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Normally I would wait for a pullback but...

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April 12, 2012 – Comments (45)

Stocks seem to be trading independent of each other, which is healthy. I see a lot of cheap names out there. Here are a few. Please, poke as many holes in my argument as possible:

 

ACI: they've got a big dividend. They are I believe cheaper than they were in march 2009. They don't seem too worried about a slowdown, and last year was the biggest year for coal in a long time, so even a slowdown from that is not terrible. China still loves the stuff, as do other emerging markets. I'm not a meteorologists, but I remember people freaking out during other warm winters too. Global warming aside, some winters are just warmer than others. People are freaking out now, so it's probably a good time to buy. Technically oversold, everybody seems to hate coal and there are a lot of shorts involved now. NG is holding coal prices down too. But if Obama gets the boot, that should change. Also, it's just way too cheap compared to oil. There are enough reasons to use NG that it should not be at a 10 year low. It's so low that many producers are shutting down. It's probably bottoming. ACI is one of the best Coal companies. Unless you think coal is going away immediately, which I doubt, this is a buy

 

DFS:  P/e of 8, constant increased dividends, share buy back is huge, AWESOME sector to be in, good CEO, growth is pretty high, blows expectations out of water, and at mini-support. Not worried about the debt

 

JAG: oversold on panic with a ton of gold in brazil. That's about it

 

STD: CEO said profits should double by 2015 (and he seems honest), with a 13% yield and near March 2009 levels. Very diversified, and the strongest bank in Spain 

 

AIG: if they get the government out, and with their real estate investments, is there any reason this won't hit $50?

 

Feedback appreciated

 

Added bonus, since I don't want to make a new blog for this one line: if you ever say "a short seller is a future buyer" than please realize a buyer is a future aeller 

45 Comments – Post Your Own

#1) On April 12, 2012 at 12:58 AM, CCharing (91.75) wrote:

I agree with AIG, STD - I'm not as familiar with the others. 

I think Santander fears are a bit overblown - the concern is all macroeconomics (maybe that comment isn't worth much considering its often about macroeconmics!)

The risk factors for STD I think are the banks sources of funding (different from many other depository institutions) and the spanish market/real estate sitaution.  And maybe the ratio of non performing loans... I bought a few shares of STD recently.

I also shorted a couple of Jan. 2013 $25 AIG puts yesterday.

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#2) On April 12, 2012 at 1:34 AM, HarryCaraysGhost (99.59) wrote:

AIG- This company will go to zero.

Jag Sux.

Std profits should be eliminated by 2013-2014.

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#3) On April 12, 2012 at 1:38 AM, Valyooo (99.40) wrote:

Hmm, I never thought of it like that Harry, good points ;)

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#4) On April 12, 2012 at 1:54 AM, HarryCaraysGhost (99.59) wrote:

Hey Man..

What's your price target on natty Gas.

It's at $1.98.

I'm thinki'n $1.65 as a buy....?

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#5) On April 12, 2012 at 2:19 AM, totallyoblivious (31.53) wrote:

ACI: I'm not a fan of their balance sheet, and I question the sustainability of their dividend.  I don't think coal's going away anytime soon, but with the NG glut, there's not much reason for coal to do much of anything.  While it is much, much cheaper than it used to be, it doesn't seem especially undervalued, nor does this sector scream "buy" to me.  It's something I'd put on a watch list and wait for either a valuation that's too good to pass up or some indication that coal is going to be in higher demand in the near future.

DFS: 

JAG: Weird behavior, this will be at the mercy of the daytraders for awhile which I want no part of.  As a long term investment it seems decent, although I still like other junior gold miners out there more (PPP & BRD in particular; I am long BRD).

STD: I don't know if it's bottomed yet with the panic in Spain and all, but it's damn cheap here even if it can still fall more.  Seems like a good opportunity as a buy and hold for a long, long time.

 AIG: I like the idea of writing puts here until the government's shares are gone.

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#6) On April 12, 2012 at 8:41 AM, Frankydontfailme (27.71) wrote:

STD will probably bounce, but I agree with HCG - this one's worth zero.

The contrarian arguments for coal are intriguing, but I'd be patient (irrational markets and all). While Obama's awful for coal, lack of demand for metallurgical coal for steel is the big negative catalyst. I'd wait for a higher low at least. 

