Divest from death, Invest in Steak!

by

There are literally thousands of publicly traded companies in the U.S. (well over 10,000 if you include OTC and Pink Sheet companies), not to mention the many other markets all over the world, each containing hundreds or thousands of companies as well. Every one of which is a potential investment, each with its own risks and possible rewards. Each company with its own story, history, people, products, and/or services. Sadly many of these companies are in one way or another engaged in the business of death. But happily for us many are not.

You do not need to look too far to find companies who are going about their business in an honest and peaceful way, not making money off of war or government contracts of any kind. I for one don’t want my money being used to slaughter innocent men, women, and children, nor do I want it used in anyway what-so-ever by any organization which slaughters men, women, and children. If you invest in something you will get more of it. It follows that investing in government will bring you more government. We know from both current events and 10,000 years of human history that more government means more war. And, of course, more war means more death.

Therefore, Investing in government contractors = investing in death. It really is that simple. I don’t want the money in my pocket (or my portfolio) stained with the blood of innocents, nor should you. I’m going to be singling out a few companies here on Divest from Death who not only go about their business in a peaceful and moral way, but are also companies that I believe may make good investments.

Of course the usual disclaimers apply: Investing in securities always entails risk. You can lose money. You have a fiduciary duty to yourself and those who depend on you to always do your own due diligence before investing in anything. etc, etc, etc, and so on, and so forth… in other words: don’t blame me if you lose your shirt.

Steak n Shake Logo

Steak n Shake

Now down to business. While I am completely against investing in the slaughter of human beings (as any decent humanitarian should be), I have no problem investing in a company which serves up the delicious fried meat of slaughtered cows on fresh buns. Therefore I’m writing this, my first Divest from Death article, about one of my favorite companies The Steak ‘n Shake Company (SNS). And more precisely about one of my favorite asset allocators, Steak ‘n Shake’s Chairman and CEO, Sardar Biglari.

Sardar Biglari first came to my attention a few years back in 2006 when at only 28 years of age he used his hedge fund (The Lion Fund) to take over the struggling restaurant chain Western Sizzlin’ (NASDAQ: WEST) and proceeded to turn the company around and transform it into a holding company. To gain control of WEST he used his hedge fund to purchase a large number of shares then asked for two seats on the board of directors. Within a few months he was named Chairman and his associate Philip Cooley was named Vice Chairman. In this house cleaning process 7 old board members resigned and one additional member aligned with Biglari was added. At this point having complete control of the board and being the company’s largest shareholder he started transforming WEST into a shareholder friendly organization, reducing expenses, reducing inefficiencies, and using its cash flow to invest in other companies. Investing the company’s cash in wherever the greatest return on invested capital could be found. He laid out his plans in his excellent must-read letter to shareholders that year. His letters are always excellent reads and I’d recommend them to anyone just for educational purposes alone even if you have no intention of investing.

His first major investment with WEST was Friendly’s Restaurants. I won’t go into the whole story here only because it has been covered elsewhere so well, even becoming the subject of a case study done by the Harvard Business school. To summarize it briefly, Friendly’s was a poorly managed restaurant chain with a strong brand run by a bunch of crooks. Biglari purchased 7% of Friendly’s shares then demanded two seats on the board of directors (the same modus operandi he used to gain control of WEST), which was refused by the board. He then brought his fight to the shareholders, setting up a website enhancefriendlys.com, sending letters to its shareholders detailing the current mismanagement as well as how things could be set right. Even buying billboard advertisements in Massachusetts where most Friendly’s shareholders were located. Then prepared for a proxy battle to win the two board seats he requested. At this point the board got nervous. Seeing the writing on the wall and knowing they were going to lose the proxy fight, they found a buyer for the company. A private equity firm who paid more than double for Friendly’s than WEST had paid for its shares. This doubled WEST‘s cash in a matter of months and allowed it to go after bigger fish.

Enhance SNS Billboard

Enhance SNS Billboard

His next big target was Steak ‘n Shake. As he’d done twice before Biglari started buying shares in the troubled Steak ‘n Shake Company (NYSE:SNS) in the summer of 2007 and by the end of the year he and a coalition consisting of the Lion Fund, Western Sizzlin’, and other associates and supporters of his which controlled more than 10% of SNS shares. He then proceeded to use the formula that had worked twice before. He demanded two board seats, was refused, engaged in a proxy battle where he setup enhancesteaknshake.com, put up billboards in Indianapolis (see billboard picture), sent letters to the shareholders and, this time, as with WEST, he won. The SNS shareholders were sick of the mismanagement of their company and voted overwhelmingly to put him and his associate Phil Cooley on the board. With the shareholders behind him, it was only a matter of weeks before he was named Chairman and months before he was made CEO. This was accompanied by a number of resignations of all the people who needed to go.

Biglari has only been in control of SNS for about a year, yet he has turned the company around significantly. It is no longer drowning in debt, in trouble with its creditors, or pursuing a destructive growth at any cost strategy. Rather it is now profitable, is paying down its debt, has a good relationship with its creditors, has shut down underperforming stores, has simplified its menu (going back to its roots focusing on steak burgers and milk shakes), has redone the interior of its company owned stores, and is starting to regain the trust of its franchisees.

This all, of course, left Sardar Biglari as the Chairman and CEO of two public companies. A situation that is being resolved by the recent announcements that SNS is being reorganized into a holding company and is acquiring Western Sizzlin’.

Other investments owned by Western Sizzlin’ are a 9% stake in ITEX Corporation (OTC: ITEX) which is a business to business bartering company. The libertarian in me has a soft spot for any business which allows people to exchange value for value while bypassing the fiat currency of the state. Biglari is a long time user of ITEX and likes the business as well. This is just speculation on my part, but I think we will see SNS acquire more (or even all) of ITEX in the future. WEST also owns 51% of Mustang Capital, an investment partnership run by John Linnartz. And finally, Western Properties, who’s only holding so far, is a 23 acre parcel of commercial real estate in Texas. This presentation has a good block diagram of Western Sizzlin’ and its holdings, which will all be under Steak ‘n Shake after the acquisition.

I believe at only 31 years old Biglari’s story is just getting started. I’ve been impressed with what he has achieved so far and have a good amount of my portfolio invested with him. As for morality, not only has he not, so far, invested in any government contractor, but I have found him to be one of the most honest and loyal (to his partners and shareholders) people I’ve seen on Wall Street. He talks about making money “with his shareholders and not off of them”, and unlike most on Wall Street, I think he’s one of the rare few who actually means it.

I suggest that anyone who is interested start by reading his letters to shareholders:

WEST 2005 letter to shareholders
WEST 2006 letter to shareholders
WEST 2007 letter to shareholders
SNS 2008 letter to shareholders

And of course, all of the financial reports from both WEST and SNS.

Two financial blogs I like which cover WEST/SNS are:

noisefree{investing}
RAGNAR IS A PIRATE (Jeff Moore from Ragnar is a Pirate leans heavily libertarian)

Steak Burger

Steak Burger

So in closing: Divest from death, invest in steak!

Disclaimer: Eric currently owns both WEST and SNS and did own Friendly’s when it was still a public company. He owns no ITEX other than what he owns beneficially through WEST. This is for informational purposes only and not a recommendation to buy or sell any security. As always, you must do your own due diligence before making any investments.

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One Response to “Divest from death, Invest in Steak!”

  1. Jim Davidson Says:

    Great essay! Thanks, Eric! I definitely want a thick juicy steak right now.

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