Tag Archives: Texas

lone star gems

Last week was no picnic for stocks. With oil prices continuing to implode and a rate hike looking more and more imminent, you’d think a Texas-based homebuilder would have dropped along with the rest of the market. Instead, LGI Homes (LGIH) rocketed from $19 to an all-time high above $24 after it demolished earnings expectations.

As they say in sports, that’s why you play the game.

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oil is down. so what?

Unless you’ve been living under a rock or on a commune somewhere, you know the big news in the markets over the past few weeks has been the plummeting price of oil. With domestic production at record levels thanks to the fracking revolution and OPEC stubbornly refusing to cut production, oil is getting cheaper and cheaper. Investors have predictably responded by selling off energy company stocks in a big way. That makes sense. Lower prices mean lower profits and, especially for smaller producers, possible bankruptcy.

But there are two related stories to the drop in oil that don’t make sense, in my opinion–and they could signal potential opportunities on the long and short side.

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yes, dammit, i’m going to write about texas again

I know I’ve been talking about the population boom in Texas quite a bit lately, and I promise to move to other subjects soon, but I really do feel like this is the biggest story nobody is talking about—especially if you’re on the lookout for stocks to buy.

Most investors like growth. I’m no exception. And in this era of the perpetual non-recovery recovery, the only place to find real growth (on this continent anyway) is deep in the heart of the Lone Star State.

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the biggest story nobody is talking about is very bad news for california

Yesterday, Toyota announced that it is relocating its North American headquarters from the LA suburb of Torrance to the Dallas suburb of Plano.

Toyota is far from the first company to leave California for Texas in recent months. In the last three years, public California companies Copart, Waste Connections, Primoris, Vermillion, Pain Therapeutics, and Tenant Healthcare have all joined the exodus.  Many private companies have moved as well, including Santa Monica money manager Dimensional Fund Advisors, which moved to Austin three years ago. But these previous relocations have been minor tremors in terms of employment and tax revenue. Toyota’s move is a major earthquake. It’s the kind of shift that can remake a region.

Unless California gets its act together and rethinks how it treats the private sector that drives its economy, many more vital employers are going to move and the Golden State is going to wind up looking a lot less golden.

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green shoots

We are definitely living through the financial equivalent of the steroids era on Wall Street, with celebrity fund managers jacking up their assets under management and posting (allegedly) too-good-to-be-true returns. But beyond the ego-driven corruption of places like Manhattan and Greenwich, there are hopeful signs that things might be getting better in my industry. Not surprisingly, two of the best examples of this trend come from a place regular readers of this blog know I am quite fond of: Texas.

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dumbed down

I’d like to expand on something I wrote near the end of my last post on the current boom in Texas. As I said, buying into or shorting secular trends is a key investment strategy for me, and Texas’ explosive growth is a major opportunity. But I don’t think most people understand why the state is doing so well. It’s not just because of its low taxes and hands-off regulatory regime. If that were the case, low-tax backwaters like Alabama and Mississippi would be thriving, too. What sets Texas apart is education, especially the public UT system, which possesses the third largest endowment in the country behind only Harvard and Yale.

Dynamic, innovative economic regions–with the highest per capita incomes–always benefit from quality educational systems. Silicon Valley and the Northeast are the most obvious examples. But other places like North Carolina’s research triangle have also been fueled by great schools. The reason for this isn’t rocket science. You simply can’t have sustained economic growth without a steady supply of smart, highly educated people.

The problem is that schools cost a lot of money. And most states these days–especially the state where I live, California–spend far more on prisoners, public employees, and old people than education. It’s a disturbing secular trend, so disturbing that if California were a stock, I’d short it.

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lone star long: cashing in on texas with capital southwest

[Note: this piece was also posted at Seeking Alpha]

For most of my thirty years in the investment business, I’ve been skeptical of closed-end investment funds. Then I flew to Dallas and shared a plate of barbecue with Gary Martin, the personable, soon-to-be-retired president of Capital Southwest Corporation (CSWC). Martin was in a good mood during our lunch meeting, and not just because it was a Friday. As he described the company’s history and its current outlook, he had the relaxed, calmly confident look of an executive with nothing to hide, sell, or prove.

“We let our numbers speak for us,” he said.

Those numbers are quite persuasive. Since Cap Southwest’s initial IPO raised $15 million in 1961, it has quietly grown 13 percent a year by buying into well-managed private companies and holding onto them for long periods of time, even after many of them go public. Like Martin and his fellow executives at Capital Southwest, the businesses they invest in are not flashy. They make things like industrial lubricants (Rectorseal), farm equipment (Alamo Group), and copper wire (Encore). They also make a lot of money, which Capital Southwest frequently shares with its stockholders. Last year, it passed along a capital gains distribution of $17.59 per share. CSWC is also surprisingly undervalued. As Philip Mause persuasively documented several months ago, the stock trades at a significant discount to the company’s net asset value.

But none of these factors explain why I set aside my longtime doubts about CEF’s and bought $3 million worth of CSWC shortly after my lunch with Gary Martin. The real reason I’m long on Capital Southwest is that familiar refrain from the real estate industry: location, location, location. Or, to be more specific, Texas, Texas, Texas.

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