It’s REITcycle Friday!

June 24, 2011

What do Howard Stern and Control Your Cash have in common? Every Friday, we mail it in. Welcome to The Best Of, a/k/a Recycle Friday. In which we take a guest post we wrote a long time ago and see how it stacks up now. With annotations, if necessary. Today’s post about real estate investment trusts – “buildings in baskets”, as they’re called – originally ran on LenPenzo.com. It’s more informative than timely, and it appears that we don’t have to change a thing.

“You can’t make money in real estate these days. It’s impossible.”

Of course you can. The market isn’t “bad” – no market for any worthwhile commodity is either unequivocally good or bad. Real estate, whether raw land or fully improved buildings, obviously has a function and will continue to. Real estate, in and of itself, is not subject to obsolescence. You know, like ambergris or Pets.com stock.

As long as people enjoy living, working and shopping on the earth’s surface, real estate in general will remain a handsome investment for somebody. At least until we figure out levitation, which could be months away.

But public perception clouds everything. One staple of the local news over the last 18 months has been the sympathetic journalist interviewing the poor unfortunate who ended up in foreclosure, because he was mystified that adjustable-rate mortgages and fixed-rate mortgages are different things. So the population at large remains convinced that behind every real estate investment is an unscrupulous lender just waiting to take some nitroglycerin and a match to your life’s savings.

Two things:

a) Read the contract. There’s a reason why although millions of mortgage holders owe more money on their houses than they’re worth, no lender has yet been forced to offer restitution to a gullible homeowner: because mortgage contracts are airtight. Instead, to appease an angry and idiotic public the government has taken to making changes by fiat.

b) If that’s how you feel, why not be on the other side of the transaction?

Yeah, me. A real estate baron. Okay.

That’s exactly what we’re talking about. Via a handy creation called a Real Estate Investment Trust (the acronym is pronounced “reet”, as in the final syllable of “discreet”).

It operates on the same principle as a mutual fund – a fund manager creates an investment out of disparate pieces of other, more basic investments. In the case of a mutual fund, that means companies’ stocks, accumulated in differing proportions and sold to you and me in easily digestible chunks costing as little as $250. In the case of a REIT, a fund manager puts together real estate investments and lets you buy in.

This is not some new development. REITs have been around for 50 years. If you have a 401(k), there’s about a 4-to-1 chance that you’re investing in one right now and don’t even realize it. (Wait, you mean you’re one of the people who actually researches to determine what’s in his 401[k]? Congratulations. Gold star for you.)

So with a REIT, I’m buying little pieces of all my neighbors’ houses?

Doubtful. Not quite. Particular REITs specialize in different market segments. For instance, some focus on industrial sites only – factories, warehouses and their ilk.  Others invest solely in what are euphemistically called “entry-level” homes – mobile homes and starter apartment complexes. Some REITs even concentrate in market segments as arcane as storage facilities or medical buildings. (I’d link to examples of each one, but that means I’d run the risk of one of you investing his entire net worth in a particular REIT, losing every penny, then suing Len and me for making the hyperlink so tempting and easy to click on. It’s much easier to paint that scenario than to write an appropriately worded disclaimer.)

REITs even trade publicly, just like the mutual fund that comprises your 401(k) probably does. But unlike stocks and mutual funds, of which there are myriads upon myriads, REITs are less plentiful. Only about 200 REITs trade on the NYSE and NASDAQ boards, making REITs fairly easy to keep track of. There they are, on the ticker, right next to the ordinary stock quotes and index figures.  There are a few private REITs as well, but they’re only for the extremely wealthy and the connected. Let’s just say that the people who buy into them aren’t reading about them here.

You know what a dividend is, right? An annual (or quarterly, or in rare cases monthly) cash payment that a company makes to its stockholders, just for owning the stock. Managers do this to make the stock more attractive compared to other stocks you might be thinking about buying: you can think of the dividend as just a consistent discount on the price of the stock.

Well, not only do many REITs offer dividends, the ones that do offer dividend yields about quadruple those of stocks that do. When you buy a REIT, ideally you’re more interested in receiving regular income payments than in watching your stock appreciate so much that you can cash out and spend the rest of your life floating in a pool and scarfing down bonbons.  REITs bottomed out last March: the index that measures their overall value (the Dow Jones Equity All REIT Index) fell 75% from its high of 2 years earlier. But since reaching its nadir, it’s more than doubled. Again, this isn’t about finding something undervalued and loading up on it – it’s about generating regular revenue while everyone around you complains about how the market is cruel and mean and why can’t my house be worth more just because I want it to?

**This article is featured in the Totally Money Blog Carnival #25-Start of Summer Edition**

Filed Under: Finance, Investments, Making Smart Choices, Real Estate Tagged With: , , ,

A cupcake IPO? Seriously now?

June 13, 2011

 

 

Perfect for those weekends in Vegas with nothing to do

Yeah, this cupcake’s not feeling well and won’t be able to make it in today

 

NOTE: this post originally ran, in a slightly less libelous version, on Adaptu.

