Deep value shopping season Part 2

Jingle bells, jingle bells. Continuing with the tax loss selling  shopping list, here are four cyclical businesses with downside protection. These companies have hedges, long term leases, or cold hard cash that are some of the ways we can have the luxury of waiting for a recovery.

Postrock (QRCP, QELP): A very complex opportunity consequence of fraud and a liquidity crisis than I hope to analyze in more detail in the future. The fraud was more limited than initially expected and the liquidity issues should be solved by a multi-merger of all subsidiaries redirecting cash flow where is most needed: Quest Resources QRCP. Quest is the owner of 120K+ Marcellus acres drilling rights but its only source of revenue were the suspended distributions from its subsidiaries. This complex merger is still foggy but if I am right, and might well be wrong, current prices are less than 1x FCF of the consolidated entity with substantial undeveloped Marcellus acres to boot. The best place to start your reasearch is the recently amended Postrock S4.

Global Ship Lease (GSL): Friends in Twitter are becoming tired of my endless promotion of this container shipping company with long term leases (the first expiration is in 2012). Well what can I say, a company priced at 1x FCF is worth promoting. Its main issue is the dependency on CMA CGM: its single charterer. CMA CGM is breaking even the last months while its competitors are in serious problems: Hapag Lloyd and Zim were rescued by their governments, CSAV did a very diluting equity raise, Maersk, Neptune and others have reported large losses. CMA CGM just announced an agreement with the banks for a new $500 million credit line and private investors are interested in injecting capital (Cerberus and Oaktree among others).  Besides Michael Gross, the second largest shareholder and company director, has been buying GSL aggressively.

Omega Navigation (ONAV): ONAV is a product tanker company. In other words, it transports refined products in specialized ships that need special coating. Some of them are ice class so they can be used in the Arctic and Baltic. This sub-segment is beneficiary of the trends of mandatory transition to double hulk and environmental constrains to refinery expansion in developed countries. In turn, this leads to substantial expected growth over the next years that should rapidly absorb the small current overcapacity. Generating $6M of FCF last quarter and the newbuilds 75% financed, though not chartered, ONAV is navigating the rough waters of an aggressive build program. Also the Glencore counterparty risk seems under control, and even more, it is becoming a financial partner in the newbuilds program. It looks to me that the chances of a catastrophe are low given a worse case where they loose their deposits for the new vessels. And since this should not impact cash flow the current price of just 2x FCF looks like a bargain.

Travelcenters of America (TA) Where have I heard about this one before?. A Christmas surprise gift since I never expected we were going to see TA again in the mid 3s

Remember, these are just leads for further investigation and I do not own some of them.

Long QRCP, QELP, GSL

Deep value shopping Season part 1

The shopping season is overwhelming and I am not talking about Christmas gifts. The selling of already depressed small cap stocks for tax reasons can be the source of real bargains. Their analysis is taking a lot of reasearch so postings are going to be sparce over the next weeks. Besides I am also desperately in need for vacations (yes!).

To compensate, the next weeks will be about sharing interesting leads. These are in no way recomendations and I do not own most of them. On the same token, I will gladly like to hear from readers their potentials flaws. I will start with beaten down financials. These are companies very difficult to analyze however complexity is a positive in my deep value investing toolkit when there is downside protection and the price is right.

Citizens Republic Bancorp (CRBC): a bank with conservative underwriting, NPAs have been stabilizing and are still less than 6%, a substantial portion of it is reserved, management is also confident that they are more than half through the snake. They have a solid deposit base and leadership position in Michigan and it trades at less than 0.4 tangible book and 3x pre-tax pre-credit earnings. I know, I know, it is Michigan. However, for the same reason the competition was decimated and, believe it or not, their deposits are growing double digits.

The South Financial Group (TSFG): If you did not like the previous bank idea, do not even look at this one. The company was decimated with the recent downgrades of regional banks. They had their share of problems in Florida, but after a recent capital injection their NPA is only 4.4% with 70% of them reserved. There are still some mortgage and CRE problems in the Carolinas, but they look more than half way through and it is just too cheap to ignore: less than 0.3 tangible book and less than 2x pre-tax pre-provisions earnings.

Maguire Properties (MPG): Are you crazy Plan? Commercial real estate, more than 4 billion of debt, negative equity, and priced for bankruptcy? Yes, but. Check the structure of the debt, most of it is non recourse secured by individual properties so they can unload the problematic Orange County properties until they end up with a profitable core. Go to their site and check their buildings in downtown LA: US Bank Tower, The Gas Company Tower, Wells Fargo Center, KMPG Center. Most of them 95%+ leased to AAA tenants and you are buying their equity at less than $70 million. And they have several profitable parking lots. If I ever had a variant perception is this business. Not for the faint of heart

Kingsway Financial Services (KFS): Everything was going great with this insurance turnaround: change of leadership, cost reductions, asset disposals, improving underwriting, stock and debt buybacks and then … all hell broke loose. The Pennsylvania Department of Insurance is challenging in court their disposal of Lincoln Insurance through charity gifts. The issue with a potential reversal of this transaction is not so much Lincoln, which had been written off and its liabilities limited. It is more a potential cross default covenant affecting other subsidiaries. At less than 0.2x conservative tangible book value, a turnaround that is/was in full swing, and a legal process that will take time my bet is that the price already discounts most of the risk. So if I manage to find some margin of safety in the debt structure I might buy some.

I will repeat again: these are not recommendations. I have no position in any of these stocks but I might buy some of them over the next week. Do your due diligence.

No position