Time Arbitrage with Primerica
Jun/110
There is an opportunity to time arbitrage the stock market by owning shares of Primerica. The market is not assigning any premium to the expected low-risk growth at Primerica over the next 5 years. The growth is expected because Citi shrunk the size of Primerica prior to the IPO. Over the next few years, Primerica will replace the term life policies that were removed with new policies. This will translate into attractive earnings growth, but Primerica trades for 1.1x book value and under 9 times this year’s estimated earnings per share. Buyers of the stock can earn an attractive return assuming no multiple growth by relying on the expectations for earnings growth in the coming years.
Last July, I wrote a bullish article about Primerica. I saw an opportunity because the company’s balance sheet was restructured prior to its April 2010 IPO. Through March, the investment thesis played out as Primerica reported 4 quarters of better than expected earnings. The stock rose from $20 last July to $26.
In April, Citigroup announced that it was selling a second tranche of Primerica, which has beaten up Primerica’s stock as the market has struggled to digest the additional supply of shares. This recent decline is an opportunity to buy shares in a company with solid earnings growth prospects at a low valuation. At these levels, I believe there is assymetrical risk / reward in the shares of Primerica.
Read the rest of this post which has my investment thesis on Primerica at Seeking Alpha.
Anti-Government Banker Builds Career on Government Subsidy
Aug/090
This weekend’s New York Times had a flattering Andrew Martin article on BB&T’s John Allison. I think it is joke for Allison to benefit from a huge government subsidy like FDIC insurance and at the same time, to present himself as anti-government/objectivist. His thought process is intellectually dishonest. He talks as though banks are purely private institutions and would still exist in their current form without FDIC insurance. I have news for him: banks exist today only because of the federal government provides backstop FDIC deposit insurance.
FDIC insurance is a large government subsidy program to help bankers attract deposits. FDIC insurance is critical to a bank because most of the value of a bank comes from its deposit base. With FDIC insurance, bank customers (depositors) are indifferent to the safety of the bank. Instead, depositors base their choice of banks based on rates offered, levels of customer service and branch locations. Without FDIC insurance, banks would have to run with much lower levels of leverage and much high levels of liquidity to attract deposits based on safety and stability. These measures would guard against bank panics or runs; however, lower leverage and higher liquidity would also dampen profitability for the bank.
Another beef I have with Allison is his blaming the housing crisis on Fannie and Freddie. It has been well documented that Wall Street led the credit bubble in the housing market with the expansion of the non-agency mortgage market, specifically the explosion in subprime and Alt-A lending. Fannie and Freddie lost market share from 2002 to 2007. If they were losing market share, how did their actions lead the housing market to its bubble status? See the series of articles on Univ. of Oregon Prof. Mark Thoma’s blog for a more complete discussion on how Wall Street led the mortgage market to a credit bubble. Allison’s blame of Fannie and Freddie seems like a convenient, popular position that fits into his distorted anti-government view.
If Allison truly wants to prove he lives his life abiding by Ayn Rand’s objectivist philosophy, he should have BB&T’s board vote to renounce the company’s bank charter. Then, we’ll see how long a bank run by an objectivist is able to maintain its depositor base and remain in business. I suspect the bank wouldn’t last long.
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