Tips / Contact
Do you want a second opinion or just want to give some visibility to a cherished idea? This might be the place and these are some of the ideas we tend to like:
- Turnarounds that are turning
- Cyclicals with downside protection
- Forced selling of good businesses
- Special situations
We want real fat pitches, situations that have real upside potential with downside protection in the Munger, Lynch, Pabrai, Tepper, tradition. Guard up, chin down, looking for a chance to connect the killer combination… and always protect yourself
Just reply to this post below. Ideas submitted have to include a thesis. It does not have to be long, one line per each item suffices but it has to include:
- The idea
- Edge: why do you think it is mispriced?
- Catalyst: how are we going to profit from the mispricing?
- Downside protection: how bad things can go?
- Upside: 2x, 3x, 5x, 10x? how many years?
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Variant Perceptions 
BOLT is a cyclical with limited downside.
Its cash minus debt is around $5 per share if I don’t remember it wrong.
It is a monopoly in the entire globe for the oil exploration business in the water.
If the current sales continues, then it is not a misprice. However I think the land oil fields are running out gradually, so oil companies have to spend more money in the sea, so after the global economy improves in, let’s say 3 years, BOLT sales could go up substantially.
I think this is a 2x in 3 years. Not great deal, but risk is low too given its strong balance sheet.
Zehua, I know that Jae from Old School Value likes it very much. I have been focusing my efforts in the sector on buying E&Ps below their reserves (and a possible reinstatement of dividends even better). Let me take a second look at it.
I talked with my petroleum engineering PHD friend. He said any oil wells have three stages. The first one costs $5 per barrel where you just drill a whole and the oil will flow out, but you can get only 5% of the total oil out of the field. Then follows the second stage that costs $20-30 and you can get another 20% oil out. The last stage needs high pressure steam that gets you another 40% oil out, and costs you $60-70 per barrel.
At present over the entire global land wells, barely any oil wells are still in stage 1, so the oil companies really have to find oil from the sea. Therefore BOLT should have a bright future given its monopoly status.
Your comments about offshore also applies to onshore and the CFW case discussed in the other thread
What do you mean by buying E&Ps below their reserves? I am very interested in the oil and gas sector, especially the gas sector, but don’t know too much about it.
For a start check the CFW posts from last year
CFW – cano petroleum seems to be trading at a deep discount to its intrinsic value due to a delayed/busted merger. This was a merger arb trade that did not (yet) work out as planned. The volume indicates someone wants out… I cannot do the idea enough justice, so check out http://seekingalpha.com/article/213604-cano-a-closer-look-at-valuation
and valueinvestorsclub.com for the write up on the original arb trade.
Another is FFNW – again on valueinvestsclub is good writeup. A Washington based lender that is trading at 40% of book and is discounting a scenario that is not realistic. Management is very adamant about reinstating dividend, possibly due to the bank’s contribution to a local charity (over 10% of all shares). The funding base is CDs and the NIM is not all that exciting, but the price discounts all this and much more.
I am sorry for the lack of details, but you will find much better info at the above sources.
Thanks for your insightful posts!
CFW: I bought it in the past and sold after the acquisition offer, and it was the subject of a couple of the early Variant Perceptions posts.
Check the comments in part 3, already at that time there were concerns about the cash flow capabilities of CFW. And when I sold, they were already too close to some covenants.
The assets are worth a lot, but only on the right hands. They have been having problems doing waterflooding so they need technical expertise. At $70/boe they should have options, but I am concerned that they did not look/receive competing offers the first time for what looked like very good assets.
CONCLUSION: Interesting situation and the failed merger is a clear edge (arbs selling). On the sidelines for the moment, trying to estimate the odds of the different scenarios.
Thanks Frank, for your suggestions.
FFNW: There were good posts on it in Above Average Odds and VIC.
If smart guys are looking at it might be worth deeper analysis. Given that I do not have a team to help me I tend to pick my battles and in banking is difficult to be completely sure about the loan portfolio. That is why when things a little to close to the edge or unknowable in banking I avoid them. If others have facts to add on their C&D portfolio please jump in.
CONCLUSION: If you have the time, I would try a deeper analysis of their C&D portfolio, my understanding is that most of their problem are concentrated in one loan (if they turn that around it might be a good bet) but I have not gone deeper than that.
This is what I wrote to a friend about FFNW:
I am also trying to find banks close to that edge. Wish I could find cheap and decent banks in basket case states (Washington is one, Hawai and Puerto Rico are others), where they might gain share for years to come, that will not dilute, … No luck yet.
FFNW jumped on me because of its high capital ratios and deposits growth. The thing is that FFNW was a little over that edge for my taste so I did not buy in the end. The Texas ratio was way too close to 1, specially considering that still 17.7% of their loans are soon to be maturing C&Ds.
Given the high level of NPAs (even considering that a % of them are performing), reserves of only 3.48% look too low so the good capital ratios could be misleading. In that case, you must be really sure that the NPAs will soon become performing or they have been written down to market levels. It might be the case, but I did not see it in the write-up.
The other thing is that I do not like bold management in banking. Large stock buybacks could also be interpreted as trying to sustain the stock price before a future dilution.
Check the situation of PFBC that Tom Brown discussed a couple of months ago. An FDIC review pushed them to dilute even though most of their NPAs were performing and their capitalization ratios were OK (insider buying too). Also you might want to compare it to CRBC, SNBC, NBBC all of them close to 0.5x TCE given that their NPAs look to have stopped the uptrend and with insider buying … I prefer their risk profile.
I am looking at CTZ-A as a more conservative version of CRBC. There is about $2 in back divies and $5 to PAR…not a home run but not bad return either if one assumes that they restore the divi at the end of the year and yield investord take this trust preferred close to PAR.
With Tier-1 at around 12% and Texas Ratio around 25 and this Q being possibly the last for all the bad loan write offs and good provisiong for the bad loans, this bank definately makes it IMHO so its just a matter of time before they restore the divi, which continues to accrue for the trust preferred.
The common undoubtedly has more potential upside but I cant handicap the equity raise to take out TARP and effects of reverse split.
Anyone have an opinion on CRBC vs. CTZ-A in terms of risk/return ?
I have it on my watchlist. I think it is very safe, considering that the worse scenario for CRBC is some equity raise … and that would be good news for the trust preferreds.
It is just that it is not cheap enough for me. Are others following some interesting distressed TRUPs?
Yeah, I needed some buffer protection in case the Michigan area economy sputters and we need another capital raise but so far it looks like a resonable risk/reward.
FBS-PA is the other one I think could make it. However it is privately owned so it might be a little more complicated.
Here are others on the watch list but all have hair on them:-
IBCPO
BBXT
OSBCP
I know IBCP and I think its TRUPs are a winner but a little illiquid after the exchange.
CTZ earns interest on deferred interest at 7.5% so by end of 2011, it will be slightly over $4 in accrued dividend + interest.
There is also a 5.75% note trading on the market but very thinly. Its up for redemption in Feb. 2013 and its about 13% YTM if you can get some….and is higher up the capital structure than the pfds. Its a pretty solid bet in my view.
I need to look to see if the 28 shares per trust pfd conversion offer (post early redemption period) still stands ……if shares go to about $1 there is nice value there….sometimes management will do private debt to equity transactions quietly.
Care to share positive views on IBCP…it seems stressed but I don’t see any FDIC/OTSor state action against the bank so seems to be below Regulatory supervision radar so far.
How did you find excellent turnaround opportunities like PRXI? Any rudimentary google stock screener search followed by due diligence analysis?
1. Most turnarounds do not turn around
2. Avoid bad industries, that limits the amount of search
3. The very good ones fall on your lap after reading a lot and working a lot
4. Screens are not very good (that I like, because I am not competing versus bots)
5. 52 week lows might help
6. But if you want one metric, P/S is probably the best. If revenues/franchise is stable or growing and you believe that the cost structure will revert to the mean (like provisions in banks) this might help. And given that I personally avoid turnarounds where revenues are declining…
Plan,
I have been watching ASRV, here are some of my thoughts…
They seem to be quite well capitalized and 30-90PD seems to have peaked q4 09 (I hope anyways). Texas Ratio is good. Deposits are growing or at least stable. Over 40% of loans in CRE but NPL are covered by LLR. The banks NIM is good but they seem to spend too much on salaries compared to their peers. The latest increase in NPA was from one CRE loan, secured by student housing. OREO A good sign has been the insiders continuing to buy. I don’t think they will need to dilute.
Something to consider is Nedret Vidinli has resigned. It seems he was brought on to help steer through the TARP participation. He owns 2.1 million shares. (10% of total). He owns them through Financial Stocks Capital Partners. He has only been on the board since 2008. FSI bought the shares in late 04 as part of the capital needed for the turnaround plan.
Other than that, I don’t have any insight. At first the resignation of Mr. Vidinli sounds bad but shares were bought during 04 and not sold before the crisis. He is also on the board of first keystone which recently merged.
I would love your thoughts…
Keep up the good work!!!
Oh yeah. OREO looks OK.
Ameriserv is one bank in my mind. I do not have any insights on Vidinli resignation and that has been the only reason not to add more shares in this pullback. He was the only director selling shares last year.
ASRV has other good things going for it:
* CEO, CFO, and lending officer bought shares all of them at higher prices than Friday’s closing, the CFO recently in May and June
* Banks from Pennsylvania have been doing quite well and it was not close to ground zero in housing
* It was barely profitable last quarter
* One of the first banks accepted for TARP and very aggressive early on on building reserves
* Priced at less than half tangible common equity
Can anyone complement on Vidinli resignation and maybe add on the state of the local economy and its loans?
Today’s results did not give many causes for concern:
*returned to profitability in the second quarter of 2010 by reporting net income of $477,000 or $0.01 per diluted common share
*total deposits averaged $795 million in the first six months of 2010, an increase of $53 million or 7.1% over the first half of 2009
* During the second quarter, total non-performing assets declined modestly to $19.8 million or 2.85% of total loans.
* The Company continued to maintain strong capital ratios that exceed the regulatory defined well capitalized status with a risk based capital ratio of 15.90%, an asset leverage ratio of 11.08% and a tangible common equity to tangible assets ratio of 7.83% at June 30, 2010.
* The allowance for loan losses provided 108% coverage of non-performing loans and was 2.99% of total loans at June 30, 2010, compared to 115% of non-performing loans and 2.72% of total loans at December 31, 2009.
The PTPP earnings remain anemic though
ASRV’s earning power is a problem. Their current price/PTPP is 4.3, a bit too high.
TNCC might worth taking a look at. NIM is impressive. Its net interest margin has grown 100% since 2007, which looks almost like a high tech fast grower.
NPA is a concern though. 30-89 PD is high for a long time.
Had an entry position and doubled it last Monday (had to sell another bank, that I thought had less potential). I was also pleasantly surprised with Second Curve just filling a 13G (5% position).
It is not your typical bank, they do indirect secured lending to truck companies. That is a business with larger steady state delinquencies, provisions and charge offs that your normal loan (deteriorating asset, resell value, etc). That is the reason it requires higher than normal net interest margins to achieve an average 1% ROA. They were thin on the TCE/TA front so that’s the reason for the capital raise. There were also rumors that they wanted to pay TARP but nothing concrete on that.
The big plus is that this type of lending was decimated in the crisis while TNCC survived very well. So if you check their PTPP earnings they are growing fast. In these times, where several banks are complaining about lack of lending opportunities, to have a track record in a niche with much less competition is something to look for.
I will try to post about it during the weekend
Thank you, Plan.
What is Second Curve?
Would you take a look at GMET? I am looking at it right now. Its proved reserve is 209 BCF, which is really good compared with current market cap.
I don’t understand how it reduced unit production cost to only $2 per MCF last year. Will call them to figure out on Monday.
They are currently making a preferred stock offering. If that is successful, I think it will provide enough liquidity for them to grind through the bad economy until natural gas price increases.
Second Curve is Tom Brown’s hedge fund the same Tom Brown from bankstocks.com. From a quick google search, it looks like this is not the first time they buy TNCC based on their successes in C&I lending. Give me some time with GMET, I am not yet fully back.
After a rapid read of some of GMET documents, I like their $2/bcfe but you should check if that production costs include depletion and depreciation costs. That looks too low for coal bed methane. Given that they are 100% natural gas, the rate of depletion has to be compensated with more drilling so those costs are important
Did you check the size and conditions of their borrowing facility? Many of the small natgas E&P producers have been challenged in that front, and given that their hedges are not the best and decrease rapidly over the next years this could be a concern in a low natgas price environment over the next years.
I read something about positive developments in a lawsuit, what is it about?
The litigation with another energy corp has settled that allows them to drill another 60 wells in Pond Creek.
Unit production cost does not seem to include depreciation, so $2 per MCF is a bit higher than CEP, another gas company I bought.
Borrowing base is currently 130 M, and they just get the lender to extand maturing date to October this year. After that, it will be 90 M for three years. They just had a preferred convertible stock offering and received a proceed of nearly 40 M, so this will be sufficient to pay down the borrowing base as well as providing liquidity.
I am impressed with their $2/bcf proved reserve as well as their successful effort to cut down SG&A significantly last year. You can take a look at that number for each of their 4 quarters and see how that drops.
Typo in the last paragraph. Not $2/bcf proved reserve. I mean a 36 M market cap for a company with 209 BCF proved reserve.
I just found a recent transaction from another company as reference. I think it is in BYR’s most recent 10Q, but can’t exactly remember. It acquired a field for 133 M, with proved reserve of around 13 MMBOE, which is 90 BCF equivalent.
Therefore if GMET liquidates, its oil field can be sold for 200 M. Since its debt is only 113 M, it can liquidate at $2 per share.
It looks underpriced, but for that matter would not you prefer CEP that has a similar cost structure but with a clear dividend reinstatement catalyst, or MCF that has a good operator, low cost structure, and no financial distress?
GMET is currently trying new frac technologies on their biggest failure Gurnee fields, and it seems promising. If by the end of the year they completely succeed, their production level will double, and with their currently low cost structure, their earnings will turn positive and rise significantly. I think in the past year they have done a great job cutting cost, and this year they are working on production increase. It looks like a great turnaround oppurtunity isn’t it?
Could be, and I am adding it to the watchlist. But given that is a micro-cap with a problematic history, they still have to show a lot in terms of execution.
It looks like there might be time to wait for a success confirmation. And there are others that have also recently refinanced but have to show ie: CMZPF that got killed after being delisted
I do like CEP, but GMET’s market cap/proved reserve is higher. I think both are great. GMET’s risk is higher, and mostly liquidity risks.
I mean GMET’s market cap/proved reserve is lower so it has more upside potential.
Thank you for the CMZPF tip. I think that company looks great at current price. Why do you say it is killed? You mean the stock price is killed when delisted?
Precisely
CMZPF looks like a great buy now. FCF has turned positive. Their liquidation value is at least $1 per share so that is a lot of margin of safety.
I spent a whole day trying to figure out their unit production cost, but couldn’t. Do you know anything about that?
Looks like CMZPF’s current expectation is cash flow 40-50 M and capex 70-80 million, so that is still a 30 million dollar cash burn this year. That is a concern to me.
GMET is different. Their FCF is already positive, and if you deduct the litigation cost, their net income is also positive.
That is interesting. My understanding is that Compton was going to keep capex at the same level of cash flow (when did they change that?). I have not dived into it given that I have another distressed E&P (PSTR) that is cash flow positive and I want to give it time.
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzk1MTUwfENoaWxkSUQ9NDAxNjA4fFR5cGU9MQ==&t=1
Please take a look at page 26. They said capex 70-80 M and cash flow 40-50 M, which makes me feel bad about the dumbness of their management.
Any updates that they later said they would control capex?
Got it, the sale will finance the deficit and they are planning to have capex = cash flow going forward. As I said, have not gone into the details yet. Thanks Zehua.
I looked at PSTR today. I think its proved reserve is too low.
GMET and CMZPF both have 10 times more gas in their fields, so they are both turnaround with high asset backing up to limit the risk.
PSTR really confuses me. In one place they said their assets allow them for 15-20 year production, but the other presentation they said their 2P reserve is only over 100 BCF. So with daily production of 50 MMCF, it can only last 7 years at most.
Also the white deer deal is a surprise to me. Right now the market cap is only $35M, but white deer got option to purchase $60M of stocks at $3.15. That is too bad and too much dilution. I feel like this company’s management has no consideration for its shareholders at all. They just collect big paychecks, sell all their stock awards at whatever price they can sell, and live their happy lives.
What is your view on FNMA? If the us housing market is indeed stabilizing, then FNMA would be able to turn into profit soon.
It is more speculative given the political risk – F&F do not have many friends lately – but I do have some FRE prefs. If you think house prices are close to the bottom, check the preferreds. Delinquencies for both GSEs have been declining several months in a row, their PTPP earnings are at record levels, and they have huge reserves well above their charge offs. Not sure about the common given the large dilution implicit with the warrants.
Thank you! I think that puzzle is probably too hard for me to solve, so I will leave it along for now.
I am thinking about significantly increasing my shares in TNCC. Just sold FDEF today. TNCC’s probably the best bank oppurtunity I see at this point. Other banks won’t have such growth niche.
have you checked FPFC? A little more speculative given that they are big on housing. However, they too some big preemptive write-offs the last Qs and their credit metrics are improving fast.
Thank you so much for the tips! I am not familiar with preferred stocks, but will start learning this weekend. I have no idea how it works and why you think the FRE prefers are good, but I will definitely start to learn now.
There are so many kinds of FRE and FNMA prefers, which one are you talking about? I am a bit confused.
For the details goes to quantumonline.com. There are par at 25 or 50, plus fixed and variable rate. Besides that the difference is the dividend yield … if they were paying.
Thank you so much! Would you recommend buying a higher interest rate preferred, or a lower one, or does it matter at all?
The one below says distribution is suspended. What does that mean?
http://www.quantumonline.com/search.cfm?tickersymbol=FMCKK&sopt=symbol
None is paying. But you are buying at less than 2 cents on the dollar, I think equity is a Zero but the prefs have a chance for appreciation (I think FRE will start showing large profits next year). Which one to buy? I think government will offer an exchange before paying dividends and all of them are pari-passu if that happens. So I would either go for the cheapest or the most liquid (if you want to have flexibility)
I see. Yeah I wouldn’t think the government is really going to pay all the dividends, but if they make an exchange of, say one dollar for 20 cents, that would still be a 10 begger because we are buying at 2 cents on the dollar.
So this is entirely speculative, and depends on how government decides the exchanges ratio?
Given their credit trends, if the housing market things don’t go worse any more, I do agree that FRE will show large profits in 2011, so if their profits is, say 2 Billions, and their prefer dividend liability is 3 Billions, are they going to pay out the 2 billions as preferred dividend, or they are still going to pay none?
Not entirely, it is more a Graham intelligent speculation. The only way that the prefs get wiped out is if FRE moves from conservatorship to receivership. Everything indicates that the government will not do that this year or the next since they are playing for time and it is not in their interest. And at the moment FRE starts to show big profits, they can not do that.
Ha, FPFC is at the brink of delisting. Given the low volume of the stock, it might get to $0.3 in 3 days.
Its credit metrics is a bit disturbing, but at least the TCE covers 200% of the NPA, and stabilizing, so I would still assume it is a relatively safe turnarond. It is interesting to see that Fairfax has a small position in it. ^-^
No need to advertise such opportunities (smile). I am waiting for its delinquent financials to make a decision.
Yeah. I learned from my past experience that I should always wait till the situation starts to improve before buying. I would rather pay a higher price, than paying for a super cheap stock which later turns out to be a value trap.
I will wait too, until FPFC shows their numbers are great, or at least the 30-89 PD incoming bad debt is low.
The delinquent financials are actually ok, right? Bankregdata still has their updates that they filed to FDIC.
