Central Securities Company Presents A Portfolio For The Lengthy Run (NYSE:CET)

Introduction

In unsure occasions, the Central Securities Company (NYSE:CET) (the “Company“) offers, amongst different issues, an funding portfolio (the “Portfolio“) that has stood the check of time, administration continuity, an affordable expense ratio, a reduction to web asset worth, and a rational, no frills method to funding administration. Morningstar charges the Firm 5-Stars Total and for the three, 5 and 10 yr intervals.

For the foregoing causes, amongst others, the Firm, which operates below the radar, needs to be on yours. My Score: Lengthy-Time period Purchase

Central Securities Company

Whereas not particularly well-known, the Firm, organized on October 1, 1929, is likely one of the oldest and most profitable closed-end fund operators.

The Firm operates as a non-diversified funding firm. As such, the share of the Firm’s Portfolio property that could be invested within the securities of a single issuer shouldn’t be restricted by the Funding Firm Act of 1940. Briefly, the Portfolio of the Firm may be very concentrated.

The general goal of the Portfolio is long-term progress of capital; dividends and revenue acquired from investments is a secondary consideration.

Per its dividend and distribution policy, the Firm distributes considerably all of its web funding revenue and realized capital features to shareholders. Consequently, distribution quantities range considerably from yr to yr. In 2023, the Firm distributed $1.85 per share in dividends to its shareholders.

In pursuing its funding goal, per its website, the Firm takes a long-term method and invests primarily in fairness securities that it believes are undervalued in gentle of their progress potential. Notably, the Firm constructs the Portfolio to “generate superior returns when compared with the broad market and preserve the Corporation’s capital in an inflationary environment.”

In selecting investments for the Portfolio, the Firm seeks (per its web site):

Sincere administration working within the pursuits of all shareholders is of the utmost significance within the appraisal of investments. We might promote securities for quite a lot of causes, together with extreme valuation, deteriorating outcomes or to redeploy property into extra promising alternatives. Central shouldn’t be restricted as to the forms of securities (e.g., fairness, fastened revenue) by which it invests. We might spend money on securities of issuers with any market capitalization.”

The Portfolio

As of September 30, 2023, the Portfolio’s largest fairness investments had been as follows (the final column exhibits the holding interval):

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Supply: Firm Web site

When reviewing its top holdings, a few things stand out to me. First, the Company clearly invests for the long term. Three (3) of the top ten (10) Portfolio investments have been held for more than 20 years. Charlie Munger’s first rule of compounding is to never interrupt it unnecessarily, and the Company is clearly an adherent to that dictum.

Second, a private company is the Portfolio’s largest holding by far. At more than 20% of the Portfolio, the Company acquired a portion of private insurer Plymouth Rock in 1982 for less than one million dollars. Today, the value of the position is approaching $300 million. An amazing ROI! Per the Company 2022 Annual Report, it owns approximately 23% of the outstanding shares of Plymouth Rock.

Plymouth Rock is led by owner-operator, Jim Stone. Mr. Stone was a former insurance commissioner of the Commonwealth of Massachusetts and, unsurprisingly, Plymouth has a strong footprint in New England. Mr. Stone’s annual letters are a worthwhile read and I look forward to reading his 2023 letter when it is released. Overall, Plymouth is a very impressive insurance company and owning the Company provides investors with meaningful exposure to this unknown private gem.

Third, other than Plymouth Rock, the Portfolio is made up of established, blue-chip companies.

In terms of sector weightings, per the 2022 Annual Report, insurance related stocks make up approximately 31.8% of the Portfolio followed by Technology & Semiconductors (18.2%) and Diversified Financials (10.4%).

In response to Morningstar, the Portfolio’s valuation seems affordable in comparison with comparable funds within the Massive Mix class.

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Administration

According to the Company’s website (linked above):

After managing the Corporation since 1973, Wilmot H. Kidd stepped down as Chief Executive Officer effective December 31, 2021. Central Securities is now managed by John C. Hill, Chief Executive Officer, who joined the Corporation in 2016. Mr. Hill is assisted by Andrew J. O’Neill, Vice President, who joined the Corporation in 2009. Wilmot Kidd continues to serve the Corporation as Chairman of the Board.

Throughout his tenure (1973-2021), Mr. Kidd achieved a superb funding file. As proven within the 2021 Annual Report, throughout Mr. Kidd’s tenure, the Firm compounded worth at a really excessive price (roughly 13+% per yr).

In 2022, after Mr. Kidd retired, the Company’s net asset value declined by 12.25% (according to Morningstar), compared to the S&P 500 Index’s 18.1% decline, and in 2023, while the Company did not beat the S&P, it did handily beat the S&P 493 with its gain of 19.1 percent (according to Morningstar). As a result, it can be deduced that the handoff from Mr. Kidd to Messrs. Hill and O’Neill has been successful (at least thus far).

