David Einhorn‘s Greenlight Capital discussed a few companies in its Q4 investor letter – you can download a copy here. We’ve already covered the hedge fund’s analysis of aircraft leasing firm AerCap Holdings. In this article, we’re going to take a look at the fund’s comments on Assured Guaranty Ltd. (NYSE: AGO), a publicly traded Bermuda-based holding company. Here is what Greenlight said about the company:
Assured Guaranty (AGO) – Short / Puerto Rico GO bonds – Long (Current valuation is not relevant because we don’t believe the accounting)
AGO is a financial guarantor. In addition to insuring many large long-term issuances in Chicago, Illinois and New Jersey that may prove problematic, AGO is already responsible for billions of dollars of defaulted Puerto Rican debt. We believe AGO has set aside inadequate loss reserves against what bond markets and our analysis suggest will be sizable losses.
Were the company to own up to the probable losses, we believe its credit rating and ability to write new business would be at risk, and it would have difficulty getting regulatory permission for the additional special dividends necessary to support AGO’s aggressive stock buyback program.
As a hedge for the possibility that Puerto Rico’s restructuring turns out better than expected for AGO, we bought defaulted Puerto Rico GO bonds. The GOs have appreciated, while AGO has held steady, making this one of the few profitable positions in 2018.
Andrey_Popov/Shutterstock.com
Assured Guaranty Ltd. (NYSE: AGO) provides credit enhancement products to the U.S. and international public finance, infrastructure and structured finance markets through operating subsidiaries.
The company reported fourth-quarter 2018 income of $88 million, higher than the income of $52 million for the same quarter of 2017. The company attributed the increase mainly to a lower effective tax rate, lower loss and loss adjustment expenses and higher fair value gains on committed capital securities, offset in part by lower premium accelerations and foreign exchange losses in the fourth quarter. However, total revenues fell $214 million, compared to $281 million for the same 2017 quarter. In addition, Assured raised its quarterly dividend by 12.5% to $0.18 per common share.
On the share market, Assured Guaranty has been performing well this year so far. Since the beginning of the year, the stock has gained nearly 17%. Over the past 12 months, the share price has surged more than 28%.
Analysts polled by FactSet have a consensus average rating of ‘BUY’ and a consensus average price target of $51.50. On Tuesday, AGO was closed at $44.93.
Meanwhile, Assured Guaranty Ltd. (NYSE: AGO) isn’t very popular stock among hedge funds tracked by Insider Monkey. According to our database, 33 funds held the stock at the end of the third quarter of 2018, including Capital Returns Management and Tegean Capital Management.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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Have You Heard of “America’s Nightmare Winter” Scenario?
Has gone public in recent weeks, with his “4th and Final Prediction”… about a scenario he calls: “America’s Nightmare Winter.”
You’ve probably never heard of Bill Bonner–but in addition to owning an interest in businesses all over the globe, he also owns more than 100,000 acres, with massive properties in South America, Central America, the U.S.,… plus three large properties in Europe.
Bonner has come forward today because he says we are about to enter, “A very strange period in America… which could result in the most difficult times we’ve seen in many, many years.”
Bonner has made three similar predictions in his 50+ year career… and each one proved to be exactly right, although he was mocked each and every time.
