One Of The Hottest Stocks On The NYSE Is A Company Most Of Us Have Never Heard Of - And It's Got An Incredible Backstory
The Texas Pacific Land Trust has traded under ticker symbol TPL since ticker tape was an emerging technology. But at a time when billions of shares change hands every day and a high-frequency head start measured in milliseconds can be enough to game the system, few on Wall Street have ever heard of it.
That's their loss.
With a colorful history peopled with scheming robber barons, corrupt politicians, wildcat oilmen, farsighted hedge funders, and one rebel heiress, TPL is currently outpacing 99% of the stocks traded on the New York Stock Exchange. Its operating margins are orbiting near the stratosphere: around 90%, compared with 30% for Apple, Inc.
A share purchased in August 2009 for $30 would today go for $170 - an for an average annual growth rate of of 41%.
This year alone, the stock is up 73%. Not bad compared to the increase of .68% we've seen in the Dow Jones Industrial Average (which doesn't include TPL) during the same period.
TPL's only real goal is to maximize returns while gradually liquidating its assets.
"Imagine the PowerPoint presentation," muses Louis Geser, chief analyst for White Space marketing and an independent microcap analyst, who began purchasing TPL when it was around $35. "You could list what this company does on one hand, and it's on autopilot."
Not exactly, says David Peterson, the Trust's CEO, who along with his team is kept pretty busy making real estate deals and keeping an eye on the accounts receivable. "It's not as sleepy as it once was, that's for sure, sir," he says.
It's been a very drawn-out process.
"Yep, we're going out of business," TPL's former manager, Roy Thomas, joked in a 2005 interview with The Dallas Morning News. "It's just taking us a while."
What began as more than 3.4 million acres has now been pared down to 911,216, and Peterson seems in no hurry to dispose of the rest. "If the trustees were to receive an offer, they would consider it," he tells Business Insider. "In the meantime, the race has started, and we're pointed in the direction of the finish line." He laughs. "Of course, no one knows how far that finish line is exactly...."
That's just fine with TPL's stockholders, who tend to be among the most patient of investors.
The Trust has a few sources of cash flow. In addition to slowly liquidating its holdings - an acre here, an acre there, usually buildable parcels near towns or cities - it derives some modest income from grazing rights and wind farms, receives surface damages from pipelines and other infrastructure, and earns royalties from oil found in shale formations miles below the surface. Currently, the latter revenue stream is by far the most lucrative due to the boom in fracking and other secondary recovery methods, which have unleashed significant reserves in areas that were abandoned by Big Oil decades ago.
But even without that recent windfall, TPL would be a highly appealing investment. The Trust spends its cash two different ways: It distributes a small fraction to shareholders in the form of dividends (at a current yield of .27%), and it systematically repurchases and retires outstanding shares. As a result, there are fewer of those out there all the time.
Donald Hodges, chairman of Hodges Capital, which counts oilman turned financier T. Boone Pickens among its clients, has been in the stock for decades and currently owns more than 6% of the Trust. "Mathematically, to me it's just one of those stocks where you can't really say what it's worth," Hodges says, "but you know it's worth a lot, and you just better hang on for the ride."
It was, The Times declared, "the acme of financiering."
Nearly a century later, in 1995, hedge fund manager Murray Stahl came to a similar conclusion. A "Contrarian Research Report" released by his fund, Horizon Asset Management, described a little-known stock that was "slowly but steadily buying itself out of public ownership.
"Although this process has been ongoing for over a century," the fund reported, "it may now have reached a point at which this dynamic begins to naturally accelerate …" Predicting that within a decade, "the company's assets could become concentrated in the hands of a few share owners," the report concluded that seeing as how the shares represented 1 million acres of Texas land, "the magnitude of this accumulation of per-share value could be extraordinary."
The price of a share at that point was a reasonable $20. Factor in subsequent stock splits, and anyone who followed Stahl's counsel would have turned that $20 into $1044, for an increase of 5120%. Horizon, now Horizon Kinetics, took its report to heart. While Stahl and his colleagues declined to speak with Business Insider for this article, public filings show that the company's position in TPL is now around 1.5 million shares, worth around $200 million.
