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Security National Financial Corporation and the Madness of Crowds

February 21, 2013 | About:
John Hussman, Ph.D.

gmax

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"I can calculate the movements of heavenly bodies but not the madness of men."

— Isaac Newton Newton's statement and the saying that "on Wall Street history repeats every day," perfectly appear to apply in the case of Security National Financial Corporation (SNFCA), a holding company in the life insurance, mortuary and mortgage loans segments.

While it is not meaningful to go into many financial details at this stage, it is important to note that from 2007 to 2011 the company's top and bottom lines decreased from $209 KKU to $159 KK (-24%) and from $2.2 KK to $1.3 KK (-43%), respectively.

The quarterly figures from fourth quarter 2011 until third quarter 2012, show a clear reversal of this multi-year downtrend as total revenues surged from $48 KK to $64 KK (+33%) while PAT jumped from $0.8 KK to $4 KK (+374 %).

This most remarkable improvement in financials and hopes for even better results in the future, sent the stock to an all-time historical high of $15.39, i.e. a 13-fold increase from the 52-week all-time low of $1.17.

Despite these impressive results, the exponential rise of the stock price and general hopes for a solid recovery of the economy in general and the housing market in particular, it is mandatory to keep things in perspective in order to avoid falling for behavioral investing-induced group think and herd behavior.

Remember that "markets have a tendency to overshoot at both ends," as Warren Buffett put it. This not only goes for markets but also for market segments and individual stocks alike, as I would like to put it.

The savvy investor will need to carry out a sound reality check by looking at historical market and stock bubbles and by considering most importantly the following facts:

1. For the past 20 or more years (before the Sept.12 surge) the median stock price had only been about $2 with very few quick-lived highest historical peaks ranging between only $4 to $5.70.

2. During earlier housing and market boom times and real economic growth the above highs had never been exceeded, even when the underlying business was supported by real growth and not expected, projected and hoped-for growth.

3.The current short interest as of 31.01.2013 is a whopping 568 000 shares i.e. 91 times the pre-September surge average short interest.

Now it is simply a matter of asking yourself whether the past 20 years were not really representative of the company's real intrinsic value or whether the expected growth projections and the new sky-high stock price signal the beginning of a brave new world and a new era with history ("Maybe history does not repeat, but it certainly rhymes," as Mark Twain said) not repeating itself.

Is it really different this time?

If you think so, you should buy.

If you don't think so, this represents an exceptional, historic short opportunity. Be quick to grab it!

Yes, investment decisions are really as simple as that.

But now comes the hard part: actually putting your thoughts into action and your money where your mouth is!

Disclosure: I am short SNFCA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.


Rating: 2.5/5 (2 votes)

Comments

payyourtuition
Payyourtuition - 1 year ago
While I agree the sharp (albeit parabolic) run up may have gone to an extreme as you say they sometimes do, I don't agree that this should revert all the way back to the mean. The reason is they changed their business model. Instead of maintaining a predominantly wholesale model in the origination of their loan production they transitioned successfully to a retail model. Why was this so suddenly successful? It was successful because due to regulatory changes and restrictions, the wholesale model does not work as well as it use to in the mortgage origination industry. Having a retail emphasis has contributed to rapid growth of experienced loan originators joining the company that did not want to continue to work for mortgage brokers who were at a competitive disadvantage. The surge in revenue and profits is a direct reflection of increased market share derived from this change in their business model. Another contributing factor is that the long time founder of the company passed away last year and most of the stock was closely held. If you notice there has been a significant increase in the stock held by institutions. As I stated the "parabolic" run up may have overshot short term but it's not as simple as taking their previous earnings and using that as a primary reason to feel that the "entire herd" did not do some of their own due diligence. Best of luck going forward...in full disclosure, I was long from the $2.25 area and sold on different levels on the way up, currently no position but am looking to re enter a long position at what I would consider a very fair valuation.
gmax
Gmax - 1 year ago
Dear P,

thank your very much for your feedback and insights.

I too had been long SNFCA and started selling off at the then historical highs between $4-5.

The change of business model sounds interesting indeed and the latest financials without any doubt signal great improvements vs. the multi-year downtrend.

But is it really so unique that it has a definite USP the competition will not be able to match or offer something even better?!

Like with any sudden exponential surge, there is too much hype,hope & expectation built in already with especially the momentum crowd jumping on to the band wagon at insane prices completely oblivious of the inverse risk/return ratio at these levels.

It is always the same in the final stages of stock manias: Just look at the ultimate stage of stock price surges of GMCR,NFLX and PANL before their sudden collapse.

All these companies have / had a definite USPs and great financials.

Yet,once the price goes over the top big time, it is all the way down from there.

The same will / is happening to SNFCA as of this writing .It,too, will regress to the mean rather sooner than later,I would say.

