What do the following have in common: coins, trading cards, autographs, stamps, currency and memorabilia?
They are all sought-after collectibles that exist in a generally illiquid market, for which authentication and transactions have historically been very challenging.
So wouldn’t it be great if there was one centralized way that these items could be authenticated and graded and for which a market could be created?
Welcome to Collector’s Universe, Inc. (CLCT). Before this company existed, dealers in these items would have to use limited experience and a haphazard and arbitrary grading system to try and value and/or sell them.
CLCT Stock Changed the Landscape
The market, such as it was, existed in the form of classified ads, specialized newspapers, catalogues, specialty shops and auction houses. The market was scattered and fragmented. It could mean expensive travel to shows or auction houses. That in turn gave rise to brokers and intermediaries, and trust was hard to come by. The risk for fraud or theft was high. The market was extremely illiquid.
eBay Inc (EBAY), interestingly, helped remove many of these barriers and also gave rise to the need for standardization in authentication and grading.
The genius of CLCT is that it consolidated and standardized all of these elements. CLCT is the single biggest go-to service for virtually every kind of collectible, hiring experts who have years and years of experience — an average of over 24 in the case of coins, cards and autographs, according to the 10-K.
This is such a highly specialized industry that, having put so many experts in place, and having put in the infrastructure necessary to provide services, the defense moat around its business grows wider every day. It isn’t like anyone can just jump into this business.
Even though CLCT has graded over 30 million coins, its 10-K says it thinks that’s only 10% of the total market. There’s a lot of market left to grab, and that means plenty of business for a very long time.
That’s what I find so interesting about CLCT. It’s not a huge growth business, although it did grow net income about 30% in Q1 to $2.78 million. So why bother with such a tiny company that doesn’t have massive profits?
Because it pays out almost everything it makes as a dividend, that dividend is likely sustainable for years to come, and right now is 7.36% ($1.40 per year). See, the company doesn’t have tremendous overhead. There’s a massive market that remains unfulfilled, and always will be. CLCT even survived the financial crisis, despite an 85% drop in its stock.
Now, in some quarters, the net income does not cover the dividend. Some years it has fallen short by $700,000 to $1.8 million. However, CLCT has more than $12 million in cash on hand, so shortfalls can be pulled from cash on hand.
However, it is certainly possible that the dividend is not sustainable. CLCT has been in a trading range from $15 to $24 the past three years, and is presently at $19.36.
That means you have some downside protection and you can also play this as a trade.
As of this writing, Lawrence Meyers has no position in any stock mentioned.
