National General Holding Corp Notes Cheap

In this low interested environment, National General Holding Corp. Subordinated Notes (NGHCZ) are really attractive.

National General Holding Corp. Subordinated Notes

  • Symbol: NGHCZ
  • Principal Amount: $25
  • Coupon Rate: 7.625%
  • Call Date: 9/15/2020
  • Mature Date: 9/15/2055
  • Distribution Dates: Quarterly
  • Current Price: $25.17

“National General Holdings Corp. is a specialty personal lines insurance holding company. Through its subsidiaries, the Company provides personal and commercial automobile insurance, health insurance products and other niche insurance products. It operates in two segments: Property and Casualty and Accident and Health. Its property and casualty insurance products protect its customers against losses due to physical damage to their motor vehicles, bodily injury and liability to others for personal injury or property damage arising out of auto accidents. Its accident and health business provides accident and non-major medical health insurance products targeting its existing P&C policyholders. The Company is licensed to operate in 50 states and the District of Columbia, but focus on underserved niche markets.”

NGHC (the parent company) is in a stable insurance business:

  • It is pretty safe company. It has a market cap of $2 billion+ and a tangible book value $1 billion+.
  • It is profitable and earnings are growing.
  • Manageable debt at $528 million.
  • It is growing both organically and acquiring companies.
  • Their investment portfolio looks conservative and does not fluctuate widely to interest moves.

The risks with a longer term debt maturity is that when interest rates go up – the price of the security will go down. However, at nearly 8% interest a year – this security seems underpriced.

Disclosure: I am long NCHCZ

Penn West Petroleum (PWE) has 50% upside

Penn West Petroleum Ltd. (PWE) explores for, develops, and produces oil and natural gas properties in western Canada. The company had been mismanaged and changed it’s CEO in 2013. Dave Roberts, the new CEO, has been trying to cut cost and sell non-core assets in order to deleverage the balance sheet. 

However with the crash in oil prices, investors have not been rewarded. The company has taken a huge hit the last couple of years. It is trading at $1.36 as of today. It had been trading over $20 a couple of years back when oil was trading at much higher prices.

Recently, there was talk that PWE would breach its financial convents at the end of quarter 2. It has to be maintain a total debt/EBITDA ratio of 5. It was at 4.4 at the end of quarter 1. The stock went below $1 and hit a 52 week low of $.45. 

To make sure this would not happen, the company sold some non core assets and sold one of it’s key core asset. It sold its Viking light oil assets in Saskatchewan to Teine Energy for C$975M ($763M). It was a much higher price that analysts had expected. With the sale, it removed any chance of a breach for 2016 and the stock shot up to its current price of $1.36. However, it still seems the company is undervalued based on the assets that are left. Let’s take a look:

Currently the company has a market capitalization of C$870 million. It has a net debt of C$600 million after the asset sale. Here are the assets still left:

  • It’s crown jewel – Cardium area. The Cardium area produces 50% more boe/d than the Saskatchewan assets and has a lower operating cost and higher netback. If  Saskatchewan assets sold for C$975M – Caridum is worth more and close to the full enterprise value of C$1470M – if not more. Cardium still has plenty of prospective areas where PWE can do additional development.
  • Non core assets worth C$100 million – C$200 million that company plans to sell. After the sale, its asset retirement obligation will be reduced to C$100 million.
  • Alberta Viking area – which currently only produces 1,000boe/d but according to PWE has the potential to be like the assets it just sold over the next couple of years.
  • “The Peace River area is focused on our Peace River Oil Partnership (PROP) with our joint venture partner. We expect this area to remain a stable production and cash generation vehicle for the Company, as approximately 90% of our operating and capital costs are paid for by our partner. Our first quarter net production at Peace River was approximately 5,000 boe/d, 98% weighted to crude oil, with operating costs of $1/boe(3).”
  • The company has also has some oil production hedged into 2017.

I am not an oil expert and do not know these areas and their worth, but it is safe to assume that the value of all these pieces exceed the enterprise value of C$1470 million. It is more like they exceed C$2B easily at the current oil prices. The price of $PWE should approach $2/share as investors start to realize this.

Disclosure: I am long PWE


Time to Shop at Macy’s

The whole consumer retail sector has taken a beating. One stock that I have picked up recently is Macys (M). It has gone from a high of low 70s last year to low 30s currently. I picked some up for the following reasons:

  • Valuation is cheap. After lowered expectations, it trades around 10 times earnings. From a free cash flow prospective, it is even cheaper. A year or two ago, it had FCF of around 2 billion. Right now it trades at a marked cap of 10 billion.
  • David Einhorn has bought into the stock recently – before the latest collapse. From Greenlight:
    • “We established a position in Macy’s (M), the operator of about 900 Macy’s, Bloomingdale’s and Bluemecury stores, at an average price of $45.69. Earlier in 2015, with the stock at $70, an activist argued that the store real estate could be separated to unleash a valuation in excess of $125 per share. Management determined a whole-company REIT wouldn’t provide the required operational flexibility. 

