Year end review

Happy new year! I took some time to disconnect over the last two weeks and enjoy the holidays. For the first post of 2013, I thought it might be a good to review all the picks from the last 3 months to see how I fared.

AIG (AIG)

AIG is still one of my top picks. It is up about only $2 from the price I paid for the stock. However, I feel it still has significant upside. Mainly all the arguments I made previously still apply:

  • It trades at half of book value.
  • The government completely sold AIG shares at the end of 2012. It now only holds warrants in the company.
  • AIG sold its stake in AIA. It also has agreed to sell a majority of its stake in ILFC.
  • The company can now focus on its core insurance operations and improve its return on assets.

Dean Foods (DF)

I sold Dean at a little bit of a loss. I still think Fresh Diary Direct segment is undervalued. However, the volatility of Whitewave was too much for me to take. I think the best way to play Dean is to wait for them to distribute the Whitewave shares and buy it before the distribution date if the current prices remain as they are.

General Motors (GM)

GM is one of my biggest winners. It is up nearly 50% for me. The government sold off 200 million shares of its stake in the company to GM recently. This should have a positive impact on EPS. If the economy improves in US and Europe and vehicle sales return to a normalized state, earnings could easily be over $5 over the coming years. Also, it is slowly removing the overhang of the pension liabilities. This could also be a big boon.

With the stock to almost $30, I might cut my position in half and book some profit. The auto industry is very capital-intensive and very competitive.

Orchard Supply Hardware (OSH) & Sears Hometown & Outlet (SHOS)

I have written a lot about these two Sears spin offs and I am short both. As I mentioned in my previous articles, I am convinced Orchard will go under. So far, it has been a very profitable short for me. I am not 100% convinced on Sears Hometown, so I only have a small short position there. Both of these plays are a bit risky, since they are cheap on a revenue multiple basis. Sears Outlet is a wild card for SHOS. If it can grow that successfully, the stock may have upside. I have no faith in the Sears Hometown business as it has had negative same store sale numbers for years. I know a lot fellow financial bloggers are long SHOS and I am open on seeing their analysis. So far, I have been wrong as SHOS. It has bounced nicely from $30 to $35 recently.

Xerox (XRX)

I bought Xerox around $6.50. The stock is around $7.20 today. Nothing fundamentally has changed about the company since I wrote the bullish case. It still trades at a significant discount to FCF and has increased its dividend. I still think there is significant upside.

Genie Energy (GNE)

Genie was a quick arbitrage trade on its offer to exchange common shares for prefered shares. I booked little less than a 10% profit on the trade. I still think there may be an opportunity on this type of trade in Genie in the future. Nobody will exchange the common for the preferred as the common is trading higher than the preferred.

Pandora (P)

I have a small short position in Pandora. So far, it has not been a good trade as the stock has shot up from $8 to $10. I continue to believe that this company will not exist in the future. It really has no barriers to entry, no competitive advantage, and is not profitable. Obviously, a lot of Pandoras profitability depends on the outcome of the Internet Radio Fairness Act. However, there is no doubt that there will be more competitors in this space in the future. I will keep this short position.

Susser Holdings (SUSS)

Susser is up about a $1 from what I bought it at. It may take some time for this stock to go up. However, it should be able to expand a lot faster after the spin-off of SUSP. I have a small position and will keep that position.

Others

I also missed out in some of my other bullish calls such as Facebook, Lumos Networks, Nacco Industries and Einsteins. I wrote a bearish case on Western Union, but the stock has been up since then. I still believe in the bearish case. I believe that Western Unions biggest competitor Moneygram will have a tough 2013 due to Western Unions price cuts. I will be looking to short in 2013.

DIsclosure: I own or am short most of the positions

Best Way To Play GM

General MotorsGeneral Motors (GM) is a stock that I am very bullish about. The best way to invest in GM is not the shares, but the warrants that were issued during the creation of the new GM. There are two kinds of warrants, GM Warrant A and GM Warrant B.

 

GM Warrant A

  • Symbol: GM-WTA
  • CUSIP: 37045V118
  • Exercise Price: $10
  • Expiration Date: July 10, 2016
  • Current GM Price: $24.17
  • Current Warrant Price: $15.12
  • Warrant Premium: ~$.95

GM Warrant B

  • Symbol: GM-WTB
  • CUSIP: 37045V126
  • Exercise Price: $18.33
  • Expiration Date: July 10, 2019
  • Current GM Price: $24.17
  • Current Warrant Price: $9.22
  • Warrant Premium: ~$3.38

The exercise price may change if there is a stock dividend or a stock split.

If you are as bullish on GM as I am, the warrants are better way to invest because they give you additional leverage. Obviously, they will go up faster than the shares, but will also go down faster. 

I personally like the GM-WTB because it gives downside protection if GM or the stock market blows up.

Click here to see more information on the warrants.

Disclosure: I own shares of GM and am looking to buy GM warrants.

Undervalued REIT, CWH

CommonWealth REIT LogoLast night, CommonWealth REIT (CWH) cut its dividend from $2/share to $1/share. The stock price went down from $14.77 to $14.57. Let’s examine the company more closely.

