Risk and Reward

Writing every day is both a pleasure and a chore. There’s no better way to stay ahead of the market’s next move than to pick out the important and actionable tidbits on a daily basis. Daily Profit readers also keep me in line with comments and suggestions and I often get a new perspective when I hear from readers. And that means you are helping make Daily Profit a valuable source. Thanks, and keep up the good work. My address is: [email protected]

Sometimes though, and it pains me to say it, I make promises here in Daily Profit, that go, um, unfulfilled. My “chore” is to keep up with what I’ve said and make sure I follow through. So in doing some “housekeeping” this morning I came across this section from the December 10 edition of Daily Profit:  

“Back in September, I recommended a momentum trade on a commercial REIT. I heard from one reader, Patrick P. who said:

Well, I don’t know about Midas touch, but I do my best to bring good trading ideas to Daily Profit readers whenever I can. And I think it may be time to pick up this commercial REIT again for another run higher. Patrick made 102% last time…I’ll include details in tomorrow’s Daily Profit.”

You may have noticed that I did not follow-up in the 11^th with the details I promised. So I’m going to fix that now…

*****The stock I recommended in September was Maguire Properties (NYSE:MPG). I discovered it when it made a strong breakout on high volume. Digging into the company a little, I discovered a Real Estate Investment Trust (REIT) that owned a lot of commercial real estate in Southern California, one of the most bombed-out real estate markets in the U.S.

Not only that, but Maguire had decided to simply walk away from a few properties. What could be worse? Could there be a more hated stock than a REIT in California that was letting properties go into default? It was perfect…

*****Over the course of a couple weeks, that breakout lead to the stock more than doubling and also gave Patrick P. a very sweet profit. And now, I think it’s time to buy that stock again.

In its latest 10Q, Maguire included the following statement: “…our board of directors approved management’s plan to cease funding cash shortfalls…”

In other words, the company decided to stop paying the mortgage on properties that are under water. And you know what? That’s a great idea. Why jeopardize your company and whatever shareholder value you have left by using up cash reserves to pay mortgages on properties that may never be profitable?

Instead, Maguire is cutting its losses and focusing on properties that are actually profitable. These include downtown Los Angeles buildings like the US Bank Tower, The Gas Company Tower, Wells Fargo Center, and KMPG Center. These properties are all 95% occupied by very stable tenants.

Maguire’s is attempting to preserve cash so it can focus on core assets like those in downtown Los Angeles. Even with its impaired assets, Maguire’s enterprise value is over $4 billion. And it brought in $528 million in revenue in the trailing 12 months. The market cap is currently just $71 million.

That’s bankruptcy pricing. And if Maguire continued “to fund cash shortfalls”, it certainly would go bankrupt. It seems to me that Maguire has no intention of rolling over. It’s walking away from cash sinkholes and trying to sell other assets to raise more cash and streamline its business.

*****The stock has returned to support around $1.50 a share. And volume is actually picking up a little. I think some institutional money is getting in now, anticipating an improvement in the company’s prospects. So if you’re looking for a somewhat risky stock that could make a big move higher, check out Maguire Properties (NYSE:MPG) at $1.50 a share.