KFS IS BRILLIANCE UNDISCOVERED
There is no magic in the formula KFS is utilizing to turn what was once a wart infested pariah of a company in the insurance industry into a gleaming, ornate demonstration of success through proper management paired with smart activism on behalf of a majority shareholder. If you haven't already done so, please review the research report I wrote on KFS in April of 2014. You will notice a couple of trends that were taking place at the company a year ago. Namely, debt was in the process of being reduced in dramatic fashion (pg. 6 of research report). Meanwhile, the insurance underwriting sector which nearly torpedoed the company several years ago was near profitability (pg. 5 of research report). Fast forward to the 10K the company released on Friday. Insurance underwriting is now profitable for the first time since pre-2008/2009 crisis. Insurance services remains profitable with a more than 100% increase in operating income year over year. Underwriting segment was the reason for the calamity this company faced years ago. The company has emerged from the calamity with the following: - Underwriting now profitable - Lean, with significantly reduced debt - New operating units with the services segment experiencing steady growth - Management completely revamped and proven to be highly capable, creative financial artists. See former units AFH and PIH that are now public, as examples of their artistry. - Significant tax benefits in the amount of $14.68 per share that haven't even started to be explored yet The cream on the puff cake here is that debt is planned to be reduced entirely over the next 18 months or so. The company has LROC preferred securities principal due at the end of June for the amount of $13.6 millon. Also, there is the issue of Trups that are in deferred interest status with the 20 month limitation expiring in early 2016. There is $22.7 million in interest due there. The interest on the Trups is accounted for as an accrued expense on balance sheet, which is why it doesn't show in the table below. As you can see, the level of income that will be generated past 2016 will rise dramatically as debt burden will be all but gone at that point. This should coincide with a sweet spot in the growth for both their services and underwriting segment. The sum total of all these events is (1) nearly no observable risk in KFS shares at this point. It is at worst a sideways performer going forward (2) a near guaranteed future date of significant share price appreciation as Wall Street plays catch up with earnings growth that nobody...
THEY DON’T RING BELLS AT MARKET TOPS
I'm not certain if the sell-off we experienced on Friday was the beginning of a multi-week or even multi-month bear raid on the markets. However, I am certain of the fact that they don't ring bells at major market tops. There will be a growing voice in the months ahead, as we embark on a Federal Reserve that will be raising rates for the first time in forever, that the markets cannot properly contend with a tightening stance. That the bull is an old, decrepit, worn out shell of its former self that can't lift itself off the ground with Janet Yellen's foot firmly implanted on its genital region. Not only does that opinion lack historical relevance when compared against other periods of tightening, where the market has gone onto much greater heights throughout the tightening cycle. But it buys into the fact that market tops are announced in bright lights and booming voices. In fact, major market tops are announced in quite the opposite fashion. It is the lack of chatter you see opposing the view that the indices are moving infinitely higher that accompanies major market tops. It is an abundance of news justifying the group mentality that sees endless prosperity ahead. It is a lack of tangible bearish information that short-sellers or general pessimists can hang their hat on as a reason to remain gloomy. The prospects of a series of rate hikes moving forward gives bears everything they want from which to hang their raggedy hats. Eventually others will join that are not quite in the bearish camp, but are persuaded by seemingly logical misinformation. That very prospect of quickly rising bearish sentiment that has a seemingly fundamental basis for its pessimism is exactly why we won't see a major market top on Fed news. When the day comes that this secular bull ends, it will be marked with absolute conviction that the markets will remain solid indefinitely without one shred of fundamental evidence to dissuade the faithful. This isn't...
