Whopper is a deep value investor and the founder of whopperinvestments.com. He can be reached at [email protected]
So I’ve recently been trying out screener.com (hat tip to Andrew from the frog’s kiss blog; if you’re interested in international investing it’s one of the few screens I’ve found that will include intl. stocks). After playing around with it for a while, I came up with a screen I was really excited about (can’t remember the exact details, but it was something like EV / EBIT < 5, ROA > 10%, pays a dividend (I really don’t care about dividend, but just through it into the screen to narrow down choices that were enjoying one year of profitability), and EV < market cap). There were only four companies that passed my screen. I started looking at the first company, and I thought I had stumbled onto the best screen / value investment ever. Listen to the ratios from the first company on the list- 12.9% dividend yield, P/E of barely over 5, EV / EBITDA just over 2, almost 30% of market cap in net cash, and ROE over 45%.
That company is Life Partners Holding (LPHI). The company is basically a broker in the “secondary market” for life insurance policies. In other words, they buy life insurance policies from people and sell them to “investors”. I know what you’re thinking, and no, you didn’t read that wrong. The company buys life insurance policies from people (actually, not just people. People who are likely to die) and sells them off as an investment. In effect, the people who buy these policies are gambling on the person dying quickly- the faster the person dies, the better the returns for the investor. But wait…. it gets better! In order to entice the gamblers, the company buys most of its policies from people who are HIV positive.
In return for this “service,” the company charges hefty fees for arranging the deal. However, the company projects mid-double digit annual returns for investors who purchase the policies- hey, if you promised me an investment with mid-double digit returns, I wouldn’t mind paying high fees. Everyone’s happy right? The sick get money now for their policies (actually, now that I think about it, couldn’t they pay the people a fee to take out the life insurance policy and the sell it off? In that case, they’d actually be helping sick people pay for their medical costs, and the effort is almost humanitarian. It does make you wonder though- would you get a bonus payment from the company when you die? Would the bonus be bigger the fast you died???), investors make great profits, and the company milks money.
Unfortunately, it doesn’t quite work that way. The mid-double digit returns are based on the company’s life expectancy projections, and the company has apparently juiced their life expectancy projections to enhance projected returns. According to this WSJ article, 90% of insured people outlive the company’s projections, investors are often forced to come up with extra premium payments when their “investment” fails to die, and the company has already settled a lawsuit involving misleading investment statements in Colorado. The company is currently under investigation by the SEC for these charges; however, the company won a federal appeals court ruling 15 years ago that says its product is not subject to federal securities law, so the SEC may have very little control over the situation (according to the WSJ), and having to pay off lawsuits might actually be the exception, not the rule.
My take
Despite all of these negatives, the company could still make a great value investment. As long as people keep buying these policies, the company will likely mint money, and you could easily see a company with these type of returns and this big of a growth opportunity trading for multiples of today’s stock price. Even if returns on their products aren’t quite as high as advertised, high single digit returns aren’t bad, and I’ve been around long enough to know that poor historical performance is not enough to deter people from continuing to pour money into an investment if you can sell it properly (I’m looking at you, mutual fund industry).
However, I’d still stay away from this one. First (and probably most importantly), managers who are willing to constantly lie to their investors about projected returns aren’t exactly the people I want stewarding my money. Second, the company has been on an explosive growth profile since the recession started, and as markets normalize it’s not hard to see their revenues/returns slipping back down to historical levels, in which case their stock would likely be at least 60% overvalued (that’s generous). Finally (and this is where it gets even more interesting), the company recently issued a press statement bashing short sellers and asking shareholders to make sure their shares weren’t being loaned out for shorting. We’ve seen this story before with Allied Capital in David Einhorn’s book (which is excellent btw), and it only ends well for the shorts (we also saw it with Einhorn and Lehman). When a company starts worrying more about hurting short sellers than running their business, it’s normally because there’s something wrong with the business.
Summary- I guess you can tell my feelings on this one. It’s fun to think about buying a small stake and making a huge profit if they can keep it going, but I think the odds would be really stacked against you (and can’t you find an investment that’s a little less sleazy???). Honestly, for readers interested in shorting, I think this one has some potential on that side, though the high dividend and unlimited upside risk in case the business isn’t a fraud or getting forcibly shut down would give me pause there as well.
Disclosure- The author is long life (hopefully for a good while longer), but has no position in any of the stocks mentioned.
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