Chris Mayer’s “Magic Formula” Stock — “A Business Model Like No Other”

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Chris Mayer has a lengthy ad out now for his Special Situations newsletter, and in it he teases a handful of different ideas, from Mongolia to spin-off investing to S&L conversions … but there was one particular pitch in the ad that caught my eye.

He says that he’s found a unique stock … and, well, it’s a short tease so I’ll just let you read it in his words:

“Edmonton, Alberta, isn’t the first place you’d look to find a sophisticated financial company. But that’s where I discovered one of the most extraordinary investment opportunities I’ve ever come upon-a company whose stock just goes up… and up… and up.

“This play has been on a 3½-year tear, from a low of $3.70 to current levels around $24-a more-than-sixfold gain.

“Oh yeah, and it pays 5%. It’s been paying dividends since January 2009. Monthly.

“This company claims a business model like no other. (I couldn’t disprove the claim, though I tried.) Like a mutual fund, it buys stock in other companies; unlike most mutual funds, it takes preferred, rather than common, shares. Like an REIT, it passes most investment income back to shareholders; unlike an REIT, it holds no real estate. Like a venture capitalist, it seeks out entrepreneurial firms; unlike a venture capitalist, it takes no role managing them.”

“It is invested in only eight companies currently. It doesn’t intend to ‘flip’ any of them. The master plan is simple: Sit tight, collect fat payouts and hang in for the long pull.

“And why not? Here’s a magic formula for safety and profit. If an enterprise falters, who gets paid first? Preferred shareholders. Furthermore, the hands-off management style lets this outfit run leaner than lean. We’re talking a half-billion-dollar firm with only seven employees.”

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What’s not to like, right? It sounds a little bit like a business development company, a little bit like a closed-end mutual fund, a little bit like a royalty company … so what is it?

Well, it’s kind of a smushed together amalgam of all three — this is, sez the Mighty, Mighty Thinkolator, Alaris Royalty Corp (AD in Toronto, ALARF on the pink sheets).

How does it match?

Well, Alaris is priced at around $24 and did hit a low of around $3.40 shortly after it started trading in early 2009, the path since that low has been almost a straight line up and to the right on the charts.

And they are a private equity investor with only eight portfolio (or “partner”) companies … and they are quite unique in the way they structure their deals. The funding they provide is backed by preferred equity, but their payout (royalties or dividends) from their partner companies is reset annually based on the top line (or near top line) revenue numbers — not on profitability or earnings. They focus on companies that they believe to be stable and growing, with low debt and low capital requirements, and their funding does not lead to a change of control or any issuance of new common equity (or even a seat on the board, or pressure on the company to change its strategy — Alaris is hands-off except for the setting of covenants for debt levels, etc.) … so it enables families or management teams to maintain control of their company while still getting meaningful financing for growth.

And yes, the dividend is currently right around 5% — and they do pay the dividend monthly, with increases at least once a year since that early 2009 swoon (that swoon came when they slashed the dividend, just as the market was in its death throes and reaching the lows of the crash). They aim for a very predictable and stable cash flow, since they know in advance what their distributions will be from their partners for the coming year, and they plan to pay out roughly 80% of that cash to shareholders.

And any reasons to suspect this isn’t a match? Well, not really — if there’s a similar company out there I haven’t found it … but Alaris is actually headquartered in Calgary. That doesn’t mean Mayer couldn’t have discovered them in Edmonton, of course.

Alaris’ partner companies are all North American, but that’s about all they have in common — there are a couple that are related to health care, a cement company, a wooden playground company, an aircraft maintenance firm, etc., you can see their profiles here if you like. And though they have only eight investments, they’ve made many more investments into those eight companies — many of their transactions are follow-on investments to fund companies who are already partners.

This is the first time I’d ever heard of this company, and I’ll admit to being interested in learning more — they do have a record, short though it is, of making each new investment accretive, with their “royalty” yield being large enough to offset any dilution from new Alaris shares or the cost of new debt (they don’t borrow a lot of money, since their goal is to be low-risk, but they do use debt as well as equity to grow), and I do like their lean structure. They say that they can double the size of their portfolio without overtaxing the current management team, which is good.

A 5% yield is not remarkable for a middle market investment company, and though performance should be pretty transparent and predictable for at least a year into the future there is a substantial amount of risk in being concentrated across such a small portfolio of partner companies — you need to be confident that Alaris is indeed finding stable, predictable partners because future revenue declines at these companies would eventually result in lower payments to Alaris, though they also do have the equivalent of a preferred senior equity position that protects them to at least some degree in the event of a bankruptcy or similarly adverse event.

So far this company does show at least some indication of being a bit more stable and predictable than some of the BDCs — when I look at them in more detail at some point in the future I’ll be comparing them to BDCs like Main Street Capital (MAIN), MVC Capital (MVC) and a few others that have caught my eye recently. I like the business model, I like the annual pre-set royalty payments from their partners, and I like their stated goal of stability, predictability and low volatility … don’t know if it’s actually “magic” as Mayer teases, but it’s certainly been working well for a couple years now.

That’s my initial look — sound like a company that’s interesting to you? Let us know what you think with a comment below.


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15 Responses to Chris Mayer’s “Magic Formula” Stock — “A Business Model Like No Other”


  1. I watched Alaris Royalty for about 6 months trying to find something wrong with it. Other than not being very familiar with their business model, I saw no reason not to run with the numbers. I bought in early June at CAD20.25 and AD is now trading at CAD24.47 as I write this with a $1.26 dividend -recently increased- paid out monthly (6.2% yield on my investment). As a Canadian citizen, I also get a tax credit on this “eligible dividend.”

