Author Archive for Doug

Taking a Look at Hilltop Holdings (HTH)

Published
by
Doug
on October 15, 2008
in Insurance and Investing
. 0 Comments

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.

Buy Berkshire at a Discount and Without Having to Pay Thousands

Published
by
Doug
on October 13, 2008
in Investing
. 0 Comments

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.

M&A Arbitrage Opportunities Abound

Published
by
Doug
on October 9, 2008
in Arbitrage, Investing and M&A
. 0 Comments

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 Explains the Credit Crisis and Bailout Bill

Published
by
Doug
on October 3, 2008
in Financial Crisis, Humour and Videos
. 0 Comments

Colbert gives a vivid explanation of the credit crisis.

Western Investment’s New Statement On GCS

Published
by
Doug
on October 3, 2008
in Uncategorized
. 0 Comments

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.

ABX: This is How You Trade!

Published
by
Doug
on October 3, 2008
in Trades
. 0 Comments

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

Sins of “Deregulation” a Political Fairy Tale

Published
by
Doug
on October 1, 2008
in Banks and Financial Crisis
. 0 Comments

The WSJ says that the ill effects of deregulation, a subject the Dems use to blame Republicans for the current financial crisis, is nothing but a political fairy tale:

As for the sins of “deregulation” more broadly, this is a political fairy tale. The least regulated of our financial institutions — hedge funds — have posed the least systemic risks in the current panic. The big investment banks that got into the most trouble could have made the same mortgage investments before 1999 as they did afterwards. One of their problems was that Lehman Brothers and Bear Stearns weren’t diversified enough. They prospered for years through direct lending and high leverage via the likes of asset-backed securities without accepting commercial deposits. But when the panic hit, this meant they lacked an adequate capital cushion to absorb losses.

Even Bill Clinton says the repeal of Glass-Steagal has nothing to do with the current crisis. I am happy to continue blaming the Dems for blocking reforms and regulation of Fannie and Freddie, two institutions I think are much more causally related to our problems.

Sweet Bank Deals of the Recent 21st Century

Published
by
Doug
on September 29, 2008
in Banks and Business
. 0 Comments

Dealscape has a list of the Top 7 bank deals of the 21st century:

No. 7. Jamie Dimon, Bank One Corp.  He deserves a higher ranking, but he’s had enough glowing praise lately. When Dimon sold Bank One in January 2004, he got $58 billion at a valuation of  2.7 times book value. All of it was in stock. But it was J.P. Morgan Chase & Co. stock, and it has risen 13% since then. The deal was good strategically and in terms of long-term shareholder value.

…

No. 3. Stephen H. Gordon, Commercial Capital Bancorp. This Irvine, Calif., bank isn’t listed here because it sold out in April 2006 for $983 million, nor because it achieved a valuation of 3.1 times tangible book value, nor even because it accepted cash. It is named here because Gordon did not accept the stock of the buyer, Washington Mutual Inc. That $983 million would be virtually worthless today if he had.

No. 2. Walter A. Dods Jr., Community First Bankshares Inc. Fargo, N.D.-based Community First Bankshares was an illogical amalgam of tiny banks in 12 western states. Yet somehow in March 2004, the bank pried $1.2 billion from the clutches of BancWest Corp., a unit of BNP Paribas SA of France, for its far-flung network. That’s equal to 3.3 times book value, all of it in cash.

No. 1. Charles John Koch, Charter One. Koch hit a grand slam in 2004 when he sold his Cleveland-based bank to Royal Bank of Scotland Group plc. He sold for $10.5 billion — in cash. The valuation was 3.0 times book value. Fantastic. But here’s the most impressive thing. Sources told The Deal at the time that Koch shopped his bank and had a few offers, but RBS was the only one offering all cash. He declined stock offers from other Ohio banks, like Fifth Third Bancorp of Cincinnati and KeyCorp of Cleveland. Those shares have been massacred in the credit crisis.

