Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Alex Bossert!
Alex is currently the chief investment officer of Bossert Capital, a value-oriented firm he founded in February 2017. Bossert Capital has offices in both Minneapolis, Minnesota and Austin, Texas. Prior to launching Bossert Capital, Alex worked at multiple investment firms, including Milestone Capital Management, based in Wayzata, Minnesota, and a UK-based hedge fund. Alex is also active @alexbossert on Twitter.
Alex, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Bossert Capital?
First off, thank you for reaching out to do this interview. I grew up in a small town in Minnesota called St. Cloud and have been a stock junkie from a young age. In fact, I bought my first share of stock at age eleven. Shortly thereafter, I read a book on Warren Buffett and was completely hooked. Ever since then, value investing has been a passion of mine. Throughout middle school and high school, I devoured every book I could find on investing and began attending the Berkshire Hathaway annual meetings at the age of fourteen. In college, I began working as an analyst for a successful fund manager in Minneapolis named Pat Conlin. After graduation, I left Milestone and joined a UK-based hedge fund. I left that role in 2017 after being prodded by several prominent families to manage a portion of their capital. In February of that year, I launched Bossert Capital with the backing of a group of successful business owners, entrepreneurs, and family offices.
You seem to take a lot of inspiration from Warren Buffett and have even listened to or attended every Berkshire meeting since 1994. How has Buffett impacted your investing style and your approach to running your fund?
I attended my first Berkshire Hathaway annual meeting at the age of fourteen with my father – back in 2005. And I have attended every single in-person Berkshire Hathaway annual meeting since then.
I have studied everything I can get my hands on about Warren Buffett. It’s always been my dream to meet him, but it hasn’t happened yet. However, I was fortunate to have gotten to know Charlie Munger quite well. I had quite a few dinners with him at his house in Los Angeles which was an incredible experience.
I have done my own case studies on as many of Buffett and Munger’s investments as possible. Not only the investments they made through Berkshire Hathaway, but also their personal investments and investments made back when they ran their partnerships. I have found inspiration from what Buffett and Munger did in their early days when they had less capital and were able to invest in more obscure investments. I have even gone back and obtained copies of the pages in the Moody’s Manuals of many of Buffett’s partnership investments in the 1950s and 1960s. It’s a fascinating exercise. Most people will say opportunities of that quality no longer exist. I could not disagree more. The opportunity set today is just as good if you are hunting in the right places.
Our portfolio consists of investments that fit two buckets. The first bucket consists of investments made based on techniques that Buffett employed in his early years. The second bucket consists of investments that take inspiration from Munger’s approach. Let me explain the first bucket in more detail. In Buffett’s early days, he was heavily influenced by Benjamin Graham and was buying dirt cheap stocks at large discounts to asset value. He called these stocks “cigar butts.” Buffett produced fantastic returns buying these types of stocks. A portion of our portfolio is in stocks like this. They are businesses we don’t want to own for the long run but are undervalued and have a large margin of safety. We have earned strong returns from these types of investments over the years. These investments keep the lights on.
The second bucket represents the bulk of our portfolio. This bucket consists of investments in high-quality businesses that we intend to own for the long run. These are quality businesses with enduring competitive advantages and long growth runways. Today, buying “compounder businesses” has become quite fashionable. I think I see a new write-up on Copart once a week. Most of these “compounder stocks” will disappoint because they have been bid up to very high valuations. Everyone knows Costco is a fantastic business. But at 50 times earnings there is not much of a margin of safety. We are buying quality businesses when they are temporarily unloved. For example, we invested in a wonderful business in Poland called Dino Polska in early 2020 when the pandemic broke out and bought more again just after the war in Ukraine broke out. The stock went on sale temporarily during that time even though the unfortunate situation in Ukraine benefitted this business because of the influx of refugees into Poland. Dino Polska is a business I hope to own for the long run.
You mentioned on Twitter that you like to attend annual meetings and are sometimes the only outside shareholder to attend them. What value do you get from going to annual meetings?
99% of money managers aren’t even investors at all, they are glorified marketers who spend their time focused on raising money rather than doing actual, thoughtful investment research. It is an integral part of my investing process to visit the companies I am invested in. I seek to get to know the management teams well and add value to them over time. Attending annual shareholder meetings of the businesses I am invested in is something I do often. You learn an incredible amount. I go out of my way to attend annual meetings, even if they are in far-flung places. A few years ago, I traveled all the way to Sydney, Australia for the annual meeting of a $30 million market cap company. It’s amazing to me how few investment managers make the effort to visit the management teams of businesses they are invested in. Recently, I was the only outside shareholder at the annual meeting of a half-billion-dollar market cap company that has been a hundred bagger over the past 25 years.
