There seems to be a very questionable subarea of investing these days that involves buying stocks in things that are basically scams. Over the past year, we’ve seen the battles over Herbalife (NYSE: HLF), a network marketer that hedge fund bad boy Wild Bill Ackman has labeled a pyramid scam.
Disturbingly enough, legendary investor Carl Icahn thinks Herbalife, which makes its money by selling franchises to immigrants that can barely speak English, is a good investment. News reports indicate that Mr. Icahn owns 17% of Herbalife. If you want the disgusting details about Herbalife, Ackman’s Pershing Square Management has prepared a summary that’s posted online here.
Well, another stock that sells a product that could be close to fraudulent is being pushed as a good investment. It’s LifeLock Inc. (NYSE: LOCK), and talk radio fans will recognize LifeLock as the identify theft solution that regularly advertises on programs like The Rush Limbaugh show.
Consumer Reports Calls Identity Theft Protection a Waste of Money
Basically, LifeLock sells its members a service that monitors their credit records and warns them of signs of identity theft. The problem is that Consumer Reports has labeled such services useless. It noted that consumers could get similar protection by simply signing up for free alerts from their credit card companies and banks and ordering a free copy of their credit report online.
Among other things, the magazine noted that credit monitoring services can miss a lot. It also noted that under federal law, consumers have zero liability for most identity theft related to fraud involving credit cards. Consumer Reports also found that the crime figures used in such advertising were overinflated.
The magazine did not name LifeLock by name, but that report should give investors pause. LifeLock is selling a very questionable product and charging memberships for it.
Okay, to be fair, from a financial position, LifeLock is not necessarily a bad company. Basically, LifeLock charges people three levels of memberships: $9.99 a month or $109.89 a year for basic protection, $19.99 a month or $219.89 a year for an advantage plan, and $29.99 a month or $329.89 a year for an Ultimate Plugs Membership.
LifeLock has Float
This makes LifeLock like an insurance company; the memberships give it float, a pool of cash it can access at any time for various purposes. Value investors know that Warren Buffett loves float; that’s one of the reason why he invests in things like insurance companies. They have lots and lots of float.
LifeLock does have a lot of float; its TTM revenue grew from $346.17 million in September 2013 to $448.63 million in September 2014. It also reported having $22.65 million in free cashflow in September 2014, compared to $16.63 million free cashflow in September 2013.
Some investors, like Motely Fool contributor Carl Cachia reported, have turned bullish on LifeLock because its EPS is increasing. Cachia is right about LifeLock’s numbers: they are good, but the company may not be.
The whole case of LifeLock, like that of Herbalife, should teach us something about real value investing. A real value investor looks at the whole company, the products or services it sells, and its total business, as well as the numbers. He or she also examines the moral implications of the company.
At the end of the day, LifeLock has no real product, just a questionable service that’s going to set it up for some big class action lawsuits. That’s not something a person investing for the long term should touch.
Stay away from LifeLock, folks. Yes, Mr. Market likes it. Unfortunately, as we all know, Mr. Market is also insane, and the market interest in LifeLock proves it.
One has to wonder how long it will be before the LifeLock house of cards comes crashing down upon investors’ heads. I also have to wonder what they’re going to be trying to get us to invest in next.