Tuesday, November 26, 2013

Hey Hey Sallie Mae

With the market ignoring all bad news and missed earnings, it is hard to find a bargain. But here it is, in the most reviled area of the financial services industry, the student loan servicers. Sallie Mae is trading at P/E of 8 for current earnings. With employment increasing, default rates are declining significantly. Moreover, there is no more reliable a buyer of a stock than the company itself. Sallie Mae has allocated $400m to buyback shares. Guidance for 2014 is $2.94 a share. If the $400m is used at an average stock price of $28/share earnings will be $3.03/share. That makes Sallie Mae seem very cheap, assuming no upside in servicing or originations. The author has entered a long position in SLM. Bought JAN 2015 $27 CALL for $1.90 Sold JAN 2015 $30 CALL for $.90 Net price $1. Upside $3 / Downside $1.

Sunday, October 27, 2013

Pioneer Natural Resources: US Shale Oil play

The largest pure play on shale oil in the US is Pioneer Natural Resources. Pioneer Natural Resources has leveraged heavily to accumulate the largest position in the Permian Basin. Pioneer estimates that the Permian Basin has 50 billion barrels of exploitable oil, second only to the Gnawar oil field in Saudi Arabia in size. As long as the price of oil stays high, then Pioneer Natural Resources will benefit heavily from this domestic drilling location. The author will enter a long position at $211/share, at a $30B market cap.

Google: The future of media, mobile content

Google is the king of search. Via Youtube, Google has the potential to be the king of media content distribution. Youtube will soon introduce paid subscriptions. This will allow content providers to completely circumvent cable networks and market directly to their audience. No more Nielsen ratings, the truth will be in click counts. The amount of users accessing Youtube from mobile devices is up from 6% in the same quarter the previous year to 40% last quarter. Mobile is where the largest growth in advertising revenue is occurring in the industry. Imagine if Google advertised show premiers by emailing all Google Android users the trailer of the new program? It is nearly inevitable that this distribution medium will have a major impact. This position has very little to do with current value, or quantification of the future. It has everything to do with future potential that can be realized in the very near future. The author has established the following position... Bought GOOG Jan 2015 $1050 Call Sold GOOG Jan 2015 $1060 Call ...for a net debit of $4.70

Tuesday, September 3, 2013

Like everybody else, going short treasuries, with a untwist

It does not take a genius to assess that the QE taper may increase the yield curve. But markets do not move in a straight line, and often relapse. Thus the movement will be jerky, and pronounced. But with that said, the net effect is a high probability of a trend toward higher rates over a 12 month period. This blog believes obtaining a leveraged return on anticipating a small upward movement is the best way to gain from the "untwisting" of long term rates when the bond purchases subside. The author is long JAN 2015 $100 TLT Puts and short JAN 2015 $95 TLT Puts for a net debit of $2.4.

Ambac : Back from the dead

Even five years after the financial meltdown, investors need a forward view of the bond insurers, especially Ambac. The "new" Ambac earned $58m in premiums this quarter (est. $200m annual) and holds a market valuation of $1b. Ambac also has lawsuits outstanding against the major banks that were settled with competitor MBIA for $1.6b. It is risky to speculate on the legal system, but Ambac lawsuit should yield a larger settlement than the MBIA due to the proportional size of the damages to Ambac. There is deep value in this company, and "somewhat" risky legal event upside also. That makes looking back at the old, dead predecessor distracting from the green shoots that investors should take hold of. The author is long AMBC at $22.50.

Wednesday, May 8, 2013

Buy Radian Group : Benefit from the re-privatization of the US mortgage insurance market

Since the downturn over 40% of all mortgages issued in the US were through the FHA program. Now that the housing market has stabilized the government seeks to reduce its role. To that end, FHFA has increased incentives NOT to obtain loans from the FHA program by mandating that on June 3, any mortgage obtained through FHA where the purchaser puts less than 20% down at purchase will be required to pay private mortgage for the life of the loan, regardless of LTV (loan to value) of the property. This is a far cry from the previous rule of mandated PMI for 5 years and 80% LTV. Why? The government is trying to revive the private mortgage insurance market. Radian Group is one of the largest private mortgage insurers that will benefit from this government pullback. After suffering huge losses in the financial crisis, there are tailwinds for the company. The company is well reserved, the delinquency rate of the legacy portfolio is rapidly declining, and the company maintained national operations ready to handle the volume of work that will be available. Most importantly, earnings from new mortgages is now outpacing the losses from old mortgages. The author has purchased RDN at will buy RDN at $13/share.

Monday, December 3, 2012

Kids know best #2: Mattel

Daddys and daughters. One of those two is hopeless in the gaze of the other. So for my daughters birthday she wanted a new doll. Not any doll, an American Girl doll. I happen to think Disney's business model takes lessons from the Branch Davidians and Jamestown to keep their following loyal. I found another business very similar. American Girl. $100 for the doll. Extra $20 to get the doll's hair done. Another $10 for a "facial" for the doll. There was a line at the "makeover counter" to do this. I did not see anyone get the facial. I might have started reading the book of "Revelations" for other signs of the apocalypse if I had. So I need to know who is making this killing? Mattel. The makers of Barbie. Diversification has been long coming. I looked at the financials. Great. Steady income growth and a modest P/E ratio. Plus the look my daughter gave when she walked away with her doll. The author bought shares at $37.15.