RESTRUCTURED, POST-BK SHARES OF WASHINGTON MUTUAL PROVIDE A MONSTROUS OPPORTUNITY IN THE MIDST OF UNCERTAINTY
*Position taken on July 25th, 2012 at an average price of .50 cents. In March, shares of a restructured Washington Mutual began trading on the pink sheets. Trading as high as 1.14 on the first day of trading, the shares have now settled into trading around .50 cents per share. The shares trade under the symbol WMIH. What follows are the reasons I have made this the largest position in the portfolios and believe it is a multi-year hold: I'm going to begin with the facts regarding the newly issued WMIH shares. Washington Mutual Holdings has very little tangible information with respect to its current business. This makes a valuation proposition a difficult task given the fact that this is a newly formed entity that hasn't filed a 10-Q, much less a 10-K. The company consists of one active business component -- WMMRC. This stands for Washington Mutual Mortgage Reinsurance Corporation. What little information is available on WMMRC is available through bankruptcy filings: http://www.kccllc.net/documents/0812229/0812229100326000000000009.pdf WM Mortgage Reinsurance Company, Inc. WM Mortgage Reinsurance Company, Inc. (previously defined as “WMMRC”), a Hawaiian corporation and non-debtor,wholly-owned subsidiary of WMI, is a captive reinsurance company, created to reinsure the risk associated with residential mortgages that were originated or acquired by WMB. Mortgage insurance for WMB-originated or acquired loans had historically been provided by seven mortgage insurance companies (collectively, the “Mortgage Insurers”), although currently WMMRC is party to mortgage reinsurance agreements with only six mortgage insurance companies. WMMRC entered into reinsurance agreements (the “Reinsurance Agreements”) with each Mortgage Insurer, pursuant to which it would share in the risk, in the form of claim losses, in exchange for a portion of the premiums generated from the residential mortgage loan portfolio held by the Mortgage Insurer. Pursuant to each Reinsurance Agreement, WMMRC established a trust account with US Bank N.A. (collectively, the “Trusts”), for the benefit of the Mortgage Insurer, to hold premiums collected and to secure WMMRC’s obligations to each Mortgage Insurer with respect to the insured loans. WMMRC was historically party to seven trust agreements – one for each Reinsurance Agreement to which it was a party. As of December 31, 2009, the value of the six remaining Trust assets was estimated to be $460 million. Each Reinsurance Agreement requires that WMMRC maintain a certain minimum amount of capital in the applicable Trust (the “Reinsurance Reserve”), which amount is determined by applicable law, as well as each Mortgage Insurer’s calculation of reserves needed, which is generally inclusive of reserves for known delinquencies within the loan portfolio and a percentage of the remaining aggregate risk exposure contained in each portfolio. Minimum capital requirements fluctuate on a monthly basis and are...
RESEARCH REPORT: SPNS CAUGHT IN A PERFECT STORM OF PROSPERITY
*6-19-12 - Since Friday I have been accumulating shares of SPNS for portfolios. It is a mid-sized position at an average price of 3.98. What follows are the compelling reasons behind the decision to invest in SPNS. *5-7-13 - SPNS sold for a 40% profit We begin with a very simple problem: The modern-day insurance industry is under increasing pressure to evolve into a more streamlined, efficient entity. The debt crisis that is slithering its way through developed economies has created an environment whereby financial companies (insurance included) are under increasing scrutiny. Frightened shareholders punish mistakes at an exaggerated rate, leading corporate executives to grasp onto corporate efficiency as the primary means of placating investors. The ultimate goal, of course, is to create value in an environment that is under constant threat of macro shocks. The problem of efficiency in the insurance industry has roots in many places. One of the primary problems is the fact that insurance companies are relying on outdated legacy systems that are increasingly falling behind the technological innovations of the past several years. These legacy systems have been in place for decades at many companies, having simply been band-aided together in order to avoid the cost and headaches involved with a major upgrade. Avoiding the short-term upgrade cost, however, has resulted in increasing long-term maintenance costs, regulatory concerns and limited functionality that inhibits growth. What all of this translates into is a minute by minute furnace in the office that is burning dollars through inefficiency during a point in time when burning dollars is no longer tolerated. It is not a matter of "if" but rather a matter of "when" ALL of these legacy systems will be upgraded. "Technology innovations, including social networking, telematics, SOA and beyond, will play a major role in determining success or failure in the insurance industry. Firms that effectively harness technologies and the opportunities they offer are destined to be among the industry winners, leading the way toward growth and prosperity. Companies that fail to keep up with the latest technologies—those mentioned in this paper and the lasting "next-gen" innovations that arrive on the scene—risk falling further behind and relinquishing their leadership positions. Make no mistake, the insurance industry is at a pivot point as future success is likely to rest on today's technology decisions and strategies." http://www.atkearney.com/index.php/Publications/technology-the-insurance-industrys-pivot-point.html Well researched estimates put the number of insurance companies that are still holding onto their old legacy systems at 80%. This is within a $50 billion insurance software industry. Post-2008 the fiscal conservatism that has become the financial industry has led to gobs of cash on the balance sheet being available for just these types...
