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
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.
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.
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
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This quarter there are two new positions as News Corp (NWSA) and BankUnited (BKU) have been discraded:
- BP plc (BP)
- Exco Resources (XCO)
I will have more to say about these companies in future posts.
Disclosure: I am still long AIG
Federated National Holding Company (FNHC), a company I wrote about over a month ago, reported first quarter earnings last Thursday. Results were great as revenue increased almost 50% and earnings per share increased 123%. Shares were up over 13% on Friday.
Even though the stock is up over 25% from the time I purchased it, I believe there still be more upside left. During the conference call, the CFO stated that business is booming in the current quarter. Last quarter, they were writing $2 million in new business a week. Just last week, they wrote $3.5 million in new business and are on pace to do the same this week. Here is what Peter J. Prygelski, the CFO said:
“I can tell you things weren’t trending favorably for a quite awhile where we used to write a $1 million and then went to $2 million, clearly since we’ve turned on all state, volume has increased. We’ve had more underwriters and more adjusters. I have no reason to believe that flow of premium will slow down. We’ve been at that – we’ve been kind of got up to that level of $3.5 million and I think we are going to hit probably close to that again this week.”
All my previous points remain in tact about FNHC. So, I will continue to hold the shares. The only concern I have is that hurricane season in Florida is approaching and a bad season is always scary for insurers.
Homeowners Choice (HCI)
Another Florida insurer that has done quite well (much better than FNHC) has been Homeowner Choice (HCI). Even though, I own their bonds, I have concerns about this company:
- The company was founded in 2006. It does not have much of a track record during the worst hurricanes seasons (2004-2005)
- HCI has grown solely from assuming policies from the state owned Citizens and defunct companies such as Homeowners Choice. They have assumed policies from them in November of 2011 and 2012 (conveniently after hurricane season). Because hurricane seasons have been tame, the company has done quite well from assuming these policies. Look for them to do the same this year in November. If they don’t, expect revenue and earnings to decline.
- Company trades at over 2.5 time book value (expensive for an insurance company).They hold most of their assets in cash and do not earn much money from investment income.
- The company has 20% of their float shorted.
- Nobody knows how profitable the assumed policies are due to the tame hurricane seasons. Also, the certain Citizens policies have restrictions on rate hikes.
I don’t see much upside left in this stock. In fact, the company could in for a huge fall if:
- A major hurricane hits Florida and we find out how profitable/risky these assumed policies are. To quote Warren Buffett, “You never know who’s swimming naked until the tide goes out”
- At some point, they will not be able to assume policies from Citizens. At this point, expect earnings and revenue to decline.
Buying puts on this stock might be a good strategy.
Disclosure: I am long FNHC and HCJ
Dean Foods (DF) will distribute an “aggregate of 47,686,000 shares of WhiteWave Class A common stock and 67,914,000 shares of WhiteWave Class B (WWAV) common stock on May 23, 2013, the distribution date, as a pro rata dividend on shares of Dean Foods common stock outstanding at the close of business on the record date of May 17, 2013.”
Based on the number of shares outstanding on March 31, “Dean Foods common stock will receive approximately 0.256 shares of WhiteWave Class A common stock and approximately 0.364 shares of WhiteWave Class B common stock in the distribution.”
Based on today’s price of WWAV, that is a distribution of almost $11/share. Dean will keep 34,400,000 shares of WWAV after the distribution, which are worth about $600+ million or $3.2+ based on todays price. However, “Dean Foods expects to dispose of its retained shares of WhiteWave Class A common stock within 18 months of the distribution in one or more debt-for-equity exchanges or other tax-free dispositions.” So, most likely investors are not going to see any dividends from the rest of kept shares.
Invest in WWAV or Dean?
I would continue to stay away from both Dean and WWAV. When I originally wrote Dean being undervalued, I was mistaken about 2 things:
- Dean was going to distribute all of WWAV shares. If they had distributed all the shares, the stub (what was left over would’ve been pretty cheap).
- Some of the Morningstar sale proceeds would be distributed to shareholders.
I would assume that WWAV shares would go down initially after the distribution as the new shares flood the market. However, there are two events that might make the shares go higher:
- Earnings report on May 9th.
- Rumors about takeover speculation.
Here is the news release on the distribution.
Disclosure: I do not own shares of DF or WWAV
This Tuesday Apple is reporting second quarter earnings. I have been debating for a while about whether to start initiating a position in Apple in wake of the significant drop in price. If the price of Apple stays at around $390, I will initiate a position in Apple before earnings for the following reasons:
- Trading at 6+ times this years earnings if you back out the cash. Hopefully, they can at least maintain earnings over the next couple of years.
