PIH IS COOL AGAIN
Mar14

PIH IS COOL AGAIN

Have been adding to our position in PIH since last week when it was announced that 1) the company would be making their long awaited expansion into Florida to write homeowners and wind-only coverage 2) Larry Swets Jr. CEO of a previously researched company and investment of ours KFS would become Chairman of the company. Mature Florida property and casualty insurers are selling well above 1 times book in most cases and above 2 times book in a few cases. PIH all the meanwhile is basically being neglected in a dark, moldy closet trading at less than 1 times book, despite have some pretty outstanding prospects for accelerating return on equity dramatically moving forward, while currently maintaining an overcapitalized balance sheet that will assist greatly in the process. This conservatively positioned balance sheet also mitigates a great deal of risk for shareholders at these levels. A diversified geographic base also mitigates the worry of having too much exposure to disaster prone regions such as their primary market in Louisiana. The company nevertheless has been effective in their reinsurance strategy, having faced an inordinate number of weather events over the past few years in Louisiana. Additionally, the company has an activist presence with Fundamental Global, PIH's largest investor. Although shareholder activism by hedge funds has now become more of a marketing strategy as opposed to an investment strategy, Fundamental Global has waged some successful campaigns in the past, proving to be beneficial to shareholder interests over the long-term. Maintaining growth in Louisiana while responsibly underwriting policies in Texas and now Florida should easily yield a near 20% return on equity, which will result in a premium to book value reflecting this new growth. A 1.5-2 times accelerating book value is easily achievable here upon some relatively straightforward execution moving forward. And, of course, barring any anomalous, weather related events. In a market of premium valuation, PIH remains an attractive, undiscovered proposition.   Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website. T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered, or where an applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any jurisdiction where such distribution or use would be contrary...

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MADE A U-TURN ON RELY: THE REASON WE ARE ALL OUT
Sep05

MADE A U-TURN ON RELY: THE REASON WE ARE ALL OUT

In what is an unusually swift u-turn for the portfolios, I exited our position in RELY during the month of August, resulting in a roughly 1% hit to overall performance, after initiating the position in July. With every position that is established within the portfolios, there are certain fundamental elements that should remain intact or on track in order for us to remain in an investment. Every situation is different, making the list of fundamental faux pas vary among our investments. In the case of RELY, the CEO Craig Bouchard was a key element in the overall strategy, as it was abundantly clear that the first acquisition made was the first in a series of acquisitions, with subsequent acquisitions being what would drive profitability going forward. In order for their strategy to be successful, the presence of an excellent asset allocator was of obvious importance. Mr. Bouchard struck me as an excellent asset allocator, understanding the various nuances of rolling up several companies in an effort to create a highly profitable entity with significant tax attributes. So when it was revealed during August that Mr. Bouchard had resigned his position, it struck me as both extremely surprising and a sign of trouble in a highly leveraged company that simply cannot handle trouble in the slightest given their current debt load. Perhaps more than any other company in the portfolios, RELY was CEO dependent in order to see their mission through. The fact that they switched out quarterbacks in the 2nd quarter during a game that they seemed to be winning is an oddity at best and a sign of a failed initial acquisition at worst. Oddities in leveraged situations, especially in the volatile field of raw materials, are best left to the daredevils among us, of which I don't count myself as one. Further, admitting that the first acquisition was ill-advised, which is essentially what Bouchard resigning or more than likely, being fired, points to, means that the company has a very long road ahead in terms of righting that initial wrong. A process that I am not necessarily interested in being part of due to the leverage involved. Lastly, it should be noted, that among value/special situation/event driven managers, I consider myself to be especially cognizant of risk. One of the worst habits of your typical, garden variety value manager is the belief that a value stock becomes that much more valuable when it moves lower. The tendency among the traditional investment community is to see greater value in the name instead of question their own thesis. My initial reaction whenever a position goes against us, especially right...

