Value Trail or Road to the poorhouse?

[petekoch]

The mortgage insurers have certainly all been given hair cuts, kind of like the first one they gave me at Fort Dix.

Here are the current Price/Book ratios of a few:
MBI 0.83
PMI 0.37
MTG 0.39
RDN 0.24

I listened to the RDN conference call this a.m. and RDN's CEO, S.A. Ibrahim, declared that even after a 3Q loss of $740MM, the company's stated book value is $42/shr. RDN shares closed today at $10.88. Actually, there were pieces of the losses that the company took which might still have value and which they might be able to recapture later on. Effectively, they put a worst-case look on the quarter's results, although they don't expect profitability until 2009.

Marty Whitman, an old fashioned balance sheet guy, recently bought nearly 11% of the company at a time when he calculated book at $50. Whitman doesn't think that book is likely to drop below $40, even with the huge losses.

With positions in USG and finance company CSE, and buys both yesterday and today in DFC, I'm reluctant to also jump into a mortgage insurer, but these look like bargains (or they might in 3-5 years). I would find RDN hard to resist in single digits. I decided to join Mohnish in DFC after spending about 5 hours the other night reading their financials, just about the entire web site, and anything else I could find on the company. The Patels Dhandho is in motels, but the Pabrai Dhandho is in a finance company.

Here are a few articles on RDN and the sector:

Don't Bet the Ranch (Radian Group, MGIC) | SmartMoney.com

SNL Interactive: Article

The Business Journal of Milwaukee: Radian Group, Inc. Company Profile

Marty Whitman's bargain stocks for a turbulent market - Oct. 23, 2007

[npg]

Judging from your avatar you need a good shave... :P

One of the downsides with bargain basement shopping is... further reductions are possible. Although I got in on USG at Buffett levels, I am currently stocking up further at a discount to 20% I originally got the stock!!! Check USG's insider buying. Huge levels of activity there.

Is USG going to move soon? Nope. Are some of your holdings going to move? Probably not. Should we care? That depends. Price momentum certainly does not necessarily have any correlation with intrinsic value or performance of the company. Unless one realizes one made a huge error in one's initial analysis I would always argue to hold on UNLESS A BETTER OPPORTUNITY IS AVAILABLE.

The hardest part with this strategy is the discipline required. Also, on an intellectual level one needs to be able to muster the confidence in one's appraisal. My take is that a lot of people either are forced to give up then (pressure from stakeholders like in mutual funds etc...), or don't have the stomach for it (usually the independent investors, like us).

---Yes, we are the INDEPENDENT investors. Not the individuals. That makes no sense. Calling yourself an individual investor is like saying: "Me, personally, I think that..." (we get the point that it's your thought. You don't need to emphasize yourself three times)---

If one happens to be a SAVER, then these tempting offers are literally like the January sales. Especially in the banking sector. When one isn't a saver then there is a small dilemma to solve as more and more bargains appear on the horizon. Is there a better offer available than the current holdings? If yes, and I would urge anyone to examine this with the greatest of cares, then you may contemplate the ever dreaded but sometimes necessary re-balancing act. Saving is important because it allows either to top up on existing positions or take new positions like the yummy stuff on offer now and take full advantage of any current bloodbath. Being a saver is key to being a successful investor. It's what allows any independent investor to take full advantage of any calamities.

BAC at current levels is getting interesting. WFC at 52 week lows? Great news!

People will need homes, and they will need mortgages. They will always need them unless we change something more dramatic to the way we organize our society. That change would certainly be at least as drastic as the soviets tried to achieve (and failed).

Just random musings....

[petekoch]

I also took another bite of USG recently. Insider buying, no matter how strong, has been dwarfed by the purchases of Nikolaus Knauf of Germany, who has raised his stake to 11% of the company.

I'll give all my recent purchases at least 3 years to play out. If some or all of them haven't worked out, I'll reassess. Hell, easily my best investment decision ever was to just let the shares of one company sit in a safe deposit box for 26 years. I can do 3-5 years standing on my head.

Of the recent lot, RDN is the one that makes me the most nervous.
Does that mean it might be the best of the lot? I haven't bought any yet. Lots of work to do before that.

[npg]

Originally Posted by petekoch

I also took another bite of USG recently. Insider buying, no matter how strong, has been dwarfed by the purchases of Nikolaus Knauf of Germany, who has raised his stake to 11% of the company.

Nikolaus is a countrymen of mine (I am a resident in the UK, just like my great-uncle once was....). We also share the same first name. I just hope we don't share the same taste in women as well, it would be too close for comfort...

