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I’ve been lazy!

July 26, 2011

OK I admit it. It has been too long since I have posted. But it’s summer and I’ve been busy. Well, not exactly busy, rather travelling and, yes, of course, extremely lazy. However, sometimes lazy, going-on slothful, is the way to go in investing.

Does that mean I haven’t been doing anything with my portfolio? Once again, not exactly. With the sale of the second half of my ASCMA position in early July I had to think about what to do with the shekels I now had burning a hole in my pocket. Unfortunately I didn’t have a lot of time to ferret out new and extremely undervalued businesses. But when I did have a few minutes to look around, I found…. NOT MUCH of interest. Everything was too expensive. What to do? Since three of my existing holdings were down around their yearly lows, what better than to add a bit to these positions? So I’ve added to positions is BAC.WS.A, AIG and GYRO. Notwithstanding Mr. Market’s current assessment, I think all three represent great value.

I added to my BAC.WS.A position at $5.50 in June and now again at $4.60 in July. We’ve still got 8 years for this story to play out and I really think it will. I am undeterred even if my position is now more than 20% underwater.

As to AIG, I added another 20% to my holdings at $27.50, which brings down my average cost to just under $30 a share.

Thirdly, I added to my small position in GYRO; they just announced a rights offering, causing a slight dip in the share price.  Why the rights offering, you may ask. I know I did. The ostensible reason is to fund the ongoing lawsuit with the State of New York as well as to fund ongoing operations. Mind you, they haven’t priced the offering yet and may never have to if the NY State appeal is rejected in the near future. But I do think it prudent that they are preparing in case the appeal drags on, and on, and on. Management may have also used the rights offering announcement as a kind of warning; the rights exercise is limited to those holding under 20% of outstanding shares, which means potential dilution for a large shareholder seeking to get greater control. I see that Bull Dog  currently owns 17% of shares outstanding, so maybe they are using this to say ‘don’t buy any more, or else”.  In any case, I was heartened to see that the press release announcing the rights offering included a statement in which the earlier-stated goal of liquidating the company over the long-term was reiterated. As to the outcome of the appeal, I have read both the State’s appeal and GYRO’s response and my opinion, having absolutely no legal background, is that I don’t see that the State has much of a case; they seem to have thrown themselves on the mercy of the court and asked the judge to be ‘fair’ to the people of New York who will have to pay the large settlement cost. A kind of weak argument, if you ask me, but then again you never know.

I’m still in slow liquidation mode here.  Unless a fantastic opportunity presents itself over the next year an a half my strategy is to exit positions as they reach their target sell price (hopefully) and reinvest only a portion. This is the pre-election period and historically it has been positive for equities. Once we tick by the next election, though, hold on to your hats. To mix metaphors I think the can we are kicking down the road now, economically speaking, will be coming to roost in late 2012 or 2013. (Ray Dalio seems to be of the same mind.. see the New Yorker article on Bridgewater Associates). Happy summer investing to all!

  1. thomascapital permalink

    GYRO and Bulldog reached a standstill agreement in 2008; I doubt the issuance is being done for control purposes. If you think about where the stock price could be a couple years from now, to me it signals mgmt would rather issue stock at ~$70 by default than perhaps having to issue stock at ~$30.

  2. Daniel permalink

    have you taken a look at MTG seems like a nice entry point, and insiders have purchased recenlty.

  3. Taylor permalink

    I’ve read the legal documents regarding GYRO’s case (including the full transcripts of the court hearings), and it is apparent, at least to me, that the state did not present its case very well. One aspect of this case that is particularly interesting to me is the fact that the town of Brookhaven has a comprehensive plan, which has a goal of eliminating spot zoned industrial properties and converting them to PDD (planned development district). This comprehensive plan was actually a decisive factor in the court’s original decision.

    Despite all of this, I still have not established a position, although I haven’t ruled it out. My reasons include the lack of a time frame, my lack of legal knowledge, and the possibility of an adverse decision.

    If the appeals court rules against the company, the share price could fall to its “pre-court decision” level, which was around $40 if I recall correctly. Having said all this, I do think the presence of a comprehensive plan and the residential nature of the surrounding area help the company’s case. But you have to weigh this against a potential loss of 30+% if the appeals court rejects the company’s argument. If the company receives the award, I estimate that the pretax NAV will be around $155 million against a current market cap of about $83 million (I added the award to the GAAP book value of equity).

    • My understanding is that the appeals court could throw out the verdict or reduce the settlement. In either case GYRO has not lost the lawsuit. In the former, there would be a retrial (or an out of court settlement) in which the state would presumably do a better job of presenting their case. The potential outcome of a retrial is hard to predict (as was the outcome of the original trial) and, in my opinion might result in a lower judgement for GYRO but not NO additional compensation.. My reading of the trial documents makes me think that the judge in the appeals case would be hard pressed to find a justification for reducing the settlement; what would the new settlement amount be based on? The state was unable to introduce any additional evidence regarding the value of the land expropriated and the only valuation was that of the plaintif, which was accepted. So it appears to me that the verdict either stands or the case remanded to the original court to retry.

      I still think there is more potential upside than downside at the current price level; that’s the justification for increasing my investment in the low $60 range.

      • Taylor permalink

        You make a good point. This is an interesting situation indeed. I may review some of the court documents to refresh my memory (Its been about 2 mos since I looked at this stuff). As I mentioned earlier, I think the Comprehensive plan is a big factor here. The fact that Brookhaven wants to reduce spot zoned industrial sites really undermines the state’s argument IMO.

  4. ryan permalink

    With the BAC.WS.A warrants are you planning to make your money of the Volatility of the warrants or are you planning to convert? Thanks

    • I am projecting that we will eventually move past this financial crisis, B of A will rebuild its capital position and the company will be once again considered a key pillar of the American economy (or at least the banking sector). Earnings will return to pre-crisis levels and the bank’s book value will be viewed as a real measure of the bank’s asset base and thus earnings power. All this will take some time, maybe even 5 to 7 years. I’m willing to wait, as the warrants for me are an investment. I bought the warrrants simply for the leverage they provide. As I’ve said before I’m for the KISS style of investing. I view volatility forecasting the same way as I view stock market forecasting; I just don’t think anyone is really good enough at it consistently to make money. So, no, I’m invested in the BAC warrants because I believe the underlieing company has a distinctly better future than Mr. Market is currently reflecting in the price.

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