Mark Skousen: “This Stock is PROFITING From the Subprime Mess”

By Travis Johnson, Stock Gumshoe, February 5, 2008

Ah, it’s so nice to have a lovely little sleuthing job to distract me … this is much more enjoyable than watching my own portfolio tick lower, or watching the market indexes crawl frantically into into the basement like scared children in a horror movie. Enough distractions like this, and I can actually follow through on my personal goal of ignoring market gyrations and patiently sticking with good companies.

But that’s beside the point, of course — no reason for you to care about my portfolio. Now Mark Skousen’s, that might be of interest to you. I find him to be a bit off-putting in person, since he gives off an aura of “more brilliant than thou”, which clearly would irritate those of us who are indeed unusually brilliant 🙂 . And to be fair, he does have book jacket blurbs from Milton Friedman, and he’s been publishing a successful newsletter for eons, so I suppose he gets some street cred that way.

But what’s important is that he’s teasing us with a new stock today — if you subscribe to his Forecasts and Strategies newsletter, which is one of several that he edits, he’ll tell you about this company that is “profiting from the subprime mess.”

Good teaser, eh? Now that the investing punditocracy has us all hot and bothered about subprime CDOs threatening to turn western civilization into a big, smoking crater, how can we avoid shelling out a few bucks to find out who’s on the other side of this catastrophe?

What’s that? You in the back, yes? Correct, the answer is, “We can listen to the Stock Gumshoe.” Very good, extra credit for you!

Skousen might be a smart economist, and you might want to subscribe to his newsletter, but if you just want to find the name of this company … read on!

What does he tell us about this one? Other than the fact that we can “Double [our] Money in the Next 12 Months with This Rising Financial Company.”

We do get a few clues:

It’s a Business Development Company (BDC) based in Vancouver that “went public in 2003 and recently listed on the American Stock Exchange.”

The company was specifically worried about US-lending and the subprime collapse before it happened, saying that it was “fearful of lending in the U.S. ‘because of its lending practices and its lending laws.'”

“In third-quarter 2007, the company’s loan portfolio increased 14% over the previous quarter to $273 million.”

There are a few other clues in the ad if you’re interested, but that’s enough to feed into the mighty Thinkolator for a few minutes.

Still spinning.

Ah, there! This is …

Quest Capital (QCC)

Quest is indeed a Business Development Company based in Vancouver, and the clues match exactly. They did make some snarky comments about US residential lending, you can see their press release from August here if you’re interested (it’s a pdf file).

For folks who don’t know, BDCs are somewhat akin to partnerships or REITs, in that they get to work tax-free and push all their taxable income through to shareholders in the form of dividends. I’ve written about a few of the big ones before, like American Capital Strategies and Allied Capital, but Quest is definitely the small fish in this fry. I don’t even know if they were technically called a BDC under Canadian regulations, but after a reorganization last month they’re now essentially a mortgage REIT.

QCC has a market cap of $300 million or so (the big guys in this business are in the $3-10 billion range), and currently pays a quarterly dividend of 2.5 cents/share. The total dividend is 10 cents a share per year at the current rate, which sounds pretty measly until you note that the share price is down near $2, so it’s a yield of about 4%. Low for a BDC or similar REIT, but not bad.

They do believe that they’re in a good spot, as do most mezzanine lenders these days — you’ll probably find that most lenders who specialize in work like this, mezzanine loans or loans to smaller and midsize businesses, are drooling at their prospects. They think that the big guys are scared to lend in this environment, so they have the opportunity to pick up market share and make very profitable loans.

Of course, saying that this firm or any of its compatriots is debt free is a bit misleading — they all use other peoples’ money for some of their lending, though Quest and their compatriots are certainly being more conservative on the leverage front lately. Quest is currently looking to increase their line of credit to help fund more loans, so they do have some risk on that front.

If they’re like most lenders in this business (and I don’t know, I haven’t really dug into their books), then they probably profit primarily from their underwriting acumen (not making bad loans) and from the spread they can achieve on their borrowed money (ie, they have a line of credit at 9% and lend at 13%, getting 4% for their trouble). In these cases, most companies have similar rate adjustments on their lending as on their borrowing, so if the prime rate goes up then both their line of credit and their existing loans also adjust up and it generally should have little direct impact.

