A Stock Only a Trading Robot Could Love

,

Citron introduces Great Northern Iron. (NYSE:GNI).


You absolutely won’t believe this:  A stock that is going to die, for certain.   100% guaranteed — a veritable ghost ship of a stock. No fraud, no deception, no fad.  Simply a huge oversight by the market.

Why is this stock different from every other stock? One simple fact: In exactly 4 years and 3 months, it goes away. Period.

GNI is an iron ore mining trust set up by a railroad baron primarily to provide a legacy for generations of heirs. Twenty years following the death of the last living heir (they are all explicitly named) in the trust, the cash is divvied up, and the property reverts, in this case to Conoco Phillips, that has acquired the holding. That’s it. End of story. No mystery. Its all right in the 10-K, where it’s been printed every year for decades.

The devil is in the details.

http://www.sec.gov/Archives/edgar/data/43410/000089710110000259/gniop100275_10k.htm

The terms of the Great Northern Iron Ore Properties Trust Agreement, created December 7, 1906, state that the Trust shall continue for twenty years after the death of the last survivor of eighteen persons named in the Trust Agreement. The last survivor of these eighteen persons died on April 6, 1995. Accordingly, the Trust terminates twenty years from April 6, 1995, that being April 6, 2015.

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) under the terms of the Trust Agreement.

Check Please!

How do you value a company that is going away, and surrendering its productive assets as it goes into the sunset ? Runoff calculations take the present value of future payment streams: 17 quarterly distributions plus about 8.53 in cash per share when the trust is liquidated in April 2015.

So what does it earn? The last 3 calendar years, it has earned 7.63 to 11.75 per share. The most profitable quarter in its history was the September 2010 quarter, in which it earned 3.50 per share.

So calculating the net present value of 18 quarters of earnings from $3.00 to $5.00 per quarter, against a discount rate of 2%, 4% or 6%, with a liquidating payment thrown in, we see a range of present values from $54.00, to at most (if the most favorable discount rate is thrown at a quarterly earning 50% higher than the company has ever earned in its history) of ….. drum roll……$94.00. Realistically, with execution and commodity pricing risk rolled in, any value above $75.00 requires a huge leap of faith.

Shares Outstanding


1,500,000
Annuals 2009 2008 2007
Net earnings 11,449 17,632 14,452
Net EPS 7.63 11.75 9.63
Current Year 9/30/2010 6/30/2010 3/31/2010
TTM by quarters 5,243 4,444 2,321
Net EPS per qtr 3.50 2.96 1.55
Discount rates
Estimated Quarterly 2% 4% 6%
3.00 ($51.52) ($49.19) ($47.02)
3.50 ($60.10) ($57.39) ($54.85)
4.00 ($68.69) ($65.59) ($62.69)
4.50 ($77.28) ($73.79) ($70.53)
5.00 ($85.86) ($81.99) ($78.36)
Liquidation est
8.53 ($7.97) ($7.48) ($7.05)

So what is this stock doing north of $150 a share? How Can This Be Possible ?


In a world where single-stock picking is rapidly becoming extinct, drowned by the massive waves of quant funds and computer generated trading, the above detail – that this company is soon to become extinct – has been entirely forgotten.

Don’t take our word for it: look how many times GNI has been mentioned in these articles titled “Best Yielding Stocks”, “Top Net Cash Flow Stocks”….etc., where it is compared to other stocks that …… well ….. won’t cease to exist on April 2015. So the computers go about their merry way,

Crazy Premise: 8% yield : (7/22/2009)

http://seekingalpha.com/article/150360-research-metrics-for-30-dividend-stocks?source=qp_article

Crazy Premise: 10.6% yield : (12/3/2010)

http://finance.yahoo.com/news/Hunger-For-Yield-Props-Up-indie-4143308691.html?x=0&.v=1

Crazy Premise: Top 10 Microcaps for yield: (12/3/2010)

http://www.cnanalyst.com/2010/12/top-10-micro-cap-stocks-with-highest-dividend-yield-arr-two-nymt-whx-cbkn-bqr-gni-ffnw-kcap-dxr-dec-.html

Great Northern Iron Ore Properties (NYSE:GNI) has the 7th highest dividend yield in this segment of the market. Its current dividend yield is 10.57%. Its dividend payout ratio was 111.30% for the last 12 months.”

Crazy Premise: Enterprise value ratio mumbo jumbo (12/2/2010)

http://www.investors.com/NewsAndAnalysis/Newsfeed/Article/123026228/201012030743/The-5-Companies-in-the-Steel-Industry-With-the-Highest-Enterprise-Value-to-Sales-Ratio-MSB-GNI-CLF-MTL-ATI-.aspx

Crazy Premise: Top ten cash flow: (12/2/2010)

http://www.investors.com/NewsAndAnalysis/Newsfeed/Article/122966176/201012020739/Synalloy-is-Among-the-Companies-in-the-Steel-Industry-Offering-Investors-the-Best-Cash-Flow-SYNL-RS-ZEUS-GNI-TX-.aspx

Great Northern Iron Ore (GNI) has a price to free cash flow ratio of 6.6x based on a current price of $138.62 and a free cash flow per share of $20.85.

Crazy Premise: Impressive Operating Results: (10/25/2010)

http://www.thestreet.com/story/10898847/metals-and-mining-winners-losers.html

Crazy Premise: Top 10 dividend yields: (10/22/2010)

http://www.thestreet.com/_yahoo/story/10898847/1/metals-and-mining-winners-losers.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

Every single one of these articles ignores the fatal flaw in its investment premise — that this company has ongoing enterprise value, which it simply does not … it is going away — with date certainty in 2015 — for an estimated liquidation value of $8.53.

Conclusion:

The art and science of stock picking — which begins by reading the filings — is apparently Not Dead Yet.  If you’re concerned about a possible run-up in the price of iron ore negating the profit of this trade, we suggest hedging with Mesabi Trust (NYSE:MSB)

Cautious Investing to All!