Sunday, February 12, 2012

Wasting Your Money, Or Your Time?

The Motley Fool, which the Jaded Consumer has criticized before (for offering users bizarre, opaque, and inconsistent return calculations, for selling "guidance" sure to get investors lost, and being extremely late to the party with shallow analysis based on easy-to-learn information about major worldwide companies with one of the most valuable brands on the planet, and using criminally obsolete information to support investment suggestions), published an article proclaiming that American Capital was wasting your money by repurchasing its shares on the open market.

I've submitted an article to Seeking Alpha about American Capital Ltd. (which went live here), which addresses the sensibility of the share buyback.

What I'd like to add here – because it's the sort of dufus claim that's in line with the rest of the Jaded Consumer's analysis of Motley Fool analytic powers – is that the Motley Fool article suggests that one of the reasons that ACAS' share buyback was bad for investors is that ACAS could not afford to pay a dividend. ACAS has been generating cash from profitable portfolio company investments to the tune of hundreds of millions, and even billions of dollars. (The 2010 results included $1.3 billion in cash proceeds from realizations; the 2009 results included $1.1 billion in realizations.) During the last-announced quarter, ACAS had $260 million in cash realizations. Cash isn't exactly in short supply at ACAS. While reducing investments by $615 million during the first nine months of 2011 (as measured by FAS-157-compliant "fair value"), ACAS reduced its debt by $740 million, ensuring that ACAS could not be forced to make debt payments against a deadline in the near term.

ACAS ended the first nine months of 2011 with $187 million, even after spending $75 million retiring shares under ACAS' new dividend policy, which favors share retirement to dividends while shares trade below NAV. On what basis does Mr. Smith of The Motley Fool conclude ACAS can't afford a dividend? What makes Mr. Smith think paying a dividend (especially at a time regulations do not require it) is of any interest to management when better uses of cash are available?

With respect to the superiority of ACAS' below-NAV share buybacks to a mere dividend, I'll link the Seeking Alpha article once it's live. But the short story on The Motley Fool's analysis is this: the article doesn't help you see your money wasted at ACAS, it only helps you to waste your time looking for reason in a lazy pile of drivel. The Motley Fool plainly wanted to sell clicks more than it wanted to provide well-reasoned analysis. Remember that the next time The Motley Fool advises you about your money.


Camilo said...

I was wondering how long it would take you to jump on that nonsense. My favorite part of their "analysis" was that they basically rest their entire argument on the fact that ACAS sold its own shares for about $5 a share when it needed the money and that now it was buying shares at about $6.75. In other words, it is selling low and buying high. While that might sound like a good argument to someone completely without any information about the context of the transactions, it is laughable coming from someone who calls himself a financial writer. Even if we all agree that seeling shares for $5 was a terrible idea, that in no way means that buying shares now is a bad idea. Let's say an Apple investor needed money and sold his shares a few years back for $5 a share. Would it then be a terrible idea to but them back at $7 a share?!?!?! No, I guess he is forever barred from buying them back because he once sold them for less. Amazing...

Jaded Consumer said...

I'm afraid I've been rather busy with Real Life™. I've actually got an opportunity I'm evaluating to invest in an illiquid portfolio company myself – one that I'd also be involved in managing. Providing services to the energy industry has attracted me in investments in the past, so examining this one is sort of a treat. The upshot is that between that and an explosion of work in my regular line of business I've had little time to stay atop the silliness that dominates the financial reporting. On the upside, I've submitted an article to Seeking Alpha that should run ahead of the results announcement ACAS scheduled for Valentines Day.

The fact that ACAS sells a major hedge fund manager shares near $5 while ACAS is working on getting out from underneath a bunch of creditors doesn't help us understand why it's a bad idea for ACAS, after it's refinanced the defaulted debt that threatened it with bankruptcy, to repurcahse shares around $7 and $8 when NAV was over $10.

Anonymous said...

Hey Jaded, good luck with the new investment opportunity. Hope you will still find time to blog. I've come to really appreciate your insights.

Re: Motley Fool. Do you know the saying, "The Titmouse is neither"? Well in their case it would be, "Motley Fool is both."

Jaded Consumer said...

Thanks for the well-wishing. I don't expect to stop blogging, but the busier I get the harder it is to finish drafts. I don't want to bother people with stuff that's not ready to be read :-)

The problem at The Motley Fool is that instead of simplifying decisions for investors who want specific trading instructions, the inconsistent guidance (Million Dollar Portfolio says Buy while Special Ops says Sell) and conflicting information (article writers hired to get clicks undermine positions in paid newsletters) turns out to prevent the service from providing what the customers who are most attracted to it are most certainly looking for. I don't think the authors coordinate, and I don't think the organization has a commitment to consistency. It is as you say a motley bunch of opinion, and on close look often foolish.

Once they re-introduce the wheat-and-chaff problem, they've eliminated their primary value to readers, who are left to their own devices again to ascertain what's truth an what's click-magnet.