This article will highlight some smaller companies that gurus are currently interested in. Among them are The South Financial Group (ticker: TSFG) and Zenith National Insurance Corp (ticker:ZNT). Zenith National Insurance Corp has a market cap of $1.42 billion while The South Financial Group has a market cap of just $86 million. And there is some Fairfax Financial Holdings Limited (ticker: FFH) news that some may have missed.
Zenith National Insurance Corp (ticker:ZNT)
This stock came to my attention due to a recent Gurufocus write up on Prem Watsa's recent activity. Prem Watsa currently holds 2,191,100 shares as of 12/31/2009. There are 37.48 million shares outstanding meaning Prem Watsa owns about 6% of all the outstanding stock.
After digging into things for only ten minutes, it was quickly becoming apparent that this company is very much shareholder friendly. They are interested in generating earnings in a highly competitive business. They have no interest in reducing profit margins simply to gain market share.
For example, the following can be read on page 4 of the 2009 annual report under the business description:
We measure our performance by our ability to increase stockholders’ equity, plus dividends to stockholders, over the long term.
10 minutes into reading the annual report, I was somewhat curious about where the stock has gone over the past few years. That's when it was discovered that Zenith National Insurance is up 30% today on news of a buyout. More specifically, a buyout by Prem Watsa of Fairfax Financial Holdings Limited (ticker: FFH). There is little upside potential given the offer price of $38. ZNT closed at $37.87 today. However, there seems to be some outrage at what some think is a lowball offer for the company. There is a chance that Prem could sweeten the deal.
The South Financial Group (ticker: TSFG)
The South Financial Group, Inc., a South Carolina corporation headquartered in Greenville, South Carolina, is a bank holding company. “TSFG” refers to The South Financial Group, Inc. and its subsidiaries, except where the context requires otherwise. TSFG operates principally through Carolina First Bank, a South Carolina-chartered commercial bank headquartered in Greenville, South Carolina, which conducts banking operations in South Carolina and North Carolina (as Carolina First), in Florida (as Mercantile), and on the internet (as Bank CaroLine).
This write up on TSFG is rather lengthy as it was originally going to be a stand alone article. Since it is not a compelling stock to run out and buy, it is discussed here in a more condensed form.
Perhaps what is most interesting about The South Financial Group (ticker: TSFG) is that it is currently trading at $0.38, down from a high of $30 just 2 years ago. But what is more interesting is that gurus are buying this beaten down bank holding company. And the even better news is the market cap of just $86 million which is putting this stock under the radar of most institutional investors. The question that remains ... what is TSFGs future?
To be honest, the best thing about this company is the interest being paid to it by the gurus tracked by Gurufocus. Michael Price owns 2,000,000 shares as of 12/31/2009, which accounts for 0.35% of the $369 million portfolio of MFP Investors LLC. Arnold Schneider owns 2,873,365 shares as of 09/30/2009, which accounts for 0.23% of the $1.81 billion portfolio of Schneider Capital Management. Lee Ainslie owns 16,713,639 shares as of 12/31/2009, which accounts for 0.12% of the $8.99 billion portfolio of Maverick Capital. No gurus have recently sold TSFG. The buying is fairly impressive given the small size of this company. These 3 gurus hold 21.6 million shares. This represents about 10% of all the current stock outstanding (215.4 million shares).
Sadly, the guru interest is what is most compelling about this company. I have to admit, the amount of transparency in the annual report is impressive. The company does a good job of breaking down the business and explaining the pieces in a fair amount of detail.
On Feb 11, 2010, TSFG’s board of directors cut their pay by 50%. However, 2 directors decided to leave at the time of this announcement. In 2008, total director compensation was $1.7 million. The 50% reduction in pay is a welcome change that should help preserve much needed capital. The exit of two directors may simply be a case of two people leaving that simply don’t care about the shareholders, but only care about their pay check (over $100K a year). The exact reason for their departure is unknown but the press release says the typical niceties such as their departure is not part of a dispute and their past service is appreciated. Of course, what else would ever have been said? In my opinion, a good board member would offer to stay on board so long as their expenses are covered. An unrealistic expectation perhaps. The board has stated that it may consider a further reduction in size in order to trim more costs.
This stock is under $1 per share. If this condition continues, it could be delisted, causing disruption of the stocks liquidity.
Non performing assets as of Dec 31, 2008 were 4.1%. This is much worse than the sub 1% metric that is typical for this company. The company attributes much of these losses to the real estate environment in Florida. Florida has 71 of TSFGs 180 branches making exposure to Florida significant.
On September 11, 2009, TSFG held a special meeting of shareholders at which an amendment to the Articles of Incorporation was approved to increase the number of authorized shares of common stock from 200 to 325 million.
TSFG could return to earnings from the past of $90 million if non performing assets are contained. For sake of argument, assume that more dilution will occur and that 325 million shares will exist.. Upon return to being profitable, EPS could be about $0.27 ($90 million divided by 325 million shares) in several years. Assuming a multiple of 12, this stock could be back to $3.25 per share within a few years. Of course, this stock is loaded with risk but it does offer a compelling discount to perceived value.
There is some convertible preferred stock out there which means the amount of common will undoubtedly increase from the current 215.4 million shares. Probably not to 325 million shares though.
The company is probably undervalued. The primary issue is non performing assets and the need for them to return to more historical levels. After that happens, earnings may return. And, of course, more red ink could ultimately make this company go bankrupt or cause more dilution than is currently expected. So, do Michael Price, Arnold Schneider and Lee Ainslie see something here. Or are they simply taking a statistical shot in the dark? The only way to invest in this one is to piggyback on their idea. The risk/reward ratio may be significant enough to take a shot at this one.
