Not a heck of a lot happening

I’ve been relatively happy with my portfolio, although the market performance has been less than thrilling. About two-thirds of the portfolio is trading well less than tangible book value, while the speculative components are fairly well positioned and I am just patiently waiting for the market to come to the conclusion that there is some serious undervaluation. Just eyeballing it, these companies are roughly at 55-70% of book value with strongly positive earnings.

Such suppression of market value can continue for some time but inevitably I will get paid – either through a dividend payment or a boost of market value. Buying back shares under tangible book value is also one of the rare times that I like to see share buybacks.

As prices have gone down, I have nibbled more of a position. This is probably the deepest value position that I have taken for my portfolio in quite some time.

Throughout the year it is always good to keep in the back of the mind if unrealized losses in the portfolio should be taken, and over the past couple months I have liquidated the losers and what is remaining in the portfolio is a substantial sum of deferred capital gains for 2013 and beyond.

I expect to see these unrealized capital gains get larger with the current portfolio. It is just a matter of being patient and hence, the general lack of observations here lately.

The end of Microsoft

Anybody using Windows 8 should realize it is a disaster for Microsoft. Possibly even worse than Windows Vista. Just ask the question of whether you will be seeing corporate clients (the major money-makers for Microsoft) upgrading to the new operating system.

The whole corporate strategy of Microsoft after they crushed IBM’s competitor, OS/2, has been to put a ringed gate around all software users and make it as difficult as possible to port outside of Microsoft DOS/Windows as possible. This worked for the most part for about 20 years before mobile and internet platforms started to become prevalent and relevant. Now, Microsoft’s strategy is simply about salvaging what is left inside the ringed gate with their Office and Exchange Server suites, where they still have a decent amount of entrenchment.

A chart is fairly instructive in terms of what the market is sensing is the reception to the Windows 8 launch:

Realize that institutional investors have much more powerful access to various data (e.g. channel sales data) than the everyday joe retail investor and you can easily see they have been betting significantly against Windows 8 being a material impact on Microsoft’s bottom line.

In terms of valuation, while Microsoft is more attractive than purchasing long term government debt, all of the growth should be discounted from the company’s valuation and instead a financial salvaging model should be applied to the company’s equity – eventually their domination of the office and exchange server market is going to erode to the point where they will completely lose pricing power.

I am not even going to get into the topic of their totally failed mobile phone market strategy, which has been even more of a disaster than Windows 8.

It is also not surprising as well to see the associated corporations, Dell and Intel being equivalent hammered by the marketplace.

All three companies will survive, but they are going to be shadows of the titans they used to be. I will give a bit of an exception for Intel, whom seem to somewhat still have their competitive act still together.

Canadian currency

For the first time since August, the Canadian dollar is worth less than a US dollar.

The 1:1 ratio is a psychological benchmark used by most people with respect to the dollar. This is actually arbitrary in light of the fact that the currency could be scaled 1:100 and be called the “Canadian Wazoo” which trades at 572 to 1 US dollar and then such comparisons would no longer be used. Both are equally invalid.

Nibbling

The presidential election outcome was the following: status quo.

I nibbled on some very boring, deep value US insurance companies in today’s trading. Also look out for low-liquidity issues – they are more likely to have their prices brought down by forced margin selling.

Assurant – Third Quarter

I went through the recent 10-Q of Assurant (NYSE: AIZ) and little has changed from my original investment assessment, mainly that the company’s equity should be trading higher than current market pricing.

There continues to be some risk on their lender-placed insurance business (which is a fancy way of describing mortgage providers putting home insurance on delinquent housing owners) as AIZ was forced to take a 30% rate haircut in California starting at the beginning of 2013. There will likely be price concessions in other states which will cut into the company’s profitability, but as the housing market in the USA starts to improve and the number of underwater mortgages continues to decrease, this revenue stream was likely to slow down regardless. The specialty property segment produced a combined ratio of 76.5% for the first 9 months of 2012 and this ratio is very likely to increase in 2013.

Their health insurance unit is at 97.2%, while employee benefits is at 106.4%.

Even with the premium haircut from their specialty insurance business, they are very likely to continue generating cash at a rate where they can continue repurchasing their undervalued shares at a significant discount. At the current share price, buybacks become extremely accretive. Since the company’s book value is about $54.05/share when excluding intangibles, each dollar of shares purchased (at the current market value of $38) is the equivalent of receiving $1.42 of value, plus the organic earning capacity of the company, which is very high relative to price.

The company is trading at the rate it is because of continued fears that regulators will continue to encroach in the profitability of the business in addition to industry-wide concerns (e.g. earnings yields from their investment portfolios) but there is a lot of margin of error for this one. When considering that the amount of raw income the company produces in the first 9 months of 2012 was nearly the same as the net income of the entire 2005 fiscal year (when the stock prices were trading at relatively the same price), coupled with the fact that average shares outstanding went from 136 million to 86 million, gives some hints as to what I believe the market value of this firm should be.