Avoid This Company

There's no nice way to say this, some stocks and companies are patently offensive. They employ business models that are purposefully opaque and their executives enrich themselves unconscionably at the expense of shareholders. In the following video, Motley Fool contributor John Maxfield explains why American Capital (Nasdaq: ACAS  ) fits this description to a tee.

After watching the video, if you're looking for stocks that aren't similarly unpalpatable, check out our free report: The 3 Dow Stocks Dividend Investors Need. It's absolutely free, so just click here and get your copy today.

John Maxfield has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (28) | Recommend This Article (30)

Comments from our Foolish Readers

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  • Report this Comment On October 09, 2012, at 4:23 PM, DividendDude wrote:

    MF: And you wonder why most investors laugh at advice from Motley Fools - this is a classic example of the low-quality authors that you allow to publish on Motley Fool. I don't think you can do anything to reverse the damage caused by Fools like this - maybe there's more in your name (Motley Fools) than you realize.

  • Report this Comment On October 09, 2012, at 5:15 PM, billr861 wrote:

    By the author's own admission he does not understand how this company operates. Yet he obliviously gives them a horrible review. How can a responsible review be given on a company that the reviewer admits he does not understand. This was a very unfair review, a totally biased review based on zero understanding of how this company operates. He needs to stick to reviewing companies that he understands.

  • Report this Comment On October 09, 2012, at 5:31 PM, njmiles03 wrote:

    Studying the history of the company would go a long way to helping the author understand ACAS. Not rocket science.

    I would suggest that if the author is so confident in his analysis of ACAS, short it.

  • Report this Comment On October 09, 2012, at 9:17 PM, snidelyyours wrote:

    I'm afraid this is a know-nothing analysis that shows no understanding. There is nothing opaque about ACAS. They've done what they say they are going to do -- at least since they bottomed out. We await the end of the tax write-offs before the company can start paying divvies again. In the meantime, the price of the stock has gone up due to large stock buybacks. When the divvies hit again (2013-2014 estimated), then there will be fewer shares and more divvies per stock -- which will drive up the price. The turnover of portfolio companies has been profitable. Unless someone does not understand the nature of BDCs, I'm not sure what is to not understand? True, its easier to understand what Chipotle does, since it does but one thing (albeit well!). Perhaps the author is simply too simple-minded for this type of investment? If Peter Lynch said, buy what you know, then if you can't understand this is not the right stock for you. But simply one's own's intellectual limitations do not call for trashing a business that has done a remarkable turnaround. I'm sad that the Fools I have long respected would give an admitted know-nothing a chance to opine about what he can't grasp. While there may be a place on the discussion board for it, it certainly should not carry the editorial stamp of approval given to professional content on the site, IMHO>

  • Report this Comment On October 09, 2012, at 11:19 PM, scromp wrote:

    Hi John, good opinions, but looking at the company at the whole I think you are missing the big picture. The 14 million or whatever for the CEO is worrying and something to certainly question. But it is fine if you are a 3 billion dollar company. Personally I managed a 1 billion dollar bond portfolio and my CEO was paid junk - and he was worth junk! I am a CFA, was CPA, got a degree in mathematics and I have studied the 10Qs of the companies that these guys manage. And to be honest, being the in the same spot a few years ago, these guys are pretty darn good and I am happy to give a few $ to let them manage my money even if I could do better (less hassle). stop looking at the past and look to see if the business has any leaks in the future? Seriously, I am looking forward to your next post. You guys generally do very good work. Check that work and get back to us. Many thanks for your time.

  • Report this Comment On October 10, 2012, at 8:37 AM, ArielBarkai wrote:

    Now I understand why this website is called Motley Fool...because any fool can say anything they want and call it "financial advice"...the moment he copped to the fact that he did not know how to analyze the company he should have stopped talking about the company and left it to companies like JPM who have called this company one of their favorite ideas in specialty finance. Last time you will see me in these foolish parts...adios!

  • Report this Comment On October 10, 2012, at 9:16 AM, JTMcGee wrote:

    Bookmarking this article to come back in a year when ACAS has outperformed.

    P.S. - ACAS's books aren't half as complicated as you're making them out to be.

  • Report this Comment On October 10, 2012, at 9:46 AM, JohnMaxfield37 wrote:

    JTMcGee, et al.

    Three questions.

    First, If ACAS is such a simple and quality investment vehicle, why does it trade for 70% of book value?

    Second, why would you trust a company that nearly drove itself into the ground but four years ago?

