A Small Cap for the Long Run

About a year ago, I recommended Columbia Sportswear (Nasdaq: COLM  ) to subscribers of my Motley Fool Hidden Gems service. Why? Because the company possessed three of the core tenets we look for in our recommendations.

  1. It was small.
  2. It was undervalued by the market.
  3. It was led by a dedicated founding family.

Know your CEO
What so impresses me about Columbia is the long-tenured management team that owns a significant share of its businesses. In today's era, CEOs stay at the helm for fewer than five years (on average), sell options at the end of every year, and hightail it to Bora Bora when they've decided enough is enough. They live happily ever after without creating lasting value in the business that made them rich. Therefore, I scour the market for managers who put their reputations and compensation packages on the line for long periods of time. These superior leadership teams recognize that the biggest gains in the market are made over decades -- not days -- because of the power of compounding.

Columbia was founded in 1938 by Paul and Marie Lamfrom as the Columbia Hat Company. After Paul Lamfrom died suddenly of a heart attack in 1964, the business was turned over to his daughter Gertrude's husband, Neal Boyle. In the ensuing years, Boyle mapped out a major expansion for Columbia Sportswear, taking out a very substantial loan in 1970. Then tragically, three months later, he died of a sudden heart attack. He was just 47 years old.

Great thinking by a great woman
With the business on shaky terrain, Gertrude Boyle summoned her son Timothy, a senior studying journalism at the University of Oregon, to help her run the company (he returned to Eugene to complete his degree years later). The two met with the company's lenders but failed to earn votes of confidence. With no easy answers, mother and son decided to enter negotiations and sell Columbia Sportswear. The bidding process attracted one lonely bidder, offering $1,400 for the company. Disgusted, Gertrude Boyle shouted him out of the office. In her own words, she'd rather run the business "into the ground by myself rather than selling for that price."

Gertrude and her son Tim have worked together as partners for 35 years. She is the chairman of the board; he is the CEO. And given Columbia Sportswear's present value close to $2 billion, that means the two of them created more than 1.4 million times what was being offered for the retailer back in 1970. Today, Gertrude and Tim own more than half of Columbia Sportswear -- holdings worth in excess of $1 billion.

Gertrude did the right thing. This is a fantastic business, built for the long run, led by folks who repurchase shares when prudent and keep shareholders in mind.

Foolish final thoughts
In addition to Columbia Sportswear, founders and CEOs with large personal stakes in the health of their businesses have spurred many of the market's biggest success stories.

For proof, just take a look at these founders and/or longtime CEOs and their companies:

Company

Person

Percent Owned

CAGR* since one year after IPO

Best Buy (NYSE: BBY  )

Richard Schulze

15.6%

25%

Charles Schwab (Nasdaq: SCHW  )

Chuck Schwab

18.4%

28%

Coldwater Creek (Nasdaq: CWTR  )

Dennis Pence

40.2%

26%

eBay (Nasdaq: EBAY  )

Pierre Omidyar

14.4%

8%

E.W. Scripps (NYSE: SSP  )

Edward Scripps

43.5%

12%

FactSet Research (NYSE: FDS  )

Howard Wille**

N/A

27%

Average CAGR

18%

*Compound annual growth rate. Raw data supplied by Capital IQ.
**Mr. Wille passed away on Sept. 6, 2005. He was a significant shareholder and active board member until his death.

There's enormous return potential in finding small companies with dedicated leaders. And those returns are exactly what we seek to deliver to our Hidden Gems members. Click here to learn more.

This article was originally published on Aug. 11, 2005. It has been updated.

Tom Gardner, co-founder of The Motley Fool, is the lead analyst of Motley Fool Hidden Gems. Tom does not own shares of any company mentioned in this article. Charles Schwab, eBay, and Best Buy are Stock Advisor recommendations. The Fool has adisclosure policy.


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