Portfolio Earnings Reports and Macro Musings

A slew of earnings reports have come in. I will summarize them in 60 seconds.

McRae Industries reported earnings that were flat compared to last year. But looking at last year's fantastic results, this is an accomplishment. If the company can show that last year was not an anomaly, then we have a new normal for this company. If so, I feel the company should trade around $40 instead of $30 now.

Wellpoint reported decent earnings. But the market pays more attention to the company's guidance because it is so committed to Obamacare. The company raised its 2014 earnings guidance from $8.20 to $8.50 per share. The new CEO Joe Swedish seemed to have aimed low with this guidance earlier and he is carefully managing the expectation upwards.

Wellpoint is spending considerable money to upgrade its IT systems for Obamacare. The company has already spent $550M. This leads me to believe that the company will have an advantage over other smaller competitors who do not have the scale to do such large upgrades. Wellpoint's success will be tied to Obamacare and the first year Obamacare enrollment numbers do not look so bad. People can slice it or dice it in many ways, but I think the Obamacare enrollment is as good as one could have expected a year ago. The bottom line is, people who don't have healthcare will buy it at a reasonable price.

I think the mainstream is starting to agree with me on this one. Barron's just published a bullish piece on Wellpoint. But I think when the mainstream starts to tout a company, watch out! The stock probably hasn't got much more room to run, and it is time to be contrarian on the stock. I definitely wouldn't add to my position, the only thing I will do in the future is selling.

Petsmart reported mixed first quarter results and they also lowered the year-end guidance. Same store sales this year will be flat compared to a year ago. The stock has tumbled 20% off its peak of a year ago. Today it trades at 14 times forward earnings. But here again, Barron has a positive piece on the company recently, which help the stock recover a bit. I wouldn't buy any more but I also don't want to sell because I dislike the capital gains tax.

In other news, Seaboard Corp completed their tender and announced that it was not fully subscribed. Therefore the buyback price will be $2950, which is the maximum price. I tendered about 15% of my shares.

And ITIC is down more than 20% since I started buying 5 months ago! And I don't really have an explanation for it. I have looked over the company a bit further to see if there is something about it that I missed in my initial analysis. I cannot find anything. Overall the housing market is stable and near-term should improve. The job market is improving which will do wonders for the housing market. Interest rates are up a bit but still near 12 month lows. So, in the absence of red flags, I have added to my position on the way down.

The US has seen inflation pick up to 2.1% yoy in May. Inflation directly affects interest rates and I'll be watching both closely. I own ITIC and four other insurance stocks. Insurance companies have large bond portfolios which would take writedowns if interest rates rise. But everything considered, inflation is a heck of a lot better than deflation.

Why I Bought European Reliance

ATH:EUPIC
Price	€ 1.390
Market Cap	€ 38.22 M ($ 52 M USD)
P/E TTM	3.9 x
Div yield	0 %
P/BV	0.63
ROE	16.3 %

My next stop in my virtual world travels takes me to Greece. My macro impression is that Greece is on the road to recovery. I primarily invest in small and micro caps now, and I saw some interesting ideas for Greek small caps here and here. I applied my screener to stocks in Greece and found a few but one really stuck out: European Reliance General Insurance SA (ATH:EUPIC).

EUPIC offers insurance and pensions and mutual funds to individuals in Greece. The company insurance offerings include life, health, fire and car. Its underwriting operations are outstanding. And it trades significantly less than book. I am sure the main reason it trades so low is because it is in Greece. The world knows that Greece had a very difficult 2011 and 2012. In fact, the country has been in recession for 5 years, and it is far from over. The country still has 25% unemployment. But from what I gather, the country has turned the corner and is on the way to recovery. One can see this from how the bond markets are pricing Greek 10 year government bonds. See chart below from the WSJ.

I invested in EUPIC partly because the company had a stellar earnings record through the last four years. The company did suffer losses in its investment portfolio in 2011, but the company's outstanding underwriting results made up for it. Prior to four years ago, the company's underwriting was decent but not as good as it is now. The company also took a € 15M writedown in its equity in 2008, when the financial crisis hit. Before that the company was trading above book and it hasn't traded close to book since then. See the following table. All numbers except dividends are in millions.

	Income	Equity	Investment income	Dividend/shr	Shares
Q1 2014		60.4	0.9		27.5
2013	9.5	57.5	0.8	0.000	27.5
2012	9.0	50.0	0.9	0.100	27.5
2011	2.7	39.5	(7.0)	0.050	27.5
2010	1.3	37.9	1.5	0.040	27.5
2009	3.1	37.7	3.4	0.040	27.5
2008	(0.0)	30.2	4.2	0.040	27.5
2007	2.5	44.5	1.6	0.073	19.2
2006	3.2	25.5	1.9	0.000	19.2
2005	1.8	20.0	0.8	0.000	19.4
2004	1.7	21.6	0.5	0.000	18.3

The company's balance sheet is like most life insurance companies. The company has investment assets, mostly bonds and some equities. The company's liabilities are just the company's underwriting obligations. The company states that 75% of the company's bonds are in the US and "core European countries". I take this to mean countries like UK, France, Germany, Netherlands and not Greece.