Intermediate readers, skip the next paragraph.

IPO = initial public offering. Refers to a formerly privately owned company finally making its shares available to whomever wants to buy them. The company now trades on a stock exchange and its financial statements are now public record. The biggest American IPO in history (not counting companies that went into receivership, became wards of the taxpayers and reemerged) was that of VISA in 2008. The heretofore private company opened on the New York Stock Exchange at $64.35/share. It peaked at $96.59 last April, and sits around 75 now.

On second thought, skip this paragraph too.

Somewhat evidently, every company has to do its IPO at some point. An IPO is obviously a big deal: and for many companies’ principals, who own options to buy the stock at a certain discounted price and will profit the second the company goes public, an IPO is as good as it’s ever going to get.

A few weeks ago, boutique cupcake retailer Crumbs Bake Shop went public. “Boutique”, by the way, is a French word meaning “small, but with cachet among urbanites and various other pretentious fools.”

Crumbs has 24 retail stores in the New York tri-state area, 6 in Los Angeles, 3 in D.C. and its environs, and 1 in Chicago with 3 more New York-area stores in the works. In New York and Los Angeles, they deliver to your door. The company is a public relations phenomenon, renowned as the creator of the Baba Booey cupcake (peanut butter frosting, chocolate cream cheese frosting, peanut butter chips) and the Artie Lange cupcake (chocolate cream cheese frosting, Vicodin filling, served in an edible wrapper doused in lysergic acid diethylamide).

Still, a company that can get Howard Stern’s attention is not necessarily a company worth investing in. If you’re old enough to remember Outpost.com, you know what we mean. Unlike VISA, Crumbs isn’t an internationally recognized name with decades of results behind it. Nor is it Microsoft (IPO 1986), nor Google (2004), with a palpable potential for growth and a revolutionary and established product line. Use whatever corporate buzzword you want with cupcakes, but “game-changer” doesn’t really fit.

Okay, what about its company history?
It barely has one. Crumbs was founded in 2003 by a husband and wife team – she’s a lawyer, he’s…well, here’s the relevant sentence from his official bio:

Jason started Famous Fixins, a manufacturer of celebrity licensed products, with such products as Britney Spears bubble-gum and NSYNC lip balm as well as products with high profile names such as Derek Jeter, Mike Piazza and Sammy Sosa.

We could go for a cool, refreshing, sturdy, gluten-free, Mac-compatible fair trade Sammy Sosa product right now. How about you?

Does it have goodwill – the accounting term that refers to intangible value beyond its assets?
Nothing you can quantify. To we middle Americans, Crumbs doesn’t even register. We’d even heard repeatedly about their novelty cupcakes, but couldn’t tell you the company’s name. The one New York cupcakery we did know the name of is Magnolia Bakery, and only because of that one Saturday Night Live bit.

Does the company have a competitive advantage that no one can replicate?
That depends. Do you have a kitchen and a couple of mixing bowls?

Crumbs’ IPO hit the ground with a valuation that now leaves it around $58 million. Granted, ExxonMobil has more than that in its petty cash envelope, but $58 million is a decent amount for a company that until this point has had only 2 visible owners.

The markup on a cupcake is enormous. Crumbs retails its cupcakes for $4.50. That’s each, not for a 4-pack. With that much profit baked into every bite, the company has designs on opening 300 more stores.

Making cupcakes can be profitable, maybe even in the long term. But a $58 million business? Here are a couple of schools of investing thought, each encapsulated in a single sentence:

You have to look at a company’s income, shareholders’ equity, how much debt it’s carrying and how much cash flows through it before you invest in it.
Control Your Cash

 

We go to Starbucks every day, so I buy Starbucks stock.
Barbra Streisand

It’s safe to say that Crumbs is counting on people who subscribe to the latter belief to help it grow into maturity.

But even Starbucks sells more than mere coffee. At one point the company went so far as to publicly consider itself the primary place to exist when you’re neither at work nor at home. The Wi-Fi and the music attest to that, and it appears to be working. Besides, when Starbucks went public it was far more entrenched than Crumbs is today.

It’s not that you can’t sell a capricious, semi-serious item in a recession – Altria and Molson Coors are both doing fine, and it’s slightly less harmful for society that overextended people stuff their faces with Baba Booey cupcakes rather than cigarettes or alcohol. But it’s hard. Let the lawyer and the manufacturer of celebrity licensed products build the business themselves.

We give the Crumbs founders our wishes for success. What we’re not giving them is our money.

McKesson has a $21 billion market cap and is trading at close to a 12-year peak. They sell payroll software to doctors, and prepare health claim management forms. You’ve never heard of them, which means they’re really underground. If that’s not hip and trendy, we don’t know what is.

