Saturday, November 17, 2012

AIG and McRae Industries Quarterly Update

AIG and McRae Industries are two recent purchases (meaning within the last half year). These are my two recent new ideas so I am watching them closely to see signs my thesis was correct.

I own AIG because it is a profitable business that trades at half of book value. In the 3rd quarter they earned an after-tax profit of $1.00 per share. The company breaks down the company into four segments: life insurance, property and casualty insurance (P&C), aircraft leasing and others (including mortgage related insurance). The good news is that all four are profitable. The only worrying sign to me the 105% combined ratio of the P&C segment. Combined ratio is the ratio of total insurance payouts and costs divided by the total insurance premium. A combined ratio over 100% does not necessarily imply an loss in the business however, because the business can eke out a profit through investment gains on the premiums held. In the coming quarters, we will also have to see the effects of Hurricane Sandy, but right now AIG cannot predict its affects.

But overall I am very pleased with the quarter and I am surprised that the stock price dropped more than 10% since the earnings announcement. Of course great investors all advise others to tune out the short term noise. So I try to ignore the crowd and remind myself that AIG has $69 of equity per share yet trades at $32. I may add to this position if AIG drops more.

McRae Industries is one of my two small cap holdings. Its market cap is a little over $50mil.

McRea makes high quality work/western boots and military boots. The company just finished its 4th quarter this summer and announced it earned $2.27 per diluted share for the year, versus $1.84 the previous year. Revenue was flat, so it indicates the company is able to increase margins. The stock trades on pink sheets recently at around $17. Its book value is about $20.50. And its net-net value is about equal to the market value. With such a strong balance sheet and a P/E of 7.5, what is there not to like?

I only found this stock after I started this blog and I documented it in this entry. So my entire history with it has been and will be documented on this blog. We shall see how it goes.

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