All posts by valuestockgeek

https://valuestockgeek.com

2019: A Year In Review

returns

Performance

After miserably under-performing in 2017 and 2018, I had a somewhat decent year and slightly exceeded the performance of the S&P 500. For an outline of my complete strategy, you can click here.

I launched this blog and set aside this chunk of my IRA in late 2016. It has been a fun ride.

I wanted to use this account to systemically follow my own version of Ben Graham’s “Simple Way” strategy and keep a live trading journal.

I also figured I’d buy net-net’s when they were available. There haven’t been many that I could find in the last few years, with the exception of Amtech (which I took one free 50% puff from), and Pendrell (which I roughly broke even on). I’m anxiously awaiting a time in which I can buy a lot of cigar butts. For now, I’m buying Simple Way stocks: low debt/equity, low P/E’s, low enterprise multiples.

Every trade has been recorded when it happens on this blog and I’ve also posted my rationales for when I buy a new position.

I thought this blog would be something different. Most of the investing blogs I found included a lot of talk about discipline, about how to find the companies, and even had write ups for new positions.

Few of the investing blogs out there showed a real person’s portfolio. Few showed when they buy,  when they sell, and show the outcome. I wanted this to be a live trading journal with all the failures and all of the successes, for all to see. I wanted to show the real, long, lonely, grind of active value investing for a normal person. I wanted this to be something different.

When I set out to do this, I wrote: “A key thing to keep in mind is that while these methods succeed over the long haul, there are periods of time when they do not work. I hope this blog will help me remain disciplined and focused on my own value investment journey.”

The last three years have certainly been a test of my discipline and that of most deep value investors. For deep value investors, this has been a particularly grueling slog.

For many, it has been tempting to stray. There are plenty of “value” investors who went out and bought a bunch of compounders with 200 P/E’s and cited See’s Candy and some Munger mental models as the reason for the style drift.

“Hey, even Buffett paid up for a good business! That’s why I’m buying Amazon and Facebook!”

“Yea dude, you’re just like Buffett in the ’70s. He really threw caution to the wind when he bought See’s at a P/E of 5 and less than sales . . . but hey, it wasn’t a net-net.”

They have been rewarded for their style drift. Over the long haul, I think they’re going to suffer the same fate as those who bought the Nifty 50 in the early ’70s and tech stocks in the late ’90s, but we shall see.

I digress. This year’s performance is an outcome that pleases me. It wasn’t much out-performance, but hey, a win is a win.

Value’s Underperformance Continues

pain

Clubber Lang explains deep value investing

My performance this year has been especially pleasing because 2019 was another year when value under-performed the broader market.

My style is closely aligned with small cap value, and here is how this year’s small cap ETF’s performed:

VBR (Vanguard Small-Cap Value) – Up 22.77%

SLYV (SPDR S&P 600 Small-Cap ETF) – Up 24.26%

They didn’t do badly. Over 20% returns are excellent. Unfortunately, in relative terms, they didn’t do as well as the S&P.

Looking at the universe of stocks with an EV/EBIT multiple under 5 in the Russell 3,000, they are currently up a measly 12.7%.

The total return of the EV/EBIT<5 universe doesn’t even tell the whole story. In early March, this group was up over 20% after a massive rally. The rally then fell apart completely, and the group suffered a face-ripping 24% drawdown. The market gods made us feel hope, and then punched us in the gut.

Earlier this year, the under-performance was even worse than 1999. It rebounded a bit at the end of the year, but it’s still a staggering level of under-performance. Deep value is suffering its worst slog since the late ’90s, and 2019 year was quite similar to 1999.

cheapobucket

So, while I matched the performance of the S&P 500, I outperformed most value strategies. Why was this the case?

The reason, I think, is that I had a high turnover at the right time. We’re all taught by Buffett that high turnover is wrong, but it helped me this year. When positions reached a decent value, I sold them. With the massive rally this year, that happened a lot sooner than I originally anticipated. I was usually right (Gap) but I got out of some stocks way too early (I’m looking at you, UFPI).

I also finally exited my long suffering Gamestop position once their private equity dreams were dashed. I got out at $11.45, which looks like it was a good move, as the stock is now down to $6.08.