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BACK IN REAL INDUSTRY (RELY)
Jul12

BACK IN REAL INDUSTRY (RELY)

There is some history here with this company, so let's do a brief review. I originally released the research report on RELY (back then it was SGGH) in October 0f 2014. The company had just made its acquisition of the aluminum recycling subsidiary of Aleris Corporation. Just a short while later, in December 2014, I exited the position due to a number of reasons, including wanting to raise cash to allocate into Impac Mortgage. On Monday, I reinitiated our position in RELY at what is roughly the same price I exited in December 2014. There have been some material improvements taking place at the company that are worthy of mention. Also, the fact that RELY escaped what was a brutal year for commodities (aluminum included) unscathed, marks an important test for management that they passed surprisingly well. For me, this is an example of the market telling a story through price that fundamentals have yet to properly capture. For all intents and purposes, given a depressed commodity market in 2015 and the newly minted, leveraged state of the company, RELY should have suffered much more than it did. The fact that it did not is a clear tell.                           Here are some of the material improvements/catalysts coming into play for RELY: RELY generated $81 million in EBITDA in 2015. One of the best performances for the company during a terrible year for commodities. Issued a "CEO Challenge" in 2015 to reduce costs by 1% ($13.4 million). Managed to cut costs by $15 million. The target for cutting costs in 2016 has been raised to $17 million. Consumption of aluminum is slated to grow by 6% globally in 2016. Additionally, the automobile aluminum supercycle is in its infant stages, with RELY positioned to be a significant supplier in the automobile space. Only 30% of the companies revenues are unhedged. The remaining revenues come from either tolling or are hedged. Free cash flow machine that has allowed for a $50 million reduction in debt in 2015. The company possesses some $900 million in NOLs that haven't been tapped into as of this date. It has been stated that Aleris is not the platform to utilize the NOLs due to significant depreciation expenses. The company is looking for bolt on acquisition candidates, passing on a myriad of deals in 2015 because they did not meet the company's requirements. Management is committed to making accretive future acquisitions while preserving ownership for current equity holders. In other words, very little future dilution. A strong movement taking place in government towards import tariffs...

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PORTFOLIO UPDATE: BACK IN IWSY
Jul28

PORTFOLIO UPDATE: BACK IN IWSY

Earlier today I announced a re-initiation of our position in IWSY on Twitter. I've had a more than two year history with this name, originally profiling the company during the first half of 2013 when the stock was trading below $1. The original research report from March 2013 is available here. The biggest frustration for investors in IWSY has been the lack of tangible earnings coming to fruition despite numerous announcements of partnerships and test pilots with major corporations and government sponsored entities. What investors don't realize are the inner-workings of the software business as it pertains to biometrics. In speaking with two software engineers over the past few months, they told me that product testing cycles for major corporations and especially government organizations is a multi-year endeavor. This becomes all the more stretched out when you are dealing with a new technology, such as biometrics. And add to that the fact that the technology IWSY is developing will protect sensitive personal and government information, you start getting the picture of why any organization involved in a test pilot of their technology would want to make sure everything is 100% effective before launching an actual program. Once the programs launch, whether in the case of Deutsche Bahn, the major retailer in Mexico (rumored to be Wal-Mart), or the newly announced partnership with Lockheed Martin, the SaaS model that has been implemented flows almost purely to the bottom line. The monthly user fees from just a single major contract instantly transforms the company into a substantial producer of cash flow. CEO Jim Miller has said the company will be cash flow positive by year end.  The partnerships the company has assembled over the past few years deserve to be noted: Fujitsu, IBM, Deutsche Telecom, CA, General Dynamics, Lockheed, HP, Microsoft, United Technologies to name a handful.  The issues of capitalization to achieve full realization of the company's potential were resolved earlier this year, as the company raised $12 million in a direct convertible preferred offering with largest shareholder Neal Goldman of Goldman Capital Management. Avoiding Wall Street institutions to act as a middle man for the transaction caused a bit of a rebellion by these institutions as they summarily downgraded IWSY following the capital raise.  The recent announcement of the Lockheed Martin contract is a substantial development for the company, acting as a conduit for adapting IWSY's technology into Federal Government projects. Here is the key line from that press release: " Lockheed Martin will offer the identity service to the federal government and other customers through its FedRAMP approved government community cloud – SolaS®." There is also the issue of...