These guys who sold their banks for cash before 2008 deserve gold medals and trophies. In general, it seems to me that selling a company for cash is vastly more preferable to a share exchange. And of course this is even easier to say looking back from the current financial crisis.

Perception is Reality and Feelings Trumps Facts

Published
by
Doug
on September 24, 2008
in Behavior and Psychology
. Closed

In September 2005, Malcolm Gladwell wrote an article about auto safety and the rise in popularity of SUVs. It’s an interesting article. Two important facts to take away from the are: (1) perception is reality and (2) feelings often trump facts. If people can acknowledge these two human tendencies, they will at least be more self-aware, and perhaps even more rational and thoughtful. The following are snippets from the article that illustrate these two central points.

Perception is Reality

Then there’s this notion that you need to be up high. That’s a contradiction, because the people who buy these S.U.V.s know at the cortex level that if you are high there is more chance of a  rollover. But at the reptilian level they think that if I am bigger and taller I’m safer. You feel secure because you are higher and dominate and look down. That you can look down is psychologically a very powerful notion. And what was the key element of safety when you were a child? It was that your mother fed you, and there was warm liquid. That’s why cup holders are absolutely crucial for safety. If there is a car that has no cup holder, it is not safe. If I can put my
coffee there, if I can have my food, if everything is round, if it’s soft, and if I’m high, then I feel safe.

Feelings Trump Facts

The truth, underneath all the rationalizations, seemed to be that S.U.V. buyers thought of big, heavy vehicles as safe: they found comfort in being surrounded by so much rubber and steel. To the engineers, of course, that didn’t make any sense, either: if consumers really wanted something that was big and heavy and comforting, they ought to buy minivans, since minivans, with their unit-body construction, do much better in accidents than S.U.V.s. (In a thirty-five-m.p.h. crash test, for instance, the driver of a Cadillac Escalade—the G.M. counterpart to the Lincoln Navigator—has a sixteen-percent chance of a life-threatening head injury, a twenty-percent chance of a life-threatening chest injury, and a thirty-five-percent chance of a leg injury. The same numbers in a Ford Windstar minivan—a vehicle engineered from the ground up, as opposed to simply being bolted onto a pickup-truck frame—are, respectively, two percent, four percent, and one percent.) But this desire for safety wasn’t a rational calculation. It was a feeling.

GSI Group: Liquidation Value

Published
by
Doug
on September 23, 2008
in Investing and Stocks
. 2 Comments

For the past couple of weeks I’ve been reading a new blog I’ve found called Barel Karsan. The title is a combination of the surnames of the two authors. It’s a very good value investing blog with a great number of posts that details the different methods of valuation that are open to investors. It’s really inspiring to me how they have in the past found small, ignored stocks trading at a discount to fair value.

A recent post detailing the steps to take when performing a liquidation value analysis spurred me to perform some searching. I created a spreadsheet to help me do a quick analysis of about 40 stocks I felt had potential to be trading below liquidation value. I found a couple promising stocks, one of which was GSI Group (GSIG). GSI Group supplies precision motion component products, lasers, and laser-based manufacturing systems to electronics, semiconductor, medical, aerospace, and industrial markets worldwide. Some of their stuff has been used on NASA’s Shuttle Discovery!

The following commentary is meant to parallel Barel Karsan’s post on the liquidation value of Amisco. And just to warn any reader, I am not an investment advisor and you should not act upon anything I say without talking to a professional. Now, on to the results of my liquidation value analysis.

GSIG liquidation value

I calculated the liquidation value per share to be roughly $6.68. Compared to a current price of $3.6 per share, the discount is about 46%. Looks good, but is it too good to be true? One would have to take a closer look at the balance sheet and cash flows to ensure they are not stepping into a trap. However, I am not able to detect any signs that would point to trouble. Cash has steadily increased, along with operating cash flow and owner earnings. GSIG has a current ratio of 6.79, which is very healthy.

In conclusion, this was a useful exercise for myself. If anyone sees any possible mistakes, please let me know via the comments.