In this week's Industry Focus: Financials, host Jason Moser sits down with The Motley Fool's own senior analyst Buck Hartzell to talk about Boston Omaha (NASDAQ: BOMN), an up-and-coming financial stock that's been getting lots of attention. Then, fool.com contributor Matt Frankel, CFP, discusses some of the main themes at this year's ShopTalk conference in Las Vegas. And, Moser and Frankel discuss a couple of stocks on their radar and The Motley Fool's new real estate investing website.
A full transcript follows the video.
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This video was recorded on March 11, 2019.
Jason Moser: Welcome Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, March 11, and we're talking Financials. I'm your host, Jason Moser, and on today's show, we're going to talk more about Matt's recent week here at Shoptalk in Vegas, big takeaways from that. As always, we'll have a tweet or two for you and One to Watch in the coming week.
We're starting this week with another installment of Between Two Fools. For more than 20 years, Buck Hartzell has been helping us invest better here at The Motley Fool. In fact, Buck ran my analyst development program back in my early days here at The Fool, and he's played an instrumental role in helping me become the investor I am today. Recently, Buck and I sat down in the studio here to dig deeper into a company that's garnering a lot of interest from our listeners and our members: Boston Omaha.
Buck, first things first. What is Boston Omaha? Have to admit, I'm a little confused by the name. What is the company and how did they make their money?
Buck Hartzell: Boston Omaha is a conglomerate, but it's a mini-conglomerate. The two main principles that run the business are Alex Rozek and Adam Peterson. One of them lives in Boston and the other one lives in Omaha. Adam lives in Omaha and Alex lives in Boston.
Moser: Now it makes perfect sense!
Hartzell: Thus the name. When they put in for their ticker, I'm told they didn't want BOMN but BOMB. I figure that the sell recommendation writes itself. "Remember when we recommended BOMB?"
Moser: It's the bomb!
Hartzell: You're right, it's the bomb. So, that's the genesis of the name.
Moser: This is an interesting company. The question pointed toward a little bit more about the sureties side of the business, but there's also a billboard side of the business. I have to admit, when you presented this -- you pitched this stock to a big group of us, and it was a neat story. In this age of technology, I still get billboards. I understand it. But it also seems like the surety side of the business is compelling.
Hartzell: Yes, it is. It absolutely is. It's a weird juxtaposition of those two businesses. You don't find many businesses that own billboards and are also ensurers. I don't even think Berkshire does. They have a lot of businesses, and I don't think they own billboards, to my knowledge.
Anyhow, Adam and Alex are capital allocators. They're just getting started in this game. I think they made about 30 acquisitions to date. They've spanned a variety of different places. The cool thing about both of these businesses -- billboards and surety, and we'll talk more about surety, because I think people get billboards -- they both have good economics. Billboards is one of the few places in advertising that's actually growing and becoming more meaningful and it works very well. We know what's happened to newspapers and magazines and some of those other places, but billboards have held up very well.
To get back to the surety business, it's a part of the insurance business with some unique economics. First of all, when you look at insurance, you want to know the loss ratios in those particular businesses. Surety has the smallest loss ratios of any of the P&C, property and casualty, businesses. The industry average is 30% loss ratio. To give you some context, auto insurance is usually a 75% loss ratio. It's been worse the last couple of years. Homeowners is 71%. Commercial is 61%. You get down to the bottom of the list, and surety is only a 30% loss ratio, which makes it a pretty compelling business.
Moser: That is. Just to think about that for a second, we talk about those loss ratios a lot and the combined ratios with companies like Markel or whatever insurer we're covering. That's really compelling from a number of angles. 30% on the surety side vs. somewhere in the neighborhood of 75% on the auto side. Having worked at an insurance company, in the auto division, I get it. I couldn't believe how many wrecks there were out there. What do you think it is about surety that keeps those loss ratios so in check?
