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Updates on a few positions during a very busy week

This last week has been jam packed full of news, earnings and outsized moves.  I don’t think I have ever had as many 10%+ days for stocks that I own (or have recently owned but unfortunately sold) as I did in the last week.  While some of these moves do not seem attributable to any specific news (such as First Mariner and Atlantic Coast Financial) most of them do.  And while I have not had time to fully digest all of the news (I haven’t had time to review what announced spin-off for IDT and so therefore won’t be touching on that) I did want to discuss the stocks that I have reviewed and can comment on in the paragraphs below:

MBIA (MBI)

I sold out of MBIA in all but one account about two weeks ago, which is unfortunate timing given what has transpired.  Nevertheless I had my reasons, they remain valid, and you gain little by looking back at bad luck.   When the stock dipped into the $13′s on the day of the announcement I was really surprised, I mean the Bank of America deal was what we had all been waiting for, but I took advantage of the opportunity and loaded up the truck with stock.  Therefore MBIA is a large position for me right now – it seemed very close to a sure bet in the mid-13′s and so I bought 11% position, going on some margin to do so.

At some point shortly I am going to have to reduce that position (I’m uncomfortable with it being this large) but I am waiting for at least the conference call tomorrow to do that.  And what I do with my shares will really depend on what is said – in particular what management says about structured unit on call.  They may come out and say that they have commuted the worst exposure, the unit isn’t going to regulator, and they expect to realize ABV of $10 from it. In that case maybe MBIA is worth quite a bit more than National alone.  We shall see.

The news that they had settled their outstanding litigation and commuted their exposure with Societe Generale was very positive.  Not only does it reduce the CMBS exposure from $15.6 billion at year end to $4 billion subsequent to it and the Bank of America settlement (and don’t forget that MBIA said on their second quarter call that virtually all of their most concerning exposure in the structured sub was related to the CMBS held by Bank of America) but it puts an end to the transformation litigation, meaning that National, the public insurer, can be considered a stand-alone entity and should be able to write new business as soon as they can get a credit upgrade to investment grade.   I’m excited to listen to the call tomorrow morning.

YRC Worldwide (YRCW)

Its been an absolutely incredible move over the last week. YRC Worldwide posted positive operating earnings and net earnings that were well above expectations for what is typically a weak seasonal quarter. While I have read some criticism that management was vague on the conference call, I thought they were as forth right as can be expected and were consistent with the areas that they offered no comment on (such as current quarter performance and capital expenditure guidance).

I have hardly reduced my position in YRC Worldwide, which is unusual for me after such a move. I am going to be a bit greedy here because I think the opportunity is skewed to the upside. The second and third quarters are seasonally better. There appears to be some evidence of more pricing power in the trucking industry and management suggested that their own pricing had become “more competitive” now that they had improved their customer service. The route and terminal changes approved by the union should lead to significant cost savings in the next few quarters. And if I may be allowed to dream a little, its not inconceivable to me that they may be able to refinance some of their debt to better terms. There are a lot of things that could go right, and perhaps more importantly, if they do, the leverage to the equity is tremendous.

On the other hand it’s a shame that I exited Arkansas Best a few weeks ago but, much like the case of MBIA, I stand by the method. I exited because I wasn’t sure whether the union negotiations were going to be settled without a strike. They weren’t and the stock popped. That’s just life.

As for the disclosure released last night that YRC Wordwide approached Arkansas Best for a takeover at the beginning of April, I admit I was surprised. But it makes sense to try to combine the two remaining union shops, and it was done at a time when Arkansas Best was trading at a severely depressed stock price because of the uncertainty of their union contract negotiations. The question that arises is whether management would make such an overture if they didn’t feel that things were going quite well in house. Maybe I am guilty of undue optimism, but I like to think that YRC Worldwide management would only make such an approach if they felt that things were rolling along quite well with the turnaround.

Walker & Dunlop (WD)

Walker & Dunlop reported a weak first quarter and the market punished the stock for that on Wednesday.  But there were a lot of interesting comments made on the conference call, and I referenced some of the highlights in the following tweet show this morning (you will want to read it from the bottom up).

tweetshow

They are getting into CMBS, into something that sounds a bit like a CLO though they called it a partnership on the call, and they are exploring REIT options. I have to think that the Fortress ownership and their two appointed board members are responsible for these initiatives.  The company also guided to higher origination volumes in Q2 (between $2.3 billion and $3 billion versus $1.5 billion in Q1) and maintained guidance for the year.  While I still don’t know if the insider selling has abated (see my original post for details), I remain patient with my position because I believe that when it does the stock will move solidly higher.

