Jerry Jones Outsized Returns; Interesting Reads

I was listening to the Founders podcast episode on Jerry Jones and wanted to jot down some key characteristics of what made some of his investments so great as well as a brief summary of the podcast. I highly recommend listening to it. I wasn’t aware that Jerry’s Cowboys purchase was a deep value turnaround.

Jerry Jones had always wanted to purchase an NFL team. He had told everybody all his life he wanted to. But first he had to make some money to finance it. He made a bit of money when his father sold his insurance company that Jerry helped build and which netted him about $500,000. Since he was extremely hungry to become rich, he then moved to Little Rock, Arkansas and wanted to get into the oil business. His first deal was when he met someone who was shopping an oil deal that everyone had turned down and had said no to. Jerry was the only person who had said yes, while at the time he was selling mobile homes.

The result?

The group hit their first well that was worth more than $4 million dollars. And they kept hitting wells each time they drilled for 15 consecutive times. He ended up selling 1 of his oil production companies in 1976 for $50 million.

What allowed him to make an outsized return on this investment that I think can apply to public markets or any type of investment is 1)When people turn their nose up at it and think it is dumb/crazy, 2) There is an ick factor associated with the investment and 3) Everyone doesn’t want to touch it and says no to it. When any of these characteristics apply to an investment you are being pitched, I believe it would pay to do more work. Or to look for investments that people think are dumb/crazy to invest in to. I don’t mean to go look for huge cash burning non-revenue generating businesses, but real businesses with downside protection that others don’t or can’t touch for whatever reason. A good example wold be General Growth Properties in 2008.

2nd and 3rd Investment

After his first success, in 1980 he decides to drill for natural gas with a partner and they take a shot drilling at 2 wells. One near San Francisco and one in South Eastern Oklahoma. Right away, the production was a disaster as an employee made a half a million-dollar mistake by accidentally dumping cement in the well ruining it at their Oklahoma location. They then invested another $500,000 and moved the drill bit 100 feet and the next day hit a natural gas well worth over $40 million. While this was happening, the San Francisco well was going to be worth $40 million over a two-year period. In total, they made $80 million on their first two natural gas drills.

The last deal he does before buying the Cowboys is extremely interesting. Jerry’s friend was the CEO of Arkansas-Louisiana Gas Company, which is the state regulated utility company. In 1981, Jones forms a new gas drilling company called Arkoma Production Company. He then enters into a deal with Arkansas-Louisana Gas Company (which people say is one of the greatest sweet heart deals of all time) that allows Jones’ company to sell gas to this utility company (which his friend is the CEO of) at a price much higher than what the utility company was currently paying other gas companies for their gas. The deal was for $4.50/thousand cubic feet, which meant Arkoma was getting more than 9x the price that other natural gas producers were selling their product for.

Then in 1985, the natural gas industry was deregulated and the price of natural gas went down significantly. But because of the terms of the agreement between Arkoma and the utility, the utility company had to purchase from Arkoma the most amount of gas it could produce at the maximum legal price. Jones then decides to purchase other natural gas producers that didn’t have this sweetheart deal because he has a guaranteed price he can sell to the utility company compared to what all the other natural gas producers could currently sell at. Thereby buying more supply and selling the gas at the inflated rate. The end result of all of this: the utility company was paying Arkoma $40 million a year for gas it didn’t need. Because this was a terrible deal for the utility company, it decided to purchase Arkoma in 1987 for $175 million. The total value to Jones and his partner based on money taken out of the business and sale price allowed them to pocket over $300 million. These articles here, here and here give a good background of the deal. This leaves Jones with about $90 million in cash at this point in his life.

Cowboys Purchase

The current owner of the Cowboys in 1988 was forced to sell the team because he had a severe cash crisis with all the businesses he owned. The owner was never really interested in owning the team but wanted to own it for the depreciation it threw off to cover his profitable oil business. When he decided to sell, he pitched 75 people who all had said no and financial advisors at the time had said buying the cowboys was “ridiculously overpriced, and financial suicide”. Enter Jerry, who buys the team in 1989 for $140 million. He used all of his $90 million in the bank and borrowed the remaining $50 million at high interest rates.

