Jim Collins: The New Outsider
05/27/2015 10:00 am EST
Jim Collins has joined the editorial team at the Outsider Club, where he will share his expertise in both high income stocks and small-cap speculations. Here, he looks at two high-yielding preferred stocks in the resource sector and two high risk healthcare stocks that are working on potentially revolutionary products.
Steven Halpern: Our guest today is Jim Collins, an asset manager and a leading newsletter writer, and the newest member of the editorial team at the Outsider Club. How are you doing today, Jim?
Jim Collins: I'm good, thank you.
Steven Halpern: Could you tell our listeners a little about your background and your new role at the Outsider Club?
Jim Collins: Sure. My background.I started out on the sales side. I worked for three major investment banks, Lehman Brothers, Donaldson, Lufkin and Jenrette, and UBS, both here in New York City-where I am now-and also in London, for five years there.
What I did for those banks was a sale side equity research on the automotive and automotive component sector. That's my big bank background.
Steven Halpern: Now, at the Outsider Club, I assume you're going to be focusing on some different areas, as well?
Jim Collins: Sure, yeah. I mean, my business itself is called Portfolio Guru LLC, so I have a newsletter called The Portfolio Guru Post. I also write for Forbes and Real Money, which is part of thestreet.com, and my biggest business is actually managing money for individuals-no institutional money, just regular people-and for that, I focus on all different sectors. That's what I do now.
Steven Halpern: Now, you're particularly well-known for your expertise in income investing. Could you share a brief overview of your investment strategies for those seeking income?
Jim Collins: Yeah, of course. Sorry, I don't think I answered the end of your last question, by the way, so for Outsider Club, I'm an editor. I'm also a contributor, so I'm writing about my investment strategies that I use every day with my actual clients and those two strategies are income investing and speculative.
To answer your second question, sorry about that. The basis-the kernel of my investment strategy-is what I call, persistent reinvestment.
So, over time, we benefit from the magic of compounding; for that strategy, everything we own pays either dividends or interest. It's mainly preferred stocks, so mainly dividends, and actually, most of the companies are monthly payers.
We take those payments and then I opportunistically reinvest those every month as we get them into other securities that also pay interest or dividends and therefore, over time, your yield increases because it is compounding.
Steven Halpern: Now, among your income ideas is an environmental services called Greenhunter Resources and you suggest the 10% Series C Cumulative Preferred (GRH-PC). What's the story here?
Jim Collins: Yeah, I mean, thematically, the story is that they are in water and the unconventional drilling business. All their wells are in Appalachia and they're dealing with companies that drill for natural gas.
When a well is hydraulically fractured, a large proportion of the water sent down to create the fractures comes back up, and then over the life of the well, it'll continue to produce water in a much, much higher ratio or much higher level than hydrocarbons. I mean, the ratio can be as much as 50 to 1.
That water comes up from the earth; it's very salty and has some other impurities. It has to be disposed of-or recycled-and they do both. It's very value-added.everybody talks about fracking, but water is such an integral part of it and that's exactly where they are.
There are a lot of other companies that do that. It's a fragmented business. I think what actually is their game-changing technology is the fact that they have approval and the ability to barge shale gas wastewater down the Ohio River to their disposal well.
The main complaint people have in these small towns-in fact, I grew up in one of them in that part of the country-is there are so many trucks on the road. And if you're carrying these things by truck, then you can carry, you know, it'd take like 400 truckloads to equal one barge load.
That's really the key is that they can get trucks off the road and do it in a more environmentally-friendly manner while still getting rid of the wastewater that obviously needs to be disposed of.
Steven Halpern: Now, also for the income, you highlight the Goodrich Petroleum Preferred C (GDP-PC). What's the attraction in this situation?
Jim Collins: Yes, the first attraction is it's trading at 40 cents on the dollar, so, I mean, that's telling you that the market is skeptical of their ability to continue to exist.
So, at that level, it's yielding around 27%-28%, and so, if you can get something that yields 28% in a world where the S&P 500 is not even yielding 1.9% and the 10-year Treasury is about 2.2%, give or take, then that's locking in a great deal.