EUPIC was established in 1977. The current CEO has been CEO or Chairman since its founding. Some of its founders are still directors. This shows a commitment and stability in the organization. I have found company statements going back to 2001, beyond that I have nothing. In 2007, the Greek bank Piraeus bought a 30% stake in the company. In exchange the bank gave the company the fire insurance business from its mortgage sales.

My impression (or hope) is that the company's insurance profile after the Piraeus investment has made the company much more profitable. But the financial crisis followed by the Greek bond crisis has overshadowed the company's solid underwriting performance. So when the sentiment turns and drives equities upwards, this company should once again trade for book.

The company's auditor is PKF Euroauditing SA going back to 2001. I have never heard of the auditor but their website seems to indicate it is a stable and big European company.

The one thing that worries me about the company me is that it has inexplicably chosen not to pay a dividend for the 2013 fiscal year. I cannot really think of a good reason for this.

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Note**: investing in Greek microcaps is a risky business. I have tediously gathered the data in this article from filings written in Greek. But I am sure I have made mistakes. If you are considering investing in this please read the disclaimer on the right.

My Current Reading List

Money Myth an interesting article about a poor immigrant's thoughts after fulfilling the American dream.

Anatomy of the Bear by Russel Napier. Interesting history published in 2009. The author goes on to say we are in a going to be in a recession from 2000 to around 2014. I think that is pretty prescient.

Confidence Game by Christine Richard: I devour any investment book with behind the scenes stories about Wall Street. This one is about Bill Ackman's fight with MBIA.

Tap Dancing to Work, by Carol J. Loomis. One more book on Buffett which adds more insight to the best investor of our time.

Investing in the Unknown and Unknowable. This article adds a lot to my thinking about probability theory and the real investment world. It is on the same topic that I discussed here.


Poor Charlie's Almanack, Edited by Peter D. Kaufman. This is a well-known book which addresses the issues of the above, based on speeches and quotes of Charlie Munger.

An anonymous writer accuses Chaoda of rampant corporate fraud. This company interests me now that I have invested in a Hong Kong stock.

An anonymous writer accuses Huabao International of being a huge pump and dump.

I also am playing around with a cool new tool that can reveal the differences in the text of different 10Qs and 10Ks of a company.

SEB is Trading Near Tender Price

Seaboard Corp's tender offer is due in a week. And the stock is approaching the maximum tender price. The price today reached $2920. The maximum tender price is $2950. Volume at this price has been more than daily average. So, when I try to guess the intentions of the buyers and sellers, I can only deduce one thing. The market does not think that the stock is worth the tender price, and the company will not be able to buy Seaboard stock with all the allocated $100M.

Several news items are affecting the Seaboard stock recently. Seaboard announced quarterly earnings of $40.55 per share compared to $47.98 a year ago. Revenue was also down slightly versus a year ago. However, operating income actually rose compared to a year ago. The operating income rose but net income fell because the company benefited from a one-time tax benefit last year. This means that last year was the anomaly and this year is the norm. The company now trades at 18 times TTM earnings.

Pork prices have jumped by more than 30% recently. I am not exactly sure why, but there has been some kind of pig virus spreading about.

The other news is that Pilgrims and Tyson Foods are in a bidding war for Hillshire Brands. Hillshire Brands in turn is trying to buyout Pinnacle Foods. It looks like food company valuations are going up amidst consolidation. In 2013, Smithfield Foods was purchased by Shuanghui. Nonetheless, Seaboard's return on equity is 7.8%. The company does not appear undervalued unless one believes that it is a takeover target. Seaboard trades at a EV/EBITDA of 10, while Pinnacle and Hillshire trade at 13.

Seaboard is my third largest position and I must consider taxes carefully if I want to close the position. I wrote about taxes in another another post but it doesn't really guide me on whether to sell. Today I have another way to think about taxes.

Suppose my Seaboard investment has gone up 100% over a long period. Also suppose the tax rate is 25%. If I sell it, the capital gain is $50 for every $100 that I should pocket. But the government takes a $12.50 tax on that, which leaves me with $87.50.  Suppose further that Seaboard returns 10% a year in the future. So, by the rule of 72, it doubles about every 7 years. Then that $12.50 which would be in Seaboard if I did not sell, would give me $12.50 in gains in 7 years.

So the fundmental question is: can I get a further $12.50 in gains in 7 years on my $87.50 if I sell Seaboard and buy something else? When put in this way, tax considerations become much more straightforward.

So I think soon I will sell or tender at least some of my Seaboard shares.