Saturday, May 10, 2014 10:58:55 AM
Collectors Universe: An Alternative Silver Strategy
May. 9, 2014 12:36 PM ET
Bruce Pile
Disclosure: I am long CLCT. (More...)
Summary
* As a defensive holding against currency market problems, silver coins are enjoying great popularity.
* Collectors Universe is a rapidly improving company.
* Collectors stock is an excellent defensive holding with several nice advantages over the more common defensive silver holdings.
With a looming currency crisis over the dollar's reserve currency status hanging over investors' heads, a constant question in the backs of our minds is how to best diversify some assets into gold and silver. Some tout the advantages of ETFs over futures, physical over paper, silver over gold, miners over metal, coins over bullion, a hole in the back yard over the safe deposit box of a bank - all fun stuff to think about, like buying insurance policies. Here's a crazy thought. What if one of the best currency defenses isn't any of the above? What if it's the stock of a company that fools around with baseball cards and other collectibles? I'm referring to Collectors Universe (CLCT), and it may be developing into a nice dollar insurance policy with a lot of advantages over the usual measures.
Some insurance policy is really needed against the change of the USD status from the world's premier currency to something else. This "reset", as it is being called, could involve currency instability. Many analysts feel China wants to put some sanity back into the global currency system by offering the yuan as what the dollar used to be before 1971, when Nixon removed it from the gold standard. They may offer a responsibly managed, trusted, gold-backed currency. There will be some kind of transition, and China's frenzied gold buying of the last five years now has their holdings at estimates ranging from 6000 tonnes to 10000 tonnes, up from a measly 1000 or so at the start of their five-year plan in 2009. This puts them at the global reserve currency table, along with the US with 8000 tonnes and Europe with 10000 tonnes. Their new five-year plan of 2014 could involve an offering of a yuan tied to gold, something way better than Bitcoin. If this doesn't happen soon, it will probably happen at some point, and having some currency mayhem insurance holdings in your lineup certainly is a must nowadays.
This change away from the USD isn't something that may happen out there in the future, it is a process that is well underway. To appreciate how fast it is changing, have a look at how much the yuan has advanced in international trade in a recent period of only 22 months:
(click to enlarge)
There are bilateral and regional agreements among the major trading partners bypassing the dollar blossoming all over the globe.
The course of this reset will likely induce the kind of turbulence that historically has caused the markets to view silver as money. I wrote an article about this a while back at Seeking Alpha, "Is Silver Money?", where I show a most interesting chart of the history of the gold/silver ratio and associated events going clear back to the 1700s. If you've ever wondered about silver's status as money, you need to look at this chart.
Getting In Tune With The Times
What does all this have to do with Collectors Universe? This small company is a leading provider of authentication and grading services for sports collectibles, autographs, and rare coins. It also authenticates and grades gold and silver coins, both old and newly minted. The company researches and publishes information on all the collectibles it provides services for. It operates an internet trading platform for coin dealers, and puts on trade shows and conventions. The coin business is known as PCGS (Professional Coin Grading Service), and is the world leader, expanding globally.
[img]static.cdn-seekingalpha.com/uploads/2014/5/8/saupload_silver-bullion-coins.jpg
[/img]
Coin grading services were born of the big counterfeiting problem in collector coins in the early '70s. The American Numismatic Association responded by establishing the ANA Certification Service (ANACS) in 1972. This was certification only (no grading), and quelled the false coin problem. But soon, overgrading and overpricing became a problem, and again, the ANA responded by adding grading service to ANACS in 1979. This also quelled the problem for awhile. But soon, you had a seller assigning a grade of A+ and a buyer thinking B-, creating market mayhem with inconsistency of grades. David Hall led a revolt of coin dealers in 1986, which resulted in the creation of the Professional Coin Grading Service (PCGS). He instituted the innovations of consensus grading (more than just one expert's opinion) and encapsulation of coins in the labeled, sealed hard plastic holders we see today for high-grade coins - the "slabbing" revolution. An offshoot of David Hall's effort was John Albanese breaking away from PCGS to form the Numismatic Guaranty Corporation of America (NGC), forming the three groups we have today overseeing a more stable coin market - ANACS, PCGS, and NGC. The baseball cards and the other two divisions of Collectors Universe were then formed, with David Hall still head of PCGS today. His title at Collectors is chief operating officer and president.
This tiny $193 million market cap stock has just a 6 million share float, so it could climb very swiftly if more money is attracted to it. It has a 31% to 26% insider/institutional ownership ratio. I like it when a tiny band of insiders own more than all the big institutions. With a tiny float and light institutional attention, there is a large upside.
Collectors has no debt, and is in a good position to greatly benefit from the debt woes of irresponsible governments and China's remedy for this. The company seems to be making a march toward this new paradigm every couple of years with the opening and closing of its business segments:
* In February, 2009, it sold its currency (paper money) authentication division.
* In September, 2011, it acquired Coinflation, a coin pricing business.
* In April, 2013, PCGS opened its first location in Mainland China, serving a burgeoning interest in gold and silver coins by the Chinese populace. Founded in 1986 in Santa Ana, CA, it expanded to Paris in 2010, Hong Kong in 2012, and then Mainland China in 2013.
The story of Collectors Universe seems to be one of a bad company gone good. Between 2005 and 2007, with the economy growing, gold climbing, and its revenues advancing, it managed a 76% decline in cash flow and a dive into the red in EPS, by Value Line data. That, and the crash of 2008 demolished the stock. But then, things started to change. Revenue remained flat, but cash flow and earnings came back from an atrocious negative 26% of sales and negative 32% of sales in 2008 to positive numbers in 2009.
