Submitted by Covestor as part of our contributors program.
Author: Andy Schornack
Disclosure: Long IRET, BAC, RNST, AIG
The month of May was disappointing for returns in both my Market Maven model and Financial Services model. The cloud of Europe continues to taint, hamper, and smother any progress made in the US economic outlook. It is a routine pattern over the past 12 months and one that will continue to impact the markets in the near term.
During the month, there were changes in both models. The Financial Services model was refocused during the month through reinvestment of dividends and sales of stock positions. The model sold out its position in F.N.B. Corporation (FNB) and Primerica (PRI) during the month as I saw better opportunities in Investors Real Estate Trust (IRET), Bank of America (BAC), Renasant (RNST), and AIG (AIG).
IRET, as was profiled last month, is an undervalued REIT with a strong yield based in North Dakota. It recently announced a joint venture where it will be purchasing 40 acres of land inside Williston, ND that has availability for up to 850 multifamily housing units. Its current 145 unit joint venture project in Williston, ND is 100% leased upon completion in July 2012. The REIT continues to build its multifamily presence in its current market areas.
BAC continues to trade under tangible book value yet it continues to make progress on building capital, reducing non-core assets, refocusing the business strategy, and positioning itself for long term earnings stability. I like BAC under $7.00/share.
RNST is a regional bank that has been in the portfolio since January 2011. As of close of trading on June 11, the company yields 4.55%. The company trades at less than book value and has been building its tangible book value quite well over the past 12 months. More importantly, RNST has been expanding its markets over the past two years. This provides an additional growth outlook that is attractive.
AIG, not unlike BAC, is a stock that everyone loves to hate. The poster child for the crisis and the bailout, AIG has not had many friends in the investment community over the past four years. However, the resulting pain and lingering cloud casts a shadow that does not reflect the significant steps the business has taken to reposition itself. The stock trades at a significant discount to its March 31, 2012 reported book value of $57.68, and the business is actively engaged at repurchasing stock and converting non-core assets to cash. Furthermore, the business continues to have solid market share in its core businesses and under the guidance of CEO, Robert Benmosche, has been executing on the plan. The large ownership stake of the U.S. Treasury is overhang, but as the business continues to reduce non-core assets, including proceeds from the liquidation of Maiden III, the business can buy back shares from the U.S. Treasury at below book value and increase earnings per share to the remaining investors.
The Market Maven model also had additions in May, primarily focused on building concentrations in IRET, BAC, and Supervalu (SVU).
SVU has continued to experience selling pressure in the markets, which I believe continue to undervalue the business and the execution of the deleveraging and repositioning steps being taken. As I mentioned on an earlier post, nearly 45% of the shares are sold short, the business has been stabilizing earnings amidst a decline in revenue, and can manage its debt obligations for the foreseeable future given anticipated cash flows, sale of non-core assets, and borrowing availability. As a result, debt will be significantly reduced over the next five years. In the near term, the primary catalyst for the stock will be the ability of the company to demonstrate more stabilized revenue and gross profits from the business. According to Yahoo Finance on June 11, 2012, the stock is trading at Forward P/E ratio of 3.03 and Enterprise Value / EBITDA of 3.81.
I continue to be positive about the position of both portfolios. Each provides an attractive indicative dividend yield as of June 11, 2012, and is invested in companies that based on my research provide attractive return probabilities.
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