THE PATH TO DISCOVERY OF NEW OPPORTUNITIES
The Roth Conference in Laguna Niguel kicks off this weekend. I rarely attend conferences. However, this one I am always torn about because it is literally walking distance from my house. To know that there is a large group of individuals talking small-cap stocks within spitting distance makes me feel that I'm missing something. I'm a bit of stock market hermit, if you will, when it comes to surrounding myself with individuals that want to provide me with information from which I will make an investment decision. I keep that circle of influence extremely tight, rarely allowing for anybody new. In fact, my new ideas are mostly generated from a series of market screens I run on a daily basis. If an idea doesn't come up on my screens, then it simply doesn't exist in my world. The prevalence of opinions and ideas that is the hallmark of conferences such as the Roth Conference is actually frightening to me professionally. Let's think about what occurs at these conferences logically: Fund managers are there hungry for opportunities to capital gains. Companies are there to promote themselves to these managers being hungry for investment capital and recognition. So you essentially have two eager individuals of equal hunger coming together countless times over a span of several days. The possibility of erroneous decisions being made within such an environment are extremely high due to both the salesmanship that is taking place on a corporate level and the desire to justify reams of information being digested on an investment management level. Emotionally overwhelming circumstances abound, in other words. If there was a record of the success investors had at these conferences in finding viable candidates it would extremely valuable in proving my point. The point being that these conferences are equity busters. Meaning that on a net-net basis the expected value of decisions made as a result of these conferences are negative. If anything, there may be a positive curve in favor of the companies presenting because they are able to garner a short-term boost as a result of the attention gained. However, from an investor standpoint, being sold on an investment by management is not the ideal path towards investment discovery. The path towards discovery of opportunities should be unbiased, unsalesman like and process driven. I'll just stay...
THERE IS NO EXIT POINT
If you are an investor in a company, you cannot have an exit point unless it is on the downside. In other words, the only time you should be concerned about an exit strategy is when you are in the process of consistently evaporating equity at the hands of a particular stock. By consciously having an upside target to sell your stock you are creating an expectation that will often times not initially be met, thereby justifying selling the stock at a lower price when your disappointment turns to despondency. Eventually you watch as the stock blows past your initial exit point, going onto further gains above and beyond anything you, as an investor, expected. This becomes especially true in a secular bull market. I started my career on the retail trading desk for Waterhouse (now TD Ameritrade) in the mid-90s. You don't know how many investors I saw sell names like AMZN and YHOO when these names went onto create absolute fortunes for investors into the 2000 top. To loosely quote Jesse Livermore, "There are lots of early bulls in a bull market, but the man who can be right and sit tight is rare." I consistently remind myself of the lessons learned two decades ago in order to properly capitalize in this bull market. Exit points are amateur-hour. Control your downside and allow the upside to flourish unencumbered. ...
CLIENT LETTER: IF AT FIRST YOU SUCCEED, QUIT TRYING
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. I have created an email list that sends this report out at the beginning of each month to those interested. The full report contains commentary about the general markets and individual positions held in managed portfolios, as well as overall performance. To be added to the list email me at mail@T11Capital.com I thought it appropriate to rename this section after feeling that the obligation to "Look Ahead" was preventing me from discussing various thoughts, analysis and philosophies that are an important parts of my process. It is also true that as an investor in the markets, I don't want to necessarily be sidetracked by short-term analysis, although I have been relatively immune from confusing short-term thoughts with long-term objectives. I have no desire to risk my immunity, however. Just as there are various imperceptible laws that govern human affairs, it can only be assumed that similar laws will also dictate the affairs of the financial markets. After all, financial markets are simply a reflection of the perception of a particular group at any given moment. This group, as opposed to the popular perception of seeking a balanced state, remains in the constant realm of disequilibrium. Markets are never balanced in nature, as balance inherently suggests predictability of an outcome. Proportionately as it applies to the financial markets dictates that disproportionate cause will lead to disproportionate effects. There has been no better proof of this law at work than what we have experienced with the near vertical run that has taken place since the 2009 bottom. The current bull market was born from a disproportionately negative circumstance that was singular in its scope and breadth. The accompanying reaction that took place in terms of monetary policy was also disproportionate and singular in nature. The law of proportionately will dictate that the effect of such disproportionate negative circumstances should be equally disproportionate on the positive end. This is simply how proportionately works. The further you stretch the rubber band to one side, the more powerful the reaction will be to the opposite side. The greater force you use to hit a tennis ball into a wall, the greater force it will exert on its return to your racket. This is proportionately in its simplest terms. Already we are seeing clues in the form of the extraordinary persistence this market has had on the upside. There have been numerous reports of record stretches without a 5% pullback in the major averages. There has been a record stretch of months without a touch...