Tuesday, August 16, 2022

The Impact of Local GDP Per Capita on the ROE of Crédit Agricole's Regional Banks

The Crédit Agricole group is not only the largest retail bank in France, but also the largest retail bank in the European Union. The Group consists of Crédit Agricole S.A., whose stock trades in the U.S. under the tickers (CRARY) and (CRARF), as well as a network of 39 regional Crédit Agricole banks, and a larger network of over 2,400 mutual banks. More than 11 million mutual shareholders own shares in the mutual banks, which themselves own shares in the regional banks, which in turn own over half the shares of Crédit Agricole S.A.

Of the 39 Crédit Agricole regional banks, 12 are publicly traded on European exchanges. Their shares have historically been cheap. One problem with investing in them, though, is deciding which ones to invest in. Since each Crédit Agricole regional bank operates in a different area of France with a different GDP per capita, I was curious if areas with higher GDPs per capita might have Crédit Agricole regional banks that earn higher returns. (Read More)

Tuesday, May 24, 2022

A Look At 'Gloomy Goldman's' 20 'Safety' Stocks

A recent Marketwatch article, titled “Gloomy Goldman offers 20 ‘safety’ stocks with valuations below the previous 2 bear markets,” listed 20 “safety stocks” that Goldman Sachs (GS) chief U.S. equity strategist David Kostin proposed for a potential downturn. According to Kostin, the companies are not only large and have strong balance sheets, they are also cheap:

'…[their] price/earnings multiple after a 20% haircut to expected 2023 earnings is below the forward p/e at the bottom of either or both of the March 2009 and March 2020 bear markets.

“Importantly, given the different real interest rate environments, the highlighted stocks are more attractively valued today on a yield gap basis relative to the rest of the index than they were in either 2009 or 2020,” said Kostin and the team.'

A stock that is cheaper than in 2009 and/or 2020 does sound cheap! In that context, I looked at the list...(Read More)

Sunday, January 16, 2022

A Look At Why World Acceptance Corporation's Stock Is Outperforming Its Peers

World Acceptance Corporation (WRLD) is an installment lender that generally makes loans at higher rates of interest to people with weaker credit. The company’s stock has performed strongly since the end of 2020, rising by around 112%.

At first glance, it seems obvious why the company’s stock has gone up. When COVID struck the U.S., many lenders feared a wave of defaults as borrowers lost their jobs and got sick. One April 2020 US News article 
described how “financial institutions around the world are bracing for consumers and businesses to default on outstanding loans.” Once investors realized that wave of defaults wouldn’t materialize due to government stimulus and a quick end to lockdowns in many states, it makes sense they would start buying the stock of lenders such as World. Moreover, we’ve seen a bull market in the past year, so it makes sense World’s stock would rise at the same time.

Though these arguments make sense, once we compare World to some of its peers, it becomes less obvious that they are the reasons for the stock’s rise...(Read More).

Friday, December 31, 2021

A Valuation Of Chesapeake Energy Based On Its Reserves

Happy New Year's Eve, everyone! I just had my first SeekingAlpha article published in over a year; I hope you all enjoy it!

***********************************************************************

For many investors, Chesapeake Energy (CHK) needs no introduction. Under its founder Aubrey McClendon, the company pioneered the use of fracking to extract oil and natural gas from shale deposits. Later, in June 2020, the company went bankrupt. The company exited bankruptcy in February 2021 and its stock has risen since then by around 40%.

Historically, post-bankruptcy stocks have
outperformed the market, which makes Chesapeake Energy’s stock interesting. To see if it might outperform the market, we need to know if the company is undervalued. We can know that by looking at its oil and gas reserves, which are the company’s ultimate source of value. If Chesapeake is trading at less than the value of its reserves, its stock may outperform in the future. (Read More)

Monday, September 14, 2020

Sixth Street Specialty Lending's Historical Value Creation May Offer Insights Into Its Future Returns

Sixth Street Specialty Lending, Inc. (TSLX) is a business development company, or BDC. The company primarily invests in companies with earnings before interest, taxes, depreciation, and amortization, or EBITDA, between $10 million and $250 million, according to the company’s most recent earnings presentation. Almost all of Sixth Street’s investments are in the companies’ first-lien secured, floating-rate debt.

I recently wrote about another BDC, Prospect Capital (PSEC), that looks cheap because it trades at a steep discount to book value.

Sixth Street Specialty Lending does not look cheap. The company trades at a price to book ratio of around 106.5%, compared to the average P/B ratio for BDCs, which is around 83%. This means each dollar of stock buys only 93.9 cents in equity in Sixth Street, compared to around $1.20 in equity in the average BDC.

