“Wall Street ‘Goof’ to Deliver your next Double” (and a fat yield)

By Travis Johnson, Stock Gumshoe, December 16, 2010

Today we come back once again to our old friend Louis Navellier — largely because he’s pitching something that my readers ask me about all the time, a way to get a decent income yield from a mining stock (most of which, despite all the teasers about gold stocks that pay dividends, have tiny yields at this point if they produce any income at all).

With this teaser for his Emerging Growth newsletter, though ($995/year), he says that the big yield — which he touts at 9%, though that may be before the stock ran up — is not really the story, the story is dramatic capital gains that he thinks will come in the very near future. Here’s how he puts it:

“50% to 100% Profits Ahead

“All because Wall Street has miscategorized this fast-moving commodities juggernaut as just another slow-growth income play….

“I just identified a little-known commodities play with 4,881% earnings growth and 12-month gains of 350% that Wall Street views as a retirement income stock.

“How can this be?

“Because this miner has been set up as royalty income trust and not as a corporation.

“This is why only one other analyst (beside myself) is following this mining juggernaut or why so few investors are profiting from this company’s dramatic rise as the commodities bull market takes hold.”

So … a few of you might immediately know who this is (there aren’t exactly a lot of mining-related royalty trusts, almost all of those tend to be in the energy arena) … but let’s check out the rest of the clues.

“… given the company’s previous 4,881% earnings growth, 2,556% sales growth and 350% 12-month run-up, I’d be disappointed if the company didn’t triple again by this time next year.”

Gotta love those nice, precise numbers (and, frankly, it’s hard not to love that kind of growth — though it’s never sustainable). Still, Louis seems to think these growth numbers will be sustainable:

“The company’s fortunes are set to rise exponentially again in 2011, as the dollar falls, commodities prices rise, and the company delivers another 4,881% quarterly earnings growth.”

And he says that it has doubled investors money and delivered a fat 9% dividend over the last year.

Finally, we get a little more by way of hints about the share price and the institutional owners:

“If you wait until earnings reports settle in, this $57 doubler could have already hit $106.

“I’m not alone in my thinking.

“Morgan Stanley, American Century, T. Rowe Price and Oppenheimer along with other 15 mutual fund and institutional holders have loaded up on more than two million shares…

“…all in anticipation of the profit wave that’s headed their way.”

He didn’t mention in that paragraph that Navellier & Associates is also one of the larger institutional holders of the shares — though they own just about one third of one percent valued at about a million and a half dollars. They rarely show up on the major holders list, but this stock is so small that they do make the top ten.

So who is it?

This is Mesabi Trust (MSB), a grantor trust that owns interests in some pieces of of the Mesabi Iron Range in Minnesota, with the income coming from Royalties on the Peter Mitchell Mine which is operated by a subsidiary of Cleveland Cliffs (now called Cliffs Natural Resources, ticker CLF).

And yes, in the last quarter they did record massive growth (as did CLF, for that matter — thought not as dramatic) — the 4,881% earnings growth and 2,556% sales growth numbers are accurate, according to Yahoo Finance. And there is only one analyst covering the stock — for what it’s worth, he expects earnings growth to moderate dramatically, with $2.80 in earnings for the current year (ends in January) and $2.92 for next year.

The trust has no control over how much revenue comes in, and in fact the trustees are not allowed to do anything to impact the business — it all depends on how much iron ore is dug up from their lands, and what the price is. Since it’s a trust that seems to have just a bank employee as administrator and some consultants to monitor compliance, it can pass along essentially all the income as a quarterly distribution to unitholders (shareholders).

With iron ore prices climbing this year and production at the mine also going up, they generated substantially more income and cash flow than last year. Many folks expect the big players like Vale and Rio Tinto to boost prices again next year, so that would be a positive for MSB, but it is definitely not a stable, steady dividend stock — not even as stable as the several natural gas-focused trusts that we looked at for the “Mainz Income” teaser a while back.

