Commentary on Current Positions

Cash Position: 22.1%
Noble Corp: 34.6%
Aeropostale: 27.4%
Hallmark Financial: 13.6%
Berkshire Hathaway: 0.7%

Noble Corp:

If you haven’t already heard, Noble is being added to the S&P 500 on Friday this week (article).  This should do well to help bring Noble closer to my estimate of intrinsic value of about $15 B. Granted, this business still has the ability to grow for the next decade or more (depending on global demand for oil & offshore drilling becoming more important as we deplete onshore reserves of oil), but today I think it’s worth about $15 B. Other than that, no new thoughts about Noble. I continue to think of it as my favorite holding and think it has the best long-term potential of everything I own.

Aeropostale:

I really believe in this business. They continue to sell at a great price & it allows for management to continue with their share buybacks at sensible prices. I don’t have any new thoughts, but I do want to thank Ed Desouza for this article about their operations & training programs. If it stays at these low prices for awhile to allow for more buybacks, long-term shareholders will see a sizable increase in the value of their holdings.

Hallmark Financial:

This holding worries me. I feel I understand the business & that it has been well-researched. However, it does not exist in a vacuum and the industry is hard to analyze as a whole. In looking at price-competitive industries, it is very difficult for individual companies to compete for abnormal profits. Hallmark does not possess a superior capital allocator, nor does it possess a competitive advantage of low-cost underwriting. It does operate in some specialty lines of insurance, however this does not lead to much higher than normal profitability. Although HALL’s book value has grown at 16% annually the past 8 years or so, they have had 2 rights offerings, as well as purchased a few small insurers below book value. I feel as though I do not understand the P/C insurance industry after seeing this video:

http://websrvr92va.audiovideoweb.com/va92web25048/sol2010-2/sol2010-2.html

If you fully understand everything discussed in the video, give me a call so you can teach me it all! I’m spending time going through it, but it isn’t simple. It’s difficult for me to figure out what lays ahead for the future. Because of that, I am considering dropping this holding… also, you should be aware, Mark Schwarz has continued to purchase shares at today’s levels. Although the company looks good when checking out historic financials (and trading at what appears to be a discount), I don’t feel as though I know what’s coming. I know for an industry like dry bulk shipping, there will be a large influx of new ships to market in the next few years and the industry will likely have terrible financial results because of overcapacity (even more dismal than in the past!). For insurance, I have no idea how many “ships” have been ordered or what the future “capacity” will be.

Consider that the S&P 500 is far above what can be considered “normal” levels at 23.5, average was about 16.5 for the last 100+ years (website). Perhaps I should be more in cash… still thinking about this, but wanted to inform the few people who read my blog that I’m not as excited about HALL as I am about Noble & Aeropostale.

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About Andrew Schneck

I am a value investor focused on misunderstood securities and industries, with an eye for long-term stock ownership.
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2 Responses to Commentary on Current Positions

  1. Andrew says:

    Regarding Noble, you feel that you have pretty good revenue visibility in terms of contracts for their rigs? Are they mostly long term contracts?

    • schn1eck7 says:

      The offshore drilling industry typically contracts deepwater rigs at multi-year contracts. Some of Noble’s contracts extend anywhere from until 2012-2020. These are pretty easy to determine for profitability in the future, so long as we don’t have any strange unprecedented governmental regulation.

      For jackups (the shallow water rigs), the contracts are about 6 months in length, sometimes longer or shorter depending on the conditions. These rigs will be under some pressure with pricing power moving forward, seeing as there is some overcapacity in marketplace today. Noble is investing solely in deepwater rigs & has been for a few years now.

      And by the way, you can look up Noble’s rig status report to see the contract lengths- it will help you understand the company better.

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