A full decade after that first report, the stock underwent a notable adjustment, losing a third of its value in just two months. But when Horizon released a follow-up report in 2005, the fund was if anything more bullish, describing the precipitous price drop as a win for stockholders, because the cheaper the stock, the faster the trust could repurchase the outstanding shares, driving up the value of those that remained.
"If you're a long-term shareholder, you almost want the price to decline," notes Eric Marshall, portfolio manager for Hodges Capital, who has been tracking TPL for decades. "The lower the stock price, the more shares get bought back, the more acres you own per share at the end."
Further, as Horizon pointed out, the more shares the Trust owns, the less it has to pay out in dividends, leaving still bigger piles of cash lying around to purchase more shares.
Donald Hodges, who recently celebrated his 80th birthday, puts it succinctly: "The guy that ends up with the last shares is going to be a rich son of a gun." Generally speaking, he adds, TPL's business model is "about as good of an equation as I've seen since I've been in this business, which is 54 years. I haven't found a negative to it yet."
There is, perhaps, no company quite like it in the world. "They don't even have to be successful as a business," Louis Geser marvels. "All they have to do is keep doing what they've been doing for 125 years."
By that reading, the mineral royalties that have been pouring into TPL's bank accounts of late are just the slimy, black icing on the cake. Oil has painted the sands of West Texas more than once in the past century, spawning corporate empires and political dynasties (the Bush family is one), winners and losers, and boom towns that blossom overnight then tip into a steep decline when the pump jacks start sputtering.
But fracking or no, TPL has quietly been making its investors wealthy for more than a century. All because of one big bet that went very, very bad - back when the country was young, capitalism was practiced with bare-knuckled zeal, oversight was virtually nonexistent, and land seemed all but limitless.
Making Tracks
Listen closely and you can hear the same lofty Utopian spirit that still sets pulses racing in today's Silicon Valley: the ardent faith in the power of technology to bring people together and ultimately redeem them. The railroad would, as we say these days, make the world a better place.
"It would form a connecting link between nations and peoples, by affording communication between the continents, islands, rivers, zones, climates, seas and gulfs," the writer went on. "It would unite the old with the new, the Latin blood with the Saxon, the present with the future, lift ignorance into the sphere of intelligence and power, and give to the peoples of the world a new life full of prosperity and promise."
It's a familiar idea - deploying a disruptive new networking technology to make life easier, increase communication, and expand horizons. In this case, the new technology was a railroad, the Texas & Pacific, and the goal of the pitch was to persuade the government to help finance its construction.
The executives of the Texas & Pacific Railway were not ones to soft-pedal the scheme's potential. "Prosperous communities of farmers, and thriving towns inhabited by intelligent mechanics, manufacturers and traders, will spring up like magic," they promised. "School houses and churches will everywhere adorn infant towns and incipient cities, and civilization will take firm and permanent root in what is now but a wilderness."
Another contemporary advocate reeled off a long list of more practical benefits, from promoting the settlement of the West and "intercourse with the Indian tribes" to increasing frontier security, facilitating military transport, spurring trade with Asia, and bringing "the lights of American civilization to regions remote and hitherto involved in the darkness of pagan idolatry and imperial despotism."
Meanwhile, failing to build the railroad, its proponents warned, could have dire consequences, including the possible secession of California and Oregon. "Who can doubt that a new republic will grow up on the shores of the Pacific, which would perhaps … obtain supremacy of [its] own," one observer suggested ominously.
The railroad's partisans marshaled another argument to pry more subsidies out of the Texas legislature and the U.S. Congress - and it too has echoes in today's tech industry. A southern route to the Pacific was needed to counteract the monopoly that had sprung up to the North, where the Central and Union Pacific railroads had created a stranglehold on interstate commerce and transport. This rationale was an especially compelling one for Southerners, still reeling economically from the war (not to mention the new labor costs brought about by the abolition of slavery) and eager to wrest their fates from the clutches of Northern robber barons.
So what if getting the railroad built meant a massive transfer of the public domain into private hands? "It was worth 25 cents an acre," Louis Geser says. "There wasn't seismic data on the property. No one knew there was oil in tight seams that could be accessed 100 years later by fracking. It was just an asset to give away to incent people to build a railroad to move goods."
