Author: Taj McCree
Covestor model: Value and Growth 2
Disclosure: Long GNI
To kick off the launch of this new model, let’s take a look at Great Northern Iron Ore Properties (NYSE: GNI), where I’ve taken a long position. My strategy on GNI is to collect dividends and aim to sell before the position drops below my acquisition price.
This iron ore-based trust is supported by the growing Chinese and Brazilian economies and their strong focus on industry. The reason for choosing GNI is largely based on its generous quarterly dividends. With these dividends, GNI brings an approximately 11.4% yield (as of 9/2/11, via Yahoo Finance https://finance.yahoo.com/quote/GNI?ltr=1, a nice yield bump over its direct competitors Cross Timbers Realty, Sabine Royalty Trust, San Juan Basin Royalty Trust and Mesa Royalty Trust.
While year to date GNI stock price is well within negative territory, the company’s financials and the demand for its product suggest price stabilization over the long term.
The trust is scheduled to dissolve in 2015, and I expect short sellers will enter the market particularly heavily in 2012-2014 in anticipation of a falling price ahead of that event. My plans are to hold this position for a few years, collecting the dividend. I’ll ignore cyclical dips, but plan to pull out as the liquidation date arrives, to avoid the uncertainties involved at that point.
Some Disagree
In a recent article on Seeking Alpha, Alan Brochstein stated “this stock is priced insanely wrong.” Brochstein suggests it should be valued between $7-8 (“Great Northern Iron: Perhaps the Most Overpriced Stock I Have Ever Seen” Alan Brochstein, 4/7/11, Seeking Alpha https://seekingalpha.com/article/262250-great-northern-iron-perhaps-the-most-overpriced-stock-i-have-ever-seen).
However, Brochstein’s analysis is based on the proposed liquidation price when the trust is dissolved in 2015 and the stock ceases to trade on the exchange. Shorters have already entered the market for GNI. The question for investors is not will the stock decline (we know it will), but when. I believe we have two years, by which time the model will have collected significant dividend income. The stock price would have to fall substantially by that time before that dividend income is completely offset, and I believe that is unlikely.