Yes
yes, but the co could be so far underwater that the prefs never see a dividend. they don’t expire, but they would be worthless in the long term.
there could also be other legislation specifically aimed at them, and that legislation might be of dubious constitutionality, but that might not matter as you’d need standing and money to bring it before a court.
my take, having gone through john hempton’s analysis a year ago in detail and having taken a position in FRE prefs somewhat after that is that there is a decent chance of these being worth something. i think his postings on these are still basically valid. the politics of these organizations is really rough though. i think these may end up doing quite well in the current situation which is political impasse + high enough interest spreads if that lasts through 2012/3. another situation in which these do well is if the economy recovers and delinquencies go down / recoveries go up — but the trends will be the other way for the remainder of the year at least.
as for which ones to get, there are a couple things to imagine. if you think that dividends may resume at some point, you’ll probably want one with a fixed dividend. if you think that the govt will settle for the same amount per bond not per $ of par, you might opt for a 25 par note rather than a 50 par note. i used to have a lot of floating notes but traded them for fixed notes after delisting as it cost me nothing to do so but a little time.
anyway i own some but think it’s both a long shot and long term play. nothing at all is going to happen for the next year and the credit situation could get worse.
Thanks babar, nothing to add
Thank you very much Barbar. I spent a whole day to go through FRE’s 10-K and 10-Q. The nonperforming asset is currently 5.9%. If we see a few quarters of steady decline, that might be the signal of turning point. But for now, I think maybe it is better to stay away and just watch how it goes.
It is a bit surprising to me that FRE even owns a lot of subprime mortgages.
Why do you think variable rates preferreds are not as good as fixed? I do not quite understand.
the variables are probably better than the fixed because in this case the variable rate prefs pay low coupons. for instance the ‘P’ series has a fixed coupon of 6% whereas the ‘G’ series pays something like libor minus 20 bps.
the subprime mortgages that FRE holds are predominantly Alt-A rather than true subprime; these haven’t been as spongy.
one thing to add is that if the govt wants these entities to exist and be privately owned in the future they will have to resolve the situation with the prefs, either by having them pay coupons or by paying off the holders. i think this is likely as creating something new and in parallel would be painful and few would want to take the risk on a purely private solution. pure nationalization is also out of the question as the book would end up as part of the national debt numbers.
i think you are right that there is no compelling reason to buy now except as a pure speculative play.
Got it. So you think the higher the dividend rate for the preferred, the better? I think there is an over 8% preferred series, and volume is reasonably high, too.
Plan, why do you think their credit trend is improving? Their NPA is still going up, and their delinquency rate is slightly down, but they said it is due to large loan modifications. I think one of your previous post said that 50% of the restructured loans will default eventually, so we have to wait and see their definitive improvement, which is their steady decrease of NPAs, lower delinqencies, and if at that time, they do not need to draw additional money from Treasury, and also their annual senior preferred dividend liability is reasonably low, that would be the time to start buying. What do you think?
At the end is a personal choice. From my point of view the delisting provided a window of opportunity for a good risk-reward for a small position.
Total delinquencies have been going down several months in a row, the cumulative effect is substantial. Also the draw from treasury is close to 0 at the moment. Regarding the modifications, I do not think is the main part of the story. The problem are the fraudulent mortgages. And they are getting paid back slowly from the BACs of this world.
Repurchases have cost the four biggest U.S. lenders $9.8 billion, according to Credit Suisse Group AG. The total could exceed $179 billion for 11 of the largest lenders, according to Chris Gamaitoni, an ex-senior financial analyst at Fannie Mae who now works at Compass Point Research and Trading LLC, a Washington-based investment bank.
The Association of Financial Guaranty Insurers, a trade group for companies that provide private insurance for defaulted mortgages, said Bank of America may owe its members $10 billion to $20 billion alone for breaches of representations and warranties, as the buyback guarantees are called.
With the standoff in congress and the current administration running out of political equity it is very unlikely that anything will happen with the GSEs anyway so I did not see much benefit of waiting. And the rest of the story is well known: each Q that nothing happens, each Q that increases the probability that they will survive in some form.
Hi Plan, how did you find the monthly data for their delinquencies? I only have 10-K and 10-Q, which does not look very well as they drew another 11 Billion from the Treasury, and NPA going up again.
I did some google search but could not find much info regarding the fraudulent loans. Would you please tell me a bit more about it? As far as I understand, Freddie mac buys a lot of loans from these banks, and they simply take their loan paper works as true info, and if some of these loans later turns out to be fraudulent, the banks have to buy back the loans?
I do not know where to get the monthly delinquency data, but if indeed they have stopped drawing funds from Treasury, then I would start to build a small position, and if their NPA starts to trend down, I would buy more.
for the 11 billion number, you must have been looking at their first quarter not second quarter 10Q. note as well that the 11 billion draw was caused by one-time accounting changes.
the monthly numbers are here: http://www.freddiemac.com/investors/. the only meaningful ones in these reports are the 90-day delinquencies.
barbar, thank you for the link. The delinquencies have been lower since January, which is how they got slower increase of NPAs.
The 10-Q is the 2nd Quarter.
http://ir.10kwizard.com/files.php?source=1372&welc_next=1&XCOMP=0&fg=23
I am looking at the August quarter. It says 10.6 B draws from treasury.
NPA at present is 5.9%. Still increasing, but the speed has slowed down. Maybe I should buy a small position, and wait for the NPA to drop before buying more.
Their total preferred stock at redemption value is 14 B, and senior preferred is 62B, so if they can stop burning cash next quarter, and stop drawing, things will turn positive, and it wouldn’t be too hard for them to pay back the senior preferred in 5 years.
I have never bought any distressed preferred stocks before, so does anyone know, if a company later resumes profitability, it has to resume paying preferred dividends? Is it even legal for the company to force to exchange the preferred stock to another form of equity or bond at an unfair exchange ratio?
Zehua, follow Babar
there’s no legal requirement for them to start paying dividends on the prefs but they can’t pay dividends on the common until they pay dividends on the prefs.
Plan
Could you please explain your (short version) thesis on PSTR ? Looks like they got some financing but it seems very expensive and could be very dilutive too. How do you handicap that.
TP
Short version? Nearly impossible given that is a complex and distressed situation so careful. For a start of your research the thesis is based on the value of the assets: 40K Marcellus acres, the quality of the hedges, the potential for the underutilized pipeline assets, and the operational cash flow hidden by the write-offs. Add to that this is a cash flow positive cyclical at the bottom of the natural gas cycle.
Any thoughts on PMI or ABK now that banks might be forced to buy back bad loans?
Ambac it is too complicated and outside my circle of competence to have an opinion.
Regarding the mortgage insurers (MTG,PMI,RDN) they seemed interesting even before all the recent hoopla. If anyone has a good report and valuation, I would love to get more in-depth into these companies and sectors.
I would not put that much value on the MBS putbacks: litigation is going to take several years, they will probably settle and the payments will be staggered. Actually, given the magnitude of the problems compared to its current price and capital, I think Bank of America is also interesting.
http://www.scribd.com/doc/39215093/PMI-Group
I will use PMI as an example, these are some of the reasons I thought the mortgage insurers were worth a look:
– their delinquencies have been declining several months in a row (slides 10 and 11)
– worst geographies and products are becoming a smaller percentage of the portfolio (slide 12)
– most of them were able to raise capital without too much dilution
– FHA is raising prices and will probably reduce their share in the market (slide 6)
– fewer competitors
– still generating substantial revenue
– seem well capitalized (slides 15 and 17)
– with all the headwinds they have not stopped paying
Remember, I am only saying they are worth a look and I am not recommending them yet.
Disclosure: I do not have any of the companies discussed
I never had a clear understanding of “Gain on sale of mortgages” for banks. If I am a bank, I make a loan of 100K, and then sell it to Freddie Mac, then I can report a gain on sale of mortgages of 100k?
Below is from FBMI’s latest 8-K: “Gain on sale of mortgages surged in the third quarter of 2010 as low interest rates on mortgages rekindled refinance activity. ” So what has refinance to do with Gain on sale of mortgages? I think refinance is basically just take a new loan from another lender to pay off the existing loan, so sale of mortgage does not seem to be involved here?
Zehua, I am business trip. I am back end of next week
Wow. I love travelling, but I have never been sent anywhere for a business trip. Enjoy!
Want to take another look at IBCA? I asked about this one 6 months ago and you said its NPA is bad. Now their NPA dropped from 6% to 2.46%, and they just had a capital infusion, so things are better now. I am just concerned with the poor NIM and pre tax pre provision earning.
Zehua, I understand why you might be interested in IBCA, specially with the recent insider buying. However, I find it a little complicated. I do not particularly like their distributed model and I would not be surprised if there were more issues coming. They reduced their NPAs but it was through a wholesale sale at a loss so I have not seen evidence yet of a slowdown in the inflows.
GMET just reported a quarterly EPS of 0.1 per share, which is exactly what I expected. This is the first positive earning in 2 years. So the effective P/E becomes 1.5 now.
Zehua, I do not think I will have time to analyze it this year
GMET is really simple. It only took me 2 hours to analyze and decide to make a concentrated bet. Its current price/FCF is 1, and their gas reserve is so high.
It took me 10 times more time to do the analysis for a simple financial like MPG.
Anyway, do you want to take a look at DJSP? It is the largest firm for helping the banks to do foreclosure. It is currently being sued by the banks as making illegal foreclosure process. If it turns out to be a fraud, then we know the bank’s loan books are probably better than they appeared to be now. If it is not a fraud, then we get a 10x here, and also we know the banks’ loan books are much worse than they appear, and they are blaming DJSP to delay their own loan books’ foreclosure. So this company is worth studying anyway.
You have a happy thanks giving. I will take a deep look into this company after I got back from this holiday.
GMET: I do not know where are you getting the 1x FCF Zehua. I am checking the cash flow from ops, subtract the capex and I am getting with luck to $6m of FCF. There are some risks too since the hedges decline rapidly over the next years and most of their acreage is already developed so I am not going to get positive surprises like PSTR selling their Marcellus. Plus you have the convertible dilution that doubles the number of shares to north of 60M. It is cheap, but it looks like many other distressed gas E&Ps. Am I missing something?
DJSP: I have been following Mr “Su casa es mi casa” Stein for a while, I think it is a terrible business that works only 2 years every 20, that was highly leveraged, with a leader very close to being just a con artist (heard him in a presentation), and that lost all support from its clients and the GSEs being at the center of the foreclosure scandal. Short candidate when I first heard it recommended but I do not short. I do not see the margin of safety (revenues completely collapsing, high leverage) and I think it will collapse.
An update on CEP: I called them today and they said although their debt is below 90% of their new 195 M credit facility base, they still have no plan to resume cash distribution throughout 2011, so I think this is currently not a good time to buy CEP yet.
Thanks for your comments on DJSP.
GMET: I used most recent quarter’s net income plus Depreciation and Amortization minus capex. Their 3 month capex should be around 1.6 M I guess, because their cash flow statement says the 9 month capex is 7.7 M, so this gets me a FCF of around 4.4 M per quarter. The price/FCF is 2, so I was wrong the first time. Their preferreds are convertible at $1.3 per share. You are right. That will dilute it to price/FCF of 4. Their proved+possible reserve in total is nearly 1 TCF. That is the major reason that I bought this in the first place. This number comes from their presentation on their website.
Any thoughts on GKK’s recent news to sell some of its properties to SL Green?
http://www.businesswire.com/news/home/20101206006135/en/SL-Green-Announces-Agreement-Acquire-York-City
Initially I thought this is an acquisition of entire GKK, otherwise the stock market wouldn’t have reacted so strongly. But it turns out to be just acquisition of a few properties. This seems to imply that at least for these buildings, GKK is not underwater. My current major concern is whether GKK’s other properties are underwater. That is really important because they need to do refinance for 44% of their existing loans in 2011.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=tm&bn=24916&tid=12431&mid=12503&tof=13&rt=1&frt=2&off=1 http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=tm&bn=24916&tid=12500&mid=12558&tof=3&rt=1&frt=2&off=1 http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=tm&bn=24916&tid=12500&mid=12515&tof=3&rt=1&frt=2&off=1 http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=tm&bn=24916&tid=12648&mid=12648&tof=2&frt=2 http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=tm&bn=24916&tid=12648&mid=12649&tof=2&rt=1&frt=2&off=1 http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=tm&bn=24916&tid=12634&mid=12635&tof=2&rt=1&frt=2&off=1 http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=tm&bn=24916&tid=12634&mid=12640&tof=1&rt=1&frt=2&off=1
These are not any properties. These are corporate properties and their sales makes it to $200M in cash independent of the non recourse CDOs and the non recourse Realty division.
GKK is a GRAHAM STOCK, its unrestricted cash and securities can buy all the prefs and common stock.
Plus you get for free
1. one CDO that is generating around $35 million of cash flow per year,
2. another CDO that will eventually heal over the next three years, maybe sooner, that generates another $30M
3. the Realty Division with more than $700M in tangible equity with real estate valued at $120/sqf.
All the maturities you mention only touch the Realty division. It is a big issue for Realty: as you say, it is 40% of Realty’s debt. I think they will save it, maybe rolling the mortgages into the CDOs ( using the restricted cash, cash from loan maturities inside the CDO like the Puck building, and small sales to generate a mortgage) and negotiating a extension of the mezz using the unrestricted cash. But anyway… Realty is a free option.
Hi Plan:
I’m wondering if you have ever done much work on UCBI. I am generally bullish on the regional banking space (and accordingly at least don’t have a negative macroeconomic view), thinking there is great opportunity in the banks that are scaring the hell out of people but will end up making it without massive dilution. I’ve crunched the numbers, and I *think* UCBI falls into that category. but depending on the timing of losses, they could get forced into a dilutive raise before PPTP can really start to shine. There was a real opportunity to but it at super distressed levels two weeks ago, but I hadn’t gotten to it – shame on me! But if you think there isn’t massive dilution and you ascribe a moderate valuation to the deposit franchise, it looks like a double over the next few years or maybe sooner ($2 to $4). Thoughts?
I did John but UCBI scared the hell out of me too (smile)
22% of their loans are construction and development, and I do not think that any amount of work can reassure an investor on their quality. They are just too risky. My understanding is that part of these loans are FDIC guaranteed but I find it a somewhat complicated to analyze.
You mention you did some calculations. Of what kind? Small banks are cheap but I would still be careful with the C&D loans. Maybe later in the cycle…
Sorry I have to give up GKK after so many hours are spent. I think at present I would be able to analyze a pure REIT like MPG thanks to your lessons, but GKK is just too complicated. I couldn’t understand the CDO part.
I think a while ago we had some talks regarding Chinese stocks like CCME and ONP. Did you delete the posts?
Do you think China is going to follow Japan’s crash in 1980, and economy stays flat for 20 years?
I think China’s growth engines are all running out.
outside my circle of competence
I have not but I do not remember where they are. That is one of the reasons why I prefer to consolidate stock discussions here
Actually I thought I put those stock discussions here. CCME and ONP. Recently these Chinese stocks are said to be lots of frauds, so the prices are really low, but later it turns out that most of them are innocent. I think even DuoYuan Printing is innocent.
If you can distinguish the frauds, valuations are cheap. With the opportunities in financials I think it is easier at least for me to detect the survivors
Sent from my iPod
Hi Plan,
specifically, I guesstimated that 45% of the C&D loans go bad and the severity is 60%. You are right that any model is extremely sensitive to the loss assumptions and the potential dilution from a low capital raise price. If mortgage and CRE losses come in around 9% and 12%, respectively, and the capital raise is a 10% discount to current prices, the stock is pretty attractive. highly volatile but that’s why it’s so depressed.
If this was an mREIT like SFI that is not regulated I would agree with the analysis.
My concern looks to be a variation of yours: regulators have been very tough in pushing for NPLs/TDRs recognition and can dictate the need for very high capital ratios with their letters of understanding or cease or desist. Preferred Bank (PFBC) had to face precisely this situation. It is difficult to handicap regulators.
That’s very true! If one was to get serious about loading up the boat with banks it makes sense to have a barbell approach (high quality, likely higher valuation – with limited capital to distressed, potential big returns). I also like and own CLFC, which now looks like it will be a consolidator of the Korean-American banking space (lots of CRE in that market thus many distressed competitors to consolidate). The market has really liked the CLFC – NARA deal.
I am asking for the moon John, both quality and valuation heh! Several regional are at their cheapest since the crisis began and many have already turned the corner in terms of credit quality. Zehua’s TNCC is just one example. You might want to check the banks I have mentioned in the Banks in my Mind series.
TNCC’s IR person is really hard to get reach to. I left over 4 voicemails in the past and never got replied. I kept complaining and today they finally said they would call me tomorrow. Do you have any specific questions to ask them, Plan?
My major question is about their underwritting standards for truck loans, and what is the % of their truck lenders got killed during the crisis. In that way I can know how much they can grow after this turnaround.
That is one, the other would be who are they stealing market share from. They are growing very fast PTPP
I just talked with them. They said during the first 7 years, this bank was growing at 47% per year. That is because the founders came from First America, and brought lots of relationships and expertise here. Even in today’s local market, they are the biggest commercial lender in terms of % of commercial loans compared with total loans. They said the barrier of entry is high, because commercial loans require much more expertise to do the lending compared with real estate loans. For real estate loans you just hire an appraisal, and then do the 80% LTV, and you are done, but commercial loans are a lot more complicated, so this provides good niche.
Regarding trucks, they only have 10% of their total loans in trucks, so it is much smaller number than I originally thought. However they were able to sell the truck NPAs at 95-97 cents on a dollar, compared with other truck lenders’ 50 cents on a dollar. They tried really hard and do the retails one by one while other lenders just go to the wholesale auctions and sell the trucks all at once. In addition, starting from this year, the new trucks will have EPA standards that limit their speed, while their old trucks don’t have this standards so they can be driven faster on the road, so their old trucks are actually easier to sell than this year’s new trucks, that gave them big relief on working through these truck NPAs.
In general, I am impressed with their commercial lending practices, and I think they will be the first to benefit from economy recovery compared with real estate lenders.
That is very interesting, thanks for sharing. The last crisis shows that RE lending is not that easy but on general grounds I would prefer to buy a bank with a niche C&I expertise than your average bank.
I would check that data point on % trucks, I thought is much higher than that. What makes the difference?
What makes what difference?
What is the other 90% of their loan if it is not trucks
I didn’t ask about that. I originally thought they are all trucks too.
The other thing about TNCC is their almost total lack of a deposit base – they rely on wholesale funding (although they say they are trying to change that). If rates really pick up it could be a bigger negative than for other banks with cheaper funding. It is a cheap stock, though, and the truck assets backing the loans could actually be money good. So it’s interesting.
Good point john! However this is exactly how they kept their non-interest expense low. If you look at their spread from 07-now, it is roughly the same, so probably not a big concern? Their major investment is C&I loans, which have shorter terms than mortgage, so if interest goes up, they can adjust their loan yield accordingly.
I was reading the latest 10K of FIGI.
“The Company earned approximately 79% of its revenue from one customer for the three months ended September 30, 2010”
Don’t you think this as a risk in this investment?
This is a construction firm so in any one quarter there could be some revenue concentration (a large percentage of their pipeline is one project). However, the recurrent revenue (facilities maintenance) are diversified and they have a long list of prime clients. My main concern is that they survive the downturn so recurring revenue, cash flow and cash is what I am focusing on.
Zehua,
My understanding of TNCC’s loan book is that it’s about 50% C&I and almost all of that is the truck loans (mainly tractor, a few trailers). I would view that as a positive in that they are asset backed and according to the company are pretty much money good right now. I haven’t contacted the company though. Perhaps you have an update?
best,
john
No. They said only 10% of their CI are trucks. However they do have the CI niche, and during market peaks, other regional banks are paying TNCC for consulting job with their CI loans.
Right now TNCC is nearly $5 now. The upside potential is not as strong as when it was $4.
This is a seasonal business, so I would hope that they report some losses in the next two quarters and drives down the price again.
I have been looking at CBEH recently. What confused me in their latest 10-Q is that they had big profits last year, yet their total assets and equity dropped quite a bit from last year. How can this even be possible in an accounting basis?
