I’ve written about a number of teasers from Michael Robinson during the couple years he’s been heading up the American Wealth Underground newsletter for Taipan (if that name doesn’t ring a bell, you might remember that this letter used to be the hypetastic BreakAway Investor under Andrew Mickey and others).
Robinson is telling us that he’s launching a new service to invest in “T-Gems” — which are basically run down stocks that have been clobbered by the market for some reason but still have viable and strong businesses, the “T” is for “turnaround”, and he apparently thinks he can pick the stocks which actually will turn around from among the masses of “turnarounds” that turn only in ever smaller circles as they slip down the drain. And as any good investor could right now, he shows a few charts of stocks that triggered his secret indicator (mostly in March of 2009, coincidentally enough) and have had huge gains since then.
This is a service that will focus on tiny and illiquid stocks, we’re told, and that’s why he has to restrict the number of subscribers … and naturally, the way to do that is by making the letter more expensive — they tell us that when this new service, which is called 180 Trader, launches on April 7 they “could easily charge” $7,500 — but of course, you get it “free” along with all the other newsletters that have list prices of up to $5,000 if you just join the lifetime “Millionaire’s Circle” and get access to a whole mess of Taipan’s newsletters.
While it’s true that there’s a reasonable rationale for selling more expensive newsletters that cater to more sophisticated investors and can recommend less-liquid investment opportunities, it’s also (arguably, I suppose) a bit hogwash-y in this case — Michael Robinson was perfectly happy to recommend a handful of rare earths stocks to his great unwashed hordes of low-rent American Wealth Underground readers last Summer, all of which were at least as small and volatile as the stock he’s teasing today for this more expensive service.
Of course, the other rationale for more expensive newsletters is just fine too, at least for us eager beaver capitalists: they make the publisher a lot more money. In many cases these publishers are set up to break even or lose money on their huge free daily e-letters and their relatively inexpensive newsletters that cost $50 or $100, all so that they can bring large numbers of “prequalified” new readers in to their ruthlessly effective marketing whirlwind and sign a few of them up for a lifetime mega-deal or a newsletter that costs several thousand dollars a year.
Now, Robinson can at least sometimes pick good stocks or good trends — whether it’s consistent or not I have no idea, but he certainly takes credit and deserves it for jumping on the most recent rare earths bandwagon last Summer, just a few months before they hit the headlines and started being teased by tons of newsletters … and if you see the list of great claimed trades he has made in that teaser letter, you’ll see that most of them are those rare earth stocks.
Will he be so fortunate this time around with his new letter? Beats me … but we should at least figure out what this stock is, don’t you think?
For which we need … the clues!
Robinson calls this investment idea “The Wire Trade.” Here’s how he pitches it …
“I’ve been in the financial game for over 30 years, and I believe the stock I’m recommending today could be the most explosive opportunity I’ve ever seen.
“This company is a certified industry leader… has a dominant advantage in a growing niche industry… and is available at the rock-bottom price of $3 per share.
“Amazingly, this company is posting stronger financial reports than it did when it was trading at $30 per share!
“In fact, on Feb. 3, 2011, they announced that fourth-quarter earnings had MORE THAN DOUBLED, year over year. And yet, the stock is still available for pennies on the dollar at $3 per share.
“I can assure you: This is a one-of-a-kind buying opportunity that will not last long.”
Sounds pretty enticing, right? As we move forward, note that they doubled earnings … not earnings per share. That will be important.
Some more clues?
“Already, the big institutional firms are loading up on this stock… getting ready for a big payday. Goldman Sachs has taken a sizable position and the rest of Wall Street will likely be soon to follow.”
Okey dokey, so some institutions buying in … more? How about some info about the business they’re in? Robinson tells us that this is one of the big players in the money wire business, with a particular strength in remittances — like Western Union (WU), only they’re not Western Union.
“This company is uniquely positioned to take advantage of global migration and remittances. In fact, they have over 220,000 locations in over 190 countries.
“In fact, they’ve got more locations than Starbucks, McDonald’s, Subway and Wal-Mart… COMBINED!”
Ooooh, exciting! So why are they so cheap, Mr. Robinson?
“To say this company’s stock price was unjustly beaten down during the market crisis is an understatement of epic proportions.
