The story starts in 1888.
A railroad company went bankrupt.
Texas Pacific Railway Company.
In the late 1800s, there was a railroad boom in America, and many railroad companies were born, successful, and dead.
Texas Pacific Railway Company was one of those that had died.
Prior to its death in 1888, it had issued bonds to raise money to buy land for building railroads.
The land was roughly about 3 million acres.
Texas was not really a high-demand area. It was mostly barren, and not many people lived there. So land was cheap.
When Texas Pacific Railway Company went bankrupt, its bond investors did not get back any money they invested.
These bonds were secured though. Which means, the land was used as collateral.
The 3 million acres (30 lakh acres) belonged to the bondholders.
A trust was formed, and the ownership of the land was transferred to the trust.
The bondholders got shares in the trust.
Texas Pacific Railway Land Trust.
The trust was peculiar. It could not issue fresh shares. No new shares could be created.
The management of the trust could not create shares and reward themselves.
But they could buy shares and destroy them.
The trust’s only purpose was to sell the land and return money to the bondholders. It was created for the benefit of the bondholders, and nothing else.
Which meant the land was fixed; the shares could not be increased.
As the shares were bought and destroyed by the trust, the shares’ price would go up — the same land represented by a smaller number of shares.
So the purpose was to return the bondholders’ money.
The method of that was selling land. Using that cash to buy shares in the share markets. And destroying them.
Thus, whoever sold the shares got their money back.
Once that aim was achieved, the trust could be shut down.
There was no time limit imposed on the trust.
They could take their time in selling off the land. As much time as they needed.
Why?
One possible reason could be that if the trust sold too much of the land too fast, the land price would fall. And that would possibly mean the bondholders get a less-than-ideal price.
Not good for the bondholders.
So, the trust would sell only when it thought the price was right, and only quantities that it felt would not cause the land price to plummet.
That never happened — yet. It hasn’t happened in the 138 years since the trust was created.
The trust is very much around even today.
The shares of this trust are available on the stock markets.
Earnings
Texas Pacific Railway Land Trust (TPRLT) has been doing what it was supposed to ever since.
For all these decades, the trust has been selling land, buying back shares, and destroying them.
The total land owned has reduced by about 75%.
Most of this land was sold in the few decades after the trust’s formation.
About 1.1 million acres owned, down from 3 million acres.
Over the last 100 years, this number has only gone down slightly, to about 0.8 million acres.
But they did keep doing the buybacks. So, the shares have reduced faster than the land being sold.
What this means is that the land-owned-per-share has been rising consistently for decades.
Now, sharp minds would ask, about where they get the money to perform these share buybacks?
Well, the trust’s job is to protect the interests of the bondholders. It didn’t leave the land barren just like that.
The trust would license the land for various purposes — grazing rights to farmers, and oil extraction rights to oil companies.
Those licenses generate cash.
The cash thus generated is used for buying back shares and also giving dividends to shareholders (who were bondholders).
The beauty of this arrangement is that the TPRLT has to spend almost no money to earn money.
They do not buy any equipment. They simply rent their land to farmers and oil companies. All costs necessary are borne by them.
Discovery
For decades, this stock existed. And barely anyone ever spoke of it.
This is one of the most peculiar cases — it was not discovered for decades because GAAP regulations require companies to disclose the buying price of land. Not the current price.
So in its quarterly and annual reports, TPRLT was writing the price at which it bought all the land before 1888.
Trusts usually make for very dull returns. Most investors would not even bother investigating the stock.
And thus, no significant investor realized that this company owned so much valuable land. For decades.
The stock was making good returns (we’ll talk about it later). But nothing that would draw the attention of institutional investors.
Then, some technological breakthroughs occurred. No, TPRLT had nothing to do with these breakthroughs.
Shale Oil Revolution
The US has lots of oil trapped in shale rocks.
Taking this out is a nightmare. Too expensive to make it a viable business.
Around 2010, oil prices were touching scary highs. Despite that, digging for shale oil was not making much sense.
But then, technological revolutions in the form of horizontal drilling, slickwater fracturing, and underground imaging — suddenly made shale oil very viable.
The USA started pumping out oil like never before.
Guess who owned a lot of land with shale oil under it?
Oil companies lined up in front of TPRLT, asking for licenses to dig out oil.
