Author: Brian Skally, Absolute Returns
Covestor model: Absolute Returns
“There's no such thing as a financially distressed company that everyone loves” - Howard Marks, Oaktree Capital Memo 6/20/12
Whilst our model generally seeks opportunities in stocks which are under-followed or overly complicated, occasionally we find opportunity in situations which are simply hated.
It’s hard to find stocks more hated at present than mortgage insurers, and in Genworth Financial (GNW) we have a troubled multi-line and mortgage insurer, an interim CEO who simply can't get along with analysts, and significant interest from some very reputable value investors.
Genworth has faced numerous challenges to spinning off its US mortgage unit and is now forced to seek alternative methods of restructuring the business. It should, however, be able to divest its Australian unit sometime in 2013. Any divestiture is likely to create value for shareholders given the significant discount to tangible book value.
In what was a relatively active month for the portfolio we exited one position in addition to opening a position in the above mentioned Genworth Financial.
We exited our portfolio position in Gramercy Preferred stock (GKK-A). This preferred is trading substantively above par, reflecting a number of accrued yet unpaid dividends. This issue is likely to become current at some future point. Indeed, the speculation is that this must happen soon to enable the common to pay a dividend and attract investor interest. However, much of the discount to fair value was eliminated by the recent run up.
The most noteworthy activity within the portfolio this month has been the settlement of a longstanding legal case between Ambase Corp (ABCP), the FDIC and the DOJ, resulting in payment to Ambase slightly in excess of $180 million. The settlement would appear to be far in excess of the market’s expectation (at least the expectation of those still paying attention), as the stock jumped significantly on the news.
Whilst Ambase remains substantially undervalued in our assessment, despite the post announcement run up, shareholders now face a number of concerns. Ambase is essentially a shell with a minimal amount of property, some investments and a large amount of cash on the way. Whilst the minority shareholders may be best served by an orderly liquidation, initial indications by management are for the payment of a special dividend.
The potential with all cash-rich shells is for management to make a poor acquisition, which destroys shareholder value. Buffett has often been quoted as saying that “time is the friend of the wonderful business, the enemy of the mediocre.” The prospects then for a shell corporation with cash burn and a history of failure appear grim indeed and yet a few positives remain.
Most notably, there’s the potential for further gains from an outstanding tax case, tax loss carry forwards for any future acquisition, and the remaining undervaluation in relation to liquidation value. Whilst the position appears likely to provide a substantial gain on our purchase price, it is unclear as to whether or not the full potential will be realized.
Looking ahead, the model continues to seek attractive situations in which to deploy capital. However, as opportunities become more scarce in a buoyant market, our expectations of future performance diminish considerably.