Aspen Insurance Holdings: Discounted And Shareholder Friendly [View article]
Good question alaskapnp and thanks for the nice words. I wrote about that question in my article on Everest Re (RE)**. As you might guess, it is mostly due to regulation and taxation. Here is what I wrote then:
"Why does Bermuda host so many insurance companies? How is it the second-largest reinsurance market, second only to New York? First, the country doesn't levy a corporate income tax on insurers, so that is quite a perk. Another reason is the regulatory environment which:
"…fosters innovation and creativity by responding to the emerging needs of the insurance and reinsurance markets…from the development of mechanisms such as captives in the 1960's, through the formation of excess liability carriers ACE and XL and the development of finite risk reinsurer Centre Solution in the 1980's, and though the formation of property catastrophe companies Mid-Ocean Re, PartnerRe, Endurance Re and many other over the last two decades, Bermuda has been and continues to be, a centre for innovation in the insurance market." [1]
Also, there is a tax incentive for American insurers to purchase reinsurance from a foreign firm, e.g., firms from Bermuda. This tax incentive, which takes the form of allowing premiums paid to foreign insurers as tax deductions, would be eliminated in the most recent White House budget***. This elimination will make having Bermudian reinsurance less advantageous if you are an American insurer seeking reinsurance. Losing this advantage would make the Bermudian insurers less attractive."
I hope that answers your question. We could always go deeper and talk about specific laws (for instance, I think Bermuda recently promised in a law not to tax insurers until at least 2035 or thereabouts). But that is the gist. Thanks for reading.
Aspen Insurance Holdings: Discounted And Shareholder Friendly [View article]
Thanks Brian! And that is a good point. I've made mention of that in previous articles but looks like I left it out this time around. AHL is definitely a solid insurer.
I have some thoughts on the question: "how much redundancy of reserves is too much?" The question is interesting because those reserves are really just a book keeping entry on the balance sheet. The actual reserves themselves are in the form of bonds. So that capital, which is part of the reserve redundancy, is earning a yield on its bonds *rather* than the average ROE. To make a long story short, I think we could, in theory, quantify the "loss from too much redundancy" by multiplying the redundancy figure by the spread between the avg. ROE and the current yield on the investment portfolio. In more natural interest rate environments, I bet this spread would be much smaller than it is today. I suppose the moral is, perhaps, that now is the time to play it close to the chest as an insurer (i.e., not over-reserve) so that capital which would be allocated to low yielding bonds could instead be (1) allocated to the capital to expand the business and earn the avg. ROE or it could be (2) allocated to share buy backs or dividends. And with many of our reinsurers below book, buy backs are effectively a capital deployment at a yield of the avg. ROE + the discount from a accurately calculated book.
Zillow's Faulty Agent Estimate, Growth Model And Stock Price [View article]
Yea, I was reading through the transcripts and came to regret my comment above after having learned about those partnerships. Oh well, such is the way of typing too soon. Although, as a programmer, I don't really think replicating what TRLA and Zillow and Realtor and all the other websites is very difficult. The social groups which use the websites are difficult to replicate but I don't think the technology is very sophisticated. The technology creates a little bit of a barrier to entry but I think the main barrier to entry is the number of participants in the field already.
Zillow's Faulty Agent Estimate, Growth Model And Stock Price [View article]
Yea, but there are big hedge funds speculating in the stock so be careful on your short. Also, earnings are positive if you take into account that the stock based compensation expense was paid in extremely overvalued stock. That said, I agree with you about the price, timing it might be a challenge.
Zillow's Faulty Agent Estimate, Growth Model And Stock Price [View article]
Good points, although currently I think Zillow might be more susceptible to a short squeeze at the present moment because of the large short interest already, as evidenced by the 12 days to cover (see Zillows short interest here: http://bit.ly/12QTwSu ). Trulia has some short interest too, but days to cover is only 3 days (see here: http://bit.ly/10mplXd )
I'll definitely be watching the earnings release here in 45 minutes.