For silver, I prefer gpl, aunff, and slw... but again Im waiting for higher lows to buy... maybe I'm just a nervous nelly 

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#7) On April 12, 2012 at 9:46 AM, leohaas (30.99) wrote:

With volatility returning to the market, why not wait for a pullback?

Coal ain't going away, and China does not listen to Obama. So it looks like your arguments for ACI are pretty good, regardless of the outcome of the 2012 election here in the US.

DFS I wish I held on to. Nobody has posted anything negative in this blog, and I cannot come up with anything either.

AIG and STD are risky. I am not saying they are worth zero, but there are scenarios under which they can go down significantly. And the companies don't have control over those scenarios. I just don't see the potential reward, so I won't be a future seller due to the lousy risk/reward.

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#8) On April 12, 2012 at 10:56 AM, Schmacko (47.33) wrote:

STD is trading on macoreconomic/european news.  Spain is now the in focus country for european problems so there is plenty of potential catalyst for short term pain there.  Also the dividend isn't set at a fixed number, which means that yield can drop enexpectedly no problem.  I think if you're buying STD you either have a very long hold time frame and a strong enough gut to whether out the short-meidum term or you're a swing trader playing the voaltility.

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#9) On April 12, 2012 at 11:45 AM, Mega (99.96) wrote:

Santander is overleveraged. Compare their balance sheet to large US banks and also consider that European sovereign debt assets appear unstable.

AIG is a lousy company - look at their earnings for evidence.  Plenty of companies that suffered in the 2008-2009 metltdown, like Citigroup, MetLife and Morgan Stanley, have returned to high levels of profitability.  In comparison AIG is basically breaking even (ignoring non-cash tax items). They are gigantic and it's not clear they have a credible turnaround story.

There are many higher quality insurers trading at a similar discount to book value, for example Symetra (SYA), Protective Life (PL), CNO (CNO), Lincoln National (LNC) and Assured Guaranty (AGO).  Look at other insurers carefully before you buy AIG.

I like Discover, I don't own any yet but would like to.

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#10) On April 12, 2012 at 12:08 PM, Valyooo (99.40) wrote:

Regarding discover, which way do you guys view this situation:

Discover is the least accepted credit card, from experience.  So, either that means 1) they have the most opportunity for growth 2) they will lag V and MA and AXP.  How do you guys take it?

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#11) On April 12, 2012 at 12:15 PM, Mstinterestinman (24.57) wrote:

These are my cheap stocks to check out :)

Ebix still way too cheap now pays a small dividend

Box

They lease shipping containers gotta love that :)

 

MCF Natural gas is way too cheap to ignore 

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#12) On April 12, 2012 at 12:54 PM, Mega (99.96) wrote:

I don't see Discover's acceptance rate as a problem in the US, where almost everyone has multiple cards and is fine with substituting a Visa.  It may be a bigger problem in overseas growth.

Keep in mind that Discover is different from the other card companies in that they are a lender, not just a card issuer.  In some ways they're more similar to COF than V, AXP and MA.

To rev up growth I suspect they would need to issue cards for 3rd parties.  I don't know if that's likely.

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#13) On April 12, 2012 at 1:04 PM, TheDumbMoney (58.64) wrote:

AIG like all insurers that primarily invest their float in bonds (been a while since I looked at AIG, so double-check that), is being killed by ZIRP.  This is a major reason the entire sector is cheap.  If you think we are in for ten more years of deleveraging and QEs, then the sector will remain cheap.  If you think this will pass within a few more years, then the earnings of the sector do not reflect the true earnings potential of the companies over a reasonable future period of time.  Just one man's opinion. 

I would not touch Santander with a ten foot pole, but have not deeply analyzed it.  My thesis is more that European banks are going to get hammered further, will have to sell assets at a discount to raise capital, etc. 

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#14) On April 12, 2012 at 1:48 PM, TMFBabo (100.00) wrote:

Totally agree with leohaas on ACI. Coal is a China/India story at this point. Maybe it should be lumped in with other materials-feeding-China stocks. I haven't investigated how expensive it is to ship coal that far since it's not very dense, but at least the stock price looks more attractive after getting hammered.

