On Friday, toward the end of the day, I added to my position in Cemex, just to rebalance the portfolio and take advantage of undue weakness in the Mexican stock market.
Earlier in the day, though my timing was good, it could have been better, I swapped my exposure in Japan Smaller Capitalization Fund [JOF] for the SPDR Russell/Nomura Small Cap Japan ETF [JSC]. Given that I like JOF, why did I trade? The premium to NAV got too high — it was 10% on an intraday basis by my calculations, so, I traded. Eventually it will go back to a discount of -5% or so, and I will reverse the trade. I still like Japanese Small caps, but I have my limits when it comes to NAV premiums.
Away from that, I am still considering trading away some/all of my RGA for some MetLife, since I think it will be a cheap way to acquire more RGA. I’m glad the separation has finally come for MetLife and RGA; it was only a question of when. RGA is a unique company; unless Swiss Re, or Munich Re, or Aegon wants to spin out their Life Re business, there are no other pure play life reinsurers out there. Reinsurance of mortality in the present environment is a cozy oligopoly, with one former main player, Scottish Re (spit, spit), badly damaged. (Though I lost badly on Scottish Re, I am still grateful that when I figured out what was going on, I was able to sell at $6+/sh. Current quote: 14 cents/sh, and I hope that MassMutual and Cerberus are enjoying themselves. I took enough lumps for my patronage of Scottish Re, so anyone who sold when I did is at least that much better off.)
Pricing power isn’t anything amazing here, because the life insurers in general have enough capital, and are not ceding as much business to the reinsurers. But it is a steady business, and one with barriers to entry — ACE and XL will try to get into the business, and Scor will try to improve its position, but RGA, Swiss Re and Munich Re will be tough to dislodge.
I am looking forward to the next reshaping, and considering industry trends… I’m really not sure which way the portfolio will go, but I am gathering tickers and industry data, and preparing for the next change.
One last note: did you know that I am overweight financials? Yes, but only insurance companies, and Alliance Data Systems. (I still don’t trust the banks, and particularly not the investment banks.) The insurers that I own are cheap to the point where earnings don’t need to grow much to give me good value over the long run, and are largely insulated from any hurricane activity this year. Now, if the winds blow, you can expect that I will do a few trades to take advantage of mispricing among reinsurance companies. That said, Endurance, Aspen, Flagstone, and PartnerRe look cheap to me at present. Endurance looks very cheap… I have owned all four in the past, and will probably own some of them again in the future. But, no major commitments until the wind starts blowing (hurricanes), or if we get to the middle of the hurricane season (say, mid-September), and nothing has happened. Then it would be time to buy. Damage from windstorm tends to be correlated within years — bad years start early, and are very bad. Good years are quiet, and continue quiet with a few storms doing low levels of damage.
Anyway, that’s what I am up to. Got other ideas? Share them with my readers!
Full disclosure: Long CX JSC RGA ADS
Hi David, are you leaning in any direction for your portfolio rebalancing, industry-wise, with the tickers you have been collecting? I can’t really figure out this market – I have mostly sold, just adding RIG (on the Brazil developments) and a microcap wind power stock that James Altucher mentioned recently. If related companies like drillers are excluded, I may be going underweight oil for the first time in years (which surprises me almost as much as you being overweight financials).
Personally, I am far more tactical than David. I believe that the bear market has resumed and that, while there are a growing number of relatively cheap stocks I can identify, I believe they could get much cheaper. I have found quite a few micro caps that are trading at very low valuations. One I have owned since February 2003 is Miller Industries (MLR). The company has paid down most of their debt and have a big cash position relative to their balance sheet. Their customers are suffering massively with diesel costs where they are and credit availability has been constrained for operators. I sold 95% of my position back in the post-Katrina spike in the stock but retain a smallish position as a placeholder. I think the stock could fall another couple of bucks as I don’t think their cycle has troughed yet. But I think normalized mid cycle EPS is around $2-$2.50, so the stock is already cheap – I am just waiting for it to get a bit cheaper.
Otherwise I think there is pretty good value in healthcare assuming the worst case political scenario doesn’t emerge. Profit margins for the sector are near long term norms, so the “E” in P/E is pretty reliable…as opposed to some sectors where the “E” is based on elevated or record margins (like energy and basic materials) which makes the seemingly low P/E ratio deceptive. For example, a company like Sanofi-Aventis (which I and my clients own) is trading at a single digit P/E ratio based on conservative forward earnings estimates and pays a decent dividend that is well covered. The pipeline is decent and results in US dollars are benefiting from the weak dollar.
I think there is an excellent opportunity for people to execute hedged, market neutral or long/short strategies at present. We have a big healthcare position, ag commodities, some precious metals stocks and a mortgage REIT versus short positions in the Nasdaq 100 and Emerging Market Equities. While to date the major market damage has been done in the financial and consume sectors, we believe this next bear market phase will bring with it recognition that this is a potentially broad based and deep recession that is developing and that many of the other sectors (particularly consumer based tech that dominate the Nasdaq 100 like RIMM, AAPL and GOOG) are expensive enough that should this more negative outcome emerge their stocks could go down much more than the SPX, DJIA or certainly healthcare…at least in our opinion!
On a personal note, I like Allied Irish Bank (AIB). They’ve been pretty well hammered along with the rest of the banks, however their balance sheet isn’t cluttered with “mess”. They’re looking to expand more into Poland as it appears that market may be consolidating a bit.
For the energy sector, I concur on RIG, also like APA, DO and UPL. Would not be a buyer at current levels.