 home builders have consolidated. There are less players and overbuilding has been greatly curtailed. That is to say that homebuilders are less speculative than ever.

Fig 2. Consolidation of the homebuilding industry. Source: https://eyeonhousing.org/2024/07/top-ten-builder-share-declines-in-2023/

Homebuilders are also building less than ever, and have lower leverage than in recent history.

Fig 3. Home starts are historically low, home builder leverage is also at record lows. Source: Millrose investor presentation

Low starts have contributed to an overall housing shortage, which makes for a tight market.

Fig 4. The US housing market is significantly undersupplied. Source:

https://www.resiclubanalytics.com/p/housing-analysts-think-housing-shortage-last-yearsthis-real-estate-ceo-isnt-sure

New lots to build homes on are similarly undersupplied.

Fig 5. Lots available for home construction are also very low

Source: https://eyeonhousing.org/2024/07/top-ten-builder-share-declines-in-2023/

All of this is to say that home builders have a strong underlying demand and a structural tightness that should continue to support their pricing and margins in the long run. .

Fig 6. Homebuilder average gross margins. Source: Millrose investor presentation

All of this would also suggest that without major signs of a "boom" cycle, any "bust" cycle would be shorter and of less magnitude.

Overview of Major Home Builders

NVR and DFH - Entirely option based land development.

DHI - Has a captive land developer (Forestar) that develops plots primarily for DHI as option contracts.

LEN - 60% of their lot pipeline is controlled via options. In Q1 of 2025 LEN spun off Millrose properties (MRP) as a REIT but is structured like a landbank. The business model is that Milrose holds the properties on their balance sheet, while Lennar develops them, and receives "income like rent" from the options fees that Lennar pays on the option contracts. When Millrose sells the properties to Lennar it uses the proceeds to buy and develop land, thus "recycling" the capital.

Millrose earned 64.8M in Q1 of 2025 on its book value of ~6B. This is an annual yield of about 4% that is returned to shareholders. Millrose works exclusively with LEN currently. It can't really compound its book significantly, and it sells at 80% of book. It's an interesting business model that benefits LEN, but I don't think it is worth investing in.

Tolle - Vertically integrated homebuilder. 45–55% of lots are optioned.

Pulte - Vertically integrated homebuilder. Focused on luxury homes in high value markets, 90% of land is owned.

In any case, each of these land developers have to get their developed lots from somewhere, so which is the best land developer in the industry? Can we find one that is advantaged and priced right? I think so…

My Favorite Land Developer (or Land Bank) with a Specialty in Home Builders

Forestar operates in markets predominantly in the southeastern United States, where development is relatively easier and demand is high.

How Lot Development Works

A Forester lot development project looks like this.

Fig 7. Land development timeline. Source: Forestar presentation Q1 2025.

The unit economics (according to Forestar) of lot development look like this:

Fig 8. Forestar project economics. Source: Forestar Presentation Q4 2019

A land developer buys a plot of land, develops it horizontally (adding utilities, roads, etc,) and sells it to a homebuilder. They collect the difference between the sales price and the development costs. Forestar achieves a 20% gross margin on average.

On the lot-level, Forestar buys a lot for on average $30,400, develops it over 10 quarters, and sells it for $101,700. If the lot is optioned by DHI, DHI pays FOR a 5% nonrefundable option fee per annum on the book value of that land. “The Company received $104.1 million in nonrefundable option payments during fiscal 2024.” (on $2.1B in land value). The revenue from this is included in the sales price of the home and recognized then.

Forestar's Competitive Advantages

• Management is focused on high asset turnover, now 52%. Similar to NFM or Costco, this is a competitive advantage. High asset/inventory turnover is one of the few ways a land developer can have a competitive advantage, and it improves cash flow generation.

• Firestar only takes on projects with an expected 15% return, not including land appreciation in their models (an added bonus), which means that management stays focused on operational excellence and not speculation.

• Land development loans are difficult for small developers to obtain at attractive rates. Banks and lenders do not like the slow and uncertain nature of land development. However, because Forestar has access to public debt markets, the backing of DHI, and a strong reputation in land development they have a cost of debt that is 50% less than their competitors. This would be like a bank with half the cost of funds of competitors.

Management is managed towards pre-tax income and ROE (which basically means they are laser focused on return on assets, as that is their main lever to improve those KPIs). There is a lot to like about this business model.

