I’m still doing some work trying to understand the railcar and coal industries, motivated largely by my feeling that RAIL represents a great opportunity. With 80% North American market share in the coal car manufacturing and with the substantial majority of the company’s business tied up in delivering to this market’s participants, it’s clearly an important item of research.

The industry is in a bit of a bubble, some say, that will burst within the next few months/years. Nonetheless, I think this may be a good time to by RAIL, since the bearishness on the industry going forward in the short-term has left the stock under-appreciated and poised to break out over the next few years, as coal has become a more long-term viable and growing business.

Things I like about the company:

- Great market share

- Working to diversify its revenue stream by offering cars catered to the needs of other buyers (not just coal transporters)

- Great returns on capital and respectable margins

- Growing institutional interest given Buffett’s recent railroad purchase and the cheapness of the stock

- Transparency of a good chunk of the next year to two year’s revenue given the nature of contracts with customers and order backlog records.

Things I don’t like:

- Cyclical business

- Product with long life-cycle, dependent upon spotty orders and infrequent repeat business for replacements

- My own uncertainty of the coal industry

I had some entirely unsuccessful and obfuscating conversations with Heron Public, Eternal Technology’s investor relations department. The failed to follow up on some simple questions (like “who are your major customers?”) and had trouble understanding what I was asking for others.

Language barriers are a problem, so I won’t fault the company for this (yet). I still think the opportunity, if nothing lurks beyond the surface, is interesting and enticing. I bought a small chunk of stock weeks ago and have seen a nice return following the 5% stock buyback announcement. I don’t think it’s all that great news, given that the company has been massively dilutive in its issuance of lots of shares, often at cheap prices (not a spectacular sign).

Yet the multiples are still dirt cheap (less than 65% of my estimated book value and at a PE multiple that will make you salivate) and I figure it’s worth the calculated risk given the small stake and possibly large upside. The verdict is still out on whether the business model is sustainable, but the downside risk exposure of massive failure in the operations of the business anytime soon is virtually nil.

Clearly I checked out from writing in June. But I’m back from that little hiatus, and I’ve decided to write more concise, to-the-point articles that will allow me to be more prolific in July. I’ve been thinking that I’m at the point where I have a bunch of ideas, but just don’t have time to share them in the the standard, longer article format. I’ll start with a few rapid-fire posts…

I was having a conversation with a reader earlier this week, and we both got to talking about the vast number of investment schemes peddled everywhere from newsletters to the internet to television. There’s a surprising lack of good advice on how to spot it and a disturbing failure on the part of many consumers to research products and advice. So I’d like to provide my own checklist of things to look out for when considering the purchase of advice, services, or products promising to make you tons of money. These are a few telltale signs of ripoffs and garbage that simply isn’t worth your time or money. The list is not exhaustive, but offers what I believe are some good things to investigate or think about when considering the purchase of investment advice or education.

1) Promises or guarantees of excess returns, especially in a short period of time. Whenever you read or here some charlatan sharing his “magic formula” for investing success that made him millions or some “testimonials” from “average folks” going from rags to riches and making a fortune in the market, be aware. If you believe their claims are genuine or you’re not sure, always ask yourself both how long it took them to do it and how much they started with. After all, anyone could make a hundred thousand dollars in a year if he started with $2 million. But if someone says he started with $1000 and in two years turned it into $1 million, run and run fast — never trust claims of 100,000% returns. There is simply no method that yields huge returns which is not extraordinarily risky and leveraged, meaning that that person could just as well have been in debt $1 million.

2) Lack of SEC registration as an Investment Advisor. A really simple way to spot something that might be shady is to check whether the seller has registered with the SEC. It is illegal for anyone or any entity to directly sell investment advice without notifying and filing with the SEC as a Registered Investment Advisor (RIA), and, trust me, anyone who is legit will surely share it with their customers, usually upfront and center. Now, things get a bit fuzzy because general investing education programs, newsletters, etc. usually do not require registration and can still charge for services. Nonetheless, if you don’t see the SEC’s stamp of approval, consider avoiding it. It’s also important to note that the presence of RIA status should likewise not be taken as a green light — plenty of registered advisors are not to be trusted. In any case, it’s just another clue to take a look at.

3) Lack of documented and verifiable returns or success stories. If an investment advice peddler is charging for services, be sure to get or ask for a track record, study, or other verifiable data demonstrating that the system or advice is sound and, well, works. Any idiot can start a website with a stock-pick newsletter, or a “system” for large, imaginary profits, but of the many, many programs out there, few will show you documented or audited results and even less will share any study indicating that their way works (for instance, by back testing). Of course, it’s easy to fudge numbers and take some liberty in creating phony returns, so the more rigorous and verifiable the data, the better.

