I sold out of the rest of my Arcan position this week. I took the rest off at $1.18. This was after I had sold the majority of my position a couple weeks ago (September 11th) at $1.25.
I had difficulty making up my mind on the stock. The company could, get taken over any day for a premium, and if that happens I will be kicking myself. But I could also be sitting around for a long time waiting for that day.
I bought Arcan at $1.50 in July. Thus, I’m taking a loss of about 20% on the sale.
The deciding factor for me was this chart, from a BMO research note on the company released two weeks ago.
A couple of weeks ago a Seeking Alpha article was published that highlighted some problems on the horizon for Radian Group (RDN). The article was excellent and it introduced me to the idea of liquidity risk at a mortgage insurance subsidiary. That led me into a much more detailed investigation of the Radian Guaranty insurance subsidiary, which I will discuss below.
The liquidity of an insurance sub
Before getting into the issues specific to Radian, let’s talk a bit about liquidity risk. For some reason liquidity is not at the forefront of discussion during conference calls and in brokerage reports on mortgage insurance companies. Questions and comments focus on risk to capital ratios and loan loss reserve methodologies, which, while providing important clues, do not in themselves allow you to conclude whether a company will have the cash available to pay the claims. The author of the SeekingAlpha article, Darren Oliver, suggested that this was because the mortgage insurance industry is not very well understood. This could be the case, I don’t know. I just find it surprising.
As a mortgage insurer, the bottom line is that you have the cash available to pay claims and that the regulator who watches over you believes that this is the case. Over time, the cash and short term investments on hand plus the premiums paid need to be enough to pay out claims made as well as operating expenses incurred. If there is a concern that the cash and future premiums will not be enough to cover the expected claims, the insurer will either be taken over by the regulator or put into run off.
I have been inching my way back into a position in Equal Energy over the last week and a half. On Thursday, with the stock dropping back to $3.40 (on the Canadian exchange) I increased my position significantly.
Of course I sold Equal at an even lower price. I began selling in May with a third of my position at $3.35, another third at $3.20, and the rest at $2.85.
So why by back now?
Well, some of the facts have changed.
Three key events have occurred that have changed my opinion on Equal Energy
- I read the SeekingAlpha posts on Equal by Nawar Alsaadi
- Drilling of the Mississippian has begun
- Central banks around the world are easing
More on my Tepper moment
In a response to my post Yesterday’s David Tepper Moment, the comment was made that the original David Tepper moment came after stocks had already moved quite a bit and that, if this was to be another David Tepper moment, it would be because we are far closer to the top than to the bottom. The comment was directly especially at gold stocks.
This made me think twice. As I remembered it the months after the original Tepper moment were some of the best for my portfolio.
Of course it was possible that I was re-imagining history in the most flattering way. Rather than take my memory on its word I decided to go back and check the stats.
2010-2011 Portfolio Holdings
As it turns out, the 5 months following David Tepper’s comments were very good for my portfolio. They were also fairly good months for stocks as a whole. The S&P returned 13% over that period. Read more