**This article is featured in the Carnival of Personal Finance #314**

Filed Under: Finance, Investments Tagged With: , , , , , ,

LinkedIn’s chart is already a bell curve

May 30, 2011

LinkedIn's current financial statements

A scant 12 days ago, LinkedIn went public. Its shares opened at $80, peaked at $115 later that day, and currently sit around $88. An initial public offering is always cause to celebrate, particularly in this, the much-ballyhooed case of Facebook’s uptight older sibling who wears golf shirts on weekends and enjoys Steely Dan.

(Part of our resistance to media bombast is waiting for things to settle. Everyone wrote about LinkedIn the day it debuted. Our contrarian nature requires us to wait a few days, and approach things with less emotion and more rationality.)

Given the number of shares LinkedIn is issuing, that makes the company worth up to $8.7 billion. It’s not IBM, but it’s not the neighborhood taqueria either. And as of two Thursdays ago, you too can own a piece of…well, of what?

Never mind. It’s an IPO! Get on board before it’s too late! This is where millionaires are made!

When Union Pacific went public, it didn’t lead the business news. (Then again, it was 1897. The only things most Americans were investing in were feed and tack.) Same deal with Southwest Airlines, decades later. Only in today’s exciting, futuristic Business 2.0/e-commerce/new economy do IPOs come with a ruffle and a flourish.

But why?

People like hype.

Look, the Control Your Cash principals both have LinkedIn accounts. We even update them semi-regularly. It’s fun to enter the name of someone you just met or don’t know and find that you either share an acquaintance or are 1 or 2 degrees removed from doing so.

What about LinkedIn’s intended purpose? Does anyone hire someone based on a LinkedIn profile? Let us know if you indeed got a job or got an employee that way. If an applicant maintains a LinkedIn profile, it tells an employer one thing: this person knows how to navigate the one social media site that doesn’t let you post embarrassing photos and incriminating comments.

LinkedIn won’t change the world. It’s been around for 8 years and would have started doing so by now. We’re not saying it’s a bad service. We use it often enough to wonder how it generated $161.4 million in revenue last year.

For us, once we’d set up our LinkedIn accounts, they served primarily as a way of updating the more shadowed corners of our email contact lists without us having to do the work ourselves. The thought sequence goes like this: “Oh yeah, Person X, whom I haven’t thought about in 4 years. I wonder if she’s still at Company Y?” If Person X updates her profile – which most users don’t seem to – we can find her new workplace without asking her directly and running the risk of a drawn-out conversation.

Is that revolutionary? Is it even necessary? Is the likelihood of building a business relationship with someone you barely keep in contact with – or with that person’s contacts, or those contacts’ contacts – worth $85 on average? (That’s the share price divided by the number of users.)

If you want to collect contacts, LinkedIn doesn’t seem to offer anything that Facebook doesn’t. Sure, the former looks more businesslike and is less detailed. But if you’re looking for information about a contact or potential contact, wouldn’t you want the opposite?

LinkedIn was forthright in the S-1 filing it was required to submit to the Securities & Exchange Commission before trading. That filing tells us how many members LinkedIn has and how they’re broken down by country. But here’s what we’d really like to know:

How many LinkedIn members have so much spare cash lying around that they’re willing to pay at least $240 a year to use its premium service? LinkedIn doesn’t run ads, making this its only stream of revenue.

LinkedIn Premium comes in three tiers: $240, $480 or $900 annually ($300, $600, or $1200 respectively if you pay by the month.)
For this you can find out who perved your profile, save profiles in folders, and let people contact you without knowing you. That last feature is something we’d pay to avoid, but whatever.
Plus with a premium membership you get a SPECIAL GOLD BADGE on your profile, instead of a blue one.
Seriously, they consider that a selling point.

The answer to all mankind's troubles

 

Facebook is free, right?

An unsightly blight on the universe

Sure, $900 is far less than a headhunter charges. But again – what legitimate business decisionmaker uses LinkedIn to supplant headhunting? That’s not a rhetorical question.

——-

Are all IPOs a rip? No, but most are. Think about it: you’re buying what’s supposed to be an asset – a tiny fraction of a business – at the time when that business is making a point of availing itself to as many potential investors as possible. When increasing demand chases a finite supply, what happens to prices? Yes, they rise.

Of course, LinkedIn’s share price could ultimately rise in the longer term because the service itself will turn out to be not only good, but significantly better than it was when LinkedIn was a private company.

How likely is that?

The LinkedIn IPO runs counter to everything we preach in our obscenely cheap new ebook, The Unglamorous Secret To Riches. We tell you to look at a company’s financial statements to find value. LinkedIn, seeing as it’s a brand new public company, has no usable financial statements to speak of. It only has this, which is the letter “B” in International Signal Code.

(Only the sailors in the audience will get that.)

Everyone – landlubber and yachtsman, rookie investor and veteran – can get something of value from our $3.50 ebook (free, if you buy it with our big book.) Pick up The Unglamorous Secret to Riches, put easily readable advice into practice today, and invest in something of substance. While avoiding the noisy glitz of well-publicized IPOs.

**This article is featured in the Carnival of Personal Finance Summer Edition**

Filed Under: Economics, Investments Tagged With: ,
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