4) Lack of a free trial. If someone is offering a “system” or regular newsletter for investing success, they’ll usually offer some sort of free trial period if they are legitimate, to allow you to test out the product before committing to buy it. If they want to get you locked in to the product and don’t offer the opportunity to test it, think long and hard before buying it.

5) Money back, satisfaction guarantees. I’m honestly a bit conflicted on this point, but here’s what I think. On one hand, if a company is not willing to put its own money where its mouth is, why should you? On the other hand, because around 70% of products are never returned even when fraudulent or stupid, even a scam artist can make such a guarantee and come out on top. So while most companies offer either a money back guarantee or a trial period (but not both), all things equal, I prefer the trial period. If it’s missing either, don’t bother.

If a company does offer a money back guarantee, it’s important to note that they should be guaranteeing “satisfaction” and not excess profits, since, as we discussed above, that’s usually another sign of a ripoff. No legitimate source — not even the best investors themselves — would ever tell you they can promise excess returns. Remember, you can still lose a ton when someone promises you profits, and simply getting your $200 back from the guarantee won’t recoup the $10,000 you lost using crappy systems, advice, or stock picks. And in some cases, the company may never even respond to your request to get your money back. Which leads me to the last point:

6) Check the BBB. The Better Business Bureau is a great resource for consumers looking to investigate the actual satisfaction of customers. It’s not perfect since many dissatisfied customers fail to report (indeed, many consumers in general don’t even think about reporting). But it’s another indicator. A fair number of irate customers is a definite red flag, so keep an eye out.

I’ll try to edit and fill into the list based on reader’s suggestions and anything else that comes to mind. So if you can think of anything you’d like to add, contact me.

Every investor is familiar with Moody’s and Standard & Poor’s credit ratings, which constantly distill information into simple and easy to understand analyses of thousands of companies and governments. But what’s interesting to me is that Moody’s and McGraw-Hill (the company which owns S&P) are themselves spectacular companies, perhaps fittingly. After all, it would be ironic for Moody’s to have to rate itself a Caa1 or something.
I’ve done a bit of research on the two companies over the past week. The big picture is not hard to see — both companies are dominant franchises in the credit rating business, each with around 40% market share. The competitive advantages are easy to spot. Investors seek a reputable source for information as important as the creditworthiness of an investment, and, as such, firms have an effective mandate to pay the rating fees for coverage. In a sense, to “signal” the creditworthiness and financial standing of the company and, thereby, lower their cost of capital.

Because both companies are so heavily entrenched in the capital markets, investors and firms alike are willing to pay up for ratings. Ratings firms do not, then, compete on price. Rather, they compete on quality, reputation, flexibility in product coverage, and geographic extent — indeed, the fact that both firms cover companies all over the world provides a common metric for any investment, and confers yet another competitive advantage over would-be entrants to the field who would have to play catch up. Both firms sport high margins and the benefit of pricing power (the best hedge against inflation, might I add).

And what’s more interesting are the tailwinds enjoyed in this essential duopoly. Worldwide capital markets are growing at a tremendous clip (with issues up over 23% compounded in the past five years) and become increasingly complex. Emerging markets continue to emerge and grow and more established markets increase their activity. The complexity, despite its connotation, is a good thing for the ratings firms. With the growth of complex issues like structured products, investors are even more sensitive to the need to have a trusted rating from a reputable source. Because S&P and Moody’s can provide this, they stand to reap the rewards of complexification.

Okay, so I just made up the word “complexification.” But I didn’t make up disintermediation (go ahead and Google it). That term refers to another tailwind involving the more and more popular trend of companies skipping the middle man investment bank and going it alone to raise capital. This is a good thing for Moody’s and S&P since those actually providing the capital will place a heavier emphasis on an independent rating given that an established bank has not underwritten the deal.

Moody’s, S&P (McGraw-Hill): Great companies. Emerging markets, disintermediation, complexification. Good things for great companies. But how about the price(s)?

Well, Moody’s, for instance, generates strong free cash flow with very little capital expenditures given that it is not capital intensive, and trades at PE around 25. Given that one may consider it a growth company, this is actually probably a reasonable price to pay. My own DCF puts the shares anywhere between $65 and $90, and that range is arguably conservative. For a great company with durable competitive advantages in a growing industry, that’s not too shabby.