Zillow's Faulty Agent Estimate, Growth Model And Stock Price [View article]
"The competition is so great and vast, it is very hard to distinguish oneself from the dozens of other companies who offer virtually the same products and services. Not to mention that major internet companies who employ a lot of programmers (remember that most of these sites mainly run on data gathering, programming to display that data and a sales department) like Yahoo (YHOO), Amazon(http://bit.ly/t2V5me), Facebook (http://bit.ly/zmUlk5), Microsoft (http://bit.ly/o3LCFd) and Google (http://bit.ly/I2oi2V) can come into this market space at any time. One company that could essentially cripple most of these internet real estate database sites is Google. The companies analyzed in this article live off of their websites being on the first page on the Google search engine. If Google wanted to combine its powerful Google Maps and Google Earth products to offer a way for a user to browse a 3D neighborhood and to see what properties are available to purchase, it would not have to go through a lot of its 50 Billion in cash to make it happen."
Exactly. I don't see any competitive moat anywhere. These prices are quite unrealistic. Any reason you choose to short Z over TRLA?
Lifetime Brands: Great Cookware Brands At A P/E Of 7 [View article]
Hey pbtown,
Sorry I never responded all those weeks ago. Moats are difficult things to analyze and there are no set rules obviously. Also Walmart concentration is hard to classify. For instance, take the case of Clorox Bleach: CLX is a major supplier to Walmart and the Clorox Bleach brand has a moat, viz., when I think about "bleach" I picture the Clorox bottle -- the company still has mind share with that product (after 100 years). So, while Walmart can wield a large amount of bargaining power, that alone does not mean the brand is bad. Also, LCUT has a great branding position as evidenced by the first paragraph:
"And in the $3.0 billion tabletop industry, Lifetime Brands is the current market leader. In cutlery, cutting boards and shears -- a segment occupied by Lifetime Brands since 1945 -- the company holds the #1 market position."
Anyways, the stock is up some 16% since I wrote this, but the earnings yield is still around 12%. I don't buy many companies I write about because I have limited capital, but LCUT checked off many of the boxes on my list.
Everest Re: There Is Justification For Its Discount To Book [View article]
Hey arbtrder,
I'll comment on two things. You wrote: "Not aware of how you can carry your bonds at anything other than current MV." They are carried at amortized cost or par (or something of that nature) in statutory accounting because bonds can theoretically be held to maturity and therefore marking them up and down because of interest rates or market whims is a fruitless exercise if the bonds are never to be sold. Because of that logic, GAAP allows fixed maturity investments to be carried at amortized cost if the bonds (or whatever) are classified as "held-to-maturity." So, there are ways for bonds to not be marked-to-market (common stocks have similar arrangements in terms of equity accounting or consolidation accounting).
As to your second paragraph, I agree that what Everest is doing is likely smart and that it will make them more attractive over time. I just happen to like PartnerRe (PRE) more because it has a better balance of diversification, has historically estimated reserves more accurately, and is simply a cheaper stock. Everest is probably a better buy than, say, RenaissanceRe (RNR) or GreenlightRe (GLRE) -- and it is definitely a better buy than many individual stocks in the broader market generally.
Here is my math when I look at this rights offering:
New shares from right offering: 4,803,551 Old Shares: 13,380,366 New Total: 18,183,917
Rights Price: $1.85 Right Offer Price: $1.65 Total Rights Price: $3.50
Current Share Price: $3.37 New Diluted Share Price: $2.48 -- I suppose since the cash was just injected in the business the old share price is more accurate due to the increase in book value (?)
So assuming all the rights are subscribed for isn't it true that the total rights price is greater than the future diluted share price -- except if the cash injection is reflected in the future share price?
Alliance Healthcare Services: Worth At Least $10.60, Probably More [View article]
Hey Paul,
Keep in mind a few things: (1) there was a management change up last year and I think that was affected by Oaktree and not a simple change of leadership as the corporation pretends; (2) tangible book value is completely arbitrary these days except in cases of financial companies (just look up the ridiculous reasons company's can have impairment charges -- e.g., impairments cued by share price declines); (3) GAAP financial figures are obviously incorrect due to their treatment of depreciation and amortization of intangibles; (4) EV is based on two components whose valuation metrics are entirely different because they offer different legal rights and, therefore, EV can be misleading -- particularly if the company is treated as a going concern (for instance, DIS has a EV/FCF of 31 times); (5) I would argue healthcare is not volatile, at least in terms that are traditionally meant by volatile; (6) the above analysis is not based on growth.
Anyways, I think you are right to call attention to the debt -- but then I would point you to the main argument of the piece that RDNT has similar earning power and a worse strategic position and worse debt position but its equity is valued 40% greater than AIQ's equity. Ergo, logically, if RDNT is appropriately priced than AIQ should sell for 40% more.