In an especially smart move, TPRLT had even sold some land but retained the oil rights under that land.
All of these licensing fees became cash flow for TPRLT.
The company achieved a massive profit margin of around 80%.
Once a stock’s profit margin looks like that, it really is hard to ignore.
Wall Street suddenly found itself very interested in a trust’s shares.
In the decade after that, a lot of attention fell on the trust.
Around 2019, activist investors attempted to turn the trust into a corporation.
Their argument was that the trust was not transparent and was not acting in the best interest of its shareholders.
One example given by them was that of the trustee selection. The shareholders didn’t get to vote. The existing trustees chose one discretionarily.
The mechanics of this are a story in itself. We will not get into that today.
Just know this — Texas Pacific Railway Land Trust became a corporate company in 2021.
Earlier, index funds couldn’t invest in it. Now, the stock gets consistent money from them.
Now, let’s talk about the returns.
Returns
Over the last 5, 10, and 15 years, the TPRLT stock has performed better than the index S&P 500.
Yes, many other stocks have done that too.
But what’s interesting is that the TPRLT has also done better than some of the best performing stocks over the same periods.
Microsoft, Google, Apple, Amazon, and even Berkshire Hathaway have given lower returns than TPRLT.
Is this an apples to apples comparison?
No, TPRLT is a much smaller company. Still, it does highlight how well it has done.
But keep in mind that this immensely good performance is the result of this stock being “discovered” around 2010.
Else, this monumental run would not have been possible.
TPRLT’s stock has given great returns before that period as well. Just that it wasn’t as high as it is now.
There have also been periods when the stock has suffered big drops and remained flat for extended periods of time.
Many of these periods have coincided with oil prices being low.
This goes without saying — past returns are no indication of future returns. Maybe it will continue performing as it has.
Or maybe, its golden years are over now that it has been discovered. We haven’t done that research ourselves.
If you’re very keen, please do the research for yourself.
Takeaways
One of the most important takeaways of this tale is that published numbers don’t tell us everything.
It makes the case for fundamental research and understanding the business even stronger.
Another one is that inefficiencies exist in the system. The big institutional investors have not discovered all that there is to find. Even they miss out on great investments.
Yet another one could be that old companies’ (trusts in this case) cannot be written off as easily as we assume.
Maybe one of the most important lessons is that there will always be stocks that most of us miss out on. There’s no reason to feel regret.
Surely there would be many other lessons you would have observed while reading this piece.
The shortest takeaway is probably this: finding multi-baggers is hard.
If things go as originally planned, Texas Pacific Railway Land Trust will shut down sometime in the future — after it has sold all its land and performed buybacks of the last remaining shares.
Till then, this very peculiar stock will continue to draw eyeballs.
Quick Takes
+The government lifted the ban on exports of grains and permitted wheat exports as well as others like maida, semolina, etc, effective immediately.
+The service producer prices rose for 4 out of 7 sectors in the April-June quarter, compared to the previous quarter. Air (passenger) services rose the most, along with banking services, pension fund management, and railway services.
+The government revised the conditions for import of raw sugar. It removed the 31 October deadline to process and sell the refined product in the domestic market to a period not exceeding 2 months from date of filing Bill of Entry, as a relief to sugar importers.
+The net profit of Regional Rural Banks rose to a record high of Rs 10,176 crore in FY26. Both gross and net NPAs reached all time lows of 5.30% and 2.10% respectively.
+Finished steel production rose 4.70% year-on-year to 54.70 million tonnes between April and July. Consumption of finished steel grew 7.90% to 56 million tonnes in the same period.
+India and Seychelles held talks and discussed a possible dedicated MoU to strengthen cooperation in fisheries, aquaculture and the blue economy (including tuna fishing, marine farming and fisheries technology).
+India’s forex reserves rose $12.42 billion to a record high of $729.33 billion for the week ended on 21 August.
+India’s Industrial Production rose 6.70% in July compared to 7.30% in June. The July growth was supported by 7.30% growth in the manufacturing sector and 8.70% increase in the electricity and gas supply sector.
+Jio Platforms, Paras Healthcare and Bharat PET along with 4 other companies received SEBI approval for their IPOs.
+SEBI extended the implementation deadline for the new framework for exchange traded funds to 7 September from 1 September, based on the feedback from the stock exchanges.
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest