Buying Capital Southwest

A new portfolio position was established today in Capital Southwest Corporation (CSWC/NASDAQ). I got in at $119.97 per share and the stock ended the day at $116.64.

Regular readers will recall that I've long been an admirer of Bill Thomas, who until last year oversaw Capital Southwest on a daily basis, and continues serving on the Board and is the single-largest shareholder.

Capital Southwest is a business development company headquartered in Dallas, Texas. My purchase price is 80% of the book value ($150.09 as of March 31). The market cap is around $462 million, there are less than 4 million shares outstanding, and the yield is less than 1%.

The stock price has been down. Primarily because its Heelys stake is worth less with the Crocs mania over, and because of significant holdings in housing-related companies like Encore Wire and Palm Harbor Homes.

Some may wonder what the future holds for the company with Bill Thomas now serving as Non-Executive Chairman. I am confident the company remains in good hands with Gary Martin as President and CEO. Martin has been with Capital Southwest since 1972, and from 1979 to 2007, served as President and CEO of The Whitmore Manufacturing Company, a portfolio company of Capital Southwest. So the company's "patient capital to exceptional businesses with significant growth potential" approach to doing business remains intact.

On a side note, you may have seen reports over the past months that Ned Sherwood and ZS Fund have a stake in Capital Southwest, and are taking an activist role believing the company's management is not acting to unlock shareholder value. Now that I have joined Sherwood & Co. as a shareholder, I'll of course keep an open mind if he launches any proxy fights.

I don't know much about Sherwood. But I'm familiar with Marty Whitman. And the first I ever heard of Bill Thomas and Capital Southwest was when I read an interview with Whitman in the early 1990s. Whitman said at that time that he'd been invested in Capital Southwest for 15 years or thereabouts. Whitman remains invested in the company. Meaning its unlikely Whitman would have been hanging out with Bill Thomas & Co. all this time if he didn't feel they were shareholder friendly.

Yet I could be wrong.

In the meantime, I see Capital Southwest as a hard book value bargain. Just keep in mind that while the company emphatically states that it is not a closed end fund, it does have a lot of investments. Crocs mania aside, it probably won't skyrocket up or down overnight. And, also, as I always remind you: do your own due diligence before jumping in.