Regardless of market conditions research continues. In times like these we are ever updating our list of interesting stocks and preparing when the proverbial “Fat Pitch” crosses our path. One stock of particular interest is Fidelity National Finance (FNF). Fidelity is at the pinnacle of companies in the title reinsurance field. It is one of the top 5 with approximately a 28% share of the U.S. market.
Title insurance is a very interesting type of insurance that is used in almost all real estate transactions. I mean every, not just including residential real estate, commercial estate but even including refinancing of mortgages. Title insurance is the proverbial “Gatekeeper” or “Toll Collector”. Fidelity National has fallen from its all time high of $28.62 to $14.61 as of Friday with a P/E of 13.65 and yield of 8.21%. Many top value investors have owned FNF in the past from David Einhorn of Greenlight, George Soros, Monish Pabrai and Richard Pzena.
Title insurance is not the sexy Apple (AAPL) or Google (GOOG) but a mundane cash producing cow. Title insurance guarantees the property owner as well as mortgage company against liens and encumbrances to the title that are not known at the time of closing. Most title defects are found before closing and resolved. However sometimes these liens or encumbrances can fall into a short period of time between title work and closing, called a gap period. Most times if there is a claim, it can be adjusted by a correction of the title. Large claims are very rare and moreover the risk is mitigated by reinsurance. On average, throughout the years, approximately only 8% of all premiums have incurred losses for title insurance companies.
Fidelity further enhances its business by maintaining various pillars of profit. It maintains a flood insurance processing division, home warranty division, as well as a personal lines insurance company. In conjunction with this, Fidelity has partial ownership in several other entities. 1. 40% of Sedgwick which is a third party administrator for workmen’s compensation claims. 2. 70% of a timber company called Cascade. 3. 60% of FNRES, an Internet real estate portal.
There are numerous ways to come to a valuation. A tool we use is comparing the earnings per share [$1.12] to the current rate of return for U.S. government bonds [4.52%]. According to many analysts this gives the intrinsic value. This showed the stock almost 50% undervalued. However this is not close to exact, and shows what the company is relative to the return of government bonds. This is another confirming idea, but Warren Buffet uses the formula of discounting future earning discounted to present value. This too has limitations but we are confident that FNF is extremely undervalued. Even though Fidelity is undervalued, the market is going through, at a minimum, a correction, and prudence is warranted.