    Third, are you content with ACAS's migration into an mREIT manager? Before answering this, remember two things. First, the mREIT space is crowded, driving up MBS prices. Second, profits in that space are wholly dependent on interest rates. And third, the management fees are a pittance compared to the potential profits from a well-run PE portfolio -- note the "well-run" qualifier.

    One comment.

    As to a JPMorgan analyst claiming that ACAS is or is not one of their "favorite ideas in specialty finance," I probably wouldn't put much credibility in that. To JPM, the typical investor is nothing more than liquidity.

    John

  • Report this Comment On October 10, 2012, at 9:58 AM, Kingla wrote:

    I'm speechless. This guy shouldn't be writing financial articles. I would suggest that he look at the last 2 years performance both in stock price and NAV gain and try again.

  • Report this Comment On October 10, 2012, at 10:30 AM, Nailpick wrote:

    Is not the goal at the Fool to profit from investing?

    .69 low in 2008 to a high of $12. just last month sounds like it hit the mark .

    Mr. Maxfield, ACAS is very profitable today. They did not go bankrupt and never defaulted, not even technically . Management trimmed and refocused their objective to which shareholders are reaping the benefits of an ever increase NAV and operational income.

    How does this not fit in the MF get rich through opportunity?

  • Report this Comment On October 10, 2012, at 10:42 AM, JohnMaxfield37 wrote:

    Nailpick,

    You're exactly right. Our objective is to profit from investing.

    But both good stocks and bad stocks go up. For example, you could have said the exact same thing about Enron or Lehman before their respective falls. You could have even made the same argument about Bernie Madoff's "fund." In retrospect, however, were they good investments?

    Ultimately, people should invest in whatever they feel will benefit them the most. I personally don't think ACAS is a stable long-term investment vehicle. I really dislike it. Take that for what it's worth. But at some point, people will get stuck holding the bag.

    John

  • Report this Comment On October 10, 2012, at 11:03 AM, Kingla wrote:

    You sound like it is inevitable that ACAS will collapse. Comparing ACAS to frauds like Enron and Madoff?? Really??

    There is so much cushion built in due to the discount to NAV and the lack of leverage that your hypothesis is highly unlikely. When coupled with the continuing significant stock buybacks the risk reward is excellent.

    This may be the worst analysis I have ever seen on the fool

  • Report this Comment On October 10, 2012, at 12:08 PM, JohnMaxfield37 wrote:

    Kingla,

    The point is that recent stock performance alone isn't sufficient evidence of a company's quality.

    With respect to NAV, that's a subjective valuation arrived at by people with an incentive to inflate it.

    The risk/reward profile you talk about is a moving target and arguably impossible to pin down.

    At the end of the day, if you're long on ACAS, I hope you're right and that you make a lot of money.

    That said, I think it's an egregiously misrun company that's migrating out of desperation into a crowded market.

    John

  • Report this Comment On October 10, 2012, at 12:40 PM, NotMyBusinessBut wrote:

    Mr Maxfield,

    Your misunderstanding and misrepresentation of ACAS is both reprehensible and irresponsible.

    You make SO MANY errors in your assertions that my fingers ache at the prospect to rebut each one, so here are just the highlights.

    #1) ACAS almost drove itself into the ground

    ACAS never missed a payment to its lenders. ACAS's NAV never went below $7/shr. ACAS was never at risk of going under. Period. They were in technical default of their loan covenants and they worked out a restructuring.

    Yes, their stock price went <$1, but of course as a stock market expert, you know that a company can't control what their stock sells for .. especially in a financial crisis where the survival of the world financial system was in doubt.

    #2) ACAS is unintelligible:

    Of his idea that analysts can't figure out ACAS is simply false on its face as there are several recent reports out. Well Fargo. Stephens. JP Morgan. Yea. .... no one can figure this out .. what a ridiculous comment.

    Yes, ACAS is a BDC which has a very large portion of its assets in equity .. and that makes them different.

    Yes, ACAS has and has had an asset-management competent (which is growing)

    Yes, the fact that ACAS is different makes it hard CURRENTLY to value like its peers in the BDC space.

    But to look at those facts which mean that ACAS is undervalued when you examine its component parts and therefore you should invest in it .. is absolutely ridiculous.

    THAT'S HOW YOU FIND UNDERVALUED COMPANIES!!! .. EVER HEARD OF BUY LOW and SELL HIGH?

    ACAS's Q2 NAV was >$16 and is selling in the $11's for Pete's sake. My analysis is that Q3 NAV will be in the high $17's.

    NAV is growing. Income is growing.