The Texas & Pacific Railway (T&P), which received its Congressional charter in 1871, wasn't the first effort to build a railroad across Texas. One attempt, which brought its backers 18 million acres of Texas state lands, ended in failure with just six miles of railway completed. The property was turned over to a receiver, eventually becoming the basis of T&P's land grant. In exchange for building the portion of the railroad that would connect Texas to San Diego - passing through New Mexico, Arizona, and California - Congress kicked in 16 million more acres in those territories. And T&P's acquisition of two smaller Texas railroads added many millions on top of that.
Wikimedia CommonsCol. Thomas ScottBy 1873, the T&P - under the able leadership of Col. Thomas A. Scott, also a vice president of the powerful Pennsylvania railroad and a would-be robber baron himself - had cobbled together one of the most impressive land grants in history, larger than the state of Massachusetts. The land was considerably more than was necessary to situate the railroad tracks, intentionally so. The idea was to sell it off piecemeal to settlers to finance construction.
Such subsidies were all the rage in those days. In total, as much as 10 percent of the country was handed over to railroads and other interests, a Gilded Age free-for-all that the Pulitzer Prize-winning historian Vernon Louis Parrington dubbed "the Great Barbecue" - a grand banquet laid out by the federal government, at which the nation's wealthiest citizens made gluttons of themselves. "Congress had rich gifts to bestow," Parrington wrote in 1927. "The eating and drinking went on … until only the great carcasses were left. Then at last came the reckoning. When the bill was sent in to the American people the farmers discovered they had been put off with the giblets while the capitalists were consuming the turkey."
Still, T&P's generous helping was not secured without considerable lobbying, log-rolling, and probably outright theft, as detailed in "Reunion and Reaction" by the late Yale historian C. Vann Woodward. One scheme engineered by Scott and his colleagues involved the creation of a construction company - its primary stockholders consisting of themselves, their cronies, and, it was alleged, numerous members of Congress - which was then handed all the railroad's construction contracts, a sweetheart deal with guaranteed profits.
Still, the land grants came with conditions: Work would have to be completed on a set timetable, or the property would be returned to the public domain. Mindful of its deadlines, T&P quickly set to work selling bonds and laying track. In an early annual report, Scott assured bondholders that the board "saw no reason why the entire line shall not be finished within a period of five years."
Obstacles began piling up almost immediately. First, an untimely lack of rainfall rendered the Red River impassable, which meant supplies had to be hauled overland. Then, in the spring of 1873, the workers were beset by an epidemic of yellow fever.
Most devastating of all was the stock market panic of 1873, when the bank Jay Cooke & Co. went under, taking the whole U.S. economy - as well as many European economies - with it and contributing to a "Great Depression" that lasted years.
Scott, by this time known as the Railroad King, sought extensions and further government subsidies, using every means at his disposal, from providing elected officials with free passage on the various lines under his control to initiating a lobbying campaign so aggressive it raised eyebrows in the media. "Of course, there are the pamphlets printed, and dinners eaten, and the usual consumption of champagne," The Times wrote when one massive T&P bailout came up for a vote. "Congressmen are classified, as an entomologist arranges his bugs before pinning them in frames … and any Senator or Representative who ventures to question the claim of Mr. Thomas Scott to receive this subsidy … is at once argued with, cajoled, threatened or persuaded."
Despite these efforts, Scott's entreaties met with increasing skepticism. One bid for a time extension, in 1880, turned into a scandal when a whistleblower named James A. George submitted a letter to a House committee accusing T&P officials of having committed "bribery and fraud" in procuring its original charter. Promising documentary proof, he alleged that the company's executives had paid "over 30 members of Congress" a total of nearly $300,000 for their votes.
The evidence was never forthcoming, and a few years later a House member claimed to have paid George $300 (a relative bargain) "to keep his mouth shut." Regardless of whether George's claim had any basis in fact, there is little doubt that fraud and corruption were par for the course in the late 19th century and beyond. "Those sorts of charges appeared constantly, and they were probably all true," says Randolf Campbell, professor of history at the University of North Texas. "In that age, anything went. These guys were all such wheeler-dealers. It's just astonishing the sort of shenanigans they got away with."
