Investment Teasers: The Good, the Bad and the Ugly

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 |  Includes: ABB, AHM, EDU, FUR, GS, MS, RAS, THMR
by: Travis Johnson

As we endure the subprime contagion and all that appears to imply - snakes raining from the heavens, baffled bankers panhandling on the streets with signs saying "will mark to model for food," and the decline of all stock markets everywhere forever and ever, it's interesting (though perhaps cruel) to note the newsletter advisers who REALLY didn't know this was coming.

There are a few candidates in recent months:

  • Louis Navellier was eagerly pushing Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) in June, saying that they should go up dramatically. Goldman was supposed to hit $300 before Labor Day, and Morgan was supposed to be worth "easily 30% more by July 4" on the Discover spinoff. To give him some credit now, Morgan did go up a little bit before the spinoff, but it's been mostly downhill since then, and it looks like a pipe dream to predict great success for any investment banker in the next few months, especially if you were starting from their nice high prices in June.
  • There were several teasers over the last couple months about various real estate finance companies:

  • Mark Skousen talked about Centerline Holdings (NYSE:CHC) (which I also wrote that I liked, to be fair), and said that insider buying meant we were headed for great returns. The shares were already looking a little cheaper back at the end of June, since subprime was already tainting most real estate shares, but it looks like those insiders, and Skousen, didn't see the freight train coming either. It's down another 30% or so since that teaser made the rounds. On the plus side, the indicated yield is up over 12% now, though I have no idea if they'll have trouble paying those dividends, or if they're being unfairly tarred with the subprime brush.
  • A second real estate investment that got some pretty heavy ad teasing exposure was Winthrop Realty Trust (NYSE:FUR), thanks to its big holder Bruce Berkowitz of Fairholme. This was teased as the $7 Penny Hedge Fund by Dan Ferris at Stansberry, and I guess it's saying something that the 20% haircut it's gotten in two or three weeks (after a little recovery from the dip down to around $5) doesn't put it at the top of the list for worst short term calls. This one actually looks more solid than some REITs recently, they just had their earnings call and said all the right things to make investors believe that they really see the subprime stuff as more of an opportunity than a threat in the long term. In the short term, it doesn't appear to be winning any prizes.
  • More dramatically, and I think we have to call this one the winner of this round:

  • The folks at ChangeWave, in teasing the "25% Cash Machine" newsletter from Bryan Perry, picked a real stinker and, arguably, one that they might have been able to tell was pretty closely tied in to vulnerable home mortgages. Or at least, one that they might have thought twice about selling as an annual 25% gain "without taking any wild risks." The company that my sleuthing identified as their pick, RAIT Financial Trust (NYSE:RAS), took the worst nosedive I've seen in a sleuthed out stock since Go Fish began it's swoon. RAS, despite heavy insider buying (as we've seen in tons of real estate companies all Spring and Summer), is now down 66% in just about one month, and that's after a bounce. On the plus side, if you have any faith at all that it's going to continue with its dividend (I suspect there's some trouble there, so don't have any faith on my account), the indicated yield is now 35%.
  • Insider buying continues apace at many of these firms, and at some others:

  • Thornburg Mortgage (TMA), which was also teased a little while back as one of the promising "801-K" Companies, has hit a similar crevasse, and like RAS has had strong insider buying very recently, but then again, it had strong insider buying all Spring, too, and look where that got it. Sometimes, management isn't any more prescient than the rest of us - or than the investment advisers, especially in the short term. Insider buying, and especially those clusters of insider buying that many of these real estate firms have seen, does GENERALLY indicate a positive future (as I talked about a bit in my writeup of the "Secret USG-4 Tipsheets" teaser), but it's certainly not an innoculation against all contagions.
  • While RAS has the distinction of having the most incredible short-term collapse in Gumshoe history (save, perhaps, for a biotech or two that clearly were lottery ticket buys based on an uncertain FDA decision), maybe the reaction to its near-$100 million exposure to the bankruptcy of American Home Mortgage (AHM) has been overdone - certainly, some folks think they're a bargain now.
  • There have been other, milder bad short term calls of late as well in newsletter teaser land:

  • Robert Hsu was convinced that we should buy in to New Oriental Education (NYSE:EDU) before its last earnings report a couple weeks back, in order to harvest the stock boom following expected blowout earnings, and that would have set you back quite a bit if you sold right after disappointing earnings, and a fall of well over 10% (it has recovered a bit since then, down only a dollar or two from when the email went out now).
  • The other specific earnings-based teaser I saw recently was by Mark Skousen for ABB Ltd. (NYSE:ABB), also failed to impress - blowout earnings were predicted, and while ABB did okay with its earnings release (though not spectacularly great), and the shares have been on a fairly consistent slope down ever since. You wouldn't have lost a lot of money if you bought on this teaser recommendation, it's down less than 10%, but if you were expecting the "Electrifying Boost" Skousen touted, you probably would have been a bit disappointed.
  • It's not particularly fair for me to call these out as short-term failures - after all, I didn't tell you that subprime was going to collapse the international credit markets this week, either (though that's far from being my job here). And most, if not all, of these advisers also have some really solid picks in the last six months or so - as well as differing time frames for their investments (For example: I'm sure Dan Ferris, who considers himself a long-term value investor, doesn't usually judge his picks with an eye toward one month's performance).

    This isn't an examination of their newsletter portfolios or performance overall, just of the stocks they've prominently teased in their ads in recent months. As always, you can see all the teaser picks from the Gumshoe, excepting very recent stuff that has yet to be updated, on the tracking spreadsheet here.

    But with all the hyperbole that goes into the investment teasers we all get in our email from newsletters and advisers every day, I think it's important to remember just how lousy almost everyone is at making short-term predictions - both individual stock reactions to events like earnings releases, and dramatic market-wide moves as we've seen in recent days. The fact that you get an email every day for a week saying that Goldman Sachs will go up 50% by the end of the summer doesn't mean that it's any more likely to happen - even if the guy who sends it is really smart and generally has a good long-term record.

    And even if the idea is a grand one, impatience can often be your enemy, especially after you get riled up by the marketing language in their emails, and convince yourself that the company being teased has invented a better bread-slicer. One higher-risk microcap company that I really like I found through a teaser ad, for example, Ambrian Partners (the teaser writeup is here, my purchase is noted here), but I couldn't justify buying until after the price fell pretty dramatically from its highs (and it may fall further still).