Although aggregator sites like Yahoo Finance indicate that the expected yield is 6.5% right now based on annualizing the current payout rate, there’s not much likelihood that the quarterly dividend will remain stable over the next four quarters (the last quarter’s dividend was more than 4X as large as the comparable dividend of a year ago, but also 30% lower than two years ago). The last four payouts actually total $2.38, which was at least a 9% yield before the stock had a huge run over the year, but represents a trailing yield of closer to 5%. If the analyst is right about next year’s earnings being $2.92 (he’d have to have an iron ore crystal ball to be very accurate), that dividend would be expected to climb a bit and probably get up to at least $2.65 or so (90% of the earnings), though, as I said, there’s not any way to be very sure about what production levels will be and what iron ore pellet prices will be from the Trust’s land. I do not know what the remaining reserve life of the lands are, but though the can’t control how much iron, if any, is produced by the operator, the Trust will exist until the iron ore is gone or until a specific group of people pass away (I have no idea why this stipulation is in the Trust documents, but this is what they say: “The Agreement of Trust has a duration ending 21 years after the death of the last survivor of 25 individuals living at the inception of the Trust [that was 1961], all of whom are named in an exhibit to the Agreement of Trust and were alive several years ago when the Trustees investigated this matter. The Amendment of Assignment has a duration ending when the reserves of minerals which are the subject of that agreement are exhausted.”)

So there you have it — it is a high yield mining company, at least indirectly, and Navellier says that if it doesn’t jump at least 50% after earnings you “won’t pay a dime” (for the newsletter, not the stock). Of course, it’s your money he’d be getting in the first place, so what does he lose if he has to give it back? The last quarterly report was issued on December 3 (that’s the 10Q, the top item on their recent SEC filings list — it has a lot more details about the Trust and operations that’s worth reading if you’re interested in investing), and that release date was about ten days before this ad started running, so that means he has quite a bit of time before the next earnings report — though arguably more important will be the next distribution/dividend announcement, which if it comes three months after the most recent one should be expected in mid-January.

Which leads us to the current state of affairs, with MSB’s unit price currently tanking dramatically, down 13% today as I type this note. The shares were at $57 on Tuesday as teased, but here we are on Thursday and they’re at $46 on no particularly Mesabi-specific news that I’m aware of … though after the huge run the stock has had, the possibility of higher-than-usual seasonal dips in dividends with the midwest storms and deep freeze, or just profit taking or one of the institutional owners pulling out, could certainly help drive shares lower, and I imagine there may be a lot of new momentum-driven shareholders who might be expected to jump ship if it turns out that dividends (as in the past) go down sharply in some upcoming quarters. It takes a lot of dividend to make up a 15% capital loss, so if you love the stock you can at least be happy that you can buy it today for far less than when Navellier got excited. I have no idea whether or not the shares will recover anytime soon, but it is a unique and interesting investment.

So whaddya think? Any insight on Mesabi, or on iron ore? On the state of production in the Mesabi range or shipping in Lake Superior? Like the dividend, or expect it to fall? Let us know with a comment below.

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18 Comments on "“Wall Street ‘Goof’ to Deliver your next Double” (and a fat yield)"

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Gravity Switch
Admin
11
December 16, 2010 12:34 pm

Ha! Just noticed that I left a typo in the subject line of today's email — oops! And no, I'm not so lazy that I intended to spell Street with just one "e"… not quite, anyway.

mamjo
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mamjo
December 16, 2010 12:53 pm

WOW down 13% today, hit a doublebottom breakdown yesterday. I'm sure VECTORVEST is flashing RED That Louis sure can pickem.

RonH
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RonH
December 16, 2010 1:15 pm

I picked up 200 shares at $23.67 back in August so from a capital appreciation standpoint I am quite pleased. However I had hoped to have been able to pick up another 300 shares before the rise began. Since Mesabi ships their ore over the Great Lakes, there is no movement during the winter when the lakes freeze (ala Gordon Lightfoot's song about the Edmund Firzgerald going down during the winds of November). I would be more inclined to buy it when it goes back down to $25 than at today's prices.

auctionpro
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0
December 16, 2010 1:24 pm

The seaway port closes withing a week until spring. The Great Lakes freighters will usually operate till mid January but it's all dependent on the weather. I lived in Northern MN for most of my life. The Iron Range has had it's share of ups and downs that's for sure.

Chuck
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Chuck
December 16, 2010 3:22 pm

The last life plus 21 years would hve to be so that the Trust Agreement is not found to have violated the "Rule Against Perpetuities", which would make it invalid, legally.

TONY
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TONY
December 16, 2010 4:48 pm

I like this stock. Second time I've owned and made money on it. I'd buy it again when it drops more.