“In 2007, before the financial crisis, this company was trading at over $29.
“The stock fell to a low of about $0.90 during the heat of the market collapse in November 2008…
“That’s a 95% plunge…
“During 2008, the company’s revenues DOUBLED from 2007… and yet the stock was driven into the dirt.
“Make no mistake: This company isn’t broken! Not by a long shot. They are merely a victim of circumstances.
“Why’d they fall so far? It’s a simple matter of herd mentality. The big institutional players dumped massive amounts of stock… particularly anything related to financial services.
“Consequently, this stock got clobbered, and it’s traded at a fraction of its true value ever since.”
Ah, so a good company, unjustly beaten down by Wall Street, just waiting to make us millions as the global economy improves and remittances pick back up? How ever can we resist?
First, we look at the real stuff — like the name of the company. To get that, we haul the Thinkolator out of the closet and fire it up. Toss in all our little clues, and we get our answer plain as day out the other end: This is MoneyGram International (MGI).
And if you think the company is just a “victim of circumstance” and the stock price was “unjustly beaten down,” then you perhaps might be forgetting that though they did maintain a decent performance in terms of revenue and income over the last several years, and have done pretty well operationally in part by helping to consolidate the remittances processing business, in 2008 everyone realized that their management had loaded up the company’s investment portfolio with subprime mortgages and CDOs. Oops! Stock falls 90% or more.
MoneyGram was rescued by Goldman Sachs and Thomas H. Lee Partners back in 2008, who invested cash to shore up the balance sheet in exchange for a controlling stake in the form of preferred stock. That preferred stock is the reason that MoneyGram has been reporting net losses for years when it comes to “earnings per share” numbers, even as the company is reporting net income — between the net income number and the “earnings per share” number comes the subtraction of preferred stock dividends. For last quarter, for example, MGI reported net income from continuing operations of $16 million … but they also had to pay the quarterly preferred stock dividend of $36 million, so common shareholders end up with net losses of about $20 million, or a reported loss of 23 cents per share. Absent a couple one-time items, that’s been the basic look of their income statement ever since the rescue.
That’s changing now, with a deal in place to turn that preferred stock into equity — but it isn’t going to be cheap. As part of the deal with Thomas H. Lee and Goldman, MGI will be converting their existing control stake into a shared 85% of the equity in the company and paying them roughly $210 million in cash, which they’ll have to borrow (they say they’re working with banks to raise those funds and to set up their new credit facility, so hopefully they’ll get decent terms now that rates and panic levels are low). So those other investors who hold equity now will own roughly 15% of the newly recapitalized company, which will have a substantially lower debt burden and no onerous preferred share dividend to service. The news of the details of the proposed recapitalization certainly helped the stock in the short term, the shares are up a good 20% or so since then (that was about two weeks ago).
My guess, just using the back of the envelope, is that if they had had this same structure in place for 2010 the earnings per share would have been in the neighborhood of 8-10 cents. There are two analyst estimates for earnings for next year according to Yahoo Finance, and if we assume that they’re including this recapitalization in their estimates (if they weren’t, the numbers would otherwise have been negative as far as I can tell) they tell us to expect 16 cents per share in earnings … which gives a forward estimated PE of about 20, and with it a fairly large degree of uncertainty (we don’t know if the recapitalization will go through as planned, or what the debt terms might be afterward — or, of course, what the global economy and their actual business will be like). Western Union, for comparison sake, is trading for about 12X next year’s expected earnings, though they’re far, far larger by any measure you can think of.
So is it worth your hard-earned money? Your money = your call, but it is at least a growing company with a pretty strong business in a solid niche. I’d argue that it’s not necessarily cheap, and that there may be some long term pressure on the stock if Goldman and Thomas H. Lee want to reduce their massive equity stake over time, but if the company continues to consolidate their business and grow, and if remittances recover and continue to be a significant part of the economy in many places around the world, they certainly have a chance to be a rejuvenated firm that should trade at a premium to the market. I’d bet we’ll see some big jumps up and down before that, but I haven’t looked that closely at their actual business performance and I also don’t know anything about other key stuff, like their relationships with their networks of pay-centers.
Whaddya think? Interested in a piece of this turnaround play? Want to step into the big dilution in exchange for actually getting a claim on some actual earnings? Let us know with a comment below.