Sell Block: Death Is Big Business
Wall Street’s essence is largely the gamble on when and in which direction an investment will move. And there’s a market for everything: Stocks, bonds, futures, commodities. But what if the bet’s on when someone will die?
That’s the market Life Partners Holdings facilitates. This life insurance broker matches terminally ill patients with investors, helping the former sell their life insurance policies at a discount to the latter for cash up front. As morbid as it sounds, Life Partners has generated 39% sales growth for last eight quarters, and earnings were up 39% in the most recent quarter.
The question, though, is whether or not that trend continues. And according to Ken Shreve and Kate Stalter, technical analysts at Investor’s Business Daily, the answer’s no. The company’s chart shows that money managers are taking profits, and they say individual investors should, too.
Take a look at that chart below. You can see that Life Partner’s “technical breakout” during the week ending Jan. 2 was followed immediately by a pullback the next week, and trading volume was heavy both times. Remember technicians see heavy volume as a sign of a move’s legitimacy, so that pullback meant institutions were cashing out. And even though the stock followed its moving average, which is how closely the share price hugs its upward trajectory, for three weeks, Life Partners eventually dipped below that level, again on high-volume selling. It was further proof, at least for technicians, that the big guys were abandoning LPHI.
The fundamentals story ends the same way. Life Partners has intrinsic problems the company may not overcome. Like the CEO, for instance. Brian Pardo’s been sanctioned by the SEC for misrepresenting financial results at a previous company. And another red flag went up when, according to Citron Research, he sent a letter to shareholders in 2007, asking them not to lend stock to short sellers. When you subtract the 6 million shares Pardo and his family own – which they’ve recently been selling, by the way – from the 12 million shares outstanding, you’re left with a 19% short interest in the stock.
There are legal problems, too, in Florida, and a recent decision in Colorado that subjects Life Partners’ investments to that state’s security laws. If something similar happens in other states, this company’s business model could take a serious hit.
The way Cramer sees it, Life Partners is up against some pretty tough odds. The recession has already destroyed so much wealth, and the idea of buying dying patients’ insurance policies probably won’t sit well with most investors. Plus, how many people will pay the company’s $500,000 transaction commission during this downturn?
Life Partners, Cramer said, looks a lot like a momentum stock that’s lost its momentum. He agreed with IBD’s Shreve and Stalter – LPHI belongs in the Sell Block.
Here are some of Cramer’s other great sell calls recently: Last week, he urged investors to get out of online education stocks like Apollo Group and Strayer. Both are down big. So is Terex, down 31% just on Thursday. Sequenom’s dropped 31% since Cramer said to get out on Jan. 23. And back in December, he announced that Masco’s dividend was unsafe, and now the company’s trying to cut it.
Questions for Cramer? firstname.lastname@example.org
Questions, comments, suggestions for the Mad Money website? email@example.com