John Harvey
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John Harvey
December 16, 2010 11:30 pm

What a Joke ! There are about 15 REIT stocks paying more than 10% dividend and about 5 or 6 of them pay 15% or more in dividends. Louis Navelliar is the biggest ""joke" for investor information that I think I have ever seen. But he seems to attract enough IDIOTS to stay in business !

Sally G
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Sally G
December 17, 2010 8:18 am

My grandfather invested in this stock a long time ago (he died in 1980). It was too speculative for me, but I certainly respected his abilities in investing. Most of his investments were long-term, dividend stocks; I never discussed investing too much with him, so I do not know his reasons, but it was a blast from the past to see this discussed here.

Herach
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Herach
December 17, 2010 9:01 am

Let me share my experience with MSB. Rather than buy 500 sh at 40, I bought 5 40 Jan calls for 3.30. This took off and hit a high of 16.00. Now the stock is down to 47 and the calls are 7.20 bid. I'll sell. hopefully at 7.5 for better than 100% since Oct. I do not regret missing the top. To show I am far from infallible, I bought xhb puts expecting housing stocks to crumble. Wrong, they just expired. Win some and lose some Whee this is fun.

Gravity Switch
Admin
11
December 17, 2010 12:07 pm

If you're curious, the NYSE was intrigued enough by the big drop in the shares yesterday to ask Mesabi what's going on — their response was pretty much, "I dunno." So as we thought, no specific news (other than perhaps Jim Cramer or someone else telling everyone to sell), but stocks that go up fast can go down fast, too.

turnipseed
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turnipseed
December 17, 2010 6:57 pm

The mesabi ore is low grade and very hard, so it is more expensive to mine than most other iron ores, i.e., it is more leveraged to the price of ore. Royalty is tied to both the price of pellets and the tons of ore mined. A drop in iron ore price will likely result in Cliff cutting production, so royalties will take a double hit. So even a minor correction in iron ore prices would cause a major price hit in this stock.

Jeff
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Jeff
December 17, 2010 8:22 pm

Sorry,but I still like the dependability of The Monthly Dividend Co.
Thanks,Jeff

Carol
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Carol
December 17, 2010 10:21 pm
Maybe, just maybe, the weather up there right now has something to do with the fall in price. When winter-savvy Minneapolis closes down due to blizzards, when the "weatherproof" sports dome there collapses, you know the weather is a bit extreme. Getting ore out of the ice-covered ground, getting it by rail to the ore boats in Duluth harbor (which I'm sure is iced in), getting those boats across Lake Superior in gale force winds and down to the Gary steel mills where the winds have half destroyed the Indiana Sand Dunes could slow business for a week or two.… Read more »
Dave
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Dave
December 21, 2010 1:40 am
Time was when a person could transfer property with so many or such broad stipulations as to tie up ownership "forever." Future generations would have no say in the matter. In the interest of stopping such practices and keeping land and real estate markets more fluid courts came up with the Rule Against Perpetuities. The Rule basically says you can't tie up real property with directives past a lifetime plus 21 years. If you do, even inadvertently (and it's easier to do than you might think) then your directives are invalid. I want to say it was one of the… Read more »
bob herrick
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bob herrick
January 19, 2011 1:49 pm

THE ARTICLE says"there’s not any way to be very sure about what production levels will be and what iron ore pellet prices will be from the Trust’s land. I do not know what the remaining reserve life of the lands are;"

does anyonewhat is at least a range of time before the iron interest s of MSB will be depleted?

jetjock
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jetjock
December 16, 2010 1:03 pm

Navellier has one of the most pathetic records when it comes to TIMING.

MSB just dropped $ 6.5 in one day…

Where was Navellier at $ 15 ?

Fred Smith
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Fred Smith
December 17, 2010 6:43 pm

Agreed. He also promotes some "two dollar stock" that after you buy his newsletter you find out the stock has not been two dollars for 6 months and is sitting at $2.92!!!

Gravity Switch
Admin
11
December 21, 2010 10:39 am

Thanks! All very new to me, makes sense and I hope I never have to understand the details. Whoever the people are that are connected to this trust, they were all alive as of \”a few years ago\” per the administrators, so I would imagine that at least some of them are alive now — I wonder if they have a schedule for how often they have to announce the status of those souls?

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