With that, he got a football team that just recently lost $9 million, couldn’t sell a majority of the luxury suites as only 6 of 188 were sold, attendance dropping 25% from the prior year, and only one home game had sold out.

Within a few years from taking over they were averaging more than $30 million in profits per year and are now doing over a billion in revenue. As of 2024 they were valued at $10.1 billion, earning 112 times his initial $90 million investment.

Here’s how he earned outsized returns on his Cowboys purchase:

• Purchased from a forced seller

• The owner had shopped the team to 75 other parties who all said no before Jones came into the picture and said yes.

• Took advantage of low hanging revenues opportunities.

  • If you sell the luxury suites in your stadium, you don’t have to share the revenues with other NFL owners as you do the typical ticket revenues. The suites could sell for $400,000 to $1.5 million and after a few years he had 95%-98% of them filled. This turned into $50 million profit just from selling these.

  • Moved the free press seats that were the best seats on the 50 yard line to the 5 yard line and sold these 50 yard line seats.

  • There were no ads inside the stadium. He placed ads inside the stadium and sold these ads to local businesses.

  • At the time they couldn’t sell beer and alcohol at the games. Jerry lobbied and wined and dined the city council to grant him a stadium license to sell alcohol. This turned into $1.5 million to $2 million per game in profit.

  • Hired sales and promotion people and cut positions that weren’t generating revenue.

His cowboy purchase can be boiled down to a few key characteristics: 1) There was a forced seller, 2) The cowboy franchise is a scarce asset as NFL franchises are rarely if ever expanded. This creates a lack of supply with all demand growth going to the limited franchises in existence and acts as a tailwind, 3) No one wanted it as it was shopped to 75 other parties, 4) Extremely low hanging revenue opportunities that were just common sense to implement.

These key characteristics in his investments are what everyone should be on the look out for and has made Jerry Jones one of the richest men in the world today.

Interesting Reads

A couple of interesting reads this past weekend:

1) Tom Murphy 2000 HBS Interview

2) Ben Graham 1955 testimony before congress

Liquidating Cannabis REIT with a Catch

Two posts ago I talked about “seasoned liquidations” and I just happened to have found exactly that. Nova Net Lease REIT is selling its main asset, Class A Units of an operating partnership, for $3.71m USD, or $0.50 per share, after undergoing a strategic review. This represents a 456-498% premium to the 30-day VWAP. Nova will then wind down its REIT and subsidiary corporation and make a liquidation distribution to shareholders relatively quickly in the next month or two in the amount of US $0.40-$0.43/unit. In the press release the distribution is to be expected in 30-60 days following the completion of the sale and in the circular it just says first quarter of 2025. This could provide upside of between 12% - 22%. Its trading OTC at $0.3526 as ticker NNLRF and on the Canadian Securities Exchange at $0.375 with ticker NNL.U. The only problem: I haven’t been able to get any order filled as the volume is dreadful so I thought I’d just share it anyways as a good case study for finding inefficient mis-pricings in the smaller market areas. And maybe someone reading this will be able to get a buy in before the distribution.

Nova owned a cannabis industrial investment property as well as a JV that held two cannabis investment properties. This is the organizational chart with what they sold.

From reading the documents, they effectively had a 35% economic interest in the LLC they sold. So after this sale, they are going to be left with Verdant Growth Properties Corp. and the REIT at the top, both of which are going to be wound down. If you look on page 74-75 on the circular PDF, you can see the financial advisor’s liquidation value calculations for the LLC which comes to roughly the distributable amount.

The transaction was announced in November and unitholders held a meeting to vote on the transaction December 20. The shareholders voted to complete the sale and it closed on January 9. Management stated $0.40-$0.43 in the press release was the estimated distribution and in the Fairness Opinion that amount is given as more precisely $0.42/share in US dollars.