Because of T&P's failure to build the requisite track, even after a five-year-extension, the company was forced to relinquish the 15 million acres granted by the Federal government in New Mexico, Arizona, and California - but not before its leaders cooked up a deal to transfer the property to the California-based Southern Pacific Railroad, which in the meantime had managed to lay down track from San Diego to Texas along the same route the T&P once hoped to use. The deal would have been, The New York Times declared in a 1885 editorial, "one of the most audacious swindles ever attempted upon the Government of the United States."
Scott had meanwhile been replaced by Jay Gould, the widely reviled railroad tycoon and stock speculator, who had managed to complete the Texas portion of the T&P, securing much of the land grant originally offered by the state of Texas.
Alas, as the T&P's empty rail cars began rattling across the mostly uninhabited scrub land of West Texas, it quickly became evident that, for the time being at least, the "prosperous communities of farmers" promised by the railroad's founders had failed to materialize.
The Southern Pacific scheme was eventually thwarted, and T&P's subsequent return of more than 15 million federal acres to the public domain goes down as the largest land grant forfeiture in history. But the railroad was still left more than 3.4 million Texas acres to play with when it went belly up and was forced into receivership. In a reorganization plan, shares in the Trust, valued at $100 each, were issued in exchange for the original railroad bonds. Each stock certificate represented 100 shares - and a board of trustees set about liquidating the land.
Doing so proved difficult, at least initially. Despite the T&P's aggressive sales pitch to settlers a decade before - when it promised that "those who earliest avail themselves of the unrivaled advantages of cheap lands and eligible situations, will, of course, reap the largest reward" - immigrants who took the bait were met with dire challenges.
The great-grandparents of President Lyndon B. Johnson were among those early Texas settlers. In the biography "The Path to Power," Robert A. Caro chronicled how within just a few years poor management of livestock and an ignorance of the science of crop rotation quickly transformed what appeared to be a fertile arcadia into an unforgiving desert.
"It had taken centuries to create the richness of the Hill Country," Caro wrote. "In two decades or three after man came into it, the richness was gone …" On their arrival, the landscape was covered with grass, but as the planting seasons went by, farmers and cattlemen realized that under a small layer of rich soil, "it was a land of stone ... and the implications of that fact had become clear."
As word got out, TPL ran into difficulty selling off its holdings - a circumstance that would prove auspicious to those who held onto their stock certificates. At that very moment, it just so happened, German inventor Karl Benz was perfecting the gasoline-powered automobile, and within a few decades, oil would begin gushing from that barren "land of stone," making a lot of Texans very wealthy.
The Case of the Missing Stock Certificate
In the ensuing decades, as its value ballooned, the missing certificate became the subject of several lawsuits on behalf of heirs of the long-defunct New York brokerage firm that had handled the transaction. As Max Hensley, president of the International Bond and Share Society, recounted in the journal Scripophily, the tale of the lost certificate became legendary. "The story appeared in Reader's Digest and constituted a whole radio program by Art Linkletter," he wrote. "Needless to say, all this pot stirring yielded a fine cornucopia of crackpots and delusional hopefuls."
Courts continually ruled in favor of the Trust, however, and for years the shares went unclaimed, and the annual dividends were placed in escrow.
But in the mid 1970s, one Jack Lewin, a retired Chicago trade magazine editor with a penchant for digging through dusty library boxes to track down old stock certificates (for $15 apiece and a 30% cut of whatever proceeds he could recover), developed an obsessive interest in No. 390.
It eventually turned up in the archives of the Wells Fargo Bank, where it had sat moldering for 75 years. The stock, it soon transpired, had been given to the Dutch mining industrialist Joseph Raphael De Lamar in consideration of a $15,000 loan he'd made to a man named Joseph Decker.
Originally valued at $10,000, the certificate didn't even cover the balance.
De Lamar was an interesting character. Born in Holland, he stowed away on a merchant ship as a boy, eventually becoming a sea captain and making his first of several fortunes salvaging shipwrecks. In later years, he entered the mining business, but his use of cyanide to mine gold, although wildly effective, was also devastating to the health of his employees. Many of De Lamar's miners lasted only a year on the job before succumbing to silicosis from the "Deadly Delamar Dust," as it was called. According to historian Arthur H. Clark, as many as 500 men gave their lives to create De Lamar's mining fortune.