In a picture, this is how Collectors has come back from the fiscal dead over the past five years:
In the bad old days, it paid no dividend. Then in 2007, it suddenly started with about a 3% average year's dividend. It dramatically upped that to 8.1% in 2008, and has gradually increased that to 10.5% in 2013, by Value Line's figures. That has dropped back this year so far, but it remains a fat dividend payer.
The cash flow from operations and EPS has been flat compared to EBITDA, as shown by the brown line above. The EBITDA cash flow has been outperforming revenue for the last five years, a condition I look for in a stock. I call this an "inverted cash flow curve", which suggests that management is getting better at handling its sales. The net income, for now, is the sore point, being relatively flat. But that hasn't kept it from being ranked #2 by the SmarTrend newsletter in the ranking done last month of the best consumer services companies in the world by ROE (return on equity). HR Block was first at 51%, CLCT comes in 2nd at 36%. That's extraordinarily high for such a small, little-known company.
All this improvement did not escape the eye of Forbes when, in November 2013, they announced that the company had been installed on their Top 100 Best Small Companies List at #50.
The Silver Syndrome
The improving management, nice dividend, and climbing sales are all good reasons to explain the buoyant stock chart over the last couple of years. But since some 67% of CLCT's revenue is from coins, there is one chart that perhaps explains what the stock is doing better than any other:
This looks very similar to the CLCT stock chart of the last five years, and suggests that the market is tying the stock more closely to post-'08 precious metal coin traffic than to the current earnings or anything else. A closer look at coins shows the stock may be following US Eagle minting even more closely than coins in general, as the big dip of 2012 in these coins matches the 2012 slump in CLCT:
(click to enlarge)
Management pointed this very thing out in reporting Q3 2012 results, when CEO Michael McConnell said:
Looking ahead, our coin business, and in particular our modern coin business, has started the fourth quarter with slower momentum than this time last year. Notably, year-to-date sales of Silver and Gold Eagles from the US Mint are down approximately 24% and 44%, respectively, as compared to the same period last year. This general market decline is impacting our customers who submit modern coins to us.
And they were glad to see the 2013 rebound in Eagle sales. In reporting Q3 2013, they said:
While this past quarter is normally our strongest of the year, coinciding with the new 2013 coin issues, we are encouraged by the current stronger coin market conditions overall, and with the increased production of gold and silver modern coins from the US and other mints around the world; we are optimistic about our prospects throughout calendar 2013."
Collectors Universe likes both gold and silver, but the market potential is vastly better with silver. You can see just how much silver coins are outperforming gold coins when you look at a direct comparison of coin sales yearly since 1986:
(click to enlarge)
Here we see that the explosive growth in coin sales since the financial panic of 2008 is almost entirely a silver thing. Is this marking a big return to silver being viewed as money again in its roller coaster ride through history, as pictured in the panoramic chart I show in the "Is Silver Money?" article?
Collectors' Game
Collectors Universe makes its money with traffic, by piece count, a fee for each individual coin. Assuming a roughly equal split of precious metal coin investment money between gold and silver, and the gold/silver ratio of around 65 currently, you would expect CLCT to be 65 times more geared to silver than to gold. And the above charts do show a much stronger correlation to silver than to gold coins. Actually, if you look at the most recent month's tallies for the number of new mint gold vs. silver coins sold, you get about 75 times more silver coins. Note that the above graph gives cumulative numbers, and for total dollar value going into coins from 1986 to now, gold has averaged a 3 to 1 advantage over silver. Currently, that ratio has radically changed to about even. If we do experience a return to silver being viewed as money via some US dollar turmoil, silver should soar from its depressed level much more than gold, and silver coin demand should soar even more than that, giving CLCT direct leverage to it.
Investing in silver is difficult. This particular stock removes many of the difficulties. Collectors Universe is a way to invest in silver without the spot price manipulation and suppression. Consider the vast difference between coin demand and spot price (shown in blue) in the first silver coin graph above. This stock also allows silver investment without having to pay fat premiums for coins over spot, and without having the storage problems and risk of large amounts of coins. To hold coins, you have to arrange and pay for storage and insurance, or worry about a bank guarding your safe deposit box with no FDIC insurance. Small deposit boxes are generally not cost-effective for bulk silver anyway. And you must wonder about what conditions may close a bank or prompt a bank to seal your box.
To own collector coins, you must pay a certification company like Collectors a fee of around $20 per coin. For a one-ounce silver coin, that means paying $40 for a silver content of $20 at today's prices. But the demand is still ferocious, and is clearly representing a widespread investor view of future silver prices and collector markets. And it may be reflecting an accessibility issue with the major metal exchanges, such as the COMEX. These exchanges trade metal as paper contracts, with real metal inventory for delivery being just a tiny fraction of contracts exchanged at ratios estimated as high as 100 to 1. In a sudden chaotic surge of physical delivery demand, these exchanges could default and shut down, leaving only coin shops for an outlet to trade silver. As the JM Bullion website's buyer guide section points out under "Disadvantages of Bars":
Generic bars produced by normal mints do not offer any kind of "collectibility" factor
The largest bars (10 oz gold bars or 100 oz silver bars) may be harder to trade in event of a crisis than smaller bars
And it could be added that even the smaller bars may be harder to trade than coins. Because of their legal tender status, coins are easier to cross national borders with. A currency crisis may truly be a complete historical return to silver being viewed as money - 1964 redux. No matter what your personal view is for silver prices or future collector prices, you do nothing with CLCT ownership but benefit from other investors' speculation and resultant coin traffic, and get paid a 6% dividend.
Why don't investors just buy junk silver coins (old silver coins with no collector value, pre-1964 in US coins) and avoid grading and certification costs? Well, there just isn't enough junk silver available nowadays for much wealth protection. Even modern minting can barely keep up with demand. "Out of stock" is a common description when you go shop. Even for small amounts, buying modern minted coins is much better investing. This is because of the "collectibility factor" mentioned above - and this is actually a very big factor.
