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 

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

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


Federated National (FNHC) Earnings

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 

Apple Earnings

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 

Federated National – Part 2

A reader Jeff S. sent me a good write up about potential risks about insurance companies in general. In the rush of posting this article yesterday, I should have mentioned them as they are important:

Book Value

Insurance companies hold a lot of assets, mainly bonds. The value of those assets shift dramatically depending on market conditions and thus, book value can go up and down dramatically. For example, Federated holds $150 million in cash and investments and the majority of it is in bonds. If the value of those bonds goes down say 10%, we are talking about a $15 million hit to book value or about $2/share. 

When you are investing in insurance companies, you are investing in bonds. Right now, it is not a great time to be an investor in bonds (especially, long term bonds) because of the low interest rates. About 16% of Federated’s portfolio bond portfolio, is in bonds that mature after 10 years. Another point is that any extra cash flow that the company gets will be invested in more bonds at the current anemic rates. 

Loss and loss adjustment expenses

Insurance companies not only have to expense actual paid losses, but also losses they expect to pay in the future. As a result, an overly optimistic management team could increase earnings by underestimating losses they may have to pay in the future.

It is worth noting that losses this year for Federated were stable even with a 20%+ new business. Also, unpaid losses and LAE has gone down $10 million year over year from $59 to $49 million.

Management attributed it to “primarily to a reassessment of our losses by line and increased underwriting procedures to manage our risks.” Federated has been focusing on writing more profitable policies. This has resulted in lower reinsurance premium rates and obviously lower losses. However, I am not a huge fan of the first reason (reassessment of our losses). 


One thing I like about Federated is that they have grown organically and not from takeouts (taking business/premiums from other insurance companies). Takeouts result in instant premium growth and a boost to earnings. Homeowners Choice, Inc. (HCI), an another florida insurer, has growth this way, but the Federated CEO is not a fan of this approach and is adding business policy by policy.


You need a good management team to manage risk. In regards to Federated, I can’t say either way they are good or bad, but I do like that they are saying the right things in the conference call.


With any investment, there is risk, but insurance companies are riskier. Federated is still a buy for me as I wrote in my previous article, but  investors should invest with caution.

Disclosure: I own FNHC

Buy Federated National (FNHC)!

Federated National (FNHC) provides homeowners insurance in Florida. It is a very small company:

  • Market capitalization of less than $60 million.
  • No analyst coverage.
  • Average volume of less than 14,000 shares traded daily.

It just reported good fourth quarter earnings over a week ago and since then the stock has surged almost 20% from $6.17 to $7.30 yesterday. However, further gains could be in store for this company as revenues should get a huge boost in 2013.


The state owned Citizens is the largest insurer in Florida. Due to concerns about whether Citizens would be able to pay out claims if major hurricanes hit the state, it has been state approved raising rates over the last couple years with the hopes of writing profitable policies and pushing customers to the private sector. This has had a positive impact on Federated:

  • Over 20%+ growth in gross premiums written in 2012 to almost $120 million.
  • State approved rates rises and disciplined underwriting have decreased loss ratio and increased net income to .53/share in 2012.


Based on management’s comments in the earnings call, 2013 should be even a better year:

  • Significant growth in new business in 2013. Last quarter the company was doing $1 million in new business and this quarter it is doing $2 million business and the CEO feels they could reach $2.5 to $3 million in business. Based on normal retention rates of 90% of existing customers, gross premiums will increase anywhere from 50% to 100%.
  • A signed deal which would allow 700 Allstate agents to write business for Federated has not gone into effect yet. This should help grow new business. 
  • Earnings should increase at a higher rate. Even though most of expenses such as reinsurance are variable, some of the smaller costs are fixed which should significantly help the bottom line with the revenue growth.
  • It is possible that earnings could be over $1/share and book value could increase from $8.26 to over $9+ share.

I bought some shares at $6.59, $7.10, and $7.15. I will most likely buy more at the right price.

There is a good seeking alpha article on the stock.

Disclosure: I own FNHC.