That said, as in life, in investing you often get what you pay for. In several recent articles, I’ve described two common types of investment opportunities:

  1. High quality companies trading at a modest discount to intrinsic value.
  2. More average companies trading at a much larger discount to intrinsic value.
In the long run, high quality companies compound an investor’s capital far more than average ones. To see if Sixth Street Specialty Lending, Inc. is a high quality company, we can use the methodology I used in my article about Prospect. We can look at how much value the company has historically created for shareholders. This will help us predict the company’s future value creation, and thus the company’s possibilities for future share price growth and dividends. (Read More)

Tuesday, August 25, 2020

Dynex Capital's Historical Value Creation May Offer Insights Into Its Future Returns

Dynex Capital, Inc. (DX) is a mortgage real estate investment trust, or mREIT. The company invests in mortgage-backed securities, or MBS, securities whose income is based on the performance of pools of mortgages.

I’ve written two recent articles about mREITs Ladder Capital (LADR) and Anworth Mortgage (ANH). Both those articles were written because those mREITs look cheap. Dynex Capital does not look cheap. The company trades at a price to book ratio of 94%. In contrast, Anworth and Ladder have, respectively, P/B ratios a little over 60%. The market certainly seems to think it is a higher quality company than other mortgage REITs, given how much higher its valuation is.

To see if Dynex Capital is a high quality company, we can use the methodology I used in my previous mREIT articles. We can look at how much value the company has historically created for shareholders. This will help us predict the company’s future value creation, and thus the company’s possibilities for future share price growth and dividends. (Read More)

Sunday, August 16, 2020

Anworth Mortgage's Value Creation Since Its IPO May Offer Insights Into Its Future Returns

Anworth Mortgage Asset Corporation (ANH) is a mortgage real estate investment trust, or mREIT. The company invests in residential mortgages as well as mortgage-backed securities, or MBS, securities whose income is based on the performance of pools of residential mortgages. Those securities include both agency-backed MBS whose performance is guaranteed by Fannie Mae (OTC:FDDXD) and Freddie Mac (OTC:FMCC), as well as non-agency MBS whose performance is not guaranteed. According to the company’s most recent quarterly report, over 70% of Anworth’s investments were in agency MBS.

By several metrics, Anworth’s stock looks cheap. The company’s price to book ratio on August 13th was 63%. This means each share of the company’s stock trading at $1.81 a share corresponded to around $2.85 of the company’s equity. Anworth also has a dividend yield of around 11%.

In that context, Anworth’s cheapness raises a question. Is it a high quality company I can “buy and hold” forever while it compounds my investment?

To see if Anworth Mortgage Asset Corporation is a high quality company, we can use the same methodology I used in my recent article about Prospect Capital. We can look at how much value the company has created for shareholders since its 1998 IPO. This will help us predict the company’s future value creation, and thus the company’s possibilities for future share price growth and dividends. (Read More)

Tuesday, August 4, 2020

Prospect Capital's Value Creation Since Its IPO May Offer Insights Into Its Future Returns

Prospect Capital Corporation (PSEC) is a business development company, or BDC. The company invests in middle market companies with an “enterprise value between $5 million and $1000 million,” according to the company's profile. Prospect invests in both the companies’ secured and unsecured debt as well as their equity.

By several metrics, Prospect’s stock looks cheap. The company’s price to book value ratio on July 31st was 63%. This means each share of the company’s stock trading at $5.01 a share corresponded to $7.98 of the company’s equity. Prospect also pays a monthly dividend of $0.06 per share, giving the company an annual dividend yield of over 14%.

Prospect Capital’s cheapness raises a question. Is it a high quality company I can “buy and hold” forever while it compounds my investment?

To see if Prospect Capital is a high quality company, we can use the same methodology I used in my May 2020 article about Ladder Capital. We can look at how much value the company has created for shareholders since its 2004 IPO. This will help us predict the company’s future value creation, and thus the company’s possibilities for future share price growth and dividends. (Read More)

Wednesday, July 22, 2020

SandRidge Mississippian Trust II Is Dissolving, Leaving Investors With Large Losses And Important Lessons

SandRidge Mississippian Trust II (SDR) (SDRMU) announced in late January 2020 it would dissolve by the end of 2020.

SDR owns oil and natural gas royalty interests in the Mississippian formation of southern Kansas and northern Oklahoma. These interests entitle SDR to royalty payments out of the income from 273 oil and gas wells drilled by SandRidge Energy (SD), the trust’s sponsor. Most of this royalty income is then distributed to the owners of the trust’s units (shares).

Once the trust is dissolved, SandRidge Mississippian Trust II’s unitholders will not get any more distributions. This will leave many of them, including investors who bought units in the trust’s IPO, with a large loss on their investment. This loss offers important lessons for future investors, especially investors in IPOs, the oil and gas industry, and in high yield stocks. (Read More)

Wednesday, June 3, 2020

2016 CLO Issuance Was Much Higher Than Expected

I recently read a May 2016 Wall Street Journal article about the recovery of CLO issuance after the early 2016 market decline.