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#15) On April 12, 2012 at 1:56 PM, chk999 (99.97) wrote:

I think ACI and BTU are both very cheap, but we may get cheaper prices before we get higher ones. But well worth watching.

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#16) On April 12, 2012 at 2:01 PM, Valyooo (99.40) wrote:

Looks like my picks are doing nicely today.

@dumber, what is ZIRP? excuse my ignorance.  Also, how will more leverage help a company primarily invested in bonds?  Or are you just saying if it is more leveraged, they don't need as much reserves?

@babo, yes it is a china feed story.  And as long as China reports big GDP numbers, I am not too concerned.  I also don't think the shipping price really matters, as long as the demand is there.

With STD, I just am taking a page out of history, which is 'big government will not let big banks fail'.  STD says they are fine and don't really need to raise capital unless they are forced to do so.

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#17) On April 12, 2012 at 2:10 PM, TheDumbMoney (58.64) wrote:

ZIRP is the Fed's zero interest rate policy.  It makes bonds have low yields (duh, I know), and thus makes it relatively harder for insurers that invest their float primarily in bonds to generate earnings at a level that they would otherwise generate, other factors held equal. 

I'm not saying anything about the leveraging of companies.  By deleveraging I am talking about the general idea that as a country we are in somewhat of the deleveraging portion of a credit cycle, or have been, and I believe ZIRP is a (justified) response to that.  My comment there is just about the speculation over how long current policies, which in my view hurt insurer earnings, will continue.  Sorry for any confusion.

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#18) On April 12, 2012 at 2:16 PM, Mega (99.96) wrote:

dumberthanafool

Other insurers are significantly profitable, they are being squeezed by low interest rates but not killed.  I think the entire sector is cheap and will perform well over the next few years.  I do not think AIG will perform as well as others.

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#19) On April 12, 2012 at 2:16 PM, Valyooo (99.40) wrote:

Oh, I was not familiar with that acronym, now I get you

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#20) On April 12, 2012 at 2:21 PM, TheDumbMoney (58.64) wrote:

Mega, oh don't get me wrong, I think AIG is at or near the bottom of the pack.  I have also not analyzed it in detail.  All I'm saying is AIG has to be viewed in the broader context of a macro situation that is in part responsible for AFL trading at a low single digits p/e and TRV trading below book value, etc.

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#21) On April 12, 2012 at 2:25 PM, TMFBabo (100.00) wrote:

@MegaShort: I actually like insurers as well. The low rate of return on the fixed income portions of their investment portfolios lead to lower ROE, which lead to lower BV multiples, hence the cheapness. The ones that underwrite profitably will be just fine. Plus, I believe there's a ton of upside when interest rates one day recover.

I actually LIKE insurers with a lot of fixed income investments. As long as they have decent investments leverage (2.5x or higher), their ROE will be juiced as interest rates recover. Seems too simplistic to expect that BV multiples will one day also trade at a premium when that happens, but that's exactly what I expect.

I completely agree with you on AIG vs. its peers.

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#22) On April 12, 2012 at 2:50 PM, Valyooo (99.40) wrote:

Which insurers are leveraged with fixed income?  And interest rates probably won't move until 2014, so dont you think it makes sense to wait a year?

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#23) On April 12, 2012 at 3:04 PM, TMFBabo (100.00) wrote:

I'll just use TWGP as my example, but there are a ton. It's actually rare for insurers to have a ton of equity investments. As of the latest quarter:

Equity = $1,077 MM
Investments = $2,587.4 MM (includes debt + preferreds + common stocks + other)
Fixed Income Investments = $2,453.7 MM

Investments leverage = $2,587.4 MM / $1,077 MM = 2.4x

A 5% after-tax return on its investments would yield a 12% gain in BV. It does trade below BV at the moment. Portfolio yield is closer to 4.6% or so, but I expect it to yield well over 5% in the future.

Two of my favorite insurers are MKL and Y and I own them both. I'd include BRK-B in this group, but I no longer consider it among the insurers though it's a major part of that business.

You're probably right that you could wait a year, but at some point, expectation of future returns should drive the stock price up (along with growth in BV, which is indeed growing at many of these companies). If I can lock in a solid price from which the 5-year CAGR is solid, I tend not to wait too long. Personally, I already have insurance exposure, so I can afford to be pickier with my next insurance stock.