As Forestar management states:

"We believe we are well-positioned to consolidate market share in the highly fragmented lot development industry because of our low net leverage and strong liquidity position, low overhead model, geographically diverse lot portfolio that is focused on affordable price points and strategic relationship with D.R. Horton"

Fig 9. Forestar has industry leading turnover, ROE and low leverage. "BP" stands for building products, which I don't consider a peer to FOR. Source: Forestar presentation Q1 2025.

Fig 10. Forestar has a lower effective rate of financing. Source: Forestar presentation Q1 2025.

"Forestar's capital structure is one of our biggest competitive advantages and it sets us apart from other land developers. Project-level land acquisition and development loans are less available and have become more expensive in recent years, impacting most of our competitors.

Other developers generally use project-level development loans, which are typically more restrictive, have floating rates and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility while our strong liquidity positions us to take advantage of attractive opportunities as they arise."

Source: https://www.stockinsights.ai/us/FOR/earnings-transcript/

Evaluating Forestar's Book.

What originally got me interested in Forestar is their price to book of 0.63.

Market cap $1,032 Mn

Book Value: $1,646 Mn (all of which is tangible)

The balance sheet is straightforward, and the biggest item is the real estate with a book value of $2,759 Mn as of March 31, 2025.

What is the nature of that real estate? Well they have 9,500 lots fully developed, in Q1 they recently sold 3,411 lots for $101,700 per lot. So those fully developed lots have a market value of $966 Mn.

When subtracted from our book value, we get a book value of $1,793 for the remaining 58,900 owned lots that are undeveloped. That means each lot is held on the books for $30,400 (roughly at cost of the raw land).

Considering the lot development takes 10 quarters, and they spent an estimated 2.3B on lot improvements over those 10 quarters, that means they have invested $39,000 per lot on improvements.

I think of these lot improvement costs as sunk, but not on the books. Including the value of those improvements would double the book value.

Or think of it another way, assume that these lots are at various phases of development but on average, half finished. (The weighted average age of these lots is 397 days, vs. 912 days in 10 quarters). Then it will cost a further $2.3 Bn to develop these properties to be sold for $101,700 per lot. Take that final sales price of $5.9 Bn and subtract the remaining development cost to get a fair market price of $3.6B. Add back the $1B in already developed lots, and we get a fair value of the real estate of $4.6B. Adding back the other balance sheet items, we get a fair book value of $3.5B (on a stated book of $1.65B). And the market price is $1B. Making the price to adjusted book value about 30%.

Historically, the market has valued the company's book appropriately. It is trading at a historically low price to book today.

FOR trades at a 14% discount to fair Earnings Power Value

I expect a sustainable revenue for them to be 1.4Bn, and an operating margin of 14%. That is an operating income of 196 mn, at their average 24% tax rate that equals earnings of 149mn. At an 8% WACC. I get a fair EV value of 1.86B. And a fair market cap of 1.16Bn, the current market cap is 1B. Or a 14% discount to fair value. I personally think about this as a 15% earnings yield, considering that MRP (the only peer) trades at a 6.6% yield, that seems high.

A note on capitalized interest:

"We capitalize interest costs throughout the development period (active real estate). Capitalized interest is charged to cost of sales as the related real estate is sold to the buyer. Interest incurred was $32.6 million and $32.8 million in fiscal 2024 and 2023. Interest charged to cost of sales in fiscal 2024 was 2.5% of total cost of sales (excluding impairments and land option charges) compared to 2.4% of total cost of sales in fiscal 2023." FOR 2024 10-K.

Consider that we have $32.7mn in capitalized interest expense that is within cogs and reduces operating income. I don't want to double count the debt, so I would rather add those costs back to EPV to find fair value, or take the debt out of the EV calculation. Including 32.7 mn in the EPV calculation adds 310 mn in EPV value, and a total 32% discount to fair value.

Forestar has a long runway with aggressive growth targets

Forestar grew EPS from $0.79 in 2019 to $4 in 2024. A CAGR of 38%. And revenue compounded at 28%. They compounded book value at 13% over that time. They have more room for growth, with management targeting a 5% market share by the end of 2030. They currently have a 2.5% market share, so that growth would be a 15% CAGR.

Forestar has 3 engines of growth:

1. Increased total SFH sales. ( In 2024, 19% of D.R. Horton’s finished lot purchases were from Forestar.)

2. Increased proportion of SFH sales by DHI. (In 2024, DHI had 13% market share)

3. Increased lot purchases of FOR lots either by DHI or other home builders. (In 2024, DNI had 2% of the US lot development market)

Fig 11. Even as total industry wide SFH closings have fallen, DHI has taken a greater share of those sales. Forestar has taken a greater share of DHI's lot sourcing.