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  2. Really like the sound of Alaris Royalty –my kind of steady–eddie solid yielding stock. But your mention of REIT-like makes me wonder if it generates a K-1 instead of 1099? My tax-preparer has me avoiding K-1s since he says it costs him $300-$600 to process each one through my 100+ pg. return, depending on how many inaccuracies or questions they raise.
    Tom L.

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  3. Tom (Lippert): Alaris couldn’t possibly issue you a K1. There’s no such tax status for companies foreign to the US. On another note, my tax return is complicated (though only 75 pages) and includes one simple-but-large K1 (my business) and at least 5 small-but-complicated K1′s from investments. My CPA gets $500 altogether for a years’s return.

    My take on Alaris: watch a while. Sounds good, I don’t understand it yet, watch for dips, I’m not sure now is the right time to be buying anything I don’t understand. This seems to be Travis’ approach.

    Did you learn anything else about Alaris in your 6 months of watching? They are up 8 or 10% in that period but appreciation was greater in the 3 prior 6 month periods. Don’t get me wrong, a stock paying 5% doesn’t really have to appreciate in today’s environment–just never sagging is good enough.

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  4. Sounds nice but when you say a 5% dividend paid out monthly do you mean 5% per month or 5% based on the year?I have quite a few Reits in my portfolio with most of them paying top end divs in their field but if that’s monthly….i’m buying after a little look see.

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  5. I have nothing but good things to say about Alaris. I purchased this stock originally in 2011 and added to it in early 2012. My average cost is approx. $16.30. “AD” has increased the dividend three times in the past 15 months, my YOC is now just over 7.73%.

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  6. I’ve owned this one for about 4 months on the advice of one of the better small cap advisors in Canada, Fabrice Taylor. I bought a chunk around $20 and then bought some more during a dip around $21.50 or so. They just signed another major deal about a week or two ago and that has caused it to spike up again. This one has a bit of volatility in it so there may be an opportunity to buy a bit lower. I am still holding onto all my shares.

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    • JTP is a closed-end fund, a bit more of a “standard” play on preferred securities — they do pay a similar dividend but hold a much broader portfolio of probably 100-200 preferred securities, though due partly to the nature of preferred stock they’re overwhelmingly levered to financial services/banks/insurance (70-80%). One of several interesting funds that owns a basket of preferred stock. There are also straight ETFs for this segment of the market, like PFF, that have similar yields in the 5-7% neighborhood.

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  7. Freehold is one that seems similar that I have owned for a few years and is doing something I do not quite understand. FRHLF is holding on to a decent chart up from 17 handles last 6/4-5, market bottom, but the
    US Royalty trusts primarily oil producers like CHKR, MARPS & WHZ have all been hammered NDRO has been a bit steadier but the US issuances are not doing well in this last 6 months. I expect the US Trusts have different structures than the Canadian ones where as FRHLF was a Royalty Trust it converted to an LLC due to the Canadian tax law changes? All I am asking or cautioning on is whether the flu that has effected the US Trusts I have listed, mostly oil producers might spread to Canadian “Trusts” like a Alaris and Freehold?

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  8. I do not know how the discussion of preferreds got in here but there is the PFXF which I use in conjunction with the CNPF to avoid exposures to US Zombie banks. Some consider the subordinated debt of US banks their preferreds shares to be shares. So then they reach and praise the banks for sharing their strong profits in recent years with shareholders. Of course the couple pennies they pay on their common is just to guarantee the preferred’s distributions. These preferreds carry very high coupons and get a lot of calls. Most banks are redeeming most as they come to their call dates those who do not redeem 7 to 8% coupons beyond their call dates …well they are probably pretty shaky in my mind. Buying at a premium to par with ~+/-2 years to call has a YTM aspect and then when called, they dump the cash on your fund which needs to find a new allocation generally above par.
    New issuances like the UTX-A are still coming out at near par, but that one gets bid up to $57 handles for it’s CVT function. PLP and UTX-A both with wide channels trading down to near ~ $2 of par in the last eight weeks, now 6-7% higher. RNR_D just recently doing a partial call which knocked the uncalled sequestered shares down to a $25.1x handle. So my outlook is that you had best be wary of preferreds funds especially those involved in US Zombie Bank debt and maybe you could benefit more by investing in the individual issuances. CNPF is 70% banks and financials underwritten by strict banking guidelines and a hard currency. While the yield is a bit modest it is enhanced by buying into sub .98 Loonie valuations and selling into a near 1.03 Loonie valuation. I personally expect the .DXY to trade below 75 later this year. Real rates of return may no longer need to be calculated as against ghost inflation but also then as to the percentage declines in the US Pe$o as well.

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  9. I’m just a rookie but I love reading this stuff. Gum Baby your the best! So my “for what it’s worth” says this is a Canadian Berkshire. Not a bad thing. Now if you could have had Berk-A at $24 (US or Can) would you?

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  10. Would Alaris dividends be taxed in the same way as Canadian common stock and generate the same type of paperwork as, for instance RY?

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  11. Alaris Royalty stock (AD) is a common stock similar to Royal Bank (RY). Dividends are treated the same way as well. This is from the Alaris site: “Dividends declared by Alaris Royalty Corp will be considered and designated as “eligible dividends” for Canadian tax purposes.”

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