We have had a long line of questions about the misleading “Internet Royalties” teaser from The Wealth Advisory, so I’m going to re-share that one.
My initial solution for this teaser pitch appeared at the tail end of a Friday File for the Irregulars (our paid members) on September 12, 2014, so many of you will have seen it before…. though they must still be actively promoting it, because the questions continue to pile up. The story hasn’t really changed since then, nor has the original ad. What HAS changed is the stock price — the shares of the one specific company they hint at, and which I continue to own personally, are up almost 50% since they started teasing it.
So it’s only fair to warn you that although this is still among my favorite stocks, and still a top-ten holding for me personally, it’s a bit more expensive than the $35 they continue to tease in the ad, it’s well above $50 today and I have sold covered calls at $60 in recent months (currently I am long the stock and those calls have expired, I may sell covered calls again if the price is right).
Yes, this “Internet Royalties” stock is actually a Real Estate Investment Trust (abbreviated REIT), and it will probably trade like a REIT during times of interest rate upheaval, so we may see better buying opportunities as the Fed shakes the tree for investors in REITs and other income-focused investments. What follows has not been updated or revised since September, 2014 but I have added an excerpt from my recent note on this stock at the end (that note is from when they raised the dividend in December, the price was right around current levels then) to give you an idea of my current position if you’re curious.
— from 9/12/14 —
This is a pretty thickly obscured teaser, with what looks to me like a highly inappropriate pitch for what turns out to be a stock that I think is just fine (I should think it’s fine, I own it and I’ve suggested it to the Irregulars in the past as well).
Whatever is it? The suspense is killing me!
Here’s the pitch:
“How to make Netflix pay YOU ‘Internet Royalties’ for EVERY movie it rents
“Thanks to a new profit loophole, you can now earn ‘royalties’ of up to $48,000 per year from any of the Internet’s top 200 retailers….
“Netflix, the world’s leading online movie provider, rents roughly 200,000 movies per day.
“That amounts to more than 8 million movies per month.
“And thanks to a now-available profit loophole known as ‘Internet Royalties,’ you can legally skim a small amount of cash off of each one of those 8 million rentals and deposit it into your bank account.
“Now, the portion you earn per rental won’t be a lot. In fact, it’ll likely amount to something in the neighborhood of 1/20th of a cent.
“But while that may seem like a very tiny amount — and it is — consider this:
“If you were to earn just 1/20th of a cent EVERY time Netflix rents a movie this month, you’d pull in $4,000, free and clear.
“Do it every month, and you’re looking at $48,000 per year in pure profits.”
Sounds exciting, right? As you can tell from the fact that I’ve owned Altius for so long and from some of my other holdings, I’m lazy at heart and just loooove royalties — there’s something so very compelling about earning money on a business that requires no work from you. So the idea of “Internet Royalties” struck a chord.
Might there be some patent that all the Internet companies have to license, enriching some lucky patent holding company?
Might there be a chip design, like those of Qualcomm (QCOM) or Arm Holdings (ARMH), both of which have been pitched as “royalty” companies before, that we could stretch to say generates royalties based on this internet retail traffic?
Maybe something exciting we’ve never even heard of?
Hope springs eternal.
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Here’s more enticement:
“You can collect these ‘royalties’ from ANY of the Internet’s top 200 retailers… all at the same time if you wish.
“Take Amazon, for example…
“Though it keeps its sales numbers under lock and key, I was able to uncover that the company ships approximately 196 million packages per year.
“Now, thanks to ‘Internet Royalties,’ you can collect a small sum of cash for EVERY package it sends out.
“Again, the ‘royalty’ will likely amount to about 1/20th of a cent… but if you do the math, that works out to a cool $98,000 per year just from Amazon ‘royalties’ alone.”
OK, so we’re talking $48,000 or $98,000 a year, from two of the hottest stocks in the world in Netflix and Amazon? How can readers not be enthused and line up to subscribe to The Wealth Advisory to learn about this secret!
Well, perhaps it’s because that part is mostly ridiculous. Do we get any real clues to help us identify which stock this is that gets a “royalty” on pretty much everything that happens on the internet? Could such a thing really exist?
“collect these “royalties”…
“EVERY time someone logs into Facebook
“EVERY time someone buys a Microsoft product online
“EVERY time someone buys a Chromecast adapter from Google’s website
“EVERY time someone purchases a Xerox device on the Internet
“EVERY time someone buys a Disney DVD online”
OMIGOD THIS MUST BE AMAZING WHERE DO I SIGN UP??!!!
Then the ad throws a little cold water on us:
“You won’t start out making a million bucks. You probably won’t even make a hundred grand.
