This is a post of a letter that went out to partners of The Insiders Fund, so there is not much new on this other than many of our holdings in the Fund skyrocketed today with a sudden reversal of trend, value stocks trumping growth. I wouldn’t bet on this continuing but I’ll gladly take it. Lincoln Financial was up as much as 17% before pulling back to close up 11.20%.
Nasdaq makes a new high and 30 million people file for unemployment. It all makes more sense when I heard this CNBC report today that the #1 usage of the Government stimulus checks is for stock trading. That goes a long way to explaining how Facebook surged $40 billion in value Thursday because they announced “new tools” for small businesses to set up online shops. I’m sure Amazon, Ebay, Walmart ,et all are quaking in their boots. Perhaps the stay at home economy stocks will lose some shine when the stimulus checks run dry. Then again, if there are still 30 million unemployed workers when the benefits run out, we might get another round of stimulus checks and new highs in the Nasdaq.
We are finding ways to participate in the market without chasing it. Option premiums are double what they were in February. We are writing puts in names of companies we would own if they had a significant drop, collecting the premium and using our large cash balance in a conservative way.
I think it’s an interesting observation that the average yield of the 15 largest positions in the Fund is 5.5%. We didn’t create The Insiders Fund for income but it does help to remember that 40% of the entire return from equities in the last 70 years has been from dividends. Perhaps that will matter more as the fear of dividend cuts recede and people look for income in a zero interest world. Chubb, one of our “insider buys” rallied 17% in the last two days after announcing a modest 4% increase in its dividend. Honestly, we can find no other rationale for the steep rise in price.
We’d like to deploy more cash but we’d be over concentrated in the financial sector, insurance companies and banks. There is a lot of insider buying in regional banks. The banks have obvious risks and we’re not likely to add to our holdings in JP Morgan, Wells Fargo, and KeyBanc without some significant new buying to reassure us of the loss reserve picture. There is a lot of insider buying in the regional banks. We did do a quick profitable trade on Zions Bank when the CEO bought $1 million worth of company stock. We will buy that one back if it sells off a little from the insider buy bounce. Banks make me nervous with the real economy this week.
The insurance companies though are very intriguing. Mercury General, a large California based property and casualty insurer with a current 6.4% dividend yield and a 34 year history of consecutive dividend raises, looks particularly tempting. It’s off 44% from its high and the Chairman of the Board has bought $24 million worth of the company’s stock in the last 10 days. People are driving less, auto claims are down. The potential loss of reinvestment income due to lower bond rates seems overstated by this drop in price. Besides Mercury has been historically a bigger player in the equity markets, more like Berkshire Hathaway.
One notable observation, a director bought over $2 million in Berkshire this week. Berkshire is down 23% YTD and is sitting out the rally with an enormous pile of cash. It has rarely traded this cheap relative to intrinsic value. A noted Buffett follower pointed out to me that the last time Berkshire lagged the market by this much was in 1999, the top of the Dot.com and internet bubble. Stay at home- Dot.com? They say history doesn’t repeat itself, it rhymes. Have a happy and safe Memorial Day weekend.