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#24) On April 12, 2012 at 3:17 PM, Valyooo (99.40) wrote:

Well, I find that wall street usually starts pricing things 6 months ahead.  So, if I think rates start to pick up early 2014, I would buy in mid 2013, or whenever there is a major sell off in 2013.  No need to wait too long, but there are still cheap stocks out now, so I figured might as well wait on insurers, you know what I mean?

Babo, got another question for you.  Do you know much about AGNC?  I recommend it to people because of the high yield and strong management and I really like the moves they make (Secondaries above market value, most stable dividend REIT, did fine 2008-2009, etc).  But where do they borrow the money from? I hear people say when the fed raises rates they are screwed...but why? I don't think REITs borrow from the fed...do they?

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#25) On April 12, 2012 at 3:45 PM, TheDumbMoney (58.64) wrote:

Well.  Just for fun, I think Bruce Berkowitz would say something along the lines of the following: 

AIG's investment leverage is something well above 3 I think.  For various reasons it is massively focused on conservative fixed income now, much more than historical average, or moreso than it need be, and that in a low rate environment.  Would see a bare minimum of a $6-8 billion add to investment income alone, probably a fair bit more, in a normal political, business, and rate environment, and it stands to have one of the largest expansions in book value.

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#26) On April 12, 2012 at 3:55 PM, Schmacko (47.33) wrote:

My understanding of why REITs get hurt if interest rates rise is that they derive most of their income from holding mortgage backed securities.  When interest rates are low/falling people refinance their mortgages which means the MBS is paid off faster than the holder originally planned for and new MBSs will have a much lower coupon rate associated with them.

The REIT makes its money from the spread on what interest rate it borrows at vs what rate it "lends" at.  When interest rates start going up all the MBSs with low coupon rates will drop in value and the REIT will have rising borrowing costs.  Since the REIT has to pay out 90% of its taxable income in distributions it can't stockpile tons of cash to prepare for the interest rate rise, so there will inevitably be some short term squeezing of their margins.

I'm sure that's oversimplified, and not entirely applicable to every REIT (maybe just mortgage rates of which AGNC is one), but that's how I see it. 

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#27) On April 12, 2012 at 4:32 PM, TheDumbMoney (58.64) wrote:

Nevermind, here's what Bruce actually thinks of AIG:

http://www.fairholmefunds.com/pdf/CaseStudyII.pdf

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#28) On April 12, 2012 at 7:06 PM, TMFBabo (100.00) wrote:

@Valyooo: Nope, don't know anything about that one. 

@DTAF: Interesting. I do realize that a lot of smart people like AIG, but I'm not sure I'm willing to spend the hours digging that would put my mind at ease with this company (even if I'm part of the crowd that misjudges and passes on the company). I do not think it is terrible of me to throw this into the "too hard" or "not worth it" pile and concentrate on other values (such as making sense of energy stocks). 

However, I will concede that it's in a better position than I originally assumed. 

 

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#29) On April 12, 2012 at 7:22 PM, TheDumbMoney (58.64) wrote:

TMFBabo, ha, you don't see it in my portfolio, do you?  :-)  I think your position on it is eminently reasonable.  Just playing devil's advocate.

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#30) On April 12, 2012 at 9:36 PM, awallejr (76.71) wrote:

I think ACI is a bargain at current prices. The main thing it has going for it is its high quality coal, something management purposefully accumulated. People also seem to forget that coal isn't just for steam (which is getting bashed) but for steel production. I would buy it in real life but am content with current coal holdings like PVR (which now seems to be growing its pipeline business which I like a lot) and MTL.

I am not knowledgeable enough to comment meaningfully on the other 3.