    In Q3, they bought $125M of their own shares at a 34% discount to NAV. That increased NAV for their shareholders by $42M alone.

    #3) If you know anything about ACAS, you'd know they they have been telegraphing a restructuring in which they will create a new BDC/RIC in which they will put their debt-assets, which will likely pay ~7% dividend based on NAV. The remaining company will reorg as a Diversified Holding Company and their control assets will be consolidated onto their balance sheet.

    So .. you have a company which doesn't fit easily into a single catagory and thus is under valued .. but is performing VERY WELL .. and has hinted that it will be breaking-up into more classically aligned businesses so that each component can be fully valued in the marketplace.

    .. and you wave people away from that opportunity? People look their entire investment lives for an under valued investment opportunity like this.

    NMB

  • Report this Comment On October 10, 2012, at 12:52 PM, NotMyBusinessBut wrote:

    PS ..

    It is CLEAR that you purposely generated a false and inflammatory post associated with ACAS so that you can generate screen views.

    I for instance never post or read MF'ing articles because they are generally useless or wrong .. but your strategy worked in my case as I just had to respond.

    What you are doing and the strategy you employed is unethical .. and it certainly isn't journalism.

    NMB

  • Report this Comment On October 10, 2012, at 1:09 PM, Nailpick wrote:

    Ditto that!

  • Report this Comment On October 10, 2012, at 2:04 PM, JTMcGee wrote:

    First, If ACAS is such a simple and quality investment vehicle, why does it trade for 70% of book value?

    --------

    John, you're writing for Fool.com. If you don't think that companies are mispriced during some periods of time, then I'm not sure why you're here. There is some opacity in the book value, but anyone who has listened to management knows how the pieces of the firm are valued to get the sum of the whole. Portfolio companies are valued at EV/EBITDA multiple of 5.5, for example. Did you know that when you made this video?

    Many investors like yourself fail to do stringent due diligence before making an investment, hence many companies trade at obscenely low valuations, assuming instead that the market is always rational.

    As NMB said very well, the company is in between two camps - it's really part BDC and part diversified holding company. An eventual spinoff will correct much of the discount in valuation.

    ---------

    Second, why would you trust a company that nearly drove itself into the ground but four years ago?

    ----------

    It didn't. The financial crisis drove it into the ground, as did FAS 157 mark to market requirements. The company triggered debt-to-asset convenants at that time. It was a poor time to be highly-levered as ACAS was, but you cannot predict events like those. I don't blame management for failing to have a crystal ball.

    More importantly, management is clearly not doing what it was doing in 2006-2007. While the portfolio is mostly equity, it is also significantly delevered relative to the make up of its portfolio in 2006-2007. Please look at the financial statements to observe this for yourself.

    ---------------

    Third, are you content with ACAS's migration into an mREIT manager? Before answering this, remember two things. First, the mREIT space is crowded, driving up MBS prices. Second, profits in that space are wholly dependent on interest rates. And third, the management fees are a pittance compared to the potential profits from a well-run PE portfolio -- note the "well-run" qualifier.

    ---------------

    The mREIT space is crowded, but American Capital LLC. is a leader in that space with both AGNC and MTGE. Secondly, the profits in that space are unreal - and will continue to be for quite some time. Third, management fees are paid to American Capital LLC., which is a wholly-owned subsidiary of ACAS. Basically, American Capital LLC is a PE investment on ACAS's part.

    "And third, the management fees are a pittance compared to the potential profits from a well-run PE portfolio -- note the "well-run" qualifier." Do you really believe this?

    American Capital Ltd. (ACAS) has a minute amount of investment capital tied up in MTGE and AGNC. The amount of money it takes to launch a new fund is so incredibly low, and ACAS is very good about displacing its seed capital with investor capital, while boosting management fee revenues year after year. Look at the ROCE for American Capital LLC as an asset manager - the returns are incredible. I'd love for ACAS to continue to work as an asset manager, as it makes a disgusting amount of money on these funds while tying up tiny amounts of capital in the business.

    John, you should have saved everyone the time. You should have said what you could have said in 30 seconds - "I don't understand this company, so I won't invest in it."

  • Report this Comment On October 10, 2012, at 2:12 PM, JTMcGee wrote:

    John,

    I have to say, this was a good followup to your last ACAS piece, in which you thought buybacks at $8.50 per share were ridiculous: http://www.fool.com/investing/general/2012/02/07/the-truth-b...

    High five!

  • Report this Comment On October 10, 2012, at 2:41 PM, JohnMaxfield37 wrote:

    JTMcGee,

    Look, I understand you all disagree. And like I said above, I hope you're right. Time will tell.