      Now, with the stock closing the year at $34.98, the math might make more sense. While it’s unlikely that management will reverse course on its own, it wouldn’t surprise us if a private equity firm teamed up with a REIT to buy the company and unlock the value privately. 

      Even if this doesn’t happen, the shares are cheap at 5x EBITDA, 7x equity free cash flow, and less than 9x 2015 EPS, with a healthy balance sheet and strong history of share repurchases. We think a portion of the recent sales weakness was driven by unseasonably warm weather and a strong dollar impacting tourist business, which should set up for favorable comparisons in 2016.”

  • Starboard Value has also picked on it and has called Macy’s to break up the real estate portion from the retail.  Here is the presentation.

Macy’s is listening – so something could happen in the near future:

We are continuing the previously announced process for maximizing the value of the company’s real estate. Under the leadership of Douglas W. Sesler, our new senior-level real estate executive, and with the help of our advisors, we are evaluating proposals from potential partners for joint ventures or similar arrangements involving Macy’s flagship locations and the company’s mall-based store portfolio. These complex transactions are being thoroughly explored. Meanwhile, the company will continue its work to monetize unproductive real estate.

A couple of ways to play this is to either buy shares outright – you get a nice dividend while you wait or to buy options in the hopes that it Macy’s sells the underlying real estate portion.

Disclosure: I am long M 

Chesapeake Energy Cumulative Convertible Preferred

Chesapeake Energy Cumulative Convertible Preferred (CHK-PD) offer an appealing risk reward profile. 

Chesapeake Energy Cumulative Convertible Preferred

  • Symbol: CHK-PD
  • Principal Amount: $100
  • Coupon Rate: 4.5%
  • Convertible: 2.2727 – $43.9998
  • Call Date: 9/15/2010
  • Mature Date: No mature date
  • Distribution Dates: Quarterly (Suspended)
  • Current Price: $24.30

Chesapeake has been hit by the low oil and natural gas prices. However, there are some positives that gives a reasonable chance that the company will survive:

  • Commodity prices have gone up. Oil prices are hovering around $50. David Einhorn has made a bet on recovering natural gas prices.  
  • The company has been exchanging debt for equity. Although this is not great for equity investors, this is really good news for bond and preferred holders. More of these announcements will be a boon to both bond and preferred prices. 
  • The company has been divesting assets to pay down debt.
  • Amended its $4.0 billion credit facility

If Chesapeake survives and eventually starts paying dividend, this preferred could start approaching $100. Also, the dividend are cumulative – which means that it will accumulate while the dividends are suspended. To me, there is a greater than 50% chance that Chesapeake survives. So, it is a good gamble to take on this. I would treat it as a long term option investment.

Here is details on the preferred. 

Disclosure: I am long CHK-PD


Income options

With the market historical highs, It is harder to find good value stocks. On the other hand, there are not many good alternative income investments to invest in while waiting for stock prices to come down. I did find a couple that are worth sharing. Both of these have a couple things in common:

  • Decent yield.
  • Relatively safe investment.
  • Short term. At these rates, I would stay away from long term bond or preferred stock investments.

SLM Corp Series A CPI Linked Notes

  • Symbol: OSM
  • Principal Amount: $25
  • Coupon Rate: CPI Linked + 2%
  • Call Date: Not callable
  • Mature Date: 3/15/2017
  • Distribution Dates: Monthly
  • Current Price: $24.30

OSM will mature in less than 3 years. It give a CPI linked monthly dividend (currently 3-4% annually). I expect the price to move from $24.30 to $25 within in the next year. If that happens, you are looking at a nice 7% return for a year for a relatively safe investment. 

Read more about it here.

Bank of California Senior Notes

  • Symbol: BOCA
  • Principal Amount: $25
  • Coupon Rate: 7.5%
  • Call Date: 4/15/2015
  • Mature Date: 4/15/2020
  • Distribution Dates: Quarterly
  • Current Price: $25.66

Boca is giving around a $.50 dividend at end of this month. So, it is almost trading at par value. You have to be careful not to buy it at a high price since it is callable next year.

Read more about it here.

Disclosure: I am long OSM and BOCA. 

