Why I Own ITIC

Lately, I have been busily searching the internet for my next smallcap. And the work paid off. The stock I found is Investor Title Insurance Company (ITIC:NASDAQ). And I first heard about it on this this twitter feed.

ITIC provides title insurance and associated transaction services in real estate transactions. I have always thought this is a lucrative industry. Any bank requires title insurance as a condition of a housing loan. It protects the buyer from defects in the title purchased. But there is rarely any issues as (almost) all deeds are recorded at the local city hall. And verifying the deed is a simple process in the computer ago. So, title insurance rarely pays out claims. Who wouldn't want get in on this industry.

ITIC is a smallcap company in an industry dominated by two giants, First American Financial and Fidelity National Financial. I summarize their key financial numbers below. Note they are based on the first 9 months of 2013 projected to the full year (which actually overestimates the PE).

As one can see, ITIC is more attractive than its two bigger peers because it has a lower earnings multiple, greater profit margin and a better balance sheet. ITIC has retained a lot of earnings. When I see that, I feel as if the person who sold me stock has given me the previous earnings, his earnings, to me for free! The two larger competitors don't have such a good balance sheet because they have a considerable amount of goodwill and intangibles.

Now a person new to this stock may be a bit gun-shy because it depends on the housing sector. Title companies have benefited from the recent increase in housing activity, no doubt. But housing sales have still some ways to go to return to pre-recession levels. After that however, there will be minimal growth for the industry as a whole. This is a classic no-growth value investment.

I also like the company's management. The company's is 42 years old yet is run still run by the original founder, J Allen Fine. His two son's are also executives with the company. This shows a good management continuity, dedication and track record, which is a key criteria for Warren Buffett. The Fine family owns 30% of the outstanding shares. They collectively earn less than $1 million in salary.

So, my investment thesis is simple. The company has a low PE for such a lucrative industry. The company has a great balance sheet, it is almost a netnet. And revenues are bound to go up in the near future.