Hartzell: It's interesting. When you look at that business, right now, roughly, there are about 10,000 different commercial surety bonds that are out there floating around. Maybe it helps to give some examples of what these are actually used for. If you open up a restaurant, and it's your first commercial business, commercial restaurant, you have some options. One of those is, usually you have to float some kind of surety bond, that when you get electricity and all that kind of stuff hooked up, it says, "Hey, this person is good. They're going to make good on all their stuff." So, you have that bond.
You're also familiar with other small business owners that may come and fix your house or do different things, and they'll say, "licensed and bonded." That's a surety bond that they get. Usually, these things are recurring every year. They're transactional in nature. The other interesting thing about them is, there's high distribution costs. What that means is, when you're an agent and you're selling these, and there's a lot of agencies that sell surety business, it's pretty profitable, they get about a 40% commission.
That's a huge commission on this business. So there's high distribution costs, and there's lots of small little bonds and things going in and out of the business. So, there's a lot of these that happen. And they're not big-dollar items, largely. There can be huge ones like in the Big Dig for Boston, this huge project. You as a commercial developer have to have surety bonds that are associated with that. They wouldn't do those types of things. They're looking at more of the smaller ones that are transactional in nature that recur all the time and are very highly profitable. What Boston Omaha's done is they've bought up both the agencies -- so, they get that 40% commission when they sell them -- but they also have some companies now that actually underwrite, they do the underwriting. They have the distribution side and the underwriting, and they'd like to pull those together and get both pieces of the pie.
Moser: That bonding you're talking about -- I'm a homeowner, I have a contractor coming over to do some work, that contractor is licensed and bonded. That bond essentially gives me the comfort as a consumer that that contractor is going to be able to get that work done. And if, for some reason, the bottom falls out and something happens, there's still going to be a way for me to be able to ...
Hartzell: Right. Here's the weird thing. When people see insurance, they think about, "Oh, there could be catastrophes. There could be all these kinds of things where I get these big losses." We know, we follow a lot of insurance companies, and there's been some catastrophes, wildfires and things like that, that have happened. Surety is a weird type of insurance. It's much different. It's a three-party agreement. Basically, the ability of the principal demands that there be no claims on the surety bond. So, there's a built-in incentive by the principal to minimize claims.
Moser: Makes sense.
Hartzell: Unlike other things. If you buy insurance, something happens to your car, you're like, "OK, here you go, I have to get it fixed." This one, they don't want to actually use it. That's why you see the 30% loss ratio. The best thing about it for Boston Omaha is, the company that they bought, which primarily did insurance in Massachusetts, but now it's going nationwide, their loss ratio has averaged 1%.
I had some numbers down here at some point. They're usually around 1% or less in a given year, which is phenomenal!
Moser: That is.
Hartzell: That's the part they're targeting, that kind of transactional nature. There's typically not losses on that.
Moser: Got it. We talked about the fact that this is the capital allocation story. We've talked about the fact that they have a history of acquisitions, somewhere in the neighborhood of 30 acquisitions at this point to build this business up. I know you like management. We talked about Adam and Alex. We obviously talk about management a lot here at The Fool. I think you've really learned as much about this management team as anybody else at this company. Talk a little bit about, what do you think makes these guys so special? Why do they work well together?
Hartzell: Interestingly, they didn't grow up as friends. Some other people they had known as acquaintances said, "Do you know each other?" And they didn't. They both manage money, so they had their respective partnerships that they managed. Then, at one point in time, they realized that they were both the second and third largest shareholders of a company in common. I think it was Alex that actually reached out to Adam and said, "Hey, we should get together." So they did, and hit it off.
Moser: So, investing brought them together! Much like it brought us together! [laughs]
Hartzell: Exactly right! And their conversations led from what they like in companies to some of the struggles and things that they've had from being passive investors and trying to manage the companies from the backseat -- driving from the backseat, we call it. They eventually got around to, "What if we built our own company? What would we do different? How would we organize it?" And those conversations went down the pike, and then, sure enough, in 2015, they ended up buying a small company, and that became what is now Boston Omaha. They're both in the driver's seat.
