A good headline, right? That caught the attention of a LOT of Gumshoe readers over the last several days, following the flurry of ads that Martin Weiss began running for his Martin’s Ultimate Portfolio service in the middle of last week. So let’s try to figure out what his “#1 Top-Ranked Stock” is, shall we?
This new offering from Weiss is a bit more personal than most of his letters have been — he usually has one of the traders or analyst folks run portfolios for him, but he says he’s doing this one himself, with his own money. And that his goal is to be risk-averse by following the Weiss Ratings system and adding to it some kind of performance metric. He says his system would have handily beaten an investment in Berkshire Hathaway over the last decade — though, of course, it didn’t, because it didn’t exist a decade ago (backtesting and checking past charts and events, as I’m sure you’re aware, is an excellent way to be right about what has already happened — not necessarily what will happen).
Weiss is well-known to a lot of Gumshoe readers, and he gets some credit for being very bearish on financials and real estate back in 2006 and 2007, when they hadn’t yet crashed, though he has also been criticized by many for being quite bearish over the last few years too, missing out on a lot of bull market fun. Hulbert tracks only one Weiss newsletter, I think, Safe Money Report, and that has been a pretty tepid performer, with returns well below the S&P 500 average, but perhaps has been “safer” than the overall market — I last covered that one back in May here, for whatever that’s worth.
So what is the stock that he’s using to launch this new service? Let’s check the clues:
“Extended Warranty Insurance Company
Holding Firm at My #1 Rank Among 12,000 Stocks.
“This unique insurance company merits a Weiss Stock Rating of A+. Plus, among all of our A+ companies, it has the #1 top-ranked Weiss Performance Index.
“You can’t do any better than that.
“You see, the company sits in a very, VERY unique spot. It tops among its publicly-traded peers in its industry — property-and-casualty insurance. But its shares are greatly undervalued relative to those peers.”
Ah, extended warranties. Haven’t thought about those in a few years — the worst deal for consumers since “rent to own”. So what is this extended warranty company? More clues:
“But what really makes this insurance company rise heads and shoulders above the ordinary in this sector (including Warren Buffett’s insurance companies) is the fact that it favors safety.Are you getting our free Daily Update
"reveal" emails? If not,
just click here...
“It will only cover products of larger manufacturers, the likes of General Motors or Microsoft, which meet its strict underwriting criteria. And that’s also a key reason why the numbers don’t disappoint:
“This big division of the company has grown by 79 percent year over year in the last quarter. And that’s after growing some 59 percent in 2013.
“Net earned premiums? Up 54.5 percent!”
OK, so it’s not just an underwriter of extended warranties (which are, if you think about it, just another kind of insurance — it’s not unusual for warranty underwriting to be done by the same folks who do insurance underwriting).
Some more clues:
“Net profit margins at 10.7 percent, compared with an average 7.8 percent among everyone else in its peer group.
“And the flipside of that number — its expense ratio at just 22.5 percent — is a lot lower than that of its peers.
“Most importantly, none of this is just a short-term, on-again-off-again phenomenon. To make it up to the top of my charts, every company has to have these kinds of strengths firmly in place over long periods of time….
“Shareholders’ equity: Up nonstop, year after year since 2009.
“Dividends per share: Ditto, with the biggest spurt of all coming in the first quarter (calculated on an annualized basis).
“Return on operating equity: Up dramatically since 2012.”
OK… anything else we can feed into the Mighty, Mighty Thinkolator to give us a good shot at an answer?
“The company recently acquired an extended warranty company in Asia.”
Interesting — are Asian consumers going to be as gullible about warranties as US consumers?
Finally, Weiss says it’s also cheap:
“This company’s shares are, relatively speaking, very, very cheap.
“They trade at 7.7 times forward earnings. But the shares of the company’s peers are trading, on average, at a whopping 13.1 times forward earnings. And the overall market is now trading at 16 times!”
