Disclosure & Other
I thought it might be best to update you on a few companies I’ve written about.
First up is the oft-debated Primus Guaranty (PRS). Last week, I made the calculated decision to sell Primus in my personal portfolio. This might seem a little flip-floppy for a long term value investor who has spoken rainbows of the company, but a lot has changed since my last write ups. I still believe Primus offers tremendous value but there exists even better value, with less risk, available in the market right now. So, at about $3.30/share (around my cost basis), I sold 2/3 of the position, and I sold the rest of it at about $2.70/share. In all, I lost about 6% of my initial investment.
Primus’ counterparty rating was downgraded by Moody’s today from AAA to AA, but the company is still in very good shape. The total exposure they had to all this was very reasonable and they’ll continue to write new business as it becomes available. They still carry risk to further bankruptcies, credit events, and turmoil but there remains tremendous upside to the investment. However, market volatility has presented opportunities with less risk and return potential.
The second matter is that my first report was released at Complete Growth Investor, earlier this week. It received a good response (I think!) and the company in mention is Premier Exhibitions (PRXI) at about $2/share. If you remember, I briefly mentioned Premier on the blog earlier, above $3, and the stock has continued to slide since then. I bought it myself first around $2.40 and subsequently averaged down further, to about $2.09/share. I believe it is a tremendous opportunity with a low probability of permanently losing capital.
My report is available to subscribers of Complete Growth Investor (CGI), so if you want to read it, ya gotta subscribe! As I mentioned in my last post, Tom Jacobs and I run a value portfolio at CGI and write full buy and sell reports on the companies, detailing our reasons and research for owning the companies, and trade alerts when we’re about to do something. I said it before and I’ll say it again: if you enjoy reading Circle of Competence you’ll probably get a lot out of CGI. I know a few readers have already subscribed and I encourage the rest of you to follow! (of course)
At the very least, go on over to www.completegrowth.com at some point and sign up to be on the e-mail list. From time to time we have and will continue to send our free reports to entice all of you to subscribe, as well as commentary and a host of other things. I suspect we’ll have a new free report out very soon.
If you can keep your wits about you in this environment, you’ll be just fine.
Disclosure: I own shares of PRXI
I’m surprised your finding opportunities much better than Primus. Wow, I sound a little insane after all the hullabalo on the news, even to my own ears. But even so, I’ll throw a few numbers at you, and I’d be greatful if you’d point out what I’m missing.
1)820 Million dollars of capital to burn.
2)~20million Dollars in free cashflow every single quarter.–>80 million/year
3)6? gianormous unsinkable ships now sunk(Fan, Fred, Bear, Lehman, WaMu, AIG) –>
4)~100 million in losses in the first 3 quarters. –>133 million/ year run rate.
5)~50 Million/ year hit to balance sheet.
6)5 years– the number of years this can continue before PRS is not a double. (820-300debt-125(current market cap)*2)/50
7)10 years– the number of years this can continue before PRD isn’t a 5 bagger(500%)gain. (820-300debt)/50
I can see why one might not be as interested in PRS at this point, but PRD sure looks like a home run to me.
Travis,
Like I said, the numbers, on the upside, are still compelling.
There is a hidden risk with Primus, though, in that with the CDS market now under a major review, the CDPC business model is subject to change or be re-assessed any day by the rating agencies. You can already see this with the recent downgrade.
My point is not that Primus isn’t a good investment. I’m just finding other investments with similar characteristics I feel more comfortable owning and have less risks entailed. I do think Primus will work out and I don’t want it to come across any other way. I just own other things right now.
Just so I’m clear on what you mean: The risk is that the ratings agencys could suddenly change the rules on them and require changes to their operating guidelines, such as posting more capital, in order to keep their desired rating. It is my understanding that should they be unable to comply with the ratings agency demands, it will effect their ability to write new business, but should not in anyway effect their current book, or trigger they payout of any money. They would just be forced into run-off. Is this correct?
Another risk I worry about is new regulations out of Washington.
Thanks for the help as always.
Travis,
Correct. Any change to the model, for example having to post collateral, or not being given the high rating it used to given its unique operating structure, would decimate Primus. It might not be worth zero but your upside is gone.
I agree that CDS regulation in general could affect Primus as well, and that is another unknown risk.
Jeff,
I was wondering if you had an opinion on the new WEST/JBX develpment? I would greatly appreciate your views on this.
Roman,
I think Sardar likes what he sees in JBX, obviously. This is going to be another huge holding for us, 680k shares is about 40% of the currently outstanding total, and he chose to issue the shares in tender as a means of raising capital.
