Tuesday, August 16, 2022

Down the HALL

Some of my best investments have happened when a temporary shock to earnings causes a company's stock price to get smoked, providing a good opportunity to buy. If leverage is low, the company usually has time to root out or mitigate the problem, and so the patient investor is rewarded for waiting for things to get back to normal.

It was with this idea in mind that I bought Hallmark Financial almost a year ago. Earnings under a previous management were poor, and so that company traded at a massive discount to book value. I figured when the dust settled and things went back to normal, the price would recover.

Unfortunately, the dust just isn't settling. The company continues to report losses quarter after quarter. It has now reached the point where the risk of bankruptcy is too high for my comfort level, so I have exited at a big loss.

Being a financial (and the built-in leverage that comes with that), it was a basket position for me. While this kind of event might push an investor away from investing in such situations in the future, I think that may be the wrong lesson here. I believe a diversified group of companies like this will do well over the long-term, but every now and again there will be blow-ups like this one.

Disclosure: No position


Tom Evans said...

Despite the drop, there have been a few interesting developments for this company. The main one being selling the E&S (i.e. profitable) parts of the business. Including the $60m from this sale, tangible equity sits at $155m while market value is appriximately $20m.

Tempted to get back in?

Saj Karsan said...

Hi Tom, I just don't trust the underwriting right now.