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#31) On April 12, 2012 at 9:45 PM, Valyooo (99.40) wrote:

What makes their coal high qUality? Sorry, I'm not a coal expert just a trader

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#32) On April 12, 2012 at 10:20 PM, awallejr (76.71) wrote:

Ash content and trace element content impacts quality.  Here is a simple link for further details:

http://www.google.com/url?sa=t&rct=j&q=coal%20qualities&source=web&cd=1&sqi=2&ved=0CC0QFjAA&url=http%3A%2F%2Fwww.wsgs.uwyo.edu%2Fcoalweb%2Flibrary%2Fscience%2Fquality.aspx&ei=Z4yHT9WyHsiE0QHpnrDFCA&usg=AFQjCNElut-mJ-WxUviF9mzGpXdx9WGXtw

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#33) On April 12, 2012 at 10:42 PM, awallejr (76.71) wrote:

Oh I realized I didn't answer your direct question.  ACI is a producer of low sulphur coal.  You need to be patient with it but over 3-5 years it could turn into a multi-bagger and paying you a decent dividend while waiting.

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#34) On April 13, 2012 at 12:10 AM, Valyooo (99.40) wrote:

Thanks!

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#35) On April 13, 2012 at 9:08 AM, Valyooo (99.40) wrote:

Hey awallwejr...how do you know their coal is higher quality than other companies?  Is this just something you pick up from reading many articles about the industry?

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#36) On April 13, 2012 at 10:14 AM, TheDumbMoney (58.64) wrote:

Coal is another thing like insurance companies where there may be a wait.  I am NOT an expert, but my understanding is coal prices are largely driven by China -- precisely because of the steel issue.  Chiina last night announced its lowest growth since 2009.  Definitive slowing.  This has markets down today.  And it has ACI down 3.76% as I write this.  Valyooo you did the "Shorting China" CAPS player.  If one thinks China is going to experience greater slowing, that argues for caution on coal.

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#37) On April 13, 2012 at 10:51 AM, Valyooo (99.40) wrote:

You may be right, but I would like to point out my shorting china player, is not me being bearish on china.  That character only shorts Chinese rto's, which seem to all be fraudulent.  The only one thing I shorted in there which was not a scam, were some way overvalued unprofitable china companies, and a leveraged china bull etf, which loses because of time decay.  I did not/would not short american companies making money off of china, or BIDU.

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#38) On April 13, 2012 at 10:58 AM, TheDumbMoney (58.64) wrote:

True, and I forgot that about the short china player.  A Bidu short would have been very silly!  The ACI action today after the China news is telling though IMO.

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#39) On April 13, 2012 at 11:00 AM, Frankydontfailme (27.71) wrote:

I agree with DTAF on this.

P.S silver is going to 60 before 24.

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#40) On April 13, 2012 at 12:27 PM, Valyooo (99.40) wrote:

I still like the action on AIG...the premiums on the calls are huge!

I think atpg is bottoming out a little too

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#41) On April 13, 2012 at 12:32 PM, TheDumbMoney (58.64) wrote:

Frankydontfailme.  :-)

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#42) On April 13, 2012 at 1:10 PM, portefeuille (99.67) wrote:

My fund currently has 350/5500 STD shares with break-even of around $32.40/6.55 in its portfolio.

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#43) On April 13, 2012 at 3:01 PM, TheDumbMoney (58.64) wrote:

Apropos (re: the insurance comments):

http://climateerinvest.blogspot.com/2012/04/reinventing-risk-free-asset-concept.html

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#44) On April 13, 2012 at 6:31 PM, awallejr (76.71) wrote:

Answering your question in #35, basically the CEO I saw interviewed  commented that was his strategy.  Value Line even classifies it as a low sulphur coal producer. Various reports, etc..

I was really tempted to buy some today, but as I said I have enough exposure to coal in my portfolio  If I saw it under $9 I would start to accumulate it hard just as a pure value play.

As for ATPG, as I mentioned elsewhere this is a 2nd half story.  Right now there is no catalyst to move it so the shorts knock it down.  Once Clipper wells come on line you will see upward movement.

An interesting way to play it is to sell to open January 2013 or 2014 $10 puts.  Last trade premiums are 5.20 and 5.80 (those were mine heheh) respectively.  In essence you get say 5.20 now and might have to spend $10 to buy the stock.  Net price to you is $4.80.  Only way I see ATPG going that low is if it is heading for Bankruptcy.  And if ATPG is over $10, you get to keep that 5.20.

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#45) On April 14, 2012 at 7:27 PM, Mega (99.96) wrote:

I wrote a blog about STD and European financials.

http://caps.fool.com/Blogs/european-financials-are/727067?source=ihpsitcag0000002&lidx=4

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