ISN (International Silver Network) crunched some hard numbers on this value-added factor recently. If you had embarked on a monthly auto-save (buying a coin a month) for new American Silver Eagles graded MS70 (the top grade) between 1986 and 2011, you would have spent $27,672 on 312 MS70s at an average cost of $88.70 a month. Today, your collection would be worth $673,344. If you had bought 312 Eagles' worth of silver in bars or junk silver coins, you would have dollar cost averaged into the spot price of silver as it rose from around $6 to $20 now - something like a 4-fold gain, not bad. But the high-grade Eagles gave you a 24-fold gain. And we didn't even have a dollar crash. So this was for an insurance policy that never was used, and instead of you paying for it, it makes you filthy rich. This makes you want to slap your forehead and say, "What was I thinking in 1986?" It is this massive collectibility value that Collectors adds with its services.
In the event of a big dollar slump, CLCT would provide exposure to a likely boom in silver coin trafficking, but even now, in dollar-peaceful times (if you could call Bitcoin peaceful), silver coin demand is soaring and the stock is giving a nice return. In defensive, crisis-prep holdings, one typically has to suffer time decay pain with such things as the VXX, or complex options strategies, or accept a negative or uncertain return between times of crisis with gold or silver price exposure. Silver coin trafficking seems to bend those rules a bit in favor of a buy-and-hold defense strategy.
Silver is most commonly thought of as a currency devalue holding. But in a disturbed economy, deflation is sometimes predicted by doom 'n gloomers. It's really impossible to predict how much of either inflation, deflation, or bouts of both would occur in a monetary blow-up. But consider that in a deflationary economy, the high-grade, collectible coins like vintage MS70s in the example above would be priced at something like $2000 a coin, with $20 of that being the spot price of silver currently. That's 1% - the other 99% being collector value. Top-grade collectors are a somewhat isolated economy, most of them independently wealthy and not as drastically effected by the economy around them as the average consumer. If you are more of the average collector and you come down from the ultra-pricey top grade to auto-save nothing but the second-grade MS69s from 1986 to present, your average collected Silver Eagle would be priced at just around $72 now. But spot silver still makes up only 28% of your investment with the other 72% being collector value. To the extent that you go for new mint, high-graded coins, your silver holdings would be somewhat insulated from a bout of deflation. You could consider a microcosm of this to be 2008, when deflation certainly posed significant problem and silver was hit with a 50% sell-off. Yet, the Silver Eagle coin market certainly did not suffer.
The Problem With Coins
It should be mentioned that the coin dealer problems of the '70s and early '80s that prompted David Hall to form PCGS are still with us today. If you, as a novice collector, decide to go out into the coin dealer world to make a killing, you will be going up against some very sharp, often unscrupulous pros with a lifetime of experience, and yes, you will get taken in the fuzzy back and forth of coin values. That's why no coin shop should be your coin value guide - only one of the three authoritative grading services. PCGS gives current prices gleaned from taking averages among bona fide dealers. Coin shop problems were discussed in a goldsilver.com piece "Investor Beware: Numismatic Collector Coins" back in 2011, where a good warning was issued to numismatic babes in the woods:
... unless you are well educated and knowledgeable about these products, you cannot hope to profit ... In the event of a global currency crisis, all the growing millions of investors who have been hoarding their collectible coins over the past four or five decades will dump them on the market in a desperate rush for cash or liquidity. Should that occur, the value of premiums on numismatic coins, save those items whose rarity is absolutely indisputable, will tank. goldsilver.com, January 10, 2011 (italics added)
Indisputable values are what PCGS is all about. The "dumping" of hoarded coins onto the market mentioned above should be considered in the context of the bigger picture of what may happen in a currency problem. The "hoarders" with enough coin value to be of market significance probably make up something like 2% of the population. The 98% think the 2% are nuts. In a dollar implosion of any magnitude, the 2% would be selling a lot of their holdings, but the 98% would suddenly be buyers; 2% selling to the 98% would probably be good supply/demand for coin prices.
This massive difference between those who own coins and those who may want to own them later can be seen graphically in some interesting charts that PCGS keeps at its website. There are coin pricing histories for many different types of coins, but I'll show just one here, because it shows two important points:
This is average dealer pricing for old mint silver coins, namely the Morgan and Peace silver dollars that were minted up until 1935. The first point I want to make is that coin collector value is a very fickle thing. The stunning performance of new mint MS70 grade silver dollars in the above auto-save example is not repeated here with the old silver dollars. In fact, since 1986, this index has lost money. The crazy popularity of the new Silver Eagles is somewhat atypical. It has certainly become the silver coin of choice since it began in 1986. Note how very well the old mints were doing before 1986, for example, from 1981 to the late '90s - during the huge bear market in silver. Even after the horrible performance since 1989, these coins still represent a 3 1/2-fold increase in value from the peak in silver from 1980. The price of silver today is less than half of its 1980 peak. If only you had known to make the switch to the Eagle in 1986! This all brings up a major problem in long-term silver coin ownership - knowing what coin is going to be popular years into the future. And this is a major advantage of owning CLCT instead of a ton of coins, because this company is geared to coin traffic no matter where it is headed. So you don't have to know what the hot coin of the future is going to be.
Which brings me to my second point with the above chart. All the various PCGS coin index charts show this crazy spike topping in 1989. What in blue blazes happened here? When David Hall got the dealer act more or less together in the mid '80s, amid a budding new bull in the stock market, lots of people began to look at coins like stocks. This culminated in some major Wall Street firms offering new products. In February of 1989, Kidder, Peabody launched a $40 million coin fund, then a year later, Merrill Lynch offered a $50 million version. But this blitz of popularity in silver coins in the midst of just the beginnings of a loose monetary policy, and an economic recovery to beat the band, was producing no real lasting incentive to move big money into coin products. So the overheated price climbs ran hard the other way. Lawsuits were flung, even one at PCGS, and the lawyers forbade Wall Street from even using the word "investment" when promoting any coin product.
