A Work of Art? - The Gate City Portfolio

I had to pause for a few days to think about a unique portfolio created by the guys at Gate City Capital. Check it out at WhaleWisdom.com.

https://whalewisdom.com/filer/gate-city-capital-management-llc

I am still learning Substack. Let’s see if posting a link works.

This all started, when at age 12, I first went to a hamburger place in Milwaukee called Bob’s Big Boy. They had better burgers and fries than McDonalds, and a nice place to sit down inside.

At about the same time, I started reading the business page of the local newspaper, it came right after sports section. I remember reading a few stories about the company, called Marcus Corp. - MCS which operated Big Boys’s, going public in 1972. The Marcus Corp. was started in 1935 when Ben Marcus bought his first movie theater in Ripon, Wisconsin. He grew the company adding hotels to the theaters and restaurants. Through all the subsequent years, I was aware MCS existed, but the movie theater business was never that interesting to me.

Then I met the grandson of Ben Marcus in about 2013 at a small cap conference. He gave a presentation about how, using great financial discipline, MCS had slowly built the 4th largest movie theater chain, and added some interesting theme hotels along the way. MCS had a pristine balance sheet, even though they owned rather than leased many of their theaters. COVID-19 was a terrible experience for the theater business, but MCS’s strong balance sheet got them through it.

When I reviewed the Communication’s Sector last week, I read the most recent MCS investor presentation and listened to a few conference calls. I quickly concluded MCS had become a very interesting small cap investment idea. As required by law, I used Guru Focus to determine who else owned this gem. The 8th largest holder was someone called Gate City Capital which owned 3% of MCS, but the report also indicated that MCS was 10% of the Gate City portfolio. What kind of crazy SOB’s would put 10% of their portfolio in a tiny theater chain. Don’t they know about AI stocks?

Gate City Capital (named after the founder’s Montana home town) is a group of three guys in Chicago that have been investing in deep value small caps since 2011. They just passed the $100 million threshold about 6 months ago, and had to start reporting their holdings to the SEC. A few Google searches later I came across a presentation given by Gate City’s leader Michael Melby. The description of Gate City’s value strategy was almost exactly what I had used over 20 years ago. The strategy relies very heavily on Ben Graham “margin of safety” concept. The goal is to limit downside risk in every stock. Some type of asset valuation is often used to limit risk.

Gate City’s portfolio is a work of art. I have been to the Museum d’Orsay in Paris to see the Mona Lisa, but what I saw on Gate City’s 13-F filing was much more inspiring.

Gate Cities largest holding is Alico - ALCO, an excellent idea based on the asset value of the company’s orange groves and excess real estate. MCS is their second largest holding. Next comes a very hated idea, Hanesbrands - HBI, which I pondered in a post two years ago. Next comes an oilfield equipment company (Helix - HLX), two radio station groups (Entravision - EVC and Saga - SGA), and a potash miner (Intrepid - IPI). Another spectacular $100 million market cap idea is Minnesota horse track/casino operator Canterbury Park - CPHC. One can make a strong asset value argument for each of these stocks. Altogether, there are 13 stocks, the last of which is one of my all-time favorite micro-caps, the mattress fabric maker Culp Industries - CULP.

In a world filled with too many Jim Cramer’s, Cathie Wood’s, and the AI loving lunatics, the Gate City guys have the courage to build a 13 stock portfolio with companies Ben Graham would have been proud to own.

The Gate City portfolio did make me stop and think.

Maybe I should just teach everyone to execute the Gate City strategy? Maybe it would just be easier to focus of market caps under $500 million, with strong balance sheets, and plenty of asset value?

I had to stop and consider, why am I pushing Corteva, Tyson, Royal Gold and 17 other silly ideas? Maybe I should just tell you to buy the Gate City 13, and keep your life simple.

Why bother with the extremely hard task learning about 2000 companies, and trying to select the best 20?

If I were just sitting all alone in a room trying to build the best portfolio for only myself, I might very well choose something like the Gate City 13.

However, it has been my experience that well less than 1% of the investing public will tolerate the Gate City strategy. While the Gate City strategy is in my opinion 100% correct, only extraordinarily well educated investors can understand the strategy. How many investors will actually stick with such an extreme approach after a few bad years of performance? I fear not many.

The value strategy I am advocating is actually in use at a mutual fund like First Eagle Small Cap Opportunity (FESCX), or a hedge fund like Select Equity Group, and maybe a few dozen other places scattered across the country.

After too much thinking, I realized I can still admire the beauty of the Gate City portfolio, but at the same time advocate for the strategy I used to build my Top 20 portfolio.