Friday, February 12, 2010

Sold All Baby B Shares at $76.51/Bought 50 GFW at 22.76/Bought 50 GY at $3.7 as Lottery Ticket/HTGC Slashes its Dividend/PSEC/China

1. Sold All Baby Berkshire Shares (BRK-B) at $76.51 Yesterday ( 2010 Speculative Strategy)(See Disclaimer): The Old Geezer can not resist the temptation of taking a quick one thousand plus dollar profit. Berkshire popped yesterday when it became clear that the merger with Burlington would soon be finalized after the approval yesterday by Burnlington's shareholders, and the Baby B shares would then be added to the S & P 500 index. WSJ My shares were bought shortly before the 50 to 1 split at $3298 and at $3244.RB BUYS BACK BABY BERKSHIRE SHARES at $3,298 SOLD BY THE LB /Bought 1 BRK/B at $3244/ The post split price for the 1 share bought at $3,244 would be $64.88 and $65.96 for the others.

2. Bought 50 GFW at $22.76 (see Disclaimer): GFW is a senior bond from AAG Holding, which is a wholly owned subsidiary of Great American Financial (GAF) (History), who guarantees this note, and GAF's major subsidiary is the Great American Life Insurance Company. Great American Financial Resources, Inc. - Home Great American Financial is in turn a subsidiary of American Financial Group (AFG), a insurance holding company. AFG is the only public company in this litany. This is a link to its last earnings report for the Q/E 12/31/2009. ex991020910.htm

GFW has a maturity date in 2033 and has a coupon of 7.5%. With a par value of $25, my current yield is close to 8.25%. This is a link to the prospectus: Final Prospectus Supplement The quantum site shows that this bond is rated investment grade, and I did not attempt to verify that claim as either accurate or current. Exchange-Traded Debt Securities Table - QuantumOnline.com

American Financial Group is controlled by the billionaire Carl Lindner and his sons. Most of the Berkshire proceeds will be invested in income producing securities, as required in the 2010 Speculative Strategy: 2010 Speculative Strategy-Gateway Post

3. Aspen Insurance (owned non-cumulative preferred only- AHL-PA): Aspen declared its regular dividend on both its common and preferred shares. Aspen Insurance Holdings also reported 126.3 million of net profit for the 4th quarter of 2009, or $1.44 per share, and $5.16 per share for last year. Book value increased 21.1% to $34.04. This is more than satisfactory for me as an owner of AHLPRA: Item # 6 Bought 50 AHLPRA at $19.75

4. Hercules Technology (owned) (HTGC): Hercules Technology Growth Capital announced a dividend of just 20 cents for the current quarter. This is below the regular dividend for the 4th quarter of 2009 of thirty cents before the special 4 cent dividend. .herculestech.com/PDFs/Q309EarningsPRFINAL11509.pdf The shares will fall on this dividend reduction. As a BDC, Hercules has to pay 90% of its net income in dividends so a special dividend may have to be given at the end of 2010. However, the dividends paid in 2009 were $1.26 per share, and a run rate of 20 cents per quarter would only be 80 cents. Hercules Technology Growth reported 4th quarter results in line with expectations, with net investment income of 27 cents per share.

The explanation for the dividend cut was given as follows: As we turn our attention to 2010, we have begun the process to build our investment portfolio which will eventually lead to increased net investment income and provide the necessary taxable earnings to continue to grow our dividend. Hercules has always believed, and as evidenced by our own variable dividend tied to taxable income performance, BDCs should pay their dividends to reflect their taxable income. Because of this discipline, Hercules has proactively adjusted its dividends to reflect its current investment portfolio taxable income generating capabilities. We have already taken steps to begin this new phase of growth of our investment portfolio, by adding four new managing directors focused solely on new asset originations who have unique sector and stage-of-investment experience specifically in the lower middle market, later stage and early stage venture capital."

Net asset value declined to $10.29 per share as of 12/31/2009 from $11.56 as of 12/31/2008.

Hercules also announced a 35 million dollar stock repurchase program yesterday.

