Marketocracy Gurus Buy Bond Insurer, Bail On Great Britain (Forbes)
Marketocracy February 20th, 2008
02.20.08, 11:20 AM ETThe market has indicated that the future for bond insurers looks bleak.
Industry players like
These products, often made up of bundled subprime mortgages, declined sharply in value as the number of mortgages in default jumped in the past year. Bond insurers could be on the hook for far more claims than anticipated, thanks to the continued deterioration in the mortgage market.
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The urgency to fix bond insurers and to preserve pristine credit ratings is mounting. At the House of Representatives Financial Services Committee hearing last week, New York Gov. Eliot Spitzer said he expected a resolution in the next three to five days, lest regulators would have to step in. (See “Good Back, Bad Book.”)
The stocks of these bond insurers have now been boot-stomped by nervous stock market investors. In the past 12 months, MBIA and Ambac have both dropped more than 80%.
But the sell-off in bond insurers could present opportunities for nimble investors who are willing to tolerate a high degree of risk. The best-performing online investors, Marketocracy’s M100, are now cherry-picking the sector for money-making prospects.
One bond insurer the M100 now like: Bermuda-based
Analysts say that the company, which has a market capitalization of about $1.85 billion, isn’t completely immune to the problems plaguing the mortgage industry. Assured has exposure to Alt-A and home equity loan securities backed by residential mortgages. Analysts note that both segments of the housing market will experience above-average default rates.
But fans of the stock point out that Assured is one of the few bond insurers that refused to insure collateralized debt obligations of asset-backed securities. And the company’s AAA rating is intact, which means the company can write more business at better pricing.
Assured has continued to grow, expanding into international markets. The company recently opened offices in London and continental Europe.
Last week, Assured announced a dividend hike of 13%. The insurer will pay a dividend of 4.5 cents on March 17 to shareholders of record at Feb. 29’s closing bell. The previous quarter’s dividend was 4 cents per share.
Assured is inexpensive in relation to its expected growth, with a price-to-earnings growth ratio of 0.63. In the past year, the stock has dropped more than 17%. The M100 decided it was time to carve out a position.
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The M100 have also decided to buy
Last week, Volcano said it swung to a fourth-quarter loss because of a December charge from its buyout of a company called CardioSpectra. Volcano recorded a loss of $23.74 million, or 53 cents per share, versus a profit of $1.43 million, or 4 cents per share, for the year-ago period. Excluding $26.2 million in buyout charges, the company earned 5 cents per share.
Revenue jumped 35% to $40 million, a record quarter for the company.
But more important for the Street is Volcano’s prospects. The company said it expects much higher revenue in 2008–between $158 million and $162 million. That’s a sizable increase of about 21% to 24% over 2007. Volcano said it expects a loss of between 2 and 4 cents per share. Excluding a stock-based compensation expense of about $10.2 million, the company forecasts a net income of 16 cents to 18 cents per share.
Those revenue projections beat the Street’s initial estimates, though analysts have since revised their projections. They’re now expecting the company to post a loss of 1 cent per share on $160.6 million in revenue. At the Feb. 15 close of $13.34, Volcano trades at 60.64 times the earnings per share estimates for 2009. But it’s growing at close to 67%.
On the sell side, the gurus decided to bail on British stocks, selling the iShares MSCI United Kingdom Index (amex: EWU). The M100 might have been spooked out of the exchange-traded fund by the Bank of England’s much-awaited quarterly inflation report, which warned that consumer price inflation could rise above a 3% annual rate in the near term.
If annual inflation rises above 3%, the Bank of England’s governor, Mervyn King, has to write a letter to the head of the Treasury, Alistair Darling, explaining why it is 1% above target. Since the central bank became independent 11 years ago, this has only happened once. The focus on inflation diminishes chances for the Bank of England to take a more aggressive approach to cutting rates. The FTSE 100, an index of blue chip stocks on the London Stock Exchange, is down about 8% year-to-date.
Perhaps because of fears of an oncoming recession, the gurus got out of
Fans of the company point to its disciplined acquisition strategy, consistently high profitability and copious free cash-flow generation.
ITW bears argue that a decline in new housing starts and weakness from automakers are pressuring North American results. Analysts also point out that while a strong European economy has so far countered the firm’s falling sales in North America, some European markets are also now starting to exhibit signs of slowdown.
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Guru Buys
Assured Guaranty
Volcano
Guru Sells
iShares MSCI United Kingdom Index
Illinois Tool Works
Marketocracy.com tracks more than 70,000 online stock portfolios. Of those, the top 100 performing portfolios, the M100, are used to create a real-life mutual fund, the Masters 100 Fund, which is managed by founder Ken Kam. Each week, Guru Picks analyzes the buys and sells of the M100. Click here for more information about Marketocracy.com and its money-management services.
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