RESEARCH REPORT: AUTH REPRESENTS A SUBSTANTIAL OPPORTUNITY IN THE WIRELESS SECTOR
7-27-12 - Sold 100% of AUTH on 7-27-12 at 8.16-8.17 for a 73% profit since 7-15. 7-15-12 - AUTH reentered on 7-15-12 & 7-16-12 at average price of 4.70 6-5-12 - Note: Took profits on AUTH on at 4.95 - 5 for a 37% gain since publishing this report. 5-8-12 - AUTH is a current long position in accounts at an average price of roughly 3.65. This is a mid-sized position to start. I will make it a large position if the performance warrants. AUTH represents my favorite type of opportunity in that there are a combination of factors at work that have led to the company being overlooked since it went public in 2007. That is a proper segue to the first reason the company has been greatly ignored: Timing of the IPO. AUTH underwriters and management certainly are not market timers, as they started trading publicly in July 0f 2007 almost precisely at a multi-year top on the S&P 500 that has not been surpassed to this day. IPOs that enjoy the misfortune of going public at multi-year tops are not only ignored but essentially buried at the very bottom of the rotting pile of companies that are victimized by the fear and panic driven selling that is the hallmark of a bear market. AUTH represents a "bottom of the pile" opportunity. The second factor leading to the company remaining undiscovered for a number of years is the fact that the company is a spin-off. It was a privately held spin-off from Harris Corp taking place during the late 90's. Development of the company did not necessarily shift into overdrive until they went public at what was arguably the worst possible time of the past 10 years. This basically put them back at square one in terms of gaining the recognition the company deserves. What does AUTH do exactly? This from the company website: AuthenTec is a leading provider of mobile and network security. Our diverse product and technology offering helps protect individuals and organizations through secure networking, content and data protection, access control and strong fingerprint security on PCs and mobile devices. The company has been aggressively expanding through acquisition: - In February 2010, AUTH acquired SafeNet’s Embedded Security Solutions division, further enhancing our offering of mobile and network security solutions. - In September 2010, AUTH acquired privately-held UPEK Inc., a supplier of fingerprint solutions for consumer, business and government applications. - In November 2011, AUTH acquired PeerSec Networks, an innovative provider of networking security solutions. - In December 2011, AUTH acquired the assets of Proxure, Inc., a provider of syncing and cloud-based storage services for PCs and...
