Out Fox The $treet

Very interesting interview with Bruce Berkowitz on CNBC today. Bruce is the famous founder and manager of Fairholme Capital Management. The interview is mostly regarding the bets on Fannie Mae and Freddie Mac preferreds, but he does confirm that the Sears Holdings (SHLD) investment thesis remains intact. He still sees a 10x increase in the value of Sears to match the value of the real estate holdings. He makes some compelling statements regarding investing in Fannie and Freddie. Maybe we need to check those out considering some our investments match his. Instead of American Int'l Group (AIG) , we chose to invest in Hartford Financial (HIG) and Lincoln Financial (LNC) to obtain exposure to insurers trading under book value. After all, investing in stocks trading below the long-term value is a core position of Stone Fox Capital. Disclosure: Long HIG, LNC, and SHLD. Please review the disclaimer page for more details. 

Even after substantial gains this year, a whole slew of financial stocks still trade below book value. As written about back in January, a good portion of the insurance stocks traded close to half of book value. While the fears from the financial crisis have mostly dissipated, the stocks continue to meander below book value even with strong earnings profiles. Investors continue to fear that either the balance sheet isn more » Disclosure: Long HIG and LNC. Please review the disclaimer page for more details. 

After the financial crisis, numerous financial-related stocks traded at prices below book values due to the fears in the accuracy of the reported balance sheets. In the years since the crisis, most of those fears have disappeared, yet many financial stocks haven’t regained the valuations suggested by the improving asset bases. A prime example exists in the insurance and retirement services sector where both Hartford Financial Services Group (NYSE: HIG   more » ) Disclosure: Long HIG and LNC. Please review the disclaimer page for more details. 

This model lost a disappointing 6.6% in July versus a 1.3% gain for the benchmark S&P 500. This model typical outpaces the major indices by a large margin in up periods so the last month was a major exception. Since the end of 2011, this model has been running on the theme that the majority of stocks would retrace the losses experienced since the July 2011 levels. In essence, our theory all along has been any losses since that time period were from irrational fear of a second financial collapse that the Europeans were unlikely to allow. Naturally this fluctuates on a case by case basis where any individual stock could move a lot higher or lower depending on circumstances since then. Unfortunately this theory took a major hit as investors piled into dividend paying stocks sending most major indices back close to 2012 highs while at the same time selling the higher risk, global growth stocks. In some cases, stocks actually hit new 52 week lows recently. T...

Ok, Barclays Capital didn't downgrade Lincoln National (LNC) for being too cheap. One has to wonder if the stock trading around .4x book value actually played a roll. Or maybe these analysts just use recent history as a basis for price targets. Honestly don't understand how a price target below book value could ever be justified. The company has made at least a $1 in each of the last 4 quarters and trades at 4.7x forward estimates. In what book is that a stock to sell? Even worst is the Daily Political website throwing in the P/E ratio of 30 to make the analyst call appear smart. Not sure why that website is even commenting on stocks, but it had the most detail that I could find on the downgrade. While the stock is down 3% today, the bounce off the 10ema will be bullish if it holds. Also, the stock came close to closing the gap from Friday just below $21. Anybody buying at these levels at least has limited risk if it goes ahead to fill the gap today or sometime this week...

Most financial stocks haven't recovered from the financial crisis even though the business has returned to solid profits. The growth doesn't exist like it did prior to the crisis but income shouldn't be ignored. The insurance sector remains one of the most undervalued sectors in the market. Stocks like Hartford Financial (HIG), Lincoln National (LNC), MetLife (MET) , and Prudential Financial (PRU) trade significantly below book value. The group consistently traded at over 1.5x book value prior to the crisis. Though all of these companies have variant business lines, the stocks have traded in an incredibly consistent pattern. Some such as Prudential have already significantly exceeded the book value per share from before the crisis yet the stock trades at a paltry 0.59 of book value. Read the full article at Seeking Alpha. Disclosure: Long HIG and LNC. Please review the disclaimer page for more details. 

After the close last night, Paulson & Co filed a 13D disclosing a presentation to the BOD and a letter sent to the CEO. The goal being for Hartford Financial (HIG) to begin the process of a spin-off of it's Property & Casualty business. Simply Paulson believes that Hartford has an industry low valuation due to the combination of both the P&C and Life business lines that competitors all spun-off long ago. He makes a compelling pitch that the ultra low valuation for the company is based on the thesis that analysts just don't follow or understand it due to the combined business lines. A Travelers (TRV) that focuses on P&C or a Lincoln Financial (LNC) that focuses on Life have higher multiples since the analysts follow either business line, but not both. Without doing all that research I could've told them that Hartford was incredibly cheap trading at close to 40% of book value. Paulson though has an army of analysts that did some incredible research. Ho...

