Category: Equity

Details of Genworth Financial merger

There are lots of juicy details of the merger proposal with Genworth Financial in their preliminary proxy filing. In particular there are some hints that Genworth MI in Canada will get sold off whether this merger is successful or not.

Despite all short-sellers and naysayers believing that the Canadian housing market is going to crap, Genworth MI continues to appreciate post-Trump and is still trading 10% below their book value. They’ll continue to be mystified when the stock will break through its all-time highs it reached back in November 2014:

Not coincidentally, that’s when I last sold shares. I will note the price has been adjusted multiple times due to their rather large dividend (currently $1.76/share), and whether the Genworth Financial merger is successful or not, it is quite probable that Genworth MI Canada will be sold for as much as can be sought for it, because doing so before the Canadian housing market collapses is the only smart thing to do.

In terms of valuation, one can make a good claim for over CAD$40/share.

The market is also not appreciating at all the notion that mortgage insurance rates will be headed higher in early 2017 due to capital changes. The last time mortgage insurance rates went higher, the stock went up about 10%.

They are also somewhat buoyed by the “good politics, bad policy” decision by the BC government to extend a 5-year interest-free loan, matching dollar-for-dollar on the first 5% of a downpayment (for an insured mortgage). It would be a poor decision for a prospective buyer in BC to not take advantage of this, but they would need to pay mortgage insurance to do so.

Genworth Financial / Long-Term Care Insurance

For those of you that are interested in why Genworth Financial (NYSE: GNW) is willing to be bought out at US$5.43/share when their book value is far, far higher should take notice of this following Wall Street Journal article about the woes of another long-term care insurance provider that went belly-up.

Putting a long story short, there is an accounting mismatch – the liabilities on the book are less than what the actual liabilities will be.

There has been a lot of incorrect analysis (especially on Seeking Alpha) on the actual value of the holding company. In general when one sees sloppy analysis that is regarded as consensus, there is a necessary, but not sufficient condition for an investment decision in the contrary.

D+H Corporation slashes dividend

I looked at D+H Corporation’s (TSX: DH) last disaster of a quarter and predicted the following:

My guess is that the dividend is going to get slashed in half.

So, today, they announced their 32 cent dividend is going down to 12 cents. The stock is up today because the company says they are going to do a share buyback with half the amount that they wouldn’t have paid out in dividends, but given their leverage situation, I’d be skeptical.

KCG Holdings – Significant share buyback

KCG Holdings (NYSE: KCG) I’ve identified as a fairly good risk-reward candidate last month.

Yesterday they announced they came to an agreement with one of their major shareholders (whom were part of the recapitalization/reverse takeover of the predecessor firm after their major trading glitch on August 1, 2012) and have swapped 8.9 million shares of BATS for 18.7 million shares of KCG stock and 8.1 million at-the-money (roughly) warrants.

After this transaction, KCG still has 2.3 million shares of BATS – they did liquidate about 2 million shares on the open market over the past month.

This transaction has a positive double-whammy for book value – not only are the BATS shares accounted for at less than market value (which means the transaction will cause an accounting gain), but the KCG shares are being bought back for well under book value. Even when accounting for the not insignificant tax bill that will result (about a hundred million!), the final book value of KCG would be around $18.79/share after the transactions.

KCG will have about 67.5 million shares outstanding and 5.1 million warrants outstanding (strike prices of $11.70, $13.16, and $14.63, with each about 1/3rds of the warrants). These are likely to be exercised and shares sold in time – each of these warrants expire in July 2017, 2018 and 2019, respectively.

The corporation is trading slightly more than 20% underneath tangible book value. They have historically made money, especially in volatile conditions. The word “volatile” is also used to describe the new President-Elect. Needless to say, this has potential.

The other note is that CEO Daniel Coleman owns 1,487,907 common shares, or about 2.2% of the company, which is not a trivial amount of capital. He also owns 161,132 warrants, and 1.7 million stock options at a strike price of $11.65/share (making the effective ownership about 4.8% assuming the exercise of warrants and options), plus stock appreciation awards at $22.50/share, due to expire in July 2018. There is some serious incentive for him to get the stock price higher.

Canopy Growth Corporation

Canopy Growth (TSX: CGC), specializing in the production of marijuana, has gone parabolic.

cgc

Today, 12.9 million shares traded (about 10% of the company) around a level that valued the entire entity at around CAD$1.5 billion.

Fundamentally, looking at their last quarterly report, they have sold $15 million of marijuana in the last 6 months.

If you (exponentially) extrapolate their revenue growth curve, they will be selling over $1 billion in marijuana in five years.

Somehow, I don’t think this will happen.

I am predicting two things:

1. Management is going to do a massive secondary offering. They did two of them earlier in 2016 (raising an 8-digit sum of money), but they will scramble to raise an even bigger amount of money which would pay for a lot of marketing. I’m guessing they’re going to aim for over a hundred million. I’d do the same if I were in their shoes, in addition to personally selling shares at the earliest possible opportunity.
2. Eventually, within the next six months, a lot of people are going to lose money on this stock.

Right now, if you are short, I can imagine the pain. Maybe those short on the stock should get a prescription of medical marijuana to ease the pain.

No positions, no intention to take any, but looking at this stock with amusement.