    As a sidenote, I still believe the buybacks are imprudent, though I commend your trust in ACAS's NAV valuations.

    John

  • Report this Comment On October 10, 2012, at 3:05 PM, fuuugly wrote:

    Clueless - nuff said. I used to value MF articles - community being diluted by worthless analysis like this is a shame.

  • Report this Comment On October 10, 2012, at 3:20 PM, scrogus wrote:

    Lots of comments from people here who are only interested in confirmation of their conclusions and trashing any dissenter. I saw a ton of this during the dot com boom and it scares me.

    I like AGNC and it has a great track record, a clear business plan and clear accounts. On the other hand, I am concerned with ACAS' history and the management issues it has had. I don't know where I come out, but I know I don't appreciate "clueless - nuff said".

  • Report this Comment On October 10, 2012, at 8:21 PM, Kingla wrote:

    John,

    Well we will just agree to disagree, just as I did on the buyback article written some time ago.

    History is really not on your side regarding the assertion that NAV is somehow inflated. Do you really think the auditors are asleep at the wheel and would allow a Company to report inflated assets? In these days of Sarbox and the like I highly doubt it.

    With that said this is one of the few articles I have ever read on the MF where there isn't 1 comment that even remotely agrees with any of your assertions. I would take the blinders off on this one.

  • Report this Comment On October 11, 2012, at 11:00 AM, NotMyBusinessBut wrote:

    Mr. Maxfield,

    "though I commend your trust in ACAS's NAV valuations."

    Now this comment really shows your unprofessionalism. In this comment you simply cast aspersions without ANY BACKUP, without ANY INFORMATION. How ridiculous.

    - Have you ever read their 10K/Q?

    - Have you listened to any of their conference calls and/or read through their published presentations?

    If you had, you'd know that there is ACTUAL EVIDENCE that ACAS's realizations since 2008 were actually 1.7% over the prior quarter's valuation.

    (slide #33, here is the link: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...

    On what bases after you see this chart do you make your claim? .. or are you one of those "cherry picking" conspiracists? If so, then look at slide #53, which shows that the realizations hasn't resulted in a degradation of the remaining portfolio .. a natural result if the realizations were cherry-picked.

    ACTUAL information is what is expected by professionals and what is needed by potential investors, not baseless and false aspersions.

    NMB

  • Report this Comment On October 12, 2012, at 8:50 PM, ahdl wrote:

    Please correct me if I misrepresent you. As I take it, you say that compared to its peers:

    1) ACAS is impossible to value

    2) ACAS has underperformed

    3) In part because of the above, ACAS' management is overpaid

    To which I'd say, in reverse order:

    3) Unfortunately, you can argue that almost any management has taken excessive risks on behalf of shareholders while taking excessive rewards for itself. But the fact is that the company didn't default on its debt, undergo punitive dilution, or go out of business. That's more than you can say for BDCs/managers like Brantley Capital (remember them?), GSV Capital (now SAR), or even BX, which has an executive compensation structure which borders on the extortionate. BX is down 60% from its peak, vs. 80% for ACAS; hardly worth a hosanna.

    2) ACAS has underperformed BX (and it's also survived as a public company through more business cycles, but whatever), though BX, as noted above, hasn't been setting the world on fire. But ACAS has actually outperformed both LM--a fairly plain vanilla asset manager, a household name, and roughly the same market cap--and FIG, among others. Suffice it to say that it's not the worst.

    1) Yes, ACAS is difficult to value and, yes, it has a lot of moving parts and, yes, its business is evolving. However, all that is true of BX as well. I think it's worthwhile to note that while you criticize ACAS for having essentially three business lines, BX has five, along with a convoluted ownership structure.

    Just sayin'.

  • Report this Comment On November 26, 2012, at 10:52 PM, sonofamram wrote:

    What is up with the grin?

  • Report this Comment On March 12, 2013, at 11:56 AM, jsbacker wrote:

    Uninformed vendettas are the worst. Pretty much everything you have said is rubbish, and the more time that passes between this review and the present, the more ignorant you are revealed to be.

    Please do more due diligence about a company before you speak, or just refrain from opening that smirky mouth.

  • Report this Comment On March 13, 2013, at 10:51 AM, bg4value wrote:

    Good call chief. Any other short ideas.

  • Report this Comment On March 30, 2013, at 9:18 AM, bellard wrote:

    Why does MF allow these guys to publish this crap! Also look at his CAPS rating....

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