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| English: Toyota Prius taxi in Manhattan, New York City (Photo credit: Wikipedia) |
Boston, May.15, free portfolios .- How'd you like to own a stake in the fastest-growing asset class of the past year?
As home prices increase and default rates plunge, banks get all the headlines. The trend drove the Financial Select Sector SPDR (NYSE:XLF) 18% higher from March 2012 through March 2013.
It's a good run... but it doesn't come close to the 55% surge by the fastest-growing asset of 2012.
What is it, you ask? It's an asset class The Oxford Club's editorial staff got a firsthand look at last week in the heart of Manhattan.
Taxi medallions.
That's right: In New York City, the price of taxi medallions (which is essentially a license to operate a cab) has increased by more than 30% from March 2012 to March 2013 - when the average taxi medallion was worth a whopping $917,000!
How can this be?
It's supply and demand at its finest. The price of medallions has surged because demand has soared, yet supply has been virtually static.
In 1937, New York offered 11,787 medallions for $10 each. It was a lot of licenses back then. But today, there are only 13,237 operating taxis. [Editor's Note: Which explains why I had to wait 30 minutes for one on Friday afternoon.]
This perpetual imbalance has led to a compound annual growth rate of 16% over 76 years. Take that, fund managers...
Driving a taxi is one of the few jobs that directly links income to time worked; the more hours a driver works each day, the more he makes. Drivers typically work 12-hour shifts six to seven days a week, saving up for a down payment to buy their own medallion rather than working for a company that captures a large portion of the wages.
The historical rates of return are impressive, but there is another hidden benefit to owning a medallion as an investor. Tax law allows an owner to depreciate the medallion over 15 years, offering a 5% tax-free return on top of the price appreciation.
The Easiest Way to Profit
What's that? You don't want to drive a taxi?
Don't fret. There's a great way to cash in on this trend...
New York-based Medallion Financial (Nasdaq: TAXI) specializes in financing taxi medallions.
In 2002, the company structured itself as a bank to take advantage of low interest rates and capture the spread between virtually free loans from the Fed and the high interest rates it can charge to finance a medallion.
One of the important factors about the company is that it has never had to foreclose on a medallion. Since the medallion is directly tied to the income of the owner, this asset class has been an extremely safe investment.
Even better, shares of the company have not been sent higher by the recent rush into banking stocks. Right now, shares trade with a P/E of 12. And since the company has been growing earnings at a 15% clip, it sports an attractive PEG ratio of just 0.8.
And get this... Medallion Financial currently pays a 6% dividend, which has helped keep the stock less volatile than the overall market - with a beta of 0.89.
The bottom line is taxi medallions represent 65% of the company's current loan portfolio. It's an asset class that has proven historically safe and, most important, reliably lucrative.
This is your chance to celebrate a cab shortage. You'll have something to smile about the next time you waste part of your day waiting for a cab.
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