About the only one sounding any alarm about government debt, and the danger to the dollar, and the implications for coins during this 1989 coin craze was a nut named Perot. I wish he would run for President again. His campaign slogan could be, "I told you so". Think about this for a moment. Is the massive spike in the collector coin markets of 1989 a small taste of what any attention from big money would do in a currency crisis in our much more dangerous world of today? I've shown in other articles how incredibly small the gold and silver market is, compared to all the other nefarious financial instruments that have ballooned since the '80s. The 1989 phenomenon was over trivial amounts of $50 million or so, and we have umpteen trillion in garbage products now that will be shunned in any such crisis. It would drive money elsewhere. A currency crisis would radically refocus investor interest, and could produce unbelievable results in coins.
Another Thing To Consider About Coins
An added dimension of safety in coins vs. bullion against any total catastrophe with the dollar is the issue of face value. The Silver Eagle is legal tender at $1 which, compared to its $20 silver content, is irrelevant. But what if silver's spot price suffers at least a temporary decimation in a dollar crash? The Eagle's face value may not be all that significant, but you can buy that same 1 ounce of silver in the Canadian Maple Leaf that has a $5 face value in Canadian dollars. And in a world where a gold and silver-bolstered Chinese yuan may be the last major currency standing after a crash of the fiat system, you can move money into both silver, gold, and yuan with the Chinese Pandas. There are one-ounce silver Pandas with a 10 yuan face value. That's 60% more currency value than the Silver Eagle's dollar, at today's exchange rate. That number would, of course, skyrocket in a dollar debacle. The yuan is not a convertible currency, so it's a bit more hassle to move around now. But some think it may become fully convertible around 2015, which could greatly accelerate the dollar's growing unpopularity in the international community. It's so karma that in the Chinese language, "yuan" means "the people's currency", as opposed to "the bankers' chicanery". And at first, the word meant "lump" after the original yuan centuries ago, which was a lump of silver.
Jim Rogers has decades of history of being ahead of major trends in hard assets. Lately, about everytime you see him on your screen, he says to buy the same three things (other than gold) - buy yuan, buy Pandas, buy agriculture, and buy often. He loves Pandas, and even has his daughters wearing bracelets inlaid with Panda coins. He has been known to plunk down over a 1/4 million dollars at a time in China's shops buying Pandas. On a recent TV interview, he apologizes for being late, but explains that he was out buying Pandas and promptly pulls some of them out of his pocket to show them off.
(click to enlarge)
I should probably add here that die-hard gold and silver fans like Rogers and Peter Schiff are not big fans of high numismatic value, which they say will crumble in bad times. On the other hand, I mentioned above that the higher-grade collectors tend to be independent of the economy. It's really impossible to say what the pricing power of the nicer coins would be like in future hard times. But if you examine the PCGS 3000 index, chart, which is the higher-value coins of all types, not just silver and gold, you see that, across the atrocious cataclysm of 2008, this index actually went up about 5%.
CLCT Market Behavior
But CLCT is a stock, and 35% of its business is baseball cards and non-coin collectibles, which are all linked to the economy. Won't a stock panic from a currency crisis slam this stock too? In its standard cautionary statement, it points this risk out, but it also highlights its strong linkage to the precious metals markets and:
our continued dependence on our coin business which generated more than 60% of our consolidated revenues and a substantial portion of our operating income in the year ended June 30, 2013, making our operating results more vulnerable to conditions that could adversely affect or cause stagnation in the prices of precious metals and collectible coins..."
Its stock seems to be much more in tune with coin demand than the price of the metals, and there is not much stagnation in coin demand. While CLCT is a stock with a third of its sales from discretionary spending, its resilience to stock sell-offs has improved dramatically since it was a relatively bad company in 2008 and before an increasing focus on coins. The stock showed good strength over the August 2011 banking-related, fear-driven sell-off (the VXX here spiked to the 2008 level), and the stock has totally ignored the past few weeks' market correction:
(click to enlarge)
Here we see that the 2011 smack-down actually had CLCT following the gold spike up rather than everything else down. And with calm stock seas in 2012, CLCT follows the big dip in US Eagle minting down, rather than creeping up with everything else. The stock now appears to be ignoring the stock market and following mainly whatever silver coin demand does. This is understandable when you consider that before 2008, modern bullion coins made up only about a 30%-40% share of the PCGS segment's revenue. Now, they aren't making any more of the coins valued just because they're very rare, but they are making a new flood of modern silver coins. And coins, most of which are modern silver mints, are now 67% of the revenue of the whole company. With its aggressive expansion into China, this figure will likely be climbing fast.
As a defensive holding, Collectors focuses on just the small defensive slice of the silver pie:
In an economic crisis, they won't be using silver coins to make cell phones. All of the above pie is offense, except the Collectors piece. For an example of how this dynamic works, consider the big recession year of 2008. The price of silver lost 27% on the year, while the number of Silver Eagles sold not only avoided a loss, but rose 100%! The average Eagle price dipped, but the coin's traffic (CLCT's bread and butter) exploded higher.
Silver coin demand is becoming a market unto itself since 2008, when investor attention was redirected to money printing and future currency confidence. The money printing, and the conditions that cause it, continues unabated by the eight central banks. And until that whole situation goes away, coin demand will continue to grow. If Collectors Universe has much more sensitivity to silver coin demand than spot price, the economy, or the stock market, it could be an alternative silver strategy worth considering.
Additional disclosure: I also own Pandas (not as many as Rogers)
http://seekingalpha.com/article/2206843-collectors-universe-an-alternative-silver-strategy?utm_medium=referral&utm_source=t.co
May. 9, 2014 12:36 PM ET
Bruce Pile
Disclosure: I am long CLCT. (More...)