RESEARCH REPORT: THE COMPELLING CASE FOR PURCHASING SHARES OF ATNY
I've been accumulating shares of ATNY since early last week. To date I have taken on a medium sized position to start and plan on making it a large sized position in the weeks to come. The reasoning behind investment in the name is compelling when taking into account all the factors. There is a value angle, an activist angle and most importantly, as you will learn, there is a knowledgeable team guiding the company forward in an effort to maximize shareholder value. ABOUT ATNY API Technologies Corp. designs, develops, and manufactures electronic systems, subsystems, RF/microwave, secure systems, and information assurance products and solutions for defense, aerospace, and commercial applications. The US, Canadian and United Kingdom Governments’ Departments of Defense (directly and through subcontractors) accounts for approximately 50%, 2% and 5% of the Company’s revenues for the three months ended February 29, 2012 (72%, 4% and 7% for the three months ended February 28, 2011), respectively. In the most recent quarter ended February 29th, 2012: Revenue of $70.7 million for the quarter ended February 29, 2012, up from $24.6 million in the quarter ended February 28, 2011 Operating income of $4.3 million compared to an operating loss of $7.2 million in the comparable quarter of 2011 Adjusted EBITDA of $10.8 million (15.3% margin) for the quarter ended February 29, 2012, versus zero in the prior-year period and $11.4 million (15.2% margin) for the quarter ended November 30, 2011 Implemented $23.8 million of annualized net cost reductions during the last 12 months GROWTH THROUGH ACQUISITION Thus far you can see that we have a defense electronics manufacturer that seems to be cutting costs and increasing the top/bottom line numbers over the recent past. The story goes far beyond these simple facts, however. ATNY has been achieving growth through acquisition. Since 2011 the company has merged with or purchased five separate companies. As a result, they have become a prime mid-level player in their space, setting them up as a target for acquisition by a top-tier name over the next 12-24 months. On January 9th, 2011 the company completed a complicated merger with SenDEC via Vintage Capital Management. That merger effectively resurrected the company through a doubling of revenues, allowing ATNY to pay down debt, reestablishing a Nasdaq listing (traded on bulletin boards prior) and implanting the head of Vintage Capital as CEO of ATNY. THE ROLE OF VINTAGE CAPITAL MANAGEMENT AND BRIAN KAHN Vintage Capital Management, as described by their website is a value-oriented, operations-driven private equity investor specializing in the defense, manufacturing and consumer sectors. What Vintage Capital Management does basically is to take large stakes in defense related...
THE COMPLETELY IRRATIONAL REASONS WHY I BOUGHT YELP STOCK TODAY
You cannot rationalize the current $1.5 billion market cap for YELP. That is why I tweeted earlier that this is purely a concept type investment rather than my typical value/restructuring play. I bought into YELP for numerous reasons. Here is my thinking: Social Media in 2012 reminds me of where the internet was in 1996. I was sitting at a trading desk for Waterhouse when Yahoo went public. I was surrounded by traders who were skeptical. I had customers who called in and were even more skeptical of the prospects for this burgeoning industry. Why the skepticism? There were no metrics or relative comparisons. When you tried to put together the numbers they just didn't add up. The market couldn't assign or rationalize a proper valuation. The same problem is evident in social media. Here we have companies going public with market caps that are blowing people away. The words "fraud", "overvalued" and "hype" are often attached to these companies. Rationalizing a nearly two billion dollar market cap for YELP is impossible. Rationalizing a nearly eleven billion dollar market cap for LNKD is mind-blowing. And rationalizing a one hundred billion dollar market cap for Facebook seems outrageous. Rationality fails in these situations. The market proves it time and time again. Yet traders continually turn to rationality in an effort to decipher the mystery of the newest and greatest sectors that consistently cause over-thinking charlatans and articulate incompetents to look mediocre at best and foolish at worst. I've spent years using YELP to help assist with restaurant reviews and anything else I want an opinion on in the service space. If an individual was to come to me pre-IPO and ask me to guess what the market cap should be? I would not put it past $500 million. $1 billion seems absolutely absurd. $1.5 billion seems like insanity. Now here is where I am different than most. When I see that my internal compass is off by so much, I don't keep walking in the same direction knowing that I am correct until I fall into the mouth of a volcano. I begin wondering why it is that the market thinks of a company like YELP 200% differently than I do? That 200% is a premium that the market is assigning to the company above and beyond what the normal mind considers acceptable. In addition, that 200% premium to what the normal mind considers acceptable keeps most out of the stock and attracts short sellers. The perfect combination of events to have a clean and steady uptrend that further reinforces doubt until that singular moment where realization of what the market...