I’m also the guy who bought Gamestop (twice!) at an average price of $24, but I take consolation that it could have been worse.

Here are all of the positions I sold this year:

closedyearend

Yes, that’s a lot of turnover. It’s very un-Berkshire.

I’ve long wondered if I’m adding anything to a value strategy with my stock picking and trading. This year, at least, it looks like it paid off. I avoided a significant drawdown for value and still enjoyed the Q1 and Q4 rallies.

I’ve held a significant amount of cash this year, after being all-in and 100% invested when the opportunity was rich a year ago.

I sold positions when they moved to my estimate of their intrinsic value, or when my thesis fell apart (Gamestop), or when the companies started to undergo significant operational slip-ups. My selling intensified after the yield curve inversion, as I thought the likelihood of a recession was higher. Market sell off’s then occured over developments in the trade war (not recession concerns), but I avoided some big drawdowns even though my rationale was wrong.

After being nearly 50% cash earlier this year, I gradually bought and scaled into positions that I thought were cheap.

This quarter, I purchased five new positions. The positions and corresponding write-ups are below:

  1. Movado
  2. National General Holdings
  3. Prudential
  4. Principal Financial Group
  5. RMR Group

A Tale of Two Decembers (Macro Stuff)

If you don’t care about my Macro views, you can skip this section

This December and last December are opposite images of each other.

The best way to represent this is CNN’s Fear and Greed index.

feargreed

Right now, the index is at 93, indicating “extreme greed.” A year ago, we were a level of 12, or “extreme fear.”

Mr. Market is one crazy lunatic.

bigtrouble

What changed fundamentally to cause this emotional swing? Nothing. The only difference is the price action and how everyone feels after a great year for stocks.

Last year, I was bullish. Cheap stocks were plentiful. On Christmas Eve 2018, I felt like Santa gave me an early Christmas present, as there were nearly 100 stocks in the Russell 3k with an EV/EBIT multiple under 5. It was the best opportunity set we’ve had in 5 years. Meanwhile, the yield curve was not inverted (it had only flattened, and only longer-dated maturities were inverted), so I knew that the odds of a recession in the next year were minimal. It seemed to me to be a great time to go long, and that’s what I did. At the end of last year, I was 100% invested and quite excited.

Right now, I’m quite bearish. The 3-month and 10-year yield curve have inverted this year. Meanwhile, bargains are less plentiful.

I believe that the yield curve is a proxy for how tight or loose monetary policy is, which is why the yield curve is a forward-looking indicator for the economy. The eggheads say that the yield curve doesn’t matter, and this time is different – but those are the same lines we heard after the last two inversions. I’ll take the easy rule that works every time over the expert opinions of the eggheads.

The yield curve inverted after four years of the Fed tightening monetary policy.

yieldcurve

The eggheads assure us that this is nothing to worry about.

The Fed was raising rates for four years and finally reversed course this summer. They then started cutting the balance sheet in early 2018.

My view that the Fed was too restrictive is perplexing for many involved, especially the Fed haters who believe that the Fed was too loose with policy. After all, how can the Fed be too restrictive when interest rates are so historically low?

The yield curve tells a different story. The yield curve indicates that monetary policy was too restrictive. It seems insane, but one also needs to look at the velocity of money, an important and often ignored component of the overall monetary picture, best expressed by the classical equation, MV=PQ.

When velocity is low – as it has been since the GFC – seemingly low interest rates can still be restrictive.

velocity

Money velocity plummeted after the GFC and never recovered. This is why I think an ultra-accommodating monetary policy didn’t cause hyperinflation as everyone feared (myself included) and the fears were best expressed by this 2010 viral cartoon.

I think that four years of monetary tightening were restrictive and baked a recession into the cake.

Shortly after the Fed inverted the yield curve, the Fed started cutting rates over the summer. In September, they began to increase the size of the balance sheet again. The Fed is now in a loosening mode, which markets have interpreted as a bullish signal.

