For those of you who don’t know about Collectors Universe (CLCT), here is a great article that explains what the company does and here is another one that explains pretty well why I like it. The reason I'm writing this article is to discuss 5 recent events, 3 that are very positive and 2 that might give investors reason for concern.
1. CLCT stock price recently traded below $13 per share
Last Monday (Oct. 3) was a turbulent trading day, especially for shares of CLCT. After trading flat for most of the day, shares began to slump around 1:30 p.m. Then, between 2:04 p.m. and 3:00 p.m., shares fell from $14.54 to $13.00. After closing at $13.40 on Monday, shares fell as low as $12.26 intra-day on Tuesday and closed at $13.23. For what is normally a stable stock price, this was unusual volatility. After making me wish I had published this article earlier in the week, CLCT closed Friday at $14.47, right around where it traded before the unusual move Monday.
Why does this matter? CLCT yields $0.325 per share quarterly. That's $1.30 per share annually. When CLCT traded at $13.00 per share it yielded 10%. Even at $14.00 per share the stock yields almost 9.3%. With a payout like that one would think that either yield support will follow or suspect that a dividend cut is around the corner. I do not believe that the latter is the case, and I think the move over the course of the week validates my thesis. The company seems committed to shareholder value and management has stated on recent conference calls that the Board remains committed to its dividend policy. The company carries no long-term debt and for a company with a market capitalization of $105M - $120M (depending on when you look), the company's $21.4M in cash makes this dividend look pretty safe. Plus, the directors do, as I will explain later, own a significant portion of the company. While they have used buybacks wisely in the past, they seem to have eased away from buybacks and are relying instead on dividends to return capital to shareholders. I believe this dividend is not in jeopardy of being cut in the foreseeable future. Additionally, if CLCT does not pursue other acquisitions I would expect to see further dividend increases or, as I would prefer, to see the company investing heavily in its new digital strategy.
CLCT performed extremely well throughout the market turmoil in August, in part because of the way in which the company's coin grading volumes are helped by rising precious metal prices. Well guess what? The market continues to face turmoil yet CLCT was trading Friday 25% below its high in August when the same European worries pushed the stock up. The story isn't broken, the price is broken. I took advantage of this and bought shares of CLCT last Tuesday between $12.7 and $12.85 and as evidenced by the move since Tuesday, I wasn't the only one trying to pick up shares of CLCT at these discounted prices.
2. Collectors Universe acquired Coinflation.com AND a new CDO
On September 16th, Collectors Universe announced that it had acquired Coinflation.com for about $750,000 and hired its founder, Alec Nevalainen, to be the new Chief Digital Officer of Collectors Universe. The CEO, Michael J. McConnell, explicitly mentioned the company's search for a Chief Digital Officer in the August 26th earnings conference call [see transcript] and how it expects a new digital strategy to be an important part of the company’s future growth. Whether or not this deal was in the works at that time, I may never know. But what I do know is that this could be the beginning of a monumental shift for the company. The grading and authentication services that CLCT operates are best-in-class but they are just that, grading and authentication services. These services do NOT assign or predict value of the asset being serviced. Coinflation.com offers a digital reference to the price and melt-value of a large number of coins, both foreign and domestic.
Maybe the acquisition was executed with the primary goal of 'buying' Coinflation's founder Alec Navalainen. It's clear that, especially as CLCT tries to grow internationally, the company will greatly benefit from a successful digital strategy. Perhaps the primary goal was to purchase a website with 600,000 monthly unique views, contributing to the increasing online ad revenues that CLCT is generating (up 61% in two years) and Alec Navalainen was an added bonus. Or maybe this is the beginning of CLCT offering grading, authentication AND valuation services.
Valuation services present a new market for CLCT and could fuel additional, un-forcasted, growth in the coming years. Either way, the stock is trading at around the same level that it was before the deal was announced, which is great for those of us that want to get in at these levels. Here'swhere you can read more about this deal, including the following quote from the press release that I think sums up why the acquisition is such a positive move for CLCT.
While not a large acquisition, strategically, the combination of Coinflation.com with the various Collectors Universe web properties is expected to create numerous opportunities to drive incremental traffic, incremental advertising dollars and add to the Company's position as a service provider of valuable information and content to coin market participants.
3. Recent investment by Sophrosyne Capital, LLC
In an SEC filing dated 8/3/11, Sophrosyne Capital, LLC disclosed that it owns 434,100 shares of CLCT. This is just under 5.5% of the outstanding shares. While I don't know exactly what price Sophrosyne Capital, LLC paid or what turned them on to CLCT, based on the timing of the filing I know that Sophrosyne is earning a yield right around 9%. I believe there is more to follow, especially with the current yield and how well CLCT performed through a period in August where many equity prices broke completely from the underlying value of the companies. A quick look at the Ownership Profile on the CLCT website shows that even some larger funds like CalPERS have taken a direct (though relatively small) interest in CLCT. I expect to see more investors and funds looking to use CLCT as a safe-haven in the future as it was in August, making it a good hedge against market turmoil.
