Stock Notes for 14 April 2009 (GNW, CBI, HPT)
Some quick notes on a few companies I have been looking at lately:
Genworth Financial (GNW)
As I have detailed in my article on taking advantage of bankruptcy risks, one can often make substantial gains by diversifying holdings in companies with significant risks that have been overly discounted by the market on an individual basis. Oftentimes, risk-reward greatly favors the long side in such situations even though risk is very high. Genworth might prove to be a classical case on this. Do I know whether Genworth will survive? No. But by going long, worst case scenario is that you lose 100% of your investment. If Genworth survives, there's potentially a 400% - 1500% gain in it at the current price.
The market might also be overreacting a little bit. The fact that they will not collect any TARP money has scared people off, but things aren't completely horrible for Genworth. Their balance sheet mostly consists of less risky securities that have been beaten down. There's a good chance those securities have bottomed (on their balance sheet). I'd value their fixed maturity portfolio somewhat higher than accounting rules require them to. Their real problem is they are overlevered and need to be more liquid, but not so much that I couldn't potentially forsee them riding this out. It's also notable that there have been some insider buys over the past few months - nothing huge, but still, sizable enough to be worth mentioning.
I give GNW 50% odds of survival, but given the downside risks and the upside potential, risk-reward greatly favors the long-position. This is not something I would ever bet the bank on, but I decided to add a small position to my KaChing simulated portfolio. It's only about 0.3% of my total portfolio, so I'm not out much if I lose the bet. I've also greenthumbed it here on the Fool. Just for fun, I also put a couple hundred bucks on this in real life. Once again, I'm not out too much if I lose.
Hospitality Properties Trust (HPT)
Oh dear market, why do you always overreact to bad news? Last Thursday, HPT suspended its quarterly dividend and shares plunged. I might be the only person on Earth who sees things like this as great news. For long-term investors, you should be delighted that HPT suspended the dividend. Sure, you won't collect as much money in the short-term, but it's in your best interest for the company to improve its liquidity. And really --- liquidity might be Hospitality's only major problem.
I have not had a chance to analyze this one in detail yet, but I can't help but to notice that HPT's book value is $59 per share. The stock currently sells in the $9 - $10 range.
Leverage, you say? It's not too shabby. Right now, their liability/value ratio is 53.4%. That's fairly low for a REIT.
HPT has about $5.35 billion in real property on their books. Certainly, some of that could be overvalued on the balance sheet, but you'd have to write it down by at least 30% before things started to look ugly.
Like I said, I haven't had a chance to thoroughly analyze this one yet, but from a shallow glance, it looks like the market might be overreacting a tad bit. I added a 0.7% position to this on my KaChing simulated portfolio and might increase that a bit over the next few days after further investigation. I have also greenthumbed this on the Fool. I might choose to initiate a position on this in real life soon.
Chicago Bridge & Iron (CBI)
I've seen a number of people recommend this stock lately. It's been beaten down a lot since the market downturn. It also intrigues me as an energy & infrastructure play, but after glancing over the financials, I'm not too hot on it. For one, their balance sheet is pretty ugly. They have $555 million in equity compared to $2.44 billion in liabilities; liability/value ratio is 81.5%. From the face of it, they have high leverage, but if you glance at their asset accounts, it only gets worse. They have $962 million in "Goodwill" and another $236 million attributed to intangibles. So in essence, their actual equity is more like $600 million in the hole.
Current ratio is not too hot at 0.6. They recorded a loss in their last fiscal year; while that is somewhat deceiving and they appear to be profitable in reality, it's not as if they are overwhelmingly profitable. If they could back to FY 2007 and FY 2006 and bringing in over $3.50 per year in free cash flows (FCFs), then things might not be so bad. For FY '08, they were in the negative on FCFs to the tune of about -$1.05 per share.
Decided to run a quick DCF on this; with an adjusted book value of -$6 (to reflect negative real equity) and a high growth rate of 5%. if you assume they bring in $1 in FCFs for Year 1 and use a 12% cost-of-capital, you end up with about an $8 valuation. That doesn't make me too comfortable. I could see them bringing in over $1 in FCFs again, but 12% COC seems pretty aggressive given their high leverage. At some point in the future, their cost of capital might be quite a bit higher than that (if it's not already - I haven't bothered to check yet).
If I start the DCF at $2 in FCFs (instead of $1) and raise COC to 14%, the valuation comes out to $16. Not completely unrealistic, but it does not seem as if the upside here compensates for the downside risks. I definitely would not go short on this, but I'd keep away from it on the long end, as well.
Disclosure: Author is long GNW and may choose to go long on HPT within the next few weeks.