Stock Gumshoe

This one just came in from Tobin Smith’s ChangeWave, on behalf of Bryan Perry’s 25% Cash Machine subscription service, and — as all of them do — it sounds too good to be true. Let’s see.

Perry “promises” that you can earn a 10% dividend yield without taking any wild risks, “AND you can even earn another 15% in yearly capital gains on top of that. Without taking any wild risks.”

I guess it depends what you think “wild” means, but let’s see what he’s talking about.

He calls his investment newsletter, and the portfolio, the “25% cash machine” (that 10% divvy plus 15% cap gain), and he notes one specific one that he’s been successful with before:

“Deerfield Triarc Capital - a specialty finance company, making a ton of money in Residential Mortgage-Backed Securities, despite the “housing crisis” - yields 10.6% today and has
already given us a total return of 25% in just 9 months.”

But he teases about one that’s even better …

“my more recent addition to our holdings has the potential to do much better than that …
Yielding 12.6%, it focuses on the commercial real estate sector, which is doing incredibly well. And this company is one of the strongest players in that market. Insiders are buying the stock - there have been 7 different open-market purchases.”

So … insider purchases, big yield … what’s not to like? The Gumshoe is intrigued.

So let’s see … a few seconds on “spin” in the Wisdomization Machine, and we find out that this company is almost certainly …

RAIT Financial Trust (RAS)

It does indeed have a nice yield — 12.7% today, thanks to a tiny dip in the share price. They are structured as a REIT and provide debt financing for the real estate industry, primarily commercial but also other types. There have been seven open market insider purchases in the past couple months, which certainly sounds promising

There’s got to be some risk here, however — one might be that, although this is not probably surprising for a financing company, they are massively indebted. If I were to invest in this one I’d want to see how they maintain their spread — do both their loans and their bonds float, or do they have any built in protection if the yield curve moves big in one direction or the other? I haven’t looked, but I think it would be an important thing for an investor to understand.

On the plus side, they’ve definitely got some good growth, and maybe those insiders know something we don’t (though a quick review of the transactions in Yahoo Finance might cause one to note that those insider purchases pale in comparison to the numerous “non open market” acquisitions and options exercises from these same insiders … not that this means they aren’t buying for a good reason).

It’s true that this company is not particularly exposed to the sub prime or residential real estate malaise, as far as I can tell at a quick glance, but that doesn’t mean there’s no risk. The shares did take a big ‘ol tumbe back in the early part of this year, along with all the other real estate stocks, and as of recent reports it still carries a pretty hefty short interest at well over 10% of the float. My hunch is that the financial partnership that I looked at a while back, CHC, sounds significantly less risky, but that’s just an initial impression (it’s also got a significantly lower yield, of course).

So … an interesting little niche REIT that does real estate lending, with a big ‘ol yield. They’ve been busy this year — buying back shares, launching more Collaterized Debt Obligations, issuing convertible preferred stock — so there’s plenty for you to sink your teeth into if you feel like researchifyin’. I’d hesitate to promise you that this is likely to get you 25% returns without causing you to toss and turn a little, but you never know. I haven’t ever seen this 25% Cash Machine service touted before, so we’ll see if it sticks around and catches our attention again. If other folks have anything to say about this company, or this type of investment, let ‘er rip.

For those of you who haven’t been checking things out over at the Gumshoe Forum, I thought I’d call your attention to a little discussion of the latest teaser ad — from Stansberry, if memeory serves — for what is purported to be an “F-series” Government Bond that might yield 180%.

I’ve participated in the discussion, as has Newshidden, who has come up with a few other sleuthed answers for Gumshoedom. There are a few clues in there as to what Stansberry is talking about, but there isn’t a lot of clarity, in my opinion, as to whether he’s talking about special REITs, buying actual agency and collateralized bonds, or something more bizarre.

The basic tease is that the government has made it possible to make lots of money on these “F bonds” by both providing the law that makes them possible, and by controlling interest rates to some degree. He hints that buying these before the next Fed meeting is the way to go.

Now, from the specific clues we can glean a few things — the quotes that Stansberry cites are from articles that are in one case about REITs in general, and in another about Annaly Mortgage specifically (Annally, NLY, is a mortgage REIT). The text of the ad seems to me to hint that the idea is to buy actual mortgage agency bonds, though that may be me taking him too literally. Other hints point to significant moments in Mortgage investing history, like the creation of Fannie Mae by FDR back in 1938.

So, this tease is clearly about mortgage investing to some degree, specifically government-related mortgage bonds of some type, and about the tax advantages of REITs, so in some way it’s probably just a tease for the mortgage REITs (there aren’t that many of these REITs, especially if you avoid the subprime ones like Novastar)

But it’s kind of an odd ad. Depending on how you read the tease these advisors are either trying to get you to buy NLY or one of their competitors, or buy some of the more obscrure mortgage bonds through your broker, or something else. Some of these had some great heydays — NLY did have returns approaching that 180% at one point, largely from capital gains and multiple expansion, so that may be where that part of the tease comes from. Unfortunately, most of these securities have dramatically lower yields — as do nearly all REITs — than they did five or six years ago.

So that’s what’s happening of interest in the forum these days. No definitive answers yet, but maybe you’ll be able to provide those. Happy sleuthing.

Update: As of the end of September there’s another, similar teaser making the rounds for the same service — this time, called Virtual Banks that are a Government Economic Security Fund. We’ve started to look into it, feel free to check it out and contribute if you’re interested.