Youngevity Preferred Stock About To Bring In Over $7 Million - How To Play This
Sep. 23, 2019 1:31 AM ET|4 comments | About: Youngevity International, Inc. (YGYI)
Spencer Osborne
Spencer Osborne
Growth, value, special situations, momentum
(4,052 followers)
Summary
Youngevity preferred stock will trade under the ticker YGYIP.
The company has already placed up to 333,500 shares at $25 per share.
This preferred stock pays 9.75% interest per year.
Youngevity (YGYI) has just removed a bullet from those which were playing the short side of this equity. For a couple of years, the company has been operating on a cash position that was less than desirable, even while the story of the growth in the company was getting materially better. It appeared that Youngevity was always cutting the cash line very close. This allowed those playing the short side to pretty much always count on some form of dilution. Then, the pressure on the CBD and THC space began to build. Bloated valuations with many companies in the space brought sector-wide sell-offs. Youngevity, a company that never really got to see much of the bloated valuations, got caught up in the mix. Add to that confusion about the very stark differences between THC products and CBD products, and you had a situation that was less than ideal.
Over the past 6 quarters though, Youngevity has seen its EBITDA grow better, its coffee business mature, and its hemp business ink some impressive deals. In fact, Youngevity is, in my opinion, on the cusp of reporting a profit in Q3 of this year. The company needed to make a bold move to separate itself from everyone else. It needed to take the ammunition away from the short traders. The preferred stock play can accomplish that.
What Youngevity did was turn its preferred stock into a bond of sorts. This allows the company to sell the stock, collect the proceeds, and simply have to pay out 9.75% per year in interest. Here are some of the attributes of this deal:
It does not dilute the common stock.
These preferred shares act as a bond of sorts.
There are no warrants or coverts (along with their toxic properties).
The preferred stock has more liquidity than bonds. If a holder wants out, he simply sells to another player who wants to make 9.75% interest.
This puts over $7 million in the coffers of the company at a rate it would have likely had to pay anyway with bonds.
This keeps the debt load carried to reasonable levels.
The company has more preferred, which it can use at any time to obtain cash.
Additional shares and the cash tied to them allows the company to be flexible.
In my opinion, a major part of the short thesis has just evaporated, and if Youngevity can announce a profit in Q3, another component of that thesis vanishes as well. This could set up a perfect storm for the end of the year, and could set up for some very nice quarters throughout 2020.
So, what might a savvy play be here? If you are a YGYI holder, should you consider becoming a YGYIP holder? It's an interesting thought. In my opinion, it depends on if you feel you hold too many shares of YGYI or are entering in order to establish a position. These two stocks are very different vehicles. The common stock will be much more volatile than the preferred. Remember, the redemption for the preferred is always $25 per share, so that stock should rarely move. The preferred is a conservative play on collecting a decent interest rate, while supporting a company which you may hold common in.
One strategy could be to acquire some preferred stock and to use the interest collected to increase your shareholdings in the common. Boil it down, and you can build a position in YGYI using Youngevity money. Another strategy may be to sell a small portion of common on a pop over to acquire some preferred stock and remove some risk from your plate, whilst still participating in the company via a now smaller common position. It's not very often that the average retail investor gets to play bond-like instruments in the market.
The last insight I will share is this: the CBD and THC space has also caused some headaches in financial institutions. There has been a massive hiccup with what is 100% legal and what is not, and how federal laws vs. state laws play into these matters. This confusion means that I can virtually guarantee that there are players which wanted to participate in this offering but could not because their institution has not yet established its own internal guidelines within the space. With each passing month, more clarity comes into the space, which frees up more investment dollars. Any of those players that were eager will be able participants in a future offering, or will perhaps become an investor in the common stock once they can.
Let me be clear, if Youngevity was not on the cusp of being profitable I would not be as bullish as I am. If it did not have a top-of-the-line coffee business, I would not be as bullish as I am. The dynamics at Youngevity simply do not exist within other companies. Over a year ago, I stated that Youngevity could be the safest CBD play in the market. I still feel that way. This company allows you to play the CBD space with a safety net of coffee and direct selling. It allows you to play the coffee space with a safety net of direct selling and CBD. It allows you to play the direct selling space with a safety net of coffee and CBD. This is a very well-rounded company on the cusp of profits, some big deals, and a potential short squeeze as all of this comes together. Stay tuned!
Disclosure: I am/we are long YGYI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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