FRMO Corporation: Interesting Set Of Assets Managed By Creative Thinkers (OTCMKTS:FRMO)

FRMO Corporation (OTCPK:FRMO) is an investment vehicle led by Murray Stahl and Steven Bregman. The duo own a significant part of the outstanding shares, and neither of them draws a salary. John Meditz and Thomas Ewing, who work at asset management firm Horizon Kinetics, also own large parts of the firm. Between the four of them, ~60% of the shares are tied up.

FRMO Corp holds a diverse array of assets, and it is a real puzzle to get a clear picture of what’s what. Management is actually quite open on their earnings calls and in letters to shareholders (but is quite time-consuming to dig through those), while accounting rules make it hard to figure out what’s what in the filings.

A few of the most critical assets are: 1) an equity interest; and 2) a revenue royalty in Horizon Kinetics.

A big part of the reason I’m invested here is that I consider Stahl and Bregman brilliant investors who not enough people know about. Many years ago, I started reading Stahl’s write-ups from their research archive and thought these essays were brilliant. After that, I started following them more closely and investing alongside them through FRMO.

My guestimate, after following this company for years, is a fair net asset value adds up to around ~$420 million. But that’s most likely a conservative asset value and doesn’t reflect any premium for the significant skill of Stahl and Bregman. FRMO’s current market cap is about $380 million, meaning the stock trades at a slight discount to its net asset value.

Below, I’ll lay out how I get to my estimates. For starters, here is the latest balance sheet:

If you look at the balance sheet values, keep in mind the performance of equities and specifically Texas Pacific Land Trust (TPL) since the balance sheet date:

This means the current fair value of equity securities is likely quite a bit lower. By my estimate, TPL likely makes up around ~1/4th of the published asset value at that date.

Other than the easily measurable publicly traded securities, investments tend to be held at cost. This obfuscates some of their value.

I’ll go over the primary holdings.

Horizon Kinetics

The asset management firm Horizon Kinetics is one of the most important components of FRMO’s value. FRMO Corp owns both a direct equity stake and a revenue share in Horizon Kinetics. The value of an asset management firm is mostly determined by assets under management. Horizon Kinetics has $6 billion under management. Assets under management (“AUM”) are down severely from back in early 2008, when the firm managed $12.5 billion just in funds that could be tracked through 13-Fs.

Based on the type of assets under management, fee levels, type of funds, previous much higher level of assets and the proven skill level of the team of capital allocators, I conservatively estimate the value of the 5% stake in Horizon Kinetics at around ~$40 million. $30 million above its stated book value.

Note that a big unknown is what is on the balance sheet of Horizon Kinetics. My impression is that the firm holds a significant amount of assets and very little debt.

FRMO also owns a 4.2% share in Horizon Kinetics’ revenue. A revenue share is unburdened by operating costs and a 4.2% revenue share is much more valuable as compared to a similarly sized equity stake. Six billion of assets under management could generate $95 million in revenue before performance fees. This translates into ~$4 million of income going towards FRMO Corp per year (roughly matching the fee income).

Sometimes there will be performance fees at the end of the calendar year (which we should see next quarter) because Kinetics’ funds performed quite well. Here’s what Stahl said on the recent earnings call:

So Horizon itself has done pretty well. Horizon is for the year closing December 31, 2022 we collected a number of performance fees and a fair amount of net income, therefore that’s going to spillover in the revenue in next quarter FRMO because you will recall we have our revenue share. And there’s also some investments in FRMO and there are very comparable investments in Horizon, so they are going to have very similar kinds performance so expect some good news over there.

Over the last year or so Horizon Kinetics has started to grow AUM again after a few years where it was less obvious the firm would ever regain prior highs in assets under management. They got a solid boost from an interesting exchange-traded fund (“ETF”) they launched called the Inflation Beneficiaries ETF (INFL). This equity ETF did 2.66% over the past year and has generated 13.79% on an annualized basis since inception. That’s really good for an equities ETF over this period of time.

Bottom line, I estimate the revenue share is worth at least double the equity stake or about $80 million(~20x multiple).

Together, the HK interest could be worth around $120 million.

TPL

FRMO Corp holds a stake in Texas Pacific Land Trust, mentioned above, where it is currently on the board and spearheaded a transformation into a corporation from a Trust. I expect TPL will be added to the S&P 500 (SP500) in 2023, although I could be wrong. Stahl has been investing in TPL since the ’70s, and it has been an absolute monster:

I think FRMO’s stake is worth $124 million as of January 26.

Equity stakes

The company publishes the value of its equity holdings. I think the current fair value of its equities could be around $150 million (that’s subtracting TPL, as I track that interest separately).

Other investments

There are lots of small stakes, like 600k shares of Grayscale Bitcoin Investment Trust (OTC:GBTC). I think that’s very interesting right now. A 0.05% stake in the Digital Currency Group, A 30% stake in Winland Holdings Group (OTCPK:WELX). This is a company that’s very much under the radar within the crypto landscape. I’ve written relatively recently about that company here. They have an investment in South La Salle worth at least $9.3 million. An investment in the Miami International Stock exchange that I think is worth at least $13 million. Investments into Horizon Kinetics partnerships and around $36 million in cash.

This is a rough overview of how it adds up:

HK revenue royalty	80
HK equity interest	40
South La Salle	9.3
Winland	3
TPL	124
Cash	36
GBTC	7.2
Miami International	13
Investments in managed funds (guestimate ex GBTC and TPL)	20
Equity securities (ex TPL/GBTC)	150
Total	482.5

Click to enlarge

Note that the above disregards a lot of even smaller interests. For example, I’ve disregarded a lot of tiny stakes in altcoins and physical bitcoin stakes, etc. For example, they have some interest in crypto-mining entities, and they are actually going to float these interests separately (emphasis mine):

Now you can say more or less the market is properly discounting the halving. So we’re much, much more favorably inclined to crypto. Now in our cryptocurrency exposure, apart from the crypto we own directly and indirectly in the funds, we have four cryptocurrency investments. I’m going to just mention them, because we don’t really highlight these things in the financial statements. One is called consensus mining, that is the merger and the capital raise of the original HK cryptocurrency mining partnerships and we did an offering. That offering is going to be listed in tradable and not in the distant future I’m guessing, but I’m thinking 60 to 75 days from now, maybe sooner.

That listing should give some visibility into what the market thinks is fair value.

Of course, there are also liabilities but these are mostly deferred taxes and securities sold short. Given the investment style of its founders, these are unlikely to come due. The securities sold short could be considered an asset instead.

A reasonable, fair value of the FRMO Corporation assets is some $482.5 million. That’s against a market cap of $380 million. That means there is about a 26% upside to fair value without considering a bunch of the smaller assets. FRMO Corporation seems like a clear hold to me. It could be a buy if you have a lot of confidence in Stahl and Bregman. I highly recommend reading their communications and insights to get more comfortable.

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