Summary
* As a defensive holding against currency market problems, silver coins are enjoying great popularity.
* Collectors Universe is a rapidly improving company.
* Collectors stock is an excellent defensive holding with several nice advantages over the more common defensive silver holdings.
With a looming currency crisis over the dollar's reserve currency status hanging over investors' heads, a constant question in the backs of our minds is how to best diversify some assets into gold and silver. Some tout the advantages of ETFs over futures, physical over paper, silver over gold, miners over metal, coins over bullion, a hole in the back yard over the safe deposit box of a bank - all fun stuff to think about, like buying insurance policies. Here's a crazy thought. What if one of the best currency defenses isn't any of the above? What if it's the stock of a company that fools around with baseball cards and other collectibles? I'm referring to Collectors Universe (CLCT), and it may be developing into a nice dollar insurance policy with a lot of advantages over the usual measures.
Some insurance policy is really needed against the change of the USD status from the world's premier currency to something else. This "reset", as it is being called, could involve currency instability. Many analysts feel China wants to put some sanity back into the global currency system by offering the yuan as what the dollar used to be before 1971, when Nixon removed it from the gold standard. They may offer a responsibly managed, trusted, gold-backed currency. There will be some kind of transition, and China's frenzied gold buying of the last five years now has their holdings at estimates ranging from 6000 tonnes to 10000 tonnes, up from a measly 1000 or so at the start of their five-year plan in 2009. This puts them at the global reserve currency table, along with the US with 8000 tonnes and Europe with 10000 tonnes. Their new five-year plan of 2014 could involve an offering of a yuan tied to gold, something way better than Bitcoin. If this doesn't happen soon, it will probably happen at some point, and having some currency mayhem insurance holdings in your lineup certainly is a must nowadays.
This change away from the USD isn't something that may happen out there in the future, it is a process that is well underway. To appreciate how fast it is changing, have a look at how much the yuan has advanced in international trade in a recent period of only 22 months:
(click to enlarge)
There are bilateral and regional agreements among the major trading partners bypassing the dollar blossoming all over the globe.
The course of this reset will likely induce the kind of turbulence that historically has caused the markets to view silver as money. I wrote an article about this a while back at Seeking Alpha, "Is Silver Money?", where I show a most interesting chart of the history of the gold/silver ratio and associated events going clear back to the 1700s. If you've ever wondered about silver's status as money, you need to look at this chart.
Getting In Tune With The Times
What does all this have to do with Collectors Universe? This small company is a leading provider of authentication and grading services for sports collectibles, autographs, and rare coins. It also authenticates and grades gold and silver coins, both old and newly minted. The company researches and publishes information on all the collectibles it provides services for. It operates an internet trading platform for coin dealers, and puts on trade shows and conventions. The coin business is known as PCGS (Professional Coin Grading Service), and is the world leader, expanding globally.
[img]static.cdn-seekingalpha.com/uploads/2014/5/8/saupload_silver-bullion-coins.jpg
[/img]
Coin grading services were born of the big counterfeiting problem in collector coins in the early '70s. The American Numismatic Association responded by establishing the ANA Certification Service (ANACS) in 1972. This was certification only (no grading), and quelled the false coin problem. But soon, overgrading and overpricing became a problem, and again, the ANA responded by adding grading service to ANACS in 1979. This also quelled the problem for awhile. But soon, you had a seller assigning a grade of A+ and a buyer thinking B-, creating market mayhem with inconsistency of grades. David Hall led a revolt of coin dealers in 1986, which resulted in the creation of the Professional Coin Grading Service (PCGS). He instituted the innovations of consensus grading (more than just one expert's opinion) and encapsulation of coins in the labeled, sealed hard plastic holders we see today for high-grade coins - the "slabbing" revolution. An offshoot of David Hall's effort was John Albanese breaking away from PCGS to form the Numismatic Guaranty Corporation of America (NGC), forming the three groups we have today overseeing a more stable coin market - ANACS, PCGS, and NGC. The baseball cards and the other two divisions of Collectors Universe were then formed, with David Hall still head of PCGS today. His title at Collectors is chief operating officer and president.
This tiny $193 million market cap stock has just a 6 million share float, so it could climb very swiftly if more money is attracted to it. It has a 31% to 26% insider/institutional ownership ratio. I like it when a tiny band of insiders own more than all the big institutions. With a tiny float and light institutional attention, there is a large upside.
Collectors has no debt, and is in a good position to greatly benefit from the debt woes of irresponsible governments and China's remedy for this. The company seems to be making a march toward this new paradigm every couple of years with the opening and closing of its business segments:
* In February, 2009, it sold its currency (paper money) authentication division.
* In September, 2011, it acquired Coinflation, a coin pricing business.
* In April, 2013, PCGS opened its first location in Mainland China, serving a burgeoning interest in gold and silver coins by the Chinese populace. Founded in 1986 in Santa Ana, CA, it expanded to Paris in 2010, Hong Kong in 2012, and then Mainland China in 2013.
The story of Collectors Universe seems to be one of a bad company gone good. Between 2005 and 2007, with the economy growing, gold climbing, and its revenues advancing, it managed a 76% decline in cash flow and a dive into the red in EPS, by Value Line data. That, and the crash of 2008 demolished the stock. But then, things started to change. Revenue remained flat, but cash flow and earnings came back from an atrocious negative 26% of sales and negative 32% of sales in 2008 to positive numbers in 2009.
In a picture, this is how Collectors has come back from the fiscal dead over the past five years:
In the bad old days, it paid no dividend. Then in 2007, it suddenly started with about a 3% average year's dividend. It dramatically upped that to 8.1% in 2008, and has gradually increased that to 10.5% in 2013, by Value Line's figures. That has dropped back this year so far, but it remains a fat dividend payer.