Looks very strange. Also one of the columns of the balance sheet says December 2010. What about that?
I will call them again on Monday and see what they say. I know their accounting was like a mess until recently when KPMG took over the accounting role. Yesterday when I called, my major concern was about their recently two private placements. They said it is very tough for non-state owned companies in China to get a bank loan. Right now they have a small revolving credit facility, and even for just that, the banks in China asked for personal guarantee from the CEO. They tried to apply for a loan in banks in US, and the interest rate is 10%. Therefore they decided to issue more shares. I think that might be an excuse, because they tend to have a habit of printing shares.
Anyway, this is still worth taking a look, suppose you trust the numbers by KPMG. They will quadruple bio diesel production in 2011, and this section is currently their major income source, so it might be an EPS of $3.
I remember I talked about CCME in this post and you said you are concerned with Chinese stock frauds. But the post is magically gone.
I still think you should take a look at this company. The business is real. My friends verified that for me in China. He spotted their ad in a long distance bus even between two very small towns.
Remember that their contracts are hard contracts that require a 30-50% increase in ad fees annually, so this guarantees super growth. Also their cost of expansion is super low.
I have seen numerous Chinese companies. Most of them really suck, but this one is different. It has CFO insider buys, share buy backs and they last month announced start of dividend, which is unheard of in other printing-share-like-frenzy Chinese suckers. I am expecting its EPS to be $8-10 in 2013.
I bought some 6 month call options as well, because of the high short interest. It could be a short squeeze drama soon.
I get your point and people I respect that have studied Chinese stocks say the same about CCME. The thing is that the timing is terrible, with financials and CRE improving fast and valuations very cheap (even compared with Chinese small caps) and I understand them much better
Yeah I understand that too. I think the banks you mentioned in this website all have 3-4x potential.
Plan, Zehua:
I do think the noise surrounding it makes it speculative, but there’s a fair to good chance CCME is legit. If nothing else, it could go a lot higher due to more coverage/discussion in the value community here, the Forbes small growth co ranking released yesterday, and given the short interest. I don’t know if the Global Hunter investment bank is legit (based in U.S., but that’s no guarantee), but I saw their analyst covers it and claims to have checked their financials in person. They do use Deloitte, the CFO did buy 100k shares, and they did announce a dividend policy based on their net income.
I do think this should be a small position becuase things that look too good to be true (i.e. their reported growth/growth outlook and low valuation) usually are. It’s possible there are diamonds in the rough there. The margins do look extremely high for this kind of business and I don’t see the barriers to entry that would justify them. But on the other hand there is so much Chinese stock fraud that that alone could be wrongly despressing the valuation. Yesterday I took a 2% portfolio position as a spec.
thanks,
John
Their contracts are all hard contracts that require 30-50% ad fee increase. Also their expansion cost is low. That is how they can sustain growth. Their per 1000 viewer cost is only 4 RMB while other traditional ad company costs are 400 RMB. So they started their contracts with low fees to attract customers, but require the 30-50% fee increase annually.
Their barrier of entry is high. Right now they are the only one allowed to do this business until 2012.
Good lord, not to jinx things but it looks like the short squeeze might be on.
CCME’s recent two days’ volume adds up to 13M. remember they only have 12M shares float, so this is most likely naked short selling going on.
Or a lot of trading going on… the Citron report is the weakest I have read from them and it sure looks like a hit job. But still, I do not more about the company and I am avoiding Chinese companies.
It is funny that muddy water chose Chinese new year to send out their report, because they know there would be no one to respond.
Muddy water is the same firm that attacked ONP and failed.
If CCME’s revenue is really that low, how is it possible for Delloitte to verify the strong free cash flow of 30-40M in their cash account?
If CCME is indeed fraud, Delloitte will go down as well.
Plan, have you taken a look at SVU?
Enormous cashflow, no need to renegotiate debt for four years, valuable real estate undervalued on the books…
The stock has been killed through a combination of disappointing results and pessimistic downgrades.
At this point it looks like a cheap LBO and is the right size to be taken over.
Doesn’t look like the most lopsided opportunity ever, as the upside from here is probably a 3X-4X and the maximum downside is POSSIBLY a complete loss, although I think the odds of that are very overblown. The huge cashflow provides them the opportunity to pay down debt at a very fast rate.
The turnaround is not turning yet, but I will be paying very close attention over the next few quarters…
If you have any thoughts on the company I’d appreciate hearing them.
Only superficially. I do not like retail turnarounds much less supermarket turnarounds. Margins are too thin and Wal-Mart too good a competitor, so no margin of safety. Add a little inflation, with problems to raise prices given the mighty competition, and things could go down fast given the large debt.
(check post on Penn Traffic)
I did analyze Supervalu business more than 10 years ago for a consulting project. Their main business at that time was wholesaling to local supermarket chains, and they were transitioning by buying at discounts their clients when they got in trouble (Wal-Mart again). So if I have to bet, the location and size of their stores are not the best.
On the good side, I remember also that they were experimenting with hard discounting (Save-a-Lot), similar to the successful Aldi, with very good results.
Thanks Plan, good points.
I do agree that over the long term, Wal-Mart probably eats their lunch.
Save-a-Lot could help them turn things around, but maybe the hole is already too deep. Perhaps the ill-timed Albertsons purchase will prove to have been the kiss of death.
ha, so now there is an inverse short squeeze, I did jinx it!
anyway bought a bit more today. I don’t have the convicion to load the boat.
Yeah. I think the shorts are rebuilding their positions these past four days. I was amazed that the past four days’ volume adds up to 200% of their float.
CCME is certainly now a battleground. There is now so much noise and inconclusive evidence it seems one can’t make a firm conclusion about fraud or not. This may end up being a real lesson to me, as it is the type of situation I normally would not end up in, despite what looked like a legitimate deep value stock. As of now I still own my stock, I’ll try to pore through what information is out there (which means learning about the SAIC filings. Shame on me for not doing so before – lesson learned.)
If this is fraud, why would their CFO buy 100k shares at $15?
Muddy Water’s report has so many errors and they also retreated the citation on page 8.
http://www.shulaw.com/About-Us/Investigations/China-MediaExpress-CCME/
The lawyer above is trying to sue Citron and MW. I contacted him and see if he could help me cover some losses.
Ever looked at VRTA?
Super cheap on almost any metric possible. Debt-free too. Admittedly, Shustek does seem pretty sleazy.
With CRE coming on strong, might be worth a peek.
Actually, I have. As well as its sister company. Sleazy comes with the CRE territory: If I share what I have faced and learned with MMPIQ you would not believe it.
Max, would you mind sharing with us a mini thesis to start the discussion?
VRTA might be interesting. Trading at 35% of BV and a little under cash and no long term debt as you note. $8 mm in OREO and $8.7 mm in RE loans- I am guessing that is where the potential mispricing is here? Market is assuming these are almost worthless. They have $5 mm in cash-total liabilities. Trading for $8 mm. So assuming the RE and loans are worth 3 mm vs. the 16.7 mm on the books? Do you have any insight into the particular assets here? You mention management is sleazy though so cash might be discounted as well. Anyway, looks interesting would be interested in hearing more.
The quick and dirty:
VRTA:
Price/BV: 0.35
No long term debt, 1.6M current liab
6.5M cash (as of 9/30/10)
VRTB:
Price/BV: 0.35
No long term debt, 13.7M current liab
14.25M cash
So both look extremely cheap on a NAV basis. Now the bad news… Shustek and Vestin Group look to me to be slowly bleeding VRTA and VRTB dry via “management” and “professional” fees. And really I don’t know what there is to stop them. There is a massive gap between NAV and the stock price, and there has been only very minimal buying back of shares. I bought a small amount of VRTA last year when it was trading around $1 a share, but seeing how Shustek was buying back tons of VRTB, perhaps II is the better choice, assuming either is good at all. I found it difficult to discern the relative values between them, since they both own shares of the others stock and it seems like assets can just be swapped back and forth between them to supply as many fees as Shustek desires.
The complete lack of debt provides a pretty damn solid MoS. If Shustek really thinks the companies are so undervalued (he has bought plenty of shares for himself to support that idea), then I am curious if the company would be willing to take on a little debt to buy back such undervalued shares.
I like the model of buying broken REITs and then selling them when they return to paying a dividend, so that’s my aim here. I’m just now wondering if maybe Shustek bleeds the NAV dry or takes the company private before that ever occurs. With the incestuous connections between the various affiliated companies, it certainly has the look of a group cookie jar.
I thought your MPG write-up was excellent, so was curious if you had heard of VRTA/VRTB. But it appears I’ll have to try harder to slip something by you 🙂
Did you follow the circus w/ Ken Klaas?
The fear of fraud could be allowing us a great opportunity, but other than keeping the position size small, I’m not sure how to handicap such a thing.
I think things are probably about as bad as they’re going to get here. Important to remember there is no debt, so the risk of a sudden collapse is basically limited to some sort of Madoff-esque confession. The discount to NAV still allows a lot of room for error. If CRE continues to improve shareholders could make 300%, 400% plus on Vestin.
Thanks Max for that write-up.
What got me interested in the first place was Shustek’s VRTB insider buys that you mention. I was keeping it in the bullpen because I do not like that it was Nevada, but even Las Vegas is rebounding.
I would add that it also looks that the book appraisals are conservative. Most real estate asset sales have been for a profit or small losses.
And even with Shustek professional and management fees (that are pretty usual in this space) the REIT selfs-destruct and liquidates at the end of the decade. There is an interview where he explains precisely this point that you should read.
I did not look into the Ken Klaas saga, anything in particular I should focus on? Do you have a list of the properties and the loans?
Is this the interview you’re referring to?
http://www.lvrj.com/business/48721852.html
I do like the protection the dated liquidation offers.
The Klaas carnival is not particularly worth digging into now that it’s over with, it was just a comedy of errors the whole time, a typical waste on legal fees.
VRTB is not a large position for me at this time, so I haven’t dug into the individual properties and loans yet. If circumstances change and I decide to make it a larger position, I will definitely look in much more detail. In that event, I’ll link you the pertinent info I find, assuming you don’t already have it.
Very nice blog you’ve got here Plan.
That’s it Max! If you decide to go deeper, I am willing to share the work
“I buy $10,000 worth (of Vestin Realty Mortgage II shares) every day. This REIT expires 2020. The book value is $10, and you can buy it at $2.50. If you can buy $10 bills for $2.50, how many are you going to buy? If you lend at 60 or 50 percent of current value, hopefully it won’t go down another 50 to 60 percent. I don’t feel real estate can go down another 40 percent. ”
Caution on VRTA, VRTB.
I came across this:-
http://www.investorvillage.com/smbd.asp?mb=4143&mn=187815&pt=msg&mid=10132630
Thanks Tango, I still think given that its assets are easily verifiable and no debt this is very unlikely to be a fraud. It has to be verified though.
TNCC starts to grow again with both deposit and loan up 4% from last quarter. I think that is a very good sign. If they could sustain this 4% per quarter growth that would be really nice. Between 07-09 they seems to be able to do so. It is just 2010 that they slowed down and focused on resolving their NPAs.
Meanwhile, I felt deeply regret that I didn’t buy any Freddie Mac preferred. I actually made a call to my broker to place the order and they kept telling me this is high risk high risk high risk and I get scared out. I wasn’t tough enough to get this done. Lesson learned here.
Plan,
I was wondering if you could comment on the (overall unsurprising) leaks about the FRE/FNM plan on Friday. Also, Ackman’s CNBC appearance yestersday included a FRE board member (Clayton Rose) who made it clear he feels no obligation to shareholders. Makes me a little nervous about what the government is thinking.
1. Nothing surprising, and the increase in rates to make room for private companies would increase FNM/FRE net income. A huge positive, and it looks like the republicans are getting on board.
2. Yes and no. He made it clear that his obligation is to the conservatorship and the conservatorship goal is to conserve the assets. That is all we need.
I am not saying that this is not risky but the problems are political not in the businesses. And if it is political, there are not many escape routes.
Plan, are you at all concerned about the signalling effect of the Manzullo bill banning a reduction in the interest rate paid to the treasury by the GSEs? The Republicans probably won’t want to reduce it even under a package deal?
I sold my prefs so no stake in this battle so I should not cry too loud what is coming next. However, trying to be constructive, I think that if the republicans did not manage to kill the GSEs in their first 6 months in office they will not have a chance to do it later.
(1) FRE is already income positive: and has guided no more borrowings. Only with a couple of quarters of profits, that can reverse the DTA allowance, they will be able to reduce their borrowings from treasury.
(2) GSEs delinquencies are improving: and they are way over-reserved. How long will they justify reserves so high? This improving delinquency trend was only barely affected by the recent housing weakness and that brings us to
(3) Housing market is still weak: nobody will experiment with killing the GSEs in the current environment. There are even a couple of republicans throwing a proposal that basically keeps the GSEs in their current form with some minuscule face-saving handouts
(4) Housing lobby is very strong and active: and they are winning battles.
The reduction in interest rate would be nice to have but it is not the whole game.
Hi Plan,
Thanks for the response. I think your approach is absolutely appropriate – it is a very contrarian bet and clearly has intense risks, but the potential upside is “asymmetric” even from here. In percentage terms, do you mind saying how much you have reduced your investment?
As for the read through to to private insurers – seems really, really bullish for the surviving companies, which, critically, are also showing improving delinquency trends. The potential leverage for RDN, MTG, PMI, is massive. I’m long RDN and MTG.
John, could you use reply to the appropriate thread. It gets very confusing with each new message without the reference.
Plan,
One more thing on the conservatorship. Wasn’t Rose saying they want to preserve the value of the assets for the conservatorship, i.e. the government’s stake. Do no minority shareholders have any consideration, much reduced consideration, or are they just making it up as they go? Obviously they still own 20.1%, but I don’t know all the legal details of their treatment. I’ve assumed AIG could be a reasonable model for what happens, and politically AIG was hated as much as FRE/FNM, I suppose.
I do not care much for the common with the current relative prices so I have not thought about it.
Hi Plan,
Apologies for not using the reply function. Will correct that going forward. I agree preferreds are a lot better bet than the common – I was thinking of the eventual implications for the preferreds. Time will tell, the more time the better!
john, you seem to know a lot about the insurance industry. Could you please take a look at PNX?
Zehua,
unfortunately I am about to leave town for a couple of weeks on business, and I’m not sure how much time I’ll have – PNX certainly is a very cheap stock due to the distress they have been under- at last check they had lost a lot of sales distribution and capital was under serious enough pressure to warn me off, but I haven’t looked in many months. I hold HIG and GNW, which are beaten down enough to offer plenty of upside, especially GNW. Even CNO might be a safer play than PNX although the businesses are different.
Hi Plan,
Do you have any follow up on CEP? I have been tracking this stock for a while, but I am always over concerned with the unit production cost of $3.5 per MCF. Other competitors are only $3 or even $2.
Thanks,
Zehua
The just released results, I have not gone through the details but I suppose that it was uneventful. They keep reducing debt with their advantageous hedges waiting for better natgas prices.
I am not saying CEP is bad. I am concerned with the upside potential of CEP because I feel this is at most a 3x due to its high unit production costs.
http://google.brand.edgar-online.com/DisplayFiling.aspx?TabIndex=2&FilingID=7773674&companyid=10629&ppu=%252fdefault.aspx%253fsym%253dFPFC
FPFC today just had an agreement with the regulator. I think this generally is a good thing to urge them to start a better business practice.
However I am a little bit worried about their agreement regarding tangible equity maintenance. I am wondering if this agreement would possibly force them to issue new stocks. I cannot find any exact number saying if tangible equity drops below xxxx, then we have to raise capital, so that is my primary concern.
Hi Plan, the agreement above seems like this bank has survived the regulator examination. According to your past experience, what is the indication that a bank does not survive the regulator? The regulator will simply close that bank and force it to be sold to another bank, such as the case with TSFG?
Is it possible that after a few months, the regulator checks FPFC’s progress and decided to shut it down?
FPFC’s loan/deposit ratio is nearly 96%, which is so much higher than other banks. Also its mortgage banking gains is very high, which makes me feel suspicious that management is not conservative about making new loans even after the credit crunch?
Plan, you earlier said:”First Place Financial FPFC: announced an equity raise so it is time to know more about the conditions and the endgame”
I didn’t see that. Today I called their CFO and asked about it. They said they have no plans to dilute shareholders unless they are forced to do so by the regulators.
One good thing I heard from them is that they are very strict on loan restructuring, and will keep that on their NPA book for 12 months before taking that status off. That is more strict than other banks such as FDEF as FBMI.
http://business-journal.com/first-place-reports-execs-resignation-p18807-1.htm
Shortly after their chief credit officer resigned, their chief risk officer is gone as well. Any thought on that?
My perception is that these two folks are forced to resign because they were not doing a good job making high quality loans in the past, which means there could be another huge wave of write downs and loan loss provisions.
Let’s wait and see if the turnaround starts from today.
They are only generating loans for the GSEs. They did not have subprime loans and the credit performance seems to confirm that they were conservative. Most of their problems are in CRE in Michigan and those loans were inherited from a couple of acquisitions (Franklin?).
Regarding the resignations, seems par from the course after the standoff with the regulators.
They filled a shelf last year that they later took back I think. The CEO denied that they needed it except for an accretive acquisition. Insiders have more than 10% of the common.
Plan, I remember you once said that banks are black boxes, so you only invest in banks with heavy insider buys?
Not only, but I like to see insider buys from the corporate officers.
Do you invest in junior oil companies? I think the biggest headache is that we don’t really know how much total gas in place and recoverable oil there is for these companies that have just started production, and ramping up their reserve base fast.
Nope, I do not
CEP filed an S-3 for 500M capital raise. I think they are going into oil business. Personally, I don’t like this. If they use the 500M to buy distressed gas fields, that would make me feel much better. But for oil, they could repeat the mistake they did in 2007 when they acquired the gas fields at peak prices.
Also this 500M capital raise is super dilutive to current holders.
That is a big raise, I am watching from the sidelines. I think they mentioned that they are looking for only small oil opportunities. I do not think they want/need that much cash.
I am watching CEP for over a year and I decided to stay away even at current price. I called them to ask about their 500 M raise, and they said this is just a renewal of the S3 form that they filed on day one of their business, so they don’t have intention to do that now.
I suggested that if they really want to raise 500M, they should look for distressed natural gas fields. There are still gas fields making ROR of 25% at $4 per MCF. If they do oil, they will have to pay a huge price for it, and hedge the oil price. Then if oil price drops, they would be in exactly the same situation as they are now for gas. Countless write offs, and scared to pay dividend. Right now their gas hedges look to be smart, but actually is pretty dumb considering the whole situation, so I warned them not to make that mistake again to get into the distressed situation as they are now. Then funny things happened: They denied that they are currently in distressed situations! If a patient denied that he is ill, he will never go to the doctor and be cured, right?
Postrock, one of my old favorites, buys a significant percentage of CEP. Very interesting with possible consolidation of the Cherokee basin.
Thoughts on FMFC? I think their reserves are kind of low, and their recent restructured loans surging make me a bit nervous.
After, a cursory glance I do not see red flags. I would check their past capital allocation history. I am surprised the stock and dividend has gone nowhere for more than 10 years even before the crisis with a low dividend payout ratio.
TNCC just filed a NT 10-K. That injects a lot of uncertainty into it. I sold with a small loss and see what will happen next.
Thanks Zehua, will keep an eye on it
Just bought some put options for PUDA as I saw a hit article today. It looks to be solid evidence.
I avoided and will keep avoiding this Chinese Small Cap stuff. There must be some great opportunities there but all the trash must be cleaned up first … and I do not short.
I feel right now the Chinese stocks are experiencing a blood bath like the US financial stocks in 2008. No matter you shorted Lehman or Goldman, you can make a decent amount of money. However when the things are cleaned up later, the good ones will raise 10x.