One reason for the dividend reduction is that the firm received 68.8 million in principal repayments during the quarter and those funds will need to be redeployed to earn appreciable income.

The shares tanked in after hours trading yesterday falling 13.85% to $8.71. Since a BDC is bought primarily for its income generation, and the substantial risks in owning them are generally known which explains their yields in the 11% to 15% range (i.e. losses on speculative investments), a dividend cut on a $10 share price to yield just 8% at the current run rate will have an immediate and substantial adverse impact on the share price. Prior to the dividend cut, HTGC was yielding over 12%. For the price to generate a 12% yield at a $.8 annual dividend per share, the price would have to fall to about $6.5. So, I am glad that I only bought 50 shares prior to the earnings report. /Bought 50 HTGC at 9.8 The shares will now have to fall below $7 for me to round up to 100 shares total, assuming that there will be some kind of dividend raise as the year progresses as suggested in the earnings call transcript: (page 4: Seeking Alpha) It may be that my 50 shares of HTGC will need to be included in the next Roth conversion.

I would also view the dividend cut to be a warning on 2010 results falling below expectations. The forecast was for $1.23 in 2010 net investment income prior to this report: HTGC: Analyst Estimates Since the BDC has to distribute 90% of its taxable net income as a dividend, that would suggest a 2010 dividend of $1.11 for 2010 rather than $.80. The only way you can get to 80 cents for a BDC, or higher assuming a raise during the year, is to earn substantially less than $1.23 for the year.

5. Bought 50 GenCorp at $3.7 Yesterday (GY)(Lottery Ticket-Category)(see Disclaimer) : I did not go into any detail researching this LT. Instead, I developed a mild interest in it due to the progress in its real estate business. GenCorp has fallen on some hard times as shown in the following long term chart: GENCORP INC Share Price Chart The high point was as recent as 2006 when the stock briefly crossed $20 before starting a waterfall formation, hitting a closing low of $1.95 in June 2009: GY: Historical Prices for GENCORP. Starting in August 2009, the stock enjoyed a huge percentage move, spurting in a few months from around $3 to $8.99 on November 23, 2009. Then, the stock tanked again to its current level. Most investors who have some familiarity with this company think of it as an aerospace and defense firm: Aerojet The Reuters profile page has a description of this business. My interest was perked by its real estate business.

The firm owns 12,200 acres in the Sacramento metropolitan area, about 15 miles east of downtown Sacramento. An additional 580 acres is owned in Chino, California. The efforts of GY to develop this land are described in detail in its last filed report: (pages 8-12: e10vk) GenCorp recently formed the Easton Development Company, LLC. to manage the planning, entitlement, development and value creation for its real estate. GenCorp Sacramento has approved the entitlements to the first two boroughs, a 1208 acre Glenborough at Easton and Easton Place, a 182 acre transit-oriented urban town center. The remaining projects are in different entitlement stages: Gencorp News Releases The market cap of the company at the current price is 216 million.

The company was profitable in 2009. The summary of its last quarterly report can be found in this Press Release filed with the SEC: Unassociated Document Price to sales is .28 GY: Key Statistics for GENCORPGenCorp

I would not risk more than $200 due to its numerous problems, however, which are summarized in the 10-K, and include pension liabilities, high debt levels, environmental clean up type issues, and asbestos litigation. Some of the debt issues were alleviated some with the recent closing of a 200 million convertible offering, due 2039, and bearing a 4.0625% coupon. Imperial Capital Closes $200 Million Convertible Subordinated Debenture Offering for GenCorp Inc. No analysts follow the stock as far as I can tell.


6. PSEC (owned): Allied Capital rejected Prospect Capital's last and best final offer. EX-99.1

7. 30 Year Treasury Auction: The treasury auctioned the 30 year treasury bond yesterday. The yield was 4.72%, higher than expected prior to the auction. www.treasurydirect.gov .pdf This was the highest yield since August 2007: News Headlines The 20 year treasury ETF fell again in price yesterday, declining .54% to $89.82: TLT That ETF was at $122.26 on 12/19/08, or $117.72 adjusted for the dividend: TLT: Historical Prices for ISHARES BARCLAYS 20 Gary Shilling thinks that is good.

