Month: August 2012

Assurant

Assurant (NYSE: AIZ) is a diversified insurance company with the majority of its profits in the specialty property market.

When looking at the metrics, the company is in very good shape financially and taking all of its assets and liabilities at face value, you have a corporation with a tangible book value of about $49.13/share, using the June 30, 2012 share count. When considering the market value of the shares are about $34/share and considering the company is slated to earn about $6/share in this fiscal year, it makes you wonder why the market is so severely underpricing the company.

There has been persistent stories for the past couple years from state regulators that have been pursuing the company over pricing of its forced-placed insurance, which are policies that are written when a homeowner no longer has insurance on his mortgaged properties – the lender can place the policy on the home to insure their (financial) interests in the property. The forced place policies were apparently too profitable for the firm.

If this turns into a reduction of premiums, or penalty, or both, it will have a material impact on the company’s financial statements, but there is a huge valuation cushion that makes it seem unlikely it will go beyond the large discount presently placed on the shares of the company.

Notably, the company has been buying back its own stock in a very aggressive manner. The following are the basic shares outstanding as of the end of the quarter:

Q3-2010 106,474,301
Q4-2010 102,000,37
Q1-2011 97,931,049
Q2-2011 94,994,982
Q3-2011 92,926,138
Q4-2011 88,524,374
Q1-2012 86,508,372
Q2-2012 82,392,454

On July 26, 2012, the company had 81,084,645 shares outstanding.

Normally I am not a fan of management buying back its own stock, but when a company is trading at 30% below tangible book value, every dollar spent on its shares purchases about $1.43 of value. Assuming you have your assets and liability structure correctly calculated, each share purchased increases the book value further. Considering that the company has historically generated cash at an impressive rate, it makes a compelling value argument.

The risk in this company appear to be in the regulatory aspects of their property insurance. It almost reminds me of what happened with Philip Morris (now Altria Group, NYSE: MO) back in the early 2000’s when they were in the middle of their litigation with the US government. Although their business metrics were fantastic, their shares relative to the valuation were in the gutter. This appears to be the same case with Assurant.

One technical analysis negative is that the company is a listed S&P 500 component. Since its market cap is well under the prescribed $5 billion level, it may get demoted to the midcap index – this typically causes a rush of advance selling as traders anticipate the supply dump from index funds removing the component. It would probably be a good time to make an entry at this point.

That stated, I am a little impatient and started a position around $34/share. I normally do not deal with S&P 500 companies, but sometimes I do make exceptions.

Summer doldrums

I have not been doing much equity research over the last little bit as recreational matters have generally dominated the landscape. One chart I have been curiously watching, however, is the 10-year note yields, which has dipped from its 1.4% minimum:

Which way are the yield winds blowing, up or down?

The Canadian 10-year note equivalents have a similar yield curve and are trading about 15-20 bps above US treasuries in yield. One would think that you could do better than 1.8% over 10 years by taking a little bit of risk…

The decline of Dell

Dell stock is down another 6% today, reaching lows not seen since the economic crisis; before that, you have to trace back to 1997 to match their current share price ($11.57 as of this writing). A “buy and hold” investor from 1997 to today would have seen a 15 year performance of precisely zero in their Dell investment. Fortunately, not many people are 15-year investors in equities these days.

I will post a lifetime chart of Dell:

Dell did mostly nothing in its first year and a half in its public existence, but as the chart depicts, the real meaty part of the growth curve was between 1995 to 2000 when an investor would have multiplied their money by 75 times. Catching this part of a company’s trajectory is the most profitable.

Of course, this is not going to happen now with Dell – the PC cycle is long since done and the company is mature. The question for an investor is – what other types of companies out there are selling products that will become as popular as PCs, and when will they have this type of growth curve? There is one that I have in mind which I have invested in where there is a feasible Dell-like scenario.

Companies in their pre-explosive growth curve typically have smaller market caps (e.g. under a billion). Cases like Apple (where they have already been public for a considerable period of time, having gone through a few product cycles) are relatively unusual.

Filtering Yahoo Finance News

Over the past couple years, the news portion of the Yahoo Finance portal has been increasingly filling with useless computer-generated articles, such as Forbes articles on every stock that is going ex-div, or paying out their dividend:

Is there any way to filter this type of stuff (or anything from Forbes, the Motley Fool and Seeking Alpha)? I’m finding going through my email spam box to be a slightly more productive use of time than sifting through these types of “news” headlines.

Very good abstract financial advice

David Merkel writes an article he titled “The Future Belongs to Those with Patience“, but the summary explanation is about how peoples’ expectations drive asset values. Waiting for when expectations are low and investing will generate superior returns. Easier said than done.

The article he wrote contains very powerful information and is well worth reading in entirety (along with most of what else Merkel writes), but is probably too abstract for those that are not in tune with the marketplace to understand. I believe it was a Warren Buffet quote that said “There are no called strikes in investing”, and using this analogy, it is if you are playing a game of baseball and every (investment) “pitch” equates to every security you end up researching. The only difference is that in a real game of baseball you’re out if you receive three good pitches and don’t swing, while in the investment world you can still wait for that perfect pitch.

Since the third quarter of 2011 I have been averaging at about a 70-90% cash balance. I started deploying this late in the second quarter of 2012, and am currently sitting on around 30% cash. I don’t know of many people that can keep large cash balances for a significant length of time – it is easy to get “itchy” and take a swing at some marginal bets. This is how you lose capital.