DISCLOSURE: The author of this article does not own any of the companies mentioned in this article. As always, do your own due diligence.
Zenith National Insurance Corp (ticker:ZNT)
This stock came to my attention due to a recent Gurufocus write up on Prem Watsa's recent activity. Prem Watsa currently holds 2,191,100 shares as of 12/31/2009. There are 37.48 million shares outstanding meaning Prem Watsa owns about 6% of all the outstanding stock.
After digging into things for only ten minutes, it was quickly becoming apparent that this company is very much shareholder friendly. They are interested in generating earnings in a highly competitive business. They have no interest in reducing profit margins simply to gain market share.
For example, the following can be read on page 4 of the 2009 annual report under the business description:
We measure our performance by our ability to increase stockholders’ equity, plus dividends to stockholders, over the long term.
10 minutes into reading the annual report, I was somewhat curious about where the stock has gone over the past few years. That's when it was discovered that Zenith National Insurance is up 30% today on news of a buyout. More specifically, a buyout by Prem Watsa of Fairfax Financial Holdings Limited (ticker: FFH). There is little upside potential given the offer price of $38. ZNT closed at $37.87 today. However, there seems to be some outrage at what some think is a lowball offer for the company. There is a chance that Prem could sweeten the deal.
The South Financial Group (ticker: TSFG)
The South Financial Group, Inc., a South Carolina corporation headquartered in Greenville, South Carolina, is a bank holding company. “TSFG” refers to The South Financial Group, Inc. and its subsidiaries, except where the context requires otherwise. TSFG operates principally through Carolina First Bank, a South Carolina-chartered commercial bank headquartered in Greenville, South Carolina, which conducts banking operations in South Carolina and North Carolina (as Carolina First), in Florida (as Mercantile), and on the internet (as Bank CaroLine).
This write up on TSFG is rather lengthy as it was originally going to be a stand alone article. Since it is not a compelling stock to run out and buy, it is discussed here in a more condensed form.
Perhaps what is most interesting about The South Financial Group (ticker: TSFG) is that it is currently trading at $0.38, down from a high of $30 just 2 years ago. But what is more interesting is that gurus are buying this beaten down bank holding company. And the even better news is the market cap of just $86 million which is putting this stock under the radar of most institutional investors. The question that remains ... what is TSFGs future?
To be honest, the best thing about this company is the interest being paid to it by the gurus tracked by Gurufocus. Michael Price owns 2,000,000 shares as of 12/31/2009, which accounts for 0.35% of the $369 million portfolio of MFP Investors LLC. Arnold Schneider owns 2,873,365 shares as of 09/30/2009, which accounts for 0.23% of the $1.81 billion portfolio of Schneider Capital Management. Lee Ainslie owns 16,713,639 shares as of 12/31/2009, which accounts for 0.12% of the $8.99 billion portfolio of Maverick Capital. No gurus have recently sold TSFG. The buying is fairly impressive given the small size of this company. These 3 gurus hold 21.6 million shares. This represents about 10% of all the current stock outstanding (215.4 million shares).
Sadly, the guru interest is what is most compelling about this company. I have to admit, the amount of transparency in the annual report is impressive. The company does a good job of breaking down the business and explaining the pieces in a fair amount of detail.
On Feb 11, 2010, TSFG’s board of directors cut their pay by 50%. However, 2 directors decided to leave at the time of this announcement. In 2008, total director compensation was $1.7 million. The 50% reduction in pay is a welcome change that should help preserve much needed capital. The exit of two directors may simply be a case of two people leaving that simply don’t care about the shareholders, but only care about their pay check (over $100K a year). The exact reason for their departure is unknown but the press release says the typical niceties such as their departure is not part of a dispute and their past service is appreciated. Of course, what else would ever have been said? In my opinion, a good board member would offer to stay on board so long as their expenses are covered. An unrealistic expectation perhaps. The board has stated that it may consider a further reduction in size in order to trim more costs.
This stock is under $1 per share. If this condition continues, it could be delisted, causing disruption of the stocks liquidity.
Non performing assets as of Dec 31, 2008 were 4.1%. This is much worse than the sub 1% metric that is typical for this company. The company attributes much of these losses to the real estate environment in Florida. Florida has 71 of TSFGs 180 branches making exposure to Florida significant.
On September 11, 2009, TSFG held a special meeting of shareholders at which an amendment to the Articles of Incorporation was approved to increase the number of authorized shares of common stock from 200 to 325 million.
TSFG could return to earnings from the past of $90 million if non performing assets are contained. For sake of argument, assume that more dilution will occur and that 325 million shares will exist.. Upon return to being profitable, EPS could be about $0.27 ($90 million divided by 325 million shares) in several years. Assuming a multiple of 12, this stock could be back to $3.25 per share within a few years. Of course, this stock is loaded with risk but it does offer a compelling discount to perceived value.
There is some convertible preferred stock out there which means the amount of common will undoubtedly increase from the current 215.4 million shares. Probably not to 325 million shares though.
The company is probably undervalued. The primary issue is non performing assets and the need for them to return to more historical levels. After that happens, earnings may return. And, of course, more red ink could ultimately make this company go bankrupt or cause more dilution than is currently expected. So, do Michael Price, Arnold Schneider and Lee Ainslie see something here. Or are they simply taking a statistical shot in the dark? The only way to invest in this one is to piggyback on their idea. The risk/reward ratio may be significant enough to take a shot at this one.
DISCLOSURE: The author of this article does not own any of the companies mentioned in this article. As always, do your own due diligence.
