Singular Research Annual “Best of the Uncovereds” Conference Transcript

Fortune Small Business is out with its annual FSB 100 list, which measures the fastest growing (by revenues) publicly-traded small business listed on U.S. exchanges. As always, it is both fascinating and frustrating.

Though the FSB 100 has many intriguing prospects, it is horribly laid out and almost impossible to assess in the format provided. For example, there’s no way on the FSB site to get a handle on the market cap of the list except one company at a time. It's another instance of a layout designed to generate unnecessary page views (and advertisement cpm’s) at the cost of reader convenience.

This is the 1st Quarter 2009 edition of our ongoing hedge fund portfolio tracking series. (Before reading this update, make sure you check out the Hedge Fund 13F filings series preface.)

Next up is Dan Loeb's Third Point LLC, a $2 billion hedge fund firm. Specifically, they deem themselves to be "event driven, value oriented investors." Loeb founded the firm back in 1995 with $3.3 million in seed capital and is still running the show these days. While Third Point is technically an activist fund, Loeb often has numerous passive investments as well. Loeb himself is quite well known for his searing and critical letters to management of various companies. Third Point has seen annual returns averaging over 15% since inception (including the crazy year that was 2008), a Sharpe Ratio of 0.9, and a correlation to the S&P500 of 0.4. As per their April investor update, we saw that they were net long healthcare and utilities, while being heavily net short consumer at that time.

However, there is a new and unprecedented phenomenon. The world is rapidly aging, and in the 21^st century populations will age more rapidly than ever before. This demographic shift will take place throughout most of the developed world resulting in sizeable reductions in labor forces, thus triggering mass immigration. Moreover, this demographic shift will further weaken global pension programs due to mortality improvements and a decrease in the number of current workers to beneficiaries. Aging will also generate a number of opportunities for investors such as a massive boom in the healthcare sector and give rise to reverse equity transactions and global longevity risk markets.

In February 2009 Citron Research and Jim Cramer provided a critical assessment of Life Partners’ (LPHI) business and management. The Citron report focused on LPHI's "egregious fees", the unlikely sustainability of those fees, the CEO’s past accounting indiscretions, and LPHI's tiny auditor and equally-small audit fees. A few days after the critical report from Citron, LPHI's management posted a response on its website. Oddly, management has since removed the response, but a copy can be found under the comments sections here.

The reports peaked my interest and as a result, I conducted additional research on LPHI’s business practices and management. I believe many of Citron’s red flags have merit, and found additional red flags that suggest a business model that revolves around exorbitant fees charged to retail investors and possible forensic accounting issues.

At the end of each trading week, Hillbent scans for the equity market for potential anomalies which exhibit extremely oversold and overbought conditions. Past observations have revealed that such candidates may experience reversal corrections to the upside or downside once the market reconfirms that their fundamentals remain solidly intact or relatively poor. From a contrarian perspective, these lists may also serve as a precursor to changes in institutional sentiment and underlying fundamentals.

(The purpose of this report is not to provide specific recommendations, but instead serve as a time-saving reference tool and starting point for investment ideas as the upcoming trading week unfolds. Of course, the results generated are not always perfect and users are strongly encouraged to perform their own due diligence on these names. Note that overbought and oversold conditions are based upon proprietary algorithms and quantitative models instead of conventional technical analysis indicators. As a supplement to this report, please refer to our Market Condition Summary to determine if market direction trends support a bullish or bearish investment bias over short-term, intermediate, and long-term timeframes.)

It may sound morbid, but death can be big business, at least for Life Partners. The company developed a system of matching terminally ill patients with investors willing to buy their life insurance policies. Life Partners saw 39% growth in the last 8 quarters as well as a 39% earnings increase. But is this trend healthy? Cramer looked at the technicals. Life Partners’ technical breakout during the first week in January was followed by a heavy volume pullback. Both the buyers in the breakout and the sellers in the pull back turned out in large numbers, a sign of conviction. The chart says the big players are leaving Life Partners for dead. The fundamentals are not so hot either. The business model might disturb and put off many investors. CEO Brian Pardo is being investigated for misrepresenting financial results at another company, and Life Partners is facing other legal difficulties. A full 19% of the stock is held short and the company has been hit hard by the recession. Cramer concludes that the Life Partners may be losing its pulse.

Life Partners (LPHI) is a viatical/life insurance settlement provider based in Waco, Texas. LPHI acts as dealmaker – it arranges for buyouts of life insurance policies in cases where the death of the policyholder can be anticipated within a finite timespan. It earns fees by connecting these potential settlors with investors, who agree to front the money and pay the premiums, in exchange for rights to the policy benefit face amount, which is received following the settlor’s subsequent death. Clients are mostly individuals who are referred to Life Partners through financial planners, lawyers, insurance agents and CPA’s.

It is the belief of Citron that this company has too many red flags that investors are advised to consider carefully:

Yahoo Finance shows Life Partners Holdings (LPHI) to announce earnings Tuesday, but a reader gave me a heads up that a SEC filing hit Friday, so we already have the news despite the lack of a press release. The company already pre-announced to the upside in December [Dec 15: Life Partners Holdings Pre Announces ... to the Upside], and in this environment, the few & proud who can do that, are to be taken notice of. Everything continues to look solid for this "non correlated" asset; they hit exactly the numbers they guided to less than a month ago.