What really took me by complete surprise is the fact that despite millions of markets watchers ,commentators and investors,not one actually commented on the most unusual, sudden and quick lived bubble forming during the period Sep12-Feb13.

Where were they?

As you might have seen ,my short rationale worked out perfectly so far and the timing ( of the publication of this article) actually was spot-on in that the stock dropped a total 31% from around $13.5 last Friday all the way to $9.31 yesterday.

And I expect further declines these coming weeks and months.

Again,thank you very much for your inputs.

gmax
Gmax - 1 year ago
Dear P, thank your very much for your feedback and insights. I too had been long SNFCA and started selling off at the then historical highs between $4-5. The change of business model sounds interesting indeed and the latest financials without any doubt signal great improvements vs. the multi-year downtrend. But is it really so unique that it has a definite USP the competition will not be able to match or offer something even better?! Like with any sudden exponential surge, there is too much hype,hope & expectation built in already with especially the momentum crowd jumping on to the band wagon at insane prices completely oblivious of the inverse risk/return ratio at these levels. It is always the same in the final stages of stock manias: Just look at the ultimate stage of stock price surges of GMCR,NFLX and PANL before their sudden collapse. All these companies have / had a definite USPs and great financials. Yet,once the price goes over the top big time, it is all the way down from there. The same will / is happening to SNFCA as of this writing .It,too, will regress to the mean rather sooner than later,I would say. What really took me by complete surprise is the fact that despite millions of markets watchers ,commentators and investors,not one actually commented on the most unusual, sudden and quick lived bubble forming during the period Sep12-Feb13. Where were they? As you might have seen ,my short rationale worked out perfectly so far and the timing ( of the publication of this article) actually was spot-on in that the stock dropped a total 31% from around $13.5 last Friday all the way to $9.31 yesterday. And I expect further declines these coming weeks and months. Again,thank you very much for your inputs.
payyourtuition
Payyourtuition - 1 year ago
I'm more in the camp of it retracing 50% of the up move into the the 7.50 area, of course it can overshoot to the downside just as much as the price can overshoot going up. As far as having any specific edge that is unique, I would say that compared to the big box banks which don't require their loan officers to take the same required tests (for national and state licensing) as mortgage bankers or brokers they get the more experienced originators that have established relationships with the realtor base. Their percentage of originations that are purchase as opposed to refinance transactions is way ahead of the industry. This is vital to maintaining market share as interest rates increase and refinances dry up. The business in general is a service business and with the 'seasoned originators" they can perform much more efficiently in turn around times compared to the banks. This is instrumental for purchase transactions as they require time of the essence. In my opinion the price on the shares of the company were grossly undervalued as they were selling for way under book value. I can only speak for their mortgage side of the business as that is the industry that I've known for over thirty years, the insurance side and the cemetary side are different animals but it looks like they have contributed to the growth of the overall company as well. Thank you for the response and further explanation of your reason for selling short, and congratulations on a very profitable trade to this point.
gmax
Gmax - 1 year ago
Dear Payyourtuition,

thank you for your feedback.

I admit that I do not possess the very specific industry expertise and mortgage business related insights & know-how you seem to have gained through 30+ years of working in this sector.

My rationale is based on my 25+years of global investing experience and the understanding of investor psychology.

While in business, science & technology and many other fields the only truly constant thing is change,I do know that basic human behavior and thus investor behaviour will never change.

Therefore the extreme " irrational exuberance " ( and its opposite extreme

" unconditional capitulation " in downturns ) as in the case of SNFCA's surge and its abrupt "sudden death " was to be expected with a fairly high degree of certainty.

My question to you is : Since you had been long the stock and since you are fully convinced of the new unique business model and its USP,why then did you not hold on to the stock as it surged to historically high ,unprecedented levels riding it all the way up to $15+ ?

" To invest successfully does not require a stratospheric IQ, unusual business

insights or inside information.



What is needed is a sound intellectual framework for making decisions and the

ability to keep emotions from corroding the framework ".

[/i]

[i] Warren Buffett


So could it be possible that your emotions got in the way and corroded your framework?

If you really want to get back in around $7.5, you are actually betting on the very highly unlikely repeat of an isolated,unprecedented outlier event which I would like to term a

" supernova " metaphorically speaking.Supernovas occur on average only three times in a century and are defined as stellar explosions that are extremely energetic and luminous often briefly outshining an entire galaxy before fading from view over several weeks or months.

In other words they are extremely rare and quick-lived high impact events !

Just some words of caution for your consideration at this stage.

Yes indeed, I am enjoying the highly overdue and continuing decline of the stock

( $ 7.79 i.e. - 42% as of yesterday ) and its new found reality.

Quod erat demonstrandum !

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