The cash flow from operations and EPS has been flat compared to EBITDA, as shown by the brown line above. The EBITDA cash flow has been outperforming revenue for the last five years, a condition I look for in a stock. I call this an "inverted cash flow curve", which suggests that management is getting better at handling its sales. The net income, for now, is the sore point, being relatively flat. But that hasn't kept it from being ranked #2 by the SmarTrend newsletter in the ranking done last month of the best consumer services companies in the world by ROE (return on equity). HR Block was first at 51%, CLCT comes in 2nd at 36%. That's extraordinarily high for such a small, little-known company.
All this improvement did not escape the eye of Forbes when, in November 2013, they announced that the company had been installed on their Top 100 Best Small Companies List at #50.
The Silver Syndrome
The improving management, nice dividend, and climbing sales are all good reasons to explain the buoyant stock chart over the last couple of years. But since some 67% of CLCT's revenue is from coins, there is one chart that perhaps explains what the stock is doing better than any other:
This looks very similar to the CLCT stock chart of the last five years, and suggests that the market is tying the stock more closely to post-'08 precious metal coin traffic than to the current earnings or anything else. A closer look at coins shows the stock may be following US Eagle minting even more closely than coins in general, as the big dip of 2012 in these coins matches the 2012 slump in CLCT:
(click to enlarge)
Management pointed this very thing out in reporting Q3 2012 results, when CEO Michael McConnell said:
Looking ahead, our coin business, and in particular our modern coin business, has started the fourth quarter with slower momentum than this time last year. Notably, year-to-date sales of Silver and Gold Eagles from the US Mint are down approximately 24% and 44%, respectively, as compared to the same period last year. This general market decline is impacting our customers who submit modern coins to us.
And they were glad to see the 2013 rebound in Eagle sales. In reporting Q3 2013, they said:
While this past quarter is normally our strongest of the year, coinciding with the new 2013 coin issues, we are encouraged by the current stronger coin market conditions overall, and with the increased production of gold and silver modern coins from the US and other mints around the world; we are optimistic about our prospects throughout calendar 2013."
Collectors Universe likes both gold and silver, but the market potential is vastly better with silver. You can see just how much silver coins are outperforming gold coins when you look at a direct comparison of coin sales yearly since 1986:
(click to enlarge)
Here we see that the explosive growth in coin sales since the financial panic of 2008 is almost entirely a silver thing. Is this marking a big return to silver being viewed as money again in its roller coaster ride through history, as pictured in the panoramic chart I show in the "Is Silver Money?" article?
Collectors' Game
Collectors Universe makes its money with traffic, by piece count, a fee for each individual coin. Assuming a roughly equal split of precious metal coin investment money between gold and silver, and the gold/silver ratio of around 65 currently, you would expect CLCT to be 65 times more geared to silver than to gold. And the above charts do show a much stronger correlation to silver than to gold coins. Actually, if you look at the most recent month's tallies for the number of new mint gold vs. silver coins sold, you get about 75 times more silver coins. Note that the above graph gives cumulative numbers, and for total dollar value going into coins from 1986 to now, gold has averaged a 3 to 1 advantage over silver. Currently, that ratio has radically changed to about even. If we do experience a return to silver being viewed as money via some US dollar turmoil, silver should soar from its depressed level much more than gold, and silver coin demand should soar even more than that, giving CLCT direct leverage to it.
Investing in silver is difficult. This particular stock removes many of the difficulties. Collectors Universe is a way to invest in silver without the spot price manipulation and suppression. Consider the vast difference between coin demand and spot price (shown in blue) in the first silver coin graph above. This stock also allows silver investment without having to pay fat premiums for coins over spot, and without having the storage problems and risk of large amounts of coins. To hold coins, you have to arrange and pay for storage and insurance, or worry about a bank guarding your safe deposit box with no FDIC insurance. Small deposit boxes are generally not cost-effective for bulk silver anyway. And you must wonder about what conditions may close a bank or prompt a bank to seal your box.
To own collector coins, you must pay a certification company like Collectors a fee of around $20 per coin. For a one-ounce silver coin, that means paying $40 for a silver content of $20 at today's prices. But the demand is still ferocious, and is clearly representing a widespread investor view of future silver prices and collector markets. And it may be reflecting an accessibility issue with the major metal exchanges, such as the COMEX. These exchanges trade metal as paper contracts, with real metal inventory for delivery being just a tiny fraction of contracts exchanged at ratios estimated as high as 100 to 1. In a sudden chaotic surge of physical delivery demand, these exchanges could default and shut down, leaving only coin shops for an outlet to trade silver. As the JM Bullion website's buyer guide section points out under "Disadvantages of Bars":
Generic bars produced by normal mints do not offer any kind of "collectibility" factor
The largest bars (10 oz gold bars or 100 oz silver bars) may be harder to trade in event of a crisis than smaller bars
And it could be added that even the smaller bars may be harder to trade than coins. Because of their legal tender status, coins are easier to cross national borders with. A currency crisis may truly be a complete historical return to silver being viewed as money - 1964 redux. No matter what your personal view is for silver prices or future collector prices, you do nothing with CLCT ownership but benefit from other investors' speculation and resultant coin traffic, and get paid a 6% dividend.
Why don't investors just buy junk silver coins (old silver coins with no collector value, pre-1964 in US coins) and avoid grading and certification costs? Well, there just isn't enough junk silver available nowadays for much wealth protection. Even modern minting can barely keep up with demand. "Out of stock" is a common description when you go shop. Even for small amounts, buying modern minted coins is much better investing. This is because of the "collectibility factor" mentioned above - and this is actually a very big factor.
