_{THE LARGEST THINGS YOU’VE NEVER HEARD OF}

Size Does Matter

Last week I went to Costco because I decided I needed my groceries measured in pallets rather than pounds for the next few weeks, and as I was walking around looking at all the members, it got me thinking about the revenue split between Costco’ membership and the actual in store business. While I wish I could tell you that I had a lively debate with the employees of Costco about their financial position, I did not. I did, however, decide to check their filings because I clearly need a hobby.

What I learned was fascinating, and it got me thinking about what other random parts of companies or pockets of capital are deceptively large. I mean in some capacity, size does matter after all. With that in mind, here are some random corners of the market that I found were much larger than any one of us gave them credit for. Except maybe their coverage analysts, but if you think I need to find a hobby go check in on your research friends now that Q3 just ended.

1. The Marlboro brand is worth more than Ford and GM combined | Value: $33–38 billion. Not Philip Morris as a company… just the trademark. Brand Finance estimates the Marlboro brand as a standalone asset at approximately $33–38 billion. Ford's market cap is roughly $45 billion and General Motors is around $50 billion. The two companies that built the American automobile industry, employ hundreds of thousands of workers, and have collectively produced over a billion vehicles are each worth roughly what one tobacco logo would fetch in an auction.

2. The federal government collects more in mineral royalties than American Airlines makes in revenue | Value: $17.4 billion a year. The Office of Natural Resources Revenue reported $17.4 billion in royalties, rents, and bonuses from oil, gas, and mineral production on federal land and offshore in fiscal year 2023. That is passive income, collected simply for owning the ground. American Airlines does about $13 billion in annual revenue and has to operate thousands of flights a day to get there. The federal government beats it by sitting still. This number appears nowhere in the public debate about the federal deficit.

3. Harvard's endowment earns more per year than the GDP of 50 countries | Value: ~$4.5 billion per year. In a good year it earns 9–10%, which is $4–5 billion in investment income. That is more than the entire annual economic output of Iceland, Kosovo, or Belize. A university in Cambridge, Massachusetts generates enough annual investment income to fund a mid-sized government's entire budget because apparently that’s what it takes to create people who turn going to your institution into their entire personality.

4. Ontario sold a highway for $3 billion that now generates $1.6 billion a year. | Value: ~$25–30 billion today. In 1999, the Ontario government sold a 99-year lease on the 407 ETR toll road across the top of Toronto for C$3.1 billion. The road now generates approximately $1.6 billion CAD per year in toll revenue. At current infrastructure multiples it is worth roughly C$25–30 billion, nearly 10x what Ontario received. Ontario sold a perpetual toll road at under 2x annual revenue and called it a good deal, and the buyer is writing up the best deal in infrastructure history. I am sure someone with deeper knowledge of Canadian history can tell me why this was a good deal at the time, but to play armchair forward (that’s hockey reference), the Ontario government should consider hiring Goldman instead of BMO next time they do a deal.

5. McDonald's rent and royalties generate more revenue than Chipotle | Value: $14.9 billion a year. If you’ve watched The Founder, great movie, you remember Ryan from The Office told Ray Kroc “You don’t build an empire on a 1.4% cut of a 15 cent hamburger. You build it by owning the land on which the hamburger is cooked”. And well, he cooked with that one. McDonald's collects $14.9 billion per year from franchisees in rent and royalties. Not from selling food, from owning the land under the restaurants and charging operators roughly 10% of gross sales. Chipotle - which McDonald’s actually owned at one point - generates about $11 billion in total annual revenue. Darden Restaurants, which runs Olive Garden and LongHorn Steakhouse combined, has a market cap of $18 billion, comparable to what McDonald's pulls in just as a landlord. Maybe that MBA really did pay off for Ryan. Wonder if he went to Harvard…oh wait, we’d know.

6. Costco's membership fee business alone is worth more than UBS | Value: $177 billion. Costco did $297 billion in sales last fiscal year, but the retail side runs on razor-thin margins: the $4.99 rotisserie chicken and $1.50 hot dog are famous loss leaders. The actual business is the annual membership fee: $5.9 billion in revenue at nearly 100% margin, and ~half of Costco's operating income. At a 30x multiple on that recurring stream, the fee business alone would be worth ~$177 billion, more than UBS's entire market value of ~$147 billion. Costco built a more profitable business than UBS and hid it inside a warehouse store, and doesn’t have staff working on 4 hours of sleep aligning footnotes.

7. The U.S. government is sitting on more oil than Harley-Davidson, Nordstrom, and Macy's are worth combined | Value: $24 billion. Okay, this one maybe isn’t a total shock, but I still found it fascinating. The Strategic Petroleum Reserve holds approximately 347 million barrels of crude oil stored in caverns along the Gulf Coast. At current prices that is roughly $24 billion in market value, exceeding the combined market caps of Harley-Davidson, Nordstrom, and Macy's. The caverns cost almost nothing to maintain. It gets mentioned in the news approximately once a year when someone proposes releasing some of it to bring gas prices down before an election. This excludes Marco Rubio’s personal collection of oil as President of Venezuela. More shocking than the value though is that the US consumes ~20 million barrels of oil per day, so the entire reserve will last only 14 days. Less than your Netflix or Spotify free trial.