Alliance Healthcare Services: Worth At Least $10.60, Probably More [View article]
Hey Paul,
I agree at first blush. But there are various ways to show that the capitalization structure is not too outrageous. For instance, with EV/FCF as Packer pointed out -- or also from the stand point of total liabilities to free-cash-flow. But, even though that may be the case, you can think of AIQ as a corporation with a speculative capital structure a la chapter 40 and 41 in Graham's Security Analysis. Basically that means there is the potential for big leveraged shareholder returns -- although its not necessarily good for bonds. Graham would probably argue that AIQ's bonds shouldn't sell above 70 probably (he is pretty conservative you have to remember) and today they sell at 95 which is an endorsement of the corporations ability to pay. Basically, shareholders get the effect of using only a little of there money and a lot of the creditors money. There is a downside, no question, but it is mitigated by the companies track record, its industry and its specific strategy.
Aspen Insurance Holdings: Discounted And Shareholder Friendly [View article]
"Why does Bermuda host so many insurance companies? How is it the second-largest reinsurance market, second only to New York? First, the country doesn't levy a corporate income tax on insurers, so that is quite a perk. Another reason is the regulatory environment which:
"…fosters innovation and creativity by responding to the emerging needs of the insurance and reinsurance markets…from the development of mechanisms such as captives in the 1960's, through the formation of excess liability carriers ACE and XL and the development of finite risk reinsurer Centre Solution in the 1980's, and though the formation of property catastrophe companies Mid-Ocean Re, PartnerRe, Endurance Re and many other over the last two decades, Bermuda has been and continues to be, a centre for innovation in the insurance market." [1]
Also, there is a tax incentive for American insurers to purchase reinsurance from a foreign firm, e.g., firms from Bermuda. This tax incentive, which takes the form of allowing premiums paid to foreign insurers as tax deductions, would be eliminated in the most recent White House budget***. This elimination will make having Bermudian reinsurance less advantageous if you are an American insurer seeking reinsurance. Losing this advantage would make the Bermudian insurers less attractive."
I hope that answers your question. We could always go deeper and talk about specific laws (for instance, I think Bermuda recently promised in a law not to tax insurers until at least 2035 or thereabouts). But that is the gist. Thanks for reading.
** On Everest RE: http://bit.ly/13k2POt
***http://bit.ly/174koVK
Aspen Insurance Holdings: Discounted And Shareholder Friendly [View article]
I have some thoughts on the question: "how much redundancy of reserves is too much?" The question is interesting because those reserves are really just a book keeping entry on the balance sheet. The actual reserves themselves are in the form of bonds. So that capital, which is part of the reserve redundancy, is earning a yield on its bonds *rather* than the average ROE. To make a long story short, I think we could, in theory, quantify the "loss from too much redundancy" by multiplying the redundancy figure by the spread between the avg. ROE and the current yield on the investment portfolio. In more natural interest rate environments, I bet this spread would be much smaller than it is today. I suppose the moral is, perhaps, that now is the time to play it close to the chest as an insurer (i.e., not over-reserve) so that capital which would be allocated to low yielding bonds could instead be (1) allocated to the capital to expand the business and earn the avg. ROE or it could be (2) allocated to share buy backs or dividends. And with many of our reinsurers below book, buy backs are effectively a capital deployment at a yield of the avg. ROE + the discount from a accurately calculated book.
Zillow's Faulty Agent Estimate, Growth Model And Stock Price [View article]
Zillow's Faulty Agent Estimate, Growth Model And Stock Price [View article]
Zillow's Faulty Agent Estimate, Growth Model And Stock Price [View article]
I'll definitely be watching the earnings release here in 45 minutes.
Zillow's Faulty Agent Estimate, Growth Model And Stock Price [View article]
Exactly. I don't see any competitive moat anywhere. These prices are quite unrealistic. Any reason you choose to short Z over TRLA?
Lifetime Brands: Great Cookware Brands At A P/E Of 7 [View article]
Sorry I never responded all those weeks ago. Moats are difficult things to analyze and there are no set rules obviously. Also Walmart concentration is hard to classify. For instance, take the case of Clorox Bleach: CLX is a major supplier to Walmart and the Clorox Bleach brand has a moat, viz., when I think about "bleach" I picture the Clorox bottle -- the company still has mind share with that product (after 100 years). So, while Walmart can wield a large amount of bargaining power, that alone does not mean the brand is bad. Also, LCUT has a great branding position as evidenced by the first paragraph:
"And in the $3.0 billion tabletop industry, Lifetime Brands is the current market leader. In cutlery, cutting boards and shears -- a segment occupied by Lifetime Brands since 1945 -- the company holds the #1 market position."