ISN (International Silver Network) crunched some hard numbers on this value-added factor recently. If you had embarked on a monthly auto-save (buying a coin a month) for new American Silver Eagles graded MS70 (the top grade) between 1986 and 2011, you would have spent $27,672 on 312 MS70s at an average cost of $88.70 a month. Today, your collection would be worth $673,344. If you had bought 312 Eagles' worth of silver in bars or junk silver coins, you would have dollar cost averaged into the spot price of silver as it rose from around $6 to $20 now - something like a 4-fold gain, not bad. But the high-grade Eagles gave you a 24-fold gain. And we didn't even have a dollar crash. So this was for an insurance policy that never was used, and instead of you paying for it, it makes you filthy rich. This makes you want to slap your forehead and say, "What was I thinking in 1986?" It is this massive collectibility value that Collectors adds with its services.
In the event of a big dollar slump, CLCT would provide exposure to a likely boom in silver coin trafficking, but even now, in dollar-peaceful times (if you could call Bitcoin peaceful), silver coin demand is soaring and the stock is giving a nice return. In defensive, crisis-prep holdings, one typically has to suffer time decay pain with such things as the VXX, or complex options strategies, or accept a negative or uncertain return between times of crisis with gold or silver price exposure. Silver coin trafficking seems to bend those rules a bit in favor of a buy-and-hold defense strategy.
Silver is most commonly thought of as a currency devalue holding. But in a disturbed economy, deflation is sometimes predicted by doom 'n gloomers. It's really impossible to predict how much of either inflation, deflation, or bouts of both would occur in a monetary blow-up. But consider that in a deflationary economy, the high-grade, collectible coins like vintage MS70s in the example above would be priced at something like $2000 a coin, with $20 of that being the spot price of silver currently. That's 1% - the other 99% being collector value. Top-grade collectors are a somewhat isolated economy, most of them independently wealthy and not as drastically effected by the economy around them as the average consumer. If you are more of the average collector and you come down from the ultra-pricey top grade to auto-save nothing but the second-grade MS69s from 1986 to present, your average collected Silver Eagle would be priced at just around $72 now. But spot silver still makes up only 28% of your investment with the other 72% being collector value. To the extent that you go for new mint, high-graded coins, your silver holdings would be somewhat insulated from a bout of deflation. You could consider a microcosm of this to be 2008, when deflation certainly posed significant problem and silver was hit with a 50% sell-off. Yet, the Silver Eagle coin market certainly did not suffer.
The Problem With Coins
It should be mentioned that the coin dealer problems of the '70s and early '80s that prompted David Hall to form PCGS are still with us today. If you, as a novice collector, decide to go out into the coin dealer world to make a killing, you will be going up against some very sharp, often unscrupulous pros with a lifetime of experience, and yes, you will get taken in the fuzzy back and forth of coin values. That's why no coin shop should be your coin value guide - only one of the three authoritative grading services. PCGS gives current prices gleaned from taking averages among bona fide dealers. Coin shop problems were discussed in a goldsilver.com piece "Investor Beware: Numismatic Collector Coins" back in 2011, where a good warning was issued to numismatic babes in the woods:
... unless you are well educated and knowledgeable about these products, you cannot hope to profit ... In the event of a global currency crisis, all the growing millions of investors who have been hoarding their collectible coins over the past four or five decades will dump them on the market in a desperate rush for cash or liquidity. Should that occur, the value of premiums on numismatic coins, save those items whose rarity is absolutely indisputable, will tank. goldsilver.com, January 10, 2011 (italics added)
Indisputable values are what PCGS is all about. The "dumping" of hoarded coins onto the market mentioned above should be considered in the context of the bigger picture of what may happen in a currency problem. The "hoarders" with enough coin value to be of market significance probably make up something like 2% of the population. The 98% think the 2% are nuts. In a dollar implosion of any magnitude, the 2% would be selling a lot of their holdings, but the 98% would suddenly be buyers; 2% selling to the 98% would probably be good supply/demand for coin prices.
This massive difference between those who own coins and those who may want to own them later can be seen graphically in some interesting charts that PCGS keeps at its website. There are coin pricing histories for many different types of coins, but I'll show just one here, because it shows two important points:
This is average dealer pricing for old mint silver coins, namely the Morgan and Peace silver dollars that were minted up until 1935. The first point I want to make is that coin collector value is a very fickle thing. The stunning performance of new mint MS70 grade silver dollars in the above auto-save example is not repeated here with the old silver dollars. In fact, since 1986, this index has lost money. The crazy popularity of the new Silver Eagles is somewhat atypical. It has certainly become the silver coin of choice since it began in 1986. Note how very well the old mints were doing before 1986, for example, from 1981 to the late '90s - during the huge bear market in silver. Even after the horrible performance since 1989, these coins still represent a 3 1/2-fold increase in value from the peak in silver from 1980. The price of silver today is less than half of its 1980 peak. If only you had known to make the switch to the Eagle in 1986! This all brings up a major problem in long-term silver coin ownership - knowing what coin is going to be popular years into the future. And this is a major advantage of owning CLCT instead of a ton of coins, because this company is geared to coin traffic no matter where it is headed. So you don't have to know what the hot coin of the future is going to be.
Which brings me to my second point with the above chart. All the various PCGS coin index charts show this crazy spike topping in 1989. What in blue blazes happened here? When David Hall got the dealer act more or less together in the mid '80s, amid a budding new bull in the stock market, lots of people began to look at coins like stocks. This culminated in some major Wall Street firms offering new products. In February of 1989, Kidder, Peabody launched a $40 million coin fund, then a year later, Merrill Lynch offered a $50 million version. But this blitz of popularity in silver coins in the midst of just the beginnings of a loose monetary policy, and an economic recovery to beat the band, was producing no real lasting incentive to move big money into coin products. So the overheated price climbs ran hard the other way. Lawsuits were flung, even one at PCGS, and the lawyers forbade Wall Street from even using the word "investment" when promoting any coin product.