8. Starbucks holds more in customer deposits than most U.S. banks | Value: $1.9 billion at zero percent interest. One of my accounting professors in college used to say that Apple is a mutual fund that sells iPhones. Well, he clearly hadn’t looked into Starbucks much. Starbucks reports having ~$1.9 billion sitting on its balance sheet in gift cards and app balances customers loaded and haven't spent. That is an interest-free loan from 35 million people, larger than the total deposits of hundreds of U.S. community banks. Starbucks collected it with no banking license, no regulatory oversight, and no interest payments. Starbucks is really a retail bank who also happens to sell overpriced lattes.

_{PRESENTED BY TOLTIQ}

Built for the Data Room, Not Adapted to It

Diligence is a compilation of documents that were never meant to be read together. There are thousands of files with no consistent format, and most data rooms are not built to handle the analysis of  a deal as it evolves. Most AI isn’t built to handle it either.

ToltIQ, however, was designed for private markets investment professionals. PE and M&A deal teams can upload the full VDR and work it as one record, with traceable links to its source document so verification is simple. Here are some of their premier features:

• Bulk Query pulls consistent, side-by-side answers from hundreds of documents in a single run. 

• Workflows turn your firm's diligence sequence into repeatable processes. 

• Blueprints convert your firm’s document templates into reusable formats. 

• Vaults keep research, templates, and market data available for every deal.

Their architecture is built to avoid redundant processing across large document sets, which keeps AI costs forecastable as usage scales. 

See these features in action; schedule a demo with their team today.

_{THE WORST CALLS EVER MADE}

Be Like A Goldfish

“One thing I can promise you, even in this market, is that I never ask my clients to judge me on my winners. I ask them to judge me on my losers, because I have so few.” - Leonardo DiCaprio as Jordan Belfort in the Wolf of Wall Street

When you go into PE, you hear that you are only as good as your last deal, and Wall Street can have a long memory at times. But sometimes, it helps to be a goldfish (short memory).

Here are some of the most expensive public calls ever made, by people who absolutely should have known better, and who you will still find quoted as experts in your morning briefing.

This entire list could have been Jim Cramer calls, but that felt like bringing a flamethrower to a knife fight, so we gave him two entries and moved on. You're welcome, Jim. Contact my people if you want me on Mad Money.

Jim Cramer told viewers Bear Stearns was fine. It collapsed six days later. March 11, 2008: "Bear Stearns is fine. Do not take your money out of them. Don't move your money from Bear. That's just silly. Don't be silly." JPMorgan bought it six days later for $2 a share, down from $170. He was technically right… it was fine, right up until it wasn't.

Jim Cramer called Silicon Valley Bank undervalued. It failed 30 days later. February 8, 2023, Cramer called SVB "a merchant bank with a deposit base that Wall Street has been mistakenly concerned about" and said it was oversold at $320. The FDIC shut it down March 10 in the second-largest bank failure in U.S. history. The Inverse Cramer ETF, which was a real product that bet against his picks, had launched the prior year. It did well.

Warren Buffett passed on Google while his own company was buying ads on it GEICO was paying Google $10–11 per click for car insurance leads. Buffett had the unit economics in his own P&L and still passed on the 2004 IPO. At the 2017 Berkshire annual meeting: "I was wrong on Google." 

Warren Buffett also passed on Amazon. Twice. 1994 and again at the 1997 IPO. At the same 2017 meeting: "I was too dumb to realize what was going to happen." Berkshire finally bought in 2019, at roughly 500x the price it passed on. To his credit, he eventually bought it. He just waited until it was worth more than the GDP of most countries first.

Warren Buffett paid $433 million in Berkshire stock for a shoe company that went to zero. Dexter Shoe, 1993. He paid in stock, not cash, which is the part that really stings. The business got wiped out by foreign competition. In his 2007 shareholder letter: "I gave away 1.6% of a wonderful business to buy a worthless business." 

Irving Fisher called a permanently high plateau in stocks two weeks before the crash. October 16, 1929, New York Times: "Stock prices have reached what looks like a permanently high plateau." The Dow fell 89% over the next three years and didn't recover until 1954. He was considered one of the most brilliant economists alive at the time, which tells you everything you need to know about economic forecasting.

Steve Ballmer said the iPhone had no chance of getting significant market share. USA Today, April 30, 2007: "There's no chance that the iPhone is going to get any significant market share. No chance." The iPhone generated over $1 trillion in cumulative revenue. Windows Mobile is dead. To Ballmer's credit, he said it with tremendous conviction, which is really the most important thing when you're wrong.

Hedge funds shorted Volkswagen and lost $30 billion in two days. In October 2008 shorts had roughly 12% of VW's float. Then Porsche disclosed it had quietly accumulated 74.1% of VW through cash-settled options, with Lower Saxony holding another 20%, leaving almost nothing available to borrow. VW went up 376% in two trading days, briefly making it the largest company on earth by market cap. Porsche made more money on that options trade than it had made selling cars in its entire history.

Jim Chanos shorted Tesla and watched it go up 743% in a single year.
Chanos called Enron. He started shorting Tesla around 2016, calling it a "walking insolvency." In 2020 Tesla rose 743% and short sellers collectively lost roughly $40 billion, the largest annual short loss on a single stock in history. Chanos was not wrong about the fundamentals. He was just wrong about whether that matters.

Sequoia Fund put 36% of its portfolio in one pharmaceutical company and watched it collapse. Sequoia was founded with Warren Buffett's personal endorsement. By 2015, it had 36% of the fund in Valeant Pharmaceuticals. When Citron published a fraud report, Valeant fell 90% from peak and Sequoia lost nearly half its portfolio value. Multiple board members resigned while management refused to cut the position. A fund with 65 years of Buffett's blessing put more than a third of it in one trade. Concentration risk is a hell of a drug.