The Best Investment on Wall Street? A New York City Taxi Medallion
Nov 16th 2011 11:30AM
Updated Nov 16th 2011 12:43PM
New York City's taxi fleet doesn't provide a good living for a lucky few investors. It provides a great one.
Taxi medallions have outperformed practically every investment imaginable -- including stocks, bonds, gold and oil -- for years. Prices for corporate and individual medallions surged 637% and 440%, respectively, between 1990 and last month. Two recently sold for a record $1 million each. They are a good investment, earning a return of about 3%, surpassing both high-grade corporate bonds and Treasuries, according to Bloomberg News.
Supply of medallions is tightly regulated, so much so that their prices have skyrocketed by 42% since August. To David Yassky, chairman of New York City's Taxi and Limousine Commission, the record price for the six-inch-wide aluminum disks that are found on the hoods of the city's taxicabs is a "vote of confidence in the city and the city's economy."
The $1 million licenses are corporate medallions that can be leased out by their owners 24 hours a day. Individual medallions, which make up 40% of the fleet and require that the vehicles be driven occasionally by their owners, are worth about $700,000, according to data from the Taxi and Limousine Commission.
Drivers Left Out in the Cold
Nat Goldbetter, a broker who handled the $1 million sale, tells DailyFinance that medallions are not for the casual investor.
"The million-dollar medallions are not great investments for somebody just getting into the business," he said in an interview. "The people who own many medallions are building their fleets."
Skyrocketing medallion prices have not filtered down to benefit the city's cab drivers, who work grueling 12-hour shifts and earn on average less than $30,000 a year, according to Bhairavi Desai, the head of the National Taxi Workers Alliance. Drivers must pay for their gas and many also pay by the day to lease their vehicles from medallion owners. One car can net more than $80,000 in fees paid for by two drivers -- one for the day shift and the night shift. Bloomberg News says that each medallion reaps about $40,000 a year in profit. "The lease system is all about sweating the drivers," Desai says in an interview.
A simple way for investors to play the medallion market is to buy shares of Medallion Financial (TAXI), a financing company that owns 300 medallions and plans to acquire several hundred more in New York and other major cities, according to Bloomberg. Its shares have surged more than 40% in the past year. The stock has a price-to-earnings ratio of just over 11, near the lower end of where it's been over the past five years.
However, investors may want to take a wait-and-see attitude toward the stock. A bill pending in the New York Legislature would allow livery drivers to pick up street hails in upper Manhattan and the outer boroughs of the city, where regular taxis are less common. Opponents argue that these permits would devalue the existing taxi medallions.
Motley Fool contributor Jonathan Berr does not own any shares of the aforementioned stocks. He always finds riding in New York City taxis to be an adventure.