The Microcap Speculator

I’ve had my eye on New Frontier Media (NOOF) all year, and its not the scantily-clad women in its videos that caught my attention. Its the fat dividend yield. According to Yahoo!, New Frontier currently yields over 10%. As mentioned earlier, NOOF’s second quarter earnings (ending 9/30/07) disappointed. Third quarter earnings were down slightly as well ($3.1M or $.13 per share versus $3.4M or $.14 per share), but according to NOOF’s conference call, third quarter revenue of $17.9M was “the highest quarterly revenue achieved in the company’s history.” New Frontier management sounded very optimistic going forward:

We believe that this quarter’s year-over-year decline in pay-per-view revenue will be the last one connected with that re-rate, and that starting next quarter we should again resume a year-over-year growth trend in that business.

That trend will be assisted by a number of factors. Key among these is the launch of a third channel on the nation’s largest DBS platform. This launch has materially improved our revenue performance on this platform. We expect these results to improve further over the coming months as we optimize our line-up on this platform with even stronger performing services.

On VOD, New Frontier continues to be the performance leader. On the systems we are able to track via third party research, our services outperform our nearest competition by at least 25% on a revenue per server hour basis.

(transcript courtesy of Seeking Alpha).

Technically, the weekly chart looks like NOOF has stabilized and is putting in a bottom. I bought NOOF Wednesday at $4.60. With continued profitability, I like the odds that the stock will turn around. The 10+% dividend pays shareholders richly to wait for the reversal, so I don’t mind being a bit early.

UPDATE 4/5/08: For an extremely well-reasoned counterpoint, please read the series on NOOF at Off The Beaten Path.

DISCLOSURE: Long NOOF.

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The figures are in, and vice beats nice. Look no further than this comparison between The Vice Fund [[VICEX]] and The Timothy Plan Conservative Growth Fund [[TCGAX]], which claims to be “America’s first pro-life, pro-family, biblically-based mutual fund group.”

The Conservative Growth Fund is only one of the funds in the Timothy Plan, but the others fared no better. Apparently the moral high road does not lead to investment success.

Investors looking to take the opposite tact have several options in microcap stocks:

New Frontier Media: [[NOOF]] With a 10% dividend and institutional support, New Frontier may be the most intriguing sin stock out there. Steel Partners and James Simons’ Renaissance Technologies each took large stakes in the company, which distributes porn adult films via pay TV and also has a fledgling internet operation. New Frontier is profitable, earning $.09 last quarter. The downside? New Frontier lacks both technical and fundamental momentum. Its stock is trading near a 52-week low and earnings are down year-over-year. Of course, its a lot easier to wait for a turnaround if you are getting paid a 10% dividend.

Private Media Group: [[PRVT]] Private Media produces and distributes adult films, magazines, and digital media. Like New Frontier, Private Media Group is profitable. Last quarter, it earned 0.5 million euros on revenues of 7.5 million euros — respectable numbers, but not especially attractive for an 85 million dollar company. If Private Media is to unlock value, it will have to find a way to increasingly monetize its huge catalog. According to Private, the future is in IPTV (internet protocol television), internet and mobile. The company has invested heavily in these businesses, but so far has only garnered meager returns.

Rick’s Cabaret: [[RICK]] The name may be straight out of Casablanca, but this is a far cry from the gin joint Bogart made famous. Rick’s operates a chain of “upscale gentlemen’s clubs,” and all those lap dances have paid off. Over the past four years, shares have rocketed from a little above $1 to over $20. The consumer may be pulling back, but not here. Rick’s sales are up 57% year-over-year. While the company may appear pricey relative to trailing earnings, Rick’s expects to earn $2 per share next year on the strength of recent and planned acquisitions.

VCG Holdings: [[VCGH]] A reader who is in the industry (on the business side, sorry to disappoint) suggested that VCG could be the next Rick’s. While the stock was on my watchlist for years, I had long been skeptical of the related party transactions. Many of VCG’s clubs and operating contracts have been purchased from majority owner Troy Lowrie. The few deals I have examined do not appear particularly egregious, but the close dealing still warrants a certain level of caution. VCG expects to earn $.86-$.92 in 2008 and $1.15-$1.25 in 2009.

Playboy Holdings [[PLA]]: No discussion of adult stocks would be complete without mention of Playboy. I expected it would be a much larger company, but it turns out that PLA only sports a $271 million market capitalization. Profits rose last quarter on increased licensing revenues, but the stock trades near its 52-week lows. The magazine may be in permanent decline, but the brand, 50+ years of pictures and 25+ years of videos, pay-TV and internet businesses all have some value.

DISCLOSURE: No position.

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BAB, Inc. (BABB.OB), the tiny comany that operates, franchises, and licenses the Big Apple Bagel, Brewster’s Coffee, Jacobs Bros. Bagels, and My Favorite Muffins brand restaurants, recently announced a special dividend of $.02 in addition to its regular quarterly cash dividend of $0.02 per share, for a total of $0.04. The dividend is payable on January 4, 2008 to shareholders of record as of December 20, 2007.

Sounds like small change, right? Not when you consider the resulting dividend yield. Assuming the company maintains its regularly quarterly dividend, buyers today will receive $.10 for the coming four quarters. At yesterday’s close of $.95, that is a yield of 10.52%!

Of course, that calculation is dependent on the company’s ability to sustain its regular quarterly dividend. I think it can. BAB is profitable, and in the first 9 months of 2007 already earned the eight cents necessary to cover a year’s worth of regular dividends.

One word of caution — the stock is quite thin, which means it is difficult to accumulate and will also likely be difficult to unload if the situation changes for the worse. I have been a buyer at $.94-$.95, and will probably continue to build this position in the coming days.

DISCLOSURE: Long BABB.OB

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It looks like I wasn’t the only one looking to capture the $1.25 dividend in Celebrate Express (BDAY) (articles). Insiders and large owners also lapped up shares just before the ex-dividend date:

INSIDER TRANSACTIONS REPORTED - LAST TWO YEARS

As expected, shares have dropped as the stock went ex-dividend. But note that they did not drop the full $1.25. My basis is $9.85, or an adjusted $8.60. I look for the stock to rebound to the mid-$9 range within three weeks.

DISCLOSURE: I am long BDAY. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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