JBX has a good model and is pushing for more franchising if I understand correctly, which is right up Sardar’s alley. By tendering with WEST shares, he saves the costs of issuing new equity or rights as we’ve done in the past, and gets right to the point.
The last point is that I don’t believe JBX will be a major activist campaign, we’re only going to hold 1% of the shares even with a full tender. Must be cheap enough to compensate.
Thank you for your prompt reply. Couple more questions/comments, now that the premium to convert for JBX shareholders is gone, do you think any of them will convert? Is Sardar gambling or targeting large shareholder(s) who want to get into WEST? If no one tenders, what happens to WEST stock? What are you general thoughts on JBX? Okay, maybe that is more than couple questions. I am very curious as to what you think about this!
“Correct. Any change to the model, for example having to post collateral, or not being given the high rating it used to given its unique operating structure, would decimate Primus. It might not be worth zero but your upside is gone.”
Wouldnt it be surprising for them to change the rules on a look back basis? I could totally see them not being able to write new business, but to be “decimated”???
Hogan,
My point is that Primus would lose their entire business model. What if they were forced to post collateral under a change in the business model? I don’t think this will happen, but if even if they were to change model on a “go forward” basis, the company is only worth run-off value. Not that I think you’d lose a lot of money, but it would make the co. much more vulnerable to future BK’s, and it would probably be worth not much more than 3/share or so. Considering that I think it’s worth north of 7.50 today, decimated indeed.
Roman,
I think there will be a certain number of shareholders who take advantage from time to time when there is a arbitrage between JBX and WEST shares at the 1.6 conversion ratio. Just because it might not be available in one instant, stock prices fluctuate.
Will they tender? I’m not sure, I am interested to hear what JBX’s management has to say on the issue, and that will certainly have an effect on the amount of shares tendered. It’s very closely akin to the ITEX situation where Biglari didn’t offer a huge premium. There will be some tendering activity as shareholders look at what WEST is offering, but it’s hard to say right now how that will resolve itself.
No real thoughts on JBX yet, have never really studied it, though I will now, but I know the stock is pretty cheap.
Yes I hear you but since nobody is trading today, they are in runoff as it is, and PRD should be worth much more than 4 per share (assuming no major BKs - yes big assumption I know). This is still a compelling buy even if they never write more CDS
They aren’t in runoff; merely cannot issue any business right now.
Under runoff PRS is not a terribly attractive investment (in this environment), but I agree that PRD is as a fixed investment. If Primus holds up, PRD will work out very well.
Hi Jeff,
I read your report on PRXI. I would be interested on how you determine maintenance capital expenditures from growth capital expenditures. If you would have the time, I think it would make a great write-up. Good luck at CGI!!!
I just started blogging about my path towards becoming a value investor.
http://studentinvestorsdiary.blogspot.com/
Check it out!
Thanks for publishing this comment.
Does anyone know where I might find a step-by-step guide to common stock valuation? I have found some of the valuations (especially Sears) on this site helpful, but not quite as “explanatory” as I need to really be able to do it on my own. I just finished reading a book that walked me through a lot of the common ratios etc that I was already aware of, and then wanted me to use DCF to find the present value…
Unfortunately, I am still unable to make the leap between the ratios (and other variables such as management quality) and projecting earnings, and then from projected earnings to a fair value of a share today.
If anyone can suggest a good place to look, it would be greatly appreciated!
Hi Jeff, I’m not sure if you still check this, but I’m hoping this will catch the attention of anyone still following PRS.
For the past 2 to 3 quarters I’ve been trying to ask questions during Primus’s Conference calls. I have never gotten through. Neither has anyone else. Every quarter I wake up at the crack of dawn to absorb the earning release (which they tend to release late) and prepare questions, I listen with rapt attention to the presentation, then when the operator says I hit Star 1. Then 10 seconds pass, they claim no one is in the Q and end the call as I’m frantically stabbing star-1. I have trouble believing no one else had a question.
Primus’s Investor relations staff, is always really nice and helpful, but I’m starting to get annoyed at never getting to ask questions of management in such interesting times. Last quarter she said others had the same problem and promised to work it out. This time I called and it was like she didn’t remember it had happened before. Disturbingly, she said they were thinking of canceling the question and answer period because no one was Q-ing up!! I vigorously encouraged her not to do that.
I was hoping someone out there was having similar issues, so I could call back able to say for sure others were having the problem.
Thanks Travis
Travis,
I get e-mails when people post comments, so I saw that.
I don’t follow PRS closely anymore because of plenty of other opportunities, but your situation is an unfortunate one. Management has complete latitude over who gets chosen in the queue and if they don’t see anything suitable, it’s their prerogative to not answer you question.
If you’re in touch with IR, my recommendation is to bring this issue up. Sometimes ya gotta be confrontational.