IPO Analysis

Analysis

As my readers know, I have been speculating (right word) in the post IPO market for the last year or so.  While in total, this has been a losing strategy (I am down with my multiplier $25,000 - to put that in perspective, I am up $230,000 in total in 2014, so about -10% of total); it could have easily been a very successful strategy with a little more patience. In addition, the loses can be attributed to a single stock (LMNS) on which I really went over-weight and which tanked.

Here is a listing of all the buys:

Date	Stock	O/C	Purchase	Curr/Sold	$ Gain	% Gain	Current
10/18	VJET	Cl	22.09	24.13	2,040	9.2%	15.17
10/30	SCAI	Cl	26.80	26.95	465	0.6%	28.86
12/11	ATHM	Cl	28.80	35.03	18,690	21.6%	46.03
1/21	FGL	Cl	19.75	19.80	200	0.3%	21.51
1/31	MBUU	Cl	17.50	19.18	6,720	9.6%	19.69
2/13	FGL	Cl	20.08	20.64	1,120	3.1%	21.51
2/24	FGL	Cl	20.01	20.64	630	3.5%	21.51
2/27	LMNS	Cl	12.94	8.86	-32,640	-31.5%	9.21
3/7	LMNS	Cl	12.49	9.36	-25,040	-25.1%	9.21
3/7	TPVG	Op	15.55	15.50	-250	2.2%	15.50
3/19	LMNS	Cl	12.02	10.45	-6,256	-13.0%	9.21
4/3	TWOU	Cl	13.92	13.71	-585	-1.5%	17.87
4/9	TWOU	Cl	12.99	13.71	483	5.5%	17.87
4/9	KANG	Cl	15.88	15.96	930	0.5%	20.27
4/11	FGL	Cl	22.57	20.64	-1,930	-8.6%	21.51
4/22	FGL	Cl	21.96	21.40	-560	-2.6%	21.51
4/28	FGL	Cl	20.36	21.58	1,793	6.0%	21.51
4/28	WB	Cl	17.55	17.89	1,020	1.9%	19.95
6/24	XNET	Cl	14.94	15.12	630	1.2%	12.11
6/27	NEP	Cl	32.05	32.30	382	0.8%	34.25
7/22	TUBE	Cl	9.40	9.80	1,602	4.3%	9.36
7/25	LOCO	Cl	18.89	20.89	7,000	10.6%	33.36
8/4	MBLY	Cl	38.45	38.20	-500	-0.7%	33.24
8/7	TTOO	Cl	14.54	14.10	-1,760	-3.0%	17.00
Grand Total					-25,816		93,782

 So you can see that while they lost $25,816; I would have made $93,782 if I had not sold.  That would have been a very satisfactory gain (when you consider my $230,000 result in 2014 for all my holdings).

So I do believe that this is an approach I should continue using in measured ways.  I just need to be a little more patient (always a challenge).  Thinking about the IPOs, the ones that have really been outsized are those that the public recognizes (think LOCO or GoPro) and ones that have gotten some positive press (ANET is a good example).

Again, it is speculative and feels a little casino-like.  But I also do believe if I am thoughtful about it, I could mine a few golden nuggets. You know, LMNS is my big loser, but when I look at their August earnings - this is not a bad little company.  Same with FGL (despite my anger at the way they stated BV), it is pretty darned inexpensive.  There may be something to be said about a re-visit to some of these.

In reading through the FGL report, one will note there are two book values:

• Book Value Per Share = $29.10
• Book Value Per Share Excluding AOCI = $22.30

With a current stock price of $21.51, it makes a big difference which one you use.  The way to think about it is that Insurance companies typically own a lot of bonds.  If they have stated that those bonds are not part of a trading portfolio (meaning they plan to hold them to maturity); then the increase in market value of these bonds as interest rates drop goes into AOCI as an unrealized capital gain.  So theoretically, if FGL holds all the bonds to maturity or if interest rates rise, the book value should converge nearer the $22.30.

That being said, when there is a large difference, that tells you the company owns a lot of bonds that are producing income at much higher rates than new bonds.  That is obviously a good thing in today's interest-starved market (which is why their bonds have unrealized capital gains).  Of course as the bonds mature and FGL has to re-invest proceeds; they will struggle to replicate the income.  So a lot depends on the duration of remaining bonds and how long an investor thinks it will be until interest rates rise.

Theoretically, FGL could liquidate today and realize that $29.10 figure - if I had a billion dollars, that might not be a terrible strategy.  That is why a lot of these life insurance companies are dual edged swords - as Interest rates go up, their book values will drop; but their prospects for future income will rise.

GNW is very similar (really the reason I do not own both).

Book Value Per Share = $32.68

Book Value Per Share Excluding AOCI = $24.31

Wow, when you look at GNW versus FGL and if you believe that book value is the most correlated predictor of life insurer stock price, it is a no brainer to buy GNW.  Every time I look at this, it makes me want to buy more. Stay tuned, at $13.50; GNW is so, so cheap IMHO.