Thursday, May 25, 2006

Third Party Research

We all know what brokerage reports on securities are really worth, even without seeing what percentage of them have Buy ratings. Both we and the SEC expect a lot more from "third-party research". A few days ago, in the light of the commodities nosedive, I wanted to see what the soothsayers say about Mesabi Trust (MSB), a natural resources royalty trust, so I looked at the Weiss Ratings report on the stock. Weiss Ratings reports have a good reputation.

What I found was a report of which parts make no sense in reference to a royalty trust, giving me the suspicion that the report was manufactured by plugging a few data points into a canned form.

"MSB has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. To add to this, MSB has a quick ratio of 1.78, which demonstrates the ability of the company to cover short-term liquidity needs."
Well, a royalty trust normally has little or no debt; I'm not even sure that the law allows them to have significant debt.

"MESABI TRUST has improved earnings per share by 18.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. During the past fiscal year, MESABI TRUST increased its bottom line by earning $1.58 versus $0.99 in the prior year."
If you consider the way metals prices have risen in that period, and the fact that 100% of MSB's earnings come from the sale of metal, this is hardly surprising, but it's not at all clear what significance it has for the future, if any. Most likely none.

"The company's dividend is higher than 90% of the companies we track."
Not surprising, since the law requires them to distribute almost all of their profit as a royalty, which the canned form calls a "dividend", presumably by mistake.

There are about three lines of apparently human-written information in the report. However, a comparison between the language of this report and those on other companies support the impression that this is canned luncheon meat. Although the chart showing the comparison between share price and the Weiss recommendation for MSB shows no problems - for the duration of the two-year metals run Weiss has rated them a Buy, and the stock has indeed been profitable - a comparison of their own chart in other reports suggests that there is almost no correlation between their recommendations, or even changes in their recommendations, and the stock price. I just looked at the Weiss report for Chiquita Brands (CQB), for example. Look for yourself.

Once again, the Ouija board proves its superiority to the opinions expressed in most stock 'research'. At least its recommendations don't come from an irrelevant canned form.


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