When Joseph died in 1918, leaving Alice half of his $20 million fortune, the society press was breathless with speculation about her romantic life. But Alice ditched the Madison Avenue residence, along with a palatial estate in Glen Cove, Long Island. She spurned her various aristocratic suitors and seemed embarrassed by her vast fortune (perhaps she had an inkling of where it came from), leading one newspaper to dub her "The Girl Who Can't Get Away From Her Millions." In later years, she became a patron of the arts and a friend to Ernest Hemingway, Paul Cadmus, Benny Goodman, Hubert de Givenchy, and many other of the day's most prominent cultural figures.
Eventually, Jack Lewin tracked her down in Palm Beach, where the 82-year-old society doyenne and gallery owner lived with her longtime lover, the actress and theater producer Eva Le Gallienne, in a Spanish-style beachfront estate. By then, Certificate No. 390 was worth $5.7 million (half of which went to charity, per Joseph's wishes). For Alice, who had no surviving relatives, the unexpected windfall was most likely a meaningless addition to an accursed inheritance she never wanted in the first place.
It's not known whether Lewin collected any of his anticipated 30% commission.
Going Back for Seconds
By 1983, the reserves were tapped out - or they might as well have been. There was more oil down there; nobody doubted that. But amid a worldwide glut, it was too hard to reach and too costly to mess with. Big oil producers packed up and made for greener pastures - the North Sea, the Gulf of Mexico, West Africa, South America. Pumps were capped, oilfield workers drifted into other lines of work, if they could find work at all, and former boom towns like Midland and Odessa took on a haunted cast, their rusting derricks standing as forlorn monuments to a swaggering era.
For two decades, TPL stock never crept past $10.
Cruise down the once empty I-20 between Midland and Odessa today and - well, you can't. The lines of wide-load semis and oil tankers, Mercedes GL-class SUVs, and jacked-up Denalis, stretch for miles. Traffic accidents are routine, with an average of one fatality per week. Housing is impossible to come by, unless you want to bunk in a "man camp." Years after the members-only Petroleum Club became a hangout for old-timers reliving the glories of the the 1970s oil embargo, there's now a wait for lunchtime tables. Per capita income in Midland is second in the nation.
New "breastaurants" are opening their doors.
Chalk it up to the development of hydraulic fracking and horizontal drilling. There are more rigs operating in the Permian Basin today than there were when J.R. Ewing took two bullets to the gut.
By some estimates, as many as 70 billion barrels of oil are sitting down there, trapped between the layers of shale - more than they have in Kuwait.
And Texas Pacific Land Trust still has the title to a great big chunk of it, and perpetual mineral rights to a good bit more.
Which explains why its stock price is on such a steep uphill ride.
So why hasn't anyone heard of it?
"That's what I love about it," Donald Hodges says. "It's under the radar. If you asked 1,000 investors, I'd be surprised if 5 knew about it. It's not a candidate for any investment banking. It doesn't owe any money. It's being ignored by the Wall Street industry."
"When the receptionist told me a journalist was calling," Eric Marshall tells Business Insider, "I thought you might have the symbol wrong."
Ultimately, TPL is just too difficult to classify and too small for most portfolio managers to take notice of. It doesn't appear on any stock index, and only 11,000 shares change hands per day on average.
"You can find the most beautiful collector's item in the world," Louis Geser observes, "but if you're a portfolio manager and you can't take a meaningful position in it, why bother?"
Of course, that still leaves plenty of room for individual investors.
At this point, only one factor might emerge to slow TPL's rise, and that's this little thing called climate change. Whether the frackers will actually manage to blast all that oil out of the ground before carbon taxes and new regulations turn it into a "stranded asset" - or Elon Musk consigns Karl Benz's combustion engine to the scrap yard of history - is a question that probably doesn't get asked a lot around the Petroleum Club.
Not that the possibility worries TPL's fans. Land in Texas will always have some value. They're not making any more of it, after all.