Saturday, November 1, 2014

Sold Remaining NMFC at $14.63/Bought 100 BANC at $11.7/Pared Highest Cost Shares by Selling 55 FFBC at $17.31 and 50 BHLB at $25.75/ Bought 100 KCAP at $7.54

Big Picture: No Change

Recent Developments: 

The October Chicago PMI rose to 66.2, better than the consensus estimate of 60.5. New orders increased sharply to 73.6. 

The BOJ boosted its annual asset purchase to ¥80 trillion Yen (approximately $732B). Bloomberg The Nikkei 225 responded with a robust up move last Friday:  N225: 16,413.76 +755.56 (+4.83%) European and U.S. equities followed suit.

Personal income increased by .2% in September while real personal consumption expenditures decreased by .2%. The PCE price index increased .1% in September. The personal savings rate for September was 5.6%. News Release: Personal Income and Outlays

Personal Saving Rate -St. Louis Fed


1. Sold Remaining NMGC at $14.63 (see Disclaimer): I changed my opinion about this externally managed BDC after learning about its significant exposure to UniTek. I discussed that loan in detail at SA: New Mountain Finance Share Offering Illustrates Multiple Risks Inherent In BDC Stocks - New Mountain Finance (NYSE:NMFC) | Seeking Alpha

That post was published as an article at SA along with two other Instablog posts that I had previously published at that site.

I did not request SA to publish those Instablogs as articles, but an SA editor did ask me for permission which I gave. I had started to use the SA Instablog as readers here know, due to the large number of problems experienced with Google's Blogger service.

I also told the SA Editor that I would not be submitting articles for publication.

I find it difficult to tolerate some of the comments normally received from individual investors who are simple annoyed by any criticism of a company whose stock is owned by them. In the NMFC article, I was writing about a stock that I owned, though I was criticizing management, something which is hardly a rare occurrence for me. I view an evaluation of management's creation or destruction of shareholder value as a necessary component of risk management.

One of the comments in the NMFC article, written by someone calling himself "BTinSF",  dismissed the article as "too full of self-pity". He was also mystified that anyone did not understand that there were risks associated with BDCs.

I have to admit that I did not see any self-pity in the article. Since I had no idea what that person was was talking about, I agreed with him that my article was "full of self-pity", hoping not to provoke any further banalities from him attempting to develop into a thought worthy of communication.

I was just explaining in my usual objective factual manner the risks inherent in BDCs. For NMFC, those risks were highlighted by the UniTek loan loss originating in my opinion from a poor underwriting decision, which precipitated a net asset value write-down and a large share offering to replenish the BDC's coffers, all happening at the same time. It was more than just the loan to Unitek at 11% cash interest plus a 4% PIK, but the size of the loan as a percentage of NMFC's gross assets.

The shares had not declined that much due to the share offering and the write-down. Perhaps, I lost $40 in unrealized gains, hardly enough to drive myself to drink. I also mentioned  in a comment that my total return for the shares sold after this news was over 13%.

After learning about the UniTek fiasco, I elected to sell the remaining 100 shares in my taxable account, realizing a total return of 13.19%. (snapshots in SOLD 100 of 150 NMFC at $14.4773 (10/23/14 Post)-Bought 100 NMFC at $14.28 (June 2013) 

I waited for the last 50 shares, held in a Roth IRA, to turn profitable before selling that lot. 

Snapshot of Trade Profit:

2014 Roth IRA Sold 50 Shares NMFC +$5.58

As discussed at SA, I will consider buying shares back only when the market price is greater than a 5% discount to net asset value. Due to the write-down in the Unitek loan, New Mountain estimated that its net asset value was $14.35 as of 10/22/14. SEC Form 8-K The company announced that write-off on the same day as yet another share offering to replenish the coffers resulting from that loss. New Mountain Finance Corporation Announces Pricing of 5,000,000 Shares of Common Stock  

I no longer believe that this BDC deserves a premium price to NAV per share, so I sold my remaining shares at a premium to that last reported net asset value per share.

2. Bought 100 KCAP at $7.54 (The $500 to $1,000 Flyer's Basket Strategy)(see Disclaimer): This is an extreme risk BDC in my opinion. The price has recently declined due to a share offering.

Snapshot of Trade:

2014 Bought 100 KCAP at $7.54

Closing Price Date of Trade: KCAP: $7.63 +0.07 (+0.93%)

Company Description: KCAP Financial (KCAP), formerly known as Kohlberg Capital, is the worst internally managed BDC in my opinion. This BDC describes its investment areas as follows:

Click to Enlarge:

Company Website: KCAP Financial
KCAP Financial Profile Page at Reuters

KCAP recently sold 3 million shares in a public offering with a 450,000 share over-allotment option. The underwriters agreed to purchase the shares at $8.02. The last reported net asset value per share was $7.67 as of 6/30/14. Prospectus (risks discussed starting at page 15)


The last quarterly dividend was $.25 per share that was paid on 10/29/14: SEC Filed Press Release

The quarterly dividend reached a high of $.41 per share in 2008 and was slashed in stages before bottoming at $.17 per share in 2010. The dividend was then raised in stages to $.28 per share before being cut again to the current rate of $.25. KCAP Financial Dividend Date & History

KCAP Interactive Stock Chart

BDZ Buzz last published a Seeking Alpha article discussing KCAP back in September.  He views this BDC to be " much riskier"  than the average BDC due in large part to KCAP receiving over 60% of its net investment income from collateralized debt obligations. I agree with his risk assessment and consequently limited my exposure to just 100 shares, which will be a maximum number. I also bought this stock in a taxable account, where I can write off any losses.

