Speaking of special situation investing. ABX Air was mentioned in Barrons this weekend in their "sizing up small cap section".
"So at $5.38, the stock is selling at nine times this year's estimate and seven times next year's -- hardly extravagant multiples, even untaxed, for a company growing 25% annually.
Those projections, however, could prove conservative, perhaps very conservative. Untaxed net of 65 cents this year and 90-95 cents next aren't out of the realm of possibility. "
Since first mentioning
Cavco it's been pretty much straight up. This pick came as a result of reading a fantastic book on special situation investing (mentioned in the link). A quick review of my calls on them is interesting;
1. With no improvement in the manufactured housing market worth $21-$28
2. With a 5% growth rate they would be worth $31
3. I then complained a little about the executive compensation but recognized that it ought to be a powerful motivator
4. Cavco was listed and traded higher than I had hoped for.
5. Berkshire Hathaway was trying to purchase Clayton Homes, another manufactured housing company. This, along with the research posted by opponents of the sale, was a great indication that the industry was at a cyclical low.
6. I discussed how important it was that US Bancorp was entering the Manufactured Home loan market was very bullish.
5. Mentioned it when it was at $18.15
Well Cavco traded above $40 today
that Fannie May would offer 30 year mortgages for manufactured homes with deposits as low as 5%.
Well I did all of the right things here except actually buying CVCO! It never quite got cheap enough for my "random" target so I never bought any. Three spin offs that I watched, Car Max, Cavco and ABX Air all shot up significantly from the prices they traded at when-issued (there is trading on upcoming spin-offs before they are actually available).
Since my first post on AES
I have continued to track them and become more bullish. The stock has trippled and probably has another double left in it. They reported their earnings for 2004 and conducted their investors conference call today. Their financial information and disclosures are the best of all the companies I've invested in. They forecast earnings of 69c in 2004 along with 23% + growth 5 years out. Building a model with that 5 year data, 10% over the next 5 years and then GDP growth, along with a 17% discount rate (cost of equity today) down to 12% at GDP growth, gives a value above $16. If you build a more complex model it is even a little higher.
There is another security issued by AES, a trust preferred
offering a 7-8% yield as well as a couple of call options on the AES common
. This just got upgraded by S&P to CCC+ with a stable rating from a negative outlook. I went to see what this meant in terms of default risk and came across an interesting article on measuring default risk based on ratings link
. It identified the probability of default over 5 years at 58.5%. This is very much higher than I expected. Even a B rated security has a 25% risk of default over 5 years. Their approach seems pretty solid which leads me to believe that S&P is way off with their ratings. That isn't so surprising given all the misses they had over the last few years with highly rated securities defaulting.
A Tax deferred Security Yielding 6%, offering significant growth
I wouldn't have believed this until I read this article on Master Limited Partnerships
. These are practically the ideal security with low management risk (forced to distribute almost all earnings), great tax treatment and great growth potential. Interestingly mutual funds can't own them today but if Bush's Energy bill gets passed they may be able to. That could cause a lot of demand, I expect some of these will be a market beating proposition.