The discussion around the yield curve is quite funny. Historically, a yield curve inversion predicts a recession roughly a year or two ahead of time. The attitude of most market participants is ridiculously short term and seems to be “the yield curve inverted, and the market went up for a few months. Therefore, it’s nothing to worry about.”

I think this year’s Fed easing is too little, too late. The markets are rallying just because the Fed is loosening policy, and investors believe we will avoid a recession. The yield curve has un-inverted and is steepening, implying that monetary policy is now accommodative. Unfortunately, I think that the Fed shifted to accommodation too late in the game.

This is what usually happens. The Fed always begins loosening policy before the recession arrives, and it is always too little, too late.

In the last cycle, the Fed began cutting rates in the summer of 2007. By the end of 2007, after multiple rate cuts, the yield curve steepened. Markets hit their peak in the fall of 2007. As we now know, we were not out of the woods in late 2007. We were only at the beginning of the pain.

During the tech boom, the same thing happened. The Fed started to cut rates at the end of 2000 and un-inverted the yield curve. We still had a recession in 2001, with the stagnation that lingered into 2003.

There is always a lag between a shift in monetary policy and the impact on the real economy. The Fed began loosening policy in mid-2007. The economy didn’t start to rebound until mid-2009. The Fed started tightening its policy back in 2004, and the recession didn’t start until the end of 2007.

There is always a lag between monetary policy and its impact on the real economy.

I think the same outcome is likely this time. We haven’t seen the full impact of the tightening that occurred from 2015 through 2019. Similarly, we probably won’t know the effect of the recent loosening of policy for a couple of years.

The length of a yield curve inversion also correlates to the length of a recession. The last yield curve inversion lasted from mid-2006 to late-2007. The recession lasted from December 2007 to the summer of 2009.

This inversion lasted for five months, from May through October this year. The length of the inversion implies we’re in store for a roughly 6-month recession. I think this means we’ll have a relatively mild recession. It will be a recession that is more like the early ’90s and early 2000s recession than it is going to be like the last, big, bad, 2008 debacle.

To summarize: I think we’re going to have a recession. I also don’t think it’s going to be as bad as 2008.

The Bigger They Are, The Harder They Fall (More Macro)

Again, skip if you don’t care about my opinion on Macro stuff.

Unfortunately, a “mild recession” doesn’t necessarily mean we’re going to have a mild bear market. The early 2000s recession (in which unemployment only peaked at 6.2%) led to a 44% drawdown in the market.

The extent of a big drawdown tends to be a combination of the severity of the recession and the extent of the overvaluation. That’s why a frothy market can drawdown severely when faced with minor economic turbulence.

In other words, the bigger they are, the harder they fall.

Before the 2000 drawdown, the market represented 146% of GDP. The massive overvaluation at the time is why such a minor recession was able to cause such a significant stock drawdown. It’s sort of like how a bubblicious stock can completely disintegrate when reality is only slightly off from the market’s lofty expectations.

Compare this to the early ’90s recession. The early ’90s recession was relatively minor, similar to the early 2000s. The increases in unemployment during the early ’90s recession were nearly identical to the early 2000s event. However, unlike the 44% drawdown in the early 2000s, in the early 1990s, the market only suffered a 16% drawdown. Why was the drawdown so minimal? Simple: valuations weren’t as high in the early ’90s. The market cap to GDP was only about 59%.

In contrast to the minor events of the early ’90s and early 2000s, the 2008 recession was the most severe recession since World War II. The market was frothy, but it wasn’t quite at 2000 bubble levels. We suffered a 50% drawdown. The 2008 drawdown happened because of the severity of what was happening in the real economy. It was not entirely a response to overvaluation in the stock market, which is what happened in the early 2000s.

I think that if we had the 2008 recession at 2000 valuations, then the early 2000s meltdown would have been much more severe. We likely would have gone into a 60% or 80% drawdown, rivaling the Great Depression. We lucked out in the early 2000s by having a relatively minor recession.

This year we crossed an important milestone. The market cap to GDP exceeded the previous bubble in 2000. In 2000, we peaked at 146% of GDP. The market currently trades at 153% of GDP.

The same is true on a price/sales basis. The market is the most expensive it has been in history. The S&P 500 currently trades at 235% of sales. At the peak of the 2000 bubble, we were at 180%.