Anyways, the stock is up some 16% since I wrote this, but the earnings yield is still around 12%. I don't buy many companies I write about because I have limited capital, but LCUT checked off many of the boxes on my list.
Everest Re: There Is Justification For Its Discount To Book [View article]
I'll comment on two things. You wrote: "Not aware of how you can carry your bonds at anything other than current MV." They are carried at amortized cost or par (or something of that nature) in statutory accounting because bonds can theoretically be held to maturity and therefore marking them up and down because of interest rates or market whims is a fruitless exercise if the bonds are never to be sold. Because of that logic, GAAP allows fixed maturity investments to be carried at amortized cost if the bonds (or whatever) are classified as "held-to-maturity." So, there are ways for bonds to not be marked-to-market (common stocks have similar arrangements in terms of equity accounting or consolidation accounting).
As to your second paragraph, I agree that what Everest is doing is likely smart and that it will make them more attractive over time. I just happen to like PartnerRe (PRE) more because it has a better balance of diversification, has historically estimated reserves more accurately, and is simply a cheaper stock. Everest is probably a better buy than, say, RenaissanceRe (RNR) or GreenlightRe (GLRE) -- and it is definitely a better buy than many individual stocks in the broader market generally.
Cache Offers Huge Value [View article]
Cache Offers Huge Value [View article]
New shares from right offering: 4,803,551
Old Shares: 13,380,366
New Total: 18,183,917
Rights Price: $1.85
Right Offer Price: $1.65
Total Rights Price: $3.50
Current Share Price: $3.37
New Diluted Share Price: $2.48 -- I suppose since the cash was just injected in the business the old share price is more accurate due to the increase in book value (?)
So assuming all the rights are subscribed for isn't it true that the total rights price is greater than the future diluted share price -- except if the cash injection is reflected in the future share price?
Alliance Healthcare Services: Worth At Least $10.60, Probably More [View article]
Keep in mind a few things: (1) there was a management change up last year and I think that was affected by Oaktree and not a simple change of leadership as the corporation pretends; (2) tangible book value is completely arbitrary these days except in cases of financial companies (just look up the ridiculous reasons company's can have impairment charges -- e.g., impairments cued by share price declines); (3) GAAP financial figures are obviously incorrect due to their treatment of depreciation and amortization of intangibles; (4) EV is based on two components whose valuation metrics are entirely different because they offer different legal rights and, therefore, EV can be misleading -- particularly if the company is treated as a going concern (for instance, DIS has a EV/FCF of 31 times); (5) I would argue healthcare is not volatile, at least in terms that are traditionally meant by volatile; (6) the above analysis is not based on growth.
Anyways, I think you are right to call attention to the debt -- but then I would point you to the main argument of the piece that RDNT has similar earning power and a worse strategic position and worse debt position but its equity is valued 40% greater than AIQ's equity. Ergo, logically, if RDNT is appropriately priced than AIQ should sell for 40% more.
Alliance Healthcare Services: Worth At Least $10.60, Probably More [View article]
I agree at first blush. But there are various ways to show that the capitalization structure is not too outrageous. For instance, with EV/FCF as Packer pointed out -- or also from the stand point of total liabilities to free-cash-flow. But, even though that may be the case, you can think of AIQ as a corporation with a speculative capital structure a la chapter 40 and 41 in Graham's Security Analysis. Basically that means there is the potential for big leveraged shareholder returns -- although its not necessarily good for bonds. Graham would probably argue that AIQ's bonds shouldn't sell above 70 probably (he is pretty conservative you have to remember) and today they sell at 95 which is an endorsement of the corporations ability to pay. Basically, shareholders get the effect of using only a little of there money and a lot of the creditors money. There is a downside, no question, but it is mitigated by the companies track record, its industry and its specific strategy.
Alliance Healthcare Services: Worth At Least $10.60, Probably More [View article]
Conrad Industries: Significantly Undervalued Shipbuilder Trading At 3.6x Earnings [View article]
Alliance Healthcare Services: Worth At Least $10.60, Probably More [View article]