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A tiny microcap on a tear

Recs

9

September 13, 2010 – Comments (7) | RELATED TICKERS: CLCT

I found a stock a few years ago using a small-cap no-debt dividend yield screen, the same one that turned me on to OLN and GHM.  It had been languishing on my CAPS watchlist for most of that time, but then I noticed a change in the tenor of its price movement and put it onto my CAPS for real, where it has netted me 31 points as of this blog entry.

The stock is called "Collector's Universe" (Nasd: CLCT) and it is a small company, $112m or so market cap.  Most of their revenue comes from grading and authentication of collectibles: antique coins, modern coins, and cards.  If you're a collector or hobbyist you know all about this: the coin or card comes sealed into a little plastic doohickey, with windows so the collector can look at his item without damaging it; and the non-counterfeit nature and the condition of the piece is recorded so that the item can be accurately valued for buying and selling purposes.

This company valued the second Honus Wagner baseball card a few years ago and gained some notoriety that way.  Recently their business has become much more robust; some say, with reason, that this is a by-product of the gold craze currently going on.  A lot of antique and modern coins are gold and a lot of collectors like to own gold in the form of collectible coins, for a variety of reasons; and CLCT is grading a lot of these coins.

Recent failed ventures have included an attempt to open a storefront and offices in Midtown Manhattan, which turned into a costly exit strategy; and an abortive attempt to enter the diamond grading business (the offices, near 47th St, were tied to this effort.)  The New York diamond industry is a cartel and I do not know how they got the idea they were going to break into it, but they failed and have exited.

Despite these headwinds, they are growing revenue fairly consistently.  Two key stats of the stock really stand out to my mind: they have no long term debt; and they are paying a fairly astonishing 11% dividend yield with a payout ratio TTM of only 37 per cent.  Another interesting stat is their beta; the stock movement has very little to do with what the market is doing.  I look for this statistic because it is not possible to make outsize gains without it.  

They are, however, micro-cap in size, and you know you're in for a choppy ride when the CEO makes a point, on the conference call, of how their summer 2010 operations were influenced negatively (adding to backlog) by the retirement of a single key employee, a coin grader.

I found the company's strong balance sheet, recession-resistant market niche, consistent increase in market share, and strong dividend yield too attractive to ignore and recently accumulated a small real-world position in my Roth IRA (which is immune to the capital gains tax on dividends, eliminating noisome double-taxation.)

I would love for other Fools to take a good hard look at the stock and tell me their unvarnished opinions.  I have learned so much from all the readers of this blog in the past and I really value the collective intelligence of the CAPS community. 

7 Comments – Post Your Own

#1) On September 15, 2010 at 9:00 AM, rd80 (98.32) wrote:

Based on a quick look, I like it.  As you mention, people looking for alternative hard, investment assets, should be good for collectibles grading.

Small cap, no debt, growing is a good combination.  I also like that most of the recent CAPS picks are green.  Don't know if that's a useful metric, but seems like it could be consider a quasi-technical indicator showing strength.

I'll join you in the green thumb bridgade and do some more research when I get some time.

Thanks for the lead.

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#2) On October 04, 2010 at 8:44 PM, tomlongrpv (76.45) wrote:

The nearly 9% dividend looks attractive.  But they are described as a micro.  And given their service orientation I suspect their business model is easily replicated and that there are low barriers to entry.  If I am right competition will slowly erode them.  But it may be that some larger company will buy them up to ease entry into what looks like a profitable service.  So it may work out.  But it is too risky for me and in any event I don't see the potential upside as being all that terrific.  I guess I would predict it will outpeform S&P but not by enough to compensate me for the risk and so it won't make it into my real life portfolio and I won't pick it here.

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#3) On October 05, 2010 at 5:58 PM, ikkyu2 (99.15) wrote:

Tom, I think there is a moat, in the sense that coin users get 'used' to a particular grading service being bonded, trustworthy, having a certain level of expertise and customer service; whereas a new company has to somehow prove to the customer that they also can at least meet those levels of trustworthiness, while also competing on price.

There are few major players in the coin grading game; PCGC, which is CLCT's offering, and their major competitor, NGC, account for 90+% of the market.

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#4) On October 06, 2010 at 11:32 AM, tomlongrpv (76.45) wrote:

ikkyu2  You may well be right.  After all keep in mind I was a freshman at Stanford walking on University Avenue in 1975 as a pretty young woman only a few years older than me was giving out free cookies.  I took one and thanked her (it was good!) and thought to myself "what a stupid idea, a shop that sells nothing but cookies."   In 1995 I read a magazine article and realized it was Debbie Fields I had met.  I should have dropped out of school and washed her floors for 5% of her "stupid idea." 

A law school classmate of mine topped my story.  He had gone to college where he hung out at an expensive coffee shop.  He thought to himself "what a stupid buiness model--people aren't going to pay over $3 just to get a cup of coffee in a nice environment."  (It was the first Starbuck's.)

Don't take investment advice from lawyers.  There is a reason we are not good business people. 

So you may well be recommending something very good but just not something I can buy. 

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#5) On October 06, 2010 at 12:47 PM, ikkyu2 (99.15) wrote:

I appreciate your thoughtful comments.  A highschool classmate of mine was graduating from college - in 1994 with a CS degree, ok I just dated myself - and asked whether he should move to San Jose and work for a 'start up' (whatever that was!) or instead go work for a very old, well-known bank in Boston upgrading their IT.

I told him "Are you kidding?  Go work at the old bank, they will never go out of business."  He ignored me, thankfully, and 5 years later cashed out his Broadcom stock for $28 million.

Goes to show, you never know what you don't know! 

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#6) On October 07, 2010 at 9:25 PM, rd80 (98.32) wrote:

Congrats on a great day in this one.

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#7) On October 07, 2010 at 11:03 PM, ikkyu2 (99.15) wrote:

Yeah, I finally caught something good, didn't I?  I actually have a position.  Rather pleased with myself.

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