So it makes sense to find terrible ones and go short now, and start buying the good ones after things are cleaned up.
I don’t directly short because I never want to do margin trades. I only buy put options.
China is facing severe coal supply shortages. I bought CHGY around 2 P/E, and now it is 1.7 P/E. My friend went there to count the trucks and told me the production is real. They missed the recent consolidation opportunities though, but still 1.7 P/E plus a little bit of coal price increase could make it very attractive.
I think it will be interesting to start sorting out the real Chinese RTO companies against the frauds. Most people can’t tell the difference so all of them go up and down together. Just like during the 2008 financial industry bust, most people can’t tell the survivors against the chapter 11 candidates.
I agree, but how can you be sure for example of CHGY?
Very good start by kicking those truck tires. Though some of the frauds have been that the company does not really own the assets or management find ways to strip them. And it is not like people did not count CCME buses.
Have you checked CHGY tax reports? This has been the way most of the shorts have found their targets. Even if the report/analysis is lacking they have hit their targets just because of it.
Plan
I just took a position in RJET, Any thoughts on RJET vs PNCL….I like both but valuation on RJET seems a bit better at current prices.
Oil is the unknown but I expect it to settle down to $80 range else we have some serious economic head winds.
I also have HNR (so RJET is a bit of a hedge) which has some near term potential discoveries and their VZ assets continue to do extremely well.
TP
Tango, could you share a bit about your investment thesis on RJET? I recently started learning the airline business, and I am still not sure what are the most important numbers to look at for this business. I know I should look at revenue and cost per ASM, and anything else?
Rjet is bit different that most airline. Its actually two models in one. Its a PINACLE airline model which operates regional jets under contract with major carriers. The carriers give them contracted rates to move planes around point A to B. How full the planes are and what the fuel prices are does not matter much under this model as they paid to move planes around on schedule under service level agreement. This segment earns pretax profit of $80M+ per year. There is contract guarantee and planes can be put back to the carrier if they don’t renew the contract so the major focus is operational efficiency. There is stability in this business as long as they can keep focus on efficiency. There are no utilization or fuel risks here.
The other model is that of a regular carrier and attendant risk of capacity utilization, fuel costs and efficiency. They bought Frontier and Mesaba airlines cheaply in bankruptcy and are operated as branded airline.
Lot of the debt is recourse to the aircraft, its trading just over x3 free cash flow and less than 1/2 tangible book. They are paying down debt on the planes just like you would pay down your mortgage on your house so they are growing book value. Tax-loss carry over means profits are sheltered from tax allowing they to increase the book even more rapidly.
They are beaten up because they are mostly unhedged on fuel costs.
I need to find this airkaholic number that Buffett has mentioned so many times. I desperately need someone to discourage me from buying them. Both of them look mighty cheap but let me put a couple of points on the table.
(1) Mutually dependent situations, like the one of Delta and Pinnacle, where there are asymmetric balance of power are unstable. Coca-Cola kept using CCE as their punching bag every time they needed to reach their numbers and never let CCE to pursue independent avenues of growth . Republic at least has managed to diversify their customer base and be independent
(2) Clients fighting for survival can play any trick on the book to eat on the profitability of the regional airlines whatever are the contracted agreements. A situation where one party wins big and the other looses all tend to be confrontational.
But it is very very tempting at these prices.
Thank you so much, Tango.
I heard about the Pinnacle story before. For the first segment, why do you say they have no fuel risks here? So their customers pay for their fuel, just like a rental car business? I see. So this part should be easier to understand and analyze.
For the other segment, I think it is harder to analyze. I was recently attracted to the airline business by HA. That seems to have strong local market share, and they bought some new planes that have better fuel efficiency, but I don’t know how to analyze that company.
Frontier’s cost per ASM is so high. Almost double that of other airlines I see, but its revenue per ASM is also double other airlines. Do you know why?
Plan, I see your above comments, don’t know how I missed it, but if you do have anything more on the business leverage that could work against PNCL and RJET I’m all ears.
John, I am not sure that this is “more”, and I am not an airline expert, but tell me what you think.
First of all, I have so much respect for the airline industry (or in other words “fear”) that I would never have a concentrated position in either of these companies. At the same time I consider them the future of the airline industry if there is a future (oil at $200+?). Southwest is no longer the lowest cost with RJET might actually replacing it and in a commoditized industry you know what that means. And they are ahead of the game in moving fast to 60-100 seaters.
Also RJET is several steps ahead in term of becoming independent of the majors. The problem though is that it exposed RJET to oil fluctuations and Frontier is struggling. The “good” news is that in my understanding Frontier is ring-fenced so they can let it just go.
Now regarding the negotiations with the majors, it looks like it has not been so bad. Let me talk about PNCL that is the most exposed and the one with lower negotiation power. The former CEO has given several signals in the CCs that the price adjustments are coming and in a big way. It looks like they are not going to be contested by Delta.
And you also have to think about the worse case. I have not looked at the actual documents, but with PNCL priced at less than TBV and lots of cash I think I read that PNCL actually does not own the airplanes and if Delta renegades of the contracts they can give them to Delta.
Of course a Delta BK would disrupt all this with the protections of Chapter 11, but they did not do that bad with with the Northwest BK in the early 2000s that gave them a window of opportunity to diversify to other airlines plus PNCL got compensation.
Does it make sense? I am tempted to buy but have done so yet.
I always thought that RJET is farther in terms of their progress in diversifying clients and becoming independent, and they have the better capital allocators. At the same time, the PNCL FCF multiple looks cheaper and its margins look too depressed and should improve over the next couple of years (price negotiations). At these prices I would buy both.
With HNR I have my issues. Too many promises over several years and they keep consuming cash. Now they had a big hit in Ohio I think, and they sold it for a ridiculous price because of their liquidity issues. I do not know, I might prefer ATPG despite having also a promotional management team but at least it looks like they are actually showing some results. Though, I have been wrong before with oil and gas picks. I still do not know what is happening with CFW and why they have not been able to sell themselves or find financing despite being cash flow positive and have large undeveloped reserves.
Long time ago you said you did not spend much time to look at CMZPF.
Well, I think their liquidity has some issues. However with recent oil price surge, their 2500 BOED oil production along can turn them around and make about 10 to 20M per year, so they should be safe regarding liquidity.
I would consider this as a long term call option on natural gas prices. However it is way cheaper than a 8 year natural gas call option. Once gas price resumes to $8, this stock’s upside is 1500-2000%, though we don’t know when that would happen.
One positive development is that Obama last month sign cash incentive plan for natural gas vehicles. I think this is pretty interesting. We can save a lot of money if our car burns natural gas instead of gasoline.
Plan, what do you think of the issue of RJET and PNCL’s business risk from renegotiation from the majors? I got burned on Delta-Pinnacle once before.
well, I”m already drunk since it should be aircoholic, not the misspelling I gave. Occifer! I’m sober I swear!
Anyway, at least it is contrarian. Speaking of Einhorn I noticed he has a tiny RJET position as of last quarter.
He’s had RJET for a while. And talking about sober, I spelled it with a K
call the aircolohic number. Bit on RJET at over $5 when I could have had it at $4.5, but I’m in.
Well John, you are fearless!
Another joke I read about about the airlines in case you have not heard it.
Do you know how to beat the S&P 500? … you buy the index and short all the airlines in it.
well, perhaps there is no standard spelling for the disease yet. It used to be fashionable for deep value investors to ignore macro, but now it may once again bite me (Europe in the news again). sigh.
Many people that have fallen will be restored again. After being hit by the macro event of a lifetime, now everyone is looking for next one. Buy and hold and ignoring macro will have their day once again in the future. End of bear markets have that effect as well as bull markets make people complacent.
Europe is an issue, but most issues if they do not hit the commercial banks do not have real consequences (internet bubble, or developed world issues on Latin America in 2009). How it could affect American CRE and residential markets, that are the most important loans in the right hand of the balance sheet, is completely unclear to me. US bank Europe sovereign exposure is very small .
Maybe people are concerned about who has been “insuring” the europe CDSs and be caught with an AIG. But after the last few years I would be very surprised that this exposure is big enough on any of the large banks considering the last few years and that there has been time to prepare.
TNCC just filed the 10-K and the price dropped a lot.
I have not heard of this. So a regulator can explicitly decide a bank is in “troubled situation”, and do enforcement actions on it? I have a feeling that FPFC is in the same “troubled situation”.
http://www.thestreet.com/story/11139248/1/tennessee-commerce-confirms-fdic-order.html
Ok…. Looks like TNCC has reached agreement with FDIC, and not need to restate their 2010 filings. This at least means those potential class action lawsuits are harmless.
I am still not happy to see their NPA over 6% and keep rising. But I think this is probably because of their seasonal trend coupled with regulator visit.
Maybe it is time to rebuild the positions…..
Take a look at FCZA, Plan. I am long on that. It looks very strong with nice PPTP P/E ratio of 2 and very high loan loss reserve.
Thanks, Zehua. On a first glance it looks safe and I added it to the watchlist
Wow Plan, you must be doing great on the Freddie mac preferreds, haha.
I think the entire regional bank sector will recover this year. Let’s find more cheap and high quality ones!
I did, but as always sold too soon.
That’s fine. Let’s try to find more regional banks. I sold CRBC recently in the hope that C and CRBC’s incoming reverse split will bring down the price.
I think there will be other bank opportunities too as the economy improves.
As expected, CRBC announced the RS, and I bought it back.
I still want to see Cathy showing a slow down of those chargeoffs
Tom Brown starts to buy CRBC now. Interesting. Hope the price would drop to $5 shortly post split so I could buy more.
Yep, and he has SNBC too. CRBC, SNBC and TNCC those are 3 stocks we have discussed intensively before he started buying. It looks like we jump in too early Zehua!
TNCC turns out to be a hide a pretend bank. I am glad I sold out earlier with a small loss. Now their NPA seems out of control, and they are placed into the troubled bank status by the regulator. Class action lawsuit may also take them down.
Zehua, I would keep it in the watchlist. My impression after following the sector for the last two years is that regulators are overreacting at a very late stage of the game.
Yes. I am tightly watching this game as it develops as well. I wouldn’t consider to buy again until they prove that they can control the NPA from the current life threatening level of nearly 7% to a much lower level, and be assured taht the incoming class actions won’t take too much damage.
What makes me unhappy is their low loan loss reserve. FCZA and CRBC both have over 150% LLR/NPA, but this bank is only 44%. They kept saying that their C&I loans have strong guarantees, co-borrowers and colleteral, but who know how much that is worth when the economy goes down and even the guarantors are in financial trouble. So I have a feeling that their LLR is too low. At least not at conservative as FCZA.
What confuses me is that on bankregdata.com, which is using their FDIC data, only reports less than 5% of NPA/TA, but their SEC filing shows 6.84%.
Plan, TNCC’s situation is even more perplexed with the class action lawsuit and the recent tornado hit in TN. I am not sure if their collaterals all have sufficient insurance coverage. Is that a mandatory requirement by the regulators?
The short answer is that I do not know. Mortgages have insurance but not sure about all types of collateral.
http://globenewswire.com/newsroom/news.html?d=220266
It says they expect regulators to have minimum total risk-based capital ratio to 12.00%, our tier 1 capital to 11.00%, and our tier 1 leverage capital to 9.00%.
They said they will try to achieve this without raising capital again. That is interesting.
And I think this is the first step they took:
http://nashvillepost.com/news/2011/5/16/tennessee_commerce_passes_on_dividend_payments
If they can really achieve that new capital ratio without decreasing the PPTP too much, and work off their NPA orderly, maybe this will be a good investment again 2 years later.
http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=7936174-874-187553&type=sect&TabIndex=2&companyid=672235&ppu=%252fdefault.aspx%253fsym%253dTNCC
Page 11. I was totally shocked that their overall loan grades were deteriorating in every type of loan. This is a new disclosure that banks were required only recently. I believe I didn’t see this for any of their quarterly reports last year. Given this table, I am pretty convinced that the regulators were not overreacting, and that this is a hide and pretend bank that is coming to the final days of reckoning.
I wish this stock has options to trade so I could buy put options and see its value goes down to sub $1.
Zehua, Page 11? it does not look that bad to me considering the recent visit of the regulators. Hey, I do not have TNCC though.
I see. Sorry I forgot to consider the regulator visit event. Well, I have to see the NPA trending down for a few quarters before I can buy again. I am not comfortable with their level of reserve and NPA.
CRBC and FCZA both seem to reserve for the NPA as well as the substandard loans, but TNCC seems to only reserve for the NPA, and have optimistic assumptions about recovery.
The class action lawsuit might not be too bad, if it is eventually filed. I estimate maximum damage to be 20M, so they would be able to survive under that, if they can return to profitability.
Plan, Zehua, I finally got around to reading the filing on the consent disclosure for TNCC. It doesn’t look that bad to me – this is guesswork but probably they are forced to be more aggressive on classifiy loans, eroding capital somewhat and thus making it take an additional couple of quarters to rebuild regulatory capital to the newly raised levels, but it doesn’t appear draconian. It certainly seems the stock selloff is way overdone at these levels if one can hold for awhile. The longest term issue is the clear pressure to replace their current funding model with stickier deposits — not sure how long that might take given their lack of a traditional branch network.
It was not bad at all, I do no understand why Second Curve sold a large block. From my experience, it is always good to wait a couple of quarters after a regulatory visit. Banks tend to be more aggressive, or conservative if you prefer, in recognizing NPAs.
Plan,
on TNCC I agree it could look optically worse for a couple of quarters due to newfound “aggression” on NPAs, but at near breakeven, then building capital again shortly it looks good to me. Not to minimize it but didn’t second curve only reduce their position by -5% or so? Also, not sure how big a deal the need to shift to a better deposit base is for the stock – any thoughts on that?
At this stage, I care more about credit/capital issues than quality of funding issues. The problems start if credit issues become much worse and they have a run while depending too much on short term C&D or brokered deposits.
So the FDIC has reasons to worry, they have to think long term and glad they are tougher. As an investor I would worry too if this was the first inning. But now? I am not so sure.
Also, to have a clear expertise on C&I can make them an acquisition target (catalyst) for a bank with a strong deposit base. C&I is one of the lending categories than is growing and performing well. ie: CIT is another C&I bank with low quality funding and is doing OK, and many value investors are pilling up.
Regarding Second Curve, you might be right. I just read the 4 forms and did not do the math.
Hi Plan,
well, I’m long CIT too, and waiting on that one to get recognized as well. Looks like fresh start accounting is hiding a lot of goodness there, although I’ve been a little surprised Thain hasn’t been more aggressive.
http://www.marketwatch.com/story/tennessee-commerce-bancorp-to-acquire-controlling-interest-in-peoples-state-bank-of-commerce-and-farmers-bank-of-lynchburg-2011-07-28?reflink=MW_news_stmp
This is very interesting. I am not sure what is DPC transaction? That is not FDIC assisted, right? If the acquired banks have a lot of NPA, then they would be really hurt, won’t they?
Probably, it looks like they are trying to diverisfy their deposits funding
Hi Plan,
I am still very confused about this in their 8-K/A. Do you know what it means? How can they convert NPA into earning assets?
“Total non-performing assets increased to $163.7 million or 73.4% at June 30, 2011, compared to $94.4 million at March 31, 2011. The increase is mainly attributed to approximately $65.0 million in loans that will be subject to a Debt Previously Contracted (DPC) workout. This workout would result in a conversion of approximately $30.0 of substandard debt into an earning asset. “
Any thoughts on AIG? I was surprised that Bruce berkiwitzs bought so much around $45, and he said he would buy more with his $5 billion cash.
This one seems extremely complicated, and I had no experience looking through insurance companies, but I am trying my best to learn.
So for insurance companies, there is no PPTP, so how do we know their upside after turnaround succeeds?
(smile) Well, I am not going to make this easy for you Zehua. I am also following AIG (warrants) but I do not want to spill the beans just yet. You might want to look at the historic profitability and equity of the surviving divisions (including the 30% in AIA). Also make sure of the final count of the diluted outstanding shares (including warrants).
Any updates on Compton Petroleum? I bought quite a big position in my portfolio (20%) in the mid 30 cents. Looks like nothing has changed, but the price tanked so much.
I would rather see them selling some more assets to pay off the debt at current natural gas prices.
Do you know why US is still in the $4/MCF range for gas, but UK is already $8? Too much shale gas drilling?
Natgas is a regional commodity, LNG is only in its infancy. For that reason the US has one of the lowest natgas prices of the world as a consequence of shale gas and a recession. Should not be sustainable, shale gas needs $6 to justify new drilling, but many people have been wrong on this for the moment.
I am not following Compton that closely.
Yeah that is my thoughts too. By the way, CEP also said in their CC that they need $6 to break even if their hedge positions are all expired in the future. Their production cost per MCF is around $3.6 vs Compton’s $2.2, so I guess most shale gas producers have similar production cost.
But big companies like Chevron are drilling gas like crazy. I don’t know why they are so frenetic on gas at such low prices. There is one positive though that Obama passed the bill for natural gas vehicle incentives.
Anyway, I play with Compton/CEP more like natural gas price’s long term call options.
Plan, Do you think it makes sense to buy PMI here if I already own Fannie and Freddy just in case the government does decide to get rid of Fannie and Freddy?
Sorry Daniel, I do not know why I missed your post.
I think both are correlated to the housing market.
If the government decides to get rid of F&F I think it is uncertain what would be the role of the mortgage insurers because their target market would be mostly the same. It is more critical for them that the FHA starts raising prices and stops supporting the housing market… and competing the mortgage insurers
Plan, have you looked at RF before? It looks interesting to me, but the current valuation is a bit high. In their latest presentation, I found that almost every top executive has been in the role for less than a year. That looks strange to me. Also I don’t quite understand how their non-interest income is so high. What do you think?
There was a management bloodbath last year. There is also some legal issues regarding Morgan Keegan. But anyway, it seems it is the cheaper of the large regionals.
Well, RF’s PPTP will be about 1.5B per year, so that is a 5.5 times P/E. Not that cheap. Citibank also has around 5 times PPTP. In terms of book value, RF is a bit cheap.
I would rather buy a small bank that is really cheap, high quality, and has #1 local market share.
Regarding legal issues, how much do you expect their loss to be? I just checked their website, and it said not FDIC insured and not assumed for your losses. So I think this means they shouldn’t have any liability at all?
Right now seems like many large financials have similar issues. GS, BAC and C are also sued for various reasons.
I do not know, I am not following Regions that closely.
Any thoughts on Capitol Bancorp’s preferred stock? They are actively selling assets. I was confused how their total Nonperforming loans remains steady for the past year, but the NPA ratio keeps increasing.
Anyway, I was curious why their CEO bought some common shares at recent levels. If they can succesfully turnaround, the preferred stock has quite a bit of upside.
I am following it but the credit numbers are horrific. If you are interested, the preferred shares are the way to go. Especially considering the path to this company surviving goes through a pref to equity conversion.
It still looks risky to me.
Plan, can you please give me your email address? I would prefer to discuss a few ideas privately first.
Top of the page… variant perceptions at gmail com
OK. Sent. Hopefully it won’t go to your trash box.
Do you happen to know why Tom Brown bought a lot of Primus Guaranty? I was originally thinking the overall fixed income market is recovering, and bond insurers might get into good profitability again, so I found this one. Then it looks like it wants to stop issuing more CDS, and orderly exit this market. But it doesn’t say what will it do next.
Do you know any other big bond insurers? I think there might be some decent growth for the next few years.
(1) No (2) MBI, AGO
Any thoughts about the overall muni bond market? Some analyst said there will be a 110 Billion default, but I guess it is likely an overblown issue, just like no one is talking about CRE loan default this year.
I think these people just desperately want to get famous, so they keep making bold statements. If they are right once, everyone will think they are guru.
Overblown
http://online.wsj.com/article/SB10001424052702303627104576409662082986084.html?mod=WSJ_business_whatsNews
I think this would offer good opportunities for small regional banks to grow. What do you think?
