Small Addition to one of My Favorite Themes

By Travis Johnson, Stock Gumshoe, January 24, 2013

I just added to my position in Greenlight Capital Re (GLRE), and have additional orders in to buy a bit more if it drops … and I have a suspicion that it might indeed drop over the next few weeks.

Greenlight is one of my favorite stocks to play on a theme that I think will be profitable over the next year (or longer): That insurance companies who don’t rely on just fixed-income portfolios will do very well. That’s because the reliance on fixed income will bring down investment returns at most insurance companies, which means they need to focus more on underwriting profitably, which means they need to firm up their prices and compete less on price.

That benefits everyone in the business … but for stockholders, it particularly benefits the companies who can benefit both from a firming or hardening pricing market for property and casualty insurance and reinsurance and above-average investment returns that aren’t reliant on “low risk” fixed income portfolios. The three plays on this in my portfolio are Markel (MKL), which will dramatically expand its portfolio with their pending acquisition, Berkshire Hathaway (BRKB), which is no longer priced as cheaply as it was thanks to enthusiasm about their railroad running flat out and their substantial exposure to the housing recovery, and Greenlight Re (GLRE).

GLRE is still trading below book value, so I added a wee bit more as I had some cash available … but why is it that I think it might drop more? Well, GLRE doesn’t report until mid-February so we won’t know for a while, but it seems very likely that they posted an investment loss in the fourth quarter, which would mean their book value could fall. I say that because GLRE’s portfolio is managed by David Einhorn’s management company, with the same strategy as the Greenlight Capital hedge funds, and Einhorn’s letter that was partly leaked yesterday indicates that they had a bad fourth quarter. The performance for the quarter was down almost 5%, thanks in part to short positions in iron ore companies and Green Mountain (GMCR) and their long position in Apple (AAPL), among others (mostly investments that have remained weak into the first bit of 2013). They still posted a reasonable 8% investment return for the year, so the year wasn’t a loss, but the quarter was bad.

Greenlight Re ...

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