HERE IS THE BREAKDOWN ON WHY I PURCHASED SHARES OF SYNC TODAY
Took profits SYNC position on July 10th in the mid-14 range for a 100% plus profit. Bought shares of SYNC today in the low-7 range. A small starter position to begin. I will increase as the performance warrants. I mentioned SYNC briefly last week. I wouldn't call it an investment, as it doesn't possess the value/restructuring angle that I look for when I profile companies in "The Gun". I wouldn't call it a trade either, as I am willing to hold it for longer than a few weeks. I guess you can call it an "investitrade". It's a mix between an investment in a concept company that has some real potential and a trade in a company that is exhibiting a good deal of technical strength. Insiders were very active in buying the company after it IPO'd at the low end of its expected range recently. They were snapping up shares all the way up to $6 per share. They have been consistently growing revenues while achieving profitability in 2011. Their major source of revenue comes from advertising as a result of a partnership with Google and shared with the companies they count as their clientele. Major customers include Verizon, Toshiba and Charter. Given the fact that they are in the high profile and increasingly popular world of facilitating online video content they do make for an acquisition target for a company looking to expand their reach in this field over the coming years. Acquisition will come with growing their customer list, adding more sources of value for those customers and becoming an indispensable part of those companies online presence. As those initiatives take off, which I believe they will, so should the stock price. This comes from the S-1 filing for SYNC: Well-positioned in large and growing market . The market for Internet-delivered content has grown rapidly over the past several years. We have been delivering online solutions to customers since 2000 and, as of September 30, 2011, had over 45 customers, including some of the nation’s major high speed Internet service providers and one major consumer electronics manufacturer. We continue to make ongoing investments in our platform to expand its functionality. We believe we are one of the only companies that has a platform solution with the scale and functionality to allow the largest high-speed Internet service providers and consumer electronics manufacturers to develop or expand their online video or other online and content offerings. As a result, we believe that we are well-positioned to gain share as the market for these services continues to grow. Established customer base with predictable search and display advertising revenue . We have long-term...
THE GUN: SHARES OF CIS ARE A LOW RISK/HIGH REWARD OPPORTUNITY BASED ON THIS ANALYSIS
Chinese stocks were decimated and banished from the vocabulary of all speculative investors in 2011. The mere mention of Chinese companies trading on US exchanges is still associated with reverse mergers, frauds and lack of transparency. Entire research firms were built around dismantling Chinese stocks. Hedge fund managers that fell for some of the better known names, such as Sino Forest, were decimated. The ravaging that took place in these stocks last year has led to a dead period in many of these names in 2012. By dead period I mean a period of sideways trading with very low volume and a general disinterest by nearly every class of investor. These dead periods are a prerequisite to the better established names - call them survivors if you wish - carving out trading bottoms that allow for the companies to experience substantial upside gains. There is a baby with the bath water mentality that takes place during these types of blanket panics. It is only natural that there will be value to be had in companies that potentially have exponential upside once sanity returns. One such company with the potential for substantial gains in the future is CIS. One of the largest IT companies in China, they provide services to everything from the financial services sector to energy and media. I purchased shares of the company today with plans of holding for the long-term. Reasons are as follows: Fundamental picture Key Points: - Price per share was $16 exactly one year ago. Currently trading at an 80% discount at a little over $3 per share. - Share decline was exacerbated by numerous factors that were reinforced by the panic surrounding Chinese stocks in the second half of 2011. - One such factor was the forced liquidation of shares held by management that were pledged as collateral for margin loans. These forced liquidation represented nearly 10% of total outstanding shares. - Another factor was the departure of the CFO from the company during the second half of 2011. - Another factor was that the CIS used the same auditor as another embattled Chinese stock VIT. Vanceinfo's (VIT) auditor was issued a subpoena by the SEC during Q3 2011. - Following these events the company restructured their management team during Q4 2011. - The company is currently trading at less than 2 times NET CASH and less than 1 times NET LIQUIDATION VALUE. - The company balance sheet is as clean as a whistle. Debt free. - Top and bottom line took a hit during the second half of 2011 due to the turmoil within the company, as well as turbulence within...