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PORTFOLIO UPDATE: AN ISSUE OF SELF-DYNAMICS
May16

PORTFOLIO UPDATE: AN ISSUE OF SELF-DYNAMICS

IMH was liquidated from the portfolios this week in the 20-21 range for what was a roughly 14 point profit since inception in Q4 2014. This leaves us with the most significant cash position we have had in years, which opens the doors to pursuing new opportunities as 2015 progresses. While discovery, research and initiation of long positions should normally be systematic, repeatable process. The decision to sell is much more dynamic in nature. It is rare that I will sell a position because of concerns regarding changing fundamentals. It is true that by the time concern rolls across my consciousness, it will also be persuading others who hold the position to reduce exposure. Fundamental data then is a lagging indicator, not being necessarily useful to sell decisions. Or at least sell decisions at an advantageous price. Impac certainly hasn't experienced any fundamental changes worthy of notice. If anything, the stock remains dramatically undervalued. Not to mention it being a great way of participating in nonqm loans, which is the future of alternative mortgage financing. What the decision to sell IMH comes down to is an issue of comfort and the fact that once comfort in a position becomes compromised even slightly, an investor becomes vulnerable to decisions that carry a negative expected value. I can't be uncomfortable in a company like Impac and efficiently sit through the volatility. Inevitably, I will become vulnerable to that volatility, being forced into a poor decision with a large position that will be difficult to liquidate.  Rather than having the market force my hand at an inopportune time, I would much rather be proactive in recognizing points in the life cycle of price when I don't properly grasp risk vs reward. Or you could also say, points in time when an investor embraces their confusion through defensive measures. And that"s all I've done here. It's an issue of self dynamics as opposed to market dynamics. At a certain point, knowledge of self while investing becomes equally if not more important than any knowledge of the markets that can be...

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SO IMPAC DECIDES TO RAISE SOME CASH…..
May09

SO IMPAC DECIDES TO RAISE SOME CASH…..

T11 Capital is currently long shares of IMH. Original research report outlining the opportunity can be found here.  Unfortunately, a majority of investors don't listen to conference calls that pre-announce a capital raise as being forthcoming. Additionally, a lot of funny money has become involved in Impac on both the long and short side, causing the tremendous spike in volume and volatility over the past couple of weeks. When a cash raise comes together with the sudden onset of volatility brought about by a gaggle of new speculators, you are bound to have the challenges of misinformation.  Here is some clarity: 1. In the Q1 conference call that took place in late-April management said, "we are currently in discussions with various parties to provide between $25 million and $50 million of debt and/or equity capital." 2. They announced on Friday that they are raising $25 million in a convertible note offering at 7.5% convertible in January 2016 at a conversion price of $21.50 per share. Mandatory conversion takes place if after January 2016 the stock trades above $30.10 for 20 consecutive trading days.  3. Why do they need this money? The company is facing skyrocketing origination volume. As a result they face increased "warehouse haircuts." A warehouse haircut is essentially the portion of the credit line advance that the originating lender is responsible for. It typically falls in the 1-2% range. Warehouse haircuts increased from $20 million in Q4 to $30 million in Q1 as origination volume increased dramatically. This is the cost of doing business as a lender. As cash flows continue to increase warehouse haircuts will take care of themselves. However, given that the company is facing growing pains of a sort at the initial onset of their new business model a cash infusion is necessary. Additionally, the cash will be used to "retain mortgage servicing rights and working capital to fund the growth of origination volumes and contingent consideration payments associated with the acquisition of CCM."  With the growth of CashCall into a total of some 40 states from 11 in Q1, advertising expenses will rise dramatically. Initially, the capital outlay to secure advertising in all of those new states will be substantial until those states begin producing mortgage origination revenue to offset the advertising costs. As the additional states begin producing revenue, the overall efficiency of their advertising model increases because of the volume discount they receive by increasing advertising basically nationwide. Dilution is only a bad thing if management can't achieve returns on capital they receive via dilution. Impac is in a stage of its business growth where high returns on capital are not...