Probably Zehua, but you also have to balance it against that these banks are now officially too big to fail. They will probably have a lower cost of funding than their competitors. Surprisingly, there are leaks of complaining banks that were left out of that list that want to get in.
At the end, a safer banking system is for the best of everyone. If these rules pass, maybe banking once again becomes a sector that is possible to buy and hold. And with the current valuations, I would not mind sacrificing a little ROE for a more stable sector.
Yeah. Totally agree.
Have you looked at euro banks like CRZBY? That one seems to be turning around already.
However, I am worried about the macro economy in euro zone. If Greece or Spain default, then these banks’ stock price would be hit really hard.
No, only STD and BBVA that are more Latin American than European. I do not like to buy banks in fixed exchange rate countries. The Euro is not a natural zone.
I am a bit confused. You are saying that the euro zone has fixed exchange rate?
I mean that Greece, Italy, Spain, Portugal, Ireland have fixed exchange rates because Europe is not an optimal currency zone
http://en.wikipedia.org/wiki/Optimum_currency_area
Yeah…. I also think that investing in a Germany bank might have much higher risk than a US regional bank. Right now the macro is still unclear for the euro zone.
Hello Plan, Re: HTCH
I had a look at this a few weeks ago and here are my thoughts in-case they’re of any use.. The company doesn’t seem to create any shareholder value over the cycle. I looked at the last 10 to 18 years and there seems to be more money being spent in capex than is being made. I am not convinced the next decade will be different. I am not optimistic that the 3 competitors will behave rationally wrt pricing of disk suspensions. For example, TDK completely dominates the disk head market and I think suspensions are not as significant to them. They may very well maintain low margins or even loose on suspensions in order to sell more disk heads. Also, it seems clear that HTCH is the weakest competitor, being completely dependent on suspensions and being late/inexperienced in moving to the east for production. I am not sure about the following point but its something to look into: I got the impression HTCH sells suspensions that are used more in the higher-end disk drives. I think the high-end enterprise segment of the disk market will be one of the first to be completely lost to SSD’s. In this segment huge disk capacity is less important than performance, and SSD’s already dominate disk performance.
I am also unimpressed with management.
You are probably right about the timing and HTCH will likely be doing better in the near future but longer term I’m not convinced there’s value here.
Thanks Guy. That is a very good exposition of some critical points. I do not know a lot about the industry and I am trying to reconcile your views with the facts, data and opinions that I have. Let me agree on some and disagree on others.
Regarding who is the strongest I thought it was clear that HTCH is the lowest cost competitor and all anecdotal info I have is that they are also better (fastest prototyping, lowest variation). Before the transition they had 40% market share. They lost part of the business not to the Japanese but to a worse competitor that Seagate (I think) wanted to defend for industry structure reasons; that competitor was finally bought by TDK for a $300M EV valuation.
You are right, historically the HDD industry has been one of the worse industries. Capital intensive, with rapid technological change and cyclical is not the best combination for long term profits. I am counting on a more normal competitive environment having gone through the last innovation cycle and facing a more concentrated industry (3 clients, 3 suppliers).
Irrationality with excess capacity is what we are seeing now with prices collapsing from the $0.8s per assemply to the $0.6s per assembly, so much that HTCH despite being the lowest cost supplier is barely reaching breakeven. I doubt it can go much lower but I do not completely discard it if the Japanese smell blood and are willing to take some heavy losses. I am sure that this is one of advantages of being part of a large conglomerate, to manage the whole cycle
My understanding also is that the enterprise segment is performing very well and most of their problems were in desktops (especially after losing the large Seagate program). They have a 50% market share in this segment but it is only like 20-25% of sales. I suppose they have better margins there though.
What do you mean with being unimpressed with management? People mean different things when they say that.
Well, thanks again. And feel free to demolish the comments of this industry newcomer.
Hi Plan,
No demolishing here, on the contrary. Let me first say, just so you can qualify my comments, that I am quite new to investing and also not familiar with the industry. I’ll take this opportunity to say thank you as I have learned a great deal from you by reading your blog and twitter feed.
I too got the impression their suspensions were considered better. However I did not come across evidence, whether anecdotal or otherwise, that they are a low cost producer. On the contrary: In the latest presentation they discuss lowering costs on many slides and on the last slide they say ‘Progressing toward goal of being the industry’s lowest cost producer’ which I read as saying they do not consider themselves already the lowest cost producer. That and the competition already having plants in the east, with the associated cost benefits, and whats more they are bigger and might enjoy some economies of scale – all led me to conclude that HTCH is not the lowest cost producer and is playing catchup.
However I may very well be wrong, what lead you to think they are the low cost producer?
Regarding the competitive environment, for me the bottom line was that HTCH seemed the most vulnerable and I had no confidence that pricing in the coming cycle will be more rational even given the consolidation. I also think TDK may potentially have an interesting advantage, whether cost to customers or technological, in that they also makes the heads. Some other random thoughts: it may be the case that the customers will want to keep HTCH alive for their history of technological innovation and to encourage competition. Also, might they be a good acquisition target for a disk maker looking to become more vertically integrated? I don’t know enough to say whether this is at all reasonable. On the other hand I do not know enough about TSA+ and the competing technologies – perhaps this technology is strong and gives them an advantage.
Regarding the enterprise segment, what I said was a thought unrelated to HTCH specifically. I don’t follow the industry from a business perspective but in my day job I did need to become somewhat familiar with SSD’s and how they compare to disks. I think disks have a large advantage over SSD’s wrt capacity-per-dollar but they generally lag SSD’s in terms of performance. Certain important parts of the enterprise segment have performance as their most important requirement from storage and I believe they will make the transition to SSD’s relatively quickly. If this happens HTCH may be hurt more than competitors.
Regarding management, I think I will retract my comment – I did not dig deep enough on this and my comment was based on some general thoughts about how the business has performed. Perhaps having survived in this industry is enough and demanding creation of shareholder value is too much to ask for 🙂 There are still some basic things like the BioMeasurement segment has lost too much for too long and why only now do they prioritize becoming a low cost producer (if indeed they are not).
Anyway I hope any of this is of use. Thanks again.
“Perhaps having survived in this industry is enough and demanding creation of shareholder value is too much to ask for 🙂 “
Hehehe,
Given the secrecy of the Japanese suppliers it is impossible to be sure of their cost structure. At the same time HTCH did a $300M investment while reducing their breakeven point by 40% including reducing their debt (interest payments) by 50%. If they were close to be competitive before, they are for sure competitive now.
And they are gaining market share and they are close to breakeven with 60% of their peak unit demand and prices 30% lower. Not many would survive that kind of shock without the cost structure.
Also the Japanese are not vertically integrated. They buy their flexures, so the financial numbers have a clear operational foundation. The CFO mentioned clearly so in their last investors presentation that they are becoming the lowest cost and using that in their pitch for new business (Seagate)
Regarding their clients supporting them because of their technology, it actually has been the other way around. Seagate has been the one supporting marginal competitors (10% of HTCH sales, and mostly enterprise) to encourage competition while loosing ground themselves while Western Digital that is 60% of HTCH sales has been gaining ground. So it is not like they are doing it for non-profit reasons. Also with Western Digital acquiring Hitachi there might be some change new programs coming to HTCH.
Regarding SSD, depends on what is the axis of performance (rapid response?). Sometimes, this performance overshoots the needs so it is not priced. My experience is that the innovations that disrupt are lower cost/price, not many people/business ntice that extra millisecond response. So it depends on the learning curve and if SSD costs start to become comparable to HDD. …. have you seen those numbers? In what type of enterprise applications do you think it is having an impact?
I still think the biomeasurement segment has potential and it does not have much of a financial impact so I am fine with subsidizing it if they keep the burn rate low.
You are way ahead of me on the investment/business side of things. I may have given up on HTCH too soon (e.g. I didn’t hear the conference call, only read the slides) as things seemed too hairy on first impression. I will do some more digging and thinking.
> Regarding SSD, depends on what is the axis of performance (rapid response?).
Yes, rapid response (aka “latency”) is an important performance metric. Another one is the number of operations per second that the device can do. In disks/ssd’s this is often measured in operations per second (IOPS), and more generally than that, this axis of performance is called ‘throughput’. Enterprise applications where performance (both latency and throughput) are important are often ones that use a databases to perform many small transactions. For example when you order a book such a transaction probably occurs (both at the book shop and at the credit card issuer). This type of application is sometimes called OLTP – online transaction processing.
Historically, the technology trend has been such that disks grew in capacity very fast (every year or two you could buy double the amount of storage for the same $), while their performance didn’t improve much at all in comparison. The operations-per-second requirements in some of the enterprise applications grew much faster than disk performance. A common solution was to use many disks and split the database over all the disks to achieve the needed total operations per second. Whatsmore each disk was of the faster, more expensive variety. Note that they didn’t really need all the space and often only a small percentage of the disk space was actually used (low utilization): they bough more disks just for the performance (IOPS).
I think SSD is more economical to use than disk in these types of enterprise applications because while disks offer more capacity per dollar, SSD’s offer more IOPS per dollar. The margin is more than an order of magnitude, this is not just a small advantage. So if the amount of data is not too large, and typically this is the case in OLTP applications (e.g. they don’t deal with images/sound/video which consumes lots of space), I think SSD’s will become popular here. I don’t have any numbers that show how this trend is evolving or is predicted to evolve.
Btw, incase its of interest, today I came across following book and from the preface it seems interesting and perhaps relevant.
The Turnaround Experience: Real-world Lessons in Revitalizing Corporations
Click to access the%20turnaround%20experience.pdf
What a good book, I loved how they go in detail in only one industry and what an industry: automobiles. It is a great source of information.
Regarding SSD performance, there are a couple of charts in Western Digital’s site that show the areal density, highly correlated to costs, of HDD and SSD. At least according to them, HDD should maintain their advantage in their foreseeable future.
If that is true the SDD potential market share gains would probably depend on just their current use growing not on on new uses and that would hinther their disruption potential.
I would love to have more info on the SSD case.
Hi Plan,
There is a strong case for SSD’s in mobile devices (they consume far less power and are less sensitive to physical movement) and in high-performance OLTP applications (they offer much better IOPS/$). For both these domains SSD’s are already today better/cheaper than disks and the margin will probably only widen. I think these technical advantages make a good case for SSD’s. The mobile domain in particular seems a sizable market. The performance domain is more a niche market but selling to enterprises can be a good business.
As far as I know disks are likely to continue to offer the best capacity per dollar in the foreseeable future and I think this guarantees they will be around for a long time to come. Outside of domains where power and performance really matter disks will probably continue to dominate. If SSD capacity/$ improves relative to disk capacity/$, SSD’s will slowly eat into disk sales (e.g. in laptops). But I am not worried for disks. Basically, by far most data in the world is stored and rarely accessed again. Disks are currently the best choice for storing very large amounts of data that is accessed rarely. Whats more the total amount of data stored in the world is growing and this will offset any losses to SSD’s.
These are the essentials of the pros/cons of each technology as I know them. I’m no expert and this is probably nothing you haven’t heard before. Basically from my perspective it looks like there is plenty room for both technologies.
In terms of new uses for SSD’s beyond the commonly known ones, I’m not sure. Perhaps one place to look is “sensor networks”. http://en.wikipedia.org/wiki/Wireless_sensor_network
Looks like Einhorn thinks the same. He bought Seagate and this is his thesis:
Seagate Technology (STX) is a manufacturer of hard disk drives. Hard disk drives are used in desktop and notebook PCs, external storage devices, enterprise storage, digital video recorders, and other consumer applications. The market is concerned that prospective hard drive unit demand will be weak due to macro weakness, substitution to flash (solid-state) storage, cannibalization of PC sales by tablets, and greater storage efficiency in the cloud. Though we don’t expect unit demand to fall anytime soon, the hard drive companies have flexibility in their business models and should be able to adjust their operations to protect profitability should unit demand decrease. Hard disk drive technology represents the cheapest, highest capacity storage solution in a world where data needs continue to grow exponentially. STX is currently in the process of acquiring Samsung’s hard drive operations. Western Digital, its leading competitor, is currently in the process of acquiring Hitachi’s hard drive operations. Following these transactions the industry will have 3 rather than 5 major players, which should increase operating stability. STX management has a large equity interest in the company and appears to be focused on shareholder return. STX repurchased $710 million of stock (~10% of shares outstanding) in the last 2 quarters and has $1.6 billion of capacity remaining under the current repurchase authorization. In April, the company also initiated an $0.18 per share quarterly dividend, providing a 4.5% yield. The Partnerships established their position at $16.06 per share. We estimate that STX has at least $3 per share of earnings power. STX shares ended the quarter at $16.16 each
Afix, much appreciated. You are saving me a lot of time on what to look for.
I think there is no question that mobile devices will grow fast so the SSD concern is if it will start cannibalizing desktops and other HDD uses. Mobile devices are catapulting cloud services that are heavy users of HDD. For the moment, it looks like it has been complementary but it is something to watch for.
Thanks again.
http://www.startribune.com/business/125115144.html
Analysts agreed that Hutchinson results are impressive, and are based on a resurgence in demand for personal computer hard-disk drives, many of which use Hutchinson Technology components. In addition to normal demand, the disk drive industry is trying to make up for a manufacturing slowdown that occurred when Japan’s earthquake and tsunami created a shortage of electronic parts, they said.
One of the chief beneficiaries of those trends has been disk drive maker Western Digital, which is a major user of Hutchinson‘s “suspension assemblies,” which suspend reading and writing chips above rapidly spinning magnetic disks.
———————–
“I think Hutchinson can sustain this recovery, because their cost cuts have been dramatic,” said Mark Miller, an analyst at Noble Financial Capital Markets in Boca Raton, Fla. “The cost cuts combined with improved overseas efficiencies have brought their break-even point down to $75 million or less — and they’re already at $72 million in the third quarter.”
But others warn that Hutchinson’s recovery could be short-lived.
Jayson Noland, an analyst who follows Western Digital for Robert W. Baird in Milwaukee, said Hutchinson could prosper if other disk drive makers sign up for more of its parts. But Hutchinson’s gains could be temporary if it continues to rely heavily on Western Digital, which is expected to lose market share to Toshiba. Earlier this year, Western Digital accounted for 58 percent of Hutchinson’s revenue.
The next critical hurdle in Hutchinson’s recovery will be whether bondholders agree to renegotiate its $122 million in convertible debt that is due in January 2013, Miller said. The company is seeking to extend the deadline two years.
———————–
http://blogs.forbes.com/ericsavitz/2011/07/07/seagate-western-digital-gain-as-j-p-morgan-turns-bullish-on-drives/?partner=yahootix
The analyst writes this morning that both companies “stand to benefit from favorable pricing conditions and bottoming unit trend-lines. The combination of these factors stands to drive upward pressures to consensus numbers beyond the near term.”
Moskowitz says the key to the drive sector is to watch pricing trends. “Our long-held thesis in evaluating the investment profile of the HDD segment has been that pricing, not units, matters most,” he explains. “Given that we think units could be bottoming, coupled with a favorable pricing environment, the HDD sector could be setting up for a major gross and operating margin expansion wave. Pricing has been flat to upward-biased in many parts of HDDs, and there have been no indications of over-supply.”
Thank you for the updates Plan. So far so good. I guess good press won’t hurt the debt negotiations.
I’m reading up on WDC a bit to get a better handle on the bigger picture. Looks like they aim at vertical integration and make their own media and disk heads (via acquisitions) + plus they use HTCH products already. Seems like them acquiring Hutchinson could make good sense.
btw, I’m following the cornerof forum thread so no need to post updates on my account (I can’t post there – I haven’t been able to register for some reason I don’t yet understand – which is why I posted here).
Ok post the questions here, and I can follow up on the corner of b&h
Incase you missed it, I came across this summary of Hutchinson history up-to 2003. Its been quite a ride.
http://www.fundinguniverse.com/company-histories/Hutchinson-Technology-Incorporated-Company-History.html
I did indeed missed it, and it is a great story. These guys are like cockroaches surviving nuclear winters once every decade. Also very interesting is the description of the transition to TSA, the last step change previously to TSA+ that pushed them to 60% market share (now only 20%).
And that Seagate quote from 1986: Steve Marshall of Seagate said, “Their reliability and pricing can’t be beat. We had our own flexure assembly plant, but shut it down. We found we couldn’t put them together for what they can do it for.”
On an interesting note, their current stock price split adjusted is below their 1985 IPO price (!) . That is despite revenues and equity increasing by an order of magnitude.
Yep, I agree. I was just bemoaning the short term state of my timing. Obviously if we truly enter another crisis all bets are off for cyclicals and the market writ large. I also agree the danger is much lower now that everyone is looking for disaster. But there is still tons of leverage in the system overall so the worry is legitimate to an extent. I’m still long loads of regional banks, just annoyed by my timing on RJET.
In the USA, leverage is at the consumer level (residential mortgages) not at the business level, and with low interest rates people are managing. It is not boom time, but I do not see the crisis.
There is always the potential unexpected consequence of a European periphery sovereign default,with German and French banks in trouble. The great advantage is that those countries, Germany and France not the periphery, should have the balance sheet to deal with those issues.
I would not buy risky cyclicals depending on international trade (shipping) but RJET and PNCL I do not see the issues. Actually oil price might go down.
I suppose in theory oil could go down but the airlines could be hurt worse by a downturn that further spooked consumers and businesses. Regarding Europe I think what is scaring investors is the idea Germany and France can’t or won’t have the balance sheet to take care of Italy and Spain, and the others (or conversely kick them out of the euro and have to recapitalize their banks). I’m not saying I believe that will happen, but I take it that’s the armageddon fear.
They do not have to take care of them, just their banks.
Plan, speaking of banks, a bit on BAC. Unfortunately my buy price is well north of here, but I am a Bank of America bull. I’m almost certainly going to swap out my equity exposure for the A warrants now that they are farther out of the money. I own a small bit of the B warrants as a spec. Do you have any thoughts about that?
thanks,
John
I have avoided the large banks. It has not been because they are not cheap (they are) but because SME banks are simpler to analyze.
However, if I end up buying it will be the warrants. Not because of the leverage but because of the anti-dilution provisions … So I would reserve some cash on the side.
Hi Plan,
Back to the large banks one more time. What do you think about Citigroup vs. Bank of America – obviously different exposures overall, but BAC only a little cheaper and arguably more capital challenged. Why not long Citi instead?
Why not indeed. Banamex is doing fantastic in Mexico. I have been following more closely Bank of America only because I find the A warrants strike price and dividend adjustment very attractive.
Plan, thanks for the comments.
hey guys, I am coming here to ask about BAC as well. I think BAC did a good Q2 and charged off 20 Billion in order to try to put the mortgage issues behind. All of its other business lines are making decent profits. What is the probability that the stock goes up to $12 by May 2012? I think it will be at least 80%.
Plan, I know you like really cheap / distressed, so maybe you can figure out what is going on at TNCC, which got obliterated today. Per their MOU with the Tennessee regulators, they were forced to take a huge write down on their unsold transportation assets, build the reserve significantly, and to top it off may be triggering another fight with the regulators by coverting a (bad?) loan made to other banks (???) into equity. Tangible book value is something like $5.5. So either this is a big opportunity for patient capital or they have been seriously overstating the value of their repossessed assets and / or the quality of the loan book.
John, most probably this should go in “too hard” pile but I am surprised by the good loan composition and decent credit ratios of the banks that they got shares. This might be a master move considering that one of the regulators main concerns was with their dependence on broker deposits. This might give a stable deposit base.
Very strange and complex transaction. If you find more about it (you too Zehua) please share
monthly conference calls? and monstrous increase of NPAs (14%!) … needs too much work Jon. A turnaround under regulatory pressures I think is too much risk. I prefer banks under a simple a cyclical recovery.
Plan,
I think you are right here given all the craziness and conflicts with the regulator. The company seems to be saying their NPAs are worth a lot more, but if that is the case, why would they be holding them for half a year (sell the trailers??). Some other distressed banks with clear evidence of turnarounds look so cheap (BANR, CRBC, WIBC, RVSB, many others) that they should be bought instead.