“However, if you follow my instructions today, you very well could put yourself in position to earn baseline ‘royalties’ and make as much as $48,000 over the next year.”
Now, I see these kinds of horribly misleading ads all the time, but still, this is KILLING me — I know there’s something plain as day that I’m not seeing just yet. Can we get another clue or two?
“You only need about $35 to get started.
“And remember, you don’t have to own stock in ANY of these companies in order collect “royalties” — not Netflix… not Amazon… not Microsoft… not ANY of them.”
So what do we buy?
“How ‘Internet Royalties’ Work (and why you’ve probably never heard of them)
“In September of 2010, the first ‘Internet Royalties’ were made available to the public.
“And on the very first day, investors spent a total of $270 million buying in.
“Ever since then, daily ‘royalty’ payouts have ranged anywhere from a mere $840 to $94,350….
“Remember, you’re not buying any expensive stocks… worrying about dividends… or holding bonds.
“Oh, and this has absolutely NOTHING to do with options in any way.
“Not only that, but you can also keep on collecting these ‘royalties’ for as long as you wish. And once the money hits your account, it’s yours — free and clear.
“You’re simply taking advantage while other people browse the Internet, buy products online, and log into well-known websites. That’s it.”
And in case you don’t think this is ridiculous enough (and I’ve left out most of the hyperbole), we also get a reference to another internet giant, Google:
“At the start of the year, shares of Google stock were trading for around $558 each.
“That’s pretty expensive… especially if you’re looking to buy several hundred shares.
“And even if you had the cash and ponied up for 50 shares, it would still have cost you $29,000.
“Now get this… on those 50 shares, you’d only have made just over $1,000 since January.
“I mean, if you’re going to sit on the stock for the next handful of years, you’ll very likely make more… but check this out:
“If you’d been collecting ‘Internet Royalties’ on Google instead, you could be sitting on an extra $50,000 — or 50 times more cash.”
So what are they pitching?
Well, we end up with just a few clues from all that — some kind of broad-based royalty stream not related to one specific internet company, not an options “income” strategy but something that pays real cash directly, it was created in September of 2010, and you can start right now for roughly $35.
So what is it? The Thinkolator, with an awfully high degree of certainty, will tell you that this must be a stock we’ve written about before (and which I own), CoreSite (COR). It’s a data center REIT, a concept which existed before in the form of Dupont Fabros (DFT) and Digital Realty Trust (DLR), but this particular company was IPO’d by Carlyle in September of 2010, did indeed raise exactly $270 million in that IPO, and is priced at about $35 right now (actually it’s down to $32 or so, the past couple weeks have been rough for most REITs).
CoreSite is a very good company, I think (obviously — I wouldn’t have bought shares and put them on our tracking spreadsheet as one of the core “Ideas” otherwise), but it’s sure not an “Internet Royalty” in the way they imply in the ad. They lease data center space to tech customers large and small at well-located, well-powered, well-secured data centers, and supply services on top of that to clients who need more than just rack space.
It’s sort of a commodity business, in that there are lots of data centers and some clients are just looking for linear feet of space and an allocated amount of power and connection to the telecoms, but there is a premium put on those with the best “backbone” colocations with telecom hubs, geographic locations, power supply, and management, among probably other criteria I’m not mentioning. And the “cloud” and growing internet use means demand for more space keeps growing faster than memory and connectivity equipment is shrinking, so I consider it a pretty steady business within the very rapidly obsolescing technology sector.
But the idea that you’re going to pull down massive $48,000 or $98,000 payouts in a year is, well, balderdash… unless you start with a huge position, and people who put on $1-2 million positions in REITs are not (I hope) doing so on the hype-y advice of a $99 newsletter (on sale for $49!).
So this falls into the large pile of teaser pitches that imply a specific, huge cash return… but are generally quite mum about the initial cash outlay required to get that possible return. At the current yield, $48,000 in annual dividend income would require starting with about $1.2 million worth of shares… unless part of that comes from capital gains because you’re convinced the stock will rise sharply (obviously, if you buy a $48,000 position, which is itself out of reach for many subscribers to $49 newsletters, and the stock doubles – which is always possible – you’ve got a $48,000 gain plus the relatively small impact of the dividend).
(If $1.2 million positions are normal holdings for you, and you delight in our $49 newsletter, well, drop me a line — I’m on the board of a nice little Montessori school in my town that would probably love to put up a new building with your name on the front.)