Based on the net difference between $0.50 per share and expected payout of $0.42, the estimated liquidation costs are about $596,000, which seems about right for a relatively quick/small liquidation. They also released the CEO when the agreement was entered into and replaced him with the CFO with no additional compensation. Also, not that it matters much, but I don’t think I have seen the financial advisor, or someone who works for the financial advisor, provide a fairness opinion and they themselves own a stake in that company.

The spread is available because the liquidity is tiny. I am a little disappointed I haven’t been able to get my ordered filled but I know there will be plenty more of these to play and hopefully someone can take advantage of the spread.

A-Z on the Canadian Securities Exchange

This January I thought I’d go A-Z on a small backwater exchange here in Canada, the Canadian Securities Exchange. This is the exchange one tier below the TSX Venture, which itself is a tier below the TSX. I downloaded the excel list of companies from the CSE website and started at the top.

The game of investing is turning over the most rocks until you find something that seems extremely compelling. This could come from reading investor letters, investment pitches, running screens, following news flow, etc. But you aren’t going to see what truly are the best opportunities unless you go through every stock on each exchange. The beauty of looking at every stock is that you can than compare it to your existing portfolio as opposed to waiting for investments to come around.  The problem with this is it is extremely time consuming and you usually end up finding a lot of junk/unprofitable companies as you can see from my notes on the right below.

While there is no exact tell for what I was looking for when going through each company’s financial statements, I wanted to see actual businesses that were profitable or at least almost profitable with a strong balance sheet. Everything else was an immediate pass. How else can I value a business if there is no real business?

A couple observations

• For a country with vast natural resources, Canada has a TON of unprofitable mining companies.

• A lot of these companies should probably just be liquidated/not publicly traded.

• Going A-Z is never easy and I found myself thinking I should just skip the names that just seem like an obvious pass but if everyone thinks like that there might be some hidden gem.

• Once you get into the habit of starting, it can become a bit addicting trying to see each company everyday. At the end of each session I found myself wanting to look at “just one more” which would usually turn into 10 more.

• My goal was to do at least one letter of the alphabet each day and I would usually surpass that because some letters didn’t have many companies.

I managed to make a list of at least some interesting companies to keep an eye on and thought I’d share the top 10 companies I thought were the most interesting.

1) ZTEST Electronics Inc.

Develops and assembles printed circuit boards and is currently undergoing a strategic review. Almost doubled revenues from 2023 to 2024 with net income going from $165K to $1.7m. Shares outstanding of 36.5 + 2.7m warrants +1.1m options with a stock price of $0.40 for a market cap of $16.12m. Trading at 9.5 times last years earnings and if they can grow again at the same rate this year, it seems really cheap. Strong balance sheet with cash balance of $2.7m against debt of just over $100K.

 2) BioHarvest Sciences

They synthesize plant based molecules and have a market cap of $110m with insiders owning 37.9% of the company. Their revenues and gross margins have exploded the past couple of years. In 2021 they did revenue of $2.1m and gross margins of 31.9%. In the TTM of Q3 2024, they’ve done revenue of $22.4m and gross margin of 54%. Huge growth that is hard to argue with.

The only downside is they are still losing money but on a lesser scale as a couple of years ago. Also, their shares outstanding have gone up as they have raised money to fund the growth. This is one I will be keeping my eye on for when 1) potential profitability will inflect, 2) no need to raise capital anymore, 3) if the valuation makes sense and 4) if I can get comfortable with the business/industry.

3) Eagle Royalties

A junior mining company but it holds 35 royalty interests in certain projects in Western Canada covering different commodities. It was spun off from Eagle Plains Resources in 2023 on a 3 for 1 ratio. Extremely strong balance sheet with total assets of $4.8m with cash comprising $3.5m of that and a note receivable of $1.25m against total liabilities of $303K. Market cap is $6.6m but they just diluted shares from 28m to 57m, with fully diluted 66m. Royalties seem lumpy as they just received one so far this year for $3.75m which turned into net income of $2.9m in the last 12 months. Insiders own 20-30%.