I like the banks you mention.
Hey Plan, was reading your tweets today on mREITs. What do you think about CT after today´s hammering? Still cash flow positive with some very nice potential upside… I bought today but I admit I may be far too early…
It is complex (and that comes from someone that bought GKK). Fees keeps it barely FCF positive and it has some cash that should give it time to realize the legacy REIT value.
I think there are other more obvious candidates in the sector but it still looks cheap.
What do you like about it?
I like the potential of the legacy assets. But perhaps I am more optimistic than most. The danger is whether or not they have enough cash to ride out the storm until those assets are realized. Today´s drop was so extreme I thought some forced selling must be involved. Time will tell.
Plan, I was very impressed with your GKK analysis. Congratulations on vindication!
Thanks, John. It looks like I was not completely crazy. Eagerly waiting for the 10K and the reestablishment of preferred shares dividends
hi plan,
any more thoughts on the preferred versus the common?
Not really, it is just a question of upside for both.
If Gramercy has in its plans to pay a dividend for the common shortly that is too strong a catalyst, and the upside is big. Also, other mREITs have found alternative financing to the CDOs. RSO is raising a CLO, NCT managed to get a repo credit line, so there is a chance that these companies may start growing again. And if that is the case …
Hi Plan,
Thank you again for sharing your thoughts. On reading the latest RAS earnings call transcript, they seemed pretty confident and given the story there (dividend, guidance, a bit of insider buying) I’m surprised that one hasn’t attracted more bulls.
Yep 😉 Good sector at the moment to have an expertise.
Plan, do you know any large euro banks that have big Italy/Spain/Greece debt exposure? I can’t find many short candidates.
I am not looking for short opportunities, and European banks have capital issues so I have not analyzed them as long opportunities either except BBVA and STD.
Eurocastle. It is managed by Fortress, which has done good work turning around NCT, but looks to be in as bad or worse shape than NCT ever was, even at the height of 2009. Analysis below taken from the semiannual update here:
http://investor.eurocastleinv.com/phoenix.zhtml?c=181176&p=irol-reportsFinancial
Eurocastle eliminated recourse debt in 2009 and 2010 through the issuance of a massively dilutive convertible offering. If conversion occurred today, it would add 385m shares to the currently-outstanding 65.7m shares of common stock. Plus, since Eurocastle is deferring the coupon payment, this number is increasing by 20% each year.
Eurocastle’s investment portfolio consists of a real estate side and a debt investing (through CDO) side. The real estate side of the house comprises numerous separate subsidiaries investing in German commercial and residential property. The subsidiaries’ debt is not recourse to each other nor to the parent. Mars Fixed 1 and Drive portfolios do not look like they will return any cash to the parent – Mars Fixed 1 was recently restructured, resulting in a majority interest being turned over to a junior lender. Drive is in the beginning stages of what will probably be a similar restructuring. The other real estate portfolios are cashflow positive.
The CDO side comprises three separate CDO subsidiaries. All three are passing interest coverage tests (122%, 153%, and 165%), but none of them are passing their OC tests at the moment (86%, 94.6%, and 79.3%). Their collateral is marked down by a 96% haircut to assets rated CCC- and a 63% haircut to assets rated CCC+ to CCC-. Given the strong interest coverage, I do wonder whether some of those haircuts may eventually reverse, and whether one or more of these can cure (especially CDO III).
Eurocastle claims a NAV of .46/diluted share (of which .61 is from real estate and -.15 is from the CDO portfolio) and normalized FFO of $26m/yr or .05/diluted share. These ratios look interesting at a share price of .07 – but how many of its subsidiaries will survive after paying off real estate lenders and CDO debtholders? And can some value be created before the convertible coupon accruing at 20% swamps the common completely? My take is that this is a zero, but it is an interesting enough situation to submit it to the smart people commenting here.
One possible kicker may be this company’s association with Fortress and thus with NCT, which is still looking to deploy cash (as suggested on the yahoo NCT board here:
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_N/threadview?m=te&bn=24531&tid=18006&mid=18006&tof=6&frt=2#18006)
The interest coverage test looks mediocre to say the least, so I assume the CDOs are not generating much cash. Add to that that the OC tests are way underwater, and I think it is safe to assume those are a Zero (even if they did a massive CDO bond buyback at massive discounts) and that FFO may be trapped in the accelerated CDO principal payment. Those CDOs look even worse than GKK CDO 2007.
* How good are the non-CDO subsidiaries?
* Are there other assets like cash?
* What is the price of the convertible?
It needs more time for an in depth look, but since mREITs are complex it would be good to know if there is at least an hypothesis of where the value might be.
Took a second look, and there might be value in the Realty portfolio but the 20% converts is just too much. There might be a play with the converts but it will depend on the price.
Cannot tell how the converts trade given that they are unlisted. There is a €50,000 minimum holding. Plus, the offering is limited to citizens of certain countries – the U.S. is not one of them, and U.S. citizens are not supposed to even access information on the convertible offering. So I imagine those attributes would rule them out for most of us. Plus, after yet another secondary from NCT at an unreasonably cheap and dilutive price, I don’t want to have anything to do with Fortress right now.
I do not think the dilution is that bad. NCT is finding really great opportunities (15-20% un-levered returns) so they can justify the extra shares. That cash can take them a long way, especially in the current environment.
Regarding Eurocastle, too complex even for me. I like to find golden needles in the haystack, but currently the haystack is made of gold too.
Apparently they’ll be using the proceeds to buy excess mortgage servicing fees, and perhaps senior living facilities:
http://phx.corporate-ir.net/phoenix.zhtml?c=132209&p=irol-newsArticle&t=Regular&id=1608149&
They will partner with Nationstar, a FIG affiliate, on the excess mortgage servicing fees.
Maybe this will make sense in the long run, but I see significant risk in getting into two new businesses right now. I also have to wonder whether these decisions were made at arms length and whether they are intended to benefit shareholders or the external manager. To sell shares at essentially a P/FCF yield of 4, the opportunity needs to be a slam dunk. Perhaps I don’t know enough about the situation, and perhaps the excess servicing fee market is dislocated and incredibly attractive, but I have my doubts here.
Now, if they were raising cash to buy GKK, that would be a different story!
Hehehe, I do not think that buying GKK fits the “slam dunk” bill either. NCT would not be able to buy GKK at a price to justify that dilution.
I agree that any new business brings extra risk. And this JV with Nationstar smells fishy. Derek Pilecki (http://twitter.com/#!/gatorcapital) was complaining on Twitter specifically on the conflict of interest.
Being devil’s advocate, both opportunities look interesting and not all cash is going in that direction (CDO bonds buybacks). A week ago there was a presentation by a Blackrock principal on the MSR opportunity (that caught the attention of Dan Loeb) and Jamie Dimon has complained openly of the stupidity of Basel III on the MSR issue asking for a unilateral US withdrawal. Isn’t it a service/fee business with no credit risk? Maybe I need to find more about it.
Also, I consider NCT cheap but not that cheap, so the dilution may be less than appears. The CDO business is in runoff and highly levered so I would have trouble justifying a 10x multiple for example.
Good conversation.
Plan,
Also, if their opportunities are that fantastic surely it makes sense not to pay a dividend and invest the incremental money there.Unless they paid a dividend to goose the stock and THEN go for the offering. But we’ll see how it turns out.
I can only hope that RAS and GKK aren’t planning any sort of similar dilutive action that undermines trust.
RSO raised capital when it was yielding around 12%. RAS and NRF also raised capital but at much higher prices around April-May. mREITs take advantage of yield chasers to raise capital for accretive opportunities. Actually that is the model for most REITs and most of them were very overvalued a couple of months ago, not so much today.
BL: FMD at $1 versus conservative $1.80 NCAV, losing money but turnaround potential.
FMD is trading well below net asset value. However, its stock is not worth its net current assets as long as looks like it will continue to bleed cash (margin of safety continuously eroding). The big uncertainty here is how long it will take for it to stop losing money – if it ever can.
First Marblehead (FMD) is a student lender which, in its heyday, originated and securitized student loans. This market essentially shut down in the credit crisis, and FMD has been working to transition into a new business model. The company consists of an Education Financing (EF) division and numerous securitization trusts. EF includes the core loan-generation and servicing operation, a subsidiary bank, and the newly-acquired Tuition Management Systems (TMS).
The company’s balance sheet looks awful because it consolidates EF and the securitization trusts. Consolidating these entities results in FMD showing a balance sheet with 8bn in assets and 8.75bn in liabilities (10Q* p. 25) – a negative 750m NAV. Since this deficit is largely in the securitization trusts, and these are non-recourse, looking at EF division only (10Q p 66), we get a better idea. The EF division balance sheet 278m in cash and short-term investments versus, 32m of receivables, and 83m of “other assets.” 51m of these other assets are from the TMS purchase, the bulk being intangibles and goodwill (49m). There are a sum total of 217m in “other liabilities.” A chunk of these other liabilities were assumed in the purchase of TMS, and covered by Education Financing’s restricted cash and receivables (see 10Q p. 50). 57m are deposits at the bank subsidiary, and 40m is a tax reserve. Taking current assets versus the liabilities not covered by restricted cash and receivables – the 57m of bank deposits and 40m tax reserve – we have 181m in net current assets, $1.80 a share. This is for a $1 share price.**
FMD is losing money right now, about 13m (cash) a quarter (10Q p 13). The element of speculation comes in here: an investor needs to judge whether they will be able to eventually generate a profit. Their founding CEO has come back to the company, charged with turning it around. He has performed well so far: their current liquidity situation is due to his efforts to obtain tax refunds. Because of the shutdown in the securitization market, he is starting a new approach to origination based on partner lending with client institutions, the Monogram platform: “Our Monogram platform provides us with an opportunity, through our Education Financing segment, to originate, administer, manage and finance education loans, and we believe that the two loan program agreements we have entered into are a significant step in our return to the education lending marketplace” (10Q p3). It looks like they have approved $112m in loans in “Fiscal 2011” – or some time between 1 July and 7 Sept 2011. I am not sure if one can annualize this volume due to possible seasonality. Perhaps someone familiar with this market could weigh in. Also, it is unclear to me how this volume truly impacts the bottom line.
So without a clear view of the future, I am left with what I do know. The company has the balance sheet to buy itself time to be successful – and with the founding CEO’s track record and incentives (7.6% of the company’s stock plus options at strikes significantly above the share price) it seems like it might be a gamble worth taking. Thoughts? Someone please rip this thesis apart. If anyone has some ideas on how to analyze their prospects of generating sufficient business going forward, please share, as I intend to continue researching this one.
Note that there was SumZero writeup by Ryan Morris at Meson several months ago basically stating the same thing as this. The writeup also does some speculation on what kind of profit FMD could generate if Monogram takes off and puts a $10 target on the stock. Unfortunately I can’t find a link.
*I originally used the 10Q for the period ending in 3/31/2011 at http://www.ir-site.com/firstmarblehead/sec2.asp. I realize they have a 10K out since then. I took a look at it and the story has not changed with regard to the NCAV.
**There is some upside to the NCAV estimate as well. The 40m tax reserve is taxes owed to MA. FMD is disputing this. If they lose, no harm done, it’s already reserved. If they win, they can release the reserve. I have no insight as to how it will turn out.
Also, after the 10Q was filed, FMD sold a chunk of less-profitable TMS contracts (18% of TMS revenue), converting some of those intangibles on the balance sheet into 6.9m cash. This helps confirm that FMD got real value in its purchase of TMS and that those intangibles are really worth something. If we do a back of the envelope calculation to compare that sale price to the price the company paid for the entirety of TMS: 100%/18% x 6.9m = 38m, versus a 47m purchase price. Not bad considering these are considered lower-profit and lower-interest contracts and that the company bought more than a book of contracts when it purchased TMS. http://www.inelegantinvestor.com/tag/fmd/
Thanks Olmstead, many people I know are following FMD but I do not have confidence on its future to speculate on it. It does not even have a business model so it is more of a start-up, a start-up that is burning cash at a very high rate. I do not like the sector either … it needs some major reform so it is difficult to argue that it will sustain historic growth rates. And finally, it is not even my type of turnaround as I argued at length here:
PlanMaestro….My name is Richard Morris and I’m a businessman and investor from Virginia Beach, Va. As an investor, I sepecialize in “turnaround” investments, and like you I like to use Warren Buffetts GEICO as an example of the kinds of potential in turnarounds.
I recently discovered your blog, and would like to share with you and others my involvment and experience in a “former” subprime mortgage lender Novastar Financial (symbol NOVS.PK). Interested?
Richard, this section is free for sharing of ideas. Just follow the instructions at the top to share the thesis.
At the same time, I do not want this to become like Yahoo message boards, the idea is to share ideas not to pump them up. So please avoid too many follow-ups.
I am skeptical of Novastar, It does not look like a good business with good management. But I have been wrong before.
“I am skeptical of Novastar, It does not look like a good business with good management. But I have been wrong before.”
Sounds like you wouldn’t be interested in what I have to say anyway
so I won’t waste any of your time or mine.
Good Luck in your turnaround investing, but my recommendation to you would be to try and be open more open minded and maybe you might have more success.
Note: I don’t believe you know what business Novastar is in, nor do you have any idea about “good management”
Richard Morris
http://www.linkedin.com/pub/richard-morris/18/a69/227
…. but as a I said, this section is open for ideas and I have been wrong before..
The information in the link to the NY Times article by Gretchen Morgenson about Novastar was provided to her by Marc Cohodes of Rocker Partners who’s hedge fund business model was to “target” and “short and distort” companies for profit like Novastar. And besides going out of business, Rocker Partners aka Copper River paid 5 Million dollars to Overstock in a lawsuit for the very same kind of behavior. If you care to learn/know more you can email me personally at richard@makesomethinghappen.com or do your own due diligence.
Do you have a thesis or not? Any further comment w/o a thesis I will delete.
Plan, do you have any insights in how to analysis airlines? I know you like RJET and PNCL, but I am not sure what are the key metrics to look at for these airlines? I am also wondering what you think about the possibility of AMR turnaround?
Sorry for my post above, Plan. I found your discussions about RJET and PNCL in April.
Could you please ignore that, and only share “what you think about the possibility of AMR turnaround?”
I do not like the sector in general, EJET and PNCL are the only ones I would follow.
I see. RJET’S current price/FCF is about one, if we exclude D&A expenses. However I think for airlines, D&A are real expenses that couldn’t be just ignored. I need more time to figure out exactly how much D&A to deduct from FCF to get a real valuation of this company. But it looks interesting to me at first glance. PNCL seems even cheaper at current price, but if US really gets into recession, I think both stocks will still fall further. Right now the main question is when to buy these shares. It seems a tough one to answer.
Such is life in the value investing world
Plan, I did some research tonight, and I am a bit concerned with the following issues:
1. Their FCF is strong every quarter, but they didn’t seem to use it to pay down debt. Their debt is horribly high, with debt/EBITDA over 7, the highest in the airline industry.
2. From the following news, it is not hard to see why PNCL has slipped from profitability to losses. Right now they haven’t announced any turnaround plans yet, so this looks more like a value trap to me.
http://www.commercialappeal.com/news/2011/oct/27/pinnacle-projecting-loss/
Zehua, you have to know the industry. If not, you have to read a lot or just avoid it. The debt is non recourse backed by the planes (leasing) and it is tax efficient. This is not an easy industry.
And I do not like the “value trap”, media abuse it too much. It is difficult to find two people that agree what “value trap” means
Thanks a lot Plan. I am learning the airline industry recently. Hope I can catch up soon. PNCL and RJET are both good candidates. I have to understand them to a comfortable level before I can buy. I think thanks to your help, I have much better understanding with banks now, so I am comfortable to buy a few banks, but not airline yet.
Do you know what happened with RJET today? That’s a big jump.
I am reading through RJET and PNCL’s restructuring plans, but still not fully understood, so I am still not holding any of them.
They announced the spinoff/sell of Frontier. The rest of the business is a fixed price (similar to a lease) with no fuel risk. There were worries that Frontier would bring the whole thing down.
I see. Thanks a lot! I just found the news too. So if they fail to sell it, it will still drag the whole company down, right?
I remember a while ago you said they are cash flow positive on frontier.
Hi Plan,
PNCL has become surprisingly cheap now. Its price/FCF is only 0.25. It announced some kind of restructuring plan yesterday on its 8-K. Do you think it is going to succeed? Why does it say 2012 will be an extremely difficult year when its FCF is still solid?
Thanks!
I wish I knew what are they planning and what are the specific issues. Working on it.
Hi Plan,
It looks like Pinnacle has negotiated with the creditor and delayed some payments.
http://www.bizjournals.com/memphis/news/2012/01/27/pinnacle-renegotiates-debt-to-avoid.html
It looks to me that PNCL’s free cash flow is very strong, so how come it has a cash constraint and has to postpone debt to avoid bankruptcy?
They have high one time costs consequence of the merger with Mesaba and the retraining of pilots. Also, there are some minimum cash covenants in their Canadian facility that are rumored to be in the order of 30 to 40M. They may also be preparing against some Delta hardball it it decides to fight some payments and price adjustments scheduled over this year.
http://www.bizjournals.com/memphis/blog/memphis-in-motion/2012/01/pinnacle-airlines-ceo-outlines.html
Plan,
This news provides some relief to them.
http://www.bloomberg.com/news/2012-02-08/pinnacle-jumps-on-higher-rate-accord-with-united-atlanta-mover.html?cmpid=yhoo
There is no detail of how much cash flow this would provide to their operations by April, but if this is sufficient to relieve their one time cost hit, then they would survive and the stock would go back to $15?
Plan, looks like some activist investor is trying to turn PNCL around.
http://money.cnn.com/news/newsfeeds/articles/globenewswire/248404.htm
This could be good news. I am still waiting for their final negotiation with Delta and United.
Wayne and Ryan are fighting the good fight.
PNCL filed chp 11 today. What’s your thought, Plan? Maybe it is too risky to consider a buy any more.
Needs work Zehua. It looks tactical to renegotiate the Q400 and labor union contracts. Delta is involved in the DIP financing and that makes me pause. They have assets.
Thank you Plan. The PNCL case is the first one I am looking at that has filed chp 11 and generating positive cash flow. I really need someone to teach me how to walk through.
Plan, do you still think TNCC is not a hide and pretend bank? It now looks to confirm my previous guess.
Now with 1 Billion asset and 11 Million equity, they have to do a capital raise in some way or another. If we assume their current reserve is finally sufficient, which I doubt because the US economy is about to enter another round of recession, they raise 100 Million equity, and the current shareholders are basically wiped out.
As I said, with the regulators all over it I prefer to keep it in thee too hard pile.
I am wondering if FPFC also belongs to the too hard pile. Its reserve/NPA is too low, and we all know that the macro is gonna be no good for the next year.
FPFC will be delisted tomorrow, so I think the stock price will drop to 0.1 soon.
At the moment it is. They should have reestated by now. Regulators risk.
Hi Plan,
I was wondering what you think about the most recent FIGI quarter and stock drop (on tiny volume, admittedly).
thx,
john
I think a key measure is the backlog that is drying up. I like the cash and the quality of revenues is much better with a larger % recurring … But with datacenter boom i I keep wondering why the backlog is not exploding.
Anyway, it still looks very cheap and is still cash flow positive.
Yes, I am wondering if the datacenter construction market is getting consolidated to the benefit of larger players & at the expense of a FIGI, but I need to do the industry research.
Plan-any updated thoughts on PSTR? Looks like it’s trading at about 1x cash flow right now. My big concern, though, is what happens when their natural gas hedges (at $6) run out. Your thoughts?
I do not have my notes at hand, but just to confirm did you include the 20m+ warrants in the 1x FCF?