I think, one thing that separates them is, they're servant leaders. From 2015 until the beginning of this year for 2019, they each only took minimum wage, about $23,600 a year. Alex now earns a salary of $275,000. Adam is still taking minimum wage. But they took care of the people that ran their respective businesses, the surety business and GIG, General Indemnity Group, that's the insurance business, and the billboard business. They paid them first. So, as they're scaling up the business and approaching profitability and all that kind of stuff now, now they can bring their salaries into play.
The other thing that's very unique is, they're good at setting incentives for people. They have it set up that their goal is to grow book value, and above a level of 6%, they take 20%, and that creates a bonus pool for the whole company that they can allocate to whoever they think is doing a very good job.
They have a lot of skin in the game. They own most of the stock. They've been responsible for seven capital raises now. And they've put that together in a very prudent way. They're creating a company that they want to spend a lot of cash back to the headquarters that they can then reallocate to other ideas.
Moser: One of those great lessons we learned from Charlie Munger back in the day: beware the power of incentives. Seems so simple, then when you start going back and looking at them, that dictates every behavior from there forward, doesn't it?
Hartzell: It's huge. I've been impressed. When I went to their second annual meeting up in Boston -- I jumped on a plane here, went up and got some lobsters up there. I think it was their second-ever annual meeting. Interesting shareholder base, interesting board, was all there. I think they're trying to build the right culture and do the right thing and create a lot of value for shareholders and themselves.
Moser: We certainly know the value of culture. Now, other than the obvious rising stock price, growing book value -- those are the signs we look for for success -- do you have any other signals? What are some other signs of success that you feel like tells you as an investor -- because you own shares in this business; we know Matt Frankel owns shares in this business; I think after what I'm hearing from all you guys, I'm probably going to have to buy a few shares myself -- what are you keeping your eye on, as far as the signs of success?
Hartzell: Signs, and they have a billboard business.
Moser: [laughs] That was unintended!
Hartzell: No, that's good. Here's the thing: They're going to have to allocate capital, so we want them to find more deals. We don't want them to force it. They have to stick to their price. We want to see them stick to their guns. And really, with last year for the surety business, General Indemnity Group, was really about scaling and getting access to all the states and that platform. That was about building that platform last year. This year, we want to see some growth on the top end and writing more policies and doing all that kind of stuff, start to see that scale.
The billboard business is going to be lumpy because it's going to be fueled by acquisitions. Usually, their model is, somebody who's been in this business, they own a decent amount of billboards, a family member dies or they need liquidity or they're retiring, and these guys come in and say, "Hey, we'll buy it." Those deals come up when they do. This is a fragmented market. They can't predict when that's going to happen.
Of course, they've invested in a variety of other things, including real estate and some banks and home builders. They're opportunistic capital allocators. We're just going to look at every new deal that comes down the pike and make sure it meets their criteria. The ultimate measure is going to be the growth of cash flow at this business over time.
Moser: It sounds like it was a company that would never be boring to follow.
Hartzell: No. There's going to be something new, and you never know when it's going to happen. And by the way, their annual meetings are worth your time. It's going to be in Boston this year. The following year, it's in Omaha. It's always a pain to get to from here in Alexandria. I can't go this year. I already wrote them and said I can't come along because my son's graduating that day.
Moser: Priorities. Understandable. OK, let's wrap this up here. I know you've got a lot of great information there on leadership. We love founder-leader, servant leadership. That's a lot of the thesis, it seems, early on at least. That's going to be the crux of the success here. It does seem like a jockey play, not that that's a problem. There are a lot of companies out there that have been very successful in our universe as jockey-play investments. You get to a point, eventually, where maybe you feel OK if power is spread out or shared a little bit more. But at this point in the game, it does really seem like this is a jockey play. Is that a safe assumption? And if so, two years from now, if one of these guys decides to move on and do something else, does that change how you feel about this business?
Hartzell: Probably it does. I think there's three people at headquarters, and they're two of the three. [laughs] We don't want to see them lose anyone. These are young guys, they're in their 40s. They have a long road ahead of them. I think they have the right culture bill. I would be worried if they left. I'm perfectly happy with the people that are running their individual businesses. They're very qualified. But this is a jockey play, and it would worry me if one of them left.
