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Week 82: Lots of Flux

Portfolio Performance


Short Lived Niko Experience

I wrote about a new position in Niko in a short summary 3 weeks ago.  A couple weeks later I sold the stock.  What can I say – its part of my process.  A lot of times I only get clarity about a stock once I own it.  I buy a position, sit on it for a few days or a week, and do some more background and some more thinking on the name.  With that my opinion becomes more clear.

The discomfort I developed with Niko was partially the result of another batch of less than stellar drilling results, but mostly the result of my conclusion that this isn’t the right time yet.  The driver of the share price will be the settlement of a new gas price contract in India.  I don’t think this is likely to occur until the existing contract expires, which is not until next year.  In the mean time Niko will continue to experience production declines in India, and they are open to negative news flow on drilling.  Read more

Is the Gain on Sale Boom over?

Earlier this week my portfolio was rolling along nicely, having closed at an all-time high on Wednesday night with me looking forward to further gains ahead.

And then Flagstar reported their fourth quarter results.

I don’t own Flagstar.  I don’t even follow Flagstar.  They are a Michigan based bank that has had some problems in their past and, most importantly for this discussion, run a reasonably large sized mortgage operation. In the fourth quarter Flagstar reported a big decline in their gain on sale margin, from 244 basis points to 153, and the Street took it to mean that the mortgage origination boom was over. In addition to the carnage of Flagstar (down about $2.50 to $15.57 on Thursday), PHH Corp, Impact Mortgage and Nationstar all took it on the chin.

But while the headline decline was steep, there is more to the story.  During the conference call Flagstar provided some clarity. The following exchange between Matthew Kerin, the president of the Mortgage banking division, and Paul Miller of FBR is instructive (via SeekingAlpha). Read more

MGIC: Is Something out of Whack?

MGIC has really taken it on the chin over the last couple of days.  While I can’t speak to the cause of the move down on Thursday, the fall on Friday, which was followed by further pressure in after hours trading, was precipitated by a note from Macquarie analyst jasper Burch.

Burch called MGIC’s valuation “out of whack”, cited earnings and book value pressure, and suggested that there was “an outside chance” that the regulators might “pull the plug”.

I found the comments surprising.

First, I don’t think his regulator comment is consistent with MGIC’s disclosure (from the SeekingAlpha transcript).

We regularly provide updates to both the GSEs and the OCI of our expectations regarding our capital position and as a result this quarter’s results including the risk to capital ratio are not a surprise to them. The GSEs and the OCI understand that our forecast calls for the risk to capital ratio of Magic to continue to rise for some time to come. The exact timing of when it will begin to decline is subject to among other things, the level of new notices and cures, the amount of new insurance written to Magic and the outcome of dispute resolutions.

Read more

An Appreciation of Comverse

One of my new sources of ideas and opinions has been twitter.   I’ve found a bunch of people on there who provide insights and from whom I have been able to learn and garner new investment ideas. While twitter has its drawbacks (for one it is difficult to hold a long conversation) it’s a great place full of investors, traders and fund managers that I would otherwise not have access to.

One fellow who I follow goes by the moniker @mojoris1977 and the name Jim Morrison. He has had a number of successful recommendations, but I hadn’t followed him into any of them until around the middle of December when he recommended a company called Comverse Inc.  Shortly after the recommendation I bought a small position after just a little background diligence, but since then I have looked a more closely at the company and turned my position into a more significant one.

Having gotten the idea from someone  who has proven to be quite astute, I approached my research from a somewhat different angle than I usually do. Rather than coming at it from the is-this-company-worth-looking-at-any-further angle I came at it from what’s-the-story-I’m-missing angle.

The Story

It wasn’t obvious at first glance. You take a look at the Comverse balance sheet and you see negative book value.  You take a look at the income statement and you see barely break-even earnings.  You take a look at the history and you see a prior accounting scandal related to the back dating of stock options and pre-spin-off financials that are mixed together with the holding company’s majority ownership in Verint.  Add to that a somewhat hard to understand business, and an equally hard to understand (CEO (because of his French accent) and you have a whole bunch of reasons to stop looking. Read more