I respect too that administration of the Firm is keen to purchase again its inventory when the low cost to NAV is extensive. In its most up-to-date Interim Report for the interval ended September 30, 2023, it was famous that:

During the nine months ended September 30, 2023, the Corporation purchased 48,978 shares of its Common Stock at an average price of $35.61. The Corporation may from time to time purchase its Common Stock in such amounts and at such prices as the Board of Directors deems advisable in the best interests of stockholders.”

The willingness of the Firm’s Board to purchase again shares is notable as a result of closed-end funds are sometimes reluctant to take action since such actions, though constructive for shareholders, can scale back administration charges by lowering the whole property managed.

The Firm’s present low cost to web asset worth (“NAV“) is greater than 17%. Whereas this could theoretically present a cushion in a downturn, there isn’t any assure that the low cost will slender; certainly, the typical low cost during the last yr has been about the place it’s right this moment. That stated, the low cost does have the impact of 1) decreasing the already affordable administration charge of 0.50% charged by the Firm, and a pair of) boosting the dividend yield. Along with the affordable administration charges, I feel potential buyers needs to be inspired by administration’s conservative method to its web site and monetary reviews, all of which have a “no-frills” high quality to them.

Possession/Pores and skin within the Sport

The important thing executives of the Firm do have skin in the game:

William H. Kidd IV, chairman of the Board owns greater than 300,000 shares (roughly 1% of the 28 million shares excellent); Mr. Andrew O’Neil, Vice President owns greater than 80,000 shares; and Mr. John C. Hill, CEO, owns greater than 64,000 shares. On the market lows again in October 2023, administration of the Firm began to step up and purchase shares at roughly 10% under right this moment’s value.

Institutional possession of the Firm shares is roughly 11%. Extremely regarded worth supervisor, Third Avenue Asset Administration, owns an curiosity within the Firm.

Dangers

Per its 2022 Annual Report, an funding within the Firm is topic to varied dangers, together with 1) a considerable portion of the Portfolio being invested within the frequent inventory of The Plymouth Rock Firm, a privately issued, illiquid safety, 2) non-diversification danger (as famous above, the Firm is a “non-diversified” funding firm), 3) the Firm is permitted to take a position a good portion of its web property in illiquid investments, 4) closed-end funding firms just like the Firm typically commerce available in the market at costs decrease than their NAV (certainly, the Firm’s shares have typically traded at a cloth low cost to its NAV), and 5) the Firm is reliant on sure key staff.

On a sector foundation, the Portfolio has plenty of publicity to the monetary system by way of its insurance coverage shares (roughly 32% of the Portfolio), plus its positions in American Specific (AXP), Charles Schwab (SCHW), JP Morgan (JPM) and Visa (V) (one other roughly 10% of the Portfolio). A U.S. or world credit score or monetary disaster might have a disproportionate impact on the Portfolio’s holdings. Such an occasion can’t be dominated out, significantly with the out-of-control U.S. fiscal deficit, to not point out U.S. Debt now exceeding $34 Trillion. Such an occasion would additionally doubtless contain substantial regulatory adjustments, which adjustments might adversely have an effect on these extremely regulated insurance coverage and monetary firms.

In fact, the entire insurance coverage publicity additionally signifies that the Firm’s success is in some measure depending on its insurance coverage firm investments minimizing and mitigating the dangers related to insuring and reinsuring catastrophic occasions.

A full record of the dangers related to an funding within the Firm is included within the linked 2022 Annual Report above.

Potential Catalysts

After a poor yr in 2022 (largely on account of funding losses, COVID value inflation and catastrophic climate situations), Plymouth Rock ought to rebound in 2023 as inflation has slowed and each bonds and shares have rallied strongly by means of the top of 2023. These outcomes will present up within the Firm’s year-end 2023 outcomes.

Furthermore, the upper rates of interest on bond portfolios won’t solely assist Plymouth Rock, however they need to additionally proceed to help Progressive (PGR), one other insurer that’s roughly 5% of the Portfolio, by offering larger funding revenue on their respective money reserves and bond holdings.

The Firm’s inventory is nicely supported at $35 and below by Firm buybacks and insider purchases, making it possible that the Firm’s inventory will escape to the upside sooner or later because it has been buying and selling sideways because the center of 2022. Lastly, the Firm’s Alphabet (GOOGL) Meta Platforms (META) and semiconductor holdings (5.4%, 2.5% and almost 9% of the Portfolio, respectively) do give it significant publicity to the expertise sector ought to these shares proceed to outperform.

Conclusion

Conservatively operated and managed, the Firm presents buyers an funding portfolio constructed for the long run. An inexpensive expense ratio, administration continuity and pores and skin within the sport, wonderful Morningstar rankings and the potential catalysts described above additional buttress the case for the Firm. I reiterate my Purchase suggestion for the Firm and added to my place on January eleventh at $37.25. In fact, do your individual due diligence.