A small manufacturer is massively overcapitalized but controlled by the founder’s family. Minority shareholders can go along for the ride but may never see a catalyst.
The United States is full of family-controlled businesses that fly well below the radar of most investors. The obvious reason is that most of these companies are very small and privately held. The cost of being a public company is very expensive for many small businesses and it can be time consuming to interact with shareholders. If you have a small business that is generating sufficient free cash flow to fund all expansion opportunities and pays good dividends to the family, there is no reason to go public.
In most cases, if you observe a family-run business that you would like to invest in, you’ll have to approach the controlling shareholder at the local Rotary Club. But some of these businesses are publicly traded and available to anyone with a brokerage account and enough patience to purchase thinly traded stock. Such is the case for a manufacturer of security products located in the small town of Kimball, Nebraska.
George Risk founded the company bearing his name in 1965. The company started by manufacturing push-button reed switches and soon branched out into security products that still represent its main line of business today. When George Risk died in 1989, his son Ken Risk took over as President and CEO and served in that capacity until his death in 2013. The company is now led by Ken Risk’s daughter, Stephanie Risk-McElroy. Today, George Risk Industries (GRI) has a market capitalization of $56.8 million with Risk family interests controlling ~60% of the shares.
I first came across GRI in 2010 when I was eager to emulate Warren Buffett’s strategy during his partnership years. GRI reminded me of Dempster Mill Manufacturing Company, one of Mr. Buffett’s early investments. At a superficial level, GRI seemed similar because it is also located in a small town in Nebraska, albeit on the other side of the state. However, from a more substantive perspective, GRI was massively overcapitalized with excess cash and a large securities portfolio. It was a net current asset value stock, also known as a “net-net”.
Intrigued by the company, I wrote George Risk Industries: A Potential Bargain With Limited Downside Risk in January 2010 and followed up with Reader Questions on George Risk. After watching the stock for months, I decided not to invest and presented my reasoning in George Risk Industries Resembles Buffett’s Dempster Mill But Lacks a Catalyst.
One of the benefits of writing about investments is the ability to travel back in time many years later. Did I get the general situation right in the original write-up and were my reasons to pass on the investment sound? Did I make the correct decision?
While my initial understanding of the business was sound enough, my decision to not invest seems a bit more suspect. I did present good reasons for passing, such as firm family control, but I also cited lack of “liquidity” when what I really lacked was the patience to put in limit orders and wait weeks or even months for a trade execution.
Then and now, GRI is very thinly traded. However, it was possible and still is possible to put money to work provided that an investor is willing to sit and wait for an execution and is not alarmed by the inability to quickly sell the position. Just as you would not jump in and out of a small private business, you would only invest in a public company like GRI with an indefinite time horizon. You might be buying a stock, but what you are really doing is going into a partnership with the Risk family.
This profile provides a review of GRI’s business model, recent financial results, balance sheet, free cash flow, capital allocation, and the family dynamics that appear to exist. While GRI is no longer a “net-net”, it still represents a reliably profitable operating company with a large portfolio of marketable securities which is certainly not needed to run the business. Trading at ~116% of book value, the valuation is not particularly demanding.
I hope readers will find this micro-cap case study interesting. But I should point out that while the stock does trade, it would be difficult to put large amounts of capital to work. For example, during August 2022, only 20,400 shares traded, and most trading days did not see any volume at all. With the stock trading in the $11-12 range, it would take many months and much patience to put large amounts of money to work.
While none of the profiles I publish are investment recommendations, this is particularly true for such a small, thinly traded stock. I should also note at the outset that I do not own George Risk shares and have no current plans to purchase shares.
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No position in George Risk Industries.