So who is it? Thinkolator sez Martin Weiss is teasing… AmTrust Financial Services (AFSI)
Which will cause a spit-take among some of you who might be enjoying a mid-afternoon coffee — at least, those who follow stocks closely. AFSI, far from being a “#1 ranked safe” stock in many peoples’ eyes, is a battleground stock that’s tangentially involved in the (sometimes kind of scummy) business of life settlements as well as the (arguably scummier) business of extended warranties and the (seemingly perpetually in crisis) California Worker’s Compensation insurance market — and it has been hotly debated in the financial press over the past year, with lots of sharply worded short “attacks” on the stock and some equally sharp retorts.
Which isn’t to say that AFSI won’t be a good stock — it might be, and it is pretty cheap on many metrics, and often buying sketchy or embattled stocks on the cheap works out very well. But it really doesn’t look “set it and forget it” safe to me.
The controversy over AFSI has cooled considerably over the last 6-8 months, since it really started with a short-seller “attack” piece/research analysis (depending on whether you agree or not) from Geoinvesting in mid-December that helped the stock lose about 25% of its value, and was cooled fairly quickly by the response from the company and some other critiques of the short position and the stock pretty much recovered by March… but there is still a substantial 20% or so short interest (down from close to 40% last Winter, I think).
I can’t give you an in-depth analysis of whether the company’s balance sheet is really safe or not (they’re not a particularly active life settlements company, from what I can tell, though they have a chunk of their balance sheet, well under 5% apparently, in those assets), but they are very profitable and growing fast, partly from acquisitions, and they don’t really have a lot of insurance industry peers.
Given that their biggest businesses are California Worker’s Comp Insurance, which has been a struggle for many insurance companies, and extended warranties, it’s a little problematic to compare them to broader-based property & casualty insurance companies like AIG (AIG) or Markel (MKL, I own that one).
Most property and casualty insurance companies trade not necessarily on their quarterly earnings and PE ratios, but based on some small premium or discount to their book value, since earnings are inconsistent and lumpy and good long-term insurers are generally trying to steadily boost their book value per share (or, perhaps, pay dividends)… but specialty insurers and more “oddball” companies like AmTrust often make much more of their money from more profitable, riskier or highly-specialized insurance lines or from fees, or grow rapidly through acquisitions, and are sometimes priced at big premiums or very steep discounts to their book value.
So AFSI looks cheap on earnings (and is, perhaps appealingly, 10% cheaper than it was a month ago) but trades at about 1.8X book, which would be ludicrous for a large P&C insurer (Chubb (CB) is often mentioned as the “gold standard” for P&C stocks and trades at only 1.3X book), but it’s pretty similarly valued to Atlas Financial Holdings (AFH, 1.7X book), which has been talked up by Chris Mayer before and which insures small commercial auto fleets (like taxicabs). That’s just an example, the two companies are not particularly comparable.
If you want confirmation that this is Martin’s stock, you can see that he lifted the charts in his email from the company’s latest investor presentation (which is worth a look, you can see it here). If you want confirmation that this is a “safe” stock, well, you’ll have to look elsewhere — it looks interesting and may be worth some further research if you’re interested in some more specialty insurance coverage, but there remains a substantial short interest and some simmering controversy over this one that I can’t sort out for you in an afternoon. The company is also tightly controlled by insiders, who own roughly half of the shares.
My first inclination is to believe that the short-sellers may be overstepping on this one, particularly as the specialty at Weiss has long been the “safety” analysis of financial firms, and even the company’s preferred stock (AFSI-PA) is trading pretty richly (perhaps indicating a fairly limited amount of fear), but that’s just a “feeling” and I haven’t scoured the filings for the real skeletons that may well be there. So go forth, Gumshoe friends, researchify to your heart’s content, and let us know if we should be buying shares of AmTrust Financial. We await your opinions, just toss ’em into that friendly little comment box below.