CLOs, or collateralized loan obligations, are bundles of “loans from junk-rated companies” that are “[repackaged]…into securities that pay varying levels of interest based on which get paid off first if the underlying loans go bad.”

Because CLOs are a way to invest in financially stressed companies, their performance is highly dependent on the economy. When the economy is doing well, CLOs can offer high rates of return. When the economy does badly, the companies that take out the loans that go into CLOs are often the first to run into trouble, inflicting potentially high losses on CLO investors. Because of that, CLOs are popular when people think the economy is doing well and very unpopular when people think the economy is doing poorly.

A 2012 report from the National Association of Insurance Commissioners shows this. CLO issuance peaked before the Great Recession and almost disappeared during the Recession:



What intrigued me about the WSJ article was the prediction near its end:
Few analysts expect CLO issuance to reach much higher than $50 billion this year…
Whenever I read a prediction like this in a past news article, I wonder if it came true. Thus, I looked up the total CLO issuance in 2016.

As it turned out, it was $72.3 billion. This was, of course, much higher than the $50 billion number “[few] analysts [expected] CLO issuance to reach” in 2016 according to the WSJ article.

I think the fact this prediction didn’t come true illustrates a valuable point. Economic and financial predictions are often wrong. This is true even when the predictions are about something only 7 months away. This doesn’t mean such predictions should be totally ignored. However, it is something to keep in mind when making investing decisions.

As a postscript, the prediction in 2019 was for “US CLO issuance…to fall in 2020.

Given the current economic situation caused by COVID-19, this prediction seems likely to come true, if for reasons no one expected back in November. That said, it will be interesting to see exactly how things turn out.

Disclaimer: The content here is not meant as investment advice. Do not rely on it in making an investment decision. Do your own research. The content here reflects only the author's opinions. Those opinions might be wrong. This content is meant solely for the entertainment of the reader and its author.

Tuesday, May 19, 2020

Comparing Whiting Petroleum's Post-Bankruptcy Enterprise Value To Its Reserves

On April 1st, Whiting Petroleum Corporation (WLL) announced it was going bankrupt. In late April, it announced how the company will be split between current lenders and shareholders after bankruptcy.

Based on the company’s bond prices, we can estimate the post-bankruptcy Whiting Petroleum’s enterprise value. We can then compare that enterprise value to the value of the company’s oil and gas reserves.

In doing so, we can see how the market is valuing those reserves. Using that valuation, we can guess what other distressed oil and gas companies’ reserves might be worth in bankruptcy. (Read More)

Friday, May 15, 2020

Alternative Financial Services Are A Major Source Of Earnings For Republic Bancorp

At first glance, Republic Bancorp, Inc. (RBCAA) looks like an ordinary regional bank. With $5,601 million in assets, Republic was Kentucky’s biggest bank at the end of 2019. Republic was also America’s 172nd largest bank.

Unlike most regional banks, though, Republic Bancorp earns around 30% of its net income from alternative financial services. The term “alternative financial services” covers products such as high interest loans and tax refund advances. Customers often use these services when they can’t access traditional bank services. Such customers are often poorer and pay higher costs.

Republic Bancorp’s Republic Processing Group (RPG) business is a big provider of these services. RPG has two segments. Tax Refund Solutions (TRS) offers tax refund advances. TRS also offers “refund transfers” that let tax filers pay for tax preparation using their refunds. Republic Credit Solutions (RCS) offers loans, mainly high interest lines of credit.

These two segments earned $28.246 million of the company’s $91.699 million in 2019 net income. It is very unusual for much of a bank’s earnings to come from alternative financial services. Since these segments are so important, we will analyze them to better understand their impact on the company. (Read More)

Wednesday, May 13, 2020

How Much Value Has Ladder Capital Created For Shareholders Since Its IPO?

One of my favorite investment bloggers, Clark Street Value, recently wrote about mortgage real estate investment trust (mREIT) Ladder Capital (LADR). Ladder mainly invests in commercial mortgage backed securities (CMBS), or pools of mortgage loans to businesses.

The post described how Ladder is well positioned to survive the current downturn due to its high quality assets and use of unsecured debt to fund those assets. It provided much information about both topics; I encourage interested readers to read it.

As an investor, though, I am not just interested in how well a company might survive the current downturn. I am also interested in the long term value the company can generate for me if I invest.

This is especially important since downturns offer two common types of opportunities for investors:
  1.  High quality companies trading at a modest discount from normal prices.
  2.  More average companies trading at a much larger discount to their intrinsic value.
In the long run, high quality companies compound an investor’s capital far more than average ones. This is true even if those average companies are purchased at much cheaper valuations.

In that context, after reading Clark Street Value’s post, I was curious which type of company Ladder Capital is. Is it a high quality company I can “buy and hold” forever while it compounds my investment? (Read More)