More so than most, I have long been intrigued by the 1960s fad of investing in conglomerate stocks. You have these beautiful, completely unrelated businesses that churn out profits under nearly all economic conditions, and, if properly managed, are immune from bankruptcy unless the conglomerate itself takes takes on too much debt or an insurance liability that could take down the parent entity if manifested.
The downside of conglomerate investing is that, as a class, conglomerate indices tend to underperform the S&P 500 Index. The theory is that each member of the portfolio is unable to reach its potential due to a lack of focus as individual business lines become neglected because no individual part receives extensive care and attention.
However, I believe that the underperformance of the conglomerate is tolerable because, in the event that there is a corporate spin-off event, you were already sitting there at the low price point and you get to experience all of the value that gets unlocked when the constituent parts go off on their own.
Purchased shares in the old Norton Simon, Inc. prior to 1982? You ended up with Revlon stock, Avis stock that was subsequently bought out by employees, Canada Dry stock that turned into Dr. Pepper stock and then subsequently merged into Keurig Dr. Pepper stock, Johnnie Walker stock that became part of Schiefflin which then became part of Diageo stock , McCall stock that converted into Time Warner stock, Smith & Wesson stock that was subsequently acquired by American Outdoor Brands, and Orville Redenbacher stock that subsequently became part of ConAgra. You would have a diversified portfolio in 2018 just by sitting on the Norton Simon shares for a few decades.
Owned the old Sears prior to 1993? Now you’re sitting on shares of Morgan Stanley, Allstate Financial, and Discover Financial Services, in addition to your retained interest in the Sears parent company.
Bought the old Philip Morris prior to 2008? You ended up with shares in Altria, Philip Morris International, Kraft-Heinz, and Mondelez.
Owned the old ITT stock five years ago? You got to retain your interest in ITT, plus you acquired shares of Xylem, and shares of Exelis too (subsequently acquired by Harris Corporation).
Decades from now, investors in Berkshire Hathaway may be sharing the most exceptional story of them all.
A less known company that may have a similar future is Otter Tail, a Minnesota company that provides electric utility services to parts of Minnesota, North Dakota, and South Dakota. What many people underestimate is the goldmine of other businesses that it is sitting on as well. It owns BTD Manufacturing, Inc., which is a hard metal fabricator. It owns T.O. Plastics, a plastics thermoforming manufacturer. It owns Northern Pipe Products, Inc., a PVC pipe manufacturer. And it owns Vinyltech Corporation, another PVC pipe manufacturer. There are also agricultural and recreational vehicle subsidiaries that are a small but growing part of the corporate umbrella.
From the perspective of a long-term investment, Otter Tail is quite intriguing. It has the stability and dividend history of a typical utility, with a record of uninterrupted dividend payments dating back to 1938, but it also comes with the potential for some significant corporate spinoffs sometime between now and the next couple of decades. Although it is an art form, anticipating corporate spinoffs is a somewhat predictable activity because there are only so many publicly traded stocks with a constellation of unrelated business lines (the difficulty is predicting “when” it will happen. My view is that the “when” cannot be predicted absent insider information, so the best approach is to identify businesses that you are happy to own as a conglomerate and just wait years and years for the spin-off events to materialize). I imagine that, in 2045, a similar story about Otter Tail will be shared comparable to the other companies mentioned on my exampli gratia list.