After a bad 2011, this year got off to a fantastic start with the model seeing a 25% gain in January easily outperforming the 4.4% gain for the S&P500. The model spent most of the month accumulating cheap stocks in order to take advantage of the market rallying against the proverbial 'wall of worry'. January was an interesting month with stocks rising even in the face of what appeared like continued negative news out of Europe. With the continued focus on Greece, most investors stayed out of the stock market and missed that yields on Italian and Spanish bonds saw dramatic declines. The ability to isolate the problems to Greece and Portugal to a lessor extent were a big relief to a market pricing in a European blowup in December. In addition, the decline in emerging markets inflation was a big benefit to the under performing stock class in the new year. Specifically fast growing countries like China and India saw multi year lows in inflation rates allowing monetary polic...

Lincoln Financial (LNC) reported after the close that earnings for Q4'11 were $1 which helped increase the book value 20% for the year. Now try explaining to a non investor why the stock price for Lincoln declined for the year. The company is worth more by every measure, but the stock is worth a lot less. Another mind boggler is that the short term earnings picture remains reasonable, even though low interest rates are keeping income artificially low. So not only did Lincoln report huge earnings in 2011, but it also has the potential for higher earnings down the road. Speaking of book value, it increased to $48.59. The main increase was due to earnings, but Lincoln also repurchased $575M shares during 2011 reducing the diluted shares by 6%. Anytime a company can buy shares at 50% of book value it provides huge value to shareholders. The company also raised the quarterly dividend 60% to $.08 to yield 1.3%.  It also repaid $250M of Senior Notes. The question still remains w...

After a strong 2009 and 2010, 2011 was a year to forget for this portfolio. The market hit highs around the end of April and this model was soaring to new heights at the time. Many of the holdings had valuations nowhere near the 2007/08 peaks or even close to what would normally be considered rich. Regardless, leverage was reduced since some gains were significant. Then, unfortunately most of the stocks collapsed and even in a few cases approached 2009 lows. With too much leverage left, the model was hit very hard. The good news is that valuations started the year as attractive as during the financial collapse of 2009. 2012 Outlook Portfolio Construction The portfolio remains overweight on the global growth theme. Most of the stocks in this sector trade as if emerging markets are headed towards a recession instead of continued growth. The biggest challenge to our investment strategy in 2011 was the major inflation fears in emerging markets like China, India, and Brazil. As 201...

The more I look at charts of the stocks I own and follow, I keep seeing a similar pattern of either strong support or the inverse head & shoulders chart. Not a technical expert, but viewing the charts gives a good picture of what the market thinks about a stock.  Below are some of the stocks that appear setup for a inverse head & shoulders chart which would be very bullish if the stock can break to the upside. Most of them are on the borderline of the right shoulder extending too far so a resolution is likely on the way. Either a breakdown to test a double bottom or a breakout back to potentially the July highs. For many stocks that would be significantly higher.  Weatherford Int'l (WFT) - oil services stock so not surprising that it has similar pattern to the OIH that Cramer profiled a few days ago.  Lincoln Financial (LNC) - not a very well defined left shoulder, but it still has the same binary setu...

It is amazing to be able to write an article about stocks trading around a forward Price-Earnings ratio of 5. Honestly, why would investors be willing to part with a company earning enough money to pay investors back in 5 years? Bonds and Treasuries can't come close to matching that, especially with interest rates at historical lows. These corporate earnings should be ever more valuable. What is ultimately amazing is that these stocks aren't comeback stories or rebound stocks. These companies aren't forecasting massive growth that might not be achievable in 2012. For the most part, earnings have been stable and predictable for the last few quarters if not the last couple of years. Why then is the market ignoring the earnings bounty provided by these stocks at current prices? Honestly, that question is perplexing. All four stocks had strong earnings in Q3 (outside a catastrophe loss at one firm) when markets faced huge financial turmoil. If earnings held up then, why would o...

After the close today, Hartford Financial (HIG) reported earnings basically in line with expectations following the tornado disasters in the US during Q2. More importantly though, HIG announced plans for a $500M share buyback equalling 5% of their current market cap of $10B. This always begs the question of why the stocks of insurers such as HIG and Lincoln National (LNC) remain so weak. Both stocks are solid position in our portfolios since they have consistently strong earnings and trade below book value. HIG trades at a PE of sub 6. Sure they are a financial, but they don't face the regulatory issues as banks. Based on a quick estimate, the book value per share for HIG would rise by $2 to $45.26 if the complete buyback were completed around the current price of $22.50. Naturally HIG is likely to rebound higher before it gets the opportunity to complete this buyback, but if not 22M shares will be removed from the market. Another nugget is that the BV will jump to $50 with e...

This is the 4th in a series of articles on stock sectors that have struggled to recover from the levels prior to the financial crisis. (See the first three here:  1 ,  2 ,  3 ) This article focuses on the life insurance and retirement financial services sector. As in most sectors, these companies don't have the exact same business models making broad comparisons an initial step of research. Read the full article at Seeking Alpha . Disclosure: Long CB, HIG, LNC in client and personal accounts. Please review the disclaimer page.