by Travis Johnson, Stock Gumshoe | July 6, 2007 7:10 pm
This one just came in from Tobin Smith[1]’s ChangeWave[2], on behalf of Bryan Perry[3]’s 25% Cash Machine[4] 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[5] 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[6] Finance might cause one to note that those insider purchases pale in comparison to the numerous “non open market” acquisitions and options[7] 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[8], 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.
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I completely enjoy reading your posts breaking down and giving away the “secrets” of these companies.
I know how much time it takes for me to look into, research and write about stocks on my own blog.
I appreciate you writing about these and I am surprised that you can manage to write about as many as you do.
Welcome back – Perry was with Smith and they touted the 25% money machine at the Orlando Money Show-2005 and he appeared on CNBC yesterday -2PM with the following touts: GLNG Golar LNG Ltd. Bermuda Co, since 1946 in the LNG tanker business (close 19.55 +6.78% with big 2PM effect – Yahoo shows about 10.9%) NAT Nordic Am Tanker Bermuda Co, bareboat charters and spot mkt with about 15 Suezmax ships – it had a little 2pm effect but lost it all after hours Yahoo shows 11.6% div/yield. PSEC Prospect Emergy Corp. A private equity fierm and had substantial 2pm effect closing 18.19 +2.31%. They deal in a wide variety of debt with equity investments mostly in energy related oil, coal storage and pwr generation since 1988.
I have owned RAS for years. They do “HARD MONEY LOANS” and KNOW HOW to manage their portfolio. They position themselves to take risk and get well paid for it. Most of their business loans are not bankable. Therefore they get a premium in rate and fees. As long as the general economy is OK they will be fine.
RAS just hit a 52 wk low on 6/27. It does look like a good solid company, but I wonder how do we decide if it has actually hit its final low point. Thank you for doing this research. I had been trying to do the same thing by myself (figuring out the teaser stocks) and wish I had found this group and your blog earlier!
I am so happy to get to your blog. Thank you so much for sharing your research on these investment advisors who probably make more money selling information than investing in the companies they tout!!
Great Blog — Kudos!… Ironically I held RAS and ABR for 2 months in my “Kerosene Folio”, and just sold yesterday since it tested more than my ususal “cut your losses threshold of -7% (-13% loss)… No bottom in sight?! … Though ABR may find support here at $24 level.
Wow … this one is going to have to be a “25% cash machine” for a Looooooong time to make up for those losses. For those who weren’t paying attention to this one (and I hope no one bought based on the teaser), they were tied in with American Home Mortgage and fell dramatically when those guys collapsed, and may have significantly more exposure to the yucky subprime lending fiasco. There are clearly some folks out there who think this one is going under, that was a really fast fall from $30 to $6 (though it did bounce a bit up to $8 or so today). I’m glad I’ve been worried about all these real estate companies, even the ones with huge insider buying … everyone’s getting tarred with the same brush these days.
Too Good To Be True… Yes, I think what really happens with the 25% Cash Machine is that you put in your dollar, and soon it’s worth only a quarter… Definately Mr. Toads Wild Ride in those stocks…
I am a charter member..Used the 25% machine to set up my 200K ira for dividends…
I am please with the dividedn income but am appalled at the lack of attention given in a down turn…
I have 25 stocks each down an average of 2000$/stock. That is a total of 25k$ o 25% to the down side..Perry will hang on to the stocks too long before issueing a sell order in my opionion…That puts fix income people in a bind in that not only are the losing capital they are also losing part of their income…
So if you do your due digilance and sell before the stocks dip too far, you will be ok..
Correction: 50k$ down not 25k$ sorry. The heavist stocks to the down side were (you guess it)
financial sector..