Another great metric is the average investor allocation to equities. Currently, that’s not quite at 2000 levels, but it’s still pretty high. Keep in mind that this chart ends in Q3. It’s probably higher now, probably around 44%.

Using the equation I described in an earlier blog post, the current investor allocation to equities suggests a 2.3% real return for US Stocks over the next decade. If history is any guide, that’s a 2.3% real return that will probably have a 50% drawdown somewhere in there.

For US stocks, the 2020s is not going be anything like the 2010s.

average

Earnings-based metrics look a little better. The TTM P/E is about 24. The CAPE ratio is 31.

Of course, the problem with earnings-based metrics for macro valuations is that they are based on a cycle where profit margins have been exceptionally high. Margins are likely to mean revert. Margins have also been boosted by leverage. Forward P/E’s don’t look insane, but forward P/E’s are a notoriously unreliable indicator.

margins

Profit margins have remained high over the last decade. Bulls will say that this is a new era. I think that this is likely to return to historical norms.

There are plenty of people who say, “this is a bubble, but it’s not as bad as the late ’90s.” They usually cite the fact that this bubble hasn’t included a bunch of money-losing dot com IPO’s. To which I say: so what? We’ve had similar insanity in initial coin offerings and money-losing venture capital moonshots. Last time we had Pets.com. This time, we have WeWork, Theranos, and fake electronic currency. No bubble is exactly the same, but they’re all bubbles and they all end in tears.

What Does This Mean for Value?

In the early 2000s, value stocks did well, while the broader market went down. If we’re lucky, the same will happen again.

Unfortunately, we probably are not that lucky. Once the broader market goes down, value stocks usually go down with it. The outperformance often happens in the early stages of an economic recovery. It’s also possible that value stocks will decline by less than the broader market.

I think value investors are in store for a significant drawdown, just like index investors likely are. We’ll just have to wait and see.

I’m preparing for this situation by holding onto cash when I can’t find bargains, rather than making an outright bet that we’re going to have a recession by going short or buying a massive amount of long-term treasury bond ETF’s.

Earlier this year, I purchased CDs that matured in December and yielded 2% on average. When they all matured this month, the market was even pricier than it was before that, which was disappointing.

Cash is King

Fortunately, a positive development occurred before my bank CD’s matured in December. My broker eliminated commissions.

The elimination of commissions made cash equivalent short term bond ETF’s more appealing to me. Before commissions were eliminated, it seemed foolish to buy a cash ETF for a commission, and then gradually exit the position and pay a new commission each time. That was almost certain to eat into even the paltry interest that I was receiving.

The commissions would eat into any interest I earned on the cash. With the elimination of these commissions, cash ETF’s are now a viable option for me. The removal of commissions is why I purchased NEAR, a cash ETF from iShares, with a TTM yield of 2.6%.

Currently, I am 20% cash. My approach to this environment is simple: I’ll buy cheap stocks when I find them and I’ll hold cash when I can’t. Hopefully, I’ll still get solid exposure to the value factor and limit my drawdown in the next recession.

Random

In 2019, I wrote some blog posts that I am pleased with, including:

Here is some random ’80s:

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

RMR Group (RMR)

winter

Key Statistics

Enterprise Value = $634.49 million

Operating Income = $205.54 million

EV/Operating Income = 3.08x

Earnings Yield = 10%

Price/Revenue = 1.04x

Debt/Equity = 0%

Free Cash Flow/EV = 27%

The Company

RMR Group is a property management company. They manage properties for REIT’s and and other real estate companies. They have been operating since 1986 (under a different name – REIT Management & Research) and manage properties in 48 states throughout the continental US.

Four of RMR’s REIT clients are: Industrial Logistics Property Trust (ILPT), Office Properties Income Trust (OPI), Senior Housing Property Trust (SNH), and Service Properties Trust (SVC). ILPT manages industrial & logistics properties, SNH manages elder care facilities (a growth industry based on US demographic makeup), SVC manages hotels.

Other clients include Travel Centers of America, a company with $6 billion in revenue operating truck stops throughout the United States. Five Star Senior Living is another client which operates elder care facilities.