That 3 year time frame is very Monish, but it is the rational argument and agree therefore.

RDN? I don't really know them well enough to have an oppinion. But lets not confuse the issue here. When something becomes unpopular it doesn't necessarily mean that there is no reason for it. The hard part in investing is to sieve through these situations. If you are quite comfortable with RDN then by all means hang on . Other sources claim that there isn't much more that could have gone wrong. "A major subsidiary went belly-up, the merger with MTG was called off, ratings teetered on the edge of a downgrade, mortgage delinquencies shot up, and financial guaranty reported a large unrealized mark-to-market loss." So far it looks 50/50 to me. I would be inclined to hang on and eventually top up if this is a company that is a darwinian survivor. Liquidation value is key in a situation like this. Ultimately, it is this value that will provide the comfort blanked.

You need to make a call as to whether you are in a line of business you are competent to eventually run if you have a majority of the shares out. To me that whole high finance stuff is a bit too heady and I prefer more mundane stuff. Nevertheless, current levels look extremely attractive to this one. My big problem is that I really don't know what to look for in a company like this, ie I don't understand it, so I don't have a model I can apply to.

If you substract the total liabilities from current equity and divide that by shares out, you don't get much left per share. 2$ or so. Thus, even at current levels you are paying quite a bit. But then again, I have no idea how relevant that figure really is. I don't even know how to work out the liquidation value for a company like that. Maybe you'd like to have a go and explain? Would be a great bit of intellectual gymnastics....

[petekoch]

Originally Posted by npg

Nikolaus is a countrymen of mine (I am a resident in the UK, just like my great-uncle once was....). We also share the same first name. I just hope we don't share the same taste in women as well, it would be too close for comfort...

What's this all about. Do tell. Does Nikolaus's taste run to kinky? Or is it yours?

You need to make a call as to whether you are in a line of business you are competent to eventually run if you have a majority of the shares out.

Actually, I'm barely competent enough to balance my checking account, but I get your meaning.

Maybe you'd like to have a go and explain? Would be a great bit of intellectual gymnastics....

Maybe, but too early for that. The nature of the business and the high speculation involved in RDN means a lot of work before I decide. Rather than calculate liquidation value, I'd first rather have strong evidence that RDN will be a survivor, which I don't have yet. The recent dance with the rating agencies gives me pause. RDN is rated AA; most of its competitors are rated AAA, for what that's worth. PMI looks more solid.

[npg]

Originally Posted by petekoch

Rather than calculate liquidation value, I'd first rather have strong evidence that RDN will be a survivor, which I don't have yet. The recent dance with the rating agencies gives me pause. RDN is rated AA; most of its competitors are rated AAA, for what that's worth. PMI looks more solid.

Hmmm, what made you buy it in the first place?

[petekoch]

Originally Posted by npg

Hmmm, what made you buy it in the first place?

As stated above, I didn't buy it yet. In fact, it got into single digits today, but I was able to resist.

Instead, I bought USB, a total opposite and about as good a bank as you'll find. A Wide Moat, below average risk and Great Stewardship (according to M*), shareholder friendly, good Q3 results (not billions in losses), financially strong, conservatively managed, with only half of revenues generated by credit spreads. I reckon there's about a 35% MOS here and a juicy 5%+ dividend at these levels. Dependable ROEs for the last 10 years and scintillating ROAs north of 2%. Hell, it's almost a Rule #1 stock.

I'm still watching RDN, PMI and MTG, though. No telling how low they go.

[npg]

I don't think one needs to go after every conceivable bargain. This is has the potential to end up in tears. When its obvious that a quality stock has gone cheap, then by all means swing. If in doubt, let it pass.

Quality will pay for itself over time.

BAC and WB are looking interesting....

[nilminih]

BVPS doubled only one time and it gives 8% equity. Also EPS doubled only one time within last 10m years.

Cash from operating activities seems good, but in year 2004, 2005 it did not seem good at all.

Current price 45.56 & MOS is 13.87 (according to stock2own.com MOS is 21.16). When we see all these numbers how do we decide it seems good? Do we use a different calculations when it comes to large financial institutions like Banks? I am lost here.
Also is this a bait to get more people to buy the stock – “Bank of America Corporation announced that its Board of Directors approved a regular quarterly dividend on common stock of $0.64 per share payable on December 28, 2007 to shareholders of record on December 7, 2007.

Originally Posted by npg

I don't think one needs to go after every conceivable bargain. This is has the potential to end up in tears. When its obvious that a quality stock has gone cheap, then by all means swing. If in doubt, let it pass.

Quality will pay for itself over time.

BAC and WB are looking interesting....