I think what's more likely to happen, and what Alex did this past year is, he closed his partnership to outside investors. He's only doing management money, and he's working full time at Boston Omaha. Adam has not done that. He has Magnolia Partners. He has not closed that. He's still running it. My expectation is that in addition to buying whole companies, at some point in time, Boston Omaha is going to also be investing in securities. That's a little bit of a conflict of interest. What I would expect that would happen at that point in time, once the business scaled enough, is that they would close their investment partnership, much like Warren Buffett did, and focus on the main business, which would be Boston Omaha. That transition hasn't fully happened, but at least Alex has done that.
Moser: All right, that sounds like a really interesting company from a lot of different angles. I really appreciate you coming here. I know our listeners appreciate you coming in here and talking more about Boston Omaha. Maybe down the line, we'll have more to talk about. Who knows, maybe we'll get Adam or Alex in here to talk with us as well. I might rely on you to try to make that happen. [laughs]
Hartzell: [laughs] OK. They're pretty busy, but maybe we can get them to call in. That'd be a good conversation.
Moser: That'd be super!
Hartzell: They can correct everything I said that was wrong.
Moser: Well, let's hope that's a very short list. [laughs] Buck Hartzell, thanks so much!
Hartzell: Thanks, Jason! Appreciate it!
Moser: And now joining me in the studio via Skype, back from Vegas, he looks like he's in one piece. He can see me, I can see him: Certified Financial Planner, Matt Frankel. Matt, how was Vegas?
Matt Frankel: It was good! I feel like I'm actually in the studio with you now because you're right there looking at me. It's a different feeling.
Moser: Yeah, it's nice. For listeners out there, we always connect via Skype here. I've always been able to see Matt, but Matt was never able to see me, which could make for some awkward pauses and difficult transitions. But maybe now, we'll get a little bit of a smoother rapport going here. I mean, I feel like we've always been able to make it work, right?
Frankel: We do, but now I can see when you're starting to talk, you can see when I'm starting to talk, things like that.
Moser: It's a little bit more helpful, yeah, I guess. Listen, we're going to get into the Shoptalk event that you went to in Las Vegas. Before I do that, I have to jump out here. Tip of the cap my Wofford Terriers, Matt. I was just telling you before we started taping, these guys are now in the top 20. Basketball team is just on fire, having a great year. Congratulations, Coach Young! You guys have a big game tonight at the Southern Conference Championship against UNCG. Wishing Wofford all the best there and also on forward as they have most definitely sealed a bid for the Big Dance. Going to get some March Madness going on in Spartanburg here real soon, I think.
Now, onto the real stuff! The business at hand, Matt! You attended Vegas. You get to go a couple of times a year, it sounds like, for conferences. You go to the Shoptalk conference, the Money 20/20 conference. Shoptalk, I'm a little bit less familiar with it, but it sounded pretty cool. What were your big three takeaways from your week at Shoptalk?
Frankel: Shoptalk is a retail conference. That's probably why. On the surface, it's not in our wheelhouse. One of the big themes is payment processing, which is why I started attending it a few years ago.
Moser: That's right in our wheelhouse!
Frankel: Right. The themes have shifted this year a little bit, which I was surprised to see when I got there. I went with Dan Kline who's one of our Consumer Goods guys. He was thrilled to see the shift.
The main focus of the show seemed to be more logistics than payment processing. There was some really cool stuff on display there. We saw one company called Takeoff Technologies that makes robotic picking centers to fill online grocery orders. In other words, there's not a person who gets the orders, there's a carved-out space of the grocery store that's set up for this and there's a little robot that goes to all the shelves, fills the order, and puts it in bags. No one even has to do anything. We were asking them how far this was from being rolled out. It's actually live in two grocery stores in Florida. Albertsons is their biggest client. I'm going to tweet out a picture of the little picking robot, which is what brought us over there in the first place.
Logistics is definitely a big theme. How can we run our business more efficiently? Less square footage, which has been a huge theme of retail over the past few years. A lot of companies have really done a great job of reducing their square footage. Best Buy is one that immediately comes to mind that's done a good job of maximizing the efficiency of their space. It seems like grocery stores and pretty much every other aspect of retail is trying to do that. That was theme one.