So that’s something to look into for Quest, how they handle interest rate risk. Otherwise, I’d think about their lending portfolio, which they disclose in part on their website — mostly in Canada, which might be good if you like the Loonie going forward, and mostly in hard-asset areas.

The latest news from Quest is that they reorganized into a Mortgage Investment Corporation, which is essentially the same sort of structure as a Mortgage REIT in the US, though not necessarily with the same rules. The announcement of this, and of the closing of their latest line of credit, is here. The big limitation for these kinds of structures is that you need to keep a large portion of the capital for the company in residential mortgage assets.

So … I hadn’t heard of Quest before, but if you’re interested in sharing your opinions about them I’m sure we’d all be happy to hear it. I have my eye on a few of the other companies in this space that I personally prefer, but that’s largely because of higher dividends, greater scale, and more personal familiarity (many of these companies,m though not QCC of course, are headquartered in the suburbs of Washington, DC, my stomping grounds).

So … I hope this gives you a little food for thought, or at least a brief distraction while market sentiment remains bitterly cruel. Enjoy!


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26 Comments on "Mark Skousen: “This Stock is PROFITING From the Subprime Mess”"

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Joe
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Joe
February 6, 2008 8:04 am

Is JRT one of those companies you mention you have an eye on?

Gravity Switch
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February 6, 2008 10:42 am

Nope, have never looked at JRT.

BRIAN
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BRIAN
February 6, 2008 11:09 am

I Own QCC for a few years now and have added shares when down in price. The stock is in a downtrend. Recommend buying now. Target was raised 3.50 recently by some analyst, Mark S. is talking about a (TRIPLE) dividend increase, making it 4% to 12% near future, due to some none-profit laws. The down side I see is the U.S.Dollar rebounding against the Canadian dollar.

The mayor
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The mayor
February 6, 2008 11:12 am

I’ve followed Oxford Funding from a previous teaser…OXFD…..Is this the same type of company?

Christine Stewart
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Christine Stewart
February 6, 2008 11:13 am
For anyone considering Skousen’s Forecast $ Strategies – BEWARE. I subscribed to his newletter for approx. 6 months. I lost more than I made! Also, he only discusses his pics that are increasing, and ignores the decliners. He thinks he’s a Washington insider and can alert you as to which way the political winds will blow – NOT! He constantly tries to sell you his overpriced seminars and books, and yes, he is a fat head. Additionally, Quest Capital sounds like the same stock he recommended last year trading at 6-7 range. Disclosure: I recently started a position in ACAS… Read more »
Garry Cleverdon
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Garry Cleverdon
February 6, 2008 11:58 am

QCC is a hot Stansberry pick for 2008 and has been for some time. No sub-prime problems and one to watch.

Todd
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Todd
February 6, 2008 12:15 pm
It is good to have the gumshoe as saw this tease yday and had a feeling it was Quest, but had not dug into it. I have owned shares for approx 2yrs and other than the diviend have not seen much return. What did attract me to it was the financing terms/equity participation that they were getting dealing with microcap mining cos(mgmt has great deal of expertise in this field) – in a bullish mining environment this should be good right? However, if any of you who like me own quite a bit of this microcap mining stuff you probably… Read more »
Max Martin
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Max Martin
February 6, 2008 12:34 pm

Too small cap for me. I own NLY and MFA.

Lora Harper
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Lora Harper
February 6, 2008 12:55 pm
You might look into Mortgage Investments Inc. (MFA)/ I’ve only owned it about 5 months and it’s up 36.88% as of today. Purchased at $7.71 and it closed yesterday at $10.56. As of now it is paying a dividend of 5.7%. It seems to ignore the bellowing herd and keeps right on coming up green when all others have turned red. You’re the greatest thing that has come along in the newsletter profession and I for one hope you have a long long career in the business. We need you!. Thanks, Ben Thinkin’
Brian
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Brian
February 6, 2008 2:14 pm

Traded out of MFA recently with a profit, but not as much as it’s up today. Believe subprime has further downside in MFA. I Would be interested in it again later on this year. Good now for a sell.
Agree with Cristine Steward comments above about Mark S. He needs to talk more about when to sell, But is still pitching QCC as a buy even while it’s down from 3.08 last year.