About the only one sounding any alarm about government debt, and the danger to the dollar, and the implications for coins during this 1989 coin craze was a nut named Perot. I wish he would run for President again. His campaign slogan could be, "I told you so". Think about this for a moment. Is the massive spike in the collector coin markets of 1989 a small taste of what any attention from big money would do in a currency crisis in our much more dangerous world of today? I've shown in other articles how incredibly small the gold and silver market is, compared to all the other nefarious financial instruments that have ballooned since the '80s. The 1989 phenomenon was over trivial amounts of $50 million or so, and we have umpteen trillion in garbage products now that will be shunned in any such crisis. It would drive money elsewhere. A currency crisis would radically refocus investor interest, and could produce unbelievable results in coins.
Another Thing To Consider About Coins
An added dimension of safety in coins vs. bullion against any total catastrophe with the dollar is the issue of face value. The Silver Eagle is legal tender at $1 which, compared to its $20 silver content, is irrelevant. But what if silver's spot price suffers at least a temporary decimation in a dollar crash? The Eagle's face value may not be all that significant, but you can buy that same 1 ounce of silver in the Canadian Maple Leaf that has a $5 face value in Canadian dollars. And in a world where a gold and silver-bolstered Chinese yuan may be the last major currency standing after a crash of the fiat system, you can move money into both silver, gold, and yuan with the Chinese Pandas. There are one-ounce silver Pandas with a 10 yuan face value. That's 60% more currency value than the Silver Eagle's dollar, at today's exchange rate. That number would, of course, skyrocket in a dollar debacle. The yuan is not a convertible currency, so it's a bit more hassle to move around now. But some think it may become fully convertible around 2015, which could greatly accelerate the dollar's growing unpopularity in the international community. It's so karma that in the Chinese language, "yuan" means "the people's currency", as opposed to "the bankers' chicanery". And at first, the word meant "lump" after the original yuan centuries ago, which was a lump of silver.
Jim Rogers has decades of history of being ahead of major trends in hard assets. Lately, about everytime you see him on your screen, he says to buy the same three things (other than gold) - buy yuan, buy Pandas, buy agriculture, and buy often. He loves Pandas, and even has his daughters wearing bracelets inlaid with Panda coins. He has been known to plunk down over a 1/4 million dollars at a time in China's shops buying Pandas. On a recent TV interview, he apologizes for being late, but explains that he was out buying Pandas and promptly pulls some of them out of his pocket to show them off.
(click to enlarge)
I should probably add here that die-hard gold and silver fans like Rogers and Peter Schiff are not big fans of high numismatic value, which they say will crumble in bad times. On the other hand, I mentioned above that the higher-grade collectors tend to be independent of the economy. It's really impossible to say what the pricing power of the nicer coins would be like in future hard times. But if you examine the PCGS 3000 index, chart, which is the higher-value coins of all types, not just silver and gold, you see that, across the atrocious cataclysm of 2008, this index actually went up about 5%.
CLCT Market Behavior
But CLCT is a stock, and 35% of its business is baseball cards and non-coin collectibles, which are all linked to the economy. Won't a stock panic from a currency crisis slam this stock too? In its standard cautionary statement, it points this risk out, but it also highlights its strong linkage to the precious metals markets and:
our continued dependence on our coin business which generated more than 60% of our consolidated revenues and a substantial portion of our operating income in the year ended June 30, 2013, making our operating results more vulnerable to conditions that could adversely affect or cause stagnation in the prices of precious metals and collectible coins..."
Its stock seems to be much more in tune with coin demand than the price of the metals, and there is not much stagnation in coin demand. While CLCT is a stock with a third of its sales from discretionary spending, its resilience to stock sell-offs has improved dramatically since it was a relatively bad company in 2008 and before an increasing focus on coins. The stock showed good strength over the August 2011 banking-related, fear-driven sell-off (the VXX here spiked to the 2008 level), and the stock has totally ignored the past few weeks' market correction:
(click to enlarge)
Here we see that the 2011 smack-down actually had CLCT following the gold spike up rather than everything else down. And with calm stock seas in 2012, CLCT follows the big dip in US Eagle minting down, rather than creeping up with everything else. The stock now appears to be ignoring the stock market and following mainly whatever silver coin demand does. This is understandable when you consider that before 2008, modern bullion coins made up only about a 30%-40% share of the PCGS segment's revenue. Now, they aren't making any more of the coins valued just because they're very rare, but they are making a new flood of modern silver coins. And coins, most of which are modern silver mints, are now 67% of the revenue of the whole company. With its aggressive expansion into China, this figure will likely be climbing fast.
As a defensive holding, Collectors focuses on just the small defensive slice of the silver pie:
In an economic crisis, they won't be using silver coins to make cell phones. All of the above pie is offense, except the Collectors piece. For an example of how this dynamic works, consider the big recession year of 2008. The price of silver lost 27% on the year, while the number of Silver Eagles sold not only avoided a loss, but rose 100%! The average Eagle price dipped, but the coin's traffic (CLCT's bread and butter) exploded higher.
Silver coin demand is becoming a market unto itself since 2008, when investor attention was redirected to money printing and future currency confidence. The money printing, and the conditions that cause it, continues unabated by the eight central banks. And until that whole situation goes away, coin demand will continue to grow. If Collectors Universe has much more sensitivity to silver coin demand than spot price, the economy, or the stock market, it could be an alternative silver strategy worth considering.
Additional disclosure: I also own Pandas (not as many as Rogers)
http://seekingalpha.com/article/2206843-collectors-universe-an-alternative-silver-strategy?utm_medium=referral&utm_source=t.co
Join the InvestorsHub Community
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
