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"Value investing is risk aversion."

– Seth Klarman

- Enjoy more of our favorite value-investing quotes


August 2, 2015


In This Edition:





If you are following our two value-based portfolios, and we hope you are, you know that we only owned one position between the two portfolios last week. That position is Aspen Insurance Holdings (AHL) in the Relative Value Portfolio.

Aspen Insurance Holdings is a worldwide, $2.92 billion insurance and reinsurance issuer. The company specializes in property and casualty insurance.

In the second-half of  July, when AHL began to trend downward at about the time the broad value-based market was also trending down; we set a tentative, behind-the-scenes stop on the stock at $47.40. This price was just below both the stock's 100-day Moving Average and also significantly below its lower Bollinger Band (gray-shaded area in the chart below).  At that time, the lower Bollinger Band stood near the stock's 50-day moving average, at about $48. Please see the chart below for more detail:

Aspen Insurance Holdings (AHL) went on a wild ride last week based on… well, not much.


 On Monday, July 27 (after the market close), Aspen reported results for the quarter and six months ended June 30, 2015. The company's press-release summary of the outcome is located here. Below are the pertinent highlights:

• 23.9% premium growth in the quarter ended June 30, 2015.
• Nevertheless, gross written premiums decreased by 7.3% to $722.8 million in the second quarter of 2015 compared with the second quarter of 2014.
•  The reason given for this is stated as: "We reduced our exposure to certain Energy-related Lloyd's lines where rates were under pressure, and competition was intense and, as a result, our level of insurance premiums declined. This [adjustment], combined with several mid-sized losses, had an adverse effect on this quarter’s Insurance results. We redeployed capital to those opportunities that were better rated and will continue to do so. We expect to achieve 11% operating return on equity for 2015."

As a result, at Tuesday's open, Aspen's stock price plummeted, sharply past our tentative stop below the 100-day moving average, and all the way down to the 150-day moving average at $46.55. Intraday, the stock price dropped all the way to the 200-day moving average at about $46.50 or about a 4% intraday loss. However, by the end of the day the stock price had recovered back to precisely above the 150-day moving average, and closed at $46.43.

On Tuesday evening, we could have sent out a notice to sell the stock because it had dropped below our tentative stop price at $47.40. However, a few things persuaded us to hold on:

1) The stock had initially dropped precisely to its 150-day moving average, then recovered back to that level from a fall to the 200-day moving average. These are very technical levels, which implies that the move was likely because traders were gaming the charts, rather than investors panicking at terrible news.

2) That close was dramatically below the lower Bollinger Band (gray-shaded area in chart above), and an extreme break of the BB usually means a sharp change of direction (in this case a rebound) is coming shortly thereafter.

3) Our Price Momentum Oscillator, shown in the lower window of the chart above, and dropped all the way to oversold conditions below -100.

4) The company's characterization of its apparently temporary shortfall was credible, and it had taken steps to improve the quality of its earnings going forward.

5) Most of all, Aspen is still deeply undervalued with excellent financials. Here is a summary of some of the stock's highlight numbers (everything in green beats out the company's peers):

• $324.9M Income on $2.71 Billion in Revenues
• PE Ratio of 9.62
• Forward PE Ratio of 10.96
• Reasonable Price-to Sales Ratio of 1.08
• Price/Book Ratio of just 0.86
• Price/Cash Ratio of only 2.38
• Price/ Free Cash Flow Ratio of 7.60
• Reasonable Debt/Equity Ratio of just 0.18

So, in summary, we primarily chose to hold on to the position because a) it remained deeply undervalued, b) its stock price stopped precisely on key technical levels (which implies traders were in charge of the price, not rampant fear), c) it had dramatically overshot its lower Bollinger Band, implying a snapback was imminent, and d) it is Price Momentum Oscillator (lower window, above) had dropped directly to oversold conditions. In my opinion, the stock was primed for a sharp repound.

We decided to hold on to AHL with the anticipation that its price could recover dramatically, and even reach back to its previous level. That recovery is exactly what has happened over the subsequent three days. On Wednesday, the price returned to the 100-day moving average (red line), on Thursday, the price moved higher again to the 50-day moving average (blue line), and then on Friday it had a slight gain after leveling out almost precisely at its previous level of $48.

How did we know to hold onto the stock rather than sell it based on established, quantitative rules that we trust and hold in high regard? While emotional, feverish human decision-making causes most of the losses in the stock market, this human over-ride decision was based strictly on 30+ years of experience in the market and resulting discretion.

It seems like I have seen scenarios just like this a million times if I have seen it once: A stock with all these characteristics inevitably bounces back after a bit of bad news.  However, by following the quantitative 'rules' and selling it because it dropped below the stop price, we would have lost about 4% and looked bad for not allowing it to bounce back. Instead, we are now back to where we were before, with a reasonable stock that is still deeply undervalued and with no new earnings report or (hopefully) any other potential shocks for another three months. Let's see if we can book some additional gains with AHL.

This is not intended to be a lesson in why to disregard signals from proven computerized decision algorythms. It is simply intended to point out why we chose to ignore that algorythmic decision and instead use personal experience and gumption to solve the probem. So far it worked out well. The stock is now back in the 'winner' column for us. Only time will tell if it will stay there.

We hope that we have thoroughly discussed the issues in this Value Alert, and you can implement these ideas to your benefit.  Our objective is to give you the best value-oriented investment information possible, with ease of use, timely identification of the issues that affect our portfolio positions, and a full understanding of our approach.  If you have any questions or comments, please contact us with a support ticket.

Best Wishes for Another Week of Intelligent Value Investing,



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Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Shareholders, employees, and writers associated with IntelligentValue, Inc. may hold positions in the securities that are discussed. If you are not sure if value investing or a particular investment is right for you, we urge you to consult with a Certified Financial Advisor. Neither, nor any of its employees or affiliates are responsible for losses you may incur.