I want to be the most knowledgeable shareholder of every single business I own. Spending an entire day with the management team at their annual meeting is one way I achieve that objective. Those deep insights give me an edge. In my view, the publicly accessible information on a company (10Ks, 10Qs, conference calls, etc.) are critical to read but tell you only a fraction of the full picture. What’s amazing to me is that most money managers don’t even bother to read the publicly available documents.
One of your most successful investments is Solitron Devices (OTC: SODI — $39 million), which is up ~10x over the last five years. Can you please tell us a little about what attracted you to Solitron and where you think the company goes from here?
Solitron Devices manufactures semiconductor components primarily for military and aerospace applications. When I first began studying Solitron in 2017, it looked risky on the surface level: it was losing money, it was delayed on its SEC filings, and it was experiencing operational hiccups with its production process. For most investors, it was an easy stock to quickly pass on.
However, I knew from studying aerospace parts businesses that they are generally very good businesses. So, I decided to dig deeper.
Since 2015, the company has been led by Tim Eriksen, who took over as part of an activist campaign. The company required a full operational restructuring due to the prior CEO’s mismanagement. A business turnaround is neither easy nor quick. Many impatient investors in Solitron who expected a rapid turnaround lost patience. The stock traded down substantially in 2018 and 2019 because of this selling pressure. I recognized the restructuring was bearing fruit and the company was turning the corner after a period of challenging years. This is when we got involved. Anyone who was following the company at this point and was willing to do more than cursory analysis could have discovered what we saw. Yet almost no one was paying attention.
My thesis for investing in Solitron was very simple: one-off expenses related to the turnaround efforts were obscuring the company’s true underlying profitability. These expenses were significant but transitory. Once those expenses rolled off, we expected the market to value Solitron fairly.
So I flew down to Solitron’s manufacturing facility in West Palm Beach and after spending the day meeting with company executives, I saw a business that was humming along. Yet, the market had not caught on to the fact that they had fixed the issues inherited from the previous management team.
We acquired the majority of our Solitron shares at less than $2 per share (equivalent to a $4 million market capitalization at the time). Based on our current estimate of Solitron’s normalized profitability, we paid less than one times free cash flow for our shares. In my view, this business merits a low double-digit multiple of free cash flow, at the very least. Bossert Capital continues to own a large stake in Solitron and we believe the stock is still undervalued at the current price of $18.
In December 2022, President Biden signed a $1.7 trillion omnibus spending bill that included appropriations for replenishing military supplies used in Ukraine and increasing stockpiles. Solitron is involved in several programs that are part of this restocking program, anticipating $20 million in increased sales over a five-year period (around $4 million annually). Based on comments at the annual meeting, I expect this will add $1 million - $1.5 million to Solitron’s annual operating income soon.
Once the restocking order commences, Solitron should be generating more than $5 million per year in free cash flow. At a recent share price of $18, Solitron’s market capitalization is $37.5 million. That’s why, at less than an 8x multiple of free cash flow, Solitron remains undervalued. Yet, there are several positive factors that will likely lead to significant earnings per share growth beyond just the restocking order, including: 1) winning additional new contracts, 2) expanding military budgets due to rising geopolitical tensions, 3) sales growth at its newly acquired subsidiary, Micro Engineering, and 4) cash allocation toward share buybacks and additional acquisitions.
However, it gets even more interesting. The Ukraine aid bill signed by President Biden this spring has the possibility of delivering another windfall for Solitron Devices.
For context, the $1.7 trillion omnibus spending bill signed by Biden back in December 2022 authorized $11.9 billion to be spent on replenishing stockpiles of weapons sent to Ukraine. As mentioned above, this 2022 bill triggered $20 million of incremental sales for Solitron which the company will begin shipping to later this year (or next year) and will last 5 years (i.e. $4 million of incremental sales per year).
The new Ukraine aid bill authorizes an additional $13.4 billion to be spent on replenishing weapons already sent to Ukraine (13% more than the 2022 bill).
If the mix of weapons included in the amount authorized to be spent on weapons replenishment in this recent appropriation is similar to the 2022 bill (it is too early to know if this is the case), then this new bill will be 13% more impactful for Solitron than the 2022 bill and could generate another $23.4 million in sales for Solitron. This would obviously be huge for Solitron!