Their year end is February 2009 (to be reported in April), at which point analysts have a $2.27 yearly EPS (58 cents is the target for their last fiscal quarter). At $42, this will give them a trailing PE of 18.5 if the price does not change between here and there. Since there is no public competitor, I don't know what a fair PE will be; they had 40% type of growth year over year. Analysts are conservative for next year saying that growth rate will be cut in half.

Life Partners Holdings (LPHI) is only followed by one analyst so this "pre-announcement" is versus a sole opinion. That said, more important than beating any analyst's guess are the growth metrics which seem to be completely sheltered from the economic storm. This is exactly the type of company we want to hunker in as hedge funds act like cats who alternate treating early cycle versus late cycle stocks as their personal ball of yarn as their sector to "run up for the day".
This is a very thinly-traded issue that frankly disobeys most technical rules and can move 8% on 150K shares, so I've just bought this when it falls - even as it breaks technical support, and cut back on it when it rises. We've already had quite a few nice round trips.

$20M in cash; long term debt under a million - perfect.

My dear friend and mentor, convicted felon-turned-fraud fighter Barry Minkow has a message for deceitful directors and officers of public companies: If you lie about your resume, past experience, and qualifications for your present job and such lies show up in SEC filings, he will find out about it and expose you to investors and regulators.

Minkow and I believe that if you lie about your educational background, you are capable of lying about anything else, too. Investors require honesty from the fiduciaries running their companies. If Barry Minkow can find false credentials in corporate America where company gatekeepers have failed, what other more devastating internal control failures exist that we do not know of?

Life settlements (formerly viatical settlements) are financial transactions where someone with an unneeded or unwanted life insurance policy sells the policy to a third party for a price that exceeds the cash value offered by the life insurance company. Sounds innocuous enough, but here's the rub: these financial transactions usually involve the policies of the terminally ill or the elderly.

This is frank discussion about growing epidemic that is set to become one of this countries biggest scams. It is so monumental that it has the potential of bringing down the entire insurance industry. Seriously. If you scare easily, stop reading now. (Note: Podcast 28 has an amazing interview with Steven Leimberg on this subject, subscribe via iTunes to ensure delivery on Sept 19th.)

Never before has the insurance industry faced such a cataclysmic onslaught of potential claims than they will begin to see in only a few decades from now. This is a crisis, which was set in motion by a rather innocent idea and has now turned into a greed-infested scheme. If left alone with no intervention, it will have us all looking back in 20-30 years wondering how and why we could of let this happen.

CME Group (CME): 'Oh c'mon! I would buy more. This is a company that is the principle beneficiary of the volatility of the market. They are doing a miraculous job. It's incredibly well-run. It's right where I recommended it. Thats' true. It hasn't moved up yet. I think that now is the time.'
Life Partners (LPHI): 'Miraculous company. ... They've created a secondary market in life insurance. It's a brilliant business model. I liked it before, and I like it again.'
Cominco (TCK): 'This is one of the greatest mineral companies…that stock is down like 8 points from its high. I think that's a tremendous find. I would pull the trigger right here.'
Mastercard (MA): ' ...transactions are going up worldwide. ... The stock has been stalled here. I remain bullish, but I gotta tell you, there are better situations here than MasterCard because it has ... quadrupled on our watch, and I think it's resting.'
United Health (UNH): ' think UNH works. ... I'm stickin' by it, but my credibility is very low with UNH.''
Cisco Systems (CSCO)
Sirius Satellite Radio (SIRI): ' I think the risk/reward is very good here. I think it's 30 cents down and $1.50 up if they approve the deal.'
Brush Engineered Manual (BW): 'This makes Beryllium, which is one of those metals that is in very short supply. I still want to stick by it.'
Google (GOOG)
Apple (AAPL): ' I think AAPL's terrific. I think it's going to a 52-week high.'
L-3 Communications Holdings (LLL): ' … also near a 52-week high. That also has bomb detection and it's got other businesses that are more diversified.'
United Technologies (UTX)
EMC (EMC): 'You know I like tech right here. EMC goes to $22.'
E-Trade Financial (ETFC): ' … is cheap down here. I like it.'

Ingles Markets (IMKTA): 'It's a supermarket stock. Don't buy, don't buy... and they have been absolutely awful... I do not care for them and I'm not going there.'
Arris Group (ARRS): 'I would actually literally sell the ARRS, and buy the CSCO.'
Valassis Communications (VCI): 'VCI - I think - is a dinosaur.'
American Science and Engineering (ASEI): 'Keep looking! Sell, sell, sell!'
Thornburg Mortgage (TMA)

Seeking Alpha publishes a summary of Jim Cramer's stock picks every day including: Mad Money Recap, Lightning Round, Stop Trading and Wall Street Confidential

I have been busy today buying stocks. I added Mothers Work (MWRK) and I accumulated shares of an actual Graham net-net for the Fat Pitch Financials Port. I also picked up shares of an odd lot tender offer and earlier this week I sold my very profitable KBR position in the Special Situations Real Money Port. More details will follow shortly on some of my purchases.

The spike in shares immediately lit up our systems, and then dawned on us that 1) no one the sell side wants to cover this name and 2) the shorts are unequivocally getting blown out of the water here. We had to dig deeper.