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Is Boston Omaha a Buy?

By Matthew Frankel, CFP® – Oct 3, 2020 at 7:41AM

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This company has a ton of potential, but a lot of execution risk as well.

Boston Omaha (BOC 0.35%) hasn't exactly been a standout this year. Even after a recent rebound, the young holding company's stock price is more than 21% lower than where it started 2020, dramatically underperforming the 5% gain in the S&P 500.

However, Boston Omaha isn't focused on the short term. Its managers make decisions based on what will produce the best long-term results for investors. So, is now a good time to add Boston Omaha to your portfolio with shares at a discount?

Hands waving over crystal ball.

Nobody has a crystal ball, but you don't need one to see long-term potential. Image source: Getty Images.

Boston Omaha: The short version

Boston Omaha is a holding company that owns a few subsidiary businesses, minority stakes in other businesses, and a portfolio of common stocks.

Specifically, there are three wholly owned businesses in Boston Omaha's portfolio. Its largest business is billboard advertising, and its Link Media Outdoor subsidiary contributed nearly 70% of the company's revenue last year. It also owns a surety insurance business, as well as a provider of rural broadband internet services. It has minority investments in a commercial real estate brokerage, asset management business, and a homebuilder.

The idea is that the company's businesses have attractive economics and generate ongoing cash flow, which can then be put to use elsewhere. For example, Link Media primarily invests in static (nondigital) billboards. These don't bring in quite as much revenue as their digital counterparts, but require very little ongoing maintenance, making them excellent choices for long-term cash flow.

A time-tested model that could pay off tremendously

This is essentially the same business model that Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.10%) has used to grow from a struggling textile manufacturer into a half-trillion-dollar conglomerate. Boston Omaha plans a similar approach: The income from its operating businesses will be used to acquire more businesses or to invest in other opportunities, and the cycle will repeat for decades to come.

To further help make the Berkshire connection, Boston Omaha owns an insurance business, which allows the company to invest other people's money in addition to its own. Insurance premiums that have been collected but that haven't been paid out yet (known as the float) can be invested in the meantime, and Boston Omaha uses the Berkshire strategy of investing some of its float in common stocks, in addition to the standard insurance company strategy of high-quality bonds.

As if this wasn't enough to make Boston Omaha sound like an early-stage Berkshire, one of Boston Omaha's co-CEOs, Alex Buffett Rosek, is the grandnephew of the Oracle of Omaha himself. While the elder Buffett doesn't have anything to do with Boston Omaha, his grandnephew certainly tries to incorporate his great-uncle's investment philosophies. In fact, if you read Boston Omaha's annual CEO letters to shareholders, you can almost hear Warren Buffett's voice -- it's that similar to how Buffett talks about Berkshire's business.

Not a sure thing, but risk-reward looks attractive

Boston Omaha is currently less than 0.1% of Berkshire's size, with a market cap of about $450 million. Clearly, there is a ton of execution risk in trying to build a multibillion-dollar conglomerate, and even if Boston Omaha is successful, it would be unrealistic to expect the 2,000,000% total returns (that's not a typo) that Berkshire has generated over the 55 years Buffett has been at the helm.

But the early progress is promising. Boston Omaha's managers are building a collection of assets that should produce strong operating income over the years and are doing an excellent job of using smart and sustainable growth strategies. In full disclosure, I doubled down on Boston Omaha in my portfolio over the summer, and investors with a relatively high level of risk tolerance and a multidecade time horizon might also want to give it a closer look.

Matthew Frankel, CFP owns shares of Berkshire Hathaway (B shares) and Boston Omaha. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Boston Omaha and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Stocks Mentioned

Berkshire Hathaway Stock Quote
Berkshire Hathaway
$477,402.98 (0.07%) $317.98
Berkshire Hathaway Stock Quote
Berkshire Hathaway
$316.15 (0.10%) $0.31
Boston Omaha Stock Quote
Boston Omaha
$28.76 (0.35%) $0.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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