Historical Net Asset Value Per Share Destruction: 
Sourced from 10-Q Filings: SEC

3/31/07 $14.78
3/31/08 $13.98
3/31/10 $ 9.62 Form 10-Q
3/31/11 $ 8.64
3/31/12 $ 7.66 10-Q
6/30/13 $ 8.24
6/30/14 $ 7.67 10-Q

That history is self-explanatory. At least the net asset value has remained relatively stable recently.

The value destruction has been concentrated in CLO's and equity securities. As noted by the company, KCAP "typically makes a minority investment in the most junior class of securities of CLO Funds raised and managed by our Asset Manager Affiliates and may selectively invest in securities issued by funds managed by other asset management companies" (page 34, 10-Q).

6/30/14 Values Assigned by Company:
Cost vs. Value
Equity Securities: $16.289+M vs. $75.8+M (pages 13-14 10-Q)
CLO Subordinated Notes & Preferred Stock:  $107.129+M vs. $75.800+M
Asset Manager Affiliates: $83.924+M vs. $75.302+M

Only on Wall Street are people richly compensated for incinerating money.

The asset manager affiliates are described at pages 42-45.

Prior Trades: None

Last Earnings Report: KCAP Financial reported net investment income of approximately $8 for the 2014 second quarter, or $.24 per share, up from $.2 in the year ago quarter.

Q2 2014 Results - Earnings Call Transcript | Seeking Alpha

10-Q For the Q/E 6/30/14 (list of investments starting at page 5)

Rationale: This is a very risky BDC and the current yield highlights that risk. At a total cost of $7.64 per share, the dividend yield is about 13.09%. The general idea will be to harvest four or more dividends and to escape at any profit on the shares.

At the current time, internally managed BDCs are selling at substantial premiums to net asset value per share. I bought shares in the internally managed KCAP at less than the last reported net asset value per share number.

Risks: The company summarizes the numerous risks incident to its business starting at page 17 of its 2013 Annual Report: 10-K

The BDZ Buzz article referenced above also does a good job of identifying the risks.

I view this BDC as extremely risky.

Future Buys/Sells: I am at my limit with 100 shares based on balancing the extreme risks with the income generation. I hope to harvest at least 4 dividends and to escape with a profit on the shares. I did time my entry after

3. Pared FFBC-Sold 55 of Highest Cost Shares at $17.31 (REGIONAL BANK BASKET STRATEGY) (see Disclaimer):

Snapshot of Trade:

2014 Pared FFBC 55 Shares at $17.31

Snapshot of Profit:

2014 Sold 55 FFBC +$110.59 Long Term
The primary profit source was a 50 share market purchase at $14.87. The remaining shares were purchased with dividends and were my highest cost shares purchased with dividends. I was able to harvest the original dividend amount plus a profit on those lots.

Snapshot of Position After Pare:

Position After Pare/Average Cost Per Share=$14.7
The average cost per share was reduced by $.18 from $14.88 to $14.7.

I am now left owning shares bought with two open market purchases and some with dividends: Item # 2 Added 30 FFBC at $14.24 (December 2012); Item # 2 Added 50 FFBC at $14.65 (June 2013 Post)

Prior Trades and Dividend History: I had previously sold the then existing highest cost shares for a profit, harvesting some dividends used to buy additional shares. Sold 57 FFBC at $17.03-Highest Cost Shares(profit $37.68)-Item # 3 Added 50 FFBC at $15.95 (August 2012)

Starting with the 2011 third quarter dividend and ending two years later, this bank was paying out 100% of its net income as a dividend, generating yields in excess of 6%. The regular quarterly rate was $.12 per share and then there was a special quarterly dividend representing the net income per share and that regular rate. The last dividend to include the special component was paid in the 2013 third quarter. Stock Splits & Cash Dividends | First Financial Bank

By selling those shares purchased with that heightened dividend amounts profitably, I captured the dividend yield for that period plus an incremental amount represented by the profit.

When ending the special dividend, the bank increased the regular quarterly dividend to $.15 per share and recently raised the rate to $.16 effective for the next payment. Stock Splits & Cash Dividends | First Financial Bank

On the negative side, the bank did cut the quarterly rate from $.17 to $.1 in 2009. I did not buy any shares before 2011.

