Great Northern Iron: Perhaps the Most Overpriced Stock I Have Ever Seen

About: Great Northern Iron Ore Properties (GNI)
by: Alan Brochstein, CFA

One of the things I appreciate most about Seeking Alpha is what I can learn from others when I share my views. Two weeks ago, I shared a list of stocks that I thought looked very cheap in "11 Low PE Stocks Not Widely Followed and Growing Rapidly". As an aside, 2 of the 11 have already been acquired, Spectrum Controls (OTCPK:SPEC) and LaBarge (NYSE:LB). In any event, one of the stocks that made the cut was Great Northern Iron (NYSE:GNI).

I should not have included GNI, despite its having the attributes I was seeking. In my defense, I explicitly stated that I didn't know the company but that the nonvoting trust would dissolve in 2015. I also didn't include it among the ones I thought really merited further attention (SPEC and LB, along with two others and Preformed Line Products (NASDAQ:PLPC), which we own in the Top 20 Model Portfolio).

As several commenters quickly pointed out (thanks jdking and skilling, as well as salishea, who provided a link to the Citron piece), this stock is priced insanely wrong. Citron Research shared its views in late December. Before I share this apparently very simple story, take a look at the chart (). When Citron published, the stock initially plunged, but it has recovered most of its losses:

If you own this stock, you don't even have to read the Citron piece, which was excellent but perhaps overkill. All you need to do is read the 10-K, where the future is all spelled out:

At the end of the Trust on April 6, 2015, the certificates of beneficial interest (shares) in the Trust will cease to trade on the New York Stock Exchange and thereafter will represent only the right to receive certain distributions payable to the certificate holders of record at the time of the termination of the Trust. Upon termination, the Trust is obligated to distribute ratably to these certificate holders the net monies remaining in the hands of the Trustees (after paying and providing for all expenses and obligations of the Trust), plus the balance in the Principal Charges account (this account is explained in the Trust's Annual Report sent to all certificate holders every year). All other Trust property (most notably the Trust's mineral properties and the active leases) must be conveyed and transferred to the reversioner (currently Glacier Park Company, a wholly owned subsidiary of ConocoPhillips Company) under the terms of the Trust Agreement.

The Trust has previously provided information in its various Securities and Exchange Commission filings, including its Annual Report, about the final distribution payable to the certificate holders upon the Trust's termination. The exact final distribution, though not determinable at this time, will generally consist of the sum of the Trust’s net monies (essentially, total assets less liabilities and properties) and the balance in the Principal Charges account, less any and all expenses and obligations of the Trust upon termination. To offer a hypothetical example, without factoring in any expenses and obligations of the Trust upon its termination, and using the financial statement values as of December 31, 2010, the net monies were approximately $7,486,000 and the Principal Charges account balance was approximately $4,840,000, resulting in a final distribution payable of approximately $12,326,000, or about $8.22 per share. After payment of this final distribution, the certificates of beneficial interest (shares) would be cancelled and have no further value. It is important to note, however, that the actual net monies on hand and the Principal Charges account balance will most likely fluctuate during the ensuing years and will not be final until after the termination and wind-down of the Trust. The Trust offers this example to further inform investors about the conceptual nature of the final distribution and does not imply or guarantee a specific known final distribution amount.

In case this isn't clear, the stock is going away in four years. The exact value isn't known, but it's currently expected to be about $8.22. Between now and then, you will get fat dividends, but, in the end, you will have your investment wiped out. The current book value of the stock is less than $7.

How does this happen? First, markets aren't exactly efficient for small companies anyway, but this one is tiny with almost no institutional ownership. So, we are talking about a bunch of individuals that likely have never read the SEC filings but rather fixated on the "yield".

Second, this is a tough short. You have to wait four years, which in hedge-fund years is like 20! In the meantime, you have to float the negative carry, as the short is responsible for the dividend. Still, about 4% of the shares are short.

I am not necessarily suggesting anyone short it (but it makes sense), but if you own this stock, you should really make sure you understand what you own. This is the most overpriced stock I have ever seen. The directors and executives must agree - they own nothing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.