Apparently, the pot of gold at the end of the rainbow has been replaced by a big box full of IOU’s and returned checks. Ireland has taken it on the chin like a peat farmer named “Paddy” in a pub brawl, financially speaking, that is.
The EU, with the reluctant and somewhat disgusted Germans playing point guard, and the IMF have, again, cobbled together yet another bail out plan to rescue a peripheral European economy in order to maintain confidence in the grand experiment known as “the Euro.” (Can you imagine the brainstorming sessions before its birth? “Hey guys! I got a great idea! Let’s have a common currency without a central bank amongst different sovereign countries that have spent most of recorded history at war with each other!”).
It goes without saying that the broad Irish equity market (ISEQ Overall) has been beaten down pretty good. YTD it’s given up around 16% and is down nearly 1000 points from an April peak of about 3500. Wouldn’t touch Irish stocks with a 10 foot shillelagh? Conventional wisdom would say so. However, if you subscribe to the Baron Rothschild axiom of “buy when you hear the cannon. Sell when you hear the violins.” It may be time to put in your earplugs, buckle the chinstrap on your helmet and do some triage amongst the wounded.
One of the ugliest places to look would be, of course, the financial sector. Monetary/crises will always cause the most collateral damage amongst those businesses whether deserved or not. Fundamentals, aside from the underpinnings of a dysfunctional national economy, have very little to do with the price movement. The Mr. Hyde of the investor emotional spectrum, fear, is the main driver. So, boy-o, ready to catch a few falling knives?
The Governor and Company of the Bank of Ireland (IRE) – bouncing in the 1.50 to 1.70 neighbourhood, IRE is one the Emerald Isle’s biggest banks. Earnings? Sorry. No. Losses? You bet. However, the Irish government has promised to backstop all deposits which will probably prop up the banks creating Citigroup (C) style zombie banks. But, remember, C was a 1.03 at the darkest of the dark. Now it’s over 4.
Irish Life and Permanent Group Holdings plc (ILPMF) – according to their website, ILPMF, trading on the Pink Sheets at about 1.13, is “…a leading provider of personal financial services in the Irish market with strong market positions in life and pensions, fund management and retail banking.” Consider it a portfolio of financial IED’s. But, just as things deteriorate, they eventually improve. The double whammy of a life insurance company bond portfolio that is improving in value and better banking business could help. The company also owns a minority stake in Allianz (Ireland). Allianz (AZESY) is a great brand name and it would seem they don’t dive into partnerships without some strenuous thought.
The New Ireland Fund (IRL) – If you don’t want to roll the bones on an individual name, go the CEF route for about 6.30 a share. IRL trades at a 14% discount to NAV and you get a little basket of Irish names like discount airline Ryanair (RYAAY) or biotech concern Elan (ELN). During the days of the rising Irish tiger, shares were bid as high as the 35’s. The fund used to pay a dividend. Who knows? Maybe it will again…one day.
It doesn’t take a PhD in economics to realise that Ireland has a bitter stout to drink. But, there may be some speculative opportunities. But if you’re going to browse the Celtic bargain bin, remember the John Maynard Keynes caveat: “The market can stay irrational longer than you can stay solvent.
“ Well…from PIIGS to piggies…let’s meet this week’s three lil’ ones…
“The Total Package”
Total SA (TOT)
Recent Price: 48.77
Current Yield: 5.10%
Prices in the integrated oil spaces look interesting these days. TOT kind of jumped out at us. One of the largest publicly traded oil companies on the globe, French domiciled TOT is a fully integrated oil/energy company: exploration and production, refining, distribution, chemicals, you name it. If it makes it go…TOT does it. The valuation isn’t reflecting the upward bias of oil prices with shares off 27% from their 52 week high creating the single digit multiple. The company has produced a 9 year average ROE of 25.23% and the dividend payout ratio is a reasonable 53%. Lots of emerging market involvement and LNG (liquefied natural gas) development too. You need energy exposure? This may be a good, cheap way to do it.
The fact that a high proportion of TOT’s assets are concentrated in Africa and the Middle East. I once heard an analyst describe the difference in finding “expensive” oil and “cheap”. “Cheap” oil can be found in places you wouldn’t want to raise children. A company with Somalian pirate contingency fund is always a concern (we don’t know if TOT has one…just sayin’). The stock price is also susceptible to commodity price slowdown. While energy and other commodities are enjoying a bit of a bounce, many analysts are in the “it won’t last camp”. Also, being a European company, no one is spared from the current turmoil du’ jour in the Eurozone. French companies, especially have been negatively affected by labour strikes. Think before you say “oui”.
“A Boy Needs A Trade…”
Lincoln Educational Services (LINC)
Recent Price: 15.02
Current Yield: 6.64%
For every traditional post secondary school it seems that there are three trade schools. These days, the lion’s share of those schools are for profit. LINC has been in that game since 1946 (post war boom don’tcha know?) with 43 campuses in 17 states under the Lincoln Technical Institute, Lincoln College of Technology, and others training folks in skills such as auto, HVAC, and IT repair, cosmetology, and others. Good numbers here. Impressive 25% ROE. Revenue and student growth this year has enjoyed high teens percentages. And the prospects look decent on a macro level. As the economy sputters and employment remains stagnant, unemployed workers will eventually re-tool their skill set to compete for the jobs that are out there. This is where companies like LINC tend to shine.
LINC ain’t Harvard. It’s a different target audience that relies on mostly government assistance for education funding. While the government seems committed to that, whatever’s coming down the entitlement cut pike (and it is coming) could affect the business adversely. In addition, the government is cracking down on so called “diploma mills” in the for profit tech college space. Not saying that LINC isn’t complaint. But again…overhang. From a pure numbers side, the dividend is only a year old and while the company is committed to paying in 2011, it’s still early in the game. As far as the street is concerned, analysts that do happen to follow LINC project an 19% drop in 2011 EPS. That’s a healthy whack.
“Take a ride in a healthy convertible…”
Healthsouth Corp 6.5% Series A Convertible Preferred (HSRPP)
Recent Price: 914.70
Current Yield: 7.1%
Healthsouth? Remember that company? High flying healthcare company (a lot of outpatient properties: PT, surgery, etc.) with the cheeseball, hillbilly CEO that’s now doing hard time in the federal pen? Stock went down to less than 20 cents? That’s the one. Back from the dead, HLS trades at around 18 bucks and makes money and will probably continue to do so based on an ageing population and healthcare cost inflation. Common equity pays zilch. However, the convert is a different story. HSRPP trades at an 8.6% discount to par ($1000) and is convertible until 2049 into 32.78 shares of the common. 39 years? You could probably consider that one perpetual unless the common trades north of $45.75 for 20 out of 30 trading days beginning July of 2011. If that’s the case, you’d stand to make a couple of bucks. Net net, this is probably a good way to get some healthcare exposure in HLS’s particular sub-sector and pick up some yield in the process in that you’d benefit from any positive price action in the common stock.
Where to start…where to start? North of seven is a nice yield in this environment but I’m not so sure it’s enough. HSRPP is rated CCC+ (y’know…why even bother with the “+”?) and based on the conversion rate, this piece of paper is under water so, again, I’m not totally sure of being compensated correctly. Also, HSRPP trades on the pink sheets. Not a whole lot of liquidity so plan to use tight limits and if you dare so..prepare to hang on to it. It will be yours.
Disclosure: Long IRE
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