12 September 2005

A couple of Cramer choices took big hits today. Are they buys now? Next up, MRH

Right after the deluge of the Gulf Coast, Cramer talked up some Katrina plays. He argued that the sell-off of insurance companies was an irrational response of the market fearing huge payouts. Cramer believed that his viewers and listeners should take advantage of this sale on insurance companies. His theory: the payouts are already accounted for in their business model and the insurance companies will be able to hike their premiums and make significantly higher profits.

Let's revisit today's Movers & Shakers section of Marketwatch.com:


Montpelier Re Holdings Ltd. (MRH: news, chart, profile) shares dropped 13.8% after the company said it estimates an impact of between $450 million and $675 million from Hurricane Katrina-related flood losses. "This is a significant net loss for us," said Anthony Taylor, the company's chairman, president and CEO, "but nevertheless it remains consistent with the nature of our business plan and our capitalization remains strong."

I read the MRH's response as fitting exactly with Cramer's theory. Cramer seems to agree, in the following excerpt from today's Real Money summary:

In response to a question about Montpelier Re (MRH:NYSE - news - research - Cramer's Take), a stock that Cramer has been bullish on and that was down more than 16% Monday, Cramer said he has looked into the situation and can find "no reason it should be down $5." He is sticking with his recommendation and thinks the stock "should be bought and bought aggressively." MRH traded at $26.09 Monday afternoon.

Before I wish that I had about five grand to pick up 200 shares, let's look at some numbers:

The IBD Ratings for MRH began the day at 18/22/C/A/E. Now, they are 18/7/C/A/D. The A grade demonstrates that MRH has a profitable business model, but the 7 score shows that the stock price is lagging significantly. Consider that MRH's market cap dropped today from $1.9B to $1.6B, leaving the stock with an 8.36 P/E and $4 below its previous 52-week low. This is prime buying territory, if the fundamentals are sound.

Sweetening the deal is the fact that MRH pays 36 cents quarterly, or $1.44 per year as a dividend. Dividing that figure into today's close of $25.99 or the after hours price of $26.30, MRH delivers a 5.5% yield, based on these purchase prices.

A quick look at the Dow Jones Property and Casualty Insurance Industry Index shows the top market cap stocks as:

BRKA - Berkshire Hathaway - 68 25 C C B 16 P/E, $107B market cap
ALL - Allstate - 79 35 C C E 11 P/E, $35.8B market cap
STA - St. Paul Travelers - 76 64 C B D- 11.5 P/E, $24.6B market cap
MLEA - Millea Holdings - 57 62 C C B+ 24.6 P/E, $24.6B market cap
PGR - Progressive - 77 55 C A B- 12.62 P/E, $19.1B market cap.

Other industry stocks with a market cap comparable to MRH ($1.6-2.0B range) include:

OCAS - Ohio Casualty Corp - 67 67 C D A- 11.23 P/E, $1.6B market cap
DHC - Danielson Holding Corp 26 82 A+ B B- 25.92 P/E, $1.8B market cap
CGI - Commerce Group - 86 30 C B C+ 7.81 P/E, $1.9B market cap
SCO - Scor Ads - 23 64 C E B- 4.98 P/E, $2.0B market cap

Out of these stocks, CGI has interesting scores; the 30 price strength lags the 86 earnings score, and the B for profitability. I'll save this stock for revisiting, but otherwise, looking at these other insurance companies, I am increasingly comfortable with MRH's P/E ratio and profitability.

I see nothing here to dissuade me from, as Cramer might put, buying MRH and buying aggressively, except for the lack of funds. I'm going to place MRH on the WershovenistPig Stock Watch List, with regrets that I cannot pull the trigger on those aforementioned 200 shares. Fooey.

1 comment:

John Coumarianos said...

Very nice blog, but why so much interest in Cramer? I'm often tempted to short whatever he's buying and buy whatever he hates. He's a short-term trader, not an investor; and you can't play that game unless you have access to the same kind of information that he USED to have when he was running his fund, racking up huge commission fees at the wire houses, playing analysts off of each other, and receiving help from his wife, who trained with legendary hedge fund manager, Michael Steinhardt.

Also, interesting watch list. So many energy and energy-related companies. That's a tough business, where the companies are totally subject to demand. They look good now, but energy is the definition of a commodity business with no pricing power. (Oil companies are still trying to figure out how to get people to say, "I've gotta get some Exxon/Mobil or BP in my car.") It's true that this could be the beginning of a very long run in oil and energy-related companies; but the fact is that nobody knows that. And I'm not sure anyone can make an educated guess about it either. There's hardly another business for which estimating future cash flows is a total crapshoot. It's the definition of a boom-and-bust business, where nobody knows how long each cycle will last.

On the other hand, I can estimate fairly reasonably how much money Colgate or Proctor and Gamble will make over the next decade. They're not sexy businesses, but they're predictable. They also may or may not be trading at attractive prices; but I can build up a mental stable of businesses whose cash flows I can estiamte and wait for Wall St. to send them down when they stumble. Then, the only bet I'm making is whether I'm smart enough to know if that established company's stumble is temporary, not whether I'm smart enough to know if a start-up barely into its post-venture stage can actually get itself off the ground or whether a fledgling drug company can come up with a cure for cancer.

So many speculative, un-established businesses on your list as well. That's also a tough game to play.

I do, however, like some of your gaming picks. I definitely think you're onto something with IGT.

Anyway, I don't mean to sound so dogmatic. I know that there are plenty of ways to skin a cat, plenty of ways to make money in the markets. But Cramer's way strikes me as one of the more difficult ones, especially if you don't have access to the information that he used to and don't have a quick trigger finger.

Keep up the good work, and I'll keep reading. We occasionally have market-related posts on Innocents Abroad as well (www.innocentsabroad.blogspot.com).