Urbana Corp (TSE:URB or UBAAF or URNAF): According to the output of my computer program this should be a good stock in the list microcap + momentum + value. At least, at 3.38 CAD for the Canadian URB symbol.
Often such smooth momentum price action is caused by investors slowly bidding the stock up because they have heard good fundamental news about it. However, in this case I think that is an illusion. There are 2 types of shares: voting common shares (TSE:URB) and non-voting class A shares (TSE:URB-A). These 2 securities have almost the same price. But they do not have the same favorable information discreteness. In order to believe in smooth momentum resulting in good future returns both stocks should have approximately the same momentum and the same information discreteness. Since information discreteness is not very good for the non-voting A shares I do not think this is a good momentum stock. I think the common shares follow the price of the class A shares. But because there is less trading liquidity in the commons momentum may seem to be smoother than momentum of class A shares.
Below I will explain why it might still be a good undervalued growth fund to hold:
Urbana Corp (filings) is a closed-end fund owning a mix of listed and unlisted stocks and real estate.
See the annual report over 2020, the annual information form, the proxy/circular for the annual meeting in 2021 and the last financial statements with management discussion.
In the annual report the auditor mentions the following key audit matter: "Valuation of Level 3 Investments". The company does a good job in explaining this in note 2 in the annual report. Therefore, I do not think there are issues, but of course there is uncertainty.
On Seeking Alpha this stock was first recommended by Chris DeMuth in 2013. At the time the fund owned stocks of stock exchanges. These stocks had lofty valuations, but the fund traded at P/B = 0.5 or so. Today the fund owns different stocks and the share price has increased much. What has not changed is that the shares trade at about half of their net asset value. On 14 January NAV was 6.97 CAD (after substracting the dividend) while the share price was 3.52 CAD.
A search on the company name and keyword "fraud" did not reveal any relevant information. Several people have written about this fund. I have not come across any reports of major governance issues.
According to the annual report there are 3 independent directors. I could not find a specific mention of which directors are independent directors, but it is easy to guess. Two independent directors are already director for more than 10 years.
In 2019 the investment manager settled a publicly disclosed enforcement proceeding with the Ontario Securities Commission (red flag).
The company is paying annual dividends. Over 2021 the company is going to pay 0.10 CAD on 31 January 2022 with ex-dividend date 14 January 2022. Last year the company spent about 5% of its book value on repurchases. In several other previous years the company also spent similar amounts on repurchases.
As of 14 January 2022 unlisted assets are 43% of the portfolio. See the company website for a list with descriptions of its main unlisted investments (as of 10 September 2021). In my opinion these investments are growth investments. In the unlisted portfolio (24% of the total portfolio) are stocks of an asset manager (majority owned by Urbana but not controlled) and of 2 exchanges. What the rest is is not completely clear. A large part of the rest seems to be investments in other funds fully or majority owned by Urbana or in affiliates of the investment manager. Almost half of the listed stocks are stocks of 3 banks and 2 exchanges. These 5 investments are almost 30% of the total portfolio.
According to page 15-16 of the annual report the company owns an undeveloped gold resource near Quebec. I do not think that resource has any book value since no development costs have been capitalized and there are no proven reserves.
In 2020 overhead costs other than transaction costs were 7.2 million CAD including 5.68 million CAD for the investment manager (Caldwell Investment Management Ltd). The company owns 20% of the parent of the investment manager, so 20% of Caldwell Financial Ltd. Total overhead costs were nearly 3% of book value.
According to page 3 of the annual information form the fee Caldwell Investment Management is 2% of the market value of the portfolio.
The fee for the investment manager has been increased from 1.5% to 2% starting from January 2020. Included in the fee are also transaction costs and certain administrative costs. Not included are transaction costs for repurchases and for specific functions such as a general counsel, a marketing employee and the CFO.
The fund uses some but minimal leverage: a loan of 24.2 million CAD compared to 352 million total assets. I do not think the company is financially distressed.
Substantial shareholders: The investment manager is run by chairman Thomas S. Caldwell (also chairman/CEO of Urbana) and CEO Brendan T.N. Caldwell (not a director of Urbana). Another insider or shareholder of the investment manager is Michael B.C. Gundy, who is also a director of Urbana. See also page 18 and 19 of the annual information form. These people (and possibly other employees/managers of the investment manager) own together 56.1% of the common shares of Urbana. These are the voting shares. In particular Thomas S. Caldwell owns 44.9% of the voting shares. The shares listed in Toronto are non-voting class A shares (red flag).
Om 21 March 2021 the 2008 Caldwell Family Trust acquired 200,000 common shares or 2% of the outstanding common shares, for 3 CAD per share.
They also control the parent of the investment manager with 89.3% of the common shares. In the annual report the company writes it owns 20% of the parent of the investment manager. Assuming this is correct and stakes have not changed, there must be a construction with non-voting shares at Caldwell Financial Ltd as well (red flag).
Related party transactions: Part of the portfolio is in funds of the investment manager. These funds charge 2% to the company but there is one exception where the company only has to pay 0.5%. Directors get small loans to buy shares of the company. I do not think there are any issues.
The CEO Thomas S. Caldwell does not get paid as director or CEO. Instead he is paid through fees to his investment management company. In 2020 the CFO earned 150k CAD. Two other managers earned 165k and 139k CAD respectively.
My take: Undervalued fund with a reasonable track record that is also a good stock for geographic and sector diversification. Though this is essentially a growth fund I still think the people behind the investment manager are conservative investors.
Since the lows of the beginning of 2013 annualized return was approximately 13% based on an estimate of dividends and the share price in USD (UBAAF). Since the beginning of 2017 I estimate annualized return at 6%.
I have not found any major governance issues. I also like the low volatility of the stock. Moreover the price of the non-voting A shares also exhibits low volatility.
I think this is a good stock for a small position. However, I will not add it to my Selected Stocks list because it does not fall into any of my strategies.