- Limited downside. I do not ses Apple stock dropping below $300. If it drops after earnings, it will allow me to buy at a cheaper price.
- Low expectations this quarter. Verizon and Cirrus Logic’s results gave investors a peek into what will be a bad quarter by Apple’s standards.
- Rampant negative sentiment on Apple shares.
- Apple should announce what they plan to do with its cash pile very soon if not at earnings announcement. A $15 dividend would give the stock a yield around 4%. A preferred stock would give the biggest boost to the stock price. However, I do not think this will happen.
- Investors will start focusing on what’s next for Apple after the earnings report. Historically, this is when the stock makes a run. There are plenty of concrete things to look forward to: iPhone 4s, cheaper iPhone, iPhone introduction on China’s largest mobile network, China Mobile.
- Even talk of potential new products whether it be a tv or watch could be a catalyst to the stock price.
- Over the next couple of years, a lot of iPhone users 2 year contracts will be expiring which should give a boost to iPhone sales.
What’s preventing me from buying a ton of shares of Apple?
- Limited upside. I do not see the stock going above $500 in the near term. It is now a value stock as opposed to a growth stock.
- Half of revenue dependent on iPhone.
- If the stock price drops even further it will allow me to buy more shares.
Commowealth (CWH) board is still battling hedge funds on control of the company. I own a small amount of shares I bought during the financial crisis. There was a good article in barrons this week recapping the battle. I urge any significant holders of the stock to join the battle against the board.
Orchard Supply Hardware Stores
Orchard (OSH) crashed after it hired restructuring lawyers. It trades below $2 now. I shorted at $14, but had to cover once it went below $5. I am still short the other spinoff Sears Hometown (SHOS). However, my brokerage made me cover some shares recently. A lot of value investors are bullish on Sears Hometown, but I have yet to be convinced.
Disclosure: I own CWH
Harvard Bioscience (HBIO), “a global developer, manufacturer and marketer of a broad range of tools to advance life science research and regenerative medicine”, is spinning off its subsidiary, Harvard Apparatus Regenerative Technology, Inc. (HART). HART, a regenerative medicine company, has no revenue and will use to proceeds to general corporate expenses.
Here are the details of the spinoff:
- Selling 1.7 million share at a range of $10-$12. Underwriters also have the option of exercising an additional 255,000 shares at the IPO price.
- HBIO will own over 80% or 8 million shares after the IPO.
- HBIO plans to distribute the shares to shareholders 4 months after the IPO.
HBIO is a $168 million dollar company. In 2012:
- Its net income, if you exclude discontinued operations, was $1.5 million.
- Amortization of intangible assets amounted to $2.7 million
- Expenses for HART were around $6.7 million. HBIO will earn around $4.6 million at the current tax rate after HART expenses are wiped off the books.
After the HART IPO, HBIO looks to have about $9 million in FCF. If we value it at 10 times FCF, HBIO will have a value of $90 million. The 8 million shares HBIO will own after the IPO will be valued at $88 million if HART IPOs at $11/share.
So, the total sum of parts value of HART is around $178 million. It is not that undervalued. However, a lot of it depends on the price of HART. I will keep an eye on both of these stocks after the IPO to see if there ever a huge value discrepancy.
Disclosure: I do not own any of the stocks mentioned.
Sallie Mae (SLM), the education loans company, has a preferred floating rate stock that is very interesting.
- Par Value is $100.
- Currently trade around $60.
- Dividend is floating based three-month LIBOR plus 1.70% per annum. Three-month LIBOR is at an all time low. Here is the libor rates history. The last four dividends add up to $2.14 or 3.5% at the current price.
- They are callable at anytime at $100. They do not mature.
- They trade on NASDAQ under the symbol SLMBP.
- The are non cumulative meaning if the company misses a dividend payment, they don’t have to pay later.
- For every 1% the libor rate goes up, the stocks yield will go up 1.67% due to discounted stock price.
- If LIBOR rates go up from historic lows, the stock price will go up significantly. For example, in 2006-2007, the three-month libor was around 5+%. If rates go up to that level, this stock will yield 11+% at the current price of $60. During that time, the stock was trading around par value or $100.
- 3.5% is a decent yield in this environment.
- SLM is a $9 billion company.
- Taxed at 15% dividend rate.
- Need to more research on SLM. The security is only good as the viability of the company.
I will update the site once I do more due diligence on SLM.
Disclosure: I do not own SLM