The Harbinger Group (NYSE:HRG) is a holding company headed by former hedge fund superstar and current Lightsquared lightning rod Phil Falcone. It originated as a "blank check" company and was converted to a holding company via a series of transactions, the genesis being a share swap wherein Falcone's hedge fund transferred its stake in Spectrum Brands (NYSE:SPB) for a larger stake in the holding company. This unusual arrangement has caused HRG to trade at an almost continuous discount to solely their stake in SPB, even as they've evolved into a more diversified company with valuable assets above and beyond just this.
They acquired an insurance company, FGL, last year for $350M, which looks like a good purchase since they had to take a "bargain purchase gain" of $150M almost immediately, and the most recent 10Q pegged the book value of the insurance segment at $845M. This is about $6 a share and when coupled with the fact that their SPB stake has grown to almost $1.1B, or $7.75 a share, makes HRG look like a very enticing value proposition.
Even when their $500M in debt (attributable to only HRG, not SPB or FGL since those are already incorporated into their respective values above) is netted out of their cash position of over $400M it only takes a small bite out of the nearly $14/share in assets that are explicitly laid out in their financials, not even including smaller stakes in companies like North American Energy Partners (NYSE:NOA).
With such a complicated corporate structure, the company has a tendency to post very lumpy earnings (or lack thereof), coming in with a loss of nearly $150M. However, this ugly looking red number masks the fact that nearly all of this loss was from a $125M increase in liability from preferred shares that they had sold to raise cash when the stock was trading much lower.
This habit of the company to raise cash at usurious interest rates is one of the things keeping the stock price depressed relative to its overall value. But when they can successfully use these funds to grow the business like with the insurance turnaround or more recent venture Salus Capital Partners, a subsidiary engaged in providing secured asset-based loans to entities across a variety of industries, it could turn Harbinger into a successful growth story a la Berkshire early in their transformation from a sleepy textile stock into the insurance and investing powerhouse they are today.
While I don't think Falcone is the next Buffett, the value contained in HRG is undeniable no matter who is at the helm. After having ridden the stock up from $5 and selling half at $8 and then the rest at $9, I am looking to reenter the stock if it gets knocked back down by any non-related issues involving Lightsquared, Falcone, or his hedge fund, or if HRG continues to diverge in price from the value of their stake in SPB.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HRG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.