Investors holding stocks trading at high NATEPBP, also known as P/E’s, are betting that the company’s EPS will increase significantly, since few investors would rationally be willing to wait the 30 years for a payback from the company in which they have invested with a P/E of 30. Reliance on the Greater Fool Theory of investment, anticipating the purchase of the stock by another investor at a higher price, is the only other reason for investing in and holding a stock requiring such a long NATEPBP.

We believe that, whenever possible, investors in early-stage companies are better advised to purchase a percentage of defined revenues, a revenue royalty (royalty), for an agreed number of years, rather than the shares of the company generating the revenues. In most situations the negotiated percentage of revenues or royalty rate should be at levels providing a better return to the investor than theoretical returns which are dependent on dramatic EPS improvement or a continuation of investor infatuation. Of course, the royalty investor is dependent on the royalty issuing company’s ability to generate at least the minimum projected revenues, and to meet the terms of the royalty agreement, which can include modifications in the event of royalty payments which are less than those which have been negotiated.

We specialize in offering clients assistance structuring royalties which meet both the needs of royalty issuing companies and superior yield-seeking investors.

In the current stock market, there are companies selling at P/E levels of less than 10 and, in some cases, even less than 5 times trailing 12-month Net-After-Tax earnings. However, these are companies which are expected by investors to have significant earnings declines, even though some are long established and are very large companies. However, these investment returns are determined by market-related price movements, whereas in a revenue royalty, the agreed royalty payment is made directly to the royalty owner.

 

Arthur Lipper, Chairman                          arthurlipper@gmail.com
British Far East Holdings Ltd.