Nexstar (NXST)

The stock just continues to power higher.  While its not the largest position in my portfolio (primarily because it never seems to correct enough for me to buy much more) it keeps getting larger from price appreciation alone.  Nexstar continues to build together more and more stations with the latest being the acquisition of White Knight Broadcasting.  According to management on the Q1 conference call, the acquisition is going to add another $100 million to revenue and $1 per share in incremental free cash flow.  Management guided to free cash flow of $5 per share over the 2014-2015 period (because of the revenue generated from political advertising, cash flows are generally averaged over the two years cycles).  That kind of guidance keeps me holding the stock even after it has doubled since my original purchase.

Impac Mortgage (IMH)

It wasn’t a great quarter at Impac but it also wasn’t any worse than I expected.  Guidance was optimistic.  With that said, I was clearly wrong about this one as my original idea was that Impac would be able to buck the trend of declining margins with increased volumes of mortgage originations and that just hasn’t held up.  But the stock still might come around. On the conference call the company said they want to use the capital they raised for a combination of MSRs, new securitizations and for funding of jumbo mortgages. They also guided to much higher volumes in Q2 (expecting $300 million per month by the end of the quarter) and over $4 billion in volume for the year.

Its not the simple earnings story I thought it might be, but they are in the right space at the right time and if they can execute and grow the MSR (which because they are growing organically they won’t have t pay up to purchase), grow originations, maybe get back into the securitization business, there could be upside here.  As I have noted I took down my position a fair bit when I was posting about my gain on sale margin worries and it is about a 3% position right now, but I plan to sit on what I have and see what they can pull off over the next few quarters.

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8 Comments Post a comment
  1. jess #

    thanks so much for doing this blog – ive made quite a few thousand $$$ the last week thanks to you (IDT, ABFS, MTG). keep doing your good work!

    May 10, 2013
  2. Anonymous #

    Did the conference call change anything for you?
    I’ve been long MBI as well.

    May 16, 2013
    • I’m still holding my shares, but I am waffling a bit as to whether I should reduce them down to a more normal sized position. I’m torn between the discount to adjusted book value (MBIA is trading at about 1/2 book right now) and that it could be a while before the company begins to write new business at National, and therefore could be wait before we see the share price begin to move towards ABV. I was hoping that the price would move into higher teens or maybe even $20 in short order but I’m starting to question whether that is going to happen.

      The BTIG note does a good job of describing the situation:

      http://www.btigresearch.com/2013/05/15/mbia-meeting-with-ceo-jay-brown-outlines-path-forward-for-national-value-at-structured-product-unit/

      May 16, 2013
  3. Nice blog, I’ll continue to follow it. In the spirit of giving back:

    For you natural gas theme, you might want to take a quick look at BRY.TO (BRYFF on pink sheets in US).
    For you banking / mortgage origination theme you might want to look into FBC. As well as following mortgage rates to help time purchase and sales at bankrate.com and weekly mortgage bankers association survey at http://www.mbaa.org/NewsandMedia/PressCenter/84507.htm
    For your MSR theme you might want to look that NCT’s recent spinoff NRZ
    For your trucking theme you might want to take a quick look into FFEX

    May 17, 2013
    • Thanks for the ideas. I’ll take a look at BRY and FBC. Not as excited about originations any more though.

      I’ve actually been watching FFEX for a while, have almost pulled trigger a couple of times but unfortunately didn’t. I liked that they didn’t have much (any?) debt, i f I remember right they trade a decent discount to book and seem to be slowly improving operations.

      I owned NCT pre-spin so I have shares in NRZ. Planned to add but I was away yesterday morning and the shares just took off by the time I was back. But I really like the MSR business, even after all the moves. I mean when rates rise these MSRs are going to be on the books a long time. I think returns there could surprise to upside.

      May 17, 2013
  4. Lou #

    re: “..I like to think that YRC Worldwide management would only make such an approach if they felt that things were rolling along quite well with the turnaround…”

    The commentary I’ve read reminds us their history of doing so is littered with the sorts of failures which contributed to the problems they are struggling to overcome, I saw the rejection of that attempt as contributing to a relief contributing to the next leg up from the $15.00 range to the Friday close.

    Given your interests in commodities, might you be looking at steel which has been beaten down to new lows while water infrastructure and auto parts/makers rally. Difficult to imagine Arcelor heading much lower, although any short term returns resulting from a turnaround in that situation may not meet your targets.

    May 20, 2013
  5. Lou #

    and given YRC’s move today alone, might you be adjusting your targets (at what point has it surely spiked and overshot at least for the short term?)

    May 20, 2013
    • I’ve started to take a little off of YRCW today

      May 20, 2013

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