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I’ve been keeping a list of stocks that are trading at a discount to my estimate of their liquidation value. As of 10/25/08, there are 21 stocks on the list trading at a discount and several more that are trading at slight premiums. Check them out.
I have not researched any of these stocks. Do your own due diligence if you wish to trade. This is merely a starting point for those interested in the investing style of Graham and Dodd.
Today, Bruce Berkowitz’s Fairholme Fund (FAIRX) filed a Form 3 for its investment in United Rentals Inc (URI), signifying that it is now a 10% owner.
I recently became a shareholder of Fairholme, coincidentally on the same day as Buffett’s most recent editorial in the New York Times. Now is the time to be greedy. Berkowitz repeats this Buffett mantra every time I have seen him interviewed and I fervently believe in his abilities to produce excellent long-term results for me.
This is really unfortunate for both these guys. The first is Chesapeake Energy (CHK) CEO, Aubrey McClendon, who had to sell nearly all of his shares of common stock in the company over the past three days in order to meet margin calls. At last count McClendon held 33,469,359 Chesapeake shares, recently worth billions.
The second guy is XL Capital’s (XL) Chairman, Brian M. O’Hara, who had to sell approximately 80% of his XL common shares on October 9th in order to meet a margin loan call.
It’s good that these guys had strong faith in the value of their companies, but when that faith is backed up with margin in this type of market environment, it often does no one any good.
Hilltop Holdings (HTH) is a holding company whose only holding is the insurance company NLASCO.
NLASCO “specializes in providing fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the south, southeastern and southwestern United States.” This sounds to me like NLASCO caters to trailer parks and the manufactured homes.
NLASCO has excellent underwriting discipline. According to Hilltop’s most recent 10-k:
The industry aggregate for combined ratio for 2006, was 92.5%, well above the combined ratio for NLIC of 78.9% for the same period. NLIC was rated #2 in National Underwriters Property and Casualty magazine 50 Profit Champions. NLIC six year average combined ratio was 80.7%, well below the industry six year average of 102.4%.
For those not familiar with the insurance industry, the combined ratio is a measure of underwriting profitability. A ratio below 100% indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.
Also, I like that the President of NLASCO has an annual incentive award that is based upon attaining a combined of 90% or less. This is good because performance is based on underwriting profit, not volume. In the insurance business, when underwriting profit and discipline is sacrificed for the amount of premiums written, this creates the potential for huge problems down the road. More people will be filing claims and the insurance company will most likely have not set aside enough money for loss reserves.
With the recent sale of its business related to manufactured home communities, Hilltop has about $770 million in cash on its balance sheet and is looking to make some sort of acquisition. Hilltop has stated that it’s open to all possibilities regarding the type of business it will acquire.
Based on the strength of the insurance underwriting alone, Hilltop looks very interesting. If Hilltop were to diversify and strengthen its insurance operations via an acquisition of another insurance outfit, I will take a more serious look at possibly acquiring some shares.
If you don’t have hundreds of thousands of dollars lying around to buy some class A shares of Berkshire, or even just a few thousand to buy the class B shares, one way to own some Berkshire is through funds. There are a couple of open-ended funds that have sizeable positions in Berkshire (e.g., Fairholme).
There are also a few closed-end funds that own large positions of Berkshire. One example is the Boulder Total Return (BTF) fund. Nearly 40% of BTF is dedicated to Berkshire. What’s even better is that you can buy this at a deep discount as shares of the fund are trading nearly 25% below its net asset value. Essentially, Berkshire is 25% off if you buy via BTF.
In this disjointed and frightened market, arbitrage opportunities in merger and acquisition simply abound. There are significant discounts even with the shareholders of the target company having voted “Yes” to acquisition. An investor using due diligence will be able to find good opportunities.
Take a look at this list of pending mergers for ideas.
Colbert gives a vivid explanation of the credit crisis.
Western Investment filed a 14A regarding their proxy battle with the management of DWS Global Commodities Stock Fund (GCS). Western reiterates that its interests are alligned with shareholders because they hold 14.5% of outstanding shares. However most alarmingly, the discount to NAV has reached an astonishing 18%! That means selling shareholders can only get 82 cents on the dollar for the assets their shares represent. If you’re a current shareholder of GCS, I would urge you to vote for Western Investment’s nominees. If you’re not a shareholder, I think this is a great special opportunity where you can simply play the discount to narrow.
For the first time in a while I did some options trading this week. Here is my process: Find a chart that looks good. Formulate a hypothesis. Purchase option at the money or in the money two months out at the very least. Set intelligent stops to limit losses. Wait and see.
On Tuesday of this week I thought the chart for ABX looked good for shorting. My hypothesis was that ABX would fall from $38-39 to about $32 in about a week or so. I purchased two ATM puts on Wednesday. I set my stops at $39.69, the high for past couple of days. Then I did not have to wait long. ABX fell %14.53 in a day! I sold one option when ABX was down %10 and the other option when ABX was down %14.
Totally awesome
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