Hallmark Financial: Wrong & Sold Out

Although I haven’t yet written an article about my selling strategy, one of the reasons I will sell is because my initial analysis & reasoning was wrong. With Hallmark Financial, I feel as though I made a mistake.

The latest SEC filing can be seen here.  Hallmark is filing an S-3 on behalf of Mark Schwarz so he can sell up to 16.3% of the company through a secondary offering. Instead of filing a secondary offering on behalf of the company to raise new capital, HALL is filing it to allow their largest shareholder, Mark Schwarz, to sell out of up to 16.3% of his holding. It would take him a few years to do this in the public markets, where the stock trades pretty thinly, but the filing allows him to do so in a much more efficient manner. The problem is, it costs HALL money for the SEC filing & registration fees. All shareholders fit the bill for Mark Schwarz to sell part of his position. This isn’t the first time he’s used HALL like it’s his company, not every shareholder’s. He filed two rights offerings that could have been used to take advantage of fellow shareholders, and his voting rights basically control the company at this point. Although he has created shareholder value in buying control in Hallmark, I feel he will take as much shareholder value for himself as possible, even in the event of hurting others. If there’s one thing I look for in a business partner above all else, it’s integrity. Here, I’m having a little trouble trusting my business partner…

Also, the P/C insurance industry can best be summed up with this video.  As I said before, this made me realize just how little I understood about industry trends & the overall dynamics that drive individual insurers. Given my lack of knowledge, I figured that I was mostly wrong on HALL, but that Mark Schwarz had done the same analysis as me and he was buying up stock; it had to be a good sign. It did look like a good price but the lack of industry knowledge made it into a speculative bet.  Considering that HALL doesn’t have a superior capital allocator with it’s float (they’ve done well with the random acquisition but the main part, the bond portfolio, only averaged about 4% every year), and they don’t have any significant competitive advantages with their underwriting (like GEICO/Progressive with their low-cost nature), this investment was not very well thought out. I apologize to you if you own stock in them- most likely you’re up 1-2% & didn’t lose money- but that I failed to do the necessary research.

I still stand by research of the individual company. Unfortunately, this industry relies on all participants & analysis on one company means pretty much nothing. I want to always have full disclosure and keep you updated.


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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