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Russian Roulette is fun... to watch in movies. But it is not fun for the financial portfolio. While it might be accretive in the short term, holding Great Northern Iron Properties (NYSE:GNI) - the financial equivalent of playing Russian Roulette - is positively dangerous in the long term.

Great Northern Iron Properties is a trust that owns interests in fee, both mineral and nonmineral lands, on the Mesabi Iron Range in northeastern Minnesota. It will terminate on April 6, 2015. As of 3/21/2013 the stock is priced at $80 and change. It issues a juicy 17.5% yield. This sounds too be good to be true, and it is.

The following illustrates why GNI is overvalued by over 100% and is indeed Russian Roulette for the portfolio:

Point 1: The DCF adds up to be less than $38.

GNI paid $13 in dividends in 2011 and $14.5 in 2012. Let's assume GNI can maintain a very optimistic $15 dividend disbursement over the next 2 years..

Doing a DCF analysis of total disbursements until termination will yield:

YearDividend DisbursementPV (assuming Discount Rate of 10%)
2013$15$15
2014$15$13.63
2015$10.64 ($2.25 for March div + $8.39 termination)$8.79
Total:$37.42

The termination calculation is from the 10k:

Principal Charges account balance was approximately $4,871,000, resulting in a final distribution payable of approximately $12,590,000, or about $8.39 per share. After payment of this final distribution, the certificates of beneficial interest (shares) would be cancelled and have no further value.

The current price of GNI is $80.50. That's an overpricing of over 110%. The trust will terminate in April 6th 2015. There will be no extenuating circumstances that will change the calculation. Having GNI in your portfolio is not going to reward you for diversification or protect your portfolio against black swan events. It will positively hurt in the long term.

Point 2: It's happened before.

GNI has fallen 50% in a short time span before. It went from $121 on Feb 4th 2012 to $60 on April 20 2012. The catalysts for the drop were not clear and the swan dive might happen when you least expect it.

Point 3: The institutions who are in it are not as unsophisticated on first pass.

While retail investors make up the vast majority (over 90%) of the float, institutional investors do own 8% of the float.

As of 12/31/2013, two institutions hold 5% of the 1.5 million shares:

Institution NameShares held% of float
BARCLAYS GLOBAL INVESTORS UK HOLDINGS LTD58,4133.9
SCHRODER INVESTMENT MANAGEMENT GROUP22,9001.5

You can see that there are also 63000 shares on loan. One can surmise a couple institutions are loaning the shares to short sellers, collecting the 80% interest per year, while the majority of retail investors are not.

Point 4: The market for overpriced high yielding trusts is on thin ice.

Similar rationale have caused stocks like ECT to take swan dives. Like GNI, ECT was also overvalued by over a margin of 100%. The market is slowing starting to connect the dots and ask questions.

Conclusion:

Stay away from GNI. If you're in it, sell it. Market sentiment is slowly turning against high yielding trusts that are trading way higher than their intrinsic values. The only saving grace for GNI is that it's not optionable and very difficult to borrow. If you can borrow against it, it currently costs 80% interest rate to borrow and short the stock.

Investors are playing Russian roulette and the outcome will not be good.

Disclaimer:

The following is intended for informational purposes only. I am not short GNI because I cannot find any shares to borrow w/ my broker.

Source: Great Northern Iron Properties: Investors Are Playing Russian Roulette