Theme two is improving the customer experience. Dan and I were walking down, they have a start-up isle of all the start-ups that are trying to pitch their ideas to investors and new potential customers. We saw one app that uses your phone sensors to measure you when you're buying clothes online. I don't know about you, but if you're like me and you order something online, it's optimistically a 50/50 chance that it's going to fit. [laughs]
Moser: I feel like I've nailed it down to a few places where I can get clothes now where I know how the sizing works. Admittedly, I'm not stepping out of the box and growing my wardrobe. But, at this point, I'm basically an old man, so who cares, right?
Frankel: I get it. [laughs] My wife thought this was a really cool idea because she sends back 80% of the clothes she buys online because they don't fit right.
Moser: Yeah, I think it's a great idea!
Frankel: You pretty much put your phone on 10 different parts of your body. It's like going to a tailor. Things like that, improving the customer experience, were a big theme.
And, last in our wheelhouse, payment processing is still a big deal. It's more ways to do it better. I went to Square's booth.
Moser: Shocker! [laughs]
Frankel: [laughs] Well, last episode, that's the last thing I told you I was going to do.
Moser: That's right.
Frankel: So, I walked over to Square's booth. They're really trying to push their hardware. If you remember from their earnings, their hardware revenue more than doubled year over year. A big part of that is their new point-of-sale offering, their first free-standing point-of-sale system designed to bring larger businesses into their ecosystem.
Moser: That hardware is a gateway drug, man. That's what gets people started.
Frankel: And what they're building, after getting a demonstration, is better than what I'm used to using when I go to most stores.
Moser: That's good to hear!
Frankel: Their newest thing that I got a nice demonstration of is, they have the register, the faces of the employee. And then you have a smaller customizable display, which the representative was telling me it was a big pain point for a lot of businesses, not being able to control what the customer sees. Normally, you just see a standard "Want to add a gratuity?" "Here's where you sign." Things like that. They could set it up so, say, a 30-second promotional video plays while the credit card's running, or something like that.
Moser: Yeah, reinforce that branding.
Frankel: Right. A lot of new payment processing solutions. Square's I found the most interesting. But maybe I'm a little biased there. Maybe we both are. We probably would have both gravitated over to the Square booth and spent half the conference there.
So, yeah, logistics, improving customer experiences, and payment processing were the big themes. I always have a great time at this conference. It's really a show. Like, the grocery robot on display actually picking some groceries. A lot of cool stuff to see there. I'll tweet out some pictures from it.
Moser: It sounds like a lot of fun. Am I assuming correctly, you'll have some articles out there on fool.com soon? Have you already got stuff up there?
Frankel: I will, and I do. I know Dan has a few on the retail side up and coming out. I have one on Square, on them trying to recruit bigger sellers already up. I have a few more in the works, too. Watch that, and watch on my Twitter. Like I said, I'm going to tweet some pictures, because a lot of the stuff I'm talking about doesn't really make sense until you see it.
Moser: Let's go ahead and make it easy for our listeners. Just to remind them, if they want to follow you on Twitter, what's your Twitter handle?
Moser: Very good! We'll retweet a lot of that stuff from our Industry Focus Twitter feed as well.
Speaking of our Industry Focus Twitter feed, I have a fun little tweet that came up over the past week. I guess it's really a bit more relevant to the Energy show that played last Thursday. But, you know what? It was a good one, and I fear if we don't pluck this thing out and read it, it may just not get read at all. So I'm going to go ahead and steal it, Matt. It's a tweet that came from Andy Cartwright, @ACortWR8. Andy says, "I want to hear a Tesla smackdown between John Rosevear and David Gardner, a Tesla bear vs. a Tesla bull." Andy, I think I speak for everyone when I say we would love to hear that, too. I think we would all be the better for it, and I have to believe it would make some good radio. What do you think, Matt?
Frankel: I agree. I think Jason and I could probably go at that, because I think we're on opposite sides of that one, even though I'm not positive.
