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.

Genworth MI Q3-2013 preview

Genworth MI (TSX: MIC) will be reporting earnings at the end of the month. They are likely to continue seeing historically high rates of mortgage conformance and as a result, they should be reporting a decent quarter as they continue to book earned premiums. Canadian unemployment continues to be steady (if not trending slightly down), which also suggests continued mortgage conformance in the future.

The other financial note is that the company spent $55 million repurchasing 1,892,643 shares at an average price of $29.06. They did this between September 3, 2013 to September 23, 2013. Not factoring in any dilution, this repurchase is about 1.96% of the outstanding shares. There is a market value to their share price where returns of capital are probably best given in dividends rather than buybacks, and it is very close to the $30 price range where I’d consider dividend increases would be a more efficient mechanism. Notably this time around, trading volumes were considerably higher than average. The public float of Genworth MI is only 43% of the total shares outstanding because the parent Genworth Financial owns 57% of the company, so the net buyback from the float was about 810,000 shares.

The buyback will alleviate the company from paying out $2.4 million a year in dividends at their current rate, or about a 4.4% yield, which is slightly better than their own investment portfolio, which at the end of June 30, had a book yield of 3.6% and coincidentally, a duration of 3.6 years.

I still believe the market is still placing a significant discount on the general perceptions of the over-valuation of the Canadian real estate market and other factors. While some of these concerns may have mid-term validity, they do not today.