Treasure Chest of Value
The Mindset Value Fund 2024 Annual Letter
Disclaimer: The below post is my 2024 Annual Investor Letter that I sent one week ago to investors in the Mindset Value Fund. This post is NOT a solicitation. I talk about stocks that I own and my view of the future. It is imperative that you do your own due diligence and not rely on anything written below. I’m posting this in order to show how my writing translates to actual performance. With that, I hope you enjoy and gain insights.
The Mindset Value Fund finished Q4 2024 down 5.8% and finished 2024 up 60.1% on a net basis.
Consorcio ARA’s Unlocked Treasure Chest of Value
We have significantly increased our position in Consorcio ARA (Mexico: ARA).
We believe that change is afoot for what we have called the most undervalued stock in North America. ARA, as you may remember, is a leading Mexican homebuilder that is sitting on a massive land bank in Mexico and a substantial amount of valuable real estate assets.
The company, which on a net basis has no debt, trades at 25% of book value and 15-20% of what we think is Net Asset Value with de minimis debt. However, this is the stock chart in the last 25 years:
If the stock is this undervalued, why does the chart look like this?
The company was founded and run by two brothers almost fifty years ago, and they helped guide their company through tough economic times and lots of turmoil in Mexico. The conservatism that guided ARA ensured that it survived the wild ups and downs of Mexico over the past decades.
Unfortunately, management has been set in their ways. ARA has been uber conservative with little or no debt, and the company pays a minimal dividend and continually has bought land. Over time, investor interest has waned as the company did not appear to be earning its cost of capital and with no change on the horizon to capital allocation, why would you invest in a value trap that is controlled by two brothers?
But change could be afoot. ARA’s 81-year-old Chairman unfortunately has encountered some health concerns, and we believe has stepped down, as he is no longer listed as Chairman on the next earnings call. It looks like the time has come for the next generation of the family to take on control of the company. We think this next generation is well versed with the power of buybacks, returning capital to shareholders and focus on ROIC.
The company has already hired a new CFO and directly from the press release on the CFO, the company is telling investors that ARA is changing (bold ours):
At ARA we cordially welcome C.P. Felipe Loera, we are sure that his experience and knowledge will be of great value, mainly in the financial strategy of evaluation and implementation of actions aimed at improving the return on investment.
ARA has been run the same way for decades and in a way that while it has ensured survival, has not been great for investor returns. Now, the company clearly is bent on change and a break with the past.
So, what can be done to unlock the company’s treasure trove of value?
Consider that the company owns shopping malls, which are cash cows. These are shopping malls in areas that will not be disrupted by Amazon or online shopping anytime soon. These are more like Latin American bazaars. In our analysis, at an 8% to 11% cap rate (11% being extremely conservative), these malls could represent 45% to 76% of the market cap by themselves. Could they be spun off? Could they be sold? Absolutely.
ARA also owns 1 kilometer of beachfront in Cabo San Lucas right next to the new Four Seasons hotel. This property could easily be worth half the market cap.
In addition to land perfect for resorts, ARA also owns industrial land, in which they could partner with infrastructure companies to develop. With a focus on ROI, the company no longer should go it alone.
This is just a taste of what the company owns and can use to redeploy assets in a shareholder friendly manner. They have been buying land in Mexico for decades and the book value is 12.57 pesos per share (compared to the stock price of 3.10). It is very unlikely that book value represents true market value, which could easily be 15-20 pesos per share.
Any kind of asset sale, divestiture and return of capital should cause the stock to soar.
And if the company is aggressive and decides to buy back shares with any of those divestiture proceeds, the returns could be incredible.
Consider that if the company bought back 30% of the stock at 6 pesos per share or almost 100% higher to its current share price, it could send book value above 15 pesos per share and NAV to 26 pesos per share.
I continue to believe ARA is the most undervalued stock in North America. We have been very patient, and we think our patience is about to pay off.
One last important point. If you are worried about Trump and the implications of his policy towards Mexico, please consider Jared Kushner, his son-in-law. His investment firm’s next big investment is in a Mexican infrastructure company.
Consorcio Ara is now our second largest position.
Grown Rogue
Our largest position remains Grown Rogue (OTC: GRUSF), and we are excited for 2025, as we are expecting a breakout year for the company.
By Q3 of this year, Grown Rogue should be growing its cash flow by triple digits year over year and yet it trades at 5 times my cash flow estimate.
We should start to see the embers of the fire that Grown Rogue is going to show in Q1 and then it ramps up from there.
The stock may move in fits and starts with macro news about cannabis and investor interest, but its financial performance this year should be hard to ignore.
There is a shortage of operational excellence in cannabis and the separation between Grown Rogue and most of the other publicly traded cannabis companies should be very clear by this summer. I cannot predict when Grown Rogue’s stock will run again, but when it does, it should go materially higher.
Vireo Bullish on Cannabis
I’ve never seen a stock announce an equity offering at a 149% premium to the last quoted stock price. And then the stock announce that the offering was oversubscribed and then the stock to trade significantly below the $0.6250 per share offering price. This is what happened in December to Vireo Growth (OTC: VREOF), which used to be called Goodness Growth.
Welcome to the wild world of cannabis, where the trading price of the OTC listed stock is completely disconnected from large pools of capital that are interested in long-term bets on cannabis.
I wrote a whole post about how I’m still Vireo bullish on Vireo and cannabis.
The amount of inefficiency and alpha available investing in cannabis is like nothing I’ve ever seen. And the number of institutional investors in cannabis continues to fall. We think this bodes well for future returns.
Perimeter
Last year was a very strong year for Perimeter (NYSE: PRM), which has a monopoly on the fire retardant that is dropped from planes to fight fires. The recent tragedy in Pacific Palisades and Altadena shows all too well the risks of fires in California.
We think insurance and the cost of these fires are going to drive California and the Federal government to be much more aggressive fighting fires than in the past and that Perimeter should earn a much higher rate than in the past. However, the stock is still a small position for us, why? Because we would like to see what management does with the cash they are generating. Do they buy back stock, or do they acquire another company? Is that acquisition in fire management?
With the lack of rain in Southern California, conditions are set for a brutal fire season. We are watching to see what management does on a capital allocation basis and may increase this position after they report Q4/Q1 earnings.
Summary
What you won’t see in any of the above commentary is any discussion of Artificial Intelligence. As you likely know, Nvidia’s stock traded down on Monday January 27th due to fears about the new Chinese AI DeepSeek that may mean you don’t need as many Nvidia chips, reducing future demand.
I literally have nothing meaningful to add about any of this but to say that Nvidia’s market cap fell by more than the entire Mexican stock market value that day. There is so much wealth concentration in the top American stocks and the valuations are so crazy high, that one stock, Nvidia, can lose the stock market of Mexico in a day, and it isn’t a catastrophe.
In 2000, when the internet bubble collapsed, I was just starting out in investment management. I owned stocks like Lone Star Tubular Services and other off the run stocks which were not in the popular zeitgeist. I produced the greatest amount of alpha compared to the S&P500 in the next three years that I’ve ever produced, earning 25% net annual returns while the market fell over 50%.
And this is the opportunity for our small cap value fund, our investments are so far afield that any incremental capital, or return of capital from our companies, might produce outsized returns. I believe we are well positioned and concentrated in excellent companies trading at low valuations. We just need to continue to be patient as our returns come in fits and starts
As always if you have any questions or comments, feel free to reach out to me.
Sincerely,
Aaron M. Edelheit