Those are exercisable between 3-4 per share so that can bring $60-80m in times of stress plus:
– the participation in CEP that they recently bought – a very underutilized long haul pipeline – several thousand unexploited acres in the Marcellus – rumour that the missisipian basin may overlap in part with their acreage.
The debt is around $190m I think (reduced a lot)? So with those assets and the cash flow they should have protection when the hedges runoff.
Their costs do not look so bad if natgas prices stay at current levels (that I do no think it is sustainable). But there are risks in extreme scenarios, that is the curse of cyclical companies that are not the lowest cost, but they also have more upside.
Hi Plan,
I am holding 90% cash right now, because I think the macro is bad and the stock market is about to crash, so cheap stocks will be cheaper. Even if I am wrong and miss the opportunity of US stock, I can still be 100% sure that fresh bargains will be easily found in the Euro zone about 12 months from now. What do you think?
Read Keynes on why to time the market that way is a bad idea. Two good books that discuss that are the last from Skidelsky and Keynes on the market.
And that comes from the guy that invented Macro and business cycle investing … But that could not find anyone that could make money out of it himself included.
Thank you. I will read about it, but isn’t George Soros making his money primarily from macro judgement and trading the stock indexes?
There are very few Soros and it is almost impossible to evaluate even after the facts if they were not just lucky. I prefer to be on the side of buying cheap compounding earnings.
Hi Plan,
I’ve been looking for books on Keynes’ investement philosophy. Are you referring to the huge 3-volume Keynes bio by Skidelsky? Or his more recent “Return of the Master”?
The Skidelsky books are very good but they do not talk much about his investment philosophy. “Keynes and the Market” is just dedicated to it, but because is focused it is a bit repetitive. There are also the “Collected Writings” where I think volume XII or XIII is just dedicated to his writings on investing … but I do not know how to get a hand on it. It is out of print and I could not find it in the usual sources.
Plan,
On twitter I suggested that we didn’t know enough about the fraud at Olympus to invest, but now I think I was wrong. It does appear to be a question of hiding losses but not of cash flow nor does it seem to be threatening the critical endoscope business. Plus Japan being Japan they will probably continue to have access to bank funding. In a restructuring there should be significant value still. I am wondering what you are thinking for valuation and if you would still be comfortable with the ADRs up significantly this morning.
thanks,
john
Valuation depends on the amount of the fraud, if the fraud did not affect revenue or cash flow I do not see why it should not recover to the 30+ range.
“Do you want a second opinion or just want to give some visibility to a cherished idea?”
Neither, I just want to be removed from your blog so as not to get any more posts. I’ve already provided an explanation. Thanks
richard@makesomethinghappen.com
If you subscribed to the tips section, you’ll have to unsubscribe yourself (check email of confirmation). I cannot do it for you.
Happy thanks giving, Plan.
Plan, could you please tell me something about BAC’s warrant B’s anti-dilution feature? I searched on google but couldn’t figure out.
If they are forced to issue new common stocks, the warrant is still diluted, right?
From recent market action, it looks like whenever BAC goes flat, down or slightly up, warrant B always go down. We might have an opportunity to buy at the 0.05-0.1 level in 6 months.
http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm
http://www.sec.gov/Archives/edgar/data/70858/000119312510044945/d424b7.htm
Plan, do you think AMR has a chance to successfully restructure? Its debt and pension liability is huge, and quarterly cash burn is huge.
UAL’s revenue is nearly double that of AMR, but salary and benefit cost is only slightly more than AMR. What’s the odd that they could get the union yield and agree to cut the current salary to half? Is it more likely that debt will be converted to equity?
http://seekingalpha.com/article/311820-bailout-this-pbgc-pension-takeovers
From this article, it looks to me that AMR’s ch11 is a sure thing for common stock wipe out.
hi plan,
Curious if you have insight on this one — to me the TARP warrants for Boa and Citi look very interesting. If BoA actually broke up the company and formed spin-offs, how would that impact the warrants? I’m not familiar with the history of such events, if any…
I am long all those warrants. My understanding is that these warrants adjust the strike for spinoff events plus they have some protections against dividends.
Hi Plan,
based on results today it looks like the need for for BOA to break up on a regional basis is even more remote. but it is interesting to see what the warrant provision would be anyway. I’ve purchased the C “A” warrants and the BAC “A” warrants.
can’t get my head around your GKK. how do you handicap they’re going to sellout? mgmt change of control clauses are 2x their annual pay. would you give up a $$$ job for only 2x annual income? and they have enough gimmicks in the B/S to keep the corporate book value negative forever.
also there’s not enough upside in the prefs. even with the indaba guy on the board don’t see how you can make them to fork over the cash. (do you need board unanimity to sell a company?)
Management does not control the board, SL Green doe. Marc Holliday, SLG’s CEO, was GKK’s previous CEO and the same with SLG’s CFO. GKK is more headaches for them than anything else. Also none of their recent moves indicate an entrenched management, the disclosure of a possible was a surprise and initiated by management itself.
Regarding the sale itself, it was not the main catalyst that I was expecting, I think the potential for dividends being GKK a REIT is much more important. The 10K coming out should be much more clear regarding GKK’s earnings potential and great liquidity than previous financial disclosures.
… and it is good to have Indaba making some noise.
this one goes under “too hard”.
from the 10K:
“We may, under certain circumstances, repurchase our common or preferred stock in private transactions with our stockholders if those purchases are approved by our board of directors. Our board of directors has no present intention of causing us to repurchase any shares…” bla bla blah
“We do not know when or if we will pay future dividends, including accumulated and unpaid dividends on the Series A preferred stock.” bla bla blah.
if they wanted a high stock price for a secondary, could have said: “we intend to restore our div when conditions permit” blah blah
“During the second quarter of 2010, our board of directors retained a financial adviser to conduct discussions with various third parties regarding potential transactions to recapitalize our company…All indications of interest were subject to significant additional due diligence by the parties submitting them and to the satisfaction of substantial qualifications and conditions, including but not limited to eliminating various of our contingent and other liabilities, restructuring Gramercy Realty indebtedness, repurchasing certain of our equity securities (including our Series A preferred stock), selling certain of our assets and obtaining the approval of our stockholders.”
“In early June 2011, our board of directors created a special committee to evaluate strategic alternatives of our Company following the anticipated disposition of our Realty division’s assets. The committee is authorized to engage a financial advisor to assist in this process.”
so they’ve been shopping it for 2 years, the buyer asked them to buy back the prefs to get a clean slate, but the price didn’t make sense anymore if they did that. the walden case is still pending after 4 years.
but enough gkk…here’s my submission. if the banks are healing, this thing should be gibraltar:
1)pay fair price for a solid industrial, get the best commercial lending biz in the world for free.
2) all the hedgies hate it (corp. prop desk squeeze them), mom & pop hate it (left them some 6 months w/o dividend), institutional investors hate it (mgmt. irresponsible going into ’08 with all that CP)
3) shareholder-friendly. super capital allocators. basically invented the modern mgmt.
3) catalyst (besides deep value): reinstate sub dividend to holding in mid 2012 after Fed stress test. CEO is itching to get the stock back to $30 and he’s got a wall of money to do it. buybacks+dividends galore.
4) GE’s fair value is $25, at $18 you get gecs for free. it’s a bit higher now but should spike down some time this yr.
best hidden places are in plain sight, where nobody’s looking.
GE is cheap, only that there are several cheaper large caps. I think your $25 target (I was putting a price closer to $30) is about right.
Regarding GKK, I have the common but I still think that with Indaba playing activist the preferreds look interesting.
The FDIC stepped up its closing activities this week with four closures. The last time the FDIC closed this many banks in a week was on October 21, 2011. Failures include Tennessee Commerce Bank, Franklin, TN ($1.2 billion Ticker: TNCC)
Thanks TangoPapa, TNCC was rejected in their attempt to merge w/another banks so it was a mater of time. Regulators risk is still present but hinks look to be improving fast in the banking sector.
Tennessee banking regulators were particularly lax in forcing banks to take their medecine early. I was shocked at how rapid TNCC deteriorated…basically in about 2 quaters, you saw a spike in Texas ratio. Interesting that in the last Quater, the deposts dropped by a whopping amount….I am alaway looking for the cannary in the coal mine….its seems gradual decline of deposits together with steady stabilization or improvement of Texas ratio is a sign of a bank trying to recover, where as a rapidly worsening Texas ratio with a big drop in deposits in a single Q foretells a dire situation.
Considering TNCC and other similar situations, when regulators appear and there is a big jump in NPLs it is better to stay out of it for a couple of Qs.
Hi Plan,
Today I looked through the banks and found a few cheap ones. Could you please give some comments here:
NCBC: asset quality ratios are good, but texas ratio kept increasing for the past three quarters. Looks like more trouble ahead?
BKOR: Texas ratio jumped to over 40 in Q1 2011, but gradually coming down from there. It looks really cheap to me.
FFKT, FMFC and GFED: These three banks are trading at about 2.5 times PPTP P/E ratio. The 30-89 PD and charge offs are both very low for the past two years. Texas ratio is around 50, not great, but it is stabilizing.
you’re gonna like this: http://google.brand.edgar-online.com/?sym=XCO
30% discount to ross and oaktree. on the negative side, the ceo just dumped a huge chunk.
looks like the lowest cost operator, lower than KWK and GDP anyway.
1.5tn proven reserves, makes about $1.5/mcf with gas at $2.5, i think. and you get the optionality in the undeveloped acreage.
In the DCF valuations I’ve seen, KWK is much cheaper, but that’s a family affair. I think oaktree and ross owning 20% should offer some protection in this one.
I like it. There are cheaper cost operators (UPL, CHK) but XCO is an excellent lead. Hoping that natgas stay low long enough so I can buy after my financials recover.
the iguana is on the board
http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8463538-867-6406&type=sect&TabIndex=2&companyid=157&ppu=%252fdefault.aspx%253fsym%253dXCO
Well, I suppose that is Wilbur Ross 🙂
CHK is hitting hard due to CEO misconduct. Let’s see if this can become an opportunity.
marking time for some dry gas companies go dry before jumping into the sector. In my view, opportunities in financials are just so great that everything else can and will have to wait.
PlanMaestro: “In my view, opportunities in financials are just so great that everything else can and will have to wait.”
AIG warrants and BAC warrants have roughly doubled while XCO has stayed flat. Any updated thoughts on this, PlanMaestro?
Plan, have you looked at RBS before?
Click to access Q3_Interim_Management_Statement_slides.pdf
It looks like they are really cheap, and credit trend is improving fast. Ireland seems to be recovering fast from the crisis.
Zehua, one of the reasons I started the Charting Banking series was to have a complete understanding of the status of the American banking system. I think it is risky to invest in an isolated bank w/o understanding the whole industry.
Now, after a superficial look at RBS, my intuition tells me it’s cheap and recovering. However,
1. British banks are notorious for being behind the curve in terms of technology and operations. Santander now has a foot in the door and it is one of the best banks in the world. That is a worry.
2. When I go through their presentations they still show with pride their international presence. I prefer Bryan Moynihan concentrating in its core businesses that is much more narrowly defined than RBS. That is another worry, I do not want to be looking over my shoulder for another stupid acquisition by RBS.
3. I do not like also that UK banks are too large for its economy and too close to Europe. That is a third worry.
4. This is the bank of former sir Fred Goodwin. You might want to read about him and how his style might have permated the culture of the bank. When I analyzed BAC, I wanted to understand how the Charlotte clique ended up in the organizational structure… and it looks like they have been under control. Not sure with RBS specially reading and listening some of their presentations. http://en.wikipedia.org/wiki/Fred_Goodwin
I think it would take a lot of work to really understand the situation. All the while, the American banks are tremendously well capitalized, mostly isolated from the macro issues, with a regulatory framework that seems to be reaching a nice balance (thanks Volcker), and a economy where the government is at least containing the austerity forces. I prefer my Bank of America and Citigroup.
Thanks a lot Plan. I definitely appreciate BAC and C as great investment opportunities.
Could you please also give some comments on these banks that I posted previously?
——————————————————————————————–
Could you please give some comments here:
NCBC: asset quality ratios are good, but texas ratio kept increasing for the past three quarters. Looks like more trouble ahead?
BKOR: Texas ratio jumped to over 40 in Q1 2011, but gradually coming down from there. It looks really cheap to me.
FFKT, FMFC and GFED: These three banks are trading at about 2.5 times PPTP P/E ratio. The 30-89 PD and charge offs are both very low for the past two years. Texas ratio is around 50, not great, but it is stabilizing.
Many months ago I mentioned FCZA, and you said you added that to your watchlist. Have you bought any yet? Its condition is improving slowly. Not as fast as CRBC, but it is very safe indeed.
Bank of Ireland—I read from bloomberg that Wilbur Ross bought 35% of its shares last July. That’s interesting to know.
I still agree with you that these UK banks don’t look as safe as the US banks.
Ross and Watsa re fantastic investors but I will throw a couple of things into this idea.
There was an arbitrage between the ADR and the local common. If you do buy, careful if you are overpaying with the ADR.
Also, remember that unemployment is high in Ireland (14%) and they are still tied to the euro.
Also, as I have told you a couple of times, I do not buy banks in countries with fixed currency systems that are not in an optimum currency. Things may work for years but a foreign shock can send into deflation, then forcing a devaluation, and finally a banking collapse. Ireland is not clear that have gotten out of this specially with Germany’s policies.
http://en.wikipedia.org/wiki/Optimum_currency_area
To get somethings out of the pipeline. FCZA, I think it is good, had it in the past, but do not have it now.
Ok. No hurry. You haven’t looked at the other banks, right, or you think only FCZA is good?
Yeah I am concerned that Ireland uses Euro as the currency as well, and they have about 4 Billion Italy+Spain government bonds. I was just thinking since they have done the loan book checking, it should probably be safe. Also Ireland economy is picking up.
How about Lloyd? UK just announced QE. I think this should be in much better position than Ireland.
Of course, I strongly prefer the US banks. Much better credit ratios. If Lloyd or Bank of Ireland drops to super low valuations like 10% TCE, I would buy then.
I have not looked at those banks yet.Lloyd? I have mostly the same comments that I made on RBS.
When I see large, quality companies, with significant downside protection at 1/3 -1/4 intrinsic value I try to not over think it much or get distracted. Over the past most of my errors have been about not doing KISS, keep it simple.
PM, question about TNCC- is there ever any value in a bank that is halted – e.g. TNCC is in receivership and the shares are $.04. for those with shares is it worth selling to get a pittance back, or is there any hope of recompense for hanging on?
Henry, you might want to check the comments on TNCC up in this page. Their “master plan” of exchanging a loan for a merger with to well capitalized banks went down the drain. They have the FDIC with a boot on their neck. Shareholders will very likely lose it all except a buyer appears.
Plan, regarding the TNCC case, what would you think would happen to its debt securities? Assume they have preferred stocks, then will those be wiped out as well?
Who would you think FDIC is going to have TNCC sold to?
FDIC is not being kind with anyone that falls of a cliff.
I know you have done extensive work with AIG. Genworth is another insurer I’m interested in. Even after a recent run-up it trades at pretty depressed levels (like .25 book value). Insurers as a group are cheaper than normal (~.9 book value), but GNW is depressed even below that. I think it is largely due to overhang from their mortgage insurance division. Their other divisions (retirement and protection, international) are looking good. Management is divesting non-core businesses and focusing, which I always like to see (recently sold medicare supplement business, upcoming IPO of Australian mortgage insurance).
They recently had a special call and presentation on their MI division that I think is unusually transparent and cogent:
http://phx.corporate-ir.net/phoenix.zhtml?c=175970&p=irol-irhome
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTI2MDkyfENoaWxkSUQ9LTF8VHlwZT0z&t=1
Their new MI being written is conservative and very profitable, and they are working through their book of problematic vintages. They are better-reserved than other MI companies. Their MI division is bumping up against regulatory capital ratios, but they’ve gotten waivers in every state where this has been the case. The scenario that they are reserving to seems somewhat pessimistic (but not drastically so); any upside surprises to the housing market would result in reserve releases.
So what’s it worth? This is from memory, so bear with me: Last quarter the company did $104m in net income. A PE of 10 on that makes it fairly valued right now. However, this income included a mortgage insurance unit loss of $79m. So let’s strip out the mortgage insurance unit, value the rest of the company, and add in MI in a way that is not based on current income.
Add $79m and $104m, PE of 10 indicates a GNW ex-MI value of ~$15/share.
If you believe their MI runoff analysis (slide 22), there is $910m of net present value in their MI division (with no new business written). That’s $1.86/share of value, bringing us up to ~$17/share.
But they are keeping MI, and writing new business. From their presentation, it looks like each year of MI written has a NPV of a bit more than $170m (embedded value of 09-11 vintages, divided by 3). Incidentally, $170m is the income from their MI division the last year before it blew up. Previously it was higher, so this may be conservative. At any rate, $170m a year discounted between 10% and 15% implies a present value for the MI division at least twice their runoff analysis value. ~$19/share.
So that’s a quick and dirty ballpark valuation. It does not include certain upside scenarios, like a return to a more-normalized investment income environment (their retirement and protection unit is still earning below their pre-2007 numbers), or divestiture of non-core business. And of course, if the MI overhang lifts and the market trades them up to around book value, it’s worth a lot more.
What I don’t like: They do life insurance and annuities, which are problematic in the current ZIRP environment (they have stopped writing the more risky annuities). Their international mortgage insurance business comprises Australia and Canada, with frothy real-estate markets. I need to better understand how mortgages and insurance work in those spots.
Thoughts?
Actually I was passing exactly because of Australia and Canada. I have not done work on those real estate markets much less insurance. I am more of a “wait for the earthquake, look for survivors” kind of investor more than a short seller.
If you ask me, GNW looks cheap. At least what management has been saying is that MI is ring fenced, so that assumption must be checked.
Australia and Canada MI make up a pretty small portion of earnings, so losing those would be relatively insignificant – esp. with the stock trading where it is. I do need to check how those entities are structured though viz. recourse to the parent. Tips on that?
Nope, haven’t gone to that level. I do not remember them that small though.
Also, it is very difficult for regulated institutions to just leave the carcass. One clear example is the mortgage insurance business of Genworth. Another one is the fight of Kingsway Financial against the Pennsylvania DOI over Lincoln Insurance.
I think Australia real estate currently is even a bigger bubble than the US in 2007. With the EZ recession, I think commodity prices will drop, and Australia real estate will take a big dent.
Plan, any thoughts on FIGI after the immense drop today? Revenue has fallen off a cliff recently, still have a backlog of 35 million. Not sure what the deal is as the industry as a whole seems to be thriving.
James, it looks like I did not reply. I put my thoughts here if you are interested.
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/fortress-international-group-figi-pk/
Plan, are you tracking BPOP? Their NPA has stabilized for over two years, and 30-89 PD gradually going down.
My major concern is that their loan loss reserve is only 35% of adjusted NPL, so I wonder if regulator would push them for an equity raise? Their cap ratios are quite good though.
BPOP NPAs are still too high but all the other metrics are heading on the right direction. The thing is … Puerto Rico. Not showing many signs of a recovery of their depression that started way before 2008.
BPOP will do a Reverse split this month. This will almost always bring down the price. If it can trade at 1 or even 0.5 price/pptp ratio, will you consider a buy?
The situation in that area is not good, but gradually improving. My major concern is still the low reserve/NPL ratio. Are you concerned with that? It is too low, but I wonder if that is skewed by the government guaranteed bad loans. From their statements, it looks to me that when a loan goes bad and it is supposed to be guaranteed by FDIC, they will still book a reserve, but this reserve seems much lower than the reserve that they would book for the non-covered loans. I am not sure why.
Zehua, I do not think too much about reverse splits. Maybe there is evidence supporting the fall in prices but not sure if RSSs are not more of an indication of firms that have fallen in hard times … and we are more interested in the few RSSs that represent companies with good times ahead. Look how CRBC has performed even in this uncertainty.
My problems with BPOP, is that I do not see Puerto Rico recovering yet and the large banks are crazy cheap.
