I spent almost a good portion of the day working on school work and have been wanting to write about this investment idea.
Comdisco Holding Company, Inc. (CDCO) emerged from Chapter 11 bankruptcy proceedings on August 12, 2002 and, under its Plan of Reorganization, its business purpose is limited to the orderly sale or run-off of all its remaining assets. In other words, Comdisco’s sole purpose is to reduce all of its assets to cash and to make distributions of all available cash to shareholders. Let me reiterate that that Comdisco is specifically prohibited from engaging in any business activities inconsistent with its limited business purpose.
Thus far, Comdisco has paid out a cumulative $183.12 per share in dividends. The last dividend paid was December 13, 2006, which is more than two years ago.
So what’s Comdisco been doing as of late? From what I can tell, its been doing what it needs to be doing. In the past 5 quarters, Comdisco has increased cash on its balance sheet from 51.8 to 61.9 million, has been able to reduce its receiveables from 18.2 to 5.5 million, and has reduced total current liabilities from 13.8 to 9 million. However, total liabilities has remained steady at around 32-33 million.
So what’s the net current asset value of Comdisco? By my calculations (using the balance sheet data from Google), the NCAV is approximately $7.28 per share. Comdisco has a price of $7.1 right now, which means the stock is trading at about a 2.2% discount to NCAV. Not a particularly great deal.
However, if we estimate that Comdisco can reduce its receievables in half again (another 2.5 million or so) and if we throw in the long term assets that you would expect would be included in the final act of liquidation (another 5 million), then we get an adjusted NCAV of $9.14. Now you have a stock trading at a discount of 22.3% of its NCAV. That’s definitely a better deal considering what I think is an extremely low risk situation where all you have to do is sit and wait for the end.
It’s been about four and a half months since I started my Liquidation Portfolio. Back in November last year I spent a lot of time looking at about 50 stocks that I estimated to be trading far beneath their liquidation value or net current assets. I chose what I thought were the 30 best and invested an equal amount of cash in each one. So far, the results are pretty good.
It’s returned 7.05% since inception and has beaten the S&P by 13.92%. The portfolio also has a pretty low expense ratio of .19%, which is just trading fees.
This is probably only the fifth or sixth time I’ve even looked at the portfolio. The only times I’ve fooled around with the portfolio is to invest a little more after the market had declined for a week or two.
Though the wealth management biz is down these days, I hope one day I’ll get to be able to use my abilities to benefit other people.
I’ll now discuss another investment I’ve made: Montpelier Re Holdings Ltd., a Bermuda-based writer of catastrophe reinsurance and property reinsurance. I like those lines of business and think conditions are favorable right now. But that’s not why I invested in the company. The company’s balance sheet is relatively conservative and liquid, which appeals to me. Assets total $2.8 billion, and liabilities, including $350 million of debt, total $1.44 billion. Shareholders equity is $1.35 billion. Net earned premiums were $528 million last year.
Montpelier’s stock, selling at 80% of book value, is attractive. But the company’s debt — specifically the 6.125% senior notes due Aug. 15, 2013 — is really cheap. The notes are trading around 74, a 14% yield to maturity.
The numbers are compelling. Montpelier could lose its entire $1.44 billion net worth (roughly half of its assets), and its bonds would still be money good. Last year, a bad year, Montpelier’s net worth declined by $300 million. And in 2005 (Hurricane Katrina), the company lost $750 million, almost as much as it had earned in the three previous years. In a good year, Montpelier can make $300 million or so. There’s no way to predict whether any year will be good or bad. Although it has never happened, the company could have a string of bad years in a row. I don’t think that’s likely, but it wouldn’t necessarily be a disaster for bondholders anyway. If Montpelier lost, say, three-quarters of its equity in one occurrence, it would have to shut down or raise new equity. Neither of those scenarios would impair bondholders, but they would be disastrous for shareholders.
The 14% yield on Montpelier’s short-term investment grade bonds is compelling. The bonds are priced for catastrophe even though none is apparent. Investing and underwriting are both about weighing risk versus reward. In the case of Montpelier’s bonds, the risk is moderate, but the reward is substantial.
Here’s a chart of the price of Montpelier bonds.
I’d like to look more into this, but I am hard-pressed for time nowadays.
For technical analysts, here’s a slideshow of some charts I created before market open yesterday. I think most of these stocks are good short setups for traders.