At its heart, this is a growth REIT with a good and growing yield, but it yields about 4% and I’d say it’s not terribly likely to have massive capital gains of 100% or more in the next year — it has almost tripled in the four years I’ve been covering it, going from $13 to $35, but that’s because we were lucky. We happened to find it when it was cheap and unloved as a “busted” IPO just a few months after it went public, and just as it was starting a pretty dramatic series of annual dividend raises even as interest rates were falling and investors were lusting after decent-yielding dividend growers.
That’s not as much the case now — I think it’s a good buy and is the class of the sector, partly because I expect the dividend growth to continue with another increase in December (they’ve raised the dividend sharply each year they’ve been public), but I’d buy it looking for something like 20% annual returns from here, dividends included, and let those dividends compound to boost multi-year growth (I’ve held it for about ten months now — I didn’t buy in personally back when it was young and I suggested it to the Irregulars in 2010, but so far my return has been about 15% capital gains plus 3% from dividends… kind of what I’d expect going forward).
Think about those examples in the ad, though — comparing a $29,000 investment in Google earlier this year to a similarly sized investment in COR (or, if they’re being broader, one of their competitors or a basket of them) and implying that these data center REITs would have you sitting on an extra $50,000?
If you had put $29,000 into COR back in the early part of this year, even giving you tremendous credit for catching it close to the 52-week low at $29 per share, then you would have a capital gain of about $5,000 on your 1,000 shares (this was a couple weeks ago, when the shares were still up above $34). And you would have received a little less than $1,400 in dividend payments. So even if we assume you get 2014’s full four quarters of dividends, that’s a total gain of $6,400 on your $29,000 investment, so a return of about 22%.
Pretty good, particularly since we’re talking about less than a year — but not an “extra $48,000.” That’s one of the few examples they used that actually included an “input” number, most of them just say, “hey, you could turn your small investment, starting with as little as $35, into $48,000!” … which is obviously stupid. Unless you buy in clumps and your first purchase is $35.00 and your second purchase is $25,000.00.
The market’s been good this year, too, despite what has happened in the last couple weeks, so even just buying an S&P 500 index fund would be up 10% or so since those lows. The best performing competitor lately has probably been Digital Realty (DLR), but that’s because they were a wounded duck beforehand and were recovering from accounting problems that hit in late 2013.
So yes, I still like CoreSite as my favorite data center REIT and I think it’s the cheapest, the fastest growing (and most sustainable dividend grower), and the one that gives me the most confidence in that small sector… but it’s not magical, and no, they don’t really earn a nickel for every Netflix rental or Amazon package — so far as I can tell, that’s just a highly misleading way of helping you visualize the fact that they essentially rent server space (that’s selling CoreSite short to some degree, they have more advanced services too — but at the heart it’s really all about the data center space).
Perhaps the newsletter is suggesting a whole bunch of these “Internet royalties,” they aren’t very clear about that other than specifically hinting about Coresite — there are other data center stocks that are worth looking at, including industry leader Equinix (EQIX), which has been planning a REIT conversion but isn’t there yet, and newer, smaller entrants to the public markets like CyrusOne (CONE), whose prospects look decent and who is in a little growth spurt from development that could bring good dividend growth (though they’re more heavily levered, too, which means missteps would hurt them more).
And, of course, these are REITs so they trade like REITs, heavily influenced by interest rates and interest rate expectations and by competitive rates available in other income-focused investments. As I’ve said before, I think a long, slow rise in interest rates will be good for most of the REITs and similar dividend-growth stories that I like in the end, but it can certainly bring in big buying opportunities for them in the short term (just check out what happened to pretty much any REIT you can think of in May, 2013, when Bernanke started talking about ending Quantitative Easing — that could easily happen to them again if there’s more hawkish, “rates up in January” or similar talk from the Fed, and that’s part of the reason why most REIT’s are down 5-10% in the last couple weeks).
If the consensus swings hard for interest rates and all the REITs start getting beat up, I hope to be nimble enough to nibble at the ones I think are best situated for a growing economy. Right now, COR is a hold for me given my expectation that we’ll probably get a dip on some interest rate hullabaloo at some point — and I’d be happy to buy more if it gets cheaper, or if they boost the dividend nicely this Fall and don’t get any credit for it.