4) Happy Belly Food Group

Seems like an interesting small business. Has a bunch of different brand food locations/consulting and also earns royalty and franchise stream income. Sales have been growing as of September 30, 2024 as they have done 5.2m in past 9 months vs 3.8m last year same period. However, still burning money and diluting but looks like cash burn has come down. Total assets of $9.1m with cash making up $3.6m of it against $3.6m of convertible debt.

5) MTL Cannabis Corp.

One of the rare profitable cannabis companies I’ve seen, although they did lose money in 2023 but they under went a RTO mid 2023. With 117m shares outstanding, 7.7m warrants and 6.5 options, there is a market cap of $48.5m using a stock price of $0.37 (not using the treasury method). While I don’t love the balance sheet of $22.6m debt against $3.2m cash, there is $18.5m of PP&E backing that up as well. Sales have been growing, going from $32m September 2023 last 6 months to $42m September 2024 last 6 months. This takes into account $10m of excise taxes as well and if the government were to change this in the next few years, it could fall right to the bottom line.

Operates 2 segments: 1) Licensed producer that just did $11m in operating income and $8.5m net income past 6 months, 2) CHC segment that did $430K operating income and $100K net income past 6 months as well. On a consolidated basis when taking corporate expenses into account, its 9m operating income and $3.4m net income. Annualize that for the year could be $18m in operating income and $7m in net income against a market cap of $48.5m for 7 times earnings.

6) Namesilo Technologies Corp.

Nice little domain name business run by Paul Andreola. Holds 1.2m in bitcoin investments as well as some other of his investment picks (Atlas Engineered, Ceapro Inc.). Does just over $40m in revenues and is profitable on an operating basis of $3-4m. Only debt is 3.8m convertible and large amount of liabilities is the deferred revenue of almost $30m of a the total $43m in liabilities.

7) Nova Net Lease REIT

I will most likely be writing this up in a couple of days but it is a Cannabis REIT that owns one investment property and a JV that owns two other properties that are profitable. Just agreed to sell most of the assets and liquidate. Stock price of $0.36 with units outstanding at 7.4m, market cap is $2.6m. The book value without making any adjustments to the properties or JV is $12m, which means on my rough math it is trading at 22% of book value. But this could be as a result of them consolidating the JV onto their statements so their true economic ownership doesn’t show through. Granted it is losing some money and burning a bit of cash but the JV is profitable according to the notes in the financial statements.

8) Urbana Corporation

Investment company with a net asset value of $427m or 10.32/share. Currently trading at $6.19 which means it is valued at 60% of net asset value. Investments are made up of both public and private amounts. Public is $202m on balance sheet and private is $297m with some private debt investments of $6m. Management in September was granted by TSX to allow a NCIB to repurchase 10% of the company’s shares which means management agrees it is undervalued. Smart capital allocation to purchase below asset value which would bump up the NAV per share after the buyback. Reading past investment pitches on them, they have always traded at a large discount.

9) ICEsoft Technologies Canada Corp.

Licenses its technology and its SAAS product to businesses and government clients. They do the mass notifications that pop up on your phone if the government needs to let people know of certain emergencies. Seems like losses have come way down and they are near breakeven. Trades at a roughly $5m market cap when taking the warrants into consideration. Annualizing their current quarters revenue, trades for about 2.5 times revenue. The balance sheet isn’t the greatest with only $111K in cash against $1.2m of convertible debt. Not a buy to me as I need a clean balance sheet and profits but one to keep an eye on.

10) Victory Square Technologies Inc.

Investment company with investments made in the tech. sector and consilidates a bunch of their investments on to the financials. Has a market cap of $45.7m but they own a 64% stake in Hydreight Technologies (Ticker is NURS.V) that is worth roughly $60m as the stock has gone crazy the past year. They also own other investments that I am sure are worth more. Could be interesting if they ever try to unlock some of this value.

Honourable Mentions

—> Grown Rogue, Plaintree Systems Inc, Royalties Inc.

I am hoping to do the TSX Venture exchange in February/March. The CSE only has about 771 listings whereas the TSX Venture has I think triple that amount so it will take me a bit longer to do obviously.