The Skinny on Following the Celebrity Money

Kristin Orman By Kristin Orman, Research Analyst, The Oxford Club

Mailbag

From the Mailbag:

Oprah Winfrey’s investment in Weight Watchers has been big news this week. The stock has more than doubled since the announcement that she bought her 10% stake. My question is, does a celebrity endorsement, like Oprah’s, in the form of an investment or board membership always result in share price appreciation? And does it last?

Battered shareholders of Weight Watchers International Inc. (NYSE: WTW) sure woke up to a pleasant surprise on Monday – courtesy of the “Oprah effect.” The company announced iconic billionaire Oprah Winfrey had bought 10% of Weight Watchers’ shares for $43.2 million, joined its board of directors and agreed to act as its spokesperson. Weight Watchers’ shares have more than doubled this week and Oprah bagged a gain of more than $70 million on paper.

It’s too early to predict how long the “Oprah halo” will last and whether or not the company can reverse its declining sales and profits. But I can tell you about a company that recruited not one, but four celebrity board members… and how it burned their fans-turned-shareholders.

Everyone knows that country singer Willie Nelson loves his “wacky tobacky.” But until 2005, most of his fans did not know much about his second love, biodiesel. That year, now-defunct alternative energy company (and penny stock) Earth Biofuels Inc. announced that it had appointed Nelson to its board of directors and licensed the singer’s “BioWillie” branded biodiesel.

Nelson was in good company. He joined Oscar-winning actor Morgan Freeman, who was appointed to Earth Biofuels’ board the month before. Besides having a board seat, Freeman invested his own money in the company, too.

Ten years ago, biofuels, made from corn or vegetable oil, were all the rage. Many hoped their adoption would reduce the country’s dependence on foreign oil while helping the environment and the nation’s farmers at the same time – all causes celebrities love to support. The following year, Earth Biodiesel landed two more famous board members.

In July 2006, the company announced that “America’s Sweetheart” Julia Roberts was joining Earth Biofuels’ newly created advisory board – as chairwoman. She even converted her large sport utility vehicle so that it would run on only biodiesel. She wanted her car to smell like french fries, I guess.

More press releases followed and Earth Biofuels’ share price creeped up as fans loaded up on the stock. Coincidentally, Roberts touted the company on Oprah Winfrey’s talk show. One month later, NASCAR driver Rusty Wallace was also added to the advisory board.

The company went on an acquisition spree, borrowing to fund its purchases of biofuel and other plants. It even bought a liquid natural gas plant previously owned by another company run by the chairman of Earth Biofuels, Dennis McLaughlin.

Earth Biofuels’ share price continued to soar despite its consistently late financial filings, mounting debt load and negative cash flow. It wasn’t really competitive with the price of oil after input prices rose. It was facing competition from much larger and better-financed competitors.


The sad thing is, if any of these celebrities had bothered to look under Earth Biofuels’ hood, they would have realized that the company never had a chance.

McLaughlin had a less-than-stellar record of building companies and shareholder value. He presided over the $100 million bankruptcy of his previous energy company, Aurora Natural Gas, in 2001. His next company fired him, alleging he had siphoned cash out of the business through his personal consultancy firms.

McLaughlin’s shenanigans hit the radar of the Securities and Exchange Commission in 2006. He, his consulting firms and associated businesses were investigated. The investigation fizzled out; McLaughlin is still running public companies today.

Willie Nelson stepped down from Earth Biofuels’ board of directors at the end of 2006, becoming a member of the advisory board. He resigned from the advisory board in April 2007, forfeiting his 6 million shares of stock. Julia Roberts and Rusty Wallace faded away, too.

There was no mention of an advisory board, Julia Roberts or Rusty Wallace in Earth Biofuels’ fiscal year 2007 annual report – filed late, by the way. During 2007, the stock price fell 95%.

In July 2007, Earth Biofuels’ creditors pushed it into involuntary bankruptcy protection due to nonpayment. The company had $33 million in unpaid debt and was burning through a lot of cash. Next, its auditors warned the company could not stay in business much longer. Institutional noteholders wanted the company to liquidate so they could get some of their money back.

By 2008, the company reported $0 in cash on its balance sheet. It settled with its creditors. Shareholders got nothing.

The bottom line is, investors should never base decisions to buy a stock on a celebrity investor, board member or spokesperson. It doesn’t matter if it is Morgan Freeman, Julia Roberts or even Oprah Winfrey. Following the famous money could make you the dumb money.

Do your own due diligence and research before you make the decision to invest. And if the company smells like soggy french fries, keep on trucking.

Good investing,

Kristin

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