4. Recent insider selling. Is it a sign of bad things to come?
What originally drew my attention towards CLCT was strong insider ownership. Even after recent selling by the CEO, CFO, other directors and a non-director who owns more than 10% of the company, I remain confident that high insider ownership is an accurate indicator of these insiders' confidence in the company.
Richard K. Duncan Sr., a non-director 10%-or-more owner of the company, sold 27,000 shares over the course of 9/8/11, 9/9/11 and 9/12/11 for prices ranging between $16.73 and $15.86. Duncan, a pioneer in the gold trading industry in his own right, purchased the majority of his shares of CLCT when it traded between $3 and $5 after the financial crisis. Duncan selling 27,000 shares concerns me very little...especially since he still owns 1,065,554 shares, about 13.25% of the shares outstanding.
Company CFO Joe Wallace recently executed some of his stock options and then sold the shares in the open market. He sold 31,250 shares between 8/31/11 and 9/8/11, netting him just under $140,000. Does this concern me? Not when you consider that he still has 85,590 shares (just over 1% of the shares outstanding) and has another 17,500 vested options to buy shares of CLCT at $13.18. Since the stock is currently trading around that level I know it is in Wallace's best interests to see the stock perform well.
Board member Deborah Farrington sold 10,000 shares on 6/17/11 at an average share price of around $14.43, netting her just under $145,000. Just four days earlier, Farrington had exercised options to purchase 29,150 shares. The 19,150 shares that she didn't sell bring her total to 41,379 shares, just over 0.5% of shares outstanding. Farrington liquidated her vested stock options during these transactions and, while she still owns considerably more shares than she sold, this series of transactions does concern me.
Company CEO Michael McConnell also sold shares in June. His sale of 17,000 shares netted him a little over $235,000 and still leaves him with 81,518 shares, which is over 1% of shares outstanding.
No one knows the company better than founder and President, David G. Hall, who has no recent transactions. His 990,773 shares amount to over 12% of the shares outstanding and on top of his modest salary he’s collecting almost $1.3M each year in dividends.
Are you noticing a pattern? The Board, which includes the CEO, plus the CFO own a total of 19.86% of the outstanding shares. Add in the shares owned by Richard K. Duncan Sr and you’re looking at total insider ownership of just over 33%. As I said above, I remain confident that the high insider ownership is an accurate indicator of these insiders' own confidence in the company.
5. Collectors Universe's recent (mostly) strong earnings report
Highlights: Gross margins jumped from 54% to 62%. Revenue from web-based advertising has grown from $900,000 in 2009 to $1.4M in 2011, a 61% increase in two years. Especially after the acquisition of Coinflation.com, this presents a significant opportunity for what is otherwise a slow-and-steady kind of growth rate. The domestic coin grading business, CLCT’s largest source of revenue, was up 25% for the quarter and its world coin grading business, one of CLCT’s newest sources of revenue, was up 152% for the quarter.
Lowlights: EPS. Net earnings were affected by a “Non-Cash Impairment Charge of $1.4M” related to the Expos segment of the company. In the earnings call CEO Michael McConnell said this impairment charge “represents the last significant legacy item faced by this business.” Without that impairment charge, operating income for the quarter would have been $3M, so you can see how this greatly affected EPS and how this would create an artificially high PE, currently at 22. It still amazes me that there are rarely any questions on these calls. It makes me think no one pays any attention to this stock.
Even after last week’s rebound, buying shares of CLCT locks in a nearly 9% dividend that doesn't appear to be in any jeopardy. As a coin and currency collector myself, I know that CLCT is being honest when it calls itself "the leader in third-party authentication and grading services for high-value collectibles." It's also the kind of business that doesn't take a complicated spreadsheet modeling session to understand. The company has strong insider ownership, growing margins, increasing revenues and is strategically expanding its very stable business model. Since the company also benefits from increased trade activity resulting from volatile precious metal prices, investors that believe the precious metals are headed much higher from here (as I do) but still want some small-cap equity exposure should consider CLCT. I didn’t think the early-week CLCT sale will last long and, as its Friday closing price of $14.47 suggests, the market looks to have agreed with me. At this price CLCT is a good buy but its trades like a micro-cap and sometimes has extremely low volume, such as the paltry 17,000 shares that changed hands Friday. When a big chunk of shares hits the market, CLCT will usually give up deep discounts like the one I took advantage of early this week. Keep your eye on this one and you should find your opportunity to jump in.
Disclosure: I am long CLCT.