My Take

The nice thing about all of RMR’s clients is that they are unlikely to be disrupted. The elder population is growing in the United States and they are all going to need medical care and housing, no matter what happens to the US economy. Truck stops and industrial parks might decline with an economic downturn, but they aren’t going away. Office properties are probably the most prone to disruption with the expansion of remote work, but that’s not going away entirely.

Not only are RMR’s clients unlikely to be disrupted, but RMR has *20-year contracts* in place to manage them. I believe a 20 year contract can be categorized as a moat. The key base management fee that they earn is .5%, which is based on market cap plus the value of the real estate. On top of that, RMR earns an incentive fee which is tied to the 3-year stock performance of the companies that it services. The management fee is steady and isn’t going anywhere. Meanwhile, when the stocks of the underlying REITs outperform, RMR earns an incentive fee on top of that.

Quantitatively, this is as good as it gets and it checks all of my boxes. It’s selling at an EV multiple of 3x, a 27% free cash flow yield, and at annual sales. The operating cash flow is $198 million, which compares favorably to the enterprise value of $635 million.

They post high returns on capital. The return on equity is 28%, and that appears to be sustainable based on the consistency of the management fees.

The balance sheet is in impeccable shape. Out of the current $46 price, $22.20 is cash. They have zero long term debt. The Altman Z-Score is 6.4, which implies a zero chance of bankruptcy.

The base case is that RMR itself has 20-year contracts in place with their key clients and they will continue to earn the base management fee. The potential upside is that the stocks of the managed companies wind up outperforming. In this situation, RMR earns more incentive fees.

The stock is currently cheap due to concerns about the REITs that it manages. The REITs have a lot of debt. OPI has a debt/equity ratio of 164%, SNH is 127%, SVC is 180%, ILPT is 97%. A few of these companies lost money in the last year and the stocks underperformed. Leverage isn’t uncommon in the REIT industry and cash flows are fairly predictable, so I am not overly concerned.Meanwhile, much of RMR’s earnings are tied up in the performance of these stocks. When those stocks underperform, it weighs down RMR with it.

Something else that probably weighs down the stock is the control of a single individual, Adam Portnoy, who controls a majority of the company’s voting stock. Not only does Adam Portnoy have total control over the company, he also serves as managing director and CEO. Investors can look at this in two ways: you have an owner-operator committed to increasing the stock price as much as possible, or you have an owner-operator who has more power than shareholders. The concerns likely weigh on the stock.

RMR has only been trading since 2015, but it is at a discount to its history and its competitors. It is currently the cheapest it has ever been. As recently as 2018, the stock traded at 3.5x sales and it currently trades at 1x sales.

Overall, this looks to me like a compelling bargain with a predictable business. The potential upside far outweighs the downside, which I think is further limited by the company’s strong balance sheet.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

NEAR

My CD’s that I bought earlier this year have all matured. There are less bargains now than there were when I bought the CD’s, unfortunately. I need an interest-bearing home for my cash while I wait for better opportunities, so I decided to go with the short term bond ETF, NEAR.

I bought 221 shares of NEAR as a cash alternative @ $50.22.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Principal Financial Group (PFG)

iowa

Key Statistics

Enterprise Value = $13.1 billion

Operating Income = $1.725 billion

EV/Operating Income = 7.59x

Earnings Yield = 9%

Price/Revenue = .95x

Debt/Equity = 28%

Price/Book = 1.02x

The Company

Principal Financial Group is an Iowa based asset manager and insurance company. Their current AUM is over $700 million. They company has grown premiums and AUM (along with fee income) rapidly over the last decade, with revenue rising from $8 billion in 2009 to $14 billion today.

The company is global in scope and operates all over the world. The business is split up into four segments: (1) Retirement & income solutions, (2) Principal Global Investors, (3) Principal International, and (4) US Insurance (life insurance is a key focus).

The valuation is likely depressed over concerns about fee income, along with the general gloom around the financial industry as the market expects interest rates to decline and there are jitters about a recession which I wrote about here.