Management Quality

Donald J. Tomnitz has been the Executive Chairman since DHI merged with Forestar in October 2017. He was previously Vice Chairman and CEO of D.R. Horton (1998–2014) with a long career in land development.

Anthony (Andy) W. Oxley is the President, CEO & Director, he joined Forestar in 2024. He was the former Senior VP at D.R. Horton for 25 years, overseeing business development, M&A, and land acquisition.

Both men are very impressive and oversaw DHI's impressive run that I started this article with; they left top roles at DHI to take on the task of building up Forestar.

A Land-Light Land Development Model (?)

Similarly to how home builders wait to buy a lot until it is ready for construction and hold options contracts in the meantime, Forestar holds unentitled lots as options.

~35% of their total lot position is held via options/contracts, and that land is not yet owned.

While under option entitlements and approvals are secured. If entitlement is successful and market conditions are favorable, they exercise the option and convert it into an owned lot. If not, they can let the option expire or negotiate differently. This offers flexibility and capital efficiency. I think this is an underappreciated element of their business model.

DHI Control

DHI bought 75% of a nascent Forestar in 2017. Today they own 62%. The reduction has come from share issuance to the public over that time and has averaged 2% a year. They have a master service agreement with DHI that continues until the earlier of (i) the date at which D.R. Horton owns less than 15% of our voting shares or (ii) June 29, 2037; however, we may terminate the agreement at any time when D.R. Horton owns less than 25% of our voting shares. And "D.R. Horton has the right to nominate a number of our Board members commensurate with its equity ownership. As long as D.R. Horton owns at least 20% of our voting securities, it retains the right to nominate individuals to our Board based on its equity ownership as well as designate the Executive Chairman."

Risks

In 2023, Forestar traded for a PE of 3. So the price could go down 50% with a similar multiple contraction. A major recession could lead to major write downs and zero or negative earnings. A resulting stock crash would be a better time to buy.

It is a captive company, so DHI could take advantage of it. It has shown no signs of doing so, and it would be like "stealing your child's piggybank money" but it could if the situation is dire enough.

Conclusion

Today you can buy Forestar for 30% of its fair market value of book, providing downside protection. Its balance sheet is conservatively stated. It has little leverage.

It has an LTM earnings yield of 17% and 15% expected future growth. It has a long runway for growth with 2% market share. It has competitive advantages that paint a clear path for how they get there.

I believe the stock is selling at a great discount due to its controlled position under DHI. I also think it is a victim of short-termism and poor macro outlook in that time frame. In the short term many things could depress the stock, but in 5-10 years it will do fundamentally well. Maybe I am overly optimistic and delusional, please let me know if that is the case.

Disclaimer:

The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.

Bought July 7 at 20.25, sold Sept 7 at 27.80

Further reading

https://www.builderonline.com/builder-100/leadership/what-makes-don-tomnitz-tick_o

https://valueinvestorsclub.com/idea/FORESTAR_GROUP_INC/2030113623

National Energy Services Reunited Corp. (NASDAQ:NESR) is an integrated energy services provider in the Middle East and North Africa. It recently announced an exchange offer. If warrant holders voluntarily exchange their shares, then on June 30th they will receive 0.1 shares of common stock per warrant. After June 30th, they will be automatically converted and shareholders will receive 0.9 shares of common stock.

The offering period will continue until 11:59 P.M., Eastern Time, on June 30, 2025.

Today 6/23 NESR common stock is selling for $5.72 a share, and warrants are $0.50. That means you are buying shares for $0.50 and receiving a value of $0.572.

Considering you have to wait one week to receive your value, that is a raw return of 14.4%. Annualized to an IRR that is 168.6% return.

This is the bid ask spread right now.

So it is hard to get a piece of this trade, but if you have a small account and time to call around at your brokerage, it is possible.

If you do get a piece of these warrants, you will need to call in to your brokerage again and ask them to participate in the exchange offer.

Disclaimer:

The information provided in this publication is for informational and educational purposes only and should not be construed as investment advice, financial advice, or a recommendation to buy or sell any securities. I am not a licensed financial advisor, and the views expressed are solely my own. Any investment decisions you make are at your own risk. Always do your own due diligence or consult a licensed financial advisor before making any financial decisions. Past performance is not indicative of future results.​