Rationale: Overall, FFBC has been a lackluster performer. By selling my highest cost shares profitably, I have reduced my average cost per share to $14.7 and increased my current dividend based on that total cost number to 4.35%, which is respectable.

The market responded positively to the third quarter earnings report that was released prior to the open yesterday.

Closing Price 10/31/14: FFBC: $17.54 +0.82 (+4.90%) claims that FFBC missed expectations by $.02. I believe that it is an incorrect assertion. The bank did report a GAAP E.P.S. number of $.26 per share. However, that number included 5 cents in acquisition and other non-recurring expenses. Typically, analysts exclude those extraordinary items in their estimates. The E.P.S. ex items was consequently $.31, beating the consensus estimate by 3 cents. First Financial Bancorp Reports Third Quarter 2014 Financial Results and Announces Dividend Increase

Future Buys/Sells: If I sell anymore shares, I will be liquidating rather than paring. I would need to lower my average cost per share to buy more shares.

4. Sold 50 BHLB at $25.75-Highest Cost Shares (REGIONAL BANK BASKET STRATEGY)(see Disclaimer): I recently discussed BHLB's third quarter earning's report: Update for Regional Bank Basket Strategy

Snapshot of Trade:

2014 Pared BHLB 50 Shares at $25.75
Closing Price on Date of Trade 10/31/14: BHLB: $25.78 +0.43 (+1.70%)

Snapshot of Profit:

2014 BHLB 50 Shares +$45.82
Item # 3 Bought: 50 BHLB at $24.51 (2/17/14 Post)

Company Description: Berkshire Hills Bancorp (BHLB) is a small bank, headquartered in Pittsfield, Massachusetts that is expanding its geographic footprint through acquisitions.

BHLB announced an agreement to purchase 20 Bank of America branches in NY back in July 2013. SEC Filed Press Release This acquisition was completed last January. This acquisition increased the total number of branches to 91 across New England and New York.

Other acquisitions include Rome Bancorp (Rome, N.Y.) in 2011; Legacy Bancorp (Pittsfield, MA) in 2011; Connecticut Bank and Trust (Hartford, CT) in 2012; and Beacon Federal (Syracuse, NY) in 2012

A long term chart shows a steady rise from around $12 in 2000 to a double top formation at close to $38 occurring first in 2004 and again in 2006. In October 2007, the shares were changing hands at close to $30 and thereafter declined to $17 before bottoming. For the most part, the shares have been in an uptrend with chop since early 2010. The most recent correction started last July after the shares crossed $29, hitting $29.2 on 7/5/13. Long Term BHLB Interactive Chart The movement over the past year has shown two distinct and relatively sharp downturns, the first being in July 2013 and the next one starting in January of 2014. BHLB Interactive Chart The price dip in 2014, roughly from $27 to $24.5, brought the stock back into my reasonable valuation range. Since 7/7/13 to my purchase at $24.51, the price has corrected by 16.06%.

Link to December 2012 Seeking Alpha article on Berkshire Hills Bancorp

BHLB Key Statistics

The current consensus E.P.S. estimate is $1.8 in 2014 and $1.91 in 2015. BHLB Analyst Estimates

Dividends: The bank is currently paying a $.18 per share quarterly dividend. Dividends | Berkshire Hills Bancorp At a total cost of $25.75, the yield is about 2.8%. The dividend was not cut during the recent Near Depression, but was maintained at $.16 per share for 14 quarters.

Prior Trades: Item # 2 Bought 50 BHLB AT $21.66 (3/12/12 Post)-Item # 1 Sold 50 BHLB at $28.74+ (7/13/13 Post)

2013 BHLB 50 Shares +$338.12
Total Trading Profits To Date= +383.94

I currently own another 50 share lot:  Item # 5 Added 50 BHLB at $23.75 (7/19/14 Post)

Rationale: I simply reset my average cost per share by selling the highest cost lot and keeping the lowest cost one.

I am managing the regional bank basket on a total return basis. That management includes a trading strategy that uses the natural volatility of a stock to average down in small lots and then to sell the highest cost shares on a pop. The general idea, which is easier said than done, is to harvest profits, including shares bought with reinvested dividends, while at the same time lowering my average cost per share over time, thereby increasing my dividend yield compared to the first purchase.

The dividend yield is my lowest in my basket based on the sale's price.

The stock price has been choppy over the past two years. BHLB Interactive Stock Chart

Future Buys/Sells: I will generally own 50 to 100 shares of this regional bank. I will sell some shares on pops and buy back on dips.

These two pares in my regional bank basket bring my realized gain total up to $16,950.59. Snapshots of realized gains and losses are at the end of the GATEWAY POST for this topic.

5. Bought 100 BANC at $11.7 (REGIONAL BANK BASKET STRATEGY) (see Disclaimer):

Snapshot of Trade:

This purchase of Banc of California (BANC) common stock is discussed in a SA Instablog: Banc Of California: Bought 100 Shares At $11.7 - South Gent | Seeking Alpha