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Safe Investing: Adult web sites?

Posted March 24, 2008

"While it is certainly not a company with high moral or ethical values, it offers investors a shot at some pretty hefty profits. " – Andrew Snyder 

By Andrew Snyder

Baltimore (TFN) — This market is a stock trader’s dream come true.  One day the market is up 200 points, the next day it gives back its gains and heads lower.  Guys like Jim Cramer are shouting, "Buy, buy, buy," while in-the-pit experts like Rick Santelli are convinced of doom and gloom.  The only thing we know for sure is traders on the winning side of the market are raking in huge sums of cash.  Unfortunately, folks on the losing side are sinking fast. 

What are you supposed to do if you cannot stand the speculation and risk of an unsteady market?  You can’t head to gold.  It has topped out and is already losing value.  The commodities markets are equally risky.  A slowing economy cannot support rising fuel, food, and metal prices for much longer.  And you certainly cannot head to the cash markets for more than a few months.  Unless, of course, you do not mind getting buried by rising inflation.

Fortunately, the equities market still offers plenty of promise.  For years, I have been touting the strength and safety of a unique mutual fund, the Vice Fund (VICEX), which focuses on so-called "sin stocks" like gambling operators, defense firms, alcohol manufacturers, and tobacco sellers.  It is a five-start fund with good management and profit potential.

The fund boasts positions in companies like Altria, MGM Mirage, Boeing, and Lockheed Martin.  Almost all of the fund’s positions are shielded against a failing economy.  Many of them, in fact, actually have a strong negative correlation with the American economy.  But what has me thinking about this fund today is not its current holdings, but the possibility of a new one in the near future.

I didn’t say you have to read it

Bloomberg is currently running an article that details a potential IPO that would take Penthouse magazine public.  While it is certainly not a company with high moral or ethical values, it offers investors a shot at some pretty hefty profits.  After all, Penthouse Media Group is quickly becoming a dominant web player.  Its offerings get the attention of millions of eyes each month.  Some of its sites rival billion-dollar offerings like MySpace, YouTube, and Facebook. 

The company, led by CEO Marc Bell, recently acquired over 25 "adult" websites with a price tag of $500 million in cash and stock.  Combined, the sites have paying memberships that measure in the millions.  One site has over 1.2 million members who pay an average of $25 per month.  YouTube would trip over itself to find that kind of membership revenue. 

Realizing "adults only" sites are not a public relation office’s dream come true, Penthouse Media is working on acquiring mainstream sties as well.  A quick glimpse at the company’s current offerings shows the transition is already happening.  The company offers two religious sites as well as a small networking site.  The company is not all about sin.

If the rumors are true, Penthouse Media Group could be trading on the open market within a few months.  Current owners are looking to raise about $250 million, making this a good opportunity for small-cap investors.  If the company continues to expand into the digital world, its initial valuation will look dirt cheap in just a few years.

It may not be a play for everyone, but you can bet the Vice Fund and its counterparts will be taking a very close look at this opportunity.  The company is managed well, is making new acquisitions left and right, and its market will not disappear anytime soon.  I am positive you will be hearing much more about this opportunity in the next few months.

Take a look at the company, its holdings, and determine if it is the right play for you.   

 


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Posted by Andrew Snyder · Filed Under Investment Strategies 

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