My Take

PFG currently has a dividend yield of 4.1% and the share count has declined by 2.67% in the last year.

PFG is cheap relative to its history and its peers. It currently trades slightly below sales, which is where it was around nadirs in the valuation such as when it was emerging from the financial crisis. It is also trading at book value for the first time since 2013. The 5-year average price/book ratio for the stock is 1.41 and the average price/sales ratio is 1.25.

Like the other financials that I own, my expectation is that the valuation gap will eventually close and while I wait for that to happen, I’ll earn a decent shareholder yield.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Prudential (PRU)

unionstation.PNG

Key Statistics

Enterprise Value = $55.73 billion

Operating Income = $6.51 billion

EV/Operating Income = 8.56x

Earnings Yield = 10%

Price/Revenue = .59x

Debt/Equity = 48%

Price/Book = .57x

The Company

Prudential is one of the largest insurance companies and asset managers in the world. They currently manage over $1.377 trillion in assets. Areas of focus include: life insurance, annuities, retirement-related products and services, mutual funds and investment management. These are all brutally competitive industries in terms of pricing, but Prudential is one of the biggest firms in the market and can effectively compete in these hostile waters.

Insurance is the company’s biggest source of revenue. Premiums represent 56% of total revenue. Investment income (such as interest income) is 25% of revenue. Asset management fees at 6.5% of all revenue. Net gains from investments represent 3% of all revenue.

The financial sector has been under pressure over the last year due to concerns about an emerging US recession and the Fed’s moves to bring down interest rates.

My Take

Naturally, with the financial industry under pressure and cheap valuations available, I am drawn to it.

I currently own a variety of insurance and financial companies that are currently trading like a financial crisis and recession have already happened. The memories are fresh from the last financial crisis, which is why investors have been so quick to react to the potential of another one happening soon. In particular, everyone remembers the way that seemingly “stable” insurance companies (like AIG) performed terribly during the crisis and risks were lurking inside the balance sheet that couldn’t be gleamed from reading a 10-k and doing my kind of armchair Saturday morning analysis. With that said, my investment in these companies is an implicit bet that a financial crisis like the last one won’t be a part of the next recession, whenever that might come.

What I like about the company: Prudential is a stable company and ROE is usually around 8%, which also matches the long-term CAGR of the stock of 8.5%. Buried in that 8.5% CAGR is a face-ripping 80% drawdown during the financial crisis. Obviously, my hope is that kind of drawdown won’t happen again if we have another recession. Recessions rarely repeat and I think the financial sector is in much better shape than it was going into the last crisis. Prudential has been reducing debt over the last decade, cutting the debt/equity ratio in half over the last 5 years. This implies that it is risk averse and avoiding the gun slinging of the 2000s.

The best part: Prudential has a juicy shareholder yield. The dividend yield is currently 4.33% and the total share count has been reduced by 3.36% over the last year.

The stock is currently absurdly cheap, with another crisis baked into it. Throughout the history of the stock, the company normally trades around book value and dips below that during times of crises. The fact that it currently trades at 57% of book value suggests to me that the worst case scenario for this company is already priced into the stock.

Prudential is one of the cheapest stocks in the S&P 500 and trades at a discount to its competitors and its history. The current P/E of 9.86 compares to an industry average of of 19.7. PRU currently trades at 57% of book value, and the 5-year average is 82%. The industry average is 120%. The stock also trades at 59% of revenue, compared to an average of 130% for the industry and a 5-year average of 70%.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

National General Holdings (NGHC)

beans

Key Statistics

Enterprise Value = $2.982 billion

Operating Income = $375 million

EV/Operating Income = 7.95x

Earnings Yield = 9%

Price/Revenue = .48x

Debt/Equity = 38%

The Company

National General Holdings is an insurance company. The company traces its origins back to a company called Integon, which was specialized in auto and life insurance. Integon was acquired by General Motor’s insurance arm in the ’90s. For a few years after GM’s demise, the company was held by a private equity firm. It was then spun out as an independent company in 2014.