Buy PCC before merger

Last year I wrote about the merger of PMC Commercial Trust (PCC) with CIM Urban REIT. After some shareholder revolt, It looks like the merger will go through. To reiterate, here are the details of the merger:

  • Existing shareholders will receive a special $5.50 dividend.
  • The merged company will have a implied valuation of $2.439 billion (based on CIM Urban equity) and pay a dividend of 3.5 after the merger.
  • PCC shares should trade at $10.50 (pre-dividend of $5.50) if the merged company trades at the implied valuation.

Currently, PCC trades at $9.50. 

Because of the shareholder revolt, CIM three founders have “agreed to purchase up to 2.75 million shares of PMC Commercial at a market price of up to $5.00 per share under a 10b5-1 trading plan. The plan generally will expire on the date that 2.75 million common shares of PMC Commercial have been purchased or August 10, 2014, whichever is earlier.” Read more about the agreement here.

The agreement should provide a price support to the post-merged company. I expect the shares to trade higher from $9.50 to $10+ in coming weeks. I owned some shares for years and have loaded up recently after the agreement was announced.

Disclosure: I am long PCC

Verizon and Vodafone near record deal.

Back in February, I wrote about a safe investment with a great upside, Vodafone (VOD).  I conservatively valued VOD at $180 billion. In that valuation, I had valued VOD’s 45% stake in Verizon Wireless at $80 billion. It seems my estimates were off as it looks like Verizon is finally (after much speculation) buying VOD’s stake in Verizon Wireless for $130 billion.

I expect VOD to go up even more on Tuesday because at this price it is still very cheap on a sum of parts valuation. Hopefully, investors get a big special dividend. I continue to hold.

Disclosure: I am long VOD

PMC Commercial Trust (PCC) Interesting Merger

For a while, I have been meaning to write about interest sensitive stocks stocks. One of these stocks that I have had in my portfolio for quite a while is PMC Commercial Trust (PCC). PCC is a REIT that makes small business loans in the hospitality industry. The company focuses on SBA loans in which the government guarantees a substantial portion of the loan. The government portion is then sold at a profit to investors. PCC keeps the non-guaranteed portion of the loan.

PCC had been trading around $7-$8 for a long time and what made it a interesting investment was:

  • It gives a steady dividend. Currently, it is $.50 annually. In the past, it has been been above a $1. 
  • The majority of the loan the company keeps is variable interest rate loan (LIBOR based). With interest rates going up, it is an opportunity for the company to earn more money and increase dividend and stock price over the coming years.
  • It trades at a significant discount to its book value of $13+.

Before I could write this up, the company announced a merger with a private company, CIM Urban REIT last week. The stock shot up over a $1. Here is the press release, but here are the simplified details:

  • Existing shareholders will receive a special $5.50 dividend.
  • The merged company will have a implied valuation of $2.439 billion (based on CIM Urban equity) and pay a dividend of 3.5 after the merger.
  • PCC shares should trade at $10.50 (pre-dividend of $5.50) if the merged company trades at the implied valuation.

The stock is trading at $9.38 today. There are a couple ways to win here:

  • It is hard to say what the company will do post merger since we don’t have the specific financials of CIM, but if it trades near the implied valuation, there is upside here.
  • The deal undervalues PCC. CIM could come in with a better offer at shareholder dissent or a rival could make a better offer.
  • At 9.38, the merged company trades at over a 20% discount to the implied valuation and I don’t see it going down much further.

If the deal does not go through, the stock could fall, but this is a stock that would be to hold due to rising interest rates. For now, I am keeping my shares.

Disclosure: I own shares of PCC. 

Catalysts Ahead For WPX Energy

WPX Energy (WPX) is a natural gas and oil gas exploration and production company in the United States (Piceance Basin, Bakken Shale, Marcellus Shale, Powder River Basin, and San Juan Basin regions). The company was spun-of of Williams Companies (WMB) in December 2011.

I stumbled on it reading the first quarter portfolio manager’s letter for one of my favorite mutual funds Aegis Value Fund (AVALX). WPX was the largest fund purchase and now comprises over 3.9% of the fund’s assets. Here are their comments on the company:

