Anyone with kids knows about Heelys (HLYS) and the wheel in the heel. What you probably didn’t know was the company got its expansion capital from a little known venture capital outfit in Dallas, Capital Southwest Corp. (CSWC). Capital Southwest went public in March 1990 at a price adjusted $19.06 a share, producing compounded annual returns of 14.5 percent, 3 percent better than the S&P 500.

Heelys itself went public in December 2006, at $21 a share; Capital Southwest was one of the selling shareholders in the IPO, reducing their ownership stake from 46 percent down to 35, netting Capital Southwest shareholders $33 million, shares that cost $15,000 in 2000. That’s an excellent return on investment wouldn’t you say? More importantly, the company still owns 9,317,310 shares, valued at $196 million in the Dec. 31, 2006 10Q. Using Heelys closing price from yesterday, $31.76, the market value of those shares is $100 million higher than in December. That’s a 51 percent return from the IPO price but approximately flat with the December 8 opening.

The remaining assets on Capital Southwest’s books at the end of 2006 carried a value of $465 million, divided among 34 companies in addition to Heelys. Some of the public investments include Kimberly-Clark (KMB), who we blogged about on April 12. Private company investments with potential include Chase Medical, Smoke Guard Systems and Rectorseal. None of these with the exception of Heelys is very glamorous but that’s a good thing in investing. Capital Southwest commits growth capital to businesses that need it and aren’t able to secure it from traditional sources. The company’s win as do the shareholders of Capital Southwest.

In the last week, the company announced its succession plan for its Chief Executive Officer, 78 year-old William Thomas. Gary Martin, the President of Whitmore Manufacturing, its’ 100 percent owned subsidiary will take over the reins. Thomas, owner of 16 percent of the outstanding shares, will stay on as Chairman of the Board. This should not change the philosophy of the company much since Martin has been with Capital Southwest since 1972.

I like this stock for many reasons. Some of them include:

• Artisan Partners and Dimensional Fund Advisers own shares.
• Even if Heelys tanks, one of the 34 remaining companies should take over the growth mantle.
• They are long-term investors, preferring to defer taxes indefinitely.
• This is a closed-end fund and as such trades at a discount. I believe it currently trades at a discount above its historical norm.
• It has very low operating expenses, just like Berkshire Hathaway (BRK-A).
  
• Just like Warren Buffett, they let management do its thing, providing capital as necessary to maintain growth.
  

This is not a stock for everyone. I like it but do your homework.