THE GUN: SOME VERY SIMPLE REASONS WHY SPRT IS BUY HERE
October 1st, 2012 - SPRT sold at 4.35 for +35% gain since August 7th. August 7th, 2012 - SPRT reinitiated at 3 July 24th, 2012 - SPRT sold at 3 for +15% since June 16th. June 16th, 2012 - SPRT reinitiated at 2.60 March 29th , 2012 - SPRT sold for +21% since posting I've been following SPRT for about 8 years now. There are no intricacies or complicated stories to tell here. It's not a post-restructuring play like GSIG or PTGI. Plain and simple: It's a software company that is transitioning to new partnerships that will aide in recovering the revenue growth that has battered the stock price since its December 2010 highs. SPRT has had a near 10 year history of moving between the $1.50 range and the $7 range. It managed to make it all the way up to $15 in 2004. Please see the chart below for further technical details. click chart to enlarge Cash flow at the company has been erratic. However, they have no debt to speak of and about $1.20 per share in cash on the books. That means at current prices the company is selling for a little more than 2 times cash. That's for a company that has signed new service contracts recently with major companies including Comcast and Staples. In addition, the CEO and other officers were purchasing shares on August 1st. He probably would have been better off if he would have been reading my notes on August 1st and held off until September, at least. Nevertheless, insiders know the history of the company and the cycles it is prone to going through on an ongoing basis. The addition of RGM Capital as a form 4 owner and continued buyer doesn't hurt either. Bottomline: Very simple here...company with a substantial operating history that has a very defined business cycle is sitting at the low end of its 10 year cycle. This is while the company is transitioning to new service contracts that will increase revenue growth and profitability in 2012. It has a clean balance sheet. Insider buying by CEO and a savvy value investor throwing his support behind the company around current prices. The company is an easy double over the next 12 months, if not a three bagger. Downside risk from these levels is roughly .70 cents or 25%...worst case scenario over the next few...
INVEST OR DIE: THESE TWO LITTLE PIGS HAVE WINGS
***PTGI sold on April 16th, 2012 +36% since posting ***GSIG sold on April 9th, 2012 +6% since posting I have two post-restructuring plays that are worth a gander: - PTGI - Primus Telecom - GSIG - GSI Group GSIG...I was long the company when it was in bankruptcy during 2010, buying initially in the $2 range and riding it up past $10. I sold out in the first quarter of 2011. The company has done nothing but strengthen its position over the past year, while the per share price has literally gone nowhere. Cliff notes version of GSIG investment thesis: overpaid for an acquisition some years ago...caused the company to go into bankruptcy...previous management tried everything to dissolve the equity in the company...activist investors became involved...equity committee was formed...activist investors litigated the matter...activist investors won in court...management ousted...company restructured...equity saved...businesses all intact...a new, experienced management team resides over the company now...generating substantial growth...largely insider owned....undiscovered still to this date. PTGI is a little more complicated of a story. I'll turn it over to Wikipedia for an explanation of what the company has gone through over the past 20 years http://en.wikipedia.org/wiki/Primus_Telecom Cliff notes version of PTGI story: much hyped telecom play in early 2000...took on too much debt...forced into bankruptcy...reduced debt substantially....activist investors have become involved...their business continues to grow...they are a cash flow machine...greatly undiscovered company....was on the pink sheets before the middle of last year...now trades on NYSE. Should the global economy and thus the markets resist the urge to cliff dive in 2012, both of these companies can see substantial upside before year...
THE GUN: AN INVESTMENT OPPORTUNITY EMERGES IN PRGS
***PRGS sold on March 28th, 2012 +27% since posting It has been awhile since I posted a report on a potential investment in an individual company. Let's see if I can shake the rust off. I came across PRGS (Progress Software) recently. Well-established software companies typically possess two key attributes: 1. Their business is extremely cyclical in nature 2. They are free cash flow machines This means that when a negative cycle kicks in, lowering per share price, it is typically a good time to buy into well-established companies with a history of solid management and free cash flow generation. PRGS has been getting beat up recently as it attempts to transition away from one segment of the marketplace to another. In the meantime, their growth has grinded to a halt, forcing the company to cut forecasts when they announced earnings on January 3rd. This cycle of disappointment has led the company on a rendezvous with the bearish segment of cyclicality within the software sector. The company has fallen from a high of $30 per share a year ago to its current price in the $18 range. Certainly a director within the company thinks it's time to buy as he bought $500,000 worth of the stock for himself on the 11th of January. Let's look at some of the key valuation metrics on a historical basis: click chart to enlarge The most significant risk to PRGS comes with management's inability to execute on their ongoing transition. This would compromise the position of the company and allow competition to diminish their market share, causing management to further lower future estimates. This outcome could take the share price to the $12-$13...