—back to more recent updates now—
For those who wonder what kinds of notes I send to our paid members, here’s yet more of a little taste — this is what I wrote in a Friday File to the Irregulars when I added to my Coresite position back on July 24, 2015:
7/24/15: I added to my position in Coresite (COR) today, following their most recent quarterly results. COR is a data center REIT, they own strategically important colocation data centers in some core areas, including LA and NY and Chicago. There are a lot of things to like about COR, including their fantastic trend of dividend increases in recent years, but one of the most important metrics is that — unlike a lot of traditional REITs — their cash flow is so impressive that they are able to fund a lot of their development without large amounts of debt or new equity offerings. They have increased their share count by about 10%, and their debt by about 20% over the last four years in the process of quadrupling their revenue. That kind of leverage and reinvestment is difficult for REITs to come by. Analysts expect COR to continue to grow funds from operations (that’s what REITs use instead of earnings, usually, so they can report their cash flow without depreciation) at 15% a year, which should allow them to continue to grow the dividend by double digits — the yield, at 3.5%, is not overwhelming large, but the dividend is easily covered by FFO so it can grow nicely and still not overly hamper their ability to grow.
Coresite is still small, with a market cap of about $1 billion, and there are now several other interesting data center REITs that are young and appealing as well, and CyrusOne (CONE) and QTS (QTS) have been impressive growers that might be worth some attention (both are a bit cheaper than COR by most measures). It might also be that DuPont Fabros (DFT) is finally turning things around, though that’s been the underperforming stock in this group for a long time (DFT is also one of the few that, like COR, has managed to avoid issuing a lot of new equity over the past couple years). I had been waiting for interest rate panic to drive the shares down a bit more, but after another excellent earnings report I decided to add to my position now — they just upgraded their funds from operations guidance by about ten cents to about $2.80 per share for all of 2015, so analysts will likely be upgrading their estimates to catch up. I would have been well advised to make this purchase on one of the occasions over the past couple months when the shares dipped to $45-46 instead of adding at $49 as I did, but, well, I still like the valuation at 17.5X FFO for this year and with expected 15% annual growth… and probably another dividend increase of 15% or so at the end of the year that would increase the effective yield on today’s buy to about 4%.
It’s not dirt cheap as it was when we first suggested it several years ago, but it’s still growing nicely, occupies a strong niche, and should show great growth in the increasingly cloud-dependent economy in the next several years… I’ve been very impressed with COR management and their ability to grow this minnow in a field of sharks (including giant $16 billion Equinix (EQIX), which just became a REIT and ~$10 billion Digital Realty Trust (DLR), which pioneered the sector), and now that the Carlyle Group (who brought them public about five years ago) have sold off most of their shares they don’t have that threat of a big institutional seller that helped to drive the shares down a couple times over the years. I expect to own this one for quite a long time, and suspect that their dividend growth and relative lack of debt will make them a bit less susceptible than traditional income investments to interest rate fluctuations, but I could be wrong — if interest rate fears drive this down substantially I’m likely to buy more.
And then I shared a brief note when COR got a bit more richly valued and they raised the dividend in December, this is from the December 4 Friday File:
And we’ll close with Coresite Realty (COR) — as expected, my favorite data center REIT increased the dividend again this week, but they raised it even more than I thought they would. The quarterly dividend was hiked from 42 cents to 53 cents (I was guessing 50 cents), an increase of 26% and good for a forward yield now of 3.6% (at the current $58 share price). That’s about right for COR, I think, and the market was clearly expecting something along these lines because it had essentially no impact on the share price (which is continuing to flirt with all-time highs).
I’ve been growing a bit uneasy about COR’s valuation, which is why I sold some December $60 calls to bump up my income a little bit, and wouldn’t object to selling my stock at $60 if it gets above that level in the next couple weeks… but if those shares do get called from me, I’ll probably turn right around and sell puts a bit lower to add them back to my portfolio eventually, this is still a stock whose management and performance I really admire, and it’s one I’d like to hold for quite a while as the dividends compound nicely (and grow nicely). Dividend growth is a fantastic thing, the shares I bought in the low $30s now have an effective yield-on-cost of 6.5% or so, and if you were lucky enough to buy when I first featured it a few years ago at $13 (I wasn’t, my buy came a long time after I wrote about it) your effective yield-on-cost would be about 16%. COR has earned its premium price largely because of the rapid pace of dividend growth, so it’s still a core holding for me — even if my covered call sale means it gets taken away and I have to work my way back into the shares… it’s just that my inclination, after this huge run in the shares, would be to wait to be an aggressive buyer until it gets back to the low $50s again, as it probably will at some point.
So that’s my thinking. It’s your money, though, so what do you think? Let us know if you’ve got thoughts on COR or other REITs with a comment below. We have left the original comments appended to this article below so you can see what Gumshoe readers have shared in the past… enjoy!
Disclosure: As mentioned above, I do own shares of Coresite personally as of January 13, 2016, I also own shares of Google and Facebook and Disney, which were mentioned briefly above. I don’t have direct interest in any other stock mentioned, short or long, and won’t trade any covered stock for at least three days after publication of an article per Stock Gumshoe’s trading rules.