Bargain alert

Manage
21

[quote]
Chipper,

The Bruce B. article was published on 9/4/2013 with him saying he estimated book value at $58 to $60. P123 shows a value of about $68 on that day for BookValQPS.
[/quote]Make that $66, but point well taken. I somehow omitted this information when I did my spreadsheet. I am now getting 23% annualized gain from a $25 warrant price.[quote]
buybacks drive up prices, but it’s also a form of ‘non-market’ supported demand - that is really like leverage. If earnings fall / turn negative, the company can’t support the stock price and the market has to - and DD’s can be exacerbated.
[/quote]AIG does not need to use earnings to buyback stock because they have > $15b in cash on hand and they are selling assets which will presumably give them more cash.[quote]
I have no crystal ball, but I believe in quant systems with large numbers of positions.
[/quote]that’s a very good option too. However, many of the investors that you list have been successful by taking large positions when they see a good deal.[quote]
Here’s people who don’t own AIG and likely passed (many of them have financial sector and insurance sector expertise):
Buffett,
Icahn,
Brian Rogers,
Bill Gates
Bill Ackman
Arnold Van Den Berg
Prem Watsa
Mohnish Pabrai
David Einhorn
David Tepper
Seth Klarman (held it previously, but sold already)
George Soros
[/quote]I’m not familiar with the expertise of Icahn, Rogers and Van Der Berg.

Buffett may be limited by regulations and/or may be concerned about correlated risk. Besides, AIG is a fair business selling at a good price. He wants a good business at a fair price because he does not want to trade in and out; he wants to purchase with the assumption that he will hold forever. AIG is not a good investment to hold for the next 30 years. Watsa may have the same issues as Buffett.

Bill Gates uses a money manager who has his areas of expertise and I don’t recall them being financials. Pabrai is a very good question. I was wondering about it. Einhorn made most of his money in Technology stocks. Soros is a trader/speculator who wants to buy something that will go up very soon; and that’s no guarantee here.[quote]
Bruce B is clearly a very large outlier in his conviction on this stock
[/quote]It’s a good point, a very good way to invest is to buy the holdings that many value managers own based on the 13F fillings (I tested different variations of 13F backtest) but I am not right or wrong because people agree with me. I’m already up over 80% from my cost on the warrants and I will probably sell it as soon as the price goes up so that my expected return goes down to 15%/year, as I can find better investments in quant models. This concentrated style has worked for others and for me as long as I remain very careful about the downside.

Thanks,
Chaim

22

I wasn’t asking myself if you made a good buy 2 years ago. I was asking myself if the warrants were / are a good buy today - as this is the title of the thread - ‘Bargain alert.’ I have come out so far, that for me, unless the warrants get driven down well under $20 (probably in the $15) range, it’s not worth looking at right now, as the most I’d invest at current price ranges is 1% of my port in it - and then it’s just a distraction. Thanks for both bringing this up, and engaging with me. It’s given me a new company to watch and a price target.

23

Thanks Tom.

My original posting intent was to demonstrate how when the market falls we can benefit, and that if it falls further then we can benefit more. The warrants were an example.

The warrants have already moved up to $27. At this price it’s a hold. Had you bought it then and sold it today you would have made $2 on $25 in less than a week. Not bad. Not that was what I am doing but it illustrates another point that I was making in the prior post.

Just a clarification on my previous post, if you buy something with an expected return of 25% a year for five years and the price goes up by 10% in a month and you sell it in a month then your annualized return is off the charts. Likewise, if in a year the price goes up further to the point where your expected future return drops to 15% a year then by selling at that point you make a huge annualized return.

Back in the days when I did manual stock selections I would have a Google spreadsheet that would constantly update my future expected returns using the latest market prices. It served me very well. When the market swooned in the spring of 2010 I was a huge buyer based on the work that I had already done. Likewise when those investments recovered in price somewhat I sold.

It’s interesting to watch how the price of the same company fluctuates so wildly without any major events happening to the business. By having an absolute valuation in your mind you have a good price anchor around which to make smart buy and sell decisions.

BTW, I have found that my largest positions worked out best because I understood them best and because I was convinced about the lack of downside.

24

Chaim,

Interesting discussion. Thank you for initiating it. As to my $0.02:

So your breakeven is $70 in Jan 2012 ($45 strike plus $25 price). AIG trades at $60.69. So you need AIG to appreciate 15.3% by 1/21.

Valuations and fundamentals aside, you get that (or a big move down) on any meaningful guidance announcement or surprise. We haven’t been seeing as many double-digit earnings-game moves lately as we used to, but we have been in a long period of modest market volatility. If that changes, and I expect it might as we keep getting more news re: China, more talk of interest rates, etc., there’s the possibility of generally rising volatility, or if not that, the willingness of derivatives buyers to price more volatility into the instrument, which would help you even if AIG and its stock stands still. (By the way, I’m not assuming you’ll hold to 2012 although you might. I assume you’d jump if you had a nice chancer to take a trading profit more quickly.)

As to AIG itself, we have to ignore the pre-2008 numbers. It was a different and ridiculously leveraged company before then, and that inflated PB. Now, it’s leverage is mundane. And present PB is below its 1.03 industry median. Post crisis new AIG also has better margins (in its business, we’re talking more or less at the gross level of spreads) then it did and decent ROEs, and most important, mundane relative to the industry. So there is room for the stock to get some extra movement if it moves toward industry valuation. Ditto for other valuation metrics. And, of course, there’s the prospect of plain-old industry growth. (Catastrophes aren’t usually much worry; these companies are pretty good at laying off risk via reinsurance contracts – the writing of which was Berkshire Hathaway’s pre-GEICO insurance specialty.)

The risks seem mainly to be (1) not-presently-visible leftover-pre-2008 “stuff”, about which all we can do is guess, (2) industry risk and how effectively the insurers will manage their portfolios assuming rates rise (3) and other idiosyncratic things one may or may not find on conference call transcripts or an even deeper dive into the company. Judging though by the stock’s recent behavior and by the below-idustry levels of short interest, I suspect the conference calls are snooze-fests and the market isn’t signaling other major worries.

Assuming you understand the downside risks of derivatives (zero if P<45 in Jan 21 but earlier dips below that won;t make the warrant go to zero since it would still have to price time to decay, volatility, etc.) and that you plan to watch AIG, which from the way your initial post was worded, seems likely (you seem to be giving this a lot of thought), it looks like an intriguing play.