Apparently Donald Trump hasn’t paid many taxes. Neither has micro-cap company P10 Holdings (PIOE). And that has helped make it a great investment.
Over the weekend, the New York Times published a long article on Donald Trump and how much (or little!) he has historically paid in taxes.
According to the Times, “Donald J. Trump paid $750 in federal income taxes the year he won the presidency. In his first year in the White House, he paid another $750.
“He had paid no income taxes at all in 10 of the previous 15 years — largely because he reported losing much more money than he made.”
Why was he able to avoid paying taxes? Because in 1995, “Mr. Trump had declared losses of $915.7 million, giving him a tax deduction that could have allowed him to avoid federal income taxes for almost two decades.”
I’m not going to weigh in on the morality of individuals avoiding taxes.
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But you can make a lot of money from investing in companies that avoid taxes. P10 Holdings stock is a perfect example. I’ll get to that in a minute…
John Malone, one of the greatest investors and capital allocators of all time, has built tremendous value over time by avoiding paying taxes.
This passage from the book “Cable Cowboy: John Malone and the Rise of the Modern Cable Business” explains Malone’s logic:
“Malone argued, successfully, that after-tax earnings simply didn’t count; what counted was cable’s prodigious cash flow, funding TCI’s continual expansion. Buying cable was like buying real estate. As the value of TCI’s franchises rose, so would the value of its stock. Net income was an invention of accountants, he declared.
“Think about it, he’d tell a young analyst: Because TCI had high interest payments and big write-offs on cable equipment, it produced losses, and because it produced losses it paid hardly any taxes to the government. As long as cable operators collected predictable, monopoly rent from customers, met interest payments, and grew from acquisitions, why worry? Malone liked the mathematics of it: Tax-sheltered cash flow could be leveraged to land more loans to create more tax-sheltered cash flow. A standing joke around TCI was that if TCI ever did report a large profit, Malone would fire the accountants.”
An investment in TCI (Tele-Communications Inc.) in 1973, when Malone took over, to the time the company was sold to AT&T in 1998, the stock generated a compound annual total return of 30.3%. Over the same period, the S&P returned 14.3%. A dollar invested in TCI in 1971 was worth over $900 in 1998 while a dollar invested in the S&P 500 was worth $22.
It pays to invest in companies that avoid taxes!
P10 Holdings Stock
For further evidence, let me introduce you to P10 Holdings (PIOE), a Cabot Micro-Cap Insider recommendation.
Don’t be put off by the company’s generic sounding name. If you look under the hood, it’s a very interesting investment opportunity.
P10 Holdings used to be called Active Power.
Active Power went bankrupt and was recapitalized by a team of investors in Texas in 2017. Importantly, the team preserved the Net Operating Losses (NOL) of the business. At the time of the recapitalization, the business had hundreds of millions of net operating losses, which could be used to offset future taxable income but no revenues and earnings. If the company ever generated earnings it would not have to pay taxes due to the legacy net operating losses.
The strategy of the investors that took over the company was brilliant: acquire stakes in private equity (PE) management companies.
The PE industry is secular growth because investors are allocating more capital to private markets (which have historically outperformed public markets). And private equity funds lock up investor capital for 10+ years so revenue is not only high margin, but also very sticky.
Since starting on its strategy, P10 Holdings has acquired stakes in three highly profitable private equity companies: RCP Advisors, Five Points Capital, and most recently, True Bridge Capital Partners.
Revenue and free cash flow have grown exponentially and the stock price has followed suit.
The best part?
$260 million of federal net operating losses remain so the company will not be paying taxes for the foreseeable future.
If history is any guide, that should bode well for PIOE stock going forward.