Key insurance products are standard auto insurance, nonstandard auto insurance (such as insuring high risk drivers), homeowner’s insurance, RV insurance, and small business auto insurance. They operate throughout the country, with large footprints in a handful of states, such as North Carolina, California, New York, Florida, Texas, New Jersey, Virginia, Louisiana, Michigan and Alabama. Revenues have steadily grown over the last 10 years, from $675 million in 2011 to $4.6 billion today. This has been through a combination of organic growth and acquisitions.

As a relatively small player in the insurance market, they focus in niche insurance products. Key niches include insurance for high risk drivers who have difficulty finding policies with other carriers (which are balanced by higher premiums charged to these drivers) and RV insurance.

The stock has been under pressure for the last year due to concerns about the wildfires in California. About 15% of NGHC’s premium volume is generated from the state of California.

My Take

National General is in my wheelhouse. It’s a cheap insurance company with little debt, consistent profitability, and the price is under some temporary pressure. I invest in these kind of situations all the time and NGHC is no different. Right now, on the basis of book value and revenue, NGHC is the cheapest it has ever been in its history.

The nice thing about insurance companies is that the market almost always overreacts to recent bad news, such as NGHC’s experience with the California wildfires. The truth is that the best time to buy an insurance company is after a big loss rather than after a tranquil period.

National General Holdings trades at a discount to its competitors and its history. The current P/E of of 10.6 compares to an industry average of 19.7. The 5-year average for the company is 18.76. The price/revenue ratio of .48x compares to a 5-year average of .72x and an industry average of 1.32x. Currently, the stock is the cheapest in its history, including where it traded post-GFC. On an EV/EBIT basis the stock trades at 7.95x, which compares to a 5-year average of 13.53x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Movado (MOV)

business.PNG

Key Statistics

Enterprise Value = $471.43 million

Operating Income = $55.59 million

EV/Operating Income = 8.48x

Earnings Yield = 13%

Price/Revenue = .62x

Debt/Equity = 28%

The Company

Movado is a luxury watchmaker. In addition to selling watches via a large number of brands to various retailers, they also operate 44 retail stores. They can chart their origins as far back to 1881 when the firm was called LAI Ditescheim & Freres SA in Switzerland. The company changed its name to Movado in 1905.

Movado’s signature watch is the mid-century “Museum Watch,” which is noteworthy for its minimalist design. It is a simple black watch with one dot representing the 12, a design which is often duplicated into other watch designs.

They sell at a wide variety of price points and multiple brands. They sell everything from luxury watches that sell for over $10,000, to affordable luxury watches (selling under brands such as Hugo Boss) at a $75-$500 levels, and mass market watches that sell for less than $75.

My Take

Watch making is a hated industry. As cell phones grew in popularity, watch use declined. Watches are declining in popularity as they are no longer a go-to means to assess time. It’s much easier to look at a phone to tell time. Mechanical watches are also being crowded out by Fitbits and Apple Watches.

Even with the industry in decline, the industry isn’t going away. In particular, I don’t think that luxury watches are going away any time soon. People don’t wear luxury watches like Movado to tell time. They wear them for reasons of fashion and that market isn’t going to disappear.

Movado is priced like it is going out of business, but I don’t think that will ever happen. At some point, the market will stabilize. A good parallel to this is the predictions that e-readers would eliminate print books, a trend which never really materialized.

The fact that the watch industry is not going away is reflected in the Movado’s operating performance. 2019’s sales were actually the best on record at $680 million. Cash flows remain healthy and the balance sheet is robust. This looks to me like a situation where Mr. Market’s sentiment doesn’t reflect the true underlying reality of the business.

Movado has a high degree of financial quality. The debt/equity ratio is only 24%. There is a significant amount of cash on hand, at $5 per share and 13.42% of assets. The Altman Z-Score of 3.1 implies a low probability of bankruptcy risk.

Movado trades at a discount to its competitors and its history. The current P/E of 7.87 compares to an industry average of 20.03. It currently trades at 6x cash flow. The price/sales ratio of .62 compares to an industry average of .93. As recently as mid-2018, the stock traded at 2x sales. The stock is so cheap that the current price/sales level is near the lows reached at the nadir of the financial crisis in 2009. Price/book is also at a significantly cheap level, currently at .85x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.