“WPX possesses low-cost natural gas reserves predominantly located in the Piceance Basin of northern Colorado and is currently developing oil reserves on its acreage in the Williston Basin of the Bakken shale play in North Dakota. In WPX, we were attracted to a company with four trillion cubic feet of gas reserves located on held-by-production acreage, giving the company a strong, stable land pipeline for future development. The $3.1 billion market cap company trades at approximately 60 percent of an understated book value. With net debt of only $1.35 billion, the enterprise trades at a modest multiple to our $1.1 billion 2013 EBITDAX estimate. Furthermore, EBITDAX is likely to grow by $150 million as wet gas processing capabilities come online and unfavorable pipeline transportation contracts expire over the next two years. In addition, we believe the company’s valuable Piceance-area acreage is highly prospective for additional unbooked reserves located in the Niobrara/Mancos shale. WPX’s initial Niobrara/Mancos well produced a stunning initial flow rate of 16 million cubic feet per day of dry gas, and one billion cubic feet of gas over its first 100 days. The new Niobrara find has the potential to double the company’s 18 trillion cubic feet of proved, probable and potential (“3P”) gas reserves. We believe WPX, as a low-cost producer, has significant upside exposure to improving natural gas prices, with each $0.25 per mcf increase in the value of its gas reserves enhancing equity value by roughly $5.00 per share. Fundamentals, fortunately, seem to be providing some tailwind, with natural gas prices increasing nearly a dollar to approximately $4.39 over the last three months as a cold spring depleted gas in storage faster than expected.”

When those comments were written at the end of April, WPX was trading around $16. Recently, the stock has shot up to around $19+ as natural gas prices have recovered. However, there are still catalysts ahead that might put the stock higher:

  • Higher natural gas prices has lead the company to increase drilling in the Piceance Basin region. This should boost production and ultimately profits. However, natural gas prices could turn due to weather fluctuations. So, the company is a bit risky in this regard.
  • Taconic Capital, a hedge fund, reported a 6.39%+ stake in late May and will engage with management in order to increase shareholder value.
  • WPX is considering disposing its 69 percent interest in Apco Oil and Gas International, Inc. (APAGF). The company has filed a 13D and management says this disposition could happen in early 2014. It is worth almost $250 million or $1.25/share.
  • “WPX has completed a data room process for its holdings in Wyoming’s Powder River Basin, including the deep rights on its acreage. WPX is evaluating bids submitted by interested third parties and remains engaged with the process to explore the potential monetization of these assets.” On the conference call, management said that a deal could be announce in sometime June.
  • The company is also looking at MLP possibilities in the San Juan or the Piceance regions.

I will initiate a position soon, but am still wary of the fact that the valuation is so greatly affected by natural gas prices.

Disclosure: I do not own WPX.

Sallie Mae Preferred Opportunity

A couple of days ago, Sallie Mae (SLM) announced that they would split the company into two to increase share holder value. 

Company A will be “an education loan management business comprised of the company’s portfolios of federally guaranteed (FFELP) and private education loans, as well as most related servicing and collection activities.” It’s “principal assets are likely to consist of approximately $118.1 billion in FFELP Loans, $31.6 billion in private education loans, $7.9 billion of other interest-earning assets; and a leading education loan servicing platform that services loans for approximately 10 million federal education loan customers, including 4.8 million customer accounts serviced under the company’s contract with the U.S. Department of Education. In aggregate, this company will own approximately 95 percent of Sallie Mae’s existing assets and remain obligated for the company’s senior indebtedness.”

Company B wil be a “private education loan origination and servicing businesses.” The “assets are likely to include approximately $9.9 billion of total assets comprised primarily of private education loans and related origination and servicing platforms; cash and other investments; and the Sallie Mae Upromise Rewards program.”

The transaction is expected to close under a year. Here is the slide deck. I have never been a fan of SLM’s business, but there may be an opportunity in the preferreds.

I wrote about the floating rate preferred (SLMPB) a couple months back. The preferred went down a bit after the announcement after Moody’s downgraded all debt and preferred because they would be lumped with Company A. However, a funny thing happened, a reader of hypezero emailed me saying that it is possible that the preferred could be redeemed at full par value ($100, currently trading below $70) at the day of the announcement. Here is his explanation:

  • “Unlike bondholders, Preferred Shareholders are owed a “Fair Allocation” in NewCo. If the plan is to redeem the Preferred Shares before spin-off, obviously no “Fair Allocation” in NewCo. is necessary.  Since no disclosure/guidance on Preferred “fair Allocation” was provided I expect the shares will be redeemed prior to spin off.”

I was a bit skeptical, but yesterday/today it is up over 10% on huge volume. The volume yesterday was over 1 million compared with the average volume of 64,000+  Maybe someone with more resources has figured this out as well. The other explanation I thought could make sense was in the preferred prospectus. It says:

  • “The board of directors maintains a committee whose purpose is to monitor and evaluate our proposed actions that may impact the rights of holders of our outstanding preferred stock.” Obviously, this split would be a detriment to the preferred. Here is a link to the prospectus.


Obviously, there are risks to this investment:

  • The planned split off does not go through.
  •  The preferred is just part of Company A making it a riskier investment. An analyst did ask about the preferred on the call and the CFO said that the preferred will stay with Company A.

Disclosure: I am long SLMBP