Genworth MI Q3-2013 report

Genworth MI (TSX: MIC) reported their third quarter earnings report yesterday evening. The highlights are not too dissimilar from their second quarter report (which I wrote about in an prior post) with the prevailing trends continuing:

– Year to year, gross/net premiums written continue to track lower this year than the previous, by about 12%, solely due to government regulatory changes. For the 9 months, premiums written were $382 million vs. recognized revenues of $430 million, so premium recognition at this rate should drop proportionately going forward.
– Loss ratios, and subsequently losses on claims, are the lowest they have been for a very, very long time. The loss ratio is 22% and this is incredibly low.
– The share buyback, as I reported earlier in the preview, brings down the shares outstanding to about 95.1 million. I very much doubt they will continue buying back shares at existing prices.

Also, while not directly relevant, they increased the dividend from 32 cents to 35 cents – historically they have increased the dividend by 3 cents each year. Cash-wise, the company has paid back $199 million to investors in the first nine months of the year and generated about $250 million through operations.

Portfolio-wise, they continue maintaining a bond portfolio – $5.06 billion, yielding roughly 3.7% at 3.8 years duration, and $219 million in dividend-yielding equity.

Business-wise, they’re clearly in a sweet spot where relatively few are defaulting on their mortgages and they continue to make a lot of money on insurance premiums. They also have a valuable vested interest in keeping the duopoly situation – the Government of Canada is the other player in the market via CMHC and they will obviously not want to pop the balloon which keeps them solvent as well. The question is whether this will continue and at least in the short term, it will. Market momentum might take this company higher than what its valuation on paper seems to be, which currently looks like what it is trading for presently. If we start seeing significant premiums over book value then I might consider paring back some of the position, but I am not in a rush to do so right now – even though due to appreciation this is starting to be quite a concentrated position.

Fairfax Chart and Blackberry

Normally when a corporation is buying out another entity (especially at a premium), the market’s instinctive reaction is to jettison the shares of the purchaser.

Fairfax’s slow attempt to take Blackberry out has a rather odd effect: Fairfax’s common share price has skyrocketed (at least relative to its historical trading patterns, which has been relatively boring):

ffh

There is a deep insider’s game being played with Blackberry and some of this information leaks into Fairfax’s stock price. Maybe I’m reading too much into this (realizing that Fairfax’s 10% stake in Blackberry is only about 5% of Fairfax’s market cap).

My hunch:

1. The terms of the deal were materially struck on October 25th and will likely be announced on November 4th in absence of any other deals;
2. Facebook getting into the scene is priced in as a negative (i.e. potential to pay more, hence worse for Fairfax).
3. The market believes Fairfax is getting a good deal.

Zuckerberg at Facebook is not an idiot and realizes that his $120 billion market cap is not going to last forever and the company needs to branch out. Similar to what Steve Case did with AOL and Time Warner, there is an interesting business case of just sheer diversification of doing an all-stock deal for Blackberry at some double-digit per share price – Facebook stock is now expensive currency and why not do a late 1990’s internet stock type move and purchase something tangible?

Its a low probability outcome, but right now capital is cheap and the market is giving the titans lots of currency to play with.

Why Carl Icahn is a smart fellow

Most people think that good investors are able to buy undervalued companies. People forget that good investors also know when to sell. Take a look at Netflix (NFLX):

nflx

Carl Icahn apparently went in at $58/share, and sold half his stake in the $300s.

The headline quote in the media articles:

… as a hardened veteran of seven bear markets I have learned that when you are lucky and/or smart enough to have made a total return of 457 percent in only 14 months it is time to take some of the chips off the table.

I’d say this is a pretty good rule of thumb for anybody to follow if they are so fortunate.

Just as a matter of arithmetic, if you invested $100 in something that went up 457% and then sold half of it, you still have $278.50 worth of something left over, not an insubstantial amount in relation to the original investment. Another way of looking at this is you would have to sell 18% of your investment to play with “house money”, so to speak (although this is a huge misconception in retail finance as there is never such a thing as house money – it is your own!)

Investing in 1999

Does it feel like 1999 to anybody out there? Basically if you invested in high beta, momentum type stocks (especially those .com companies with as little revenues and high negative incomes) you would have made like gangbusters. If you actually invested in anything that made financial sense, you would have seriously underperformed, if not seen depreciation in your asset values.

People investing in Apple currently must feel like that. There is a lot of stuff out there that has seen substantial price appreciation and very little change in the fundamental thesis in the first place – e.g. has the story with Netflix (a triple since the beginning of the year) changed any over the past 10 months? Priceline (nearly doubled)? Even old technology, like Hewlett Packard, has seen appreciation that doesn’t seem to correspond with any real change in their underlying structure.

Just because markets are trading wildly higher doesn’t mean that they won’t stop doing so – momentum in the marketplace has amazing power that will confound even the most seasoned of investors. Its already happened elsewhere, such as the Nikkei 225:

nikk

Investors in the month of May saw appreciation and depreciation of nearly 20%.

We are in strange, strange times. The trick is to not lose money on the way down.