Downside Protection Report Highlights Top Ideas of the Month: Newly Public Insurance Company, Electrical Power Generator
In the just-released monthly issue of Downside Protection Report, editor John Mihaljevic, CFA and The Manual of Ideas research team highlight their latest top two monthly investment ideas. Each stock is judged to have strong downside protection and above-average upside potential.
The first featured idea of the month is a recently public insurance company with a strong niche presence in the attractive agribusiness segment. The company appears grossly mispriced as a result of the recent conversion from a mutual company to a publicly held corporation. Due to the quirky structure of the conversion, investors in the recent IPO not only received a claim on the cash invested in the IPO but also on the company's existing assets and business. This produced an unusual opportunity to buy a well-established, well-run insurer at roughly one-half of tangible book value. Not surprisingly, insiders bought shares in the IPO, and the company has rushed to repurchase stock almost immediately after issuing it in the IPO. The shares are still available in the public market at only a modest premium to the IPO price -- though probably not for long.
The second featured idea is a multi-billion dollar competitive energy company that generates electric power primarily via coal-fired power plants. The shares trade at less than one-half of tangible book value, even without ascribing any value to the company's multi-billion dollar net operating loss carryforwards, which should be available to offset income taxes for several years. The company continues to generate positive free cash flow and has an unlevered balance sheet. The shares trade at 2.4 times estimated 2010 EBITDA and a 15% estimated free cash flow yield.