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KFS IS BRILLIANCE UNDISCOVERED
Mar14

KFS IS BRILLIANCE UNDISCOVERED

There is no magic in the formula KFS is utilizing to turn what was once a wart infested pariah of a company in the insurance industry into a gleaming, ornate demonstration of success through proper management paired with smart activism on behalf of a majority shareholder. If you haven't already done so, please review the research report I wrote on KFS in April of 2014. You will notice a couple of trends that were taking place at the company a year ago. Namely, debt was in the process of being reduced in dramatic fashion (pg. 6 of research report). Meanwhile, the insurance underwriting sector which nearly torpedoed the company several years ago was near profitability (pg. 5 of research report). Fast forward to the 10K the company released on Friday. Insurance underwriting is now profitable for the first time since pre-2008/2009 crisis. Insurance services remains profitable with a more than 100% increase in operating income year over year. Underwriting segment was the reason for the calamity this company faced years ago. The company has emerged from the calamity with the following: - Underwriting now profitable - Lean, with significantly reduced debt - New operating units with the services segment experiencing steady growth - Management completely revamped and proven to be highly capable, creative financial artists. See former units AFH and PIH that are now public, as examples of their artistry.  - Significant tax benefits in the amount of $14.68 per share that haven't even started to be explored yet The cream on the puff cake here is that debt is planned to be reduced entirely over the next 18 months or so. The company has LROC preferred securities principal due at the end of June for the amount of $13.6 millon. Also, there is the issue of Trups that are in deferred interest status with the 20 month limitation expiring in early 2016. There is $22.7 million in interest due there. The interest on the Trups is accounted for as an accrued expense on balance sheet, which is why it doesn't show in the table below. As you can see, the level of income that will be generated past 2016 will rise dramatically as debt burden will be all but gone at that point. This should coincide with a sweet spot in the growth for both their services and underwriting segment. The sum total of all these events is (1) nearly no observable risk in KFS shares at this point. It is at worst a sideways performer going forward (2) a near guaranteed future date of significant share price appreciation as Wall Street plays catch up with earnings growth that nobody...

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PORTFOLIO UPDATE: IT’S ALL IN THE DETAILS
Oct22

PORTFOLIO UPDATE: IT’S ALL IN THE DETAILS

On Monday, I tweeted the following:         SGGH is Signature Group, which was an NOL shell, with approximately $900 million in NOLs. The NOL part is great, but it's not the reason I bought into the company here.  On Friday, the company announced their first acquisition, paying $525 million for the world's largest independent aluminum recycler.  Before getting into the micro view of the SGGH, let's talk about the timing of this announcement. I don't think they could have timed the announcement of the acquisition at a worse time for fetching any kind of premium or gaining any kind of new interest from investors. In other words, the 20%+ reaction on the first day that has now been reduced to about a 10% upside premium for the shares post-announcement does not reflect the new reality, capabilities or potential for this company going forward. The market of Q3 and Q4 2014 is incapable of factoring in premiums to anything with a market cap below $500 million. Invariably, a pessimistic view has been given to small companies unless they present clear, straightforward data that requires very little in the way of analytic interpretation. This is what occurs during negative cycles in the micro/small-cap space. Nobody cares. And that is exactly where the opportunity for 200, 300, 500 or even 1000 percent upside in names resides. The simple act of Wall Street being in a drunken, depressive malaise that creates a black hole for proper pricing of tangible, positive fundamental changes in these companies is where the opportunity lies.  So let's look at SGGH and the new form they have taken with this acquisition: First point: Recycled aluminum is a growth industry not because individuals are going to be increasing their consumption of Dr. Pepper, but rather, automobile manufacturers are being held to a higher standard of fuel efficiency. As such, they need a lighter material that doesn't compromise strength or safety. Tesla uses aluminum frames. The new Ford F-150 is the first Ford model to use an aluminum frame. Toyota is increasing use of aluminum in their automobiles. You get the picture. It is a sustainable trend in automobile manufacturing.  Recycled aluminum is preferred as aluminum can be recycled without compromising quality. There is no need to have "virgin" material.  Aluminum sheet deliveries to auto makers are forecast to rise from 504 million pounds in 2014 to 2.7 billion pounds by 2018.  Second point: SGGH is paying $525 million for a company with approximately $75 million in EBITDA in 2014. The high point of their EBITDA was $105 million in 2011 on revenues of approximately $1.6 billion. This...

