KFS: When Value Capitulates

I find it interesting that even us “value guys” yearn to be in the safety of other like minded “value guys”. Even value investors can be a little bit a club-and-crowd into investments, which isn’t how you make money in markets.

Buffett tells us to go where others are not and yet 40,000+ go out to Omaha to see him. I have to admit, there is a camaraderie and warmth to the whole idea which temps me into almost going every year.

That said, Buffett’s advice and early activities seem to recommend the opposite. That is – attending annual meetings with only one other shareholder – sifting through pages of obscure stock list and manuals – looking in backwater areas and markets for opportunities – and buying quirky securities. Basically taking the road less traveled.

I am reminded of a friend telling me about going to an annual meeting where he was the only shareholder and the company didn’t know what to do with him (Louis Geser – Vulcan International – he’s a great nugget finder).

After this reflection, I have to admit – I’m not sure Warren would attend his own shareholder meeting.

All this discussion of safety in the crowd (yes even the value club crowds into ideas and stories) has come up in my mind as I’ve watched Kingsway (NYSE: KFS) slide in price.

Kingway has been a warm value investor hang out for a few years now. Without going into the past, Kingsway has always seemed to me to be fairly valued, with a strong following of “value guys” in the name.

That is until recently. Its super interesting to me that as Kingsway’s story begins to get lonelier, the price starts to get interesting. Its the Howard Marks idea of the perversity of risk in action. The less something costs, the less risky it is, and more the expected return should be. But it is lonely.

Please perform your own calculations, but my “valuation to worst” math for the business is:

25m for non-standard auto sale
80m for the warranty business
10m for leased RE
20m for hold co investments
30m for the NOL
(-)57m of preferred stock
=100m-ish (rough “valuation to worst”)

Current MC is 72m

Not bad considering the caliber of the management team you get, their ability to do smart deals, and the growing warranty roll up business opportunity they are executing on. I think the value of the warranty business is the real secret here.

Also note (for the “needs a catalyst” investor): Kingsway turning profitable due to the sale of the non-standard auto insurance business, and the warranty businesses growth could be a catalyst for the stock.

I’m not into catalysts. I believe that if you buy something for the right price, a lot good things can happen that you cannot anticipate. And as Klarman would say – I’m paraphrasing: “nobody knows where the bottom is, so you buy value the moment you find it”.

So in summing up.. its gotten lonely at Kingsway, but frankly that is why things are just getting interesting!

Happy investing, and please don’t trust any of my numbers and please do your own analysis.

Thomas

P.S. I recently purchased some Kingsway in my personal account.