8. Wellpoint Health Insurance Increases: My high deductible plan with Blue Cross Blue Shield of Tennessee had about a 10% rise in the premium in 2010, compared to 2009, and I have never had a claim other than my annual physical. Maybe I should feel blessed both on my health and my health insurance premium which must be excluded from the government's CPI calculations along with several other major bills that I pay. I read that Anthem Blue Cross of California, a subsidiary of Wellpoint, was hiking rates for its 800,000 customers by as much as 39%. latimes.com There is no end in sight either.

9. China: For the second time this year, China's central bank raised bank reserve requirements. Effective 2/25/2010, the bank reserve requirement will be increased by 50 basis points. This article in Reuters contains views of this surprise hike by some analysts. This hike raises the reserve requirement to 16.5% of deposits. In the U.S. the requirement is 10%: FRB: Monetary Policy, Reserve Requirements

2 comments:

  1. I did see your comment about Hercules the other day although I hadn't heard of it. I have heard of a couple of the companies in their portfolio. It seems to me this type of "venture" company is so heavily dependent on their managment team that it's hard to guage with a historical performance since '03 (i.e. have to be able to manage in lean times as well as growth). Loan performance has been an issue the last few quarters and it looks to continue for a few to come. Based on their investor relations presentation it appears they were banking on getting some additional SBIC government incentives and up their debt to equity leverage to 1.4 to 1 (whereas BDC's are allowed 1:1). Again, it depends on how effectively their management uses that extra leverage. I'll stop here for fear of entering into B.S. mode with my lack of knowledge. I'm likely to devote a bit of capital to it but I'd consider it a speculative play in many ways as evidenced by their price fluctuation upon earnings release. I'll likey follow your 50 share increments idea and buy it down until I reach 50-200 shares.
    http://files.shareholder.com/downloads/HTGC/844847942x0x331442/1D73612E-C1D0-4914-B0B3-43C0F0214B4F/InvestorPresentationQ309.pdf

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  2. Hercules may have more potential upside than the other BDCs due to the prevalence of warrants in most of its deals, as well as the potential of some of the companies. Still, the BDCs invest in private companies that have an uncertain future. I do not mean uncertain as to how much money they will make, but as to whether or not they will even survive to become public companies. The failure rate is generally high, and that is reflected in the terms of the loans, with high interest rates and equity kickers. These investments are summarized at pages 3 to 14 in this last file 10Q http://www.sec.gov/Archives/edgar
    /data/1280784/000119312509229553/
    d10q.htm

    I suspect, but do no know, that Hercules was buying their stock last Friday to keep it from falling to $8. They announced the 35 million dollar buyback on the day HTGC informed investors of the dividend cut. The volume on Friday was close to 2.4 million with the daily average around 186 thousand. For me, for a BDC investing in these risky ventures, I want to be compensated somewhere in the 11 to 15% range and for the BDC to earn its payout from real income rather than accounting gimmicks. As a result of the dividend reduction, the price will have to fall to around $7 to bring me to the 11% yield at the current run rate of .8. So, I will wait to add once I see a further decline in price to $7 or an increase in the dividend rate which would increase the yield to over 11% at the then existing price at the time of the increase.

    TAXI is different than the others.

    The BDCs with dividends in the range of 11 to 15% at the time of purchase include PSEC (currently 15% yield) and AINV (10.5%). Some others that I do not own and their current dividend yields include: TICC (10%); TCAP (13.6%); ARCC (11.54%); BKCC (14.84%) & CODI (11%). The yields are as of 2/12/2010.

    HTGC is currently at 8.68% which is not competitive with the other BDCs, and HTGC's yield does not compensate the new owner for the risk inherent in these type of companies. I will reinvest the dividend, however, and I did well on HTGC the last time I owned it with dividends reinvested.

    This is a good discussion by a money manager who is knowledgeable about this sector: http://seekingalpha.com/article/
    182771-top-10-reasons-to-
    invest-in-business-development-companies

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