In Activist Arbitrage: A Study of Open-Ending Attempts of Closed-End Funds, which was co-written with Michael Bradley, Alon Brav, and Wei Jiang, and which was recently accepted for publication in the Journal of Financial Economics, we conduct a comprehensive empirical study of the attempts of activist arbitrageurs to open-end closed-end funds in the U.S. Unlike the traditional pure-trading arbitrage, activist arbitrageurs do not simply wait for convergence, but rather take actions to open-end the target fund, knowing that upon open-ending the price of the fund’s shares will be forced to converge to the NAV.
For the past three months I’ve been working on a paper with a similar topic: activist investors and closed-end fund arbitrage. I haven’t yet read the aforementioned paper, but I’m sure its a lot more in-depth and technical than my paper. The goal I had with my paper was to create a sort of Idiot’s Guide to Closed-End Fund Arbitrage and Activist Investors. I explain the methods, goals, and arguments of both the activists and fund management, give a walkthrough of some actual proxy contests, and discuss some of the shareholder issues that arise.
I should have my paper finished within the next month or so and I might post it online.
Way back in in 1897, L.M. Holt wrote a paper entitled “Panics and Booms”. When Holt wrote the paper, the economy was at the tail end of a depression that had begun in 1892. Holt argued that booms always follow busts, so folks should anticipate the return of flush times. Five years later, a new boom was in full swing, and a newspaper republished Holt’s paper as a warning that the next depression was due around 1910, give or take. Option ARMageddon writes that “the Bank Panic of 1907 arrived a bit ahead of schedule.”
Here is a snippet of the paper:
During prosperous times, there being work for all, all are supplied with the means of accumulating wealth, and thus all are enabled to provide themselves, and families with all the necessaries, and many of the luxuries, of life; and hence, during the prosperous times the demand for goods and property increases and soon the demand exceeds supply, and then prices advance.
This rule, which is applied to the laborer, is also applied to the business man. Prosperous times induce business men to branch out in their several lines of trade…. The volume of trade being large, each gets a corresponding proportion of it. Many business men find that they can do more business than is allowed by their limited capital. They then buy on credit.
Prices are continually advancing, therefore they are able to make margins of profit not only on the capital furnished by themselves, but on the capital furnished through their credit.
This rule also applies to people dealing in real estate. The country is growing; money is easy; the times are good; business is prosperous and therefore speculation is favored. A man worth $5000 can buy four times that amount of property using his credit, and sometimes he buys ten times that amount or more. While prices are advancing he not only gets the benefits of the advance in the price of the property represented by the capital furnished by himself, but also on the capital furnished by his credit.
When prices of property and goods during a period of business depression are falling, the loss does not come on the entire property, but only on that portion of it represented by the cash capital the man has invested in it. The debt never shrinks until the real investment is all gone.
I purchased ROH several months ago at $63 and have endured some thrilling declines, but I held on with the conviction that things would be settled favorably in or out of court. I figured there were three possible outcomes: (1) the worst possible scenario would be that the deal would fall through; (2) the most likely scenario would be a modification of the deal in which DOW would pay a slightly lower price for ROH; and (3) the best possible scenario would be DOW paying the original price for ROH.
Well, DOW and ROH settled their dispute out of court. And the best part? DOW is purchasing ROH for the full price of $78 per share.
Now, can you guess (1) what indexes they represent and (2) the time frame that’s shown.
Give up?
The black line is the NASDAQ from the early 80s to its peak on March 10, 2000.
The blue line is the inverse of the Philadelphia KBW Bank Sector Index from August 2005 to March 6, 2009. I basically turned this chart upside down.
I understand that one can often create a chart or look at a chart and have it say whatever he or she wants. With this in mind, I simply want to illustrate how parabolic moves eventually exhaust themselves and reverse sharply. We saw parabolic moves reverse last year with the prices of oil and other commodities. Likewise, I think the extreme downward pressure on the price of bank stocks will ultimately reverse, most likely quite more sharply than people will expect.
This blog is produced by Douglas Ott, an employee of Banyan Capital Management as an outside business activity. As such, Banyan Capital Management does not review or approve materials presented herein. By viewing or participating in discussion on this blog, you understand that the opinions expressed within do not reflect the opinions or recommendations of Banyan Capital Management, but are the opinions of the author and individual participants.
Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or other instrument. Before investing, consider your investment objectives, risks, charges, and expenses. Any purchase or sale activity in any securities instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results.
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