 

 

Company Info:

  • Name:  CommonWealth REIT
  • Symbol:  CWH
  • Price: $14.57 
  • Market Cap: 1.22 Billion
  • Sector: Office REIT. Owns and leases $6 Billion worth of property mostly in U.S. 

Thesis:

CommonWealth REIT (CWH) is significantly undervalued based on the value of its property. It is worth somewhere between $33 – $44/share. However, RMR, the company that manages CWH, is not creating shareholder value.

Valuation:

  •  Liquid Assets:   $917 Million  (Cash and Equity Investments (SIR, GOV, AIC))
  • Other Assets (Excluding Liquid): $6.4 Billion
  • Total Liabilities $3.75 Billion
  • Preferred Stock Outstanding $779 Million 
  • Total Value of Company (including Depreciation of Real Estate):  $2.8 Billion ($33/share+)
  • Total Value of Company (excluding Depreciation of Real Estate): $3.7 Billion+ ($44/share) 

The company is valued somewhere between $33 – $45/share. It has a 100%+ to 200%+ upside.

Stock Overhang:

Management:  Company has no employees. RMR manages full operations. RMR incentive is to maximize management fees at the expense of shareholders. Evidence of this and possible conflict of interest:

  • Company is spinning off the good assets (GOV, SIR) as a way to increase management fee. Managing the spinoffs (more management fee) and using the proceeds from the spinoffs to buy more real estate (more management fee) instead of increasing share holder value.
  • RMR manages CWH, SIR, GOV, HPT, RIF, SNH, TRV. Senior Management and Board of Trustees overlap in all of these companies.
  • Family Business. Father (Barry Portnoy) and Son (Adam Portnoy) own RMR and are on Senior Management/Board of Trustees at companies. Brother-In-Law/Son-In-Law an officer at RMR
  • RMR managed companies and RMR are in business together. They all have invested in an insurance company AIC. Conflict of interest!
  • Company is thinking of spinning of small Australian real estate assets which have been performing well just like they did with GOV, SIR.
  • Company is selling shares at these low rates instead of shedding assets and increasing shareholder value

Economy: Obviously, the high unemployment rate is decreasing the occupancy rate. It is down below 85% on remaining assets. 

Best way to Invest

I do not trust management. So, buying shares it out of the question. As I had mentioned the best way to play this is to buy April 2013 $15 options. They are priced around $.40, since it is a dividend paying stock.

Disclosure: I own shares and options of CWH.

Options Strategies on GM, NYB, CWH

Here are different options strategies that offer a good risk/reward ratio. 

Undervalued Dividend Paying Stocks

Long-term options on high dividend paying options have low prices because the upside on the price is usually limited. However, sometimes the dividend paying stock is undervalued, and options are the best way to establish a long position in the stock.

A case in point is CommonWealth REIT (CWH). CWH is a REIT that owns and rents over 500 office properties worth over $6 billion mostly in U.S. Due to inept management and a recovering economy, the company’s profits are down. Now there are concerns that management might cut the 14% dividend yield. As a result, the stock price is down over 25% to $14.35, and the company trades at around 40% of tangible book value.

The company is severely undervalued, and there are catalysts that could take the stock price higher.

  • Economy improving. Obviously the office properties rental market is highly dependent on a strong job market.
  • No dividend cut.
  • Activist investor buys a substantial stake in the company and unlocks the real value of the company.

Because of the horrible management, it is no advisable to buy the shares outright. However, the April $15 Jan 13 calls are very attractive and trade around $.40/share. If the stock price goes from $14.35 to $20, you will make 11.5 times on your investment. A $1,000 investment would make you an $11, 500 profit. Also, the maximum you could lose is $.40/share.

 New York Community Bancorp (NYB), “a multi-bank holding company for New York Community Bank and New York Commercial Bank”, is another one that is attractive. Although, it is not undervalued like CWH, it pays a 7% yield. Investors looking for income could cause the share price to increase. The stock price is $14.74 and the April $15 Jan 13 calls trade around $.50/share. It is entirely possible the stock could go as high as $20. At that price, it will stay pay a juicy 5% yield.

Selling Puts To Buy Shares

A way to make a little extra income, and buy a company that you are really bullish about is to sell very short term puts on the company. A put allows an investor to sell a particular stock for a specified price by a certain date.

For example, one of the companies that we are bullish on is General Motors (GM). It is currently trading around $24.50. If we want to buy the shares at or below $24, we could sell the October $24 puts for $.41. These options expire in a little over 2 weeks. If the price of GM stays above $24, we make $.41. If it does not, we bought a company that we plan to hold for a long time at $23.59.

Warren Buffett uses this strategy to establish big positions in companies. However, this should only be done with companies that you are overly bullish about.

Conclusion

Every investment strategy is different. Sometimes options allow investors a better way to invest than just buying or selling the shares outright. 

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Disclosure: I own shares of GM, CWH. I own options on CWH.