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THE WALL STREET FOOL
Jul22

THE WALL STREET FOOL

"There is a time for all things, but I didn't know it. And that is precisely what beats so many men on Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying and selling stocks daily - or sufficient knowledge to make his play an intelligent play." --- Jesse Livermore There is a certain degree of nobility that comes with the act of doing nothing in the business of finance. It is a counter-intuitive trait that does not digest easily with most investors. Yet it is an absolute key building block in the act of creating any formidable wealth within a portfolio of stocks. We are looked at from a very early age not by what we accomplish through stillness, but what we accomplish through action. It is believed that in action is where victory is born. If you are injured by a certain action, then you simply take another action to "get through" your injury, as action is the only way to victory. If, on the other hand, you are injured through the act of stillness, you are automatically labeled as being lazy, incompetent and unable to perform the essential task of taking action. The very act of daydreaming. Imagining. Introspection. They all run completely counter to the key attributes that create success according to popular perception. What is missed by those who constantly preach action, whether in popular books, blog postings or in any form of media is the moments in between when the act of stillness leads to a clear path of action. You cannot have a reason to act at every single moment. Then your actions become diluted within a sea of inconsequential motion. Action should have purpose. And purpose is derived through stillness. In my case, in particular, I have clearly entered a point in the life of the current portfolio holdings (WMIH, HH, IWSY & KFS) that any action taken will be forced. There is nothing to do but sit. Volume is extremely low as all the current portfolio holdings are in between catalysts. To force an action here by attempting to discover momentum that would create basis points would be foolish. It is a negative expected value proposition as it is difficult to duplicate with a high success rate AND it takes away from the key focus of the portfolio that is backed by a strategy seeking asymmetric (overused financial jargon,...

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PORTFOLIO UPDATE: SIMPLICITY RULES
Jun04

PORTFOLIO UPDATE: SIMPLICITY RULES

During the trading day today, I tweeted the following:         IWSY has been a position I have been in and out of numerous times over the past year after publishing research on the name when it was trading below $1. It has been a profitable investment overall, although lately the company has been grinding in a sideways range.  I would like to hold onto a position in IWSY from this point, perhaps into the end of the year. I believe that revenues are about to ramp, as is recognition of the company as the leader in multimodal biometrics. It is not a matter of IF IWSY becomes an acquisition target  by a large, well heeled technology company, but rather WHEN. In the meantime, you get the revenue ramp as the catalyst not only to an increase in value overall, but an increase in recognition of the company, which will feed the eventual acquisition of this name. A classic virtuous cycle.  I will go into the reasons why I believe revenues are set to ramp, as well as other catalysts that are becoming apparent, in the monthly report I send to investors, to be published at the end of June.  Increasingly, I am keeping the monthly report/summary as an email only type deal. I'm giving away too much information about the portfolios I manage to simply post it publicly. I will continue to post the report from time to time. However, the monthly summary postings on this site will be more infrequent in nature.  If you haven't joined the email list, you may do so by getting in touch with me at mail@T11Capital.com  As of the close today, managed portfolios are invested in four positions: IWSY, WMIH, HH and KFS. Simplicity has and will always...

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