Dividends4Life
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February 6, 2008 2:29 pm

“Profiting from the subprime mess” – now that is a teaser that will get most everyone’s attention, especially those of us who have felt the pain. I’ve held ACAS for years and have been please with is income stream. It has a great record of raising dividends and plans to in 2008. I have never looked at QCC, but I’ve added it to my list to evaluate.

Best Wishes,
D4L

Gravity Switch
Admin
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February 6, 2008 3:52 pm

Brian, that’s a little surprising to me — I’ve read Skousen’s writing on occasion, and I’ve seen him talk a number of times, and he almost always says that he has strict stop-loss recommendations with his stock picks. It’s interesting that this hasn’t been reflected in the experience of several of you who subscribe to his stuff.

Buffalo
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Buffalo
February 6, 2008 3:57 pm

I first heard about QCC fron Stansberry S&A Digest 8/17 2007. I bought some. Since then it has been as high as 3.00 and as low as 2.00. I’m still holding. It was later mentioned in a Nov “True Wealth” Special Report,also part of the Stansberry newsletter group.

Mahkel
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Mahkel
February 6, 2008 5:52 pm

I did well with Skousen’s cMed recommendation and so bought QCC a year ago for over $3.-, and the stock hasn’t been up there again since.I’m ready to double my money as soon as Mark is.

Another Brian
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Another Brian
February 6, 2008 6:49 pm

Christine Stewart is dead on. Skousen does not live up to his claims. Just like Robert Hsu. It’s like they don’t even know what’s happening on a daily basis. Perhaps they should stop their seminars and read the advice their organizations are giving. Or better yet invest according to their advice at the same time they give it.

JMGrif
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JMGrif
February 6, 2008 11:15 pm

I was thinking about R.Hsu, I saw it mentioned earlier. Can you tell us more about his service, Thanks

A. Nony Mouse
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A. Nony Mouse
February 7, 2008 1:03 am

Hey gummie–If you’re interested in Canadian Financial Stocks…Take a look at Toronto Dominion Bank (TD) no exposure to US sub-prime problem…and uh.. not such a speculative play

Brian B.
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Brian B.
February 7, 2008 2:08 am

Well Mark S. does actively use stops on “SOME” of his recommendations, But has of yet to say there is one in play for QCC. I would like to think so. In his defense ,”It’s a long term trade for the dividend.”

Brian B.
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Brian B.
February 7, 2008 2:12 am

I joined his newsletter and am not pleased as oxford, or true wealth newsletters

Lee Dietschweiler
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February 7, 2008 11:58 am

Does anyone have insight on NSOL. It is running about 53cents, but under “news”, the company has an agreement to be bought out for $1.50 a share about Feb. 18.

Andre B.
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Andre B.
February 7, 2008 1:46 pm

I am very interested in AFN (Alesco Financial) it pays a huge dividend. Does anyone have any information on this company?

FlatironsJR
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FlatironsJR
February 8, 2008 12:35 pm
I was a subscriber to Forecasts and Strategies for 2 years. Mark Skounsen does use stops, but not on everything (CMED is an example. I even sent an email to him asking about no stop on CMED and he replied that it had too much upside potential and he was convinced that it was a LTBH. Currently I am up 50% and 100% on those picks). What I really appreciated from Mark was his honesty regrading where his wealth comes from: His business, not his stock picks. He knows he is running a business and he will tell you that… Read more »
FlatironsJR
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FlatironsJR
February 8, 2008 12:41 pm

Lee;

I have a really funny story about NSOL.

I have friends who bought shares many years ago (@ a $1 a year) from a guy in a Target parking lot. When they got there the guy asked, “Did anyone follow you?”. And, they bought shares.

NSOL has technology to remediate radio active waste; mostly for medical waste. Their founder died drag racing in Idaho.

Hope that helps.

FlatironsJR
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FlatironsJR
February 8, 2008 12:42 pm

Sorry,

NSOL at a $1 a share, not year.

Gravity Switch
Admin
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February 8, 2008 12:58 pm

Flatirons, that is an awesome story! I love the picture, “I’ve got a hot tip … you weren’t followed, were you?”

And the fact that they bought shares following that intrigue tells you everything you need to know about sales letters that include the “please don’t share this” … “loose lips sink ships” language. It just plain works.

who noze
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who noze
December 7, 2008 11:19 am

infomation on nsol can be ,obtained on raging bull ,com

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