(Editor's note: Following the interview, Jim Collins adds, "Goodrich Petroleum Preferred C is trading up and now yields 24.74%. That's obviously still an extremely high yield and I remain confident that Goodrich Petroleum will make those interest payments.")
The issue is that-obviously-they are very much hurt by low oil prices, but oil prices have been improving. They are fairly well-hedged.
The biggest thing that they've got going for them is that they're able to take well costs down by at least 30%, so they can still get a decent rate of return on the wells that they're drilling at current commodity prices.
They're able to squeeze their suppliers so much-and ultimately-that's what's going to keep them alive until oil prices rebound. Which I do think they will, and honestly, we've already seen the beginning of that rebound.
Steven Halpern: Now, as you mentioned earlier, in addition to income investing, you also focus on small- and micro-cap stocks as more speculative ideas and one of those ideas is Mannkind (MNKD), which is involved in treating diabetes. What's the story here?
Jim Collins: Yeah, so they have a revolutionary delivery system and formulation that allows a dry powder version of insulin to be inhaled by the diabetic in a prandial basis, which means you do it before you eat.
Basically, instead of a needle, you have something that's extremely small, fits easily in the palm of your hand, smaller than, actually, your normal asthma inhaler.
There is a certain proportion of the diabetic community that does not use insulin either frequently-as frequently as they should-or at all, because they're afraid of the needles, so what Afrezza does is it allows you to actually inhale the insulin.
It's revolutionary and the man who is behind the company, Alfred Mann, has had a number of different companies in the past where he has revolutionized the hardware, the delivery system, and with diabetes as a growing market, I believe that's exactly what's happening here.
The key point there is that they have a marketing agreement with Sanofi (SNY), which is the world's leader in diabetes care.
It's just gone on sale here in the States, in the beginning of February, so it's new, but it's not necessarily speculative because they have such an established partner.
With Sanofi, they have the ability to earn $775 million in milestone payments over the next few years, of which, they've already earned $50 million.
It's not a shot in the dark and Al Mann, the billionaire chairman, actually controls 38% of the stock, so again, that makes it less risky, I think, than your average medical technology company.
Steven Halpern: Now, another company in the healthcare sector which could also be considered revolutionary in this way is Second Sight Medical Products (EYES), which is working to restore vision to blind patients. Can you tell us more about this company?
Jim Collins: Yeah, I mean, Second Sight obviously is.has a product which is nothing less than revolutionary. Their largest shareholder there is also Alfred Mann-same as Mannkind-so, what he's trying to do there is, he had a company that revolutionized cochlear implants and one night one of his friends actually told him that he should be doing a cochlear implant for the eye, so that's exactly how it works.
I mean, they put this thing in your eye. It's got a number of different mini-electrodes-more than 60 of them-and basically, what it does is it bypasses the bad photoreceptors in your eye, in someone who's got a degenerative condition, so right now it's only indicated for degenerative retinal conditions, the most common of which is retinitis pigmentosa.
So someone who used to be able to see-has a functioning optic nerve but has bad photoreceptors and is legally considered blind-through this, through an external camera which is hooked up through, basically, a pair of sunglasses, they can send light images-bypassing the failed photoreceptors-through the optic nerve into the brain. It's a long description of it, but basically, someone who couldn't see at all, can now make out shapes.
Essentially, it makes things like eating easier, because you can see where your fork is, you can walk around. It's not perfect vision, but they've had some people.they have had anecdotal reports of people going bowling with the Argus 2 device and doing things that blind people could never do.
It's very early days, but they do have now more than 100 of these things implanted and they're working with a number of different centers, both here, in western Europe, and the Middle East, and it's growing, so that's a huge total investable market and they've just started out.
They have also a very large patent estate and I would estimate that they are at least five years ahead of any of their competitors in terms of having an actual working retinal prosthesis, which they have, which has been approved by the FDA for more than a year, and also has the CE mark, which means it can be sold in western Europe, so they are way ahead of everybody else.
Steven Halpern: Well, thank you for your insights today. You've shared a few fascinating ideas here. Again, our guest is Jim Collins of the Outsider Club. Thank you for taking the time today.
Jim Collins: Okay, thank you, Steven.