Moser: Maybe. I don't know. What side are you on there with Tesla?
Frankel: I'm a bear.
Moser: See, I'm never going to own shares of Tesla. I'm a big supporter of what they're doing, but it's not a stock I want to own. Just too many things can go wrong, and cars are really difficult.
Frankel: Fair enough. My thought with Tesla is, just because something's a great product doesn't make it a great business.
Moser: That's a good lesson! That's a very good lesson!
Frankel: That's where I feel. But I think John and David, that could be a three-round cage match right there.
Moser: That'd be a fun one. We're going to start pushing for that one. Andy, thanks for the tweet! As a reminder for our listeners, you can follow us on Twitter @MFIndustryFocus. If you aren't following us, I'm not even going to ask you why not. I'm just telling you, get out there and start following us. Send us your questions, your observations, and chances are, we will probably call it out on the show.
OK, Matt, it's that time of the week. Again, we're going to wrap this up with One to Watch. What's your One to Watch this week?
Frankel: In honor of The Fool launching its new real estate brand this week --
Moser: What!? Real estate brand?! Tell me more!
Frankel: If you remember, I think that was a couple of months back when you had Matty A. on the show?
Frankel: The time has finally come. Our new real estate venture starts tomorrow. It's called Million Acres. Check it out. The site will be live at some point tomorrow. I'm very excited for that. So, in honor of that, and just because I think it's a great overall investment and a really great way to add diversification to your portfolio, I'm going to go ahead and recommend an ETF that focuses on real estate investment trusts. It's the Vanguard REIT ETF, ticker VNQ. It's a really low-cost way to get exposure to some of the best real estate investment trusts in the market without a lot of expense and without a lot of knowledge. If you're looking to tiptoe into real estate and add it to your portfolio, that's a really good way to start.
Moser: Yeah, great way to get exposure there. I love that. Hey, you might see me tomorrow, because I helped Matty put together some of that promotional material and the video announcing the service tomorrow. We had a lot of fun putting that together. I have to say, I was really impressed with how in-depth, not only the content is, but the ideas. It really covers the spectrum there. A lot of different ways to invest in real estate. I'm sure you guys are going to have a blast with it.
I'm going to be looking at DocuSign this week, ticker DOCU. DocuSign earnings come out on Thursday the 14th. If you don't know what DocuSign does, they offer e-signature solutions for businesses to digitally prepare, execute, and act on agreements. More and more, I believe this is how business is being conducted. If you've bought or sold a house recently, chances are you've probably signed something with DocuSign. It is a very clever solution, very easy to use, and it's becoming adopted more and more as a legitimate way of doing business. I can remember a long time ago where we would submit offers for a house, and it actually had to be faxed. I couldn't figure out why in the world, but there was something that said it had to be faxed. We're moving beyond that now, and DocuSign is a company that's helping to blaze that trail.
The stock is not really supported by any fundamentals. By that, I mean the business is not profitable yet. It's not cash flow positive if you back out that stock-based compensation. So, for me, I'm hoping we see this stock go on sale, because I have it at the top of my watch list. I'd love to add it to my portfolio, just waiting for the right time.
I think that'll about do it for us this week. Matt, great seeing you again! Glad you got back from Vegas OK. Sounds like you had a good time. Appreciate all that great information regarding Shoptalk.
Frankel: Always good to be here! I don't know if I'll see you in Vegas next or up there next or wherever, but I'll see you somewhere soon! [laughs]
Moser: [laughs] Sounds good! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Austin Morgan. For Matt Frankel and Buck Hartzell, I'm Jason Moser. Thanks for listening! And we'll see you next week!
Buck Hartzell owns shares of Berkshire Hathaway (A shares), Berkshire Hathaway (B shares), Boston Omaha, and Markel. Jason Moser owns shares of Markel and Square. Matthew Frankel, CFP owns shares of Berkshire Hathaway (B shares), Boston Omaha, Markel, and Square. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Markel, Square, and Tesla. The Motley Fool recommends Boston Omaha and DocuSign. The Motley Fool has a disclosure policy.