Yeah you are right. I looked at BPOP again, and I feel like with so much NPA, it may take 10+ years to gradually return to good profitability, and I am still very concerned with the poor reserve/NPL ratio, so I think I will pass.
For other large banks, I am still not sure how you get the $40 B PPTP per year for BAC. I only get $15-20 B in my calculation.
hey Plan, how do you explain:
1. WIBC’s high ROA?
2. ZION’s low funding costs? I can see how a BAC or WFC do it, but ZION?
That is a good puzzle for you, what is the key profitability driver for the banking industry? There are banks smaller but much more profitable than BAC or WFC and is not necessarily true that they are taking more risks.
so you don’t know. I come here in order to save 10 min of research, not to get a NIM tutorial.
well, I claim ZION’s competitive advantage is bigger than WIBCs. and if you did your lesson you’d disagree with me.
Luckyscam, maybe you should protect, improve, or help this blog first? The best way to get an answer is to deserve one. Sometimes I do have a sense of humor, but this is my turf and my rules.
Hi Plan,
It’s been a long time since you mentioned PSTR. It’s hitting new all-time lows. What are your thoughts on it now?
They depend a little too much for my taste on the natgas pricing compared with other opportunities but might revise my stand later if they continue to reduce debt at the current pace. At the current natgas prices they, and many others, will suffer. Some operators have been able to extract at a total cost below $4. So without new demand, that is coming slowly, we might stay at these prices for a while.
Postrock cost structure is high, better than most shale plays though, and they do not have liquids to navigate this period. So there is a question of timing that is difficult to handicap considering that these are not normal times for the natgas industry. Hey, it is not normal times compared to any commodity down cycle.
At the same time, they have a private equity majority owner that has been willing to inject capital (ie: acquire a participation in CEP) and there has been substantial operational improvement and debt reduction. They also have non-core assets, like an interstate pipeline, that are underutilized and two more years of hedges. So there is some resilience … but at the moment not a sure shot for my concentrated portfolio
Plan, any thoughts on ATPGP?
It could be a nice turnaround this year.
Hello sir,
I have a question, is a company that has plans to declare a share right offering higher than its market price undervalued?
Example:
Company A is currently trading below its par of $1. In a board meeting they have plans to declare a share right offering of $1 to raise capital. Company A’s stock price is currently trading at $.60. It has a book value of $1.80.
Is the company undervalued?
Thanks in advance.
Curious
There is a chance that is but all depends on the specifics. For example, some of the RTO Chinese capital raises were a sham. On the other side of the spectrum, TPGI looks very cheap and is managing to raise capital at prices well above than the market price at the same. It seems to indicate that the private value is much higher that the market price.
Thank you for your reply Planmaestro.:)
Planmaestro,
May I ask your thoughts regarding this stock?
I was checking on a company yesterday and I found their accounting intriguing. They sold the 3 ha land to a dominant real estate company. The total selling price of the land was not disclosed but details regarding the changes in “cash and cash equivalent” and “advances from customer” account provided a hint.
They disclosed that the significant increase of cash balance is due to the advance payment on the sale of a real estate which is 24% of the agreed price. It is stated that 554.5 million is the total advances made. Therefore, total consideration of the sale of land is 2.3 billion (554.5/24%).
The intriguing part is that the transaction above is not recognized as revenues yet but according to their discussions under the cash and cash equivalents, they will recognize the sale this 2012 as revenues. Therefore, a sudden surge on their revenues of 2.3 billion is reasonably possible this year and according to my estimate, an EPS of 3.4.
Do you think its undervalued if its trading at 9.50? Currently they are operating at a loss but yesterday they disclosed buying back 1 million of their own shares. In addition, they formed a joint venture company with the dominant real estate company for their 21 ha property. Is it a possible turn around story?
Plan, do you have any thoughts on the risk to American banks regarding the LIBOR scandal?
Thanks,
John
That there are risks. Vacations and the election has mitigated the impact but I suppose something will happen eventually.
Hello Mr Maestro!
Started to get excited about the pending announcement from GKK. As you know the new CEO promised a detailed company update on or before 8-9-12. I’ve done plenty of work on this one, as you know, but would like your opinion. I can see where after paying preferred arrears and levering up the rest of the cash would lead to a will lead to a fully diluted EPS of between .82 and 1.13 as soon as next year (the variance is obviously CDO 2005). Do you have a sense of how long they could ride their loss carryforwards before paying a common dividend would be required to manitain REIT status? Also, any guesses on the enormous jump in the short position in the latter half of June? Thanks in advance
Shoot me an email Matt if you would like to discuss this further.
I can see where you are coming from: GKK can leverage the new NNN 2x for a mid-teens return. I do not have the exact numbers for the tax loss carry forwards, but it must be a huge number in the hundred of millions. That could carry them for several years. No insights into the short position except that the last few weeks have been crazy.
My only big questions at the moment are two big loans that are threading water. One of them we will probably know more about in the next quarterly report. I would not be concerned about these loans with the old crew, there are ways to handle this. But if the new CEO wants to cut with the legacy issues and raise some equity … I would hate that.
Plan,
Ever heard of CHH.CN (.TO)? Would be interested to hear your thoughts. Co looks like garbage, made some mistakes (its a roll up strategy), but could be turning a corner now. Demographics seem to be correct (aging population) and Chair & new CEO have history of turning around other businesses. If strategy works I imagine gain of 1X to 5X over next few yrs. If plan fails hopefully you can get out with a 50% hair cut.
L/S Strategies, I wish I could have an opinion but healthcare is a very country specific regulated sector. I’m having problems just following specific niches in the USA so I think the Canadian healthcare sector, and Centric Health in specific, is not in my circle of competence.
Going through the presentations:
Click to access Investor_Presentation_October_25_FINAL.pdf
Click to access Centric_Health_2012_Investor_Day_Presentation.pdf
I would say I would review those acquisitions and how they are performing. Does not seem like a company in a turnaround more like a team in growth by acquisitions strategy. Those are difficult to evaluate.
But maybe somebody else that reads these feed may add to the discussion. Sorry for not being of much help here.
hi plan-
looking at fiaty after reading spier magazine blip. it looks to me like a possible four bagger at least and cheap on a forward ev/ebitda basis. also, clear auto tailwinds given saar for chrysler. wondering what you think the fair value range of this is? thanks in advance and best wishes in the new year!
As you have probably noticed, I have not posted about about FIAT or GM yet. My current position in FIAT is minuscule though I think it’s very safe, love its management, and is worth substantially more.
I don’t like to talk target prices, especially now that I’m still waiting on it while letting the TARP warrants run, but when I say “substantially more” … I mean it.
AMREP (AXR):
Main asset is 17K+ acres in a development outside Albuquerque, NM, carried on books at a little more than 4K/acre. Even at that low price, book value is north of $12/share. Stock sells for less than $11 (was $7 2 months ago). Same land sold for $90K/acre during the bubble. When home prices move higher, land is sure to follow.
Company also owns a small bit of home site acreage in Colorado.
Top shareholder – Nick Karabots – is busy gifting his shares away to a Philadelphia hospital, which, I believe, is keeping a lid on the stock.
Company also owns a magazine distribution business – not a great business, but still earning a profit.
Upside: Several multiples of current price
Downside: Hard to see a whole lot given land holdings.
Very new to balance sheet analysis/value investing, so go easy on me!
Thanks Steve, based on your comments it looks like an interesting lead. If you are looking for a hated asset, development land in New Mexico looks like a good start. And I see a cash flow positive operation (magazine distribution business) and that is a BIG plus.
At the same time, as we have mention with other similar ideas in the TIP section, this is not a moat industry and it attracts some shady characters. Therefore it requires due diligence and, even after that, you better size it according to what is expected of a Graham stock. Some land in New Mexico will never be developed again, and on a superficial glance I see they have some debt so careful with maturities and covenants.
It requires a lot of work and, as you can imagine from my latest posts and lack of blogging, I’m very happy with a large concentrated bet in TARP warrants. So I’m following Munger’s mantra: “investing is where you find a few great companies and then sit on your ass.” Sorry for not being of more help but I’m avoiding getting distracted (not that I may not revisit it in the future).
Hi plan, what are your thoughts on gkk now after they just sold their cdo’s
follow this thread, good comments.
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/gkk-gramercy-capital/msg102104/#msg102104
follow this thread, good comments.
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/gkk-gramercy-capital/msg102104/#msg102104
hi plan-
wondering what you think fair value range for shld is? do you think lampert needs to turn around the stores or is the plan to monetize real estate, buy back shares, orchestrate spinoffs enough? thanks in advance!
Bob, I don’t have Sears and it’s so opaque that I prefer to keep the insights on this one to myself until if/when an opportunity materializes. Let’s say you might want to follow Bruce Berkowitz advice and check which subs are guarantors and non-guarantors of debt. That’s a similar analysis to what I did with GKK and the MPG preferreds.
Hi Plan, I saw you discussing Dutch Ideas. I might be of some help here. I am Dutch and live in the Netherlands. I am a very much value oriented. Let me know.
Hi Floris,
As you can imagine from the tweets, I am following the KPN situation hoping for an opportunity after the dilution and debt reduction. ING and Delta Lloyd look very cheap too. I imagine there must be more, anything else that you are seeing there?
hi plan-
from your tweets, it looks like perhaps you’re not as enthusiastic about CHK as pabrai, wondering what you think about SD given dinakar singh/TPG now has some sway? I took a small position in SD after the Permian divestiture. As others have noted on the web, a bit concerned about the 2013 spending plan. I just noticed numerous successful fund managers n this – mecham, cooperman, watsa, weiss. Thx in advance for your perspective and have a great weekend!
Many know more about natgas and energy than me. CHK should be OK, it’s just that I don’t think I have much of an edge besides thinking that natgas should eventually recover (that “everyone” knows). Also, the recent Mississippi Lime transaction wasn’t reassuring, and that goes for SD too.
In the meantime, you have all these good quality financials. What can I say.
hi plan, i agree on the quality financials. wondering which bank or banks you’d buy other than bank of america?
i am currently long both bank of america and citigroup. my fair value target on bac is around $35. i recently sold goldman sachs at a profit, but probably should have just held.
Most have run in price, but you might want to take a look to Capital One and Zions among the regionals. There are also opportunities in the local bank space
hi plan-
wondering what you think of cowen group (cown)? i believe trading at less than tangible book and AUM increasing. Has taken a dramatic dive down and seems to be in the early stages of a positive move perhaps.
after the recent runup in the markets, particularly financials, wondering if you still see opportunities in warrants? i am long the gm b warrants, but that’s it. any other warrants worth considering at this point?
thx in advance! much appreciation for your perspectives.
bob
Sorry for the late answer Bob. I haven’t checked Cowen Group but I remember that I put it in the too hard pile despite the very cheap price. Investment banks are run mainly for the benefit of the bankers. And it’s an industry which I wouldn’t consider investing except for the top bracket. Too many firms of this type have come and gone, and shareholders are not their main consideration.
There are a couple of cheap warrants with underlyings that are still cheap, not as cheap as they were before. You might want to analyze COF/WS, ZIONW. AMBCW is a recent non-TARP addition, but to be honest, I haven’t been able to get my arms around Ambac the stock.
Plan’s wisdom could’ve saved me some angst (and a little money – but honestly only down ~15%) in IFMI. I echo his observation – these small IBs seem to be compensation schemes masquerading as public companies. I would only get involved in another where there is a clearly shareholder-friendly team involved, or an activist.
Plan and Olmsted —
It may be worth taking another look at Eurocastle (“ECT”)
Within the last 2 months, They’ve…
– Extinguished the convert (but not before changing the strike price from 0.30/sh to 0.05/sh!)
– Lowered the Mgmt Fee via lowering the NAV base amount
– Did a 1:200 reverse stock split
– Raised a bit over EUR 100m in capital at 7.25/sh (i.e. 0.036/sh or a discount to NAV of >50%!), and
– Redirected corp. strategy towards distressed Italian RE and credit (plan is to liquidate the German RE portfolio opportunistically over time)
I’d be ticked off if I’d invested at 0.07/sh given FIG was raising 100% of the depressed market cap at 0.036/sh (something like 5x FCF and 0.3x NAV!), but that’s also why there’s the opportunity.
The negatives are that the CEF is raising capital at this ridiculous price (they reason that they can get >25% IRRs investing in distressed Italian RE and debt today… may be possible, but I also think it obviously has to do with growing AUM in order to increase the base on which they charge a 1.5% management fee), the debt maturities on some of the German RE portfolio are coming due over the next 1-2 years (they claim that they won’t have much problem doing so because the lenders are German banks who have zero interest in owning property… I think that’s right, but why not refinance and THEN raise capital so you don’t have that refinancing overhang which forces you to raise capital at EUR 7.25/sh? FIG couldn’t say it in the offering docs, but I suspect the banks wanted to be sure that ECT was going to have adequate financial backing to support its continued management/servicing of the properties to ensure the lease payments keep flowing in), economic uncertainty in Euroland, and general lack of familiarity with the story (and those who ARE familiar with the story are disgusted and have been burned badly).
On the positives, one can invest in the CEF at ~60% % of NAV, P/FCF of a touch over 5x (bit of a lag before they’ve plowed the newly raised EUR 100m capital into Italian assets), and you get a 7% dividend yield while you wait for Mr. Market to catch up to the story. ECT is sitting on about EUR 135m of dry powder right now at the holding Company level and all of the assets (CDOs and RE vehicles) are non-recourse and non cross-collareralized.
Fairly interesting shareholder base bulwarks too — CA Teachers, York, Kingdon, and Indus collectively own 45% while FIG owns 19% (assuming they all threw more EUR into the till to avoid being diluted at 30% of NAV). I suspect most purchased via the converts, because they were no where to be found in 2009 when the converts were issued to stave off BK.
The whole situation reminds me of NCT over the last 18 months — every time they raised capital, I was screaming “WTF!? Why now!? Wait till the market catches up to you!” Turns out if you can buy a dollar for 25 cents, it makes sense (pun intended) to sell a dollar for 50 cents.
Thanks TboneSam. It’s going to take time to get up to speed.
Man, it looks interesting and messy at the same time. A letal combination that I should have learned to avoid by now … but you got my attention Tbone.
Any good resources to jumpstart the research?
I’ll shoot you an email at some point over the next week. In the interim, the May 2013 offering prospectus and June 2012 investor preso (both found on the ECT website) are phenomenal introductions.
There are so many lessons to be learned from this story btw… Gresham’s Law of Lending (i.e. Munger re: Wesco’s thrift), the terrors brought on by warehouse financing and recourse debt, principal-agent problems of asset managers… The list goes on and on.
Gooood stuuuuffffff
excellent, my email is at the top of the page.
T-Bone! (or do you prefer Sam?)
Thanks for bringing the developments to my attention. If you send an email to Plan I would love to be cc’ed on it. Diving into those two resources now.
Sure, you betcha
Great- You can DM me on twitter @Olmsted2 for my email, or if you email Plan he can just forward it to me. I appreciate it!
Tbone – As you say, the more I read, the more this does sound like NCT 2.0, just two years later. Fortress is pretty savvy I think, but they swing for the fences – and occasionally blow up. AFTER they blow up, and put fresh capital in, is the time to go with them. And my initial doubts with Fortress’ mortgage servicing plan were clearly misplaced – so I am inclined to give them the benefit of doubt when they declare a strategy change toward Italian RE and NPLs. But analogies are dangerous shortcuts, so I will attempt to leave it at that and consider the issues stand-alone.
Discount to NAV is pretty serious, but it is important to note that the German property portfolio is valued on a 5.5% cap rate and is leveraged to the hilt. So any detrimental valuation change can quickly wipe out a lot of NAV.
A 5.5% cap rate seems about right for Germany. But I can see why they are looking to sell down this portfolio and redeploy where there is more upside.
The financing maturities are scary. Yes, it looks like it would be best for all parties to come to an amicable refi agreement – but I’ve been burned by “no-brainer” refis that never occurred (GKK ring a bell?) – and so I hate to take it for granted.
Then again, a big chunk of NAV in cash, the opportunity to participate in a convergence towards NAV as a stable RE portfolio is (hopefully) refinanced and liquidated, and the opportunity to benefit from a growing NAV through investments by a savvy operator (Fortress) in a hated asset class… tempting…
About through the prospectus. Not a whole lot in there to change my initial views. A couple random observations:
Nardone and Edens both own a pile of shares. These guys have been important insider bellwethers in NCT, so I am interested in following their purchases (or lack thereof). I cannot find their intentions with regard to the rights offering in the prospectus – each of the pro forma ownership tables uses a statement to the effect of, “assuming Mr. Nardone does not exercise rights to buy additional shares.”
Although they couch it in the requisite filing language, it seems the company is quite confident it will not have portions of its property portfolio foreclosed: “Based on the past experiences of the Group and the Manager, the Company is confident that agreement can be reached with lenders to either extend or refinance each relevant Portfolio Financing prior to its maturity, at least on a short term basis. Given the non-recourse nature of the financings, the Company is not obliged to utilise any additional capital to refinance any of the Relevant Portfolio Financings and it does not currently anticipate that it would use a significant amount of capital for this purpose.”
I believe that not every portfolio is financed by the same lender – so the refi risk between each portfolio is not strictly correlated. That is, trouble refinancing one portfolio does not necessarily mean they will have trouble refinancing all portfolios. Additionally, the company has some fresh cash that they can use to help lubricate any difficult issues that may arise with individual portfolio lenders. Yes, I realize this cash is intended for investment into Italian NPLs, but I’m sure it could be deployed to rescue one of the property portfolios if it became necessary to do so.
There is a bit of a game theory issue here – if a lender knows the company has fresh cash, and knows that refinancing is not an all-or-nothing proposition, individual lenders may be incentivized to play hardball to get some of that cash for themselves before another lender was able to do so. Not sure if this makes sense, just something I’m batting around in my head.
In general though, I’m getting more comfortable with the refi risk. It’s different than GKK’s failed refi, for example. Regular banks are really disincentivized to take over property that can meet its debt service, in contrast to GKK turning over property to a REIT and an I-bank. Eurocastle also has numerous non-recourse entities, versus just the one for GKK. This spreads risk, and would allow more concentrated efforts to rescue one portfolio if it became necessary.
hi plan-
wondering what your thoughts are on byddf?
from a link of corner berkshire fairfax, it looks like two of pabrai’s funds have a 10% position and he reduced to a 1.44% position in the other one. am now guessing this one is probably the one pabrai has 60% of one of his personal accounts and thinks could be a 40X as opposed to fiaty – which was my top candidate before. it seems difficult to value.
cown has popped some, but in the auto parts space, mpaa and lea look pretty cheap to me from an ev/ebitda angle with activists circling.
thx in advance. have a great one.
bob
Hi Bob,
BYD has a larger marketcap than Fiat despite the first being a battery supplier that’s only a start-up in the car business, while the second has some of the most emblematic brands in the business, a global distribution network, and one of the best CEO / controlling shareholder tandems I’ve ever seen.
I don’t know what Mohnish has in his personal account but in mine is no contest.
yeah, i agree with you on fiat. much clearer picture there. not sure why chanos & odey are short. maybe pair trades.
any difference in opinion on byddf after recent earnings? market cap is kind of nuts, but at least there appears to be more of an earnings stream. munger’s djco meeting notes got me intrigued about the overarching chinese pollution problem.
also, on the gse’s, i agree with those that say fifth amendment has been violated and it seems pretty unjust for the preferred holders. that said, given the risk, what would it take for you to go long the fannie mae preferred’s?
thx in advance!
after thinking about it, byddf & fnmas are too much like lotto tickets with minimal downside protection. a more sensible “home run attempt” might be the hig warrants. wondering what your thoughts are on these warrants despite the runup in hig?
Plan, do you have an opinion on FNMAS and the related? It would seem Congress not incentivized to undertake any kind of privatization that would be favorable to shareholders/preferred holders. Is the court case the only hope, or do these hedge funds know something we dont?