On fundamentals alone, Cornerstone Progressive Return (NYSEMKT:CFP) appears vastly overvalued. In the face of this fundamental overvaluation, its major shareholder has been liquidating approximately half its position and has another 5 million shares of CFP to be sold or transferred for its holdings to be completely liquidated—if that is its intent. (See graph below.)
Potential Embedded Losses
Based on a reasonable set of assumptions—but not perfect information—it appears that the net cost basis per share of its major shareholder and its clients is $9.47 per share (see assumptions below).
Since June of this year, the major shareholder and its clients have liquidated or transferred 4.3 million shares at a slight profit of $617,000 based on a share price that is 50% greater than its NAV. Had the shares been sold at a price closer to its NAV, the holdings would have been sold at a loss of $13 million.
Therefore, assuming a correct estimate of net cost basis of approximately $9.47 per share, there is a $15 million embedded potential loss in the remaining holdings if the stock were to be sold at its NAV as opposed to its current 50% premium.
Consequently, maintaining the current share price near or above $9.50 per share is an important factor in realizing profitability on such holdings.
Fundamental Reasons Why CFP Seems Overvalued
Before turning to an analysis of the major shareholdings, let me list those fundamental reasons why the CFP seems overvalued:
- It is trading 50% above its intrinsic value as determined by NAV when the industry is trading at a 5.7% discount;
- It is in an active process of liquidation by distributing its capital to shareholders in the form of return-of-capital distributions (27% of share price) and in 2.5 years may be fully liquidated;
- Since its inception in 2007 its has lost 60% of its intrinsic (NYSE:NAV)—twice as much as the CEF market segment;
- Two-thirds of its portfolio holdings are other CEFs that investors could buy at a discount as opposed to owning them at a premium through stock ownership of CFP.
- Its two sister companies, also selling at wide premiums, recently cut their monthly return of capital distribution rates approximately 20%; CFP didn’t; is this an omen?
Is the Major Shareholder(s) Bailing Out?
CFP’s major shareholder is Doliver Capital Partners, LLC (Doliver). Doliver had originally owned/controlled 98.8% of the 9.3 million shares outstanding based on its November 10, 2007 13-G filing for October 31, 2007.
Since June of this year, Doliver has reduced its 9.2 million share control through the liquidation or distribution of 4.3 million shares and continues to hold an additional 5 million shares. The graph below illustrates Doliver’s 13-G holdings and its cumulative liquidation against the backdrop of total shares outstanding.
Just Fallen Off the Turnip Truck
It has been suggested elsewhere that the reduction in Doliver’s 13-G holdings is a function of clients leaving and not by sales initiated by Doliver.
Whether Doliver is initiating the sales or such sales are being accomplished in other accounts to which the stock is being dispersed, there appears to be a fundamental distribution strategy with a systematic liquidation of the position.
Consistent Selling of Shares
Since the initiation of the “liquidation” process in June ‘09, CFP’s total monthly share volume has gone from 485,900 shares in May of ’09 to over 2.0 million shares traded in the month of November. The average “liquidation” of Doliver’s holdings has consistently averaged around 700,000 shares. This has translated into approximately 37% of the average trading volume of CFP per period. These “transferred” shares have somehow found their way into the market as executed sell orders.
Estimated Embedded Losses
The major assumption in this analysis of potential embedded losses for Doliver and its clients is that shares were acquired at the IPO price of $15.00 per share.
Why this is a reasonable assumption? Because CFP’s inception date was 9/10/07 and the first 13-G filed by Doliver, or its predecessors is on 10/10/07 showing it owned 8 million shares. The balance of the 9.3 million shares appeared to be acquired the following month.
Let’s Do the Numbers
If Doliver purchased the shares at $15.00 it would have received over its holding period 27 return-of-capital monthly distributions of approximately $.2050 per share amounting to $5.53 per share. This would have lowered its current cost basis to around $9.47 per share.
Why Maintaining the Premium Is Important
In the table above are two liquidation scenarios. The first is Doliver’s actual sale of CFP shares based on an average stock price and the implied cost basis of $9.47 per share. The average gain was $.14 per share. As a result, total estimated gain on liquidation is $617,415.
The second scenario is the sales of Doliver shares if the sales price was at NAV. In the second scenario the average loss would have been $3.18 per share with an estimated loss of approximately $13 million versus a profit of 617,415 in scenario 1.
If the stock price is unable to trade at its current price of around $9.50 per share, 50% premium to NAV, and trades closer to its NAV, then Doliver has the potential of sustaining a maximum loss of $15 million based on its current holdings of approximately 5 million shares times the $3.00 per share difference between its current price and NAV.
The maintenance of the current share price at a 50% premium is critical for the remaining holdings of Doliver. If Doliver can’t sell its position, without any additional earnings or asset appreciation, in 2.5 years it will have received the balance of the $6.00 NAV as a return-of-capital distribution against a $9.47 current cost basis per share. Time is not on their side.
If the shares that are being transferred to its clients have disparate interests other than Doliver’s, a slide in the stock can trigger a “run on the bank”.
My concern continues to be the unwitting transfer of wealth from uninformed, retail investors who may think they’re getting a 27% yield on investment when all they’re getting is a portion of their money back. We all have retired uncles and aunts who live on social security and investment income. It is on their behalf we need to “stress test” situations such as CFP to protect their investment capital from evaporating.
Caveat and Disclaimers: The case presented here is academic. It is not to imply, suggest or to be interpreted that inappropriate activities have been or are currently being conducted on the part of CFP, Doliver, its clients, or its brokers. This exercise is just a marshalling